Lord Peter Hain: Why Guptas, KPMG and HSBC bosses go unpunished for state capture

For at least the past five years, it has been common knowledge that Jacob Zuma was played like a puppet by the Gupta family and that state capture and corruption ravaged the economy. There is a wealth of evidence in the public domain that senior professionals working for corporates like KPMG, HSBC and others have had their hands in the cookie jar. There are also details on how banks have allowed individuals who have enriched themselves at taxpayers’ expense to move money out of South Africa and into remote jurisdictions. President Cyril Ramaphosa promised action against state capture villains, but so far no-one has gone to jail for perpetrating financial crimes. British peer Lord Peter Hain, raised in South Africa and a former activist against apartheid, has pieced together the reasons why the Gupta brothers and others have so far gone unpunished for their deeds. State capture is estimated to have cost South Africa about R1.5trn – and that’s before you assess the reputational harm that has deterred foreign investment now and into the foreseeable future as well as the chronic damage inflicted on state entities like Eskom, which are holding back economic growth. Hain has shared, with the Zondo Commission, a detailed listed of those who have enabled corruption and provides suggestions to bring the perpetrators to book. His full report is published here on BizNews, with permission. – Jackie Cameron

Peter Hain’s submission to the Judicial Commission of Enquiry into State Capture

The Global Dimension

Introduction

  1. State capture in South Africa was in part facilitated by the massive complicity of international financial institutions, global corporates and foreign governments (notably in India, Dubai and Hong Kong). These governments and corporates must now act in partnership with the South African Treasury to recover the billions of rands looted from SA taxpayers, much laundered abroad. Having spoken under parliamentary privilege in the UK House of Lords in September 2017 – January 2018 on these matters, on the basis of interaction with whistle-blowers within the South African state and private sectors, my focus is upon the global dimension (especially money laundering) because without that state capture could not have been as monumentally lucrative to its perpetrators as it so tragically has been.
  2. It is incumbent upon the relevant foreign governments implicated and their enforcement and regulatory agencies to resource and prioritise cooperation to bring to justice those responsible for the international looting from South African taxpayers. The same must be the case for the global corporates involved. But, so far, neither has happened.
  3. I am grateful for their advice and assistance in drafting this to a number of friends and contacts for their expertise without which my submission could not have been anything as comprehensive and also I hope authoritative.

Structure of report

  1. This report starts by providing an overview of the Current Status of Financial Crime Globally. Following that introduction, Part One explains the roles and importance of international actors and foreign enablers, without whom there could not have been the state capture of South Africa, drawing primarily on the well-known case-studies of Messrs Ajay, Atul and Rajesh Gupta’s (the Guptas) corrupt activities. Part Two recommends practical, specific and achievable steps that should be taken by international enablers (such as banks and consultants, foreign states and enforcement agencies) as well as South African authorities to prevent future state capture and to help make amends for the harm they have contributed to. Finally, the Conclusion provides an overview of the key points in this report and the principles of transparency and fairness that it embodies.
Description Page Reference
CURRENT STATUS OF FINANCIAL CRIME GLOBALLY
Global picture 3
South African picture 3-4
PART ONE: INTERNATIONAL ACTORS – CONDUCT CONTRIBUTING TO SOUTH AFRICA’S STATE CAPTURE
Banks 5-6
Professional Enablers 6-7
Corporates 8
States 9-10
PART TWO: REMEDIAL MEASURES
Banks and Professional Enablers

  • Transparency of Ownership
  • Information Sharing
  • Self-policing
11-15
Corporates

  • Extractive Industries Transparency Initiative
  • Black Economic Empowerment
16-17
States

  • Legislation 
  • Financial Action Task Force
  • Mutual Legal Assistance
  • Extradition
18-21
CONCLUSION
Conclusion

  • Transparency and Fairness
22

Current status of financial crime globally

Global picture

  1. Financial crime threatens the security and prosperity of the international community and the global financial network. It undermines the integrity of financial systems and damages the international reputation of the states where it flourishes. Criminals launder vast sums of illicit funds every year; transforming their ill-gotten gains in to seemingly legitimate assets. It is estimated that around 5% of global GDP or USD 2 trillion is laundered each and every year. Developing countries seem particularly prone to forms of corruption and the abuse of their domestic financial and regulatory systems. They are also particularly unable to navigate the web of global money flows, or to enforce reasonable standards of transparency and fairness in international business and banking. The impact of these combined issues leaves many countries without the levers to prevent flows of illicit funds from their economy and so keeps many of their citizens in perpetual and abject poverty.  
  2. Fighting corruption therefore requires global action and global co-ordination from a range of stakeholders, including governments, businesses, banks and non-governmental organisations. Without this, the state capture of South Africa or another country will happen again, the South African Treasury will not be able to recover the billions looted and laundered abroad, and ‘rent seeking’ enabled by international banks and multinationals in South Africa will be able to continue largely unhindered and undeterred.

South African picture

  1. Whilst the true scale of the flagrant theft from the South African state (and therefore the South African taxpayers) under the Zuma administration is not fully known, the direct and indirect costs of state capture have been estimated at around R1.5 trillion.
  2. The Commission of Inquiry into State Capture (the Commission) is already well aware of the systemic lack of transparency and accountability of South African government bodies that allowed corruption to thrive, provided criminals with access to the Treasury’s coffers and supplied the foundations for state capture. Whilst South Africa must reflect on the domestic changes it needs to make as a nation to prevent corrupt individuals infiltrating public offices and looting from the South African people, it is also crucial that the international community fully acknowledges the roles that various international actors played in the capture of the state. It was international actors who helped and continue to help corrupt individuals to enjoy the spoils of their illegality by offering them the means to move their ill-gotten gains out of South Africa, and then sometimes (as in the Estina dairy farm scandal) back in undetected. It was international actors who helped corrupt individuals create complex corporate structures disguising the true ownership of funds and complicating the tracing and repatriation of stolen funds whilst earning fat fees out of the looting. It was international actors that provided refuge to corrupt individuals and the means to continue their activities through less regulated ‘open’ economies.
  3. Therefore, international actors across the public and private sectors must commit their resources to strengthening regulations, improving corporate governance, increasing transparency and coordinating globally to reduce financial crime. They should also actively assist the South African authorities in the quest to recover and return the stolen funds to South Africa. Without cross-border cooperation and engagement of the public and private sectors, no country will be emancipated from financial crime.

