Illicit Financial Flows, Base Erosion & Profit Sharing, Panama Papers: Treasury, SARB, Financial Intelligence Centre, SARS inputs

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Finance Standing Committee

25 May 2016
Chairperson: Ms J Fubbs; Mr Y Carrim; Mr S Luzipho (ANC)
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Meeting Summary

This was a joint meeting with the Portfolio Committees of Trade and Industry and Mineral Resources.

National Treasury introduced the presentations. On illicit flows, the difficulty was hard evidence. The media put out a lot of information but it would be helpful if people went directly to the authorities with evidence so that it could investigate. This was a difficult issue. Coordination and sharing of information amongst state agencies was emphasised.

The South African Reserve Bank said it had increased enforcement action under the Exchange Control Regulations and FICA, and had identified high risk areas. From January 2015, about R307 million was blocked and there were 77 new investigations. An important consideration was that South African individuals could invest up to R10 million out of jurisdiction plus take out R1 million for discretionary purposes.

The Financial Intelligence Centre said that it made information available within the constitutional framework to various stakeholders in government. In 2014/15 they had received 6.9 million suspicious transactions and in 2015/16 9.4 million transactions. They had set up a research project to try and fully understand illicit flows and the illicit economy. A lot of work was done with DPCI and NICOC. FIC would be conducting investigations on entities that had enabled the Panama Papers to occur.

SARS had attended a secial Panama Papers meeting in April of the Joint International Tax Shelter Information and Collaboration Network (JITSIC) where an action plan was devised aimed at attaining information and sharing more efficiently. SARS had identified 79 of the total 560 offshore entities that matched their databases.

SARS went through BEPS action items. Out of the 15, four were related to transfer pricing. They dealt mainly with substance, contractual allocation of risk and capital, high risk transactions and re-characterisation. In December 2015 they had issued a notice enhancing the document and record keeping requirements for transfer pricing, and amended the Tax Administration Act. SARS said that currently it had a challenge finding experienced human resources.

On its customs mandate, SARS had 2 597 officers present at 10 airports, 8 seaports, 17 SACU ports, 2 SADC ports and 1 inland port to control goods flowing in and out of the country, to collect duties, protect society from harmful goods, and to protect the economy.

Members asked if the Guptas had properly been through customs when they left earlier this year, and if it was true that they had left illegally with a large amount of cash; the number of non-whites who were accused of illicit flows; about the African Union and their tactics on transfer pricing; what Parliament could do to assist with this issue; about the lack of seizure of goods already in the country being sold at low prices because of mis-invoicing; about looking at the intermediaries involved in the Panama Papers; if FIC sent all alleged crimes to SAPS.

Meeting report

The Finance Chairperson, Mr Y Carrim (ANC), said that the three Portfolio Committees present were all dealing with illicit flows, base erosion and profit shifting and had agreed to meet jointly on a regular basis. In particular at this meeting they were also discussing the Panama Papers, as this involved South Africa as well. The Committees wanted to know what progress had been made since the Panama Papers had been released. Secondly, since the previous meeting on managing base erosion and profit shifting in 2015, what had been the progress?

The Trade and Industry Chairperson, Ms J Fubbs (ANC), agreed about the decision to hold these meetings jointly but to be led and chaired by Finance, as this was the direct mandate of Finance, which they recognised and respected, though they also wished to have the issue of transfer pricing effectively recognised.

The Mineral Resources Chairperson, Mr S Luzipho, briefing commented on starting the meeting promptly.

The teams that were present were National Treasury headed by Mr Ismail Momoniat, the DDG: Tax Financial Sector Policy, Mr Cecil Morden Chief Director: Tax Policy Unit and Ms Yanga Mputa Chief Director: Tax Policy Unit. From South African Revenue Service (SARS) there was Mr Vincent Sibanda, the Executive Stakeholder Management, Ms Nishana Gosai Manager: Transfer Pricing, Dr Jouza Loots- Executive: Revenue & Risk, Mr Vlok Symington, Group Executive: Product Oversight, Legal and Policy and Mr William Mpye – GE: Customs Compliance, Risk & Case Selection. From Financial Intelligence Centre (FIC) there was Mr Murray Michell, the Director, and Mr Nischal Mewalall – Executive Manager: Monitoring & Analysis. From the South African Reserve Bank (SARB) there was Mr Eligah Mazibuko, Head of Financial Surveillance Department and Mr Andre Malherbe – Manager: Compliance & Enforcement. From DTI, there was Mr Nkosiyomzi Madula, DTI Chief Director: Research and Policy, Mr Livhuhani Mukhiti, DTI Director of Research and Policy and Mr Desmond Ramabulana, DTI Director of Commercial Law.

National Treasury overview
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, began by pointing out how involved the Treasury related entities were. He wanted to do a quick overview and situate all the presentations. They had a hearing in September 2015, and the question was what was new since then. There were lots of reports on illicit flows that appeared in the newspaper, they had the Panama Papers and lots of examples of illicit flows that Members of Parliament had raised, cash being taken to enabling countries. Their difficulty was whether there was any hard evidence. There was a lot seen in newspapers and often people made those statements, it would be helpful if they went to National Treasury and provided more information on their sources so that it could be followed up.

All the authorities present, they all read the newspapers, and one hoped they took up those cases. A lot of the information from Treasury was confidential but there was sharing between the entities. The key objective for them was to catch those responsible for illicit flows out of South Africa, and, as important, to ensure the preventive measures could be stepped up to the point where they identified the weaknesses so that illicit flows were prevented.

On who had been transgressors, that was where there was a problem. They did not know, because, by definition it was impossible to know the exact amount as it was illegal, so people did not report. All the numbers were estimates. There was Global Financial Integrity (GFI) and UN agencies all coming up with numbers but the honest fact was they did not know if the actual number was significantly higher or lower.

The GFI in Washington dealt with unrecorded money flows out of the country which could take three forms; corrupt, criminal or commercial. He added that definition and methodology tended to be specific. They looked at trade numbers and trade with countries, how country Y felt about your trade with country X, and they tried to compare. He thought there were issues with that methodology, he was not saying that the methodologies were not useful but it did not give an actual indicator. They should bear in mind that for a country like South Africa, aside from illicit flows going out, there may well be illicit flows coming in from neighbouring or other countries.

Illicit money by definition is that it was illegally earned, transferred or utilised and violated laws or regulations in the origin country. They did know that there were illicit flows but they did not know how much. There were also different types of illicit flows, and that was why they had a plethora of entities here. When looking at something like the Panama Papers, even if a name appeared, it did not mean that it was illegitimate. What was the best way to know? That was why they often had amnesties and Voluntary Disclosure Programmes (VDPs) or was it better enforcement? It was probably better enforcement and giving people a chance to come right.

They needed to figure out what problem they were trying to deal with when they spoke of illicit flows? Was it just to stop them in the future or deal with those that had taken place in the past? How did they get justice because people clearly committed illegal acts so they should be prosecuted? What were they doing about those? It was important to consider what period they wanted to cover. Did they want to deal with pre 1994, when he was sure a lot of money went out, or did they want to know what happened after 1994. There were many amnesties - in 2003, 2010 and a VDP from 2012.

