SANAN MIRZOYEV: Urgent need for bill to clarify laws around fake company fronting

In February 2023, SA will almost certainly be making an unwelcome appearance on the Financial Action Task Force’s (FATF) roster of greylisted countries — unless “we perform a few miracles”. These were the words of National Treasury’s Ismail Momoniat when he presented a grim account before parliament back in July.

The FATF is an international policy-making body focused mainly on fighting  money laundering, financing of terrorism and the proliferation of weapons of mass destruction. The FATF plenary convened recently in Paris, and SA had an opportunity to report on its progress and convince critics it was trying to  comply.

The benefit of adhering to FATF’s recommendations is that SA can continue to be an easy destination and transit point for financial flows to and from the world’s richest democracies. The disadvantage of appearing on the “naughty list” was recently set out in an IMF report: a 7.6% reduction in capital inflows, a 3% reduction in foreign direct investment and other investment inflows falling 3.6% on average. Greylisting is bad for the economy.

The FATF published its most recent evaluation of SA in October 2021. Its opening paragraph painted a picture that could make even the most stoic of policymakers wince: “SA has a relatively high volume and intensity of crime and more than half of reported crimes fall into categories that generate proceeds. The main domestic proceeds-generating predicate crimes are tax crimes, corruption and bribery, fraud, then trafficking in illicit drugs, and environmental type crimes.”

SA’s compliance with FATF standards was found to be deficient in several respects, including slow law enforcement action to prevent and tackle financial crimes. State capture was mentioned. Another major sticking-point is beneficial ownership. The country was given until February 2023 to remedy such deficiencies.

As a relatively novel policy in global parlance, it is worth explaining the meaning of and significance of “beneficial ownership”. Like any other country SA allows for the legal creation of varied corporate entities such as companies, trusts and nonprofit organisations, which can then trade, set up other entities, employ people and bid for contracts. There are several advantages: beneficial tax arrangements, less risk exposure for the owner, or an entity that can exist beyond the lifetime of its creator. The entity exists in its own name, can open bank accounts, deal with assets and enter into contracts.

However, such entities the world over have been abused by those seeking to evade taxes, hide illicit sources of funds and, importantly, mask the identities of the individuals who benefit from the arrangements. If the beneficial owners of entities are not known, these structures can serve as powerful conduits for perpetrators of corruption, money launderers, tax evaders, organised criminals, sanction dodgers and terrorist financiers alike.

By knowing the identities of the real people who benefit from the operations and profits of entities, the idea is that criminals will have fewer ways to dissociate themselves from their nefarious activities.

Earlier in 2022, Corruption Watch co-hosted an event with Open Ownership on beneficial ownership transparency. The event led to Corruption Watch conducting a detailed review of SA’s beneficial ownership environment as part of its contribution to the Financial Intelligence Centre’s National Risk Assessment. Fake business addresses, individuals holding directorships in an unfathomable number of companies, complex offshore arrangements and fronting in state procurement were just some of the red flags that were identified.

Corruption Watch also demonstrated how trusts, companies and arrangements were abused by the beneficiaries of state capture. For example, it is alleged that Salim Essa used Regiments Capital and Trillian to pay large amounts of money, provided courtesy of Eskom and Transnet, out the back door to entities associated with the Guptas. When Trillian was red-flagged, Essa is said to have quickly found a new vehicle for moving money in the form of Nkonki Inc.

On the heels of the FATF report the Treasury was saddled with the unenviable task of addressing the country’s legal gaps within a painfully narrow timeframe. The resulting product, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill was published in the Government Gazette on August 18.

The bill introduces amendments to various legal acts. At the core of many of the changes is the introduction of mandatory registration and disclosure of persons who own, control, or benefit from entities and arrangements.

A few weeks ago parliament’s standing committee on finance asked for and received public comment on the bill. Corruption Watch could draw on its earlier work to swiftly make extensive written and oral submissions. But  many NGOs and interest groups were not similarly placed and voiced their concern about the unusually  short timeframe, prompting parliament to extend the deadline to October 25.

Corruption Watch raised several issues in its submission: 

• A sprawling and convoluted definition of “beneficial owner” risks creating many legal loopholes and implementation challenges;
• The bill requires that there be full beneficial ownership disclosure around ownership/control in companies, trusts, nonprofit organisations and other arrangements. This is all very welcome, but a lack of integration between different data registers (e.g. the trust and companies registers) will undermine the beneficial ownership transparency regime;
• The bill attempts to regulate nominee arrangements, which enable someone to own, control, or benefit from an entity on behalf of someone else. The latest FATF guidance suggests these practices should be strictly regulated or altogether prohibited. For the sake of effective implementation, Corruption Watch prefers the latter view;
• Effective sanctions and measures to ensure compliance are possibly not effective — a mere administrative fine will have no effect if it is cheaper to pay the fine than to incur costs to comply; and
• In SA we have seen the crucial role investigative journalists and civil society played in uncovering many egregious abuses of state funds. Being able to access beneficial ownership data publicly will greatly empower South Africans to help guard against these occurrences. To create a public register would also be in keeping with SA’s existing commitments to the G20 and the Open Government Partnership.

So as SA’s dreaded day of FATF-reckoning draws near, MPs will be seized with addressing all the complex technical changes that appear in the bill — and at lightning speed. We wait to see whether the General Laws Amendment Bill ever sees the light of day, rather than making a Houdini-esque disappearance into Nedlac, a fate that the Public Procurement Bill and Companies Act Amendment Bill appear to have had.

• Mirzoyov, an advocate, is legal consultant for Corruption Watch.