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South Africa

The risk of the Financial Action Task Force (FATF) greylisting looms large over recent South African reforms, as do the ongoing consequences of “state capture”. The four-year-long Judicial Commission of Enquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State (Zondo Commission) has submitted its final report to the President. The Presidency, Parliament, law enforcement and regulators have shifted to pursuing criminal prosecutions and administrative penalties against offenders, recovering funds and considering necessary legislative and institutional reforms. High profile arrests and settlement agreements relating to state capture and asset freezing related to corporate accounting and reporting fraud have dominated the latter part of 2022. We anticipate that 2023 is likely to see similar arrests, extensive litigation and a raft of legislative reform focused on preventing money-laundering and regulating public procurement. State capture investigations have prompted increasing cooperation between law enforcement and regulatory agencies which has extended to using relatively powerful anti-money laundering (AML), tax evasion and exchange control remedies to combat corporate fraud as well as environmental and cyber-crimes.

Investigations trends/developments

State Capture Commission concludes

The Zondo Commission, initiated in January 2018, submitted the final volume of its report in June 2022. Its over 350 recommendations include referrals to investigatory and prosecution authorities, asset-recovery and disciplinary sanction by professional bodies as well as legislative, constitutional and institutional reforms. A National Anti-Corruption Advisory Council, appointed by the President in August 2022, has contributed to the President’s formal response and may become a permanent feature of the anti-corruption framework. The President has committed to considering various reforms including legislative amendments to strengthen NPA independence; increased private sector obligations when dealing with the State; improved whistleblower protections; and finalisation of the long-delayed Public Procurement Bill.

Regulators ramp up

As the Special Investigating Unit (SIU) continues its investigations, an increasing number of civil recovery proceedings, administrative reviews and asset‑freezing applications are being brought before the Special Tribunal and High Courts. The results of the joint “state capture” task force of the NPA and Directorate for Priority Crime Investigation are starting to be seen with a pattern of charging former state officials, together with implicated private individuals and companies. In addition to NPA collaborations with the South African Revenue Service (SARS), Financial Intelligence Centre (FIC) and South African Reserve Bank (SARB), the Companies and Intellectual Property Commission (CIPC) has commenced compliance reviews of implicated companies. Black-listing has also been mooted, with the National Treasury imposing a ten‑year ban from tendering for public sector contracts on a large management consulting firm in September 2022 and stating that it, together with SARS, is considering restricting the firm’s directors.

Public procurement under the spotlight

Public entities, state departments and the SIU have launched increasing numbers of “self-review” applications to have unlawful conduct set aside and recover funds from private companies involved in procurement irregularities, fraud and corruption. The result has been rapidly developing precedent regarding principles of public procurement, consequences of unlawful public contracts and the due diligence obligations of private parties contracting with the state. In parallel, high‑profile settlement agreements have continued, including the Department of Water and Sanitation’s settlements with two foreign IT companies for approximately ZAR 177 million and ZAR 345 million respectively. Settlement agreements concluded in previous years, however, have not deterred authorities from pursuing criminal sanctions against implicated individuals, as evidenced by arrests and charges against company representatives implicated in the Kusile power station and Transnet locomotive cases.

Freezing, forfeiture and insolvencies

A trend, extending beyond state capture cases, is the authorities’ use of asset‑freezing and forfeiture provisions targeting the proceeds of financial and environmental crime. Asset Forfeiture Unit (AFU) confiscation orders include those relating to proceeds of abalone poaching while the largest cumulative preservation order obtained by the AFU to date is linked to the Gupta family’s Optimum Coal Mine and Coal Terminal assets (estimated to be in excess of ZAR 8 billion).

The SIU has obtained preservation orders against bank accounts, properties and pension benefits of a range of state capture‑implicated individuals and companies. While frozen assets have been placed under curatorship, certain cases have also led to insolvency proceedings. In some cases, asset forfeiture and insolvency proceedings have been at the instance of the SARS and the SARB. The SARB’s attachment of assets belonging to a former CEO of a large global retailer rests on the powerful penalty provisions in the Exchange Control Regulations. These allow for the forfeiture of the contravention amount to the state as well as a fine of the larger of ZAR 250,000 or the contravention amount (and/or imprisonment of up to five years). In this case, contraventions are estimated at ZAR 4.835 billion with the court also ordering the appointment of forensic experts and a supervising attorney to evaluate assets and uplift material relevant to the SARB’s investigations. Similarly, the SARS’ focus on the tobacco, gold and fuel industries has led to provisions in the Tax Administration Act being used to place assets of Gold Leaf Tobacco Corporation and its directors under curatorship.

