Will the country evaluation by the financial action task force recognise the South African judiciary’s contribution regarding effectiveness?

On 21 August the Gauteng Division of the High Court handed down a judgment setting aside the findings of the Arms Procurement Commission, chaired in 2015 by Justice W. Seriti. This ground-breaking judgment sets South African precedent regarding the powers of a court to review the findings of a judicial commission of inquiry. Importantly, it also redefines the role, function and obligations of a commissioner tasked with uncovering the truth.

4 Sep 2019 6 min read Dispute Resolution Alert Article

The applicants, two non-profit organisations Corruption Watch NPC and Right2know Campaign, contended that the Arms Procurement Commission failed to comply with the requirements of legality and rationality. The High Court held that the Commission failed to enquire fully and comprehensively into the issues which it was required to investigate on the basis of its terms of reference. It criticised the Commission for asking peripheral questions to implicated witnesses, thus failing “to test the veracity of the evidence in terms of documents, reports and records which were readily available to it”.

This judgment empowers the Zondo Commission of Inquiry into State Capture and reaffirms the role of the fourth estate (the media) in confronting and uncovering grand corruption and state capture. The judge stated that “whereas a Court of law is bound by rules of evidence and pleadings, a commission is not so bound. It may inform itself of facts in any way it pleases, including by hearsay evidence, newspaper reports or representations or submissions without sworn evidence. Commissions are designed to allow an investigation which goes beyond what might be permitted in Court.” In the judgment, in a footnote to paragaraph [62], reference is made to the three books which were published on the arms deal controversy and it is noted that “…none of these texts appear to have been examined carefully by the Commission…”

This judgment goes a long way to establish a clear standard for the numerous other commissioners currently sitting in similar public inquiries in the country, affirming the duty to inquire fully into the matters they have to investigate. The case also serves as important evidence to the outside world and, in particular, global regulating bodies such as the Financial Actions Task Force (FATF), that South Africa’s Rule of Law is alive and well, and protected by an independent judiciary willing to hold itself accountable. This new precedent will turn the Commission of Inquiry, a very useful fact-finding mechanism, into a very powerful inquisitorial mechanism to uncover the truth and to introduce a dynamic new level of effectiveness into our criminal justice system.

Why would this be relevant for FATF and important for South Africa?

FATF last evaluated South Africa in February 2009 and the onsite FATF inspection is scheduled for October/November this year with the possible Plenary discussion regarding the Mutual Evaluation Report (MER) scheduled for June next year.

This mutual evaluation is very important as the process is extremely thorough and the scrutiny and analysis intensive, taking 14 months to complete. The FATF assesses over 40 jurisdictions while the remaining global jurisdictions are assessed by the FATF Regional Bodies in conjunction with the World Bank and IMF. The FATF Plenary considers and adopts only two mutual evaluation reports at each of its three annual Plenary meetings; each assessment cycle is therefore eight years’ long.

Will South Africa be found compliant with global Anti-Money Laundering (AML) and Combating of Terrorist Financing (CTF) standards or will the chickens of corruption and state capture come home to roost?

South Africa has a fairly robust, albeit pressured, economy and one of the most efficient and modern financial sectors in the world and a well-structured and funded Financial Intelligence Unit (FIU). We have been on the red carpet before. When FATF evaluated South Africa in 2009, it already raised certain caveats. The MER noted that corruption already presented a problem. Regarding Recommendation 32 it was recorded that “the assessment team was not provided with comprehensive data or statistics on details of money laundering investigations, prosecutions and convictions which could have been helpful in gauging the effectiveness of the AML/CFT regime in South Africa”.

Since South Africa was regarded as “partially or non-compliant” for certain core FATF Recommendations, we had to report, under a targeted follow-up process, to every FATF Plenary on the progress made in addressing the deficiencies in the 2009 MER. This sword kept hanging over us until November 2017 when, as a result of the Financial Centre Amendment Act (which came into operation in October 2017 and which, among other things, addressed deficiencies relating to customer due diligence (CDD) and record keeping) the FATF decided to remove South Africa from its targeted follow-up process. The country was off the hook, for a while.

FATF’s imminent evaluation of South Africa

South Africa’s risk lies in FATF’s recognition that corruption and money laundering are intrinsically linked: With corruption as the predicate offence, subsequent financial transactions deal with “proceeds of crime”. We can hardly deny that corruption has inflicted extreme pain on our country. After all, South Africa does not have an ongoing Commission of Inquiry into State Capture for nothing. Corruption, as we know from experience, features as part and parcel of any syndicate system, whether it relates to arms, drugs, human trafficking or terror. This is why corruption issues are very important during a country’s mutual evaluation process which serves to assess a country’s compliance with the FATF Recommendations. Anti-Bribery and Corruption (ABAC) and AML go hand-in-hand.

For its fourth round of mutual evaluations, the FATF has adopted complementary approaches for assessing compliance. The assessment comprises two distinctly separate components namely:

  1. Technical compliance, regarding the legal and institutional framework; and
  2. Effectiveness, regarding a country’s ability to meet a defined set of outcomes thus testing whether the technical framework produces required results.

South Africa’s track record over the last decade regarding money laundering and corruption paints a less-than-perfect picture. In the Basel AML Index of 2018, measuring effective enforcement of Anti-Money Laundering measures, South Africa is listed as one of the Top 10 “decliners”. The Corruption Perception Index, published internationally by Transparency International has also given us a score of 43 - a score below 50 indicative of corruption issues. The 2019 Rule of Law Index places South Africa in position 47, in the lower half of the world, just above Argentina and just below Ghana, with Denmark in the top position and Venezuela at the bottom of the list. The reports by the State Capacity Research Project (entitled, Betrayal of the Promise: How SA is being stolen), the SA Council of Churches and the Parliamentary Committee on Public Enterprises have clearly connected the dots illustrating the country’s systemic corruption.

South Africa has fortunately recently started a healing journey with a new President who has appointed a Commission of Inquiry into State Capture. We also have a new Head of the NPA, Ms Shamila Batohi, who is said to have everything it takes to get the wheels of justice turning again. There has, however, been concerns that little is going to change; that the Commission of Inquiry will not translate into real action; that no one will be prosecuted. But it is often said that “the show ain’t over till the fat lady sings”. If the commissions truly discharge their duties in accordance with the standards so clearly defined by the latest High Court judgment, there may be a lot of singing still to come. Supplemented by responsible and truth-seeking journalism, Ms Batohi and her colleagues should have ample evidence for the prosecutions to follow.

The FATF Methodology Manual for this round of evaluations clearly indicates that assessment of effectiveness is not a statistical exercise and that the evaluation should be completed “within the context of the country’s circumstances”. Assessors should note international and domestic contextual factors that might significantly influence the effectiveness of the country’s AML/CFT measures. “This could include such factors as the maturity or sophistication of the AML/CFT regime and the institutions which implement it, or issues of corruption (own emphasis) or financial exclusion”.

Will the FATF accept these new developments as sufficient evidence of South Africa’s effectiveness in its AML/TF and Anti-Bribery regime? Perhaps not. But even if we have to live on a follow-up list for a few plenary meetings, we have an opportunity to prove our effectiveness in producing the required outcomes that FATF seeks. In doing so, returning to the Rule of Law and eradicating corruption, South Africa will resume its place as a leading African State.

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