Illicit Financial Flows & Base Erosion and Profit Sharing: input by government agencies

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Finance Standing Committee

15 March 2017
Chairperson: Mr Y Carrim (ANC); Ms J Fubbs (ANC); Mr S Luzipho (ANC)
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Meeting Summary

The Standing Committee on Finance, the Portfolio Committees on Trade and Industry and Mineral Resources held a joint meeting on illicit financial flows to hear the views of the following stakeholders in the battle to stop the harmful effects of illicit financial flows (IFFs), transfer pricing and base erosion and profit sharing (BEPS): National Treasury; SARS Customs; Financial Intelligence Centre; Department of Trade and Industry; South African Reserve Bank; South Africa Police Service; National Prosecuting Agency and Department of Mineral Resources. This would lead to recommendations on strategies to deter IFFs and BEPS and ultimately lead to a Money Bill being introduced into Parliament on the matter.

The Hawks Head of the Commercial Crimes Unit of the South African Police Service (SAPS) was not able to present on its requested brief. The Committees expressed disappointment that SAPS was unable to answer the questions on IFFs cases referred to SAPS for further investigation. The Committees were keen to know if the referrals were sent to different police units or to a specific police unit. They asked SAPS to give the current status of specific investigations captured in the Minister of Finance affidavit; if it had received any complaints about cash in transit from SA to Dubai and if it had names of people that were taking money from SA to Dubai. SAPS was asked what made it difficult monitor IFFs and cash in transit at airports and what had been the role of SAPS in stopping this. Members asked SAPS to give updates on the case against the Gupta family, state its relationship with FIC in the enforcement of laws dealing with financial crime, as it seemed SAPS was ill equipped to enforce such laws.

The National Prosecuting Agency (NPA) identified systemic weaknesses that include:
▪ the empowerment of family trusts that exchange funds without identifying the perpetrators (this needs to be pursued by the relevant Committees in Parliament)
▪ high value negotiable instruments which do not need customer identification such as buying different amounts of goods totalling R5 million in cash and exporting the goods
▪ non-implementation of cash declaration at points of entry due to administrative reasons
▪ current exchange regime is too narrow (cash system legislation is no longer in tune with best practices around the world)
▪ training issues that stem from the fact that law enforcement agents regard the area between customs, immigration and the aircraft as where anything goes
▪ there is no law for when people are found with huge sums of cash
▪ allowing people that make large cash deposits to remain anonymous.

The NPA recommended that:
▪  family trusts use electronic records (that are traceable) in carrying out its transactions;
▪ look at the Money Laundering Advisory Council which is in a process of being abolished to control IFFs;
▪ create a formal joint structure with the Department of Justice Correctional, SAPS and Finance with a capacity to deal with IFFs because the way to address IFFs cuts across these clusters;
▪ work with FIC and border management agencies to implement cash declaration reporting;
▪ engage with private sector to improve systemic controls, detection and reporting of IFFs;
▪ work with SARB to better enforce exchange control regulations;
▪ review and improve training of law enforcement on cash seizures and financial investigations.

Members agreed to look into the recommendations put forward by the National Prosecuting Agency (NPA) to assist in stopping IFFs and asked several questions about its recommendations. It asked SARB to move from blocking orders on IFFS to prosecuting the perpetrators of the attempted crime. Members asked if the trends on IFFs suggested that perpetrators were large companies or people in organised crime; asked National Treasury to state how it proposed to collect tax from small companies owned by foreigners, deal with illegal gambling activities and how to deal with prosecution of IFFs. Members asked how many of the IFF cases referred by the FIC had led to the perpetrators being jailed and asked about Border Management Authority Bill working with Customs as Treasury said it was not pleased with separating custom administration and custom collection because the agencies needed to be coordinated in its reports to Treasury, Parliament and government and reporting had not been addressed, hence the fight against IFFs was not taken seriously.

Members commented that the 2017 tax legislation contained steps to deal with IFFs as the Minister of Finance stated that multinational companies would be required to file further information to SARS which would allow SA to monitor cross border fund flows and trace if these companies were avoiding tax. They said SARS must continue to improve capacity to enforce legislation and strengthen its efforts to stop tax evasion. The Financial Intelligence Centre was asked for an update on the 2015 HSBC Swiss Bank incident and explain why only 10% of accounting institutions were reporting to FIC, and about a system to reconcile advance payments made to SARS for imports, in order to identify ghost imports

Members observed that a lot of illegality existed in the mining industry; fake metals transaction occurred but the technology and capacity at the SA borders had not been able to check it; transfer pricing could occur only with the compliance of some officials; The Department of Mineral Resources was asked what action it had taken against companies that were involved in transfer pricing and tax evasion since 2015.

Members noted the adverse effects of multi-national tax evasion. Tax avoidance was legal but broad and directly linked to transfer pricing. Members advised clarifying the legislation on tax avoidance to ensure that NPA and SAPS can prosecute IFFs cases. Members suggested a workshop with auditing firms and stakeholders so as to narrow the gap between tax avoidance and tax evasion.

The Department of Mineral Resources said the fact that it does not have a presence at the ports of entry to the country to monitor the export of mineral resources, pose a great challenge in its fight against base erosion. There is a need for greater cooperation between government agencies in order to successfully tackle base erosion. DMR said that there is a zero tolerance policy to companies that engage in flouting transfer pricing regulations and it enforces the law without fear or favour. DMR has applied the recommendation in the Farlam Commission report on transfer pricing to other corporations involved in the extractive sector as well.

Major General Khuna from the Hawks division of SAPS apologised once again for not being able to provide information. He stated that General Ntlemeza did not prohibit him from discussing anything in Parliament but he was just following protocol out of his own initiative.

Members said that what was frustratingly clear was that despite Parliament identifying the lack of collaboration between government agencies almost two or three years ago, recommendations on intergovernmental cooperation have gone unimplemented so far.