Significant law reforms impacting corporate criminal liability

Greylisting risk and focus on beneficial ownership

The Financial Action Task Force’s threat of “greylisting” South Africa has generated a number of amendment bills and directives from the Prudential Authority on beneficial ownership reporting, enhanced customer due diligence requirements, and criminal background checks on directors and officers.

The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act (assented to in December 2022) includes amendments to South Africa’s financial sector regulatory framework legislation and the regulation of trusts, Non-profit Organisations (NPOs) and companies to enhance oversight and reporting over beneficial ownership. Its amendments to the Trust Property Control Act, 57 of 1988, Nonprofit Organisation Act, 71 of 1997 and Companies Act, 71 of 2008 include requirements for collection, retention and reporting of beneficial ownership information and contemplate access to beneficial ownership information in the respective registers of the Master’s Office, NPO Directorate and CIPC. Registration of NPOs making donations or providing services outside of South Africa  is to become mandatory  with offences for registration failures and non-compliance with disclosure requirements. There would be increased fines of up to ZAR 10 million and/or five years’ imprisonment for non-disclosures by trustees.

Expanded KYC obligations and disqualification requirements

Amendments to the Financial Intelligence Centre Act, 38 of 2001 (FICA) and the Financial Sector Regulation Act, 9 of 2017 include KYC requirements for trustees, trust beneficiaries and partnerships; draw the estate agency and gambling sectors within scope; and increase accountable institutions’ risk management obligations regarding new and existing clients. The Prudential Authority’s directive, requiring enhanced due diligence and criminal background checks on directors and senior officers of entities subject to the Banks Act, 94 of 1990, anticipates these more stringent KYC requirements, powers of regulators to issue minimum standards for KYC reporting by beneficial owners and financial institutions and an expansion of disqualification requirements for trustees, NPO officers and company directors.

Proliferation financing and sanctions

Responding to FATF recommendations, the Prudential Authority has provided a Guidance Note to the banking sector on how to identify and assess proliferation finance risks. The FICA amendments expand its scope to include proliferation financing activities and the range of persons required to freeze assets under UN sanctions. Amendments contemplate the automatic effectiveness of UN Financial Sanctions, under Chapter VII of the UN Charter, without the need for Ministerial gazetting. Amendments also include empowering the FIC to provide forensic evidence for the purposes of court proceedings and for administrative penalties for non‑compliance (in addition to existing criminal sanctions).

Internal investigations – key considerations

Access to information requests and privilege

The number of complex investigations linked to state capture and high-profile corporate frauds has placed increasing pressure on corporates to release internal investigations reports to the media and regulators. Two of South Africa’s prominent investigative news outlets have successfully obtained a May 2022 court order to access a forensic accounting report commissioned by a major global retailer through its attorneys. The press argued that any privilege claimed over the report was limited by the media’s right to receive and impart information or ideas. The court’s decision ultimately turned on a factual finding that the company had waived its privilege. While we understand the order is subject to appeal, the judgment has been hailed by the press and civil society as a victory for media freedom and the role of the press in ensuring corporate transparency. The court’s approach provides a cautionary tale regarding protecting privilege and exercising vigilance in the publication of investigation outcomes balanced against their regulatory reporting obligations.

The public interest and personal information

An area to watch is how personal information is managed and the basis on which it may be disclosed to regulators or in the public interest. The Information Regulator has approved codes of conduct for processing personal information by South Africa’s Banking and Credit Bureau Associations while launching its Enforcement Division during the course of 2022. It is not yet clear whether the joint oversight by the Information Regulator over the Protection of Personal Information Act, 4 of 2013 (POPIA) and the Promotion of Access to Information Act, 3 of 2000 will assist in how these statutes intersect. A recent High Court analysis suggests that access to information may be ordered to protect the public interest where personal information has already been submitted to regulators, in this case privacy rights limited by the public interest in information regarding the permitting of leopard hunting.