To be more specific on illicit flows, not all flows were illicit. One had to look at what laws had been transgressed. It could be drug laws, human trafficking laws, counterfeiting laws, and for that they needed to go to the prosecuting authority directly. It could be corruption, bribery or theft, or fraud, it could be commercial law, tax laws, tax avoidance and a whole plethora of other acts. There were many authorities that dealt with this and he wanted them to also be identified and held to account.

There were challenges in that they did not have many prosecutions. Often when cases were reported, it was not always clear there was a follow up through prosecution. Of the entities that sat here today, none of them had the power to prosecute. They could facilitate that by talking to the prosecuting authority. So how best did they catch transgressors?

The key point was whether they were sharing information and coordinating. The tendency was for each to work in its own silo. For those on the Finance Committee, they would have seen the Financial Intelligence Centre Amendment Bill, seen the informational challenges, and that there were a lot of laws that required confidentiality and may even be specific about with whom they could share information. Often that was not as broad as it should be. There were also other considerations of privacy, so there needed to be some kind of balancing.

He definitely thought there needed to be coordination, but was it good enough? Even the Treasury families had a forum and they met, but he did think more needed to be done.

They also needed hard research. National Treasury as a department did not have access to SARB’s information or FIC’s information. They could share information amongst themselves, but it was hoped that there would be follow up.

It was tough enough to do it within the Treasury family, but it became more difficult when reporting to different Ministers. There were those reporting to Minister of Finance, those reporting to Minister of Trade and Industry, did they coordinate? They all looked at beneficial ownership, they needed the CIPC to be involved as well, were they involved? He did not have the answer, they did not have time to ensure all the coordination. Often the information was still paper based, not digitised.

Mr Andre Malherbe, SARB Manager: Compliance & Enforcement, stated that Gibraltar had an online database where in real time one could update the initial ownership of countries.

Mr Momoniat was saying that when it was available online it made a huge different to everyone. Were these things updated in real time as it happened?

The Treasury was involved in excon approvals, government bonds, so there was a lot of outflow and inflow that Treasury itself was involved in. SARS was involved in assessing of taxes, transfer pricing issues, and within SARS the movement of goods and services and trade pricing. Aside from checking for caps revenue, they may be checking for security. At an airport, there was airport security and customs. Financial Intelligence Centre (FIC) dealt with cash run records and suspicious transaction records. SARB had particular information on outflows. For Treasury there was also Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA). Just from media reports, did they know that all state owned entities and public sector outflows were approved appropriately, did they not need tighter controls especially in offshore operations? These were questions in the public domain because these also instituted illicit flows if something was not done according to the PFMA.

As an example of all the players and the complexity, if they looked at beneficial ownership which was a big issue that came up around the FIC Amendment Bill and where they were lagging, who were the actual owners? Does the JSE have sufficient information? Did the CIPC have sufficient information? In most cases the answer was no. Looking at investment and pension funds in terms of who invested them, did they know who the ultimate persons were that were responsible for investing those funds. When looking at trusts, they needed to look at Department of Justice and the Master’s Office, where did they fit in?

A lot of illicit flows happened around property, they all heard about the London property market and the billionaires from certain countries who bought soccer teams and properties. Was the Deeds Office updated, which fell under Department of Rural Affairs. They clearly did not have the kind of coordination necessary within government, there was some coordination, but it could always be improved. Similarly, could Parliament assist because it was not just the one or three committees involved in their oversight.

SARB would go first and would deal with Panama, transfer pricing, trade mispricing and the brief report from customs. FIC would come in with what they did and about Panama. If there was time, Treasury would give an update on BEPS, because there were 15 actions there, four of which were related to transfer pricing, but they would just give a brief update. The main message he had, was that they did not have the full picture, there were all these other players out there that also needed to be involved.

Mr Carrim stated that the way Mr Momoniat was raising questions, it would seem that government was flustered. He was raising good questions but they were not consistent with what they had been saying up until then as a team, that they were aware of the gravity of the problem, they were tending to it, they had given figures before, this was more of a workshop type reflection to say that they did not really know how serious the problem was. It was not consistent with the three or four sittings the committees had had with them over the last 18 or so months. Although he was sure that they all understood the complexities of what Mr Momoniat was pointing to, but presumably they were on the ball and doing what they could. It was inconsistent with what had been said to the committees up until then, it was more a philosophical reflection. It was coming a bit late, this would have been fine 18 months ago when they first met them, but it was more of an introspection, reflective input which they would presumable have amongst themselves and then come forward with answers. If they were expecting to get answers from the committees that was expecting too much. The introduction was rather negative.

Mr Momoniat stated that he wanted to get across how complex the issue was, certainly he thought that each of the entities were doing their best and were expanding, but he was saying that this issue was so complex that they needed much more from each silo or departmental family with more effective coordination. The proof was in how many were prosecuted or fined. It was not South Africa’s specific problem, but it was hard to ensure that in the whole chain this was actually working, and it required very different skills. To solve this in an incremental way, they could solve small problems, but if this was a big problem, how would they solve it? Most countries, certainly developing countries faced these challenges and he did not want to appear and say that everything was OK; they saw too many reports in the newspapers. As a taxpayer he would want to know that at least someone was checking the report and the problem was being sorted out.

Chairperson Carrim said that the idea of the meeting was to get a quick briefing on the Panama Papers, they would have to find a fuller opportunity. The first week back in August was a committee week, they needed a longer meeting then. When the other entities made inputs they should understand that it was part of a two part process. The entities were also still putting together the Panama Papers data. In August they would have a longer meeting with the entities, where they would be much more proactive and clear.

Chairperson Fubbs stated that National Treasury had listed BEPS as comprising 15 actions and the complexity of that. From their side, as Trade and Industry, they thought transfer pricing, while complex, did not have the same complexities as the other actions. So the objective was what could be done and was being done, they needed action in order to proceed.

Mr Momoniat wanted to be clear that each of the presentations would show the actions that were actually happening and what was being done about them. It was important to get the entire picture and know that if they were to operate in silos, even if everyone was successful, they would not necessarily solve the big problem.

South African Reserve Bank (SARB) Financial Surveillance Department on Illicit Financial Flows
Mr Eligah Mazibuko, SARB Head of Financial Surveillance Department, said that illicit flows started years ago, prior to the Panama Papers, it was just the magnitude of the information that had been revealed that concerned people currently. He noted the 2003 amnesty. At SARB, a strategic focus area was to monitor cross border flows and prevent abuse of the financial system. They worked with other agencies, SAPS, FIC and the Asset Forfeiture Unit (AFU). They worked with SARS on border control, and the money that could flow through ports, especially airports. They did awareness training and provided guidance in terms of legislation on who could store the money that had been taken and on what basis the money could be taken from people carrying it illegally out of the country. They could not do this work alone. They had increased enforcement action under Exchange Control Regulations and the Financial Intelligence Centre Act (FICA). They could block the money and where people could not explain from where they got the funds, the money could ultimately be forfeited to the state in the long run.

They focused on high risk areas such as freight payments; advance payments for imports where people would give reasons to send money offshore, especially for capital goods where they say the manufacturer would not be able to start without money going out, but when they started to look at whether there had been an import, they found there had never been an import. It was unfortunate to see that people took advantage of such dispensations. They also focused on unauthorised dealers in foreign currency. He noted currency black markets in Cape Town and in Limpopo where people were starting to sell dollars on the street.