Part one: International actors- conduct contributing to South Africa’s State Capture

  1. In this part 1, I describe how international actors have (whether knowingly or unknowingly) facilitated State Capture in South Africa. The cases that I cite in this regard are drawn from reports in the public domain and from evidence submitted to this Commission of Inquiry. Save where I refer to my own interactions with the relevant international actors, I do not claim to have direct personal knowledge of the facts in this regard and rely on the reports and evidence cited in the footnotes to this report.

Banks

  1. Electronic banking remains the simplest and fastest means of transferring funds between people and across borders. It allows criminals to move their money to more convenient (often also less regulated) jurisdictions and it ‘cleans’ the money by mingling it with other funds and disguising its source so that it is easier to spend.
  2. It is alleged that the Guptas used a number of international banks (many of whom are household names, including HSBC, Standard Chartered and, above all, Bank of Baroda) to transfer money around their network, disguise payments and hide the source of their funds. Broadly, the banks appear to have assisted the Guptas in two ways: (i) by allowing bank accounts to be opened and in doing so granting access to the bank’s global network; and (ii) by allowing the transfer of illicit funds into and out of accounts. There were, however, warning clear signs even in publicly available materials that the Guptas’ activities were suspicious and these ‘red flags’ should have been spotted by the banks either much sooner or immediately:

12.1 the secretive nature of the transactions (the reason, the source of funds and the ownership of the accounts was often obscured);

12.2 there were unexplained payments to and from third parties with little or no apparent connection to the underlying transaction;12.3 many accounts were used to transfer funds of various amounts around shell companies (or front companies, which do not conduct trading but allow funds to flow through them, while obscuring the persons who control them);

12.4 there were unexplained connections with and movement of monies between jurisdictions; 

12.5 the Guptas (who beneficially owned most of the companies) were linked to the corrupt political elite under former President Jacob Zuma in South Africa and there was an increasing awareness amongst the international community that corruption was rife in South Africa under the Zuma administration; and

12.6 the legitimate funds created by the Gupta’s enterprises were dwarfed by the funds they amassed through illegal activity.

  1. A specific example of a transaction that should have been stopped, or at the least investigated by the bank concerned, was a loan on 18 January 2017 by Trillian Management Consulting (then majority owned by a Gupta associate; Salim Essa) of R160 million to Centaur Mining (a Gupta owned company) via Trillian Financial Advisory (a Gupta owned company). It is alleged that Bank of Baroda SA (part of India’s state-owned, global Bank of Baroda) bank accounts were utilised for this movement of funds. The reason for this chain of transactions was stated to be an inter-company loan. However, no loan documentation has so far been found to exist and no explanation was reportedly provided to the bank for the structure of the transaction. Other reports into the activities of this branch of the bank in respect of Gupta associated accounts and transfers indicate that it issued loan guarantees without approval and may have quashed internal compliance concerns raised by employees.
  2. In another example, it has been alleged that South African government funding for a state financed project (Estina Dairy Farm) was transferred via the Gupta controlled Estina (Pty) Ltd to a Standard Chartered bank account held by Gateway Limited (a Gupta owned company registered in the United Arab Emirates) in May, August, September 2013. Standard Chartered did not stop this transaction despite the fact that government funds were leaving the jurisdiction to a company beneficially owned by the Guptas with no material explanation provided regarding the suspicious payment structure.
  3. Given that banks ought to have access to customer data and transaction data for all accounts they open and transfers they facilitate, they are well placed to monitor the legitimacy of any and all transactions, in addition to having regulatory and moral responsibilities to recognise and stop illegal money flows. But when they met me in London (after I had named them under parliamentary privilege in November 2017 as complicit in state capture/money laundering), I found a great reluctance from HSBC and Standard Chartered – citing ‘client confidentiality’ – to cooperate fully when I specifically asked them to trace and track the money laundered by the Guptas under the Zuma administration. That is simply unacceptable.
  4. It is important that banks take full responsibility for monitoring transactions and for ensuring that adequate compliance policies and procedures are properly implemented across all business areas and branches to prevent money launderers from disguising and disseminating their illegal profits and exploiting weaknesses within the banks’ infrastructure. 

The suggested remedial measures in relation to banks are considered in Part Two – Banks and Professional Enablers

