Solving SA’s white-collar crime puzzle

It was described as “the great bank heist”: the audacious conspiracy by which dozens of employees of VBS Mutual Bank colluded to loot almost R2bn before the bank’s demise in 2018.

“I trust that, in this case, arrests will be made,” wrote advocate Terry Motau in his damning report for financial sector regulator the Prudential Authority, which named and shamed those responsible.

Motau’s wish has, in part, come true: 27 people have so far been arrested in connection with the VBS looting. But justice remains elusive, as no trial of those involved has yet begun.

There has been an explosion of major corporate fraud scandals  in SA in the past 15 years, involving some of the largest companies in the country. Think retailer Steinhoff, technology company EOH, sugar multinational Tongaat Hulett and the syndicate of companies that colluded to rig contracts for stadium construction for the 2010 Soccer World Cup.

But no arrests have been made in any of these cases.

Economic and financial crimes are often wrongly perceived as victimless, we write in the newly released “Strategic Organised Crime Risk Assessment for SA”, the first assessment of its kind in more than a decade. Rather, such crimes   inflict multifaceted harms, eroding the tax base and faith in the financial system, impeding much-needed development, perpetuating intolerable levels of inequality, hiding illicit gains, fuelling corruption and giving organised crime the ability to expand into the licit economy.  

The vast and growing burden of economic and financial crime — from corporate fraud to money-laundering — is a monumental challenge for national law enforcement institutions, which are facing a ticking clock to avoid being greylisted by global financial crimes watchdog the Financial Action Task Force (FATF) from next February. Back in 2021 the organisation warned of “significant shortcomings” in SA’s implementation of legal frameworks on money-laundering, including “a failure to pursue serious cases”.  

As advocate Xolisile Khanyile, executive director of the  Financial Intelligence Centre, the SA entity that gathers, analyses and disseminates  financial intelligence, explains it: “The complexity of financial crime is increasing. Resources and capacity are serious concerns as they [affect] the entire value chain.”

This is echoed by the findings of the most recent economic crime and fraud  report from consulting firm PwC, released in 2020, which surveyed 245 companies in SA that had lost $1.7bn to fraud in the preceding year. Perhaps the most illuminating finding was that the proportion of fraud perpetrated by senior management had risen to 34% in 2020 from 20% in 2018. It suggests more fraud than ever is being orchestrated from within.

The weakening of the police, the prosecutions service and financial institutions — often by the appointment of inept or compromised individuals to head key agencies — was a major part of the state capture that proliferated during the tenure of former president Jacob Zuma.

DA MP Glynnis Breytenbach, who previously headed the Specialised Commercial Crime Unit in the National Prosecuting Authority (NPA), doesn’t pull punches when asked why it is that the NPA isn’t able to get on top of serious crime. “The NPA was entirely hollowed out by a series of national directors — Menzi Simelane, Nomgcobo Jiba and Shaun Abrahams,” she says. “They did an inestimable amount of damage to the independence of prosecutors who wouldn’t do their bidding. As a result, the best people left.”

The NPA has reported a shortage of skilled and experienced prosecutors in its annual reports. And the problem of rare skills leaving the organisation becomes more acute when it comes to complicated commercial crimes.

Says Breytenbach: “I’ve always believed it takes 10 years to make someone into a good, effective prosecutor. But it takes 20 years if you want a specialist, like in these crimes.”

NPA head Shamila Batohi has made a similar assessment. “A lack of skill and capacity to dedicate staff to highly complex and voluminous matters still plagues the organisation,” she said in a presentation to parliament in November 2021.

Until 2008, SA had an independent multidisciplinary unit in the Scorpions (the Directorate of Special Operations), which was highly effective in its mandate to investigate complex corruption cases. But it was disbanded through a parliamentary vote, driven through by the governing  ANC, for investigating senior members of the party, including Zuma.

Nonprofit advocacy group Corruption Watch argues that the Scorpions were dismantled for purely political reasons, leading to a “surge in impunity when it comes to combating corruption and making those in power account for their actions”.

The situation is such that chief justice Raymond Zondo, in his final report to President Cyril Ramaphosa on state capture, recommended that an independent anticorruption body be established once more.