In conclusion, the Finance Chairperson said developing countries have lost over $6.6 trillion in 2012 alone, developing countries lost $991.2 billion and South Africa alone lost $122 billion between 2003 and 2012 and 5% of the GDP from sub-Saharan Africa is lost to base erosion and profit shifting. SAPS was urged to toughen its stance. The stakeholder agencies and departments were encouraged to follow up on the progress of cases that they have reported to SAPS for further investigation. He added that the fact that not one of the 1 700 South African residents identified in the Panama Papers has been prosecuted was puzzling.

Meeting report

Mr Y Carrim (ANC), Chairperson of Standing Committee on Finance, said the three chairpersons had met and decided that the eight relevant parliamentary committees could not all meet four times a year but while the three focal Committees would meet twice a year, each committee would tackle these matters during the course of meetings with the agencies they had oversight over. For instance when the Standing Committee on Finance meets the South African Revenue Service (SARS) on Double Tax agreements it would ask SARS questions on IFFs and aggressive tax avoidance. Similarly when the Portfolio Committee on Mineral Resources met with its agencies, it would ask questions on IFFs, because most mineral economies are linked to BEPS, aggressive tax avoidance and tax evasion.  This decision was taken because at the last meeting of the eight committees, Members expressed frustration that besides comments from National Treasury and Financial Intelligence Centre (FIC) not much progress had been achieved on IFFs. The Committees were of the opinion that SAPS did not act on IFF matters referred to it and even if SAPS acted, the Committees were not sure that it had the necessary resources and expertise and the National Prosecuting Authority (NPA) did not have the necessary resources and expertise to prosecute IFF cases. Based on this, the three focal Chairpersons met with the Portfolio Committee Chairpersons on Police and Justice and Correctional Service and agreed that those two Committees would engage SAPS and NPA on progress on IFFs and money laundering every quarter during meetings. The aim of today’s meeting was to have a joint briefing on illicit financial flows and base erosion and profit sharing which would accommodate the views of the different agencies and departments and lead to recommendations on strategies to deter IFFs and BEPS and ultimately to take a Money Bill through Parliament. The process would continue next quarter with consideration of the draft report that resulted from engagements with stakeholders.


Ms J Fubbs (ANC), Chairperson of the Portfolio Committee on Trade and Industry, said this was a good summary of the position of the Committees. The Portfolio Committee on Trade and Industry had a particular interest in the deliberations on IFFs and BEPS and anxiously wanted the process to be concluded although it was only the Finance Committee that had the constitutional authority to take a Money Bill through Parliament so it depended on that Committee to conclude the Money Bill. She expressed happiness that the Minister of Finance had referred to transfer pricing and base erosion in his budget speech on three occasions, had committed the Ministry and Department to accelerate the matter and regarded the deliberations on IFFs and BEPS as a milestone to get the Money Bill through Parliament.

Mr Carrim noted that he had attended and co-opened a one day conference in the UK on Tax Transparency in December 2016 which was organised by the Global Tax Transparency Network (GTTN) of Committees on Finance. South Africa was invited because the member nations recognised that the country was crucial to the fight on IFFs and was among the ten worst counties in terms of IFFs figures. The highlight of the conference report presented to Parliament indicated the adoption of the statements of the 46 member nations present. The global network conference was dominated by countries in the advanced industrialised world and it was a struggle to acknowledge some of the peculiarities, sensitivities and needs of countries in the African Continent. Based on this, efforts were being made to host the Tax Transparency conference in South Africa in December 2017, even though there were financial implications but deliberations are ongoing in Parliament to facilitate hosting the conference. He remarked that the Committees should note that the GTTN agreed to a statement calling for all multinational companies to declare profits, assets and number of people they employ in each country so that there would be transparency about the tax that they pay and to confirm if these companies are paying taxes in the countries where they produce value. The report was circulated to the three Committees and they would be asked to adopt the call to ensure that multinational companies operating in SA are held accountable for the value they produce and pay tax proportionately.

National Treasury presentation
Mr Ismail Momoniat, Treasury Deputy Director-General: Tax and Financial Sector Policy, focused on capacity to deal with financial crimes when identified. He referred to the cash heist at Oliver Tambo International Airport and the question was why that cash was being transferred. Were such transfers legitimate and what was the role of Customs, FIC and SARS? Was SAPS communicating with these agencies and was there effective communication amongst these agencies? Newspaper and social media reports existed that reflected IFF issues; the regulators needed to be curious, but there would be no progress in addressing IFFs if regulators decide not to lay charges, so prosecutions could not start. Other challenges were regulators did not inspect airplanes for cash. Customs and SARS were focused only on what comes into the country such as arms but the regulators did not monitor the outward movement of cash. When bank accounts are closed, the relevant authorities do not ask why the account was closed. Regulators were frustrated that when cases were reported, progress was not made on prosecutions. So the issues for Treasury were how often information was shared. The regulators did not report crimes and Parliament did not receive statistics and reports on the outcomes. For instance, Treasury had reports that mining rehabilitation funds may or may not have been affected. Mr Momoniat stated that he would want the Department of Mineral Resources (DMR) to state what happened to the funds. SARS was empowered to investigate and impose fines even though SARS was not obligated to reveal the information because of taxpayer confidentiality. SARS could be held to account If it did not collect the revenue. The question was how the relevant authorities held perpetrators to account, what was the capacity of the enforcement agencies and how efficient was the prosecuting authority in implementing the laws because there is no point in establishing new laws when the old laws cannot be implemented. For instance, the risk would increase with the Border Management Agency. Treasury was not pleased with separating custom administration and custom collection because the agencies needed to be coordinated in its reports to Treasury, Parliament and government and reporting issues had not been addressed, hence the fight against IFFs was not taken seriously.

SARS Customs presentation
Mr William Mpye, SARS Group Executive: Customs Compliance Risk and Case Selection, stated that the agency had discovered that certain companies and individuals do simulated imports into the country to take money outside the country using legitimate processes through the banks with the intention to take money out of the country. The Advance Import Payment (AIP) was a legitimate process that allowed importers and manufacturers to do their work without delay, materials were ordered and upfront payments were made and cleared through the South African Reserve Bank (SARB) against the goods. However these companies and individuals transfer funds without importing goods into SA. In an attempt to clamp down on these activities, Customs Compliance had approached banks and firms that deal with foreign currency to list all transactions that have not been closed i.e. transactions that have gone beyond the allowable period. He gave statistics of transactions that did not have any proof of import in the country since this was the first time that Customs had observed such cases. The outcomes showed that four of the cases were ghost exports and they has been referred to the SARS criminal investigative unit. Transfer pricings have been identified in multinational companies (MC), as MCs adjust their statements before publishing their profit margins. SARS had adjusted the tax return forms (ITR14) and mandated MCs to indicate if their statements were adjusted before publishing them.

