Illicit financial flows: briefing by Inter-Agency Working Group

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Finance Standing Committee

17 March 2020
Chairperson: Mr M Maswanganyi (ANC)
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Meeting Summary

The Committee was briefed by the Inter-Agency Working Group on Illicit Financial Flows on its investigations. The amounts involved ranged from R100 million to R2.7 billion. The investigations had resulted in the recovery of R400 million in illicit funds and several prosecutions.  

In addition the SA Reserve Bank had in 2019/20 blocked funds with a total value R3.8 billion in 148 cases involving 275 accounts. A total of R111.9 million was forfeited in 50 cases involving 73 accounts.

The SA Revenue Service said transfer pricing to avoid tax had increased. It estimated that in 2017, R93 billion left the country in service charges, including R31 billion in interest payments against loans. Assessed losses carried forward by large corporates surged from R130 billion in 2015 to R280 billion in 2017. Criminal and illicit economic activities were a serious problem. The prejudice to the fiscus was more than R100 billion.

The Committee heard that the Inter-Agency Working Group includes the South African Police Service, the Hawks, the South African Revenue Service, the Financial Sector Conduct Authority, the Financial Intelligence Centre, the Special Investigating Unit, the National Prosecuting Authority and the South African Reserve Bank. It combats money laundering, tax evasion and other illicit transactions. The group concentrated on complex cases involving amounts of more than R100 million.

Members were told that the UN Economic Commission for Africa estimated that illicit flows from Africa amounted to USD 50 billion a year, twice the amount that the continent received in official development assistance (ODA). The illicit financial flows drained foreign exchange reserves and reduced tax collection. They cancelled out investment flows and worsened poverty.

Members expressed concern about the extent of the illicit economy and about the State’s inability to collect all the revenue due to it. The Committee called for a comprehensive report on illicit financial flows and tax evasion to be delivered to Parliament within a month.

Meeting report

The Chairperson remarked on the extent of tax evasion and illegal financial flows. If everyone paid their taxes, total revenue collection would be in excess of R2 trillion instead of the current R1.9 trillion. Foreign nationals owned unregistered businesses “all over” the country. He questioned whether they were paying their taxes and suggested that what appeared to be small businesses could in fact be part of much larger networks operating through these container shops.

The Inter Agency Working Group (IAWG) coordinated the work of several agencies involved in combating illicit financial flows (IFFs). These were the Financial Intelligence Centre (FIC); SA Reserve Bank (SARB); Directorate for Priority Crime Investigation (DPCI), commonly known as the Hawks; SA Revenue Service (SARS); Financial Sector Conduct Authority (FSCA); SA Police Service (SAPS); the Special Investigating Unit (SIU); and the National Prosecuting Authority (NPA).

Financial Intelligence Centre (FIC) presentation
Adv Xolisile Khanyile, FIC Director, said IFFs were defined as money that was illegally earned, transferred or utilised that crosses borders. They included cross-border transfers of the proceeds of tax evasion, corruption, trade in contraband goods and criminal activities such as drug trafficking and counterfeiting.

The UN Economic Commission for Africa estimated that IFFs from Africa amounted to USD 50 billion a year, twice the amount that the continent received in official development assistance (ODA). The IFFs drained foreign exchange reserves and reduced tax collection. They cancelled out investment flows and worsened poverty.

Dr Mike Masiapato, FIC Executive Manager: Monitoring and Analysis, said the criteria for selecting cases for inter-agency collaboration through the IAWG were that they should involve more than R100 million and involve at least three of the agencies.

Initially, eight cases had been selected by the IAWG. Two had been finalised, so a further two cases had now been added to the list. These cases were:

• A Ponzi scheme in which R126 million was taken out of the country. Suspects were arrested and were to appear in court in May 2020. A preservation order to the value of R71.6 million was obtained and steps were being taken to recover USD 5 million in a US account.

• Exchange control contraventions involving misinvoicing of R700 million. A criminal investigation was ongoing. SARB had frozen R72 million and would start processes to have the amount forfeited.

• Exchange control contraventions involving illegal exports and misinvoicing, with R397 million taken out of the country. DPCI and SARS were investigating and R9.3 million had been forfeited to SARB.

• The transfer out of the country of R2.7 billion in proceeds from smuggling rhino horn across borders. One person had been sentenced and others were being investigated. None of the funds had been recovered.

• The use of the “hawaladar” informal money transfer system to take out more than R100 million. Brokers were being identified and intelligence gathering was underway.

• Cash seizures from “cash mules” at ports of entry totalling R67 million. Investigations were ongoing. In seven cases, the suspects were represented by the same attorney, suggesting a link between role players.

• Exchange control contraventions, corruption and money laundering in which the country lost 100 million. A sentence of eight years’ imprisonment for corruption was imposed and the IAWG case was closed. There was an ongoing investigation into money laundering.

• The transfer of R2.7 billion to China by organised crime syndicates. An amount of R2.9 million in 175 accounts was blocked. Intervention by SARB had disrupted the syndicate and the case was closed.

• A new case involving a travel agent and exchange control offences of R2.5 billion. An amount of R78 million had been blocked by SARB and intelligence gathering was underway.

• A new investigation into a hawaladar case involving R150 million. SARB had blocked R73.7 million and intelligence gathering and profiling was being done.

Dr Masiapato said total recoveries of funds from 2018 to date amounted to R400 million.

Mr Pieter Alberts, FIC Senior Manager, said the FIC Act identified sectors vulnerable to money laundering. It required them to verify the identities of clients, keep records of transactions and submit reports to the FIC. These sectors were estate agents, banks, attorneys, the gambling sector, motor vehicle dealers and foreign exchange dealers. Providers of crypto assets would soon be added to the list.

Adv Khanyile said the FIC would explore new ways of improving the financial intelligence reports it provided to law enforcement agencies. It would create partnerships with the private sector in order to access relevant financial information and seek improved access to government databases.

South African Reserve Bank (SARB) presentation
Mr Thys Basson , SARB Head of Compliance and Enforcement, said SARB Financial Surveillance (FinSurv) department investigated illicit foreign currency transactions. It took administrative actions against alleged perpetrators by blocking funds, attaching money or assets and having them forfeited. Criminal matters were referred to law enforcement agencies.

In the 2019/20 financial year, the total value of funds blocked was R3.8 billion in 148 cases involving 275 accounts. A total of R111.9 million was forfeited in 50 cases involving 73 accounts. Mr Basson said there was a lengthy process to be followed between the blocking and forfeiture of funds.

In its collaboration with stakeholders during the year, SARB had received 43 referrals of cases from the FIC. It referred three cases to the FIC. It received 142 enquiries from SARS, SAPS, NPA and the Asset Forfeiture Unit. It referred 24 entities or persons to SARS for investigation of tax non-compliance.

SARB had received an increased number of referrals from banks. It shared information with the Prudential Authority for inspection purposes. It presented training sessions to stakeholders as well as training for students doing courses in the investigation of financial crime.

Mr Basson gave a breakdown of the feedback received from the SAPS on cases reported to it by SARB:
- Six cases were closed with no result;
- In five cases the status was unknown;
- Thirty-eight investigations were ongoing;
- Five cases were currently in court;
- Eight cases were prosecuted successfully;
- Six cases were closed because suspects could not be traced;
- Seven cases were withdrawn.

Mr Basson listed some of the interventions by the FinSurv department:
- It investigated a case in which large volumes of crypto currency were acquired locally and transferred to crypto exchanges abroad. More than R15 million in the accounts of three main players was blocked.
- More than R69 million was blocked in an ongoing investigation into a suspected illegal money transfer scheme. It involved numerous local entities making payments based on falsified documents to common entities controlled by a South African resident. This had been referred to the IAWG for joint investigation.
- R22 million which had been blocked by FinSurv was subsequently restrained by the Asset Forfeiture Unit.

Discussion
Mr A Sarupen (DA) asked if the IAWG worked with international investigating, prosecuting and tax authorities in repatriating people for prosecution and in recovering money. Did the IAWG pursue cases from start to final prosecution or did they just “follow the money?” What legal teeth did they have? Were any cases involving the illicit tobacco industry being investigated? This was an issue that should be given priority in light of reports alleging that “politically sensitive persons” were involved. Had there been any cases involving illegal mining? Did the agencies need more legal powers to do their work?

Mr I Morolong (ANC) asked what the reasons were for setting a threshold of R100 million for cases dealt with by the inter-agency team.

Mr G Skosana (ANC) asked for information about investigations involving smaller amounts which were done by individual agencies. He said he was happy that some progress was being made in dealing with IFFs. The Committee was “seriously worried” about the inability to collect all the revenue due to the country. He asked why one case had been closed without any prosecution and why SARB did not know the status of some of the cases it had referred to the SAPS.  

