“Why Drug Dealers Live with Their Mothers” was one of the essays that appeared in the popular book Freakonomics. In short, the study revealed that most drug dealers never leave home because of a simple economic reality: they can’t afford to. Equally, when the Mafia infiltrator, ‘Donnie Brasco’, wrote of his years undercover, he described the life of his fellow ‘wise guys’ as financially insecure – albeit with brief spikes in income. It seems that it is really only the kingpins of the underworld who accumulate a stock of wealth too great for the base of a mattress. The banking system is thus not so easily avoided if you’ve managed to amass some wealth – by means foul or fair.
As far back as 1989, this became apparent to members of the G7 group of countries who initiated the formation of the Financial Action Task Force (FATF) – an inter-governmental organisation headquartered in Paris. The organisation’s core mandate is to set international standards for legislating, regulating and fighting against money laundering and the financing of terrorist activities. South Africa became a member of this body in 2003, but in 2001, we had already taken steps to introduce anti-money laundering legislation, with the promulgation of the Financial Intelligence Centre Act. This Act provided for the establishment of a supervisory body, namely the Financial Intelligence Centre (FIC), which requires financial institutions to report on ‘suspicious or unusual transactions’ (amongst other things), with a view to detecting financial crimes that threaten the integrity and security of the financial system. This is also one of the over- arching objectives of the Financial Action Task Force.
The FATF monitors compliance levels of its members by means of peer reviews, known as ‘mutual evaluations’. However, as far back as 2009, South Africa’s Mutual Evaluation revealed a number of areas of non- compliance, including: customer due diligence and record-keeping, beneficial ownership and politically exposed persons (‘PEPs’). These issues were duly addressed by the FIC Amendment Bill, tabled by Treasury in Parliament in April 2015. The Bill went through the National Assembly in October 2015, following which, the normal parliamentary process began, reaching completion in May 2016. It was then presented to President Zuma on 13 June 2016 – either to sign or to refer back to the National Assembly, in terms of his constitutional duties. The President, however, took no action, later revealing that he had been petitioned not to sign, by Mzwanele Manyi of the The Progressive Professionals Forum and Danisa Baloyi of The Black Business Council. The official reasons behind their objections to the Bill were based on the claim that it was ‘unconstitutional’ because it allowed for warrantless searches. However, other objections relating to the Bill’s handling of politically exposed persons began to come to the fore, suggesting that opposition to the Bill lies at the heart of South Africa’s present political and economic reality.
President Zuma failed to take action by September 2016, thus prompting the Council for the Advancement of the South African Constitution (CASAC) to do so. They issued a letter urging him to comply with his duties, failing which, they would ask the courts to intervene. Once again, he did not act and CASAC approached the Constitutional Court on the matter in November 2016. CASAC’s court action was successful in that it forced the President to refer the Bill back to Parliament for debate, in January 2017. It was at these Parliamentary Standing Committee meetings on finance that the reality of the issue of politically exposed persons came to light. This became evident despite the fact that the debate was supposed to be confined to the issue of ‘warrantless searches’ – the official reason for it being opposed in the first place.
Despite this opposition, a sufficient number of MPs were convinced by legal opinions that the Bill was indeed sound, and, in late February 2017, it was adopted by Parliament. Presidential sign-off, however, has yet to take place. At the same time, South Africa received a ‘stay of execution’, so to speak, at the FATF’s plenary session in Paris from 20 to 24 February 2017, with an extension being granted until June 2017 for the country to correct what the organisation terms ‘serious deficiencies’ (as documented in the FATF’s “Outcomes of the February 2017 Meeting of the Financial Action Task Force”). Failure to get the amendments passed into law may not only result in South Africa being placed on a global blacklist, but will have far-reaching economic consequences. These include making it more difficult (and hence more expensive) for South African banks to do business with international banks. Not to mention the implications for foreign direct investment in an emerging market seen to be very reluctant to conform to international money-laundering best practice, as well as a freshly-awarded junk status rating.
Despite South Africa’s outdated laws, financial institutions are still obliged to comply with an FIC Act, last amended in 2008. More than a year after the dust had settled on the Gupta family’s landing at the Waterkloof airforce base in 2013, South Africa’s banks were quietly flagging transactions and re-considering their business dealings with the Gupta’s firm, Oakbay Investments. By mid-2016, the Financial Intelligence Centre had received a total of 72 ‘suspicious’ or ‘unusual’ transactions connected to the Gupta family, dating from 2012 to 2016, when the Big Four banks eventually closed all Gupta-related accounts.
The banks cited compliance with international banking rules as the reason they made the decision to close the accounts. They were followed by the South African branch of Bank of China in September 2016, and, most recently, Mumbai-based banking institution, Bank of Baroda (with branches in Sandton and Durban) has also shut down their accounts. Simultaneously, the Guptas began pursuing other avenues in order to be able to transact financially. In November 2016, their business associates, Salim Aziz Essa and Hamza Farooqui made a bid for the South African division of Habib Overseas Bank, through a company named Vardospan. The Luxembourg-based parent company of Habib Overseas Bank, however, attached a condition of sale: Vardospan needed to obtain a banking license in South Africa. Such a license is granted by the Registrar of Banks, with the approval of the Minister of Finance. Uncannily, the expiration date of the Vardospan deal was 31 March 2017 – the day that the news of the Finance Minister’s unceremonious midnight firing, broke.
At the time of writing, Pravin Gordhan’s successor, the newly appointed Minister of Finance, Malusi Gigaba, had not yet managed to approve Vardospan’s banking license. He may have been pre-occupied with the knowledge that S&P would downgrade South Africa to sub-investment status, one working day after his appointment. 31 March 2017 was also approximately one month after Parliament adopted the FIC Amendment Bill – and by when President Zuma should have signed it. If he does not sign the Bill, we will have to wait until June this year to see whether National Treasury’s newly-led delegation to Paris will be looked upon as kindly as our February representatives. But, as recent history has shown, the FATF’s recommendations wield substantial de facto influence over financial institutions wanting to transact on a global stage – whether their home countries adopt the recommendations as law, or not.