From January 2015 to date, 145 bank accounts were frozen as a result of suspected illicit financial flows, with approximately R307 million blocked. 77 new investigations were opened during this period. They worked with enforcement agencies and there were arrests in KwaZulu-Natal, Mpumalanga, Western Cape and Gauteng. There was a dramatic increase in referrals, which were tip offs, about suspected transactions. In terms of the cases, there was a significant reduction in number of illicit flow cases opened, because once people knew that you were on to their modus operandi, sometimes they had an impact in that regard.

Offshore Leaks is the name of the report disclosing details of 130 000 offshore accounts in April 2013. It was considered the world’s biggest hit at the time against international tax fraud. Offshore Leaks comprised of more than 2.5 million secret records about the assets of people from 170 countries.

The Panama Papers themselves contain leaked confidential information about the provision of trust services, wealth management, international business structures and commercial law services by Panamanian law firm, Mossack Fonseca, for its clients in offshore jurisdictions. They had been facilitating investors to hide their money in other jurisdictions. Normally entities in the past set up interest-bearing accounts that offered a high degree of anonymity and ease of transferability. The benefit was, that in terms of inheritance, it was easier to transfer. As time went on they were used for tax evasion and money laundering. The Panama Papers provide insight into how high net worth individuals structure their financial affairs to minimise tax exposure. People evaded paying tax by going to low tax jurisdictions where they could rake in more profit. The papers disclosed beneficial ownership of trusts and entities. One way to hide beneficiary holders, was to have nominated directors and use shelf companies that you could buy off the shelf already with a tax number, corporate structure, with credit history, but they would never know the underlying owners of that particular company. The papers disclosed details of the enablers. People do not have any expertise, so they need an intermediary like a legal firm to assist with creating these structures. The leaked information consists of 11.5 million documents covering services performed between 1970s and early 2016.

It was leaked by a newspaper which had journalists belonging to the International Consortium of Investigative Journalists (ICIJ). Some South Africans journalists have ICIJ affiliation, and they had been introducing this information in the newspapers. At this stage they did not have all the information, there is information still to come and SARB was monitoring this. They had a cross-border system so they tried to compare from that system, because if people transferred money from South Africa it was captured on the system. However, it did not mean that everything that was captured was legal, because people did sometimes use fake documents.

Important considerations were that individual South Africans can legally invest up to R10 million per annum plus R1 million for discretionary purposes abroad. The Panama Papers provides limited information; some of it was from the 1970s, and so it was outdated or those perpetrators took advantage of the 2003 amnesty or the 2010 Voluntary Disclosure Programme (VDP). SARB was still checking the compliance status of individuals and entities implicated in the leaked information. They worked with SARS in this regard, considered possible contraventions of financial requirements and legislation and to determine whether offshore accounts had any nexus to criminality. Today when people invested offshore there was a notion to follow the money because the money would leave South Africa, and it would return to finance people who were involved in criminal activities. In setting up financial structures there were regulations, one could not just decide to set up a structure anywhere in the world without approval from certain regulators. When identifying exchange control violations, they could block the accounts and in the end, once they had verified from where the funds had come and for what it was to be used, it could be confiscated by the state.

Financial Intelligence Centre (FIC) presentation
Mr Murray Michell, FIC Director ,stated that FIC’s main purpose was to identify the proceeds of crime, which meant going to the source, the crime itself, and the extent to which it generated proceeds in the form of money laundering and illicit financial flows.

The FIC makes the information it collects available, within a constrained framework, to various stakeholders within the government sector, including investigating authorities, intelligence services and SARS and certain supervisory bodies which included SARB, both the FinSurv side of it and the banking department. They were able to move the information back and forth and give guidance to those reporting institutions. It was not only the hard financial intelligence they provided, but it was also providing information for policy development.

There had been an ongoing growth in suspicious transaction reports (STRs) over the years, although in the past year, the reporting of suspicious transactions was slightly down, but overall the tendency was up and would continue to increase. They now had over a million suspicious transactions in the database and they had over 25 million cash threshold reports (CTR) recorded in the database between 2010 and 2015. They were constantly modernising and updating the IT systems to crunch this and other data which led to all sorts of interesting results. Looking at the priority areas for FIC, and those had developed over the past five or six years, he wanted to look at the 2015/16 year, those blocks determined the focus of FIC. They did not simply receive data coming in and then try to make sense of it. They set it against the priorities determined by the law enforcement investigative authorities on the one hand and the intelligence services on the other. There were prime priorities and national security priorities, and it helped them look for what they needed to look for, and then assist them in their investigations.

On performance in 2014/15, 6.9 million total reports were received, which included the full gambit of suspicious transactions. There were only 18 Terrorist Property Reports (TPRs), which was probably a good sign for South Africa and its national security. In terms of better utilisation of financial intelligence, the number of cases that FIC had disseminated for full investigation was 870. The requests responded to from international counterparts was sitting at 1 799. Temporary blocking of funds to enable the take back of money, was R180 million. It contributed to 22 judicial actions, which extended their mandate, but it meant FIC officials were appearing as expert witnesses in court matters. The crime types referred for investigation were listed for 2015/16 and the key areas were corruption, crimes against the state, fraud and money laundering.

The crime types for which information was requested were listed. Mr Michell said what was important here was terrorism and robbery. There was a lot of work on national security and terror related matters even though there were few reports. Fraud was the key crime type. FIC was not working in isolation but with a wide range of investigative authorities on the law enforcement side. The requestors for information were listed (slide12).

Moving on to the illicit economy and the financial flows, FIC ran a research project from 2013 to 2015, to try and understand the illicit flows in relation to the illicit/illegal economy. They had to understand from their side what the illegal economy was, and what major crime types drove the generation of proceeds. This led, last year, to an interrogation of virtual currencies such as Bitcoin and Blockchain, because of the threat they posed to our financial system. The research was intended to better coordinate efforts with law enforcement authorities, security agencies, SARS and banking supervisors. Crime was a process and in many cases it was a business, and they needed to understand all the components of that in order to intervene appropriately.

The Financial Action Task Force standards were paramount. The FATF had done some work which SARS and been involved in as well as FIC, on trade based money laundering, which linked to transfer pricing. It was a good piece of work and should be fed into the committees in the future. FIC had worked with the United Nations Office on Drugs and Crime and OECD to understand transnational crime, in particular narcotics, terrorism and human trafficking, and the flows associated with those. Illicit financial flows were very difficult to measure, notwithstanding all the numbers out there, and the existing methodologies only gave crude estimates. FIC’s working definition for illicit/ illegal economy was provided.

In this project, they sort to engage with as many different stakeholders across the board as possible. They had many workshops, both in the economic cluster and the justice crime prevention cluster. They wanted the crime prevention side to understand the role of finance and money in relation to crime and beginning to help focus their efforts there. Broadly, the illicit flows clumped into transfer pricing/mispricing (65%); criminal activities, including narcotics (30%), and corruption and other (5%), which was a small quantum in relation to the overall.

