TOWARDS EFFECTIVE CONTROL OF MONEY LAUNDERING IN SOUTHERN AFRICA

Some Practical dilemmas

Charles Goredema
Senior researcher in the Organised Crime and Corruption Programme at the ISS

Fazila Montsi
Law lecturer at the University of the Western Cape. Ms Montsi now works in the private sector and writes in her personal capacity.

Published in African Security Review Vol 11 No 1, 2002

Money laundering, as both a manifestation and a facilitator of organised crime, has attracted increasing interest since the late 1980s. The resolve to control it has yielded a number of initiatives in many parts of the world. The formation of the Financial Action Task Force on Money Laundering in 1989 is a prominent example. In its wake, countries in eastern and southern Africa founded the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) in 1999. Members of the group have pledged to adopt and implement measures against money laundering. This article explores the practical implications of implementing such measures in Southern Africa against the background of certain challenges and realities. It is based on a survey of the nine Southern African members of the ESAAMLG.

Table 1

	Is money laundering a criminal offence?		Does the jurisdiction have client- profiling guidelines for financial services intermediaries and facilitators?		Are financial services intermediaries and facilitators required to report suspicious transactions?		Is the money laundering law extra-territorial in effect?
Jurisdiction	Yes	No	Yes	No	Yes	No	Yes	No
Botswana	X			X		X	X
Lesotho		X		X		X		X
Malawi	X		X			X		X
Mauritius	X		X		X		X
Mozambique		X		X		X		X
Namibia		X		X	X			X
The Seychelles	X		X		X		X
South Africa	X			X	X		X
Swaziland	X			X	X		X
Zambia		X		X		X		X
Zimbabwe	X			X		X	X

The situation in some countries may change in the next few months, as various legislative initiatives come to fruition in Lesotho,1 Malawi, Mozambique, South Africa,2 Swaziland,3 Zambia4 and Zimbabwe. Notwithstanding the absence of specific laws against money laundering, central banks in Lesotho and Namibia regularly issue guidelines to financial institutions relating to money laundering control.

The mere existence of legislation against money laundering is no guarantee of its adequacy or efficacy. The Financial Intelligence Centre Bill in South Africa, for example, was motivated by the realisation that pre-existing legislation against money laundering was incomplete. The Prevention of Organised Crime Act (1998) needed to be complemented by a mechanism for the mobilisation of information collected from various points vulnerable to the practice. Table 1 shows that there are various countries whose anti-laundering laws do not impose reporting obligations on institutions that might facilitate laundering.

Furthermore, there is no unanimity on the definition of money laundering in the region, with the definitions in Botswana, the Seychelles and Zimbabwe being somewhat inadequate. In fact, there is scope for conceptual controversy on the question of how broadly the practice should be defined. Should laws against money laundering target proceeds of crime only or should they also concern themselves with all fruits of illegitimate activity? One suspects that the response of most countries will be to confine money laundering to proceeds of crime, an interpretation which would be consistent with Article 6 of the Palermo Convention. This, however, results in a narrow understanding of money laundering, creating loopholes in cases of tax evasion, externalisation of funds or corruption.

Money-laundering control and transient priorities in Southern Africa

Contextual realities

Money laundering that involves currency conversion tends to have transnational dimensions. Successful control strategies therefore need to be co-ordinated across borders. This must have motivated the Palermo Convention. A regional approach to money laundering presupposes a harmonisation of first the legislative and other measures, and second, of implementation. Harmonisation is difficult to achieve if priorities among the respective national authorities or governments are at variance. Notwithstanding the putative agreement signified by signature of the Convention by many of the ESAAMLG states, and reiterated at the Windhoek meeting in August 2001, the question must still be raised as to whether these states prioritise measures against money laundering.

There are certain realities and developments which suggest a negative answer in a number of cases. The presence of alternative and competing preoccupations is a factor that must be considered in this regard. A study of the problems likely to be encountered in the implementation of the Palermo Convention in Southern Africa, showed that there were certain challenges capable of detracting from the thrust against organised crime, including money laundering. Most of them stem from the context in which measures against money laundering will have to function.5