Professional enablers

  1. Professional enablers are persons or entities that become involved (whether intentionally or unintentionally) in facilitating the ‘cleaning’ of laundered money in return for a fee. Their role is to disguise the source, location and ownership of funds. Examples of professional enablers include lawyers, auditors/accountants and estate agents. Lawyers might assist by setting up complex corporate structures of shell companies enabling money to be moved from one country to another country where there is low transparency. Accountants might incorrectly audit company financials leading to suspicious transactions being hidden in the accounts. Estate agents might receive laundered money into their client accounts during property purchases.  
  2. To provide insight into the scale of this problem, the Solicitors Regulation Authority (SRA) in the UK completed a review of whether 59 law firms in England and Wales were meeting their obligations to conduct money laundering checks. 26 of those 59 firms were ultimately referred into disciplinary processes. If the situation is this poor in a country that otherwise scores well on anti-corruption by other measures (e.g. the UK has a low ranking of 11th in Transparency International’s annual Corruption Perception Index) what does that suggest about the anti-money laundering capability of professional enablers in countries with a worse reputation?  
  3. As is set out in detail below, a number of professional enablers appear to have, or have themselves recognised that they assisted the Guptas in their looting from the South African people, including global brand names such as KPMG, Bain & Co and Hogan Lovells. The relevant allegations are to the effect that these firms profited while the Guptas hid funds stolen from South Africa; funds that would otherwise have been spent on essential public services and on helping to repair the colossal damage caused by the apartheid, still a huge deadweight on the country..
  4. In 2018, I referred Hogan Lovells to the SRA for whitewashing corruption within the South African Revenue Service, requesting it be disbarred from practicing in the UK for its terrible complicity in state capture. But the SRA eventually accepted Hogan Lovells’ own defence that it was only the international law firm it claimed to be for ‘branding purposes’, and that the SRA therefore had no locus to intervene in the reported corruption collusion of its South African branch. I note that Hogan Lovells has since deservedly lost South African business and been forced to restructure after it refused to admit obvious culpability, even when other global corporates did.
  5. Another example of a professional enabler who assisted the Guptas is KPMG’s South Africa Division. KPMG South Africa was responsible for auditing various Gupta companies in South Africa for around 15 years up until March 2016. During that period, it flagrantly ignored warnings regarding the integrity and ethics of the Guptas and falsely categorised spending (such as a wedding in 2013) as business expenses whilst earning significant fees for performing auditing services (such fees ultimately being paid for by laundered funds). Eventually the firm conducted an internal investigation which led to eight senior executives being fired and a promise to repay R40 million it had earned from auditing Gupta related companies to anti-corruption charities.
  6. A third example is that of Bain, the Boston-based consultancy firm, which was named in the Commission of Inquiry into Tax Administration and Governance by the South African Revenue Service (referred to as the “Nugent Commission”) as having ‘coached’ Tom Moyane on how to implement the capturing of SARS a full year before he was appointed Commissioner. Several of these meetings took pace at Nkandla, the private homestead of President Zuma. “So serious were its actions that the Nugent commission recommends criminal prosecutions against Bain & Co. It found that Bain had engaged in a “premeditated offensive against SARS, strategised by the local office of Bain & Company Inc, located in Boston, for [former SARS head] Mr [Tom] Moyane to seize SARS … Mr Moyane’s interest was to take control of SARS. Bain’s interest was to make money.”
  7. Professional services firms have access to client data, meaning that they are well placed to monitor and recognise suspicious transactions and customer activities. It is essential that global professional services firms enact robust compliance policies and procedures to recognise and prevent money-laundering and actively educate all employees across all business areas and branches about the importance of those policies.

The suggested remedial measures that should be implemented in relation to professional enablers are considered in the Part Two – Banks and Professional Enablers section below (pages 11-15). 

Corporates 

  1. Allegations of corruption are often directed at the state and government officials. However, South Africa is a living example of where privately owned companies can become intentional or unintentional facilitators of money laundering and bribery by doing business with criminals in order to win lucrative contracts or other commercial advantages, often in the state procurement space. Conduct of this nature has prompted many an investigation by a regulator, such as the UK’s Serious Fraud Office’s discussions with Acacia Mining in December 2018 in relation to employees in Tanzania engaging in corruption.
  2. A common typology of how a company might facilitate corruption (and commit criminal offences in doing so) is where a corrupt individual (such as a government official) offers a company a public contract in return for a commission payment (also known as ‘rent seeking’ and a form of bribery). In this scenario the company, frequently under the guise of a Black Empowerment Enterprise (BEE), is awarded a private or government contract at an agreed price (often an inflated amount to take into account various bribery payments to government officials and associates) without either (a) having to complete a fair bidding process (discouraging fair competition) or (b) having to prove their capability leading to contracts being awarded to parties who do not have the capability to fulfil them. Contracts infected with this form of corruption are rarely performed properly or even sometimes at all; even where the contract is effectively ‘sold’ to an ostensibly competent foreign company. Examples of this type of corruption are set out below.
  3. 26. Transnet – Its senior executives assisted the Guptas in corrupting the state procurement process for commercial gain. In a contract obtained for providing locomotives South China Rail undertook to pay more than £250 million in bribes to Gupta linked shell or BEE companies in return for the Guptas using their political influence to ensure that the Transnet tender was awarded to South China Rail. It was later revealed that South China Rail did not adhere to the strict local content and supplier development obligations, required to assist in growing the South African economy. For the first 166 locomotives delivered, the local content score was 33%.
  4. Housing – In the Free State under the leadership of the then ANC Premier, Mr Ace Magashule, an alleged associate of the Guptas, the absence of 11,000 homes for those in dire need has been explained as a direct result of building contracts being awarded to political supporters through BEE’s, where those BEE’s all too frequently had no or little building experience and would have failed any transparent or fair procurement process.
  5. Consultants – The capture of the South African state would not have occurred if companies had refused to engage in negotiations and broker deals with corrupt government officials and associates. Yet many, including global brand names like SAP and McKinsey appear shamelessly to have done so, earning enormous fees and thereby being complicit in the looting and diversion of scarce taxpayers money from providing much needed health, education, care, housing and other vital provisions in a country still weighed down by the apartheid legacy of mass unemployment, poverty and deliberate under-skilling.
  6. The private sector is legally responsible for fostering an environment where financial crime does not pay and where there is fair competition for tenders and contracts. Creating such an environment requires companies to know and understand who they are doing business with, whether that is a counter-party, a consultant or a supplier, have access to information to ascertain whether a counter-party (including BEE’s) is capable of completing its obligations and to have confirmation of whether a party and its owners   are located in South Africa, the UK or anywhere else in the world.

The suggested remedial measures that should be implemented in relation to corporates are considered in Part Two – Corporates section below (pages 16-17). 

