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South Africa

South Africa’s white collar crime framework continues to develop in the wake of a series of “state capture” enquiries by the Special Investigating Unit (SIU) and National Prosecuting Authority (NPA). Together with former President Zuma’s longstanding corruption trial relating to arms procurement in the late 1990s and activism on corporate accountability and environmental issues, this has led to clarifications regarding key issues in the investigation and prosecution of white collar crime. 

While South African courts have been particularly active in the past year, Parliament, National Treasury and regulators such as the South African Revenue Service (SARS) and Financial Intelligence Centre (FIC) have taken steps to consolidate and amend South Africa’s regulatory framework to enhance corporate transparency and improve personal data and crypto asset regulation – developments likely to unfold in the next year. Major cross-border investigations to watch include the CumEx banking scandal while poaching continues to be a key focus of cross-border law-enforcement.

Investigations trends/developments

Contracting with the State

The authorities continue to focus on investigating public sector corruption or “state capture”. The first part of the report from the Judicial Commission of Enquiry into allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State, as chaired by Deputy Chief Justice Raymond Zondo (the Zondo Commission) has been handed to the President and was published online on 4 January. Some 874 pages in extent, the first part of the report contains numerous adverse findings by the Zondo Commission in regard to state capture and corrupt activity relating to South African Airways and associated entities, the South African Revenue Service (SARS) and irregular media procurement by Government and various State Owned Enterprises (SOEs) through the Gupta family, coupled with extensive referrals for further criminal investigation and prosecution by the National Prosecuting Authority (NPA) and steps to be taken for the recovery of misappropriated funds and forfeiture proceedings in relation to the proceeds of crime, where appropriate. Two further parts to the report are expected as at end January and February. The President in turn has undertaken to report to parliament by June on further action to be taken in implementing the findings and recommendations of the Zondo Commission. In the meantime, several “state capture” matters have already been referred to the Special Investigating Unit (SIU), which has commenced investigation and civil recovery proceedings before the Special Tribunal while criminal prosecutions are being pursued by the National Prosecuting Agency (NPA). In parallel, there are indications that State-Owned Enterprises (SOEs) are moving towards administrative “self-review” before the High Courts in order to set aside contracts tainted by corruption and claim restitution of misappropriated funds. The consequent rapid development of public procurement and administrative law principles has important implications for private parties who contract with the State and will likely shape due diligence obligations when contracting with the government. 

A new SIU focus is ZAR14.8 billion of misappropriated public funds associated with Covid-19 government tenders. While the most high-profile example is the “Digital Vibes” scandal, implicating South Africa’s former Minister of Health, the SIU is reported to have sought ZAR1.39 billion in civil recoveries before the Special Tribunal, with 214 cases referred to the NPA for criminal investigation. The commencement of Special Tribunal sittings highlights its powers to order the preservation and forfeiture of private parties’ assets and to set aside tainted contracts. 

Significant law reforms impacting corporate criminal liability

Strengthening AML and CTF framework

The October 2021 publication of the Financial Action Task Force Mutual Evaluation Report on Eastern and Southern Africa (FATF Report) highlighted weaknesses in the proactive investigation of money laundering and terrorist financing, slow progress of prosecutions relating to terrorist financing, and difficulties obtaining information regarding the ultimate beneficial ownership records of companies and trusts. 

The authorities have sought to remedy weaknesses in the corporate transparency regime (particularly in the disclosure of ultimate beneficial ownership) through the publication of the Companies Amendment Bill (Companies Bill) on 1 October 2021. Proposed amendments include obliging all companies (rather than only listed entities) to require shareholder disclosure of ultimate beneficial ownership; to publish details of persons who, alone or in aggregate, hold beneficial interests of 5% or more of shares of a particular class; and to lodge this information with the Companies and Intellectual Properties Commission. The proposed definition of a “true owner” mirrors that of the Financial Intelligence Centre Act (FICA) and aligns with the definitions provided by FATF. The Bill provides that these records be made available on request to shareholders and members of the public. If enacted, the Bill will require a greater degree of due diligence on the part of shareholders and also place an obligation on company secretaries and Boards to ensure that there are adequate procedures in place for responding to access to information requests. Liability for failure to take reasonable steps to do so within the shortened ten-business-day time period is an offence for which directors or prescribed companies may be held liable.