A lot of work was done with Directorate for Priority Crime Investigation DPCI and within the National Intelligence Coordinating Committee (NICOC) structures to look at the value chains of crime types. That had helped with strategic focus and intention to be able to intervene appropriately. They had a better understanding of the business of crime, where the lack of transparency enabled hidden financial flows, which the Panama Papers confirmed. That lack of transparency was a serious flaw.

Challenges going ahead, the illicit financial flows are subset of the illicit economy and they needed to understand this in much more detail. It requires a national policy and long term multi-disciplinary (inter-departmental) implementation plan, involving different government clusters, including DIRCO intervention. It needed granular research work, where models and methodology research could be developed. It required policy development and coordinated operational interventions. He wanted to again make the link to the Panama Papers, in that they saw that disclosure and transparency was critical and they needed the wherewithal to pierce the corporate veil.

Mr Michell said that he had made the decision last week that FIC conduct inspections into the entities that had enabled the Panama Papers actions to have occurred to establish if they had met the obligations, registration and reporting requirement of the FIC Act.

South African Revenue Service (SARS) briefing on the Panama Papers
Mr Vlok Symington, SARS Group Executive: Product Oversight, Legal and Policy, said that the Panama Papers contained about 11.5 million internal files. No one has access to the financial transactions, emails and other correspondence, they only had the searchable database of basic corporate data that the ICIJ had released. The policy of ICIJ is not to hand over the other type of material. In short, the data available is a useful starting point for further enquiry but will require substantial follow-up work.

SARS was invited to a special Panama Papers meeting of the Joint International Tax Shelter Information and Collaboration Network (JITSIC) which consisted of a number of tax administrators from around the world, to in April 2016, to find out what each of these tax administrators would be doing and had been doing. An action plan was agreed on by the tax administrators aimed at attaining more information and sharing it more efficiently. At the moment, SARS had downloaded the data and converted it to a spreadsheet format. They had identified the names of roughly 1700 individual South African residents, after removing duplicates, those varied from shareholders to beneficiaries to directors. They identified 56 South African intermediaries.

Using charts for clarity, Mr Symington explained the typical structures of an offshore company and bank account. Either the client or intermediary would go to Mossack Fonseca in Panama, who would then set up a company and appoint a nominee director, so the link between the company and the South African resident was gone. It was only captured in the underlying supporting documentation found in the offices of Mossack Fonseca. The company would set up a bank account either in the same country or in another jurisdiction, which again broke the link. He had inserted a trust on top, which made the link more invisible.

They had thus far been able to identify 79 of a total 560 off shore entities that they had been able to match to their database. They had so far been able to match 79 of them, this number would grow. SARS had been able to link 81 South African residents with those 79 offshore companies. They had set up a unit within SARS to manage this, and were doing their best to match the rest of the names with entities so they could begin to see what their tax profiles looked like. It was too early to know the extent of the tax evasion. They did not have any estimates of the value lying in those bank accounts at the moment. They would allow residents to make use of VDP processes, even the special VDP being introduced on 1 October 2016, if SARS did not get to them before 1 October.

Chairperson Carrim stated that the Committee would process the Voluntary Disclosure Bill in August, and SARS would certainly have it before the end of October. The FIC Amendment Bill was being processed by NCOP and it was being debated on the same day.

SARS briefing on Base Erosion & Profit Sharing (BEPS)
Ms Nishana Gosai, SARS Manager: Transfer Pricing, noted that as initially stated, out of the 15 BEPS actions, four were related to transfer pricing, and two or three others touched on transfer pricing. The four key best action items were actions 8-10 and 13. Action items 8 to 10 dealt mainly with substance around certain transaction types, like intangibles and how to value them; the contractual allocation of risk and capital; and high risk transactions such as base eroding payments like management fees, and dealt with the issue of re-characterisation. Action 13 dealt with transfer pricing documentation.

In terms of intangibles, the thinking now was that they would no longer blindly accept legal contracts or ownership, without looking at the economic substance of where the business generating the intellectual property was performed. The owner was sitting in a low tax jurisdiction and thinking they should be entitled to intangibles with inflated returns. In terms of contractual allocation of risk and capital, that was dealt with on the premise that it was a common economic principle that profits followed risk. What they started to see were paper allocations and paper transfers, without those entities being able to bear such risk. Looking at capital, it became common place to have cash boxes resident in low tax jurisdictions. Just because they provided capital, it was questionable how the flows got into the low tax jurisdiction; the thinking was that they were entitled to all the profits. That was no longer the case. The underlying premise now was that value – where economic transaction took place – was looked at rather than where the legal contracts resided. Looking at high risk transactions, they dealt with re-characterisation and altering those contracts in order to allow the conduct. South Africa had always had transfer pricing legislation, it had been around since 1995. However, these revisions and extensions out of the best action items were going to go a long way in helping them to reinforce, audit, monitor and track the transfer pricing transgressors. SARS had revised the guidelines at the domestic level to enhance their capabilities to get to the heart of the transgressors.

When she had presented last year, she spoke a bit about the challenges they experience, the diversion and delay tactics by taxpayers, where the failure to provide information did not assist the authorities in making a meaningful audit. On the back of the best outcomes, the momentum gained, working with National Treasury, they came up with a few regulations. In December 2015 they issued a public notice enhancing their document and record keeping requirements for transfer pricing. They had public consultations with businesses on 9 May 2016 and she thought the feeling from the sector was that it was hard hitting and a milestone progress. Up until now, since 1995, SARS had not had transfer pricing documentation or record keeping as a statutory requirement. Now it was. Public officers having to sign off tax returns were now going to be under severe pressure to go back and ensure they were in compliance with the record keeping notice.

Further SARS inserted section 42(a) into the Tax Administration Act to clarify the requirements to be met against taxpayers failing to provide information to SARS. The common tactic used was claiming legal privilege. Now they had put in very stringent measures to say if they were going to put that claim in, what the criteria were and the rights and powers of SARS. They set up a process that in the instance of a stalemate they had a judicial process. They amended section 46 of Act in order to access foreign based information. Transfer pricing related to cross border transactions where one party to the transaction was always sitting offshore. A large part of the hindrance to auditing transfer pricing transgressions was the failure of SARS to get the offshore information. So now they had put in a mechanism to get that. They had also put in a backstop to say that taxpayers who did not provide such information on the basis that it was offshore may be prohibited from providing it later in the event that it helped them.

They had amended section 47 of the Act, clarifying the persons who may be interviewed or called upon to provide information on a company or entity under audit. A multi-national was a legal persona but there were people in those legal entities that had information. One of the things that SARS identified was that there may be some loopholes around that person providing information on the activities of the company, which had now been clarified to close that gap.

They had amended section 49 of Act to say that such persons had to do so under oath or solemn declaration. The reason for this was that unless people felt that there was a strong deterrent, a common answer may be “I don’t know”. That cop-out can no longer be used.

They had amended section 99 of Act which extended the prescription period on the statute of limitations. It was found that taxpayers would play the prescription game and when SARS was ready to make an assessment, they were out of time. They now had strict rules about extending the prescription timeline. They had also made inbound services a portable arrangement. These inbound services were listed in the BEPS action items as being a significant base eroding payment for developing countries. They were able now to better track and audit it.