States 

  1. Globalisation has made it easier for criminals to dissipate tainted funds more broadly; resulting in countries unconnected to the underlying crime being used to launder money and being drawn into the web of corruption. Without the cooperation and coordination of states, criminals are able to simply avoid the rule of law by relocating themselves and their stolen funds to another country. Criminals often exploit the differing standards and enforcement of legislation across states, and the lack of political will in some states to fund the fight against financial crime as a result of budgetary constraints, by choosing to locate assets in jurisdictions where regulations are weaker, regulators are underfunded, or where there is less transparency around corporate ownership.  
  2. Many criminals also attempt to relocate to countries where there is no extradition agreement in place to avoid being forced to return to the country where their crimes were perpetrated. Up until now, governments have paid lip service to curbing financial crime without actually doing so. The UK and South Africa, for example, both have strict anti-money laundering regulations but the named wrongdoers and many others have managed to evade this legislation with the complicity of South African public officials and the ‘professional services’ of foreign headquartered or located global banks and professional enablers, respectively.
  3. An example of the global reach of the Guptas and their utilisation of other states to safeguard their wealth and prevent their arrest is their links to Dubai (where they currently reside), India (their country of birth where they also reside) and Hong Kong (where they reportedly funnelled laundered funds and received kickbacks).
  4. 33. Hong KongShiwa Mazibuko, head of the South Africa Reserve Bank financial surveillance department informed the Commission during his testimony on 7 June 2019 that around R52 million was moved from South Africa to Hong Kong via Homix (a Gupta owned company) to Morning Star International and YKA International Trading Company (Hong Kong companies). Other reports indicate that some of the funds laundered in Hong Kong were used to purchase diamonds via companies such as Simoni Gems (a Hong Kong company linked to the Guptas that received funds from South African Gupta companies). These funds have not yet been repatriated to South Africa, nor have the Hong Kong authorities taken any public action against the Guptas. Other reports indicate that more than $100 million of the kickbacks received by the Guptas in respect of purchases of CSR and CNR locomotives by Transnet were channelled through the HSBC Hong Kong accounts of their front companies Tequesta and Regiments Asia.
  5. Dubai – The Guptas currently reside in Dubai (Villa L35, Lailak Street, Emirates Hills, Dubai, identifiable by the Gupta gold crest at the entrance gates and purchased with laundered funds) after fleeing from South Africa in early 2018. The Guptas have not yet been extradited to face trial in South Africa, nor have any monies in Dubai been repatriated to South Africa.
  6. India – The Guptas are Indian by birth and have a number of family members, businesses and properties in India. The Guptas have also commissioned the building of the R200 million Shiva Dham temple using laundered funds and appear to continue haemorrhaging funds at an alarming rate, including recently funding a wedding costing R427 million in June 2019. Whilst the Indian authorities have investigated the Guptas, no funds have yet been repatriated to South Africa.
  7. The active assistance and determined cooperation of diplomats and states is critical to the repatriation of South Africa’s stolen funds and the extradition of the Guptas to face trial in South Africa for their crimes. States must also strengthen regulations and enforce them within their jurisdictional reach to ensure that there is a real deterrent from engaging in illegal activity. It is not enough to establish legislation such as the UK’s Bribery Act 2010 and South Africa’s own powerful anti-corruption legislation. Enforcement and investigative agencies (such as the Serious Fraud Office, National Crime Agency and Financial Conduct Authority in the UK, Directorate for Priority Crime Investigation within the SA Police Services and the National Prosecuting Authority and the Special Investigations Unit in South Africa) need to be utilising the legislation to conduct investigations and require proper resourcing to do so. In the UK, these agencies have not had anything resembling the resources required to combat financial crime in recent years, leading to a request earlier this year from the head of the National Crime Agency for an additional GBP 2.7 billion in funding for that agency alone. As a reminder of the assistance these agencies can provide in combating financial crime, the UK’s Serious Fraud Office’s investigation into the activities of Standard Bank Plc in Tanzania led to USD 7 million being paid in compensation to the Government of Tanzania and over USD25 million paid in fines and disgorgement of profits.
  8. States simply cannot continue to condemn corruption on the international stage whilst allowing the proceeds of crime to be pumped into and through their economies. In particular, the states referred to above must reflect on their involvement in the capture of South Africa and implement remedial steps as a matter of urgency.

The suggested remedial measures that should be implemented in relation to states are considered in Part Two – States section below (pages 18-21). 

Part Two: Remedial measures

  1. The consequences of South Africa’s crippling state capture demonstrate the need for the international community to re-affirm its collective commitment to preventing and eradicating financial crime. As explained in Part One, without the involvement of international actors and enablers, the devastating impact financial crime wrought on South Africa would have been significantly reduced. We must now treat South Africa’s experience of state capture as an opportunity; an opportunity for the international community, including business and banking, to learn from the failures and weaknesses in the global regulatory system that enabled such stifling corruption to eventuate. Specific steps can and must be taken to prevent state capture afflicting South Africa or any other country in the future.
  2. The following recommendations are made to foster a transparent international environment where there is pro-active co-operation between banks, professional enablers, companies and states, and where the perpetrators of corruption and money laundering are no longer able to hide in the shadows.

Banks and Professional Enablers 

  1. Successfully combating financial crime can only be achieved through a meaningful partnership between the private sector and the public sector, concentrating around shared strategic priorities and the alignment of resources. Within the private sector, banks and professional enablers have arguably the most significant role to play in combatting financial crime. It should be a source of shame for the world’s leading economies that banking institutions and professional enablers responsible for facilitating corrupt practices in foreign countries are headquartered in their jurisdictions (London, New York, Delhi and Shanghai, for instance). I note that the average, honest citizen on a modest or medium income is subject to all manner of frustrating and time-consuming procedures and requirements to open a bank account or legitimately move money, but somehow banks turn a blind eye to global crime such as that perpetrated by the Guptas, their cronies and allies, on a gargantuan scale. How can that be right?
  2. Whilst it might seem counterintuitive to seek assistance from entities that are reported to have contributed to state capture and assisted corrupt persons to move stolen funds out of South Africa (for instance HSBC, Standard Chartered, Bank of Baroda, McKinsey, KPMG, Hogan Lovells, and Bain & Co, to name a few), their involvement is crucial to understanding the global picture of financial crime. For it is a fact that funds moved across the world today leave a digital footprint. Banks and professional enablers (particularly global banks) possess the technological and financial clout needed to force change and that power should be harnessed to assist regulators to target their often too limited resources.  