Finance Intelligence Centre (FIC) presentation
Mr Murray Michell, FIC Director, emphasised that FIC was tasked with identifying the processing of crime and was focussed on illegality as opposed to mispricing and transfer pricing. Audited figures for 2015/16 showed that 34 255 institution were registered with the FIC. In the last financial year over nine million reports were made to the FIC in various forms and 2 419 of these cases were referred to law enforcement partners for action. FIC analysed all information in the Panama Papers which included engagement with FIC counterparts in Panama and all the relevant information had been referred to law enforcement agents. Compliance checks were carried out on the South African institutions named in the Panama Papers, the investigations included participation of the Law Society and the Financial Services Board but there were no transgressions in relation to Panama Papers. However these SA institutions are continually monitored.

The issues that need FIC follow-up in intergovernmental relations include beneficial ownership and shareholder information contained in the FIC Amendment Bill and ensuring that the relevant departments such as DTI, Companies and Intellectual Property Commission (CIPC), Department of Justice and Correctional Services are ready to work with FIC on implementation on the FIC Amendment Bill when it gets signed off especially on issues of transformation. Secondly, FIC works with Customs and Treasury to ensure that monies moved through borders are declared. Legislation against this has not been promulgated mainly because institutions have not accepted responsibility for all the ports of entry and the capacity to deal with non-compliance of cash declaration at all ports of entry. The FIC is working closely with projects initiated by National Director of Public Prosecutions run by the Asset Forfeiture Unit (AFU) and Armed Forces Benefit Association (AFBA) to create a task team to deal with financial crimes as a consequence of IFFs. The South African Reserve Bank and NPA would give updates on the projects.

Department of Trade and Industry (DTI) presentation
Mr Desmond Ramabulana, DTI Deputy Director, Company Law and Policy, Consumer and Corporate Regulation Division (CCRD), stated that the CCRD worked with FIC on beneficial ownership projects to administer the Companies Act and was part of an interdepartmental committee in conjunction with the Department of Public Services and Administration (DPSA) to ensure that legislation on beneficial ownership projects had clear regulations on disclosures for beneficial ownership of particular entities. Presently DTI is working with the Companies and Intellectual Property Commission (CIPC) to amend the Companies Act in the next parliamentary calendar. However measures are being put in place to allow the Minister to address certain matters in the interim that do not need to wait for the legislation to ensure that beneficial ownership requirements were parts of the requirements companies must comply with when it filed its annual return. The DTI stand point is that online gambling is not allowed in SA, legislation is in place already and all illegal winnings that could flow from illegal gambling are being blocked by SARB. The DTI covers intellectual property issues and counterfeiting where it liaises with the border police. The most recent engagements were in relation to small business from foreigners, the Small Business Act is being looked into to protect the small businesses of South Africans to ensure that municipalities can account for all the role players. With the formation of the Department of Small Business Development (DSBD), DTI assists DSBD to handle the legislation.

South African Reserve Bank (SARB) presentation
Mr Thys Basson, Head: Financial Surveillance Department (FinSurv) at SARB, reported that the department regulates and monitors cross border foreign exchange transactions, prevents the abuse of the financial system and supports the regulation of financial institutions from a prudential point of view. FinSurv is empowered to investigate illicit foreign currency transactions and institute action against alleged perpetrators including the blocking of funds, forfeiture of money/ assets, and referral to law enforcement. Its most important monitoring system is the reporting system where all cross border foreign currency transactions are reported electronically to FinSurv by all authorised dealers in foreign exchange and authorised dealers (ADs) in with limited authority foreign exchange (ADLAs). This enables FinSurv to trace transactions. The Import Verification System that verifies and authenticates SARS Customs data on imports is available. All information is shared based on the current laws. FinSurv provides all cross-border transaction data to SARS and FIC on all exports/imports, accepts request for information from SARS, law enforcement agencies and referral and requests for information from FIC. FinSurv has implemented various measures to deal with IFFs to increase the ability to detect, deter and disrupt IFFs, FinSurv implemented proactive mining and analysed cross border foreign currency data to detect suspicious activities and continually enhances financial intelligence using data and information during investigations.

It engages with other departments within SARB particularly the Bank Supervision Department through sharing of information and joint inspection of Ads. Engagement includes sharing information with SARS, FIC, law enforcement agencies, National Prosecution Agency (NPA) including the AFU and participating in multi-agency task teams that target specific cases which enable FinSurv to fully investigate the foreign exchange activities and other activities related to IFFs.

The strategy of FinSurv has changed to awareness campaigns involving ADs while focusing on the role of ADs to detect and report suspicious foreign currency activities and the risk of non-compliance which includes negative impact on the integrity of the financial system. FinSurv has developed mechanisms to alert banks, ADs and ADLAs when suspicious activity by specific parties is detected and the enforcement strategy has changed to early detection and disruption of activities.

The outcomes of measures taken were a dramatic increase in referrals by ADs where IFFs were suspected that contributed to early detection and enforcement. Proactive mining and analysis of cross-border foreign currency data led to early detection and enforcement, although alleged perpetrators changed their mode of operation, counter measures were implemented. He gave statistics on outcomes of the measures taken which included one successful prosecution for bribery and corruption (not on IFF). He highlighted the challenges faced by FinSurv were inadequate capacity, difficulty in parallel investigations due to challenges such as communication, minimal resources and systems to facilitate early detection.

Mr Carrim invited the facilitator from South African Police Service to give his report. He remarked that SAPS and the NPA were vital in the deliberations and asked SAPS to state what interventions had been implemented, why the perpetrators of the crime were not in jail, when the perpetrators would be jailed, and when SAPS could report that substantial numbers of the perpetrators were jailed.