Sectors targeted by law reforms or enforcement action

Financial services sector and auditing profession

While enforcement action has focused on state‑owned enterprises, complex fraud and money-laundering through public-private partnerships and tender fraud, the conduct of auditors and accurate financial reporting have also been targeted. An important trend is financial services regulators and the SARS focusing on corporate adherence to customer risk assessments and compliance with prudential standards. Sanctions imposed by the FSCA under FICA in the 2021/2022 financial year all related to defective Risk Management and Compliance Programmes, failure to conduct Customer Due Diligence or failure to file Cash Threshold Reports with financial penalties ranging from R 20,000 to R 6.3 million.

The beginnings of crypto-regulation?

After a two-year period of public comment and consideration, the FSCA has declared crypto assets as “Financial Products” under the Financial and Intermediary Services Act, 2002, publishing a policy document supporting the declaration and announcing a licensing period between June and November 2023. This appears to be the first step in drawing crypto asset service providers and crypto exchanges within the financial regulatory framework.

Cross‑border coordination investigation or enforcement activity

A continuing trend is coordinated cross-border investigation and enforcement relating to cyber- and environmental crime, both linked to international money-laundering networks.

Cybercrime and extraditions

South Africa has been part of ongoing INTERPOL coordinated action against members of the cyber-fraud gang, Black Axe, and related groups. The most recently announced arrests include two suspects in South Africa linked to online scams while extradition requests from the U.S. in relation to previous arrests are subject to court review. South Africa’s own requests for international cooperation include extradition requests linked to high‑profile corporate crime, including the Gupta brothers (wanted in connection with state capture-related charges) and persons implicated in a multi-jurisdictional accounting fraud of a listed company, a ZAR 745 million corruption case involving Eskom and the 2020 bitcoin-based Ponzi scheme linked to Mirror Trading International.

Money-laundering and tax offences expose wildlife crime

A number of multi-agency and cross-border operations have focused on exposing wildlife crime through tax investigations and suspicious transaction reports. One such operation included the SARS together with agencies such as the wildlife divisions of the DPCI and South African Police Service, South African National Parks, the Department of Environmental Affairs and the AFU arresting members of an international syndicate involved in rhino-horn trafficking which was exposed through tax evasion. Inter-agency cooperation to prevent wildlife crime more broadly includes the FIC, DFFE and the public-private partnership, the South African Anti‑Money‑Laundering Integrated Task Force.

Predictions for 2023

FATF response and State Capture repercussions

2023 is likely to be dominated by legislative and regulatory reform prompted by South Africa’s need to respond to the FATF recommendations and political pressure to see results from the Zondo Commission. While some of the more controversial legislative reforms may remain subject to legal challenge, regulators are currently using existing powers to issue directives and guidance to impose greater reporting and due diligence obligations on the financial services sector. Criminal proceedings against those involved in state capture may lead to additional investigations by regulators and investigatory authorities, including calling upon third parties to provide evidence and the need for in-house legal teams to manage competing information requests. It is also possible that banking, insurance, auditing and legal possession may come under greater scrutiny in terms of obligations to monitor and report suspicions of unlawful activity.

Tax and AML disclosures to tackle organised crime

The approach of regulators and the National Prosecuting Authority (NPA) to organised crime has increasingly turned to the relatively powerful AML and tax regimes. For example, the NPA has pursued money laundering charges against those arrested for illegal mining or possession, disposal and transportation of minerals due to the more stringent sentences available for money laundering offences. Similarly, the SARS has focused on pursuing VAT carousels in tackling illegality in the secondary gold market. The relatively powerful tools of tax audits and money laundering reporting obligations are likely to continue to be used to investigate organised crime, complex corporate fraud and cross-border criminal activity with investigatory authorities relying on information gathered from corporate and financial services reporting.

This article is part of the Allen & Overy Cross-border White collar Crime and Investigations Review. Please visit the review homepage for our overviews and insights in other jurisdictions. 

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