State capture, FATF grey-listing and cross-border white collar crime and investigations in South Africa: an overview of the key issues
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Publications: 10 January 2024
As anticipated, the Financial Action Task Force (FATF) grey-listed South Africa in 2023, despite a variety of reforms proposed and enacted to avoid this.
The predominant view is that FATF took action due to the ongoing consequences of ‘state capture’ – the four-year-long Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State (Zondo Commission) identified a number of deficiencies in South Africa’s investigative, prosecutorial and anti-money laundering (AML) framework. A detailed response plan, recently published by the Presidency of South Africa, describes how the government is taking action to respond to the wide-ranging and damning conclusions of the Zondo Commission (the Response Plan).
The Presidency, parliament, law enforcement and regulators continue to pursue criminal prosecutions and administrative penalties against offenders, recovering funds and implementing necessary legislative and institutional reforms.
Investigations trends and developments
South Africa’s grey-listing by FATF in February 2023 follows failures to address AML and terrorist financing shortcomings in the country’s legal framework, as highlighted in FATF’s 2021 Mutual Evaluation Report for South Africa (Mutual Evaluation Report). The Mutual Evaluation Report referred to South Africa suffering from a sustained period of state capture in which substantial corruption proceeds were accumulated and expatriated, and anti-corruption institutions were undermined.1
Since the grey-listing, there has been increased enforcement activity by the Prudential Authority of the South African Reserve Bank, and the Financial Sector Conduct Authority:
- For foreign corporates doing business in South Africa, the grey-listing increased customer screening requirements and enhanced due diligence, especially by financial institutions during onboarding.
- For local businesses it means being subjected to heightened levels of scrutiny and transactional costs, if their overseas counterparties elect not to “de-risk” and exit South African relationships.
The Response Plan, published following the conclusion of the Zondo Commission, outlines a range of reforms to prevent future state capture and to enhance South Africa’s anti-bribery and anti-corruption (ABAC) and AML regimes. These include:
- establishing a permanent Anti-State Capture and Corruption Commission and an independent Public Procurement Anti-Corruption Agency
- the Public Procurement Bill introduced to Parliament on 20 June 2023, which aims to increase transparency, create binding codes of conduct in the procurement space, afford protection for accounting officers and disbar contravening suppliers.
Important 2023 law reforms impacting corporate criminal liability
The Response Plan details legislative amendments to address corruption. The most relevant are:
- the National Prosecuting Authority Amendment Bill (NPA Bill)
- the Companies Second Amendment Bill (Companies Amendment Bill)
The NPA Bill, passed by Parliament on 6 December 2023, aims to make the Investigating Directorate Against Corruption (IDAC) permanent. This is significant as the IDAC is regarded as the most successful ABAC enforcement agency in South Africa but previously operated under a temporary Presidential Proclamation. The NPA Bill amendment grants the IDAC security of tenure, allowing it to appoint permanent investigators to probe and prosecute complex bribery, corruption and white collar crime matters.
The Companies Amendment Bill, introduced in 2023, is currently under consideration by Parliament. It proposes to extend the time bars applicable to applications for director delinquency and proceedings to recover loss due to director liability (where directors have breached their duties or acted unlawfully). This is a significant change from the current provisions of the Companies Act, which provide that proceedings to recover any loss, damages, or costs for which a director may be held liable may not be commenced more than three years from the act or omission that gave rise to the liability. The Companies Amendment Bill proposes to amend the section to empower the courts, on good cause, to extend the time period of three years, whether or not any act or omission referred to in the section occurred before the extended period.
Internal investigations – key developments
A recent case clarifies how litigation privilege may apply in an internal investigation. In Tiso Blackstar Group (Pty) Ltd and Others v Steinhoff International Holdings N.V., investigative journalists sought disclosure of a high-profile investigation report into a significant corporate fraud. The court held that for internal investigation reports to be subject to litigation privilege (a subset of legal professional privilege in South Africa), those reports should be procured for the express purpose of contemplated litigation. If the claim of litigation privilege is challenged, robust evidence must be advanced to justify the claim. If the purpose of the report is for contemplated litigation, a litigant should ensure that assertions in sworn affidavits should not be vague or imprecise, especially when describing why the litigation against person(s) and/or entities was contemplated and the basis on which that opinion had been formed.
In Steinhoff, insufficient facts had been put forward to support a claim that, at the time that the internal report and investigation were commissioned, litigation was “likely”. The claim to privilege failed.
Sectors targeted by law reforms
The Financial Sector Conduct Authority (FSCA) declared cryptoassets a “Financial Product” under the Financial and Intermediary Services Act, 2002 in late 2022. In addition, it published an accompanying policy document supporting the declaration and announcing a licensing period between June and November 2023. This is the first step in drawing cryptoasset service providers and crypto exchanges into the financial regulatory framework. FSCA representatives have recently stated in media appearances that the FSCA has started developing a regulatory framework for cryptoassets to protect those who want to invest in the sector.
The proposed Public Procurement Bill, introduced to Parliament in June 2023, is set to reform the public procurement sector. The Bill aims to advance ethical conduct and combat corruption in procurement by procuring institutions. As identified in the Zondo Commission and the Response Plan, one of the primary causes of the dysfunctional state of public procurement in South Africa is the complex and disjointed regulatory framework relating to public procurement, a primary source of corporate crime. A vast range of national legislation, regulations, instruction notes, practice notes, policies, “circulars”, and guidelines regulate public procurement. The proposed Public Procurement Bill presents a unitary avenue for public procurement which aims to address the risk of incoherence and lack of adherence by corporates that engage with government in procurement activity.
The Bill expressly defines ‘Corruption’ in relation to the Prevention and Combating of Corrupt Activities Act, 2004 and establishes the Public Procurement Office to oversee and enforce the procurement system. This is a notable development as the term ‘corruption’ was previously not mentioned at all in the Public Finance Management Act. The Bill also introduces debarment orders, rejection and cancellation of bids, and reporting and investigation of allegations involving corruption, fraud, collusion or coercion by any party in the procurement process. It further requires the development and use of an information and communication technology-based procurement system to enhance transparency and integrity and to enable external scrutiny and monitoring of procurement.
Cross-border coordinated investigation or enforcement activity
Anti-poaching efforts and associated money laundering consequences continue to dominate cross-border engagements. On 25 January 2023, a new partnership between the U.S. and South Africa, expected to boost efforts to combat wildlife crime, creates a new South Africa Task Force on Combating the Financing of Wildlife Trafficking (Task Force). The Task Force will work to combat illicit finance linked to illegal wildlife by:
- prioritising the sharing of financial red flags and indicators related to wildlife trafficking cases
- increasing information sharing between financial intelligence units to support law enforcement agencies in South Africa and the U.S.
- convening the relevant government authorities, regulators, law enforcement, and private sector to improve controls to combat money laundering and the illicit proceeds related to drug and wildlife trafficking.
Predictions for 2024
Since South Africa’s grey-listing, the South African Prudential Authority and FSCA have commenced numerous investigations and enforcement actions to address the various investigative and prosecutorial failings related to AML and combatting the financing of terrorism identified by the FATF. It is also anticipated that regulators will place emphasis on compliance with the Financial Intelligence Centre Act, and specifically the risk-based approach to the design of know your customer and compliance programmes.
This article is part of our Cross-Border White Collar Crime and Investigations Review. Please click here for our overviews and insights in other jurisdictions.
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1. Mutual Evaluation Report at page 3.