They had broadened the corporate tax return to improve and increase disclosure requirements of transfer pricing and other BEPS related transactions. They had implemented measures 18 months ago, and on completion of the BEPS project, they were undertaking further exercises within SARS to say how they could better improve this.

BEPS Action 13 addressed the principle of transparency. Again they found documentation was key to any audit and to the conclusion of an audit. Action 13 recommended a three tier approach: Master file talking about the overall group; Local file which is detailed information specific to operations in the country; and then the Country-by-Country (CBC) report which provided a macro shot of the entire group with triggers of economic activity such as taxes paid, which jurisdiction one resided in, what was the capital structure, how many people were employed, etc. The CBC report was considered the minimum standard. South Africa had just passed legislation on the CBC in their jurisdiction. They also had further projects to clarify or intensify the Local file and Master file for their jurisdiction and that would be released later on this year.

Last year SARS reported that over a three year period, they had tracked income and made an adjustment to the tune of R20 billion which resulted in about R5 billion in tax collection. For this year, the 2015/16 financial year, tax collections relating to transfer pricing at SARS approximated to about R850 million. This resulted from three main sectors; mining and quarrying (R721m), oil refinery (R94m) and manufacturing (R42.5m).

They had 29 tax payers currently in audit but those spanned multiple years of enquiry. She gave a breakdown of the sectors they related to and some of the risks they had identified. In terms of their transfer pricing capacity at SARS, they currently had 25 staff members and had a recruitment process underway for additional capacity and they had a dedicated training programme for enhancing capacity.

One of the challenges around capacity was the scarcity of experienced human resources which was a global phenomenon. All tax administration, including advisory, was struggling. They were actually resorting to hiring foreign skills and seconding them on a basis of three years to assist with capacity. There was competition between SARS and the private sector, since it was known that private sector did pay well. Transfer pricing experience paid very well. There was, however, positive retention due to diversity of work and exposure and subscribing to the higher mandate and making a difference. The challenge of hiring from outside as opposed to building from within, was that external candidates came with no audit experience for this tax authority, they were unfamiliar with SARS governance procedures and systems and it took them a while to assimilate into the system.

Ms Gosai spoke about SARS leveraging international best practice, staying abreast and ensuring that it continued to improve itself. For example, last year they had participated in UN Workshop on Practical Issues in Transfer Pricing for Developing Countries. SARS also sat on the steering committee to enhance transfer pricing in developing countries.

Dr Jouza Loots, SARS Executive: Revenue and Risk, stated that the GFI reports were all high level and the numbers were at a high macro-economic level. They were focusing on doing research on a granular level to get to grips with how great mis-invoicing or mispricing was. It was a concern that the numbers were enormous. So what they were currently doing was selecting a subsection of the economy that had a wide-ranging impact on the rest of the economy. In undertaking this granular research, data availability was critical. They relied on trade statistics and product pricing data. They cascaded the data into a macro-economic level. They needed to test the research and analysis based on pricing information and trade statistics to the financial entities within that subsector. They needed to do some data mapping. The mispricing manifested itself in two ways, import over-invoicing or export under-invoicing and they were looking at both.

Mr William Mpye, SARS Group Executive: Customs Compliance, Risk and Case Selection, updated the Committee on the customs mandate, which was control of the goods flowing in and out of the country, the collection of duties, protection of society from harmful goods, protection of the economy. They did this with about 2 597 officers present at 10 airports, 8 seaports, 17 SACU ports, 2 SADC ports and 1 inland port. Their capabilities included technology such as scanners, ray scanners, and body scanners. They also made use of detector dogs to sniff out currency, and in addition to what SARB had already presented, they had started to detect the movement of currency through SA borders. The types of precious metals found were diamonds and gold, currency was USD and Euros etc. Rhino horn was found, narcotics which could be used as part of money laundering, tobacco cigarettes and health products, including Viagra, contraception, enlarging creams and the like.

Gold and currency were the significant items detected so far, with about R18 million in gold. He referred to the R79 million detected at King Shaka airport. They were planning to extend their capabilities in terms of technology scanners, as well as increasing detector dog capacity. There was a programme for doing that. The current scanner capacity was at border posts, airports and seaports. A slide showed scanner images, detector dogs in operation and concealment methods.

Chairperson Carrim stated that it would be helpful if Members contributed towards a programme for the next meeting, or else it becomes a “feel good” presentation. He wanted to devise a full report so when they all met again, they were clear on what information was needed and they were not covering the same ground.

Mr D Maynier (DA) stated that it was a matter of public knowledge that he had been asking for an enquiry into whether the Guptas illegally removed assets including large amounts of cash from South Africa. What he got in response was bureaucratic stalling and zigzagging. He specifically wanted to ask SARS Customs, whether the Guptas had properly cleared customs and their baggage was properly inspected when they left Lanseria on or about 10 April 2016. More generally, was any institution in fact investigating this matter? The effect of the obfuscation was to suggest that a matter of huge public importance was not being investigated and that inevitably undermined public trust in the institutions responsible.

He was concerned about the SARB presentation because it appeared that SARB was not aware that the full ICIJ database was now available. It did not seem that SARB was seized with this matter nor was doing anything about the Panama Papers data. He wondered if SARB would concede they were mistaken and what it was that they planned to do about the Panama Papers.

A question to SARS, he had a look through the database and he was delighted to see that they were looking through the information released by ICIJ. A quick search of the database revealed that under the name Zuma, there were three hits, under the name Shaik, three hits, under the name Gupta, five hits. He asked SARS to confirm if the entities which resulted from a search of those names were included in the investigation.

Mr A Williams (ANC) particularly welcomed SARS transfer pricing unit and the trade mis-invoicing research input. He agreed with Mr Carrim that Treasury’s overview almost sounded like it was the first time that they had ever come to Parliament to talk about this. They basically said that they did not know what illicit flows were, and if they did not know, then who did. Fundamentally it seemed they had been speaking about this for years, and now they were coming to say that it was complicated. He proposed Parliament set up an ad hoc committee to research illicit financial flows. Through that committee they could bring everyone together to stop the silo situation. Of the 81 people that had been identified, what percentage were non-white because he wanted to know where the real rich people were.

Dr M Khoza (ANC) agreed with Mr Williams that they emphasise the importance of getting the different entities to work together on illicit flows. If they were going to be led by facts, they needed data. Even if that data was not a clear reflection of what was out there, at least it was something for them to work with. This was why the first presentation was disappointing to her. How could they, at this stage be dealing with conceptual issues? The African Union even developed a slogan and they were able to quantify. They did identify some witnesses with the data they had. It was estimated that over the last 15 years they had probably lost R15 trillion on the continent. They should at least be able to ascertain how much of that could be attributed to South Africa. She supported the idea of establishing a formal structure. To her, the illicit economy was a new type of colonialism, which was complex and high tech. The devastation experienced during colonialisation would be experienced again if it was not properly addressed. It was for that reason that African Union had made this one of the key agendas of the African Union. They needed to work with some kind of data. As politicians, they were not going over the conceptual issues.

