Illicit trade out of control in SA

Experts outline practical steps for removal from greylist

● Global organisations working to combat illicit trade say the scourge is out of control in South Africa, and unless the country makes an extra effort it will remain on Financial Action Task Force’s (FATF) greylist.

“During the pandemic, the government imposed lockdowns during which criminal networks consolidated their place in the market. The lockdowns are gone but the networks remain,” said Stefano Betti, deputy director-general at the Transnational Alliance to Combat Illicit Trade (Tracit).

“We have seen a rise in counterfeiting where large consignments from neighbouring countries are split into smaller packages and brought into South Africa by nefarious means. In this way they manipulate the system and weaken law enforcement’s ability to trace the origin,” he added.

Speaking to the Sunday Times at the Europe, Middle East, and Africa Security Conference and Exhibition in Dubai this week, Betti said Tracit had also identified illegal mining as a thriving criminal enterprise.

Rampant illicit trade threatened President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan by robbing the government of tax revenue that otherwise could be invested in creating jobs, reindustrialising the economy, accelerating economic reforms and fighting crime and corruption, he said.

“Addressing the significant revenue leakages caused by illicit trade and its negative impact on domestic resource mobilisation is thus critical for financing key structural reforms, as well as for putting public finances on a more sustainable path. These are both key for restoring confidence in the South African economy.”

The FATF, a Paris-based international financial crime watchdog, placed South Africa on its greylist in February, citing inadequate action to deal with money-laundering, financing of terrorism and other illicit activities.

A greylisting often disrupts a country’s capital flows, with financial institutions exiting relationships with customers based in high-risk countries due to the high costs of compliance, the IMF said in a 2021 paper.

When it announced its decision, the FATF said South Africa needed to show it could investigate and prosecute complex moneylaundering cases, work with global partners on money-laundering and impose sanctions for noncompliance.

Betti said though the proposed deadline of January 2025 for the country to be removed from the greylist was nearing, there was still room for the government to comply.

“Officials need to make better use of the financial intelligence they receive internally and from other countries, and enforce preventive measures. It’s doable. If there’s the

political will it can be done,” said Betti.

Tracit released a report earlier this year on the impact of illicit trade in the country. It found there were sharp increases in illicit cigarette trading, copper cable theft and abalone poaching, among other things.

The share of illicit cigarette sales increased by 54% compared with a 34% increase in 2018, while state rail and ports company Transnet reported a 177% increase in the incidence of copper cable theft in the past five years.

Philippe van Gils, director of illicit trade prevention at tobacco giant Philip Morris International, said low levels of prosecution had led to an increased sense of impunity among criminals, adding that illicit activity discouraged investments in countries that were badly affected.

“These [criminal] organisations continue to operate because [the participants] know they will not be prosecuted. But why would anyone invest in a country when you know that your competitor will be in the illicit market that sells at unfair rates and poor quality?

“It’s a vicious circle because we have other priorities such as electricity, unemployment, crime and other socioeconomic issues to deal with. But everything is interlinked; if you make this problem a fiscal imperative, you can solve all the other problems,” Van Gils said.

Juan Carlos Buitrago, former director-general of fiscal and customs police in Colombia and founder and CEO of Strategos BIP, who was part of the team that spearheaded the exit of Panama from the greylist, said South Africa could learn a lot from the country.

“We dismantled 92 criminal organisations, arrested 1,500 people involved in illicit trade, and seized a lot of money assets. This included those involved in corruption.

“Of the 92 suspects, 25 were from the region. About 30% of the organisations used clandestine sea routes to transport all kinds of illicit goods, such as alcohol, clothes, cocaine, tobacco and minerals. Every week a ship was intercepted.”

He said many criminals used official border controls by manipulating the officials, altering the tracking of information of the products and through corruption.

Buitrago now heads an alliance called COEPA (Colombia, Ecuador and Panama) focused on combating illicit trading in Central and South America.

He said South Africa must take practical steps to ensure successful prosecutions of criminals and cartels that are running amok if it is to get off the greylisting.

“You must investigate and make arrests. Seize money and assets of criminals, and then do separate investigations into the corruption element. You need a four-way system. Also, regard intelligence as part of your work,” Buitrago said.

“One of the organisations we stopped was detected in the US by the police and we ended up seizing $1m from the [Mexican] Sinaloa cartel. We were able to get evidence of illicit trade, movement of money and a link to other countries. We found that the criminals take dirty money, buy illicit goods, sell in different countries and the proceeds are untraceable as proceeds of crime.”

After assessing the country in 2022, the FATF identified eight actions South Africa must take. They include co-operating with inbound mutual legal assistance from other jurisdictions investigating money-laundering and terrorism finance and confiscate the assets of those involved.

It must also closely monitor beneficial ownership of companies to ensure transparency in declaring all share ownerships and apply tough sanctions against those who fail to properly disclose such details.

The country must further demonstrate that its law enforcement agencies are regularly requesting information from the Financial Intelligence Centre to conduct investigations.

Also, it must identify and confiscate the illicit proceeds of those crimes and impose targeted financial sanctions on suspects and their accomplices.

The National Treasury said at the time South Africa had made progress in addressing 67 actions recommended by the watchdog.

“After engagements with the FATF, it assessed that the country needed to make further and sustained progress in addressing the eight areas of strategic deficiencies related to the effective implementation of South Africa’s anti-money laundering/combating the financing of terrorism laws as set out in the FATF’s statement,” it said.