Public access to tax records

Taxpayer confidentiality is under review as a result of a November 2021 High Court judgment which declared provisions of the Tax Administration Act (TAA) and Promotion of Access to Information Act (PAIA) unconstitutional to the extent that the South African Revenue Service (SARS) may refuse public access to taxpayer records (and dissemination of such records by a requester), despite it being in the “public interest” to do so. 

In this case, the “public interest” in accessing former President Zuma’s tax returns was asserted by leading media outlets (based on allegations of tax avoidance by Mr Zuma during his presidency). The case follows a trend of social and media activism to hold public officials accountable for corruption and white-collar crime. SARS has confirmed its intention to oppose a confirmation of constitutional invalidity by the Constitutional Court and has sought leave to appeal the order. In the interim, taxpayer records are no longer immune to public scrutiny through access to information requests – albeit in exceptional circumstances.

New data protection regime

The Protection of Personal Information Act (POPIA), modelled on the EU General Data Protection Regulation (GDPR), is now fully in force. The new Information Regulator has commenced operations including assuming responsibility for enforcement. One of the first tests of how the Information Regulator is likely to interact with the police and NPA occurred in the past year in the form of a ransomware attack on the South African Department of Justice and Constitutional Development (DoJ) in September 2021. The resulting data breach included the Information Regulator’s own data (which was being stored on the DoJ’s IT systems). 

Internal investigations – key developments

In-house legal and investigations teams should review internal compliance programmes and ensure that personal information is processed in accordance with POPIA. This includes:

  • the appointment of an information officer
  • compilation and assessment of any personal information already in possession
  • adopting appropriate security measures to ensure the integrity and confidentiality of personal information
  • verification of personal information
  • ensuring that personal information is not retained for longer than is necessary to fulfil the purpose for which it was obtained
  • deletion of unauthorised personal information.

In obtaining and processing personal information for an internal investigation, such information must be processed fairly and lawfully, with the consent of the data subject and for a specific purpose. Measures must be put in place to secure information obtained against loss, unlawful access, interference, modification, unauthorised destruction and disclosure.

Sectors targeted by law reforms or enforcement action

Crypto assets

A set of forward-looking law reforms to regulate crypto assets (in part to counter money laundering and terrororist financing) are gradually moving through the consultation process. The Intergovernmental Fintech Working Group (IFWG) published its position paper on crypto assets on 11 June 2021. The IFWG’s 25 recommendations seek to draw Crypto Asset Service Providers (CASPs) into South Africa’s broader regulatory framework, aimed at combatting money laundering and terrorist financing, regulating cross-border financial flows (implicating Exchange Control Regulations and the South African Reserve Bank’s Financial Surveillance Department), and preventing fraud, consumer abuse and market misconduct.

The Financial Sector Conduct Authority (FSCA) published a draft declaration that crypto assets would be regarded as a “financial product” under the Financial Advisory and Intermediary Services Act, 37 of 2002 (FAIS) on 20 November 2020. The effect of the FSCA’s declaration is to require that CASPs be authorised to advise or provide intermediary services (and applies to crypto asset exchanges and platforms, as well as brokers and advisors).

Electronic communications service providers

The Cybercrimes Act partly came into force on 1 December 2021, defining various types of cybercrime and obliging electronic communications service providers and financial institutions to provide assistance to police officers or investigators where required to do so. Provisions not yet in force include reporting obligations for electronic communications service providers and financial institutions in respect of certain types of cybercrimes. This Act joins a small but growing body of laws in other jurisdictions, aimed at giving investigators direct access to data held by communication service providers. This sector, as well as the financial services sector, will need to be ready to respond.

Sectors with environmental impact

The evolving Karpowership controversy reflects the interplay of ESG considerations in the energy sector and the role of political, government and civil society stakeholders in matters under investigation by regulatory and prosecutorial authorities. 