South Africa Police Service presentation
Major-General Alfred Khana, Head: Commercial Crimes Unit, Directorate for Priority Crime Investigation (DPCI), reported that the Hawks operated with different mandates and certain reports were sent to different departments within SAPS. Government departments needed to clarify from where certain investigations were sent.  However the reports received must have substantial evidence in order to begin prosecution procedures. He was not in a position to give the statistics required but hopefully by the next meeting he would be in position to do so.

Discussion
Mr Carrim stated that he had engaged with the Chairperson of the Police Portfolio Committee about three weeks ago with about 15 email exchanges and with the SAPS Parliamentary Liaison Officer. With 48 hours to the start of this meeting, SAPS was still arguing continually that it had no idea what to do about the briefing. He expressed his disappointment that even with all the communications with SAPS and the Police Portfolio Committee, SAPS was unable to give any report or answer these questions.

Ms Fubbs remarked that Mr Carrim was right to be disappointed. Each agency had been aware of the facts, the message sent to all agencies was clear.

Mr S Luzipho, Chairperson of the Mineral Resources Portfolio Committee, said that a report that was not compiled could not be presented. For SAPS to appear before the Committees and start pointing accusing fingers was quite strange. This showed that the organisation was not integrated and the Police Portfolio Committee must address the non-integration within SAPS as the Hawks would not communicate with the mainstream of SAPS and vice versa. Since the report was needed, the report should have been compiled with the cooperation of Hawks because they were within the same entity. Also, the events showed that SAPS did not prioritise the report.

Mr Carrim clarified the process for Members by stating that he had communicated with Mr Francois Beukman, Police Portfolio Committee Chairperson, who had stated that an officer would be attending the meeting from the Hawks. He asked General Khana to confirm if he was from the Commercial Crimes Unit.

General Khana replied that he was from the Hawks and its Commercial Crimes Unit was one component within the Hawks.

Mr Carrim stated that in fairness to General Khana this was his first meeting, the Committees had made their point. However, the Committees could not wait until the next meeting in August to get answers to these questions. He suggested that the Committees would give General Khana some breathing space so that the required information could be sent to General Khana to ensure that the questions are addressed. He asked General Khana to collect information through emails before the next IFF session on what had been dealt within the year, how IFFs were being tackled, what sort of expertise is needed to address IFFs, what sort of expertise SAPS had presently and to give an explanation on the nature of the issues. During the GTTN conference in the UK, people in the advanced industrialised world noted that IFFs moved so fast and every time the government announced new laws, the perpetrators found better ways of tax evasion. Also during the GTTN conference, the British Parliament stated that its own police force and prosecuting authority did not have the capacity to tackle IFFs. However these points do not excuse SAPS.

Ms Fubbs pointed out that the four agencies that had presented briefings had stated that "the cases had been referred to SAPS". She asked SAPS to confirm if these agencies referred the cases to SAPS or if the referrals were sent to the wrong address.  Which criminal investigating agencies handled IFF cases?

Mr F Shivambu (EFF) remarked that SAPS should indicate if it had received case referrals for the criminal investigation of illicit financial flows.

General Khana asked the Committees to give him time to communicate with his office after which he would be in a position to answer the questions and give proper answers.

Mr Carrim excused General Khana so he could be communicate with his office and send the emailed responses to the committee secretary to circulate to Members so by 12pm they could discuss the responses.

Ms T Tobias (ANC) stated that it was unacceptable that the SAPS representative could appear at the meeting and that people given responsibility could not respond to questions. When the Committees last met it had expected figures during this meeting. She thanked SARB for the figures it gave but she was not impressed with the DTI who could not give the information required. According to SARB only one case out of 31 had been dealt with and this was unacceptable. She asked SAPS to confirm if it was afraid to deal with corruption and IFFs because SAPS could not claim that out of 31 cases it had only prosecuted successfully investigated one case. SAPS was frustrating the FIC. She remarked that if SAPS had the mandate to deal with commercial crime then SAPS must present the information on IFFs by the next meeting.

Ms Fubbs apologised to the meeting because it appeared that DTI had not being informed that it would make a presentation

Mr D Maynier (DA) said that he completely agreed with Committee Chairpersons that it was completely unacceptable that SAPS could not present the information needed by the Committees. The FIC in its Annual Financial Report referred 511 cases for further investigation to the prosecuting authority. He suggested that within a reasonable period the Committees should ask every one of the agencies involved to give a status report in writing on all 511 cases. In addition the Committees should get a status report as well on all 31 cases being investigated by the relevant authority. He had some questions about specific investigations and asked the Chairperson if he could ask the questions right away.

Mr Carrim replied that it would be of no use as the SAPS representative might not have the information.

National Prosecuting Agency (NPA) presentation
Mr Willie Hofmeyr, NPA Deputy National Director of Public Prosecutions, reported that not all IFFs have been criminalised; these IFFs might be against specific regulations and many of the other Government agencies such as Hawks deal with criminal cases. There were gaps in the NPA Act, for instance, the non-conviction Asset Forfeiture clause makes provision for the forfeiture of assets from IFFs that were not criminalised and for this reason NPA did not deal with BEPS issues. However where there were criminal activities the NPA made pleas for the case to be referred to it and in conjunction with the Hawks the NPA attends to such cases The main focus of the NPA was the identification, seizing and forfeiting of proceeds from crime and prosecuting those that had facilitated the illicit flows. The NPA had identified several new patterns of IFFs across different crime types; hence a working group was set up to look at these crimes with local and international law enforcement agencies as well as the private sector to see what lessons could be learnt. The lessons learnt include abuse of exchange control regulations in relation to allowances and the prepayment of goods hence goods may be paid for but never delivered and gaps in the current legal framework of banks allow perpetrators of IFFs to avoid detection. For instance, as there are presently no customer verification identification requirements, perpetrators walk into banks and deposit R10 million in cash into the bank accounts of other customers. The biggest case the NPA has been working on was a syndicate that managed to smuggle about R2 billion out of SA using different techniques. In the last two years there has been a significant increase in cash seizures at border points which added up to R200 million that was exceptional in the NPA's experience. This does not mean the NPA is making progress on IFFs rather much more funds are taken outside the country. The systemic weaknesses that exist include:
▪ the empowerment of family trusts that exchange funds without identifying the perpetrators (this needs to be pursued by the relevant Committees in Parliament)
▪ high value negotiable instruments which do not need customer identification such as buying different amounts of goods totalling R5 million in cash and exporting the goods
▪ non-implementation of cash declaration at points of entry due to administrative reasons
▪ current exchange regime is too narrow (cash system legislation is no longer in tune with best practices around the world)
▪ training issues that stem from the fact that law enforcement agents regard the area between customs, immigration and the aircraft as where anything goes
▪ there is no law for when people are found with huge sums of cash
▪ allowing people that make large cash deposits to remain anonymous.