They needed to be careful as politicians to not get overly excited by just one family. They needed to go beyond just the Guptas. The Guptas were not the only culprits. They had people who were in the services industry who were advising government, who were also involved in transfer pricing. If the Guptas were doing anything wrong they should be dealt with. Africa was losing over R750 billion a year and that was a conservative statistic from the African Union. Surely that was not only the Guptas? What they were beginning to gather from SARS was an indication of what was happening in this space; those areas posing a serious challenge. The problem was they had trucks moving over borders supposed to be going to Malawi but it never got to that border. In South Africa they were not tracking enough. They needed to adopt the slogan of the African Union, and South Africa should be at the forefront. They had to because South Africa had the biggest ports, that they should play an important role in this, as it was undermining their developmental agenda. She appealed to the technocrats to assist them in this. If the information was consolidated and they were given a chance to meet, they probably would be having a more qualitative discussion because there was some kind of data to work with. She was proposing that FIC be at the forefront of this, and the Standing Committee on Finance could have quarterly reports from FIC to say what was happening on that front and bring the data. This was a reality and it was undermining the developmental agenda.

Mr J Lorimer (DA) understood why it was difficult to quantify illicit funds. He appreciated not being lied to with an estimate which was more of a calculated guess. However, it was possible to report what illicit funds had been found. Bottom line was that it did not matter how much it was, it was too much and if they did not have the mechanisms in place, which they did, it would just grow. He thought there was a misconception that been politicised that South Africa was behind when it came to tracking transfer pricing and base erosion. South Africa’s rules were far more sophisticated and were leading the way. His question was what more needed to be done by Parliament to help prevent these funds flowing unlawfully. He thought the regulations were pretty tight, so besides the justice system having to be improved, what more could Parliament do?

Mr G Hill-Lewis (DA) stated that the bottom line effect of transferring funds offshore illegally from South Africa and importing goods to be sold in South Africa for a profit without declaring those goods had the same effect. What interested him, was SARS lack of attention to under invoicing in importing, not so much at the border, but behind the border when those goods were in the country and they knew exactly where they were, yet there was very little attention paid to tracking them down and seizing them. He gave the example of the preponderance of China malls across the country. There were four or five in Cape Town alone. Those malls were only able to offer the prices they offer because those goods were under invoiced or not invoiced at all at the border and no duties were paid on their import. Yet SARS was unable to provide a single example of a raid on a mall in South Africa that had fines or prosecutions of those guilty of importing those goods without paying the necessary duties. Illicit flows should not only be about guns, drugs and money but should also be about ordinary consumer goods that were brought into the country without paying any fees on them. He had not seen the requisite effort in doing that, and if that was incorrect he requested the details.

Ms T Tobias (ANC) appreciated so many government entities in one room working together. The day before, she had read the report by Global Financial Integrity on the Panama Papers. One of the items raised, was that there was a misuse of corporations on limited liability companies, and that was a serious statement. They were basing it on what US law enforcement companies had been doing on illicit flows. They emphasised the use of shelf companies that made it difficult for them to get to the beneficial owner. She wanted to zoom in on that, looking at shelf companies and how they hid their beneficial owners and take into account the GFI work on this. Illicit flows were complex; she asked FIC what type of system they had in place to test whether an entity was legal. In terms of SARB, how much of that money could they say they had captured, and how much of it was clean and dirty money, because then it would have tapped into what she had said about focusing on shelf companies and their role. Law enforcement agencies in this context would wait for SARS to go to them and say they suspected something untoward about a shelf company that they wanted investigated, or vice versa. How would they deal with that - testing criminality when the shelf company was sitting there and the books were clean? Illicit financial flows were not money that went through the books.

She wanted to emphasise that SARS should not leave our borders, because the Department of Home Affairs wanted to fill that special role filled by SARS. It was only the expertise of SARS that would be able to detect inside the containers, and ascertain whether the information about the company was relevant to what was inside the container. Their report should insist that SARS continue to be posted at the borders and continue its work. She also wanted to make a special case to investigate intermediaries because if a person said they had given an intermediary the responsibility to invest their money, that person could say he was not aware that his money was invested improperly. It meant that the beneficial owner excluded himself from the activities of the intermediary.

Of 11.5 million documents released, they would only look at those that concerned South Africa. They should not be conducting investigations that were going to be fruitless but rather try to bring back home what South Africa was entitled to and make the individuals concerned aware that the space was becoming fairer, because of the tax agreements signed with other countries there would be a lot of information sharing and there would be a lot of transparency. There should not be banks that continue to operate in the way they did.

Mr B Mkongi (ANC) said the FIC gave interesting statistics for the illicit flows, transfer pricing or mispricing, accounted 65%, criminal activities accounted for 30%, while corruption and other accounted for 5%, which could account for the Guptas and so forth being raised here. He did not say it should not be dealt with. It went to the point raised by Mr Williams, the demographic representation of the mispricing and mis-invoicing, who were they? When did they begin with this? How much money did they take out of the country illegally and who were these people? It was fundamental to get the demographic representation and accountability so as to lay the ground for this debate.

Secondly, if the Republic of South Africa was serious about this matter, because it hit to the heart of the developmental state with its three deep seated challenges of unemployment, inequality and poverty. Since there were these issues, if there were others opposing the ruling party, they were benefiting from this, for always criticising the ruling party for its incapacity and lack of resources in delivering to the people, because of people who were taking money out of the country. If they were serious in South Africa about dealing with the issue, they had to take action at the executive level. They could talk about the collaboration of departments, but what he wanted to propose was a collaboration of the executive first. The executive should create a sub-committee which dealt with this particular matter. If there was no mandate from the executive, the process would be difficult. They should also replicate this process in Parliament, they had begun to do so, and they were doing well in dealing with this matter.

In his recent readings he found that the world was moving fast in terms of technology advancement on this matter. Where was South Africa on this matter? Reading the new information on customs and taxation, they were very far. Did they have capabilities to track this? Did they have software to track quality information that could not be contested? What they found was at the borders, was one truck would be scanned but ten would be let through unscanned. The money and resources they could use to buy such technology, could it be said that that was more than the money going out of South Africa? If that was not the case, why did they not invest in customs, SARS, and buy those skills? If they were serious about this matter they had to put money where it mattered.

Mr R Lees (DA) said that a great deal had been said about catching and finding these illegal flows, that was the practice and South Africa had to do that. He was curious to know about the research, to know how much work was done by South Africa and internationally to prevent illicit transactions from happening. If a person was focused on terrorism, it really was not going to be easy to stop such a person. If they minimised the tax burden, this was a preventive measure. To what extent were they trying to look at incentives instead? All these measures for catching the wrongdoers cost a lot of money. The FIC operation among others, even SARS, was a burden on the economy; it was not productive in terms of growing the economy. He was not arguing that it was not necessary, but surely their emphasis should have been on trying to minimise the tax burden. FIC had done some research, and it was being done here and internationally.

Chairperson Fubbs said that SARS had insufficient capacity to deal with the magnitude of the issue. Mr Momoniat pointed out there were15 actions under BEP, and in terms of transfer pricing there were four such actions. They were directly identifiable and much easier to address than some of the other items in BEPS. She saw no reason why they could not tackle what they could immediately and put measures in place in terms of what they knew was there. When they had the colloquium on transfer pricing, Judge Dennis Davis spoke of at least R1.1 billion which had been recouped after investigations in 2012 related to transfer pricing. What the Committee wanted was an annual report on what was being recouped and the outstanding amount. She did not agree that an estimate was not useful. She thought an educated researched estimate was highly valuable, with a statistical impairment on either side. They knew it was hundreds of billion, However, if they could just tackle the R20 billion in South Africa, and make a start with R10 billion annually.