The weakness of the economic systems of many of the ESAAMLG states presents a major challenge. At a time when most of them are under pressure from the demands of social, political and economic transformation, poor policies and fiscal decisions have left the financial services sector in some of the Southern African Development Community (SADC) states, in a perilous state. This sector is a key player in confronting money laundering, but it cannot be expected to be a reliable partner to state structures in a cohesive alliance. The capacity of the financial services sector to perform its obligations in respect of money laundering is affected by the extent of its desperation. The attitude of a sector besieged by a shortage of investment capital to a cash injection might well be to “deal first, ask questions later”,6 especially if the cash is in hard currency or is paid in settlement of an overdraft or loan or professional fees. In none of these transactions is tainted money likely to be subjected to much scrutiny by a grateful bank. It is well known that the banking sector in Swaziland and Zimbabwe is afflicted by bad debts, in the latter case amounting to more than Z$12 billion (R1.7 billion). The danger of bankruptcy is real, unless heavy capital inflows are forthcoming.7 An analyst has observed that:8

“Laundering strategies involve financial transactions the size of which are extremely profitable and hence attractive to the legitimate financial enterprises that process them; laundering diverts money from an illegal economy into needed and welcome investment in the legitimate economy; and, generally, it is now so well integrated into the 24-hour-a-day global network of financial transactions that its curtailment might ... have consequences beyond those that legislators and enforcement officials conventionally suppose.”

On the other hand, it could be argued that the volition, or lack of it, of intermediary institutions is not decisive, as the effectiveness of anti-laundering measures will depend rather on enforcement by the state. The argument overlooks the potential that exists for these institutions to sabotage state initiatives perceived to be inimical to their interests. A recent illustration of such potential can be found in Zimbabwe, where the state has been engaged in a virtually unwinnable battle to tame the parallel foreign exchange market. The prescribed rates are considered to be so unrealistic that the market would run dry if bureaux de change adopted them. Not a single one follows them. Banks that have stuck to the government rates hardly receive any foreign currency.

The same desperation can also affect the state sector’s resolve to turn away tainted funds. In the words of Prof. Rider (1999):9

“There are countries which have become so isolated from conventional sources of development finance that their leaders, even assuming them to be men of honour, have but little alternative to seeking funds from those who require discretion. The laundering of money, in varying states of cleanliness, through national treasuries and government-sponsored projects is nothing new.”

Zimbabwe is notably at risk on account of isolation from conventional sources of hard currency, as the International Monetary Fund and the World Bank have shunned it.

There are many kinds of projects that provide opportunities for the infusion of laundered money. Privatisation of state corporations, which is occurring throughout the region, is a sphere replete with examples. Strategic partnerships for the exploitation of resources in the DRC have yielded similar opportunities for suspect operators to wash dirty funds.

Apart from the ‘survival’ incentive to flout a new anti-money laundering system, there is the cost factor. Requiring accountable institutions to partner the state in public policing involves imposing an additional administrative infrastructure, which costs money to set up and run effectively. Common elements of a money laundering control system include:

a customer identification mechanism


effective record keeping


a duty to report information about transactions entered into with the financial institution.

If it is widely defined so as to include both transactions of a certain magnitude and transactions which raise suspicion, the duty to report may be quite onerous. A system which purports to be effective must obviously define the duty widely.10 Moreover, if reporting is to be performed timeously, it must be done – in the case of a multi-branch financial institution – directly from branch level rather than through a central unit. This has significant resource implications. At the same time, establishing disparate reporting centres within a single institution could impede the development of a uniform practice.

In some instances it could even result in duplicated reports, as where a deposit is made at a branch of a bank for transmission to the branch where the account is held. In jurisdictions where anti-laundering laws have been in force for some time, financial institutions have created compliance units/centres to collect and collate transaction reports.

Quite often, the decision to file a report from a branch to the compliance unit is preceded by an investigation, which has cost implications. It is doubtful that many of the relevant institutions in the ‘conventional’ financial services sector have the required capacity even for a basic reporting system. The possibility of securing support from the state sector to offset compliance costs is, in many instances, remote.

The system envisaged in the Financial Intelligence Centre Act (2001) in South Africa, and the Anti-Money Laundering Act (1996) in the Seychelles, widens the net of accountable institutions. The ability of these institutions to establish compliance units and to absorb the additional costs involved varies. It may not work well in some parts of the region.

A related issue which may have implications for effective transnational co-operation is whether lawyers should be included in the range of accountable institutions. The majority of ESAAMLG states share a common law tradition, which places the lawyer–client relationship on a pedestal. There is empirical evidence of the abuse of this kind of relationship, and the privilege attached to it, to launder money.11 Lawyers are well positioned to acquire information relating to money laundering, and even to facilitate it. As Prof. De Koker suggested in a submission to the joint portfolio hearing on the Financial Intelligence Bill in April 2001:

“If attorneys are exempted from reporting obligations, the abuse of the profession by launderers will simply increase. Such an exemption will, in fact, invite abuse of the profession by launderers.”

For this reason international trends are against retaining a blanket protection. Lawyers are nominally included in the list of accountable institutions, but exempted from reporting requirements in situations connected with the representation or defence of clients in legal proceedings – criminal or civil. In certain countries in Europe where lawyers are required to report, they do so indirectly through their professional associations rather than to statutory intelligence units.12 South Africa has opted for a limited exemption with direct reporting to the Financial Intelligence Centre.13 The Seychelles does not require reporting by lawyers; a position which seems to be shared by the rest of the ESAAMLG. The disparity could impact negatively on cases requiring mutual legal assistance, in that a country such as the Seychelles would not be able to pass on financial intelligence held by a lawyer to South Africa, even though the reverse would be feasible.

The ultimate dilemma in which accountable institutions – and the economies in which they operate – are caught up, is that, regardless of the cost of compliance mechanisms, it is in their long-term interest to take effective measures to control money laundering. Productive, long-term foreign direct investment is unlikely to be attracted to an institution or a country that is expressly or implicitly receptive of the proceeds of crime.

There have been countries that perceived such proceeds with indifference or even encouraged their investment, but on account of international initiatives – the latest of which culminated in the Palermo Convention – the number of such countries is rapidly diminishing.14 The condemnation which greeted the attempt by the Seychelles to offer citizenship conditional on the investment of a prescribed amount of money, regardless of its source, in the early 1990s, indicates that the international community is no longer tolerant of jurisdictions that turn a blind eye to money laundering.

Political Will

As with all endeavours against crime, political will is a significant variable. It is of particular importance in respect of money laundering control because of the linkages between high-level corruption and money laundering. Money laundering control measures impose an important role on the state sector. In Southern Africa, the integrity and commitment of functionaries within that sector could be decisive.

It may be argued that all states in the region have nailed their colours to the mast and declared their political will. Institutional arrangements and developments in several countries militate against this assumption. The state is required to perform leadership, supervisory and enforcement functions. To perform these requires good faith, fairness and accountability – basic elements of sound public administration. These qualities are not abundant in the region. It is evident that a number of ESAAMLG states have fragile and/or hesitant administrations, characterised by anti-democratic tendencies. As a result, governments have either embraced corruption or compromised the capacity to combat it. The validity of this observation is not affected by the SADC states’ recent adoption of the Protocol Against Corruption.

In Swaziland, Zambia and Zimbabwe, for example, government dominates the entire state sector, marginalising other institutions, with two visible consequences. The first is that it diminishes the capacity of institutions outside central government to make an input in the formulation of legislation. The second is that it opens the way for bias and caprice in decision making, including decisions on the implementation and enforcement of laws, weakening the ability of the state to deal with money laundering, particularly if it emanates from, or aligns itself with, functionaries within central government. Penetration of the state sector by individuals with criminal inclinations becomes easy, as does subversion of the required political will to confront criminal activity.

The inevitable subversion of political will manifests in inconsistent or erratic enforcement of the law, as law enforcement is rendered hostage to transient political interests.15 In almost every case where this happens, the confidence of prospective partners in the campaign against crime is eroded. Institutions outside the state sector become reluctant to entrust greater powers in the government or its agencies, or to co-operate in the enforcement of such powers. Misgivings and even resistance to extending powers of surveillance to law enforcement authorities in the absence of reliable safeguards against abuse, is evident in Malawi, Swaziland, Zimbabwe and Zambia.

One safeguard which is pertinent to the control of money laundering would be the creation of a mechanism to ensure mutual accountability between the state and the non-state sector. Such a mechanism would exercise some degree of supervision of the processing of reported money laundering cases. It should also reassure and protect whistleblowers. The reality is that in states where government is obsessed with absolute control, there is no such devolution of responsibility, and the executive has an unfettered discretion in the disposal of reported cases.

Nature of regulatory authority

There is no uniformity of approach in the region regarding the nature and position of the regulatory structures to take centre stage in implementing legislation against money laundering. Some countries have created intelligence units to receive and analyse suspicious transaction reports, while others leave this function to the central bank. The Palermo Convention prescribes a financial intelligence unit.16 Whatever option is taken, the institution receiving reports needs to be autonomous and have adequate resources to be able to function. The extent to which this occurs in a given country might depend on the political will of government. An autonomous unit is envisaged in South Africa, but nowhere else is there an indication that this approach will be emulated.17

Equally important is the autonomy and accountability of the licensing authority for the institutions to be entrusted with a gate-keeping role. Experience from the region has demonstrated that where the licensing function is retained by a central government with a shaky commitment to fair public administration, corruption easily creeps in. As a result, institutions with criminal inclinations can be licensed. Mozambique and Zimbabwe have recent examples of this. Within a matter of months these institutions may open up new avenues for money laundering. Southern African countries require effective regulatory infrastructures, politically and financially independent of government but operating within a guiding legislative framework.

State sector resources

The problem of resources is not merely financial. Policing serious economic crime requires and involves trained and experienced personnel and appropriate equipment. The question is whether existing structures in the state sector of the region are adequately endowed. At the core of these structures are the police and the prosecution departments: ESAAMLG countries have significant deficits in these areas. Except for South Africa – where a number of initiatives have produced a restructured, better trained and motivated unit to deal with economic crime – police agencies in the region are short staffed and under equipped.18 There are indications that personnel mobility away from the state sector generally, and the police and prosecution in particular, is aggravating the situation.

In certain countries, police effectiveness is further hampered by distractions emanating from political pressure.19 Joint operations and training workshops under the auspices of the Southern Africa Regional Police Chiefs Co-operation Organisation (SARPCCO) occasionally complement the efforts of individual police departments, but these are not an adequate substitute. SARPCCO operations have merely laid a framework for the exchange of knowledge and skills among structures with the potential to detect and combat organised crime, including money laundering. Within countries, police entities should be organised in such a way as to prioritise economic crime. This might even require building capacity for proactive responses to such crime, for example, by creating research units.

Detecting the dirty transaction

A perennial problem encountered by accountable institutions in money laundering control is that of identifying illegally acquired money. The difficulties are compounded if there is a high volume of high-value legitimate business conducted with the suspected institution. The accountable institution is hamstrung in that it cannot even rely on statistical probabilities in selecting suspect transactions to report. What is even more problematic is detecting the criminal motive underlying a transaction which is, on the face of it, above board. Such is the case with illegitimate currency conversions.

Currency exchange traders, such as bureaux de change, are frequently used for currency conversions. Even in a relatively simple economy, it is difficult to synchronise a multiplicity of institutions to close loopholes. For example, an individual can externalise funds through a bogus application for a travel allowance. An individual, using the pretext of travelling abroad, can purchase foreign currency in South Africa on presenting an airline or rail ticket. It is easy thereafter for the purchaser to export the foreign currency through another person. No declaration of currency taken out of the country is required (nor is there a requirement in some countries that imported currency should be declared), and there is no method by which to detect that the journey for which currency was procured did not occur.

The client profiling required of accountable institutions entails a familiarity with the background of a client, his/her/its credentials, earning capacity and a great deal more. It involves the performance of functions which not many institutions are regularly involved in. In Southern Africa, this is made more difficult by the absence of general ‘unsolicited’ asset disclosure legislation. Except for a few countries, even high-ranking public officials are not required to declare assets and liabilities. In fact, the obligation to declare liabilities is rarely encountered. Evidence from West Africa and South America indicates that these officials are particularly prone to money laundering. The lack of legal support for one of the essential components of client profiling detracts from the capacity of accountable institutions to discharge their obligations. A recent survey of the states under review revealed a number of trends (see Table 2).

Table 2

	Does the jurisdiction require the disclosure of assets by any individual or entity?	If the answer is yes, who is required to disclose assets?	How regularly is asset disclosure required?	Who has access to disclosed information?	Any requirement to disclose liabilities?
Jurisdiction	Yes	No
Botswana		X	–	–	–	None
Lesotho		X	–	–	–	None
Malawi		X	–	–
	Can be				In corruption	None
	compelled in a			"enquiries,"
	corruption inquiry			Corruption
					Bureau and
					police
Mauritius	X		"Legislators, "	On the assumption	National	Yes
			ministers and	of office and	"Assembly,"
			officials with	when there is	and
			statutory tenure	a substantial	responsible
				change in	minister
				assets/liabilities
Mozambique		X	–	–	–	None
Namibia		X	–	–	–	None
The Seychelles		X	–	–	–	None
South Africa	X		Elected	Annually	Access open	None
			legislators		to public
Swaziland		X	–	–	–	None
Zambia	X		Aspirant members	On filing	Access open to	None
			of Parliament or	nomination	public
			prospective	papers
			President
Zimbabwe		X	–	–	–	None

It appears that Mauritius, South Africa and Zambia had taken the furthest steps in creating ‘unsolicited’ asset disclosure legislation. In Malawi, as well as to a certain extent Swaziland, asset disclosure is contingent upon the institution of an inquiry or criminal investigation. In Mauritius, disclosure requirements are broad, as liabilities are also disclosed and the range of persons includes next of kin. In addition, the timing of subsequent disclosure depends on diminution or increase in assets or liabilities.

