Combatting Corruption to Create a Sustainable Path of Future Growth for South Africa

Business success – and survival – relies largely on developing a strategy and timeline that takes into account various scenarios, considers several mitigating and aggravating factors, makes certain assumptions, spotlights possible threats, and charts a course for the future.

“The world’s financial, political and social landscapes continue to shift, and businesses face an increasingly complex and interconnected range of strategic challenges to their security and growth.” — Steven Gunby, President and Chief Executive Officer FTI Consulting

A company’s ability to successfully mitigate these risks and threats – its resilience – through informed insights and solid preparation for whatever comes next is what will ensure its survival.

The FTI Consulting South Africa Resilience Barometer report published in October 2021¹ set out to chart the areas making the top of the board meeting agenda for South African executives – the C-Suite – and provide fact-based and timely insights to enable clear-headed decisions in a volatile and changing environment.

Globally, we found that the most common threat listed by our counterparts was the potential emergence of new, vaccine-resistant COVID-19 variants. In South Africa, it was listed fourth. Our top concerns are unemployment and corruption.

“The country’s progress away from the lost decade plus of state capture is inconclusive given significant corruption scandals that have plagued the past two years. Corruption in state owned enterprises and across local government where annually resources are lost to wasteful expenditure demonstrate insufficient political will to aggressively combating corruption.” — Karam Singh, Corruption Watch.

This perception is magnified by the pandemic-enforced disruptions to business models, increased digitisation and digitalisation, and hybrid and remote working environments – the Work From Home (WFH) scenario – among other aggravations.

These situations of rapid and dramatic change have facilitated the spread of corruption and abuse by fraudsters.

However, despite the widespread negative economic impacts of the COVID-19 pandemic, the current political climate provides a unique opportunity to reinvigorate the country’s fight against corruption.

“Addressing corruption and the misappropriation of state resources must remain a priority. By curbing – hopefully eradicating – corruption, businesses would be able to expand and flourish, which means increasing employment, greater prosperity, and a more equitable and sustainable future for all.” — Petrus Marais, Head of South Africa Practice at FTI Consulting South Africa

It is encouraging to hear the robust anti-corruption statements from the senior leadership in both government and the ANC and the initiatives and proposals of several courses of intended action².

These are needed to protect state resources and implement good governance procedures regarding public finances, including the promise of criminal prosecution for the perpetrators.

The cabinet and the governing party have proposed several anti-corruption measures, including requiring officials to step down from public office if charged. And while the police services and prosecution authorities remain underresourced, we are starting to see consideration for nontrial resolution of criminal matters, such as plea bargains and deferred prosecution agreements, to speed up the imposition of penalties and sanctions.

83% Not surprisingly, 83% of respondents would like to see greater transparency and increased availability of ultimate beneficial ownership (UBO) information to help in the fight against corrupt activity that hamstrings businesses.

The challenge here is that law reform must take place to provide the prosecution authorities with more latitude the negotiate deferred prosecution agreements.

Such reforms must be coupled with a campaign to promote a culture of self-disclosure on the part of corporate actors who uncover wrong-doing and potential criminal liability for misconduct.

In October 2021, the Financial Action Task Force (FATF), along with Transparency International, made recommendations to the Treasury dealing with beneficial ownership³, which they consider poses a high-risk situation enabling criminal activity. (In 2003, South Africa became a member of the FATF, an international body that promotes policies and standards to combat money laundering, terrorist financing, and other nefarious activities⁴.)

Beneficial ownership transparency must be seen as part of a broader set of measures to reform procurement corruption in South Africa where the country lags behind in creating a transparent, open and corruption proof system.

Fronting in particular is pervasive and very few of those either implicated or found guilty of procurement fraud are debarred from doing continued business with government as per existing laws. From fronting to money laundering, ensuring beneficial ownership transparency initiatives implemented, monitored and enforced must inform South Africa’s future anti-corruption response.

The Financial Action Task Force (FATF) recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CTF) standard. FATF strongly recommend that South Africa pursue money laundering and terrorist financing in line with its risk profile, including so-called “State Capture”, the corruption practices involving businesses and politicians conspiring to influence South Africa’s decision-making process to advance their own interests.

State Capture helped generate substantial corruption proceeds and undermined key agencies with roles to combat such activity.

Recent initiatives have started to address the situation, including replacing key staff and increasing resources at law enforcement and judicial agencies.

The Mutual Evaluation Report stated that while some money laundering (which includes corruption and State Capture activities) cases have been identified, there remained significant weaknesses in the country’s AntiMoney Laundering (AML), Combating the Financing of Terrorism (CFT), and Counter Financing of Proliferation (CPF) systems⁷.

South Africa is expected to take remedial steps within 18 months to address deficiencies identified in the report. These findings will further erode confidence in South Africa’s ability to combat money laundering and financial crime.

The Country’s Financial Intelligence Centre effectively produces operational financial intelligence. Law enforcement agencies use this for criminal investigations and to trace assets but lack the skills and resources to proactively investigate money laundering or terrorist financing.” — The FATF

Combating corruption at every level is vital, not only to guarantee the basic human rights enshrined in our constitution but to attract the investment needed to fuel future economic growth.

The business community – and society at large – remains optimistic that a demonstratable “line in the sand” has been drawn. What we now wish to see is decisive action taken to push back against corruption, fraud and the malfeasances of state capture.

Footnotes:

1: https://ftiresiliencebarometer.com/featured/details/south-africa-october-2021

2: https://www.gov.za/sites/default/files/gcis_document/202105/national-anti-corruption-strategy-2020-2030.pdf

3: https://www.fatf-gafi.org/publications/fatfgeneral/documents/outcomes-fatf-plenary-october-2021.html

4: https://www.gov.za/speeches/treasury-south-africa%E2%80%99s-anti-money-laundering-mutual-evaluation-report-released-financial

5: https://www.oecd.org/gov/ethics/Corruption-Public-Procurement-Brochure.pdf

6: http://www.treasury.gov.za/publications/other/Mutual-Evaluation-Report-South-Africa.pdf

7: http://www.treasury.gov.za/publications/other/Mutual-Evaluation-Report-South-Africa.pdf