Ms M Mabiletsa (ANC) asked about the procedure for recovering funds that had been blocked.

Ms P Abraham (ANC) suggested that criminals might take note of the threshold set for investigations and ensure that they kept illegal transactions below this limit. She proposed that SARB should be proactive in offering training on IFFs to tertiary institutions.

Responses
Adv Khanyile undertook to provide the Committee with a detailed report on cases being investigated by individual agencies within the IAWG. The Committee could also be provided with an update of a report on tobacco industry investigations which had previously been presented to the Committee.

On cooperation with international agencies, she pointed out that the National Prosecuting Authority (NPA) was a member of the IAWG. The Department of Justice provided help in dealing with foreign jurisdictions. South Africa belonged to the international Egmont Group of Financial Intelligence Units. However, there were sometimes difficulties in exchanging information, because agencies preferred to keep information to hemselves while they finalised cases. It would help if the IAWG had the financial capacity to travel more to meet with counterparts.

Adv Khanyile told Mr Sarupen that freezing and seizing criminals' assets hit them where it hurt most - in their pockets. However, matters did not end there. They would still be pursued by SARS, the Hawks and the NPA.

Mr Alberts replied that the FIC had supported SARS and other agencies in investigating 127 cases of illicit tobacco trading between 2014 and 2018. The investigations involved 15 individuals and 350 entities.

On the case closed without prosecution, Mr Alberts replied that this was a complex investigation involving R2.7 billion and 2 000 bank accounts. SARB was able to block some of the money still in the accounts, but it was sometimes a challenge to repatriate money from certain jurisdictions.

Mr Basson explained that the unknown status of some cases reported to SAPS, was due to difficulties in obtaining information from individual investigating officers. This was a shortcoming that needed to be addressed.

Mr Basson described the blocking of funds as a “very powerful regulation.” When there were grounds to believe that an illegal transaction was in progress, the funds were frozen in the owner’s account and could not be released by the bank. The owner was given an opportunity to make representations before the bank took a decision on whether to proceed with forfeiture. While cases involving more than R100 million were referred to the IAWG, SARB did not set any limits for its own investigations.

Dr Masiapato replied that all the members of the IAWG carried out investigations and shared issues when they fell into the ambit of other agencies. The R100 million threshold was aimed at ensuring that they worked together on more complex cases with cross-cutting issues.

South African Revenue Service (SARS) presentation
Mr Edward Kieswetter, SARS Commissioner, told the Committee that SARS had recently established an integrated enforcement capability to deal with the illicit economy. Currently, there were 764 active investigations into cases involving R30.8 billion. To date, R1.4 billion had been recovered by way of cash collected, preservation orders and proven claims against liquidated assets. Twenty cases had been referred to law enforcement agencies.

SARS had received 179 requests for information from the Public Investment Corporation (PIC), the Zondo Commission, DPCI and the SIU. The requests involved 1 385 taxpayers linked to 2 984 entities. Twenty-four cases involving 350 entities were under SARS investigation or audit and 19 tax criminal charges had been referred to law enforcement agencies.

Mr Kieswetter outlined tax compliance areas that were of concern:

• Transfer pricing: The Davis Tax Committee estimated that, between 2008 and 2011, more than R200 billion left South Africa as service charge outflows. SARS preliminary review for 2017 showed that R93 billion left the country in service charges, including R31 billion in interest payments against loans.

• Assessed losses carried forward by large corporates surged from R130bn in 2015 to R280 bn in 2017.

• Criminal and illicit economic activities were a serious problem. The prejudice to the fiscus was more than R100 billion.

• Base erosion and profit shifting which seriously eroded the current and future tax base. Through aggressive transfer pricing practices, profits actually earned though key South African activities ended up in tax favourable jurisdictions like Switzerland.

Mr Kieswetter said South Africa had information exchange agreements with 160 countries but there was a need to improve these processes to establish asymmetries between what was exported from a country and what was declared as imports to South Africa. It was estimated that three million South Africans had assets offshore. There would be increased efforts to find out who had not declared their assets.

Resolution
The Chairperson said it was important for the Committee to get a comprehensive report on IFFs and general tax evasion. It was important for the Committee to inform the public about the impact of IFFs on the economy. He requested the IAWG produce such a report in collaboration with other experts so that it could be discussed and adopted by Parliament.

Committee members agreed that the report be produced within a month.

The meeting was adjourned.

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