While asset disclosure legislation cannot on its own control money laundering, it may create an additional source of information for accountable institutions compiling client profiles, particularly where the information is given on oath.

Alternative remittance

The resort to alternative remittance systems to conceal currency transfer, in response to restrictive foreign exchange laws or to further crime, is a worldwide phenomenon. The Financial Action Task Force has deliberated the subject interminably without coming closer to a method of controlling the practice. These systems avoid the formal banking system and are therefore not likely to be monitored or factored into official statistics. Records either do not exist or they are coded. The best-known alternative remittance systems are the hawala and the chit systems, both of which have been linked to money laundering.

The extent to which they constitute a problem in Southern Africa has yet to be established. What is re-emerging in the region is a variant, utilised in order to facilitate the externalisation of capital, for instance, from the disposal of immovable property. Examples from South Africa and Zimbabwe abound. Precipitated by a combination of three factors – first the calamitous decline in the value of the currency, second the evaporation of investor confidence, and third the dispersal of nationals in better performing economies of the world – major sale transactions in foreign currency are increasingly occurring, especially involving houses in up-market suburbs.

A house advertised for Z$10 million, for example, can be acquired for an equivalent (at the parallel market rate of Z$30 dollars to the rand) price of just over R333,000. If the purchaser can afford to pay in US dollars, the price converts (at the rate of Z$350 to a US dollar) to US$28,571. The transaction does not entail any transnational currency remission, and is therefore attractive and relatively safe for the parties involved. The consequences to the local fiscus, in terms of lost foreign currency, are devastating.

Viability of compliance

There are other practical impediments that impede client profiling in investment transactions on the stock market. The majority of transactions conducted on the Johannesburg Stock Exchange (JSE), the largest in the region, involve institutions and agents acting on behalf of their own clients. For instance, a deal brokered on behalf of an asset management accountable institution such as Sanlam/Old Mutual on the JSE would typically involve a vast number of the asset manager’s clients. Some of these clients will be acting in a representative capacity for an even larger number of clients. Client profiling by the JSE beyond the broker dealing with it, is not practically viable.

The matter is even more complex in respect of foreign asset managers, as they customarily do not divulge client identities. As the JSE conceded in a presentation to the portfolio committees of Finance and Justice earlier this year:

“... the JSE does not have jurisdiction over the foreign clients (and) ... cannot compel them to release this information. They may simply refuse to deal in the South African markets if we make it difficult for them.”

On occasion, an accountable institution that complies with the obligation to report may come into conflict with a client for whom funds are being held. This is likely to arise if, following the report, the institution then prevents access to the funds. It raises the question of whether an accountable institution’s compliance takes precedence over the rights of the depositor or beneficial owner of suspect funds. The legislation surveyed gives only a partial answer to this issue insofar as it indemnifies the accountable institution against its clients if complying in good faith. While protecting the accountable institution against a suit for breach of contract, anti-laundering law generally does not entitle the accountable institution to withhold funds from the depositor or disentitle the latter from seeking relief from the courts in the event of encountering difficulties in withdrawing orinstitutions and clients.

Conclusion

The complexity of the picture portrayed in this paper suggests the prudence of involving a wide range of stakeholders in formulating measures to control money laundering. Institutions representing both the state and the non-state sector should be involved. At the very least, these should include law enforcement and financial regulatory authorities, financial institutions (bank and non-bank), the legal profession, estate agents, other intermediaries who could facilitate laundering and civil society.
Having involved these stakeholders in creating the legislation, governments should commit themselves to submitting the measures to periodic review by a body representative of the same entities.

It seems inevitable that all states with a modicum of commitment to controlling money laundering will have to establish centralised structures to follow up reported suspicious transactions, and to decide on appropriate modes of disposal of both non-compliance and laundering cases. These structures can only function well if integrated with existing structures (central bank, auditor general, police, prosecution, judiciary). The Financial Services Authority in the United Kingdom exemplifies this approach. At a regional level, a more sustained and enduring network, which involves ESSAMLG, SARPCCO, the non-state sector and respective professional associations, is required.

This integration can only occur where there is a willingness by central governments to concede some of their regulatory authority. Unfortunately, too many member states of the ESAAMLG are still a long way away from that point. Perhaps the time has come to learn from jurisdictions regarded by the Financial Action Task Force as success stories in the sphere of money laundering control, such as Brazil, Greece and Luxembourg.

Notes