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South Africa Fincrime Roundup: Regulator hits HSBC on AML, trade mis-invoicing, VBS ‘bank heist’

Tuesday, November 13, 2018   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org

November 13, 2018

The past few weeks have shone a harsh light on the financial crime countermeasures in place in South Africa, with a regulator penalizing a foreign bank on compliance failures, news of a potential $130 million bank fraud fueled by corruption and a report stating the country loses billions of dollars annually to trade mispricing.

The news comes at a particularly precarious time in South Africa, with the country wrestling with the rampant graft and cronyism employed by prior President Jacob Zuma – who faces corruption, fraud and money laundering and other charges for looting country coffers for his own gain – and the still-smoldering and very public implosion of its tax agency.

This retrenching is borne out in watchdog reports. The 2017 Transparency International Corruption Perceptions Index scored South Africa 43 out of 100, ranking it 71 out of 180 countries, and a drop of two points from the prior year. Overall, jurisdictions with scores under 50 are considered to have serious issues when it comes to bribery and rule of law.

So in this ACFCS Fincrime Roundup, we are highlighting several recent pieces of news that give vital details to help compliance professionals better gauge the overall financial crime and compliance risks of the region, which appear to be on the rise.


South Africa banking regulator fines HSBC AML program more than $1 million, must remediate program

Last week, the Prudential Authority, a body that monitors financial institutions as part of the South Africa’s Reserve Bank, penalized the local operations of London-based HSBC 15 million rand, which equates to roughly $1.1 million, for anti-money laundering (AML) program failures, though the fine could be halved if the operation can improve operations quickly enough.  

The regulator imposed the administrative sanctions “because certain weaknesses were identified in HSBC’s processes which inhibited HSBC from proactively detecting potential money laundering and the financing of terrorism,” according to penalty documents, adding that there is currently no actual evidence of financial crimes.

The penalty is a fraction of prior high-profile fines HSBC paid in a few years ago for processing billions of dollars tied to organized criminal groups. In 2012, HSBC paid federal regulators and investigators $1.9 billion in a deferred prosecution agreement (DPA).

In penalty documents and Congressional proceedings HSBC admitted that over a decade it laundered more than $1.2 billion for illicit drug trafficking groups and rogue regime Iran.

During its long commercial relationship with Mexican drug cartels, HSBC was accused of moving $7 billion in drug cash to the U.S. in 2007 and 2008, chiefly through its Mexican affiliate. No top bank executives were prosecuted or went to jail.

That fine was preceded by federal regulatory orders requiring HSBC to retool how it crafts customer, jurisdiction and other risk scores and better pair those findings with the proper depth of corresponding controls, just to name a few.

In a similar vein, the South African regulatory is ordering HSBC to strengthen its systems to better parse out customers risks, detect aberrant and unusual transactions and report those filings to the government and law enforcement.

More broadly, even as it has retooled its AML programs, upgraded systems and brought on a wealth of new talent, HSBC faces a bevy of current probes related to its counter-crime defenses.

 In media and company reports, the U.K.’s Financial Conduct Authority (FCA), and DOJ, are analyzing the bank’s AML controls related to a South African graft scandal and the sprawling FIFA corruption probe, among other still wriggling strands of outstanding compliance, investigative and regulatory risks.

The bank also stated in financials recently it potentially processed transactions related to an individual on U.S. sanctions lists for weapons proliferation offenses.


A look at the $130 million VBS ‘bank heist’ and how it opened a window into rampant government corruption in South Africa – to the most powerful individuals and agencies

The British Broadcasting Corp. (BBC) released a scathing investigative report detailing what it called a “spectacular $130 million ‘heist’” involving South Africa’s VBS bank, with a resulting political firestorm that exposed “how deeply corruption is now entrenched in local government and beyond.”

The grip of graft that prospered under currently indicated former president Jacob Zuma is now the persisting cultural problem of President Cyril Ramaphosa's government.

The story of the bank’s rise and fall – essentially becoming a massive Ponzi scheme for corrupt political powerbrokers and greedy, eager business interests – is the tale of a “scam that stretched from impoverished rural villages all the way to the upper echelons of government, and which now explains the perilous fragility of a nation's institutions.”

The report describes VBS as a small mutual bank, off the radar of most titans of industry.

The institution was a “mutual bank, largely owned by its depositors, that helped rural communities, living on land owned by tribal chiefs, to secure mortgages or save for family funerals.”

Outside of the impoverished northern province of Limpopo, few had even heard of the operation. But, according to the BBC, that changed quickly, alarmingly so.

After being infiltrated by nefarious insiders, VBS allegedly transformed with “staggering speed” into a “slush fund for corrupt politicians, local government leaders and their business cronies, by way of a breathtakingly elaborate and cynical pyramid scheme.”

The bank's owners are accused of “bribing local officials in some of South Africa's poorest and most dysfunctional municipalities - persuading them to divert, or to pretend to divert, their budgets into VBS's coffers in return for cash and gifts. They deny the allegation.”

The way the bank fraud operated had several steps, according to the BBC report, including:

  • The bank creates a fake deposit in the name of a related party.
  • The bank then solicits deposits from municipalities and public entities.
  • The municipal deposits are then withdrawn against the fictitious deposits or are used to grant “loans” to related parties.
  • Next, the purported loans for the related parties are extinguished with fake payments and false accounting entries.
  • The bank’s chief financial officer then falsified the accounts and monthly data returns to the South African Reserve Bank (SARB).
  • The doctored financial statements and imagined monthly returns were then signed off by external auditors.

The result of the scam: “The bank was effectively a Ponzi scheme to the benefit of certain related parties,” while other employees and functionaries were “paid to keep quiet or to look the other way.”

Its chairman, Tshifhiwa Matodzi, according to the report, is the accused mastermind, along the “support of a team of highly qualified accountants and lawyers, and a dizzying network of apparently fraudulent shell companies and subcontractors.”

As a crippling piece of corruption context, the report stated, South African municipalities “lose, steal, or otherwise fail to account for about $2 billion worth of public funds.” 


Africa loses more than $7 billion a year in government revenue due to illicit trade mis-invoicing: GFI

Africa, a country already beset by rampant schemes to loot public funds, evade taxes and under pressure to bolster financial crime and compliance countermeasures, is also losing billions of dollars a year to lax oversight of the shipping and movement of goods in its trade sector, according to a global watchdog group.  

In a four-year period, from 2010-2014, the already struggling jurisdiction of South Africa lost $37 billion in revenues due to trade mis-invoicing, a common tactic by criminals and the corrupt to move and launder illicit and graft-gilt funds – equating to $7.4 billion a year, according to a new report by transparency champion Global Financial Integrity (GFI).

The report, titