Treasury details illicit cash flows

.…Finance Standing Committee gets update

May 2020….In a recent meeting of the Finance Standing Committee, the Inter-Agency Working Group (IAWG) on Illicit Financial Flows told MPs and chair Joe Maswanganyi that from 2108 until the present that investigations had resulted in the recovery of R400m. SARS also told parliamentarians at the same meeting that in terms of illicit flows outwards in 2017 alone, an estimated R93bn had left the country.The Committee had called upon IAWG for a briefing and update and as result, has called for a full report on the whole issue at the end of May which will be made available to the public.  IAWG coordinates the work of several agencies involved in combating IFFs. These are the Financial Intelligence Centre (FIC); SA Reserve Bank (SARB); Directorate for Priority Crime Investigation (DPCI) commonly known as the Hawks;  SA Revenue Service (SARS);   Financial Sector Conduct Authority (FSCA);    SA Police Service (SAPS);   the Special Investigating Unit (SIU);   and the National Prosecuting Authority (NPA).

Adv. Xolisile Khanyile, FIC Director, told Parliament that a definition of IFFs was “Funds that were illegally earned that were transferred or managed in a fashion that the money crossed borders”.  This, she said, could be deemed to include included transfers accumulated as a result of tax evasion and amounts earned from corrupt practices trade in contraband goods.  To this had to be added drug trafficking and counterfeiting activities.

Khanyile said that in taking a broader view on the effect IFFs had on the SA economy, there was no doubt such criminal activity drained its foreign exchange reserves, reduced tax collection, cancelled out investment flows and in an overall sense, worsened poverty.

Africa overview

She added that that the UN Economic Commission for Africa had estimated that current illicit flows from Africa probably amounted to some US$50bn per annum which was the amount that the continent received in developmental assistance.  Khanyile noted that the IAWG concentrated only on complex cases involving amounts of more than R100m.

Dr Mike Masiapato, who is FIC’s executive handling its monitoring and analysis processes, said to handle cases successfully, such had to involve at least three of the agencies within IAWG to make an investigation workable.   Eight cases were now under investigation.

Financial gangsters

These included a Ponzi scheme involving R126m taken out of the country, suspects appearing in court in May 2019.  R71.6m at this point, Dr Masiapato said, had been secured was and a process started to recover US$5m held in the USA.

In another case, mis-invoicing to the tune of R700m was involved where Reserve Bank had frozen R72m and processes start to forfeit the sums involved.  Exchange control contraventions amounting to R397m leaving SA were involved with DPCI and SARS involved in the follow up.  At this stage R9.3m had been surrendered to SARB.

 Brotherhood

A problem existed with hawala transactions (*Refer end note), Masiapato said, where a case involved a total of around R150m. The parties, similar to brokers, were being investigated in various countries and intelligence gathering started on the underground systems involved.    So far, SARB had managed to block R73.7m in transactions. This had damaged considerably the parties trading in this manner.

On the subject of illegal imports of cash, MPs were told that a major issue had always been “cash mules” at SA ports of entry and Dr Masiapato gave a figure of R67m recovered, but he did not elaborate on the period or the circumstances.

Old tacky

Exchange control contraventions, similar to customs matters, were always an ongoing issue and would continue always to be so, it was explained by Dr Masiapato.  One case currently involved R100m with the case now being closed and the culprit receiving an 8-year imprisonment imposed.

A major problem also was transfer of monies to China by organised crime syndicates. Recently, a transfer of R2.7bn was involved with a now well-known Chinese syndicate.  Reserve Bank successfully intervened by disrupting exchanges which at the time involved 175 bank accounts andR2.9m was recovered, Masiapato said.  Another current follow-up by SARB involving exchange control offences had involved a travel agent to the extent of R2.5bn, R78m of this so far being blocked. The case is ongoing.

Want to talk

Pieter Alberts, a senior manager from FIC , said the organisation was to explore new ways of improving the financial intelligence reports it provided to law enforcement agencies in terms of the FIC Act.  FIC would be creating considerably more private sector partnerships to access financial information needed on specific cases, he said, and would seek improved access to government databases.

South African Reserve Bank (SARB) told parliamentarians that for 2019/20, the year under review, R3.8bn involving 148 cases had been blocked involving 275 bank accounts.  Of this, R112m had been forfeited in 50 of the cases.    Thys Basson said that SARB was receiving an increasing number of cases from banks in South Africa.

 Bits and pieces

Interesting was the fact that R15m in the accounts of individuals involved in the regular illegal transfer of crypto currency. Such funds when blocked are held in an interest bearing accounts, usually originators bank account.  This is in terms of SARB instructions whilst investigations by any member of the IAWG grouping continue. Basson described the blocking of funds as a “very powerful regulation”.

Gumming up systems

The act of a blocking funds had a serious effect upon the long and short-term trading ability of both parties to the transfer locally and abroad.   This was even if the full amount suspected had been over a long period and therefore only current trading in the account was found when frozen, Basson said.

Blocking funds was a most effective deterrent in both halting any further movements, throwing arrangements between parties into confusion and providing evidence for criminal prosecution on both present and past behaviour.     It was a feared instrument, he said.

Private business sectors consistently subject to money laundering investigations, Basson told MPs, were estate agents, banks, attorneys, the gambling sector, motor vehicle dealers and foreign exchange dealers.   Dealers that built up crypto asset holdings would soon be added to the SARB focus list.

Number counts

SARB had received 43 referrals of cases from the FIC, Basson concluded.  It had referred three cases to the FIC and received 142 enquiries from SARS, SAPS, NPA and the Asset Forfeiture Unit.  Also SARB had referred 24 entities or persons to SARS for investigation of tax non-compliance.

As a result of questioning from MPs on the subject of performance of police investigations, Thys Basson gave facts and figures supporting a poor record by SAPS in this area. After lengthy debate, it was decided by Chair Maswanganyi, that all matters and the lack of public awareness of all issues involving IFFs, had to escalated.

It was adopted across party lines that rather than go any deeper into such matters for the moment that Adv. Xolisile Khanyile should compile a full and detailed report for Parliament on IAWG concerns and needs, the reports for tabling by the end of April 2020 and then released for general interest.

 Pay up time

Well-known Commissioner of Taxes, Edward Kieswetter, then closed the meeting with a report from SARS on illicit flows of money from the perspective of the losses of tax to the fiscus.   He said that SARS had recently established an integrated enforcement capability to deal with the illicit economy which unit had some 760 active investigations into cases involving R30.8bn. Cases involving 350 entities were under SARS investigation

To date, R1.4 billion had been recovered by way of cash collected, preservation orders and proven claims against liquidated assets. Twenty cases at this stage for major sums over R5m had been referred by SARS to law enforcement agencies.  Kieswetter said SARS had received some 200 requests this year alone for information from parties such as the PIC investigation, the Zondo Commission  and regular enquiries from DPCI and the SIU. The requests involved 1 385 taxpayers linked to 2 984 entities.

 Tax games

Of concern to SARS, Kieswetter said was that assessed losses carried forward by large corporates surged from R130bn in 2015 to R280 bn in 2017. Also, base erosion and profit shifting were seriously eroding the current and future tax base of South Africa currently, since profits actually earned though locally generated activity in key industries and commerce were ending up in tax favourable jurisdictions. He quoted Switzerland as an example.

Summing up

In conclusion the Standing Committee on Finance repeated its call for a report to be escalated to a national level.    Chair Joe Maswanganyi told Adv. Xolisile Khanyile that it was essential for the public to be informed on the levels of illicit money transfers and for the public to understand the effect on the economy. She said she would do this.

The IAWG report, he said, should be produced in collaboration other experts in the grouping and would be debated, any findings being then agreed to be adopted by Parliament.

*Note on hawala transactions.

Hawala originated in South Asia during the 8th century and is used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers.

 A handler in one country accepts cash from a customer then contacts a handler in another country who hands hand out the equivalent amount minus commission.   In an overall sense, each handler ensures that all transactions between them are more or less balanced, once commission considered. 

  The process, obviously illegal, cuts out any bank transfer fees since hawala as an informal agreement, based on trust between the handlers, obviates any need for a bank account. Thus, money never “crosses borders” and no “follow the money” track is apparent.

 

 

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