Mr Hofmeyr said the NPA suggested that agencies had to be on the look-out for suspicious transaction reporting at major retailers which amounted to huge sums of IFFs.

The Committees should recommend that:
▪  family trusts use electronic records (that are traceable) in carrying out its transactions; ▪ look at the Money Laundering Advisory Council which is in a process of being abolished to control IFFs;
▪ create a formal joint structure with the Department of Justice Correctional, SAPS and Finance with a capacity to deal with IFFs because the way to address IFFs cuts across these clusters;
▪ work with FIC and border management agencies to implement cash declaration reporting;
▪ engage with private sector to improve systemic controls, detection and reporting of IFFs;
▪ work with SARB to better enforce exchange control regulations;
▪ review and improve training of law enforcement on cash seizures and financial investigations.

Discussion
Mr Maynier observed that parliamentary meetings were long on strategies, long on process, long on analysis but ended up with no outputs, he stated that this was the reason he had asked for a written statistical report on all IFF matters referred to prosecuting authorities in the last financial year.

Mr Carrim interrupted Mr Maynier and asked him to focus on asking questions on specific matters.

Mr Maynier remarked that he had referred a matter to the Hawks requesting an investigation into the 72 suspicious transactions totalling R6.3 billion as contained in the Minister of Finance’s affidavit which was signed on 13 October 2016. He asked the Hawks if the matter was been investigated and what the current status of the investigations was. In the same affidavit there was a letter dated 12 August 2016 signed by the Registrar of Banks where he made reference to a transaction involving VR Laser Asia, a company associated with Oakbay, which could lead to an exchange control related investigation. He asked SARB if the matter is being investigated and what the current status of the investigation was. On 15 April 2016 he had asked SARB to investigate if the banks had complied with FIC and various guidance notes in respect of the Gupta and Oakbay accounts. He asked SARB if the investigation had started and what the current status of the investigation was.

Mr B Topham (DA) asked if SAPS got referrals directly from FIC; if it received referrals from different units in FIC; if the FIC referrals were sent to different police units or directly to a specific police unit, SARB or SARS and if the cases were related to any of these agencies. He asked if SARB and SARS referred the criminal cases from their investigations to a specific police unit after independent investigations of cases. If this was not the process, the Committees should make a recommendation that IFFs criminal cases should be referred to a specific police unit.

Mr B Mkongi (ANC) remarked that he did not like entertaining rumours and asked SAPS if it had received any complaints about cash in transit from SA to Dubai, if SAPS had names of people who were taking money from SA to Dubai because such rumours were dangerous for SA. He asked what made it difficult to monitor IFFs and cash in transit at airports and what had been SAPS’s role in stopping IFFs and cash in transit at airports.

Mr Shivambu said that on the 4 October 2016 he had opened a case at the Rosebank police station against the Gupta family and all parties mentioned in the affidavit of the Minister of Finance. FIC noted the case. The case was conducted by General Prince Mokotedi from the Commercial Crimes Unit (CCU) who promised to give feedback but he had not given any feedback yet. Also General Mokotedi promised to give updates on the money movements highlighted by the Minister of Finance in his affidavit. He asked SAPS to give an update on the case, state its relationship with FIC in the enforcement of laws that relate to financial crime. He suggested that the Committee should discuss a different mechanism to enforce laws to do with financial crime because it seemed that SAPS was not the correct instrument to enforce laws on financial crime. Mr Carrim had correctly noted that even advanced countries had the same difficulty in using the conventional law enforcement agencies to deal with otherwise extremely sophisticated criminal activities by syndicates who specialise in quick money movements and IFFs.

Ms S Shope-Sithole (ANC) said IFFs and BEPS were a serious matter to the Committees, the agencies and South Africa as a whole. However, the same seriousness was not reflected by some of the government departments. For instance, she expected that the DTI would have shown some figures in its briefing that would better explain the situation. It was very discouraging that DTI came to the meeting unprepared, she was disappointed that SAPS could not access the information requested by Parliament despite the technology available. Hence her impression was that SAPS and other government departments did not take IFFs and BEPS seriously. Chapter 3 of the Constitution demands that all government entities must communicate with each other and all spheres of Government should conduct their affairs in a manner that does not divide the RSA but in the case of the police it does not divide RSA but it divides itself.

Mr Maynier remarked that even if the SAPS representative was in a predicament he should state the briefing request he received from the Committee, from whom did he receive it and when he got it.

Mr Carrim stated that SAPS would not answer the question. He asked the committee support staff to give all the electronic evidence to Mr Maynier.

Mr Maynier replied that the question was not directed to him but to General Khana.

Mr Carrim agreed with all the comments by Members especially the comments by Ms Tobias but he understood the predicament of General Khana because of the way that Government establishments operate. He agreed with Ms Shope-Sithole’s comments but stated that it was not fair to focus on General Khana only because it is the institution that has challenges and he might have been informed about the briefing only today. The DTI should have been informed three and half weeks ago via a letter sent to DTI.

Mr Mkongi said he had listened to the recent SAPS crime statistics report and no reference had been made about IFFs or IFFs referrals. Hence the Committee was not convinced it was one of SAPS priority areas.