Transparency of Ownership

Recommendation: (i) creation of a public register of beneficial owners (BOs) within the next six months; and (ii) strengthening the audit programme of banks and professional enablers’ due diligence in South Africa

  1. In order for banks and professional enablers to recognise suspicious customers or transactions, they must know the identity of the customer.  Understanding who the beneficial owners (BOs) of corporate entities are is integral to enabling banks and professional enablers to understand the background to a transaction so that a proper assessment can be made of whether there is a corruption risk. This is why greater transparency around beneficial ownership has been high on the G20 Agenda for the last five years, after G20 leaders adopted the High-Level Principles on Beneficial Ownership Transparency in 2014. In this regard, South Africa has recently introduced legislation to strengthen customer due diligence measures, including with respect to beneficial ownership and persons in prominent positions.
  2. As explained in Part One, criminals often hide behind complex layers of shell companies, obstructing banks and professional enablers from associating transactions to or from the shell companies with the criminal. Banks and professional enablers therefore need to ensure that thorough due diligence is carried out before customers are on-boarded (e.g. before bank accounts are opened or clients accepted) to ensure that they understand the true identity of the customer. Once on-boarded, banks and professional enablers should conduct ongoing monitoring of the customer to ensure that the corruption risk profile is updated to reflect any new information received. This is particularly important in relation to business areas (such as state procurement) or geographical areas (such as South Africa) that have experienced  a high risk of corruption which was rife under the Zuma Administration, or where the customer is a politically exposed person. In these higher risk scenarios, more rigorous requirements should be adopted accordingly.
  3. In order to facilitate banks and professional enablers identification of BOs, states should commit to increasing transparency around the parties that enter into contracts with state-owned enterprises by creating a public BO register within the next six months containing information (name and address) for all of the BOs of all the entities that have entered into major contracts with the South African government (above a certain threshold amount). This would help banks and professional enablers to assess the legitimacy of payments from state-owned enterprises to third parties. Once live, BO information for new major contracts should be added as a matter of course and in advance of any contract being signed so that the BO information can be scrutinised. The register should also be updated and verified by an independent body on a monthly basis to ensure that banks and professional enablers (and others) have access to accurate and up-to-date information, and to prevent the register being fraudulently completed by corrupt officials. 
  4. In order to ensure that banks and professional enablers are held to account for their risk assessments of customers and transactions, it is recommended that the programme for auditing the due diligence carried out by these entities in South Africa is improved. Currently, the South African Reserve Bank audits banks on a regular basis under the Financial Intelligence Centre Act 2001 and the South African Reserve Bank Act, 1989. Reports on the audits are then published and substantial fines imposed for non-compliance. Given the significant role that banks and professional enablers played in facilitating state capture, it is suggested that the South African Reserve Bank carries out a greater number of audits on these entities, particularly on those that have been identified as not complying with anti-money laundering legislation previously. These audits should take place without notice and a random sample of due diligence files should be reviewed, thereby making it difficult for banks and professional enablers to hide any compliance failures. Finally, key findings from these reviews (to the extent they do not assist criminals seeking to beat bank’s controls), a ‘root causes analysis’ and an overall score should be made publicly available, as should personal undertakings by senior ‘headquarter’ management to timelines and funding; guaranteeing commitments made by the relevant bank’s local branch to any critical remediation work. In this way the public, business and government can be helped to reach their decisions about which banks live up to their ethical claims and deserve increased business.

Information Sharing 

  1. Recommendations: (i) consolidation of data within banks and professional enablers; (ii) establish a body replicating the UK’s Joint Money Laundering Steering Group (JMLSG) within South Africa within the next 12 months; (iii) implement legislation allowing the voluntary sharing of data between banks where there is a suspicion of money laundering; (iv) establish a body replicating the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) in South Africa within the next 12 months; and (v) require banks to provide the South African regulators with a copy of monthly reports to management on corruption risks
  2. Significant advances in technology have made it easier than ever to collate, store and share data. However, fragmentation of domestic and cross-border information sharing (i) within banks and professional enablers; (ii) between banks and professional enablers; and (iii) between banks and professional enablers and states, continues to impede financial crime prevention and prevent those parties from understanding the full financial crime picture. Greater (and better quality) data sharing will enable banks and professional enablers to identify and stop suspicious transactions and to more accurately report the nature of suspicious transactions to regulators, which in turn will help regulators to identify criminal activity and prioritise enforcement.  
  3. Corruption Watch (part of Transparency International focusing on fighting corruption in South Africa) has assisted in shining light on the corrupt activities taking place in South Africa by raising and maintaining public awareness of what corruption looks like and how it affects ordinary people’s lives. However, the engagement of civil society alone is not sufficient to understand the true scale of financial crime.
  4. Banks and professional enablers (in particular global banks) are crucial to building an accurate picture of financial crime because they have access to software and systems that enable them to retain and collate information on customers and transactions that are unavailable to a regulator in the ordinary course. Similarly, banks often have access to huge financial resources and employ large teams of compliance personnel to assess financial crime risks that underfunded regulators may only dream of. Therefore, banks and professional enablers are the first line of defence when it comes to corruption and a private-public sector partnership is integral to reducing financial crime. Although some sharing of information already occurs, it is not effective and Banks must cease hiding behind confidentiality (or the limits of current reporting systems), and work collaboratively and pro-actively to share useful data and intelligence on a confidential basis with South Africa, global regulators and enforcement agencies.
  5. It is moreover also incumbent on states to recognise the value of sharing information with and amongst banks. It is a frequent complaint of banks that they rarely receive feedback from regulators regarding the quality of their reporting. They seldom receive any indication of whom regulators have identified as targets of suspicion and are not called upon to assist in the monitoring of their transactional behaviour. It is important that regulators develop better forms of cooperation with banks and trusted working relationships.     

Within Banks and Professional Enablers

  1. Banks and professional enablers must consolidate data across their organisations (i.e. information should be shared across different product departments and geographical areas). This will help prevent ‘passporting’, whereby criminals gain access to a financial institution’s multinational network through a less regulated jurisdiction or product area. Banks and professional enablers should not be allowed to claim ignorance of the activities of branches placed in jurisdictions in a bank’s multinational operations where anti-money laundering policies and procedures are not as rigorous, or where there are opaque banking and corporate structures. We need to look no further than the activities of the South African branch of Bank of Baroda (see Part One – Banks above) for an example of how a local bank branch was exploited to gain access to a global bank’s infrastructure.  
  2. Banks and professional enablers must commit to ensuring that they are diligently consolidating and reviewing the data they obtain on customers and transactions across the network so that employees have access to all of the data on a customer or a transaction and can judge the financial crime risk (and report to the regulators) accordingly.

Between Banks and Professional Enablers

  1. In order to encourage information sharing between banks and professional enablers so that they can create a more complete picture of a customer and their transactions, it is recommended that a body replicating the UK’s Joint Money Laundering Steering Group (JMLSG) is set up within South Africa in the next 12 months. JMLSG (made up of the leading UK trade associations in the financial services industry) has created practical guidance for the financial sector around how banks should fulfil their obligations under UK anti-money laundering and counter terrorist financing laws and regulations. This guidance has reportedly significantly enhanced the ability of those in the financial sector to comply with the applicable laws and regulations because it is written by those with an in-depth knowledge of how that sector works on the ground.  It has also ensured that there is a degree of universality in approach across the financial sector.
  2. It is further recommended that legislation permitting the voluntary sharing of data between banks where there is a suspicion of money laundering should be implemented in South Africa, as has occurred in other states. For example, the UK’s Criminal Finances Act 2017 introduces voluntary information sharing between regulated entities (such as banks and professional enablers) when they have notified the UK’s National Crime Agency of a suspicion of money laundering. These provisions have allowed banks and professional enablers to communicate when there is a suspicion of money laundering and collate the relevant data held by multiple organisations so that they can provide a more fulsome picture to regulators (enabling the regulator in turn to better allocate resources and make a more accurate assessment as to what action needs to be taken in respect of the transaction).

Between Banks and Professional Enablers and States

  1. In order to foster relations between state law enforcement and the financial sector, it is recommended that South Africa establishes a body replicating the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) within the next 12 months. JMLIT promotes the exchange and analysis of information relating to money laundering and wider economic threats and, since its inception, has supported and developed over 500 law enforcement investigations and has directly contributed to over 130 arrests and the seizure or restraint of over £46m m. As is the case for JMLIT, this newly formed body should be comprised of both local banks and international banks (in recognition that corruption and money laundering can involve the global movement of funds around banking institutions).
  2. It is further recommended that international banks should be required to share, with the South African authorities, copies of their monthly or weekly reports to management relating to their assessment of money-laundering, sanctions and corruption risks within the bank and the effectiveness of the banks’ compliance programme (in their unedited form). These reports, which are already required to be created by US and UK authorities (even if they are not shared), would enable the authorities to better understand how robust the bank’s compliance programme is within South Africa against the inherent risk and whether there are any material weaknesses that criminals might exploit. Collating key themes from these reports would also provide an overview in almost real time which would help the South African agencies target limited resources. There is simply no good reason for foreign banks to be better informed of the financial crime risk they present to South Africa, than the South African authorities.

Self-policing

  1. Recommendation: Additional penalties for banks and professional enablers for failure to self-monitor (removal or suspension of banking licenses and a ‘senior manager’s regime’)
  2. In addition to banks and professional enablers sharing data, these organisations must make better use of the data they have access to by fastidiously ensuring that it is utilised to identify potential criminal activity. Banks and professional enablers should take pro-active responsibility for monitoring their adherence to anti-money laundering regulations and internal anti-corruption policies, rather than relying on regulators to oversee and intervene when legislation has been breached and crimes have already been committed. The Bank of Baroda’s apparent wilful indifference to the Guptas’ shady dealings (only closing their accounts very late in the day, after billions had already been laundered through them) is a shameful example of complicity in state capture, corruption and criminality. The Bank of Baroda should in my view have been punished for its actions.
  3. In order to encourage strict adherence to money laundering regulations and company procedures regarding the same, it is recommended that banks and professional enablers should face additional sanctions at both an organisational and an individual level, in addition to those already included in the current anti-money laundering legislation. On an organisational level, licenses should be immediately stripped from banks if they consistently fail to meet the anti-money laundering standards expected and licenses should be automatically suspended (pending investigation) if it is suspected that they have facilitated money laundering or corruption. This would act as a powerful deterrent. On an individual level, there should be the introduction of a ‘senior manager’s regime’ whereby senior management is personally responsible for the failures of their company over money laundering and corruption. Punishments should include removal of permission to work for any regulated entity (such as a bank), fines and perhaps even prison time (for the most serious offences). This would encourage management to take a more active role in ensuring that their institution adopts and effects anti-money laundering policies and procedures.

Corporates 

  1. Aside from banks and professional enablers, corporate entities can also be responsible for fostering an environment that allows corruption to flourish by continuing to do business with corrupt individuals. This is particularly concerning in the state procurement sector (where taxpayers’ money is at stake) and in certain industries that have historically proved susceptible to corruption. Corporate entities therefore need to contribute to the fight against crime by changing the way that they do business.

Extractive Industries Transparency Initiative (EITI)

  1. Recommendation: Establishment of standards for good governance (based on the EITI standards) for industries that are vulnerable to corruption
  2. EITI is a global standard for good governance of businesses operating in the mining, oil, gas and other extractive industries. It promotes greater transparency and accountability amongst the industry players through practical policies and procedures designed to combat money laundering and corruption. Those that adhere to the EITI standard publically disclose information from the point of extraction, right up to how the public is benefited. Government, companies and civil society are expected to collaborate and cooperate to promote understanding of resource management to prevent improper exploitation of resources. For example, EITI members are required to disclose information related to how the sector is managed so that there is an understanding of the laws and procedures for the award of production licenses. This information includes the process for awarding a license, information about the recipient of the license and any material deviations from the tender framework. Disclosure of this level and type makes it difficult for licenses to be awarded outside of the established framework without attracting criticism and challenge from bidders and the public.  
  3. The extractive industries are not the only business areas that have been historically vulnerable to corruption. The international community is in the process of considering establishing EITI equivalents for other vulnerable business areas that could benefit from increased transparency, such as state procurement contracts. The guidelines for the state procurement sector would likely include requiring states to publicly publish information about the tender process and the successful tender party so that it is more difficult for tenders to be awarded illegally to counterparties without the necessary capability. A level of visibility around the successful tender party would make it easier for the state and other third parties to better understand who they are doing business with and whether that person poses a financial crime risk (see Part Two – Transparency of Ownership).
  4. It is recommended that South Africa joins the EITI initiative as a matter of priority to help to tackle corruption in the South African extractives industries (as the Commission will be aware, state capture involved the misappropriation of extractive industries, including the sale of the Optimum coal mine to the Guptas). To the extent that the EITI principles are rolled out to other sectors, either by EITI or by any new body, South Africa should ensure that it adopts the principles for those additional business areas too.

Black Economic Empowerment (BEE)

  1. Recommendation: Increased transparency around BEE contracts
  2. It is a sad reality that increased protection is needed in order to ensure that the important and legitimate aims of the Black Economic Empowerment (BEE) programme are not undermined through corrupt manipulation by a few corrupt individuals (such as the Guptas) and their illegal ‘rent seeking’. Unfortunately, in recent history, contracts with state-owned enterprises have been awarded to enterprises under the BEE initiative that do not have or intend to obtain the requisite capability to properly perform those contracts, nor intend to further the aims of the BEE movement. In that regard. Part 1 of this document identified Gupta businesses and those related to the Free State that were often claimed to be BEE’s but which did not deliver on their promises or empower black communities. Therefore, special attention must be paid to better regulating and promoting the BEE programme (over and above the general state procurement recommendations set out immediately above) to ensure that it offers the intended benefits.
  3. It is recommended that, in addition to the disclosure of information regarding BOs and contractual counterparties (see Part Two – Transparency of Ownership and Information Sharing), there must be increased transparency around whether BEE parties (i) have a relevant track record; (ii) meet basic up-skilling requirements to perform a contract e.g. do hire and train black employees to the number and qualifications required for competency under the contract; and (iii) satisfactorily perform their contract against contractual key performance indicators including final sign-off on completion.  The number of employees retained by businesses claiming to operate as a BEE enterprise should also be recorded, verified and disclosed, as those that exploit the BEE initiative usually create a shell company with very few employees (much fewer than would be needed to fulfil the contract) solely to win the contract. In other words, they pervert the admirable and necessary objectives of BEE. This additional transparency could be achieved in the form of regular public updates by the state through the Department of Public Enterprises websites and a whistle-blowing hotline for the reporting of breaches
  4. Given that the BEE programme is so important to the future of South Africa and has been wrongly exploited and manipulated by state capture criminals over a protracted period, greater transparency and accountability in this area is essential to ensure that: (i) those whom the initiative was designed to benefit are able to benefit; (ii) the South African people are provided with the goods or services promised under a state contract; and (iii) financial institutions who bank BEE’s,  the press and local communities can identify rogue BEEs so that they cannot move any ill-gotten ‘rents’ abroad and out of easy reach. 

States 

  1. States that wish to maintain or enhance their status as global financial centres or successful environments for business opportunities must bolster their commitment to tackling financial crime. Money laundering almost always involves the transfer of funds across borders, as criminals seek to exploit the complexity inherent in the global financial system and the differences between different state laws and regulations. Central to a state’s ability to strengthen and enforce anti-money laundering legislation is whether its regulators have been suitably armed with the necessary powers and the requisite funding. Regulators should be able to investigate and punish all of those who commit serious financial crime. Closer bonds should also be established between states (and their regulators) to ensure that there is a stronger collective defence against criminals exploiting jurisdictions with weaker anti-money laundering legislation or more opaque financial systems.

Legislation 

  1. Recommendation: (ii) proper utilisation of existing legislation; (ii) implementation of additional measures to hold public officials to account for misusing information gathered during an investigation; (iii) implementation of additional measures to recover the proceeds of crime (e.g. unexplained wealth orders); and (iv) additional funding for regulators
  2. South Africa, along with many other states, has strong anti-money laundering and corruption legislation in place (such as the Prevention and Combating of Corrupt Activities Act 2004 and the Financial Intelligence Centre Act 2001) that makes it an offence to engage in money laundering or other corrupt activities. However, this legislation was not suitably enforced to combat financial crime, allowing state capture to occur and third parties in other jurisdictions to facilitate financial crime. Therefore, the first priority of the South African government and other states must be to ensure that regulators are properly utilising the anti-money laundering legislation already in existence to hold criminals to account.
  3. In applying anti-money laundering legislation, states should not be afraid to hold public officials to account. If anything, they should be held to a much higher standard of accountability than others given their role as elected officials acting on behalf of the South African people. It is recommended that the accountability of public officials is strengthened by introducing new anti-money laundering legislation in South Africa to hold public officials criminally liable for misusing information gathered during an anti-corruption investigation. Although such behaviour is criminalised in SA legislation, the fact that there has been no prosecution of the misuse of information has more to do with the “hollowing out”/dysfunctionality of SA law enforcement authorities as a result of state capture than it has to do with laws on the statue book. The people of South Africa have put their trust in their government officials and these individuals should not be allowed to prosper at their expense.
  4. It is also recommended that South Africa introduces additional robust and dynamic tools to assist regulators with recovering the proceeds of crime more easily and to encourage regulators to monitor and investigate parties suspected of facilitating money laundering or corruption. South Africa must review the anti-corruption and anti-money laundering measures being adopted by other states, adopting any that it feels would assist its regulators to better hold criminals to account and recover the proceeds of crime. For example, the UK has recently introduced unexplained wealth orders (UWOs) into the UK regulators’ toolbox. These orders require a person to explain the source of wealth used to acquire certain property in the UK. In the event that a legitimate explanation is not provided, the property is seized by the regulators and deemed recoverable proceeds of crime. This regulation allowed the UK’s National Crime Agency to require the wife of a jailed banker (who was convicted of embezzling up to $3 billion in Azerbaijan) to explain how she had come to acquire certain valuable properties and assets in England worth over £22 million.
  5. Coupled with stronger enforcement powers is the need for a commitment to funding regulators. It is recognised that funding regulators can be politically difficult when there are a number of budgetary considerations and, ultimately, the level of funding will be influenced by the electorate and the political mandate of those in power. However, the less funding regulators receive, the less investigations will be conducted, the less funds recovered and the less criminals held to account. It is recommended that funding is increased for regulators, in particular South African regulators, to enable them to properly perform their function.