In a ZAR225 billion deal, the Turkish-led Karpowership consortium were selected as preferred bidders for South Africa's Risk Mitigation Independent Power Producer Procurement Programme. The national energy regulator has approved Karpowership's energy generation licence but the Department of Forestry, Fisheries and the Environment (DFFE) has rejected Karpowership's environmental impact assessment. Karpowership has appealed that decision. In the interim, the DFFE's enforcement unit (the "Green Scorpions") has recommended criminal charges against Karpowership's agents for intentionally misleading the DFFE and attempting to bypass environmental regulations. Separately, the Department of Mineral Resources and Energy is facing a legal review challenge by a disappointed bidder, seeking to overturn the tender award on the basis of allegations of corruption (which have been fiercely contested in the media and are subject to investigation by Parliament and SARS). The matter illustrates how a company can get caught up in the tensions between different government departments exacerbated by ESG considerations – here being the E (environment) and G (alleged corruption). 

Cross-border coordinated enforcement activity

South Africa and the United Arab Emirates (UAE) concluded treaties on extradition and mutual legal assistance in 2018, which the UAE ratified in 2021. It is anticipated that these treaties will facilitate greater cooperation between South Africa and the UAE and assist in the investigation and prosecution of crimes. In particular, the treaty will assist the South African government in ensuring the return of the Gupta brothers, Atul and Rajesh, and their wives, Chetali and Arti, to stand trial for money laundering. The United Kingdom imposed sanctions on the Guptas in 2021 (already sanctioned under the U.S. “Magnitsky” regime in 2019). The Guptas wielded enormous political influence in South Africa and are heavily linked to state capture. 

South Africa continues to cooperate both regionally and internationally in respect of anti-poaching operations, while also participating in the INTERPOL-supported Operation Afya II which concluded in July 2021. The operation, across Southern Africa, focused on investigating, intercepting and seizing counterfeit and illicit health products with an estimated value of USD3.5 million. 

In July 2021, SARS and the United States Internal Revenue Service Criminal Investigation Division issued a statement announcing their cooperation. Their focus includes public corruption, cyber fraud and money laundering and, in particular, promoters, professional enablers and financial institutions. This partnership is part of a wider focus on cross-border illicit financial flows relating to poaching, mineral smuggling and the illicit tobacco and counterfeit textile trades. There is also a growing awareness of the links between environmental crime and money laundering.

Financial crime issue predictions for 2022

  • Strengthened financial crime response will likely see improved implementation of existing AML legislation and particular attention to corporate responsibility: We expect to see a comprehensive response and follow-up actions taken in 2022 based on the recommendations in the FATF Report concerning South Africa’s AML and CFT framework.
  • Pandora Papers disclosures: The almost 12 million offshore financial asset records have not yet named South African individuals or corporations, however, reports indicate that there are some 56,493 links to South Africa and it is anticipated that further releases will name South African individuals or corporations. The likely consequence is coordinated investigation and possibly enforcement action commencing in 2022. 
  • Dealing with the government: The final report of the Zondo Commission will result in tightening measures to prevent government corruption, with a focus on SOEs. The fallout from the inquiry and the final report will continue to concern entities that conduct business with the South African government. As cases move through the prosecution and civil recovery processes, we anticipate further clarity regarding the applicable legal principles in relation to private parties contracting with the State.
  • Data privacy: As the Information Regulator commences operations, in-house counsel will need to ensure internal and external investigations are carried out without breaching the new data privacy laws.
  • Corporate accountability: Corporate accountability is likely to remain in the spotlight due to the activities of SARS while South Africa is seeing increasing awareness concerning the intersection between white-collar crime and environmental regulation. The environmental space is one to watch – particularly if the planned amendments to various environmental legislation are eventually enacted, as these not only aim to provide environmental investigators with greater powers, but also to expand the range of companies and individuals subject to the wide-ranging environmental duty of care.

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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The 'Cross-Border White Collar Crime and Investigations Review' analyses the latest developments and trends, and highlights the most significant among the current and emerging issues that white collar crime and investigations in-house counsel should prioritise in the year ahead.

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