Mr Luzipho remarked that if a person states that he did not have the information, he would only cook it up if you insisted that he should give you the information then your discussion would be based on wrong information. Perhaps the SAPS representative would be able to answer the direct questions if he received the information from his office. This information was needed so that the extent of implementation of the law can be measured. It was a policy matter and Mr Hofmeyr had identified the gaps and had given suggestions on what could be done to remedy the situation. The Committees could consider these suggestions. In the case of SAPS, the Committees could not get the statistics hence they could not identify if the challenges were a policy matter. He suggested that the three focal Chairpersons engage with the Police Portfolio Committee Chairperson so SAPS can specifically brief the Committees in a written response on the work done to stop IFFs within the next two weeks. This would allow the Committees to know if IFFs was part of SAPS priority areas.

Mr Carrim asked the Committees to suggest the way forward.

Mr Luzipho stated that SAPS must give the Committees a comprehensive report and brief the eight Committees in two weeks’ time.

Mr Carrim replied that the Finance Committee did not have a free day but the briefing might be scheduled as a late afternoon meeting after 3.00pm. General Khana could answer specific questions and give detailed answers in writing to the Committees.

Ms Tobias remarked that General Khana must respond to the specific questions asked by Mr Maynier. Mr Hofmeyr’s suggestions could be considered as recommendations. SAPS should send written reports on the other questions. However the Chairpersons must liaise with the Chairperson of the Police Portfolio Committee.

Mr Carrim said that the meeting day would be negotiated before the last sitting of Parliament this session. He asked General Khana to liaise with his colleagues and return to brief them at 1.00pm.

General Khana stated that he had already liaised with the FIC on IFFs. He would answer the specific questions after liaising with the SAPS office but written reports would have to be submitted on the IFFs.

Mr Maynier supported the suggestion by General Khana.

Ms Tobias commented that she was pleased that the NPA had a mechanism that alerted and investigated suspicious transactions although the banks had stated that it did not have issues of suspicious transactions. She recommended that the Committees look at ways in which the mechanism could assist in stopping IFFs. They should look at the targeted matters in the JPS cluster as identified by the NPA and ask for clarification on the operation of the Money Laundering Advisory Council.

Mr D Macpherson (DA) expressed concern about the lack of communication by the agencies that had briefed the Committees. He asked the agencies to clarify if they looked at information from newspapers and if they reacted to such information. How did they establish the cash in IFFs was not stolen money? He asked for an update on the adjusted form of the tax return. He asked how DTI dealt with changes in beneficiation within the year and asked the NPA to state why it was focusing on family trusts.

Mr S Buthelezi (ANC) suggested that the different arms of government should take IFFs seriously and take decisions on the mechanism that could be used to catch perpetrators, Even when laws are put made they needed to enforced to ensure progress on prosecuting the perpetrators of IFFs because IFFs were actually fraud and theft. He asked SARS to give more information about ghost imports and state the period investigated. He asked the FIC to investigate the Panama Papers further and asked SARB to move from blocking orders on IFFs to prosecuting the perpetrators of the attempted crime because budget deficits might not occur if there were no IFFs.

Mr A Lees (DA) expressed concern about security documents being used to get money out of the country without identification (know your client process). He asked if the trends on IFFs suggest that perpetrators were large companies or people in organised crime. He asked NPA to describe the nature of the transactions (the people involved).

Ms P Mantashe (ANC) asked Treasury to state how it proposed to collect tax from small companies owned by foreigners to ensure that the tax for citizens is not hiked. How did it deal with illegal gambling activities and with the prosecution of IFFs. She gave the example of an illegal immigrant who was found in possession of approximately R12 million by the DPCI in East London.

Mr B Topham (DA) asked how many IFFs cases referred by the FIC led to the perpetrators being jailed. Due to dematerialisation of shareholders, companies could not reveal its shareholders however with foreign investors it would be difficult to identify IFFs. Therefore he asked how SA could find a mechanism that sets up a franchise on what funds could be taken out of SA since we are trying to attract foreign investment and the foreign investors would expect loyalty fees. He asked how well the border management authorities worked with Customs.

Mr Shivambu said that some of the items in the 2017 Tax Bill contain some steps to deal with IFFs. For instance, the Minister of Finance stated that multinational companies would be required to file further information to SARS which would allow SA to monitor cross border fund flows and trace if these companies were avoiding tax and SARS must continue to improve capacity to enforce legislation and strengthen its efforts to stop tax avoidance and evasion. He suggested that the Committees need to clarify legislation on tax avoidance which happens through transfer pricing and tax evasion so that the NPA and SAPS can prosecute IFFs cases as presently they could not prosecute the cases. Legislation should look at aggressive tax planning of foreign companies in SA. He asked SARS to explain how it punished foreign companies that bloated expenses, declared smaller profits in order to reduce tax - because deficit budgets could only be avoided if taxes are collected maximally. He asked FIC to give updates on the 2015 HSBC Swiss Bank incident.

Mr Maynier said that SARB had stated that it had changed its strategy to lay charges on law enforcement matters, he asked SARB to explain why it had changed its strategy. FIC stated that there had been growth in reporting in accounting institutions. However, FIC should explain the reason only 10% of the accounting institutions were reporting to FIC.

Mr Carrim stated that since Treasury had oversight functions over SARS, it needed to relate well with SARS.

The National Treasury representative replied that its involvement was only on policy matters. Treasury had a good relationship with SARS and played its role.

Mr Shivambu said that in 2014 Treasury had stated that tax evasion was not a crime but in the new legislation it has been identified that tax evasion is a crime, hence it is a policy issue. He asked Treasury for a response.

The National Treasury representative replied that the rules were already in place, the amended Act allowed SARS to exchange information country by country. The common reporting standards would commence on 1 September 2017, transfer pricing reporting would commence in December 2017. Treasury had rules and laws that covered transfer pricing and tax evasion and Treasury intervened on the policy angle where it was needed.