Financial Action Task Force (FATF)

  1. Recommendation: Fully implement all of the FATF recommendations
  2. States should strive for increased universality in anti-money laundering policies and procedures. This will ensure that the standard is raised in states where financial corruption is endemic (such as the United Arab Emirates, China and Hong Kong) and there is commonality across borders, reducing confusion as to what anti-money laundering standards apply in what country. Whilst it is imperative that each state passes its own laws legislating against money laundering, basing such legislation on the same set of principles would help ensure universality. The Financial Action Task Force (FATF) has proposed a set of recommendations aimed at preventing, detecting and sanctioning money laundering that should be adopted by all states and should underpin national legislation on this issue.
  3. South Africa is a member of the FATF. However, simply being a member and agreeing with the recommendations is not sufficient. South Africa must actively implement the recommendations and ensure that national legislation reflects all of the recommendations. Furthermore, South Africa must monitor whether the recommendations are actively being applied. All law enforcement and regulatory authorities across South Africa must demonstrate their willingness to support the FATF standards, and thereby their commitment to eradicating corruption.

Mutual Legal Assistance

  1. Recommendation: Increased mutual legal assistance
  2. In order to prevent criminals evading justice by relocating themselves and their assets to another jurisdiction, states must develop closer bonds and work together to ensure that criminals are held to account wherever they are in the world. States should be prepared to “rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering and should do so expeditiously, before criminals are able to hide or disguise their ill-gotten gains. Based on the reported locations of the funds stolen laundered by the Guptas, fostering closer cooperation between South Africa and Hong Kong, the United Arab Emirates and India is of particular importance.
  3. Mutual Legal Assistance Treaties (MLATs) offer a way of formally documenting cooperation between states to exchange information to assist in criminal investigations and hold criminals who have relocated themselves and their assets to another jurisdiction to account. MLATs can provide a state with access to information/assistance that could not normally be obtained through inter-law enforcement cooperation. In relation to financial crime specifically, the types of assistance that can be requested when an MLAT is in place include: (i) serving proceedings; (ii) obtaining special procedural material (e.g. records held by banks or accountants); (ii) search and seizure of evidence; and (iii) freezing or confiscation of assets.
  4. It is recommended that South Africa negotiate MLATs with other states where it is politically possible to formalise cooperation and to provide additional options to recover criminal property that has been moved overseas. It is further recommended that once signed, the process for formal ratification is completed within a three month period. For example, a MLAT (and extradition agreement) with Hong Kong was signed on 20 February 2009 but has yet to be submitted to parliament for ratification. Where there are MLATs already in place, for example with India, better use must be made of those agreements to ensure that the proponents of financial crime are held to account.

Extradition Agreements 

  1. Recommendation: Proliferation of responsible and effective extradition agreements
  2. Extradition agreements, like MLATs, are another type of inter-state agreement that can be utilised to hold criminals to account and bring those who have fled overseas along with laundered funds to justice. States should “constructively and effectively execute extradition requests in relation to money laundering and terrorist financing, without undue delay to prevent those who have evaded justice from enjoying or hiding their ill-gotten gains or committing further offences. All governments must ensure that their country does not provide a safe haven for the perpetrators of state capture, looking to seek refuge beyond the reach of international justice (some of the main culprits being Dubai, Hong Kong and tax havens in the Caribbean). This requires the express criminalisation of money laundering and other types of financial crime as extraditable offences and agreements between states to extradite persons who commit those offences.
  3. States must proactively engage with one another to ensure that criminals can be extradited quickly or risk the criminal relocating to another jurisdiction or dissipating the stolen funds. For example, whilst the extradition agreement and MLAT between South Africa and the United Arab Emirates is a positive step forward in bringing those responsible for the state’s capture to justice, it has taken eight years of negotiations and the Guptas have yet to be extradited and are currently free to spend their billions, reducing any amount that will later be returned to South Africa. Why? In my view, either the government under the Ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, is wilfully sheltering a family that has looted astronomical amounts from South African taxpayers, or the South African authorities do not have the capability/political will to insist that the Guptas are arrested and returned to South Africa to face trial.
  4. It is recommended that South Africa negotiate extradition agreements with other states where it is politically possible to formalise cooperation and to provide a method for seeking the repatriation of criminals. It is, however, recognised that caution must be exercised in relation to states that do not observe the Universal Declaration of Human Rights in their justice systems. Where there are extradition agreements already in place, better use must be made of those agreements. Whilst a number of states are making good use of INTERPOL and Europol in pursuit of economic criminals, the effectiveness of any ‘red notices’ (i.e. international person wanted notice) issued is thwarted by the existence of extradition free havens for the perpetrators of corruption and financial crime.
  5. Regardless of the existence of extradition agreements, states must be willing to cooperate and to cooperate expeditiously to ensure that criminals are held to account and it is suggested that ad-hoc agreements are reached with respect to specific individuals responsible for serious financial crime in the interim to speed the process up.

Conclusion

In summary, my recommendations to the Commission are:

    1. Increase transparency around the beneficial owners of corporates and strengthen the programme for auditing the due diligence conducted by banks and professional enablers to ensure that they are fully complying with anti-money laundering legislation and polices.
    2. Increase the sharing of data within banks and professional enablers, between banks and professional enablers, and between banks, professional enablers and the state, so that there is greater visibility around the risk profile of customers and transactions.
    3. Create additional penalties (at both an organisational level and an individual level) for banks and professional enablers who fail to self-police and act in accordance with anti-money laundering legislation and procedures.
    4. Join the EITI so that there is greater transparency and accountability around the operation of the extractive industries; historically an area at higher risk of corruption.
    5. Increase transparency around the BEE programme to ensure that the legitimate aims of this initiative are not subverted for the personal gain of criminals.
    6. Ensure proper utilisation of anti-money laundering and corruption legislation in existence, as well as implementing additional legislation (to better hold public officials to account and to assist with recovery of assets) coupled with increased funding for regulators.
    7. Fully implement all of the FATF Recommendations.
    8. Increase mutual legal assistance between states.
    9. Encourage extradition agreements between states.

Transparency and fairness

  1. Making the changes needed to combat financial crime, investigate potential corruption and repatriate stolen funds will not be easy. However, the people of South Africa deserve better than the obscene looting and devastation caused by state capture and I hope that the recommendations referenced in this report are also recommended by the Commission, and then implemented by the Government. South Africa has had, and still does, a corruption near death experience that must not be repeated and must be eradicated if the country is to survive and prosper in the future – and if the values of the freedom struggle are to be realised.
  • Lord Peter Hain, House of Lords London SW1A 0PW