The NPA has also raised the alarm about the “poorer quality of police investigations” as well as a resources shortfall,  resulting in fewer cases being brought by the police for prosecution and a higher number of cases being withdrawn before they go to court. In 2020, for example, 110,249 criminal cases were withdrawn (6% more than the year before).

Experts believe there is an underlying lack of capacity and capability in the police to engage with the intricate and complex nature of many economic and financial crimes. Specifically, there are serious shortfalls in forensic accounting and cyberforensic skills and little money available to acquire these.

Major corporate frauds have emerged in this void in governance. In many ways, they bear the hallmarks of organised crime through the orchestrated collusion of many individuals over long periods. In the case of Steinhoff, at which the largest-ever corporate fraud in SA was committed, forensic auditors reported in March 2019 that “a small group of Steinhoff Group former executives and other non-Steinhoff executives” implemented “fictitious and/or irregular transactions” worth R106bn over a decade.

In the case of EOH, “serious governance failures and wrongdoing” were discovered at the once high-flying technology company. These included R47m for “overbilled” contracts and R750m where there was “no valid work”. Sixteen EOH employees were implicated, and 80 external companies may have been involved.

“A group of people saw the weaknesses in the governance structures and exploited this, particularly as it related to public sector business — and they organised the extraction of money in a variety of ways,” says EOH CEO Stephen van Coller in an interview.

In this respect, the pillaging of EOH clearly resembled organised crime.

SA’s private sector is coming under greater pressure from organised crime in other ways too. Extortion networks are increasingly integrating into the licit sphere by establishing themselves as legally registered companies. Gauteng-based extortion networks, for example, rebranded as legal “security companies”, offer “quick results” for clients disaffected by the perceived deficiencies of the state to provide security and legal redress.

Meanwhile, in KwaZulu-Natal, “business forums” have targeted the construction sector, seeking to enrich themselves from government contracts. These groups are simultaneously diverting profits from legitimate businesses to support criminal interests, while hiding in plain sight, disguised as legitimate businesses themselves.

The effect of financial crime and money-laundering is far-reaching. It erodes faith in the financial system, where the perception of integrity is vital. This, in turn, may undermine foreign direct investment, with knock-on effects on economic development.

Money-laundering is crucial to organised crime groups: it allows them to expand into the legitimate sphere, make illicit proceeds much harder to trace, and enable corrupt officials to hide evidence of wrongdoing.

SA is urgently taking steps to redress some of the damage of state capture and avoid the FATF greylisting, which would raise the cost of doing business for companies seeking to invest in  the country. The National Treasury has tabled in parliament a range of legislative amendments to the legal frameworks to fight corruption, money-laundering and terrorist financing.

Another potential strategy was presented by the market conduct regulator of financial institutions, the  Financial Sector Conduct Authority,  at a symposium on financial crime in November that brought together law enforcement representatives and the private sector. The suggestion was to source specialised skills by seconding 1,000 people with forensic accounting expertise to the state. These experts from the private sector would then volunteer their services to the Hawks for, say, two days a month.

A bill is also being drawn up to create an independent investigating and prosecuting unit, similar to the Scorpions, which could have the scope to investigate and prosecute all high-level corruption cases — including the corporate frauds that are routinely in the headlines.

But these efforts face an uphill struggle, and much more is needed. A memo from the Treasury describes “a few miracles” that are needed if SA is to avoid the seemingly inevitable FATF greylisting.

Unless the status quo changes dramatically with the development and implementation of a coherent strategy that eschews endlessly reactive, siloed responses in favour of clear, targeted approaches across government, economic crime will continue to pay handsome dividends for those who perpetrate it.

* This article draws on the “Strategic Organised Crime Risk Assessment for SA” by the Global Initiative Against Transnational Organised Crime (GI-TOC), published this week. The GI-TOC is a network of more than 500 experts on organised crime drawn from law enforcement, academia, conservation, technology, media, the private sector and development agencies. It publishes research and analysis on emerging criminal threats and works to develop innovative strategies to counter organised crime globally