Mr Carrim remarked that the gaps between Tax Avoidance and Tax Evasion must be narrowed. The Committees needed to address Tax Avoidance and Tax Evasion by engaging with auditing consultants, PricewaterhouseCoopers. Treasury must carefully consider ways to narrow the gap between Tax Avoidance and Tax Evasion in a way that did not allow investments to decline substantially while ensuring that companies paid taxes where it operated.

Ms Tobias stated that the Finance Committee needed to have a workshop on this and give Treasury time to make a review.

Mr Luzipho said there seemed to be no strategy that Government used to deal with Tax Avoidance and Tax Evasion. A part of IFFs was illegal mining hence IFFs should not be reduced to transfer pricing alone. He supported the workshop idea because at the moment there was a disintegration of powers.

Ms Fubbs said government’s greatest source of income was tax, but the adverse effects of a multi-national tax evasion strategy structure lead to loss of income. Tax avoidance is legal but broad yet it was directly linked to transfer pricing. However because government was losing tax funds the Committees needed to make decisions on what would continue to be regarded as tax avoidance to ensure that Government would not lose income from tax.

Mr Mpye, SARS Customs, stated that SARS read newspapers and this had led to the investigation of some individuals who were evading tax. He explained how companies adjusted their end of year statements to evade tax and strategy that SARS had used to to tackle the trend by adjusting the tax return form.

Mr Carrim asked Customs to confirm the period that its figures covered and observed that Custom was not doing enough to address the case.

Mr Mpye replied that the Custom figures were for 2014/2015. The case was being looked at for the first time, companies took advantage of loopholes. Transfer pricing was used to avoid tax. SARS referrals occurred in two ways: 1. responses from SARS and Customs which were investigated further and fraud cases were referred to SAPS and 2. unstructured cases that happened at point of entry (when gold, funds or precious stones were not declared at point of entry are dealt with by Custom), the Border Management Authority question involved policy which he could not answer to. He said the slides were clear on the status of cases.

Mr A Lees stated that he wanted clarity on if there was a system to reconcile advanced payment between custom and SARS.

Mr Mpye stated that advanced payments were reconciled with goods imported, banks had a limit of how long it requires clients to pay for goods overseas, the Customs observed that some clients paid for goods and the goods did not get into SA, hence Customs would follow-up the foreclosure to ensure that the goods are actually imported.

Mr Michell, FIC, stated that the data on reporting came into FIC electronically and was processed electronically according to laid down criteria, referrals had a nodal point in SAPS that the FIC relates with (either NPA or SAPS) and the information circulated within these designated agencies, the FIC never has enough capacity but its working towards getting enough analytical capacity, FIC needs to be assured that enough capacity existed in the value chain of law enforcement agencies, the joint effort is not available in the referrals FIC makes, FIC has found gaps on the policy that regulates investigations, Australia brings private sector to assist in law enforcement and it has worked for it. The anti-money laundering council has been disbanded; FIC suggested that the Council must meet at operational level. The Panama papers were investigated according to the Act no non-compliance was found however FIC could not confirm if tax evasion occurred. Engagements were ongoing with the Swiss authority to access information about HSBC matters a Memorandum of Understanding is being drafted and the FIC hopes that this would be enough because until recently this information could not be accessed. The statistics on reporting entities varies from year to year, other entities report from time to time because these agencies do not see why they should report on it activities but FIC is presently educating these agencies. The FIC receives a lot of information and makes lots of referrals to SAPS, the referrals are low due to capacity because FIC does far more work than analysis and delivers products that require less work by SAPS.

Mr Ramabulana, DTI, conceded that disclosure of shareholders was done annually but DTI would look at how it could disclose spontaneous changes of shareholders. The legislation on illegal gambling has been enforced and SARB assists in blocking illegal servers.

Mr Hofmeyr, NPA, stated that it would further investigate huge cash deposits.

Mr Carrim asked why there was a gap.

Mr Hofmeyr replied that huge cash deposits were a recent phenomenon and it was a gap that needed regulation exemption.

Mr Carrim asked Mr Hofmeyr to explain huge cash deposits and family trusts.

Mr Hofmeyr explained how huge cash deposits and family trusts constituted IFFs.

Mr Basson, SARB replied that he would give the actual dates in a written report. FinSurv and the Bank Supervision Department would review the identification of bank clients. Blocking orders was one of the instruments used in the investigation of cross border transactions.

Department of Mineral Resources (DMR) presentation
Mr Joel Raphela, DMR Deputy Director-General: Mineral Policy and Promotion, reported that DMR needed intervention to address BEPS. DMR understood the challenges of BEPS and was working closely with SARS. The presentation indicated that significant transfer pricing occurred on BEPS within the mining industry. Transfer pricing was a challenge that undermined the SA economy especially the mining industry hence there was a need to explore appropriate mining regulations.

Mr Buthelezi said that a lot of illegality existed in the mining industry. Fake metals transactions occurred but the technology and capacity at the borders have not been able to check it.

Mr Topham said that transfer pricing could occur only with the compliance of some officials. He asked how transfer pricing occurred despite the laws in place.

Mr Mkongi focussed on transfer pricing in relation to tax evasion. He asked DMR to state the action it had taken against companies involved in transfer pricing and tax evasion since 2015.

Afternoon session
Mr David Msiza, Acting Director General, Department of Mineral Resources (DMR), stated that the advancements made in technology and the fact that the DMR does not have a presence at the ports of entry to the country in order to monitor the export of mineral resources, pose a great challenge in its fight against base erosion. He called for greater cooperation between government agencies in order to eradicate base erosion and recommended that organisations that participate in the extractive sector and participate in eroding the tax base be brought to the table in order to come up with an inclusive solution. He said DMR was not apologetic about dealing with transfer pricing but enforced the law without fear or favour. The Minister of Mineral Resources had issued a statement to the effect that organisations that engage in base erosion will meet with the full wrath of the law. He stressed that stakeholders need to collaborate with a plethora of organisations in tackling this problem. There is a Memorandum of Understanding between DMR and SARS in order to develop the exchange of information protocols further. Presently, DMR does exchange information with SARS on an ad hoc basis in order to address challenges.