The other issue was the implications. Some legislation could not be effectively implemented, such as BBBEE, as a result of the impairment of transfer pricing which placed negative figures on the balance sheet, and directly impacted on socio-economic development. The Portfolio Committee of Trade and Industry would be a culprit if it did not look at where they had failed the country and do extra oversight. BEPS impacted negatively on industrialisation. SARB had a handle on exchange control, and needed to link that up because it was on the exchange control that a lot of the transfer pricing took place. This was brought up by several of the institutions. They were well aware of illegalities with regards to cigarettes, what may not be known was that a lot of those illegal cigarettes were made by legal cigarette companies here in South Africa, so it was difficult to address.

The committee researcher, Mr Dumisani Jantjies, said that the questions had been broadly answered. The main question had always been about quantifying the loss, because government may be wasting money by investing in so many preventative measures if it was not clear what they were chasing. This question was always going to come up. They needed research on all the information that was coming out about corporations.

Chairperson Carrim thought that Members understood that such issues invariably had a level of uncertainty. The entities would refine their understanding of the issues, but in the meantime the Committees had to act sensibly. They understood that Mr Momomiat was trying to tell the Committee that this was complicated. The question put to them was, while they were working these things out, they had to act more decisively.

The second issue for him was what was being done, presumably FIC referred matters to SAPS. Did all allegations go to SAPS generally and what happened then? Did FIC follow up and say, they expected results in 6 months? He was asking Members whether there not something missing here, should they not also bring in the Chairperson of Justice, the National Prosecuting Authority and perhaps the National Director of Public Prosecutions (NDPP). They could do this work, but where was the evidence that the work had been done? The next time they all met he wanted to ask the things that really mattered. The issue was how many people had been convicted? How many people were forwarded to SAPS in the last two years and how many were acted upon?

In the one SARS document it said that 81 South Africans had emerged from Panama Papers, and in the other from SARS, 1 700 South Africans were mentioned. All of them were presumably not committing crimes. He heard Mr Maynier say that some more of it had been released more recently, how would they get more information? Was it correct to say that they still did not have enough information? What did they think Parliament could do to contribute to their fulfilling their role more effectively, beyond calling them in every six months on this matter?

Mr Momoniat wanted to be clear that illicit flows was high priority for government and Treasury. They needed to act decisively now, not wait for all the information. It was like HIV/AIDS, they did not need to know the figure, once it was there, they acted. In acting, they were saying that the only way to know they were acting, because in National Treasury they sat in an ivory tower, was from their colleagues in the front lines who would have the information. Whether they were doing enough, whether they could do more, was another question. They did not need to know the answer to say they should be doing more. The public needed to have confidence that when cases were reported, someone was dealing with it. The difficulty was that there were limitations in the law, that they could not talk about one case specifically, but let them answer the specific questions. If it was information from FIC it did not even get to the Minister. Even the FIC had limitations on to whom it could provide that information. They had to act within the law. Having said that, in the public interest there were cases that they all wanted to know that someone was working on these. It was a priority, and it may well be an African Union priority but, every country should doing something about it. It required lots of agents, lots of capacity, not just scanners, but intellectual research.

Looking at smuggling, for example in SARS, that was always a focus. These syndicates were extremely sophisticated, so unless they had that capability they would always be behind the curve. So it was not only about getting the finances right but the architecture right and if SARS had no intrusive capacity, many would use that not to pay their taxes. They should be able to go in and find information and lay charges. There were issues there, he just wanted to bring out some of the complexities.

There were questions about what all these entities were doing, but the question is in government there are other agencies, should they not also be doing something? National Treasury should not be holding the burden. When reporting, Treasury wanted to say that even if there are limitations, there is nowhere to hide. This was why they wanted people to correct their affairs. They had the special VDPs, because the problem was once anything was outside of the country it was hard to take action because it was out of their control. They had to rely on treaties and agreements. Panama had previously decided that they would not be part of the automatic exchange of information. That was why this leak was important. They did not have any treaty with South Africa, so they were not going to get any more information from them. The underlying documentation of the Panama Papers had not been put out. According to news reports, the Canadian tax authority had somehow gotten more detailed reports of the Panama Papers. SARS could try to use other ways of getting that information. They were doing as much as they were able to do, but they still had limited information. He said they had to go for anyone breaking the law.

He said the days of non-white were over. He personally resented the term non-white. They could give breakdowns. He wanted members to be sensitive about the information. SARS still needed harder information before they could act. He agreed with the proposal. The pressure from this meeting helped. Perhaps it did need to be stepped up as a government-wide initiative. It was not clear whether the prosecuting authorities acted on everything given by FIC. The FIC may not have acted on all the information found in newspaper reports. To the extent that the parliamentary committees could assist in getting a wider programme, it would be helpful. The issue was the estimates were important, but the methodologies were problematic. If the scales were too high or too low, they needed to assess that because then they could sharpen the action that they needed to take. If they relied on statistical numbers, trade data, it did not have names or say what. Customs had caught someone with cocaine. Now how many people had they not caught?

Mr Mpye replied about the Guptas, saying they had received a general declaration from the captain of flight on that day. They had checked and confirmed 8 passengers, 8 crew members and 15 bags. All that luggage had gone through customs, had been scanned and checked, and nothing untoward was found. On the China malls and the like, SARS did do follow ups, though they may not have done media publicised raids. However, what they did was they took data through a risk process, and through that risk management determined whether the goods were allowed into country or not. For those they may have missed at a particular time, they had another complementary process called post clearance audit. For those goods that had got through the border unchecked, they went to where it was supposed to have landed and follow up there, and if there was any untoward behaviour, a case was raised. From a criminal point of view, the culprits did not appear in court, because it was more of an administrative fine, therefore it was not in media. They may not have necessarily raided the mails, but where they did, it would not have involved the media.

In terms of scanning of goods, they worked on risk management basis. They required the traders and agents to supply them with information 24-48 hours before. With that information, they performed risk management. Based on the risk identified, they would then scan whatever they wanted to scan. If they were to scan every single truck or container coming into the country, they would clog up traffic. Most of the manufacturers today worked on a just in time process. At the particular time they required a particular car, it would arrive in the country. SARS had to work on a risk management basis. Upfront they would have given BMW a particular status, because they knew their controls and who BMW was. They launched a programme called Perfect Trader. So those types of goods would not be subjected to strict inspection. There would be sealing of the container. They knew the numbers used by BMW and what seals they put on and therefore as long as the seal was intact, they could go through without being scanned thoroughly. There was not always necessarily a need to scan every single vehicle that passed through.

They had IT systems that assisted in this. So the information that would come through automatically from the traders and agents, would have gone into the system to check against certain risk rules and guidelines and it would spew out results to stop certain vehicles because it did not understand what was in there or could not identify it. Therefore they would stop it, scan it, and if needed unpack it.