The DMR Director: Beneficiation, Mr Kagiso Menoe, described transfer pricing as a complicated problem that requires a collaborative effort from various government departments. Transfer pricing would normally manifest itself in the payment of consultant fees. An organisation will usually hire an affiliated organisation that is located in a foreign jurisdiction to provide consultant services. This affiliated organisation would then charge high consultation fees which would then be deducted as an expense by the local organisation. The result of this transaction is the lowering or eliminating of profits. The same strategy may be adopted with marketing fees. Advance import payments have been used to facilitate transfer mispricing as well.

Mr Msiza said that the DMR has complied with the Farlam Commission recommendation on Lonmin and has used the recommendation on transfer pricing on other corporations involved in the extractive sector as well. He said that there is a zero tolerance policy against companies that engage in flouting transfer pricing regulations. 

Discussion
Mr B Mkongi (ANC) expressed his frustration over the fact that Parliament had raised the issue of collaboration between government agencies almost two or three years ago and nothing has happened.

Mr Carrim agreed with this observation.

Ms J Fubbs said she is concerned about transfer pricing. Parliament should persuade the big mining companies to have their primary listing in the country, and that can be achieved through regulation. Transfer pricing is a political and economic issue because when the country loses money through transfer pricing there is a knock on effect that is felt across the labour sector through low salaries. There may be a need to review the exchange control regulations enforced by the Reserve Bank.

Mr Basson, SARB, replied that there have been enquiries in order to establish what the exchange control implications are. These enquiries had not been finalised. Further, there has been exchange of correspondence between the department and lawyers representing individuals. He noted that once issues had been finalised a decision will be made on what further steps to take.

South African Police Service (SAPS) submission
Major General Khuna stated that the Directorate for Priority Crime Investigation (DPCI) known as the Hawks sits in various committees, takes notes and informs the relevant individuals within the police force about issues that would have arisen. He was not prepared to make submissions to the Committees on any issues and will forward the issues so raised to the relevant individuals as per protocol.

Discussion
Mr Buthelezi recommended that the Committees should not try squeezing half baked answers from the individual that is present and the Committees should allow his superiors to brief the Committees.

Mr Maynier asked the Chairpersons to look into how the individual came to Parliament without information. He asked that SAPS be requested to appear in two weeks’ time to answer the questions.

Ms Tobias was interested in knowing what has happened to the cases that had been forwarded to the SAPS for investigation. She said 31 cases have been forwarded to SAPS for investigation and SAPS had only successfully finalised one. The implication is that the work that all the government departments do becomes irrelevant. Government should not be scratching its head to try and find resources for this. There is a lot of money being lost through base erosion that could be used to contribute towards the fight against poverty. Parliament should set clear time lines to get the necessary answers from SAPS. Failing to do so will be a dereliction of duty on Parliament’s part but it would be undesirable to invoke Acts of Parliament in order to get the answers from the police service.

Mr Carrim said he does not understand why a SAPS representative that does not have answers came to Parliament in the first place. There is no law that asks specifically for General Ntlemeza to come and give answers to Parliament. A number of urgent emails were sent to SAPS inviting them to Parliament on this specific occasion and those invitations seem to have been ignored.

He lamented that already in 2014 it was stated that abusive transfer pricing should not be allowed to happen because developing countries have lost over $6.6 trillion. In 2012 alone, developing countries lost $991.2 billion and South Africa alone lost $122 billion between 2003 and 2012. He noted that over five per cent of the gross domestic product from sub-Sahara Africa is lost to base erosion and profit shifting. Curbing base erosion is a way of financing government expenditure. SAPS is behaving as the weakest link in a very weak chain. SAPS is not taking this matter seriously. Parliament will write to the Minister of Police, the SAPS head and the Police Portfolio Committee that oversees the SAPS function. He noted that the SAPS had been very uncooperative and that the National Prosecuting Authority had been exceptionally cooperative in this enquiry.

Ms Tobias suggested that the Committee give SAPS the benefit of the doubt and give it two weeks to compile the information the Committee had requested, before perhaps issuing a subpoena against them.

Mr Carrim suggested that perhaps the Speaker will have to get involved and write and invite SAPS. He was quick to rule against issuing a subpoena.

Mr Carrim brought up the unanswered question by Ms Mantashe about the legal effect was of remittances that foreign nationals sent back to their home countries. The focus of the question was not on small amounts but on excessively large amounts. Ms Mantashe gave the example of an illegal immigrant who was found in possession of approximately R12 million by the DPCI in East London.

Mr Basson, SARB, said that the Reserve Bank does not have an issue with remittances being sent within the provisions of the law. However, if some violations of the law are brought to its attention, action will be taken by the Reserve Bank.

Major General Khuna from the Hawks division of SAPS apologised once again for not being able to provide information. He stated that General Ntlemeza did not prohibit him from discussing anything in Parliament but he was just following protocol out of his own initiative.

Ms Fubbs lamented that the matter raised by Ms Mantashe was such a recent affair and that SAPS was comfortable engaging in a discussion on that matter with the media but is uncomfortable discussing the same in Parliament. She found that surprising and disturbing.

Mr Carrim stated that an internal arrangement on who should speak in Parliament is not binding on Parliament. He however chose not to pursue that issue. He clarified that this meeting was solely to ascertain what the state institutions had achieved so far. He asked that the researchers compile all the presentations and information and forward this to Members by 17 March 2017.

Mr Carrim queried how it was possible that of the 1 700 South African residents identified in the Panama Papers, not a single one has been successfully prosecuted or convicted. He reminded the Financial Intelligence Centre that they are subject to the Constitution and they need to seriously reconsider their confidentiality arrangements with citizens. He asked that each of the stakeholders should follow up on the progress of matters that they have reported to SAPS for further investigation. He called for a strategy which included two meetings a year for the three committees and one meeting a year for all eight committees in which all committee will be given ten minutes at the beginning of the meeting to give feedback on their findings during the year. He asked for the establishment of an exchange of information mechanism between the committees and cautioned against the duplication of investigation by the committees.

Mr Maynier asked whether this situation would have been dealt with as cautiously if the government had not disbanded the Scorpions.

His comment was ignored by the joint committee and the meeting was adjourned.

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