Their systems had the capability of tracking goods going from Durban to Malawi. When a container landed in Durban destined for Malawi, from the initial information they received, they would know about that. Should it not reach the border at the estimated time, and they did not receive acquittal information that the goods had left the country, they then did follow up on those particular goods. They had a team of people that dealt with exactly that. They had a post clearance audit and technical intervention units for goods diverted into the country. They dealt with them from a criminal point of view, if they chose to settle and give SARS the necessary penalties, they could do that. These issues would not always go into the media, because most traders preferred to settle with SARS.

The example given by Mr Mpye about BMW was just an example. It should not be taken out of context. There was case selection execution and governance that regulated the organisation. The matter of the list, they were unable to provide that information at present, they could make that information available after they had completed all the analysis, and it could be part of written responses to the committee.

Mr Mazibuko replied that SARB was dealing with the Panama Papers information. It had to be taken into account that they had preventative work that they were responsible for. The Panama Papers was the recovery process that would take some time, and perhaps when they came back the next year they could see if they had dealt with that information. They had limited resources so they were focusing on prevention. They were comparing the information to the cross-border system and then they would be able to pick up whether these were people who had been authorised through the previous amnesty and VDP processes. In terms of the cross border system, they would be able to tell after they had sifted through all that information if there were illegal flows. They monitored information and then had to send inspectors. There were areas in South Africa where there were weak controls and people took advantage of particular areas to take money out of the country. He referred to illegal gambling information captured together with the National Gambling Board. The mere fact that it could be monitored was vital so that they could sift through to see what was illegal.     

Mr Michell answered the question on how FIC tested if entities were legal and if they were operating legally. This had to do with the customer due diligence process within the financial institutions and banks needed to identify their customers, they needed to know who they were working with as individuals and entities. As individuals their reference would be the Department of Home Affairs registry. As entities it would be the CPIC. Those were the only two entities which gave the legal basis of whom they did business with. Once those institutions detected that something untoward was happening, they would inform the FIC. FIC would refer to Home Affairs and CPIC to check if those persons or entities were real. If foreign nationals set up shelf companies in the country, FIC would not know and neither would CPIC. Already there was a smokescreen that could be created. The Committee had passed the amendment to the FIC Act which introduced two things – providing clarity on beneficial ownership which was crucial because it would begin to deal with the real owners and do away with the smokescreen of shelf companies. They would be able to bring together over time, various legal and natural persons behind the companies, trusts, property deals and so on. The second amendment was the risk based approach which enabled institutions to assess the risk involved, categorise that risk and then do the due diligence.

Mr Maynier said Chairperson Carrim had raised a good question which had to been answered: whether there was a process underway to get the larger body of data in the Panama Papers? At least one tax authority, Canada, already had. 

Chairperson Carrim agreed, if Canada could do it, why could South Africa not?

Mr Symington stated that they had asked the Canadian commissioner when they saw him two weeks previously in Moscow whether Canada had the information. He said he did not. They were not aware of anyone that had the information. JTSIC was doing a lot of work to try and get the information out.

Dr Khoza stated that notwithstanding the confidentiality and sensitivity of the issues, one of the things she thought they were not doing enough, was communicating what was happening, SARS in particular. When there was something major happening and they were issuing a fine, what was their media strategy for that? Did they publicise this? They could use the media to their advantage. She thought the Panama Papers had played a major role, businessmen from South Africa had been named. That sort of media coverage acted as a preventative measure. She wanted to find out more from FIC and SARS about their media strategy, because that was so important. They did not use the media enough to their advantage.

Mr Lees (DA) took the Panama example, if Panama were involved in developing a nuclear bomb, there would be international pressure on Panama, there would be sanctions. And yet, with this financial bomb, no one was cooperating. He wanted to know if there were moves afoot to say if Panama did not toe the line or sign the treaties, it would be out in the cold.

Chairperson Carrim thought it was a good point. He added that everyone in the committee agreed that if the Guptas had done something wrong, they had to be made to account. Any person should be treated the same. They could not pass laws and expect some entities to not abide by those laws. He said that if the entities present could not answer certain questions for legal reasons then the committee had to respect that.

Chairperson Fubbs said they had repeatedly asked for transfer pricing information. She read that they were told of the recovery of certain funds in 2012. If they able to recover funds using that law in 2012, they were still able to do so. She asked them to communicate that information to the Portfolio Committee on Trade and Industry and the names of the culprits on an annual basis.

Ms Yanga Mputa, Treasury Chief Director: Tax Policy Unit, replied about international pressure on Panama, saying they were on the Global Forum for the Exchange of Information, and she was the assessor of Panama on exchange of information. They had gone to Panama and reviewed it and that report was expected in September 2016. Panama stated that they did not want automatic exchange of information and the country had a sovereign right to refuse this. South Africa had been wanting to negotiate a bilateral agreement with Panama, but Panama has refused.

Mr Mpye answered the question as to why SARS did not name and shame. It was because of legislation passed in this Parliament, the secrecy provision, which stated that they needed to protect the confidentiality of the taxpayer. If they said anything, it would be on an anonymous basis. They could not mention the taxpayer’s name.

Mr Mazibuko stated that those institutions or individuals who had funds forfeited to state, were published in the government gazette by SARB. They had a huge block of R34 million, because of the magnitude there was much interest, and the names were there for everyone to see.

Chairperson Carrim said they wanted to meet again reasonably soon after Parliament returns in August. He did not want a mechanical meeting, he wanted to see where the Panama Paper process had gone. Before the end of the third quarter, these three committees, as well as Justice and Police, would hold the next meeting. Just by bringing them together placed pressure so, in that sense, Parliament was playing some role in having government coordinate more effectively. His sense was that they got together on the eve of coming to Parliament and share information. Was there a structure that brought them all together, including the NPA. He suggested that the three chairs be mandated by the committees to write to the Ministers concerned, within 10 days, to say they wanted to see more coordination and a report on that. Perhaps they should consider writing to the Leader of Government Business. They did not hear from Trade and Industry. The next meeting would be better organised and it would be a longer sitting for more effective engagement with them.

The Department of Trade and Industry representative wanted to bring it to the committees’ attention that since the committees had written letters the previous year, they had been able to meet as a task team, where they agreed on various actions to take. Various agencies were represented there. They set out an action plan. They needed to revisit that so they are able to move towards the policy they had spoken about today and the international streams as well. They had met earlier this year all of them.

Chairperson Carrim stated that they wanted Ministers to take political responsibility, so they would call at least the key ones in.

Mr Lusipho commented that they needed to find synergy on the work that was being done. Ignorance was an expensive exercise, sometimes one had to listen to get updated. They needed to get a ministerial briefing directly as to whether there was any work being done, and whether there was a vision on this matter. If there was any initiative being taken, the committee should be informed. Those who were the custodians of enforcement legislation, had to develop an understanding of the issues at play. The idea of bringing in the NPA and others was necessary, considering the backlog in legislation and information. Part of the job of the Chairperson was not just to write letters, but to look at how best they could do an exercise in consolidating the information they had. An impression had been created that people were avoiding this issue, but it was now clear that this was incorrect. Considering the extent of work done thus far, there was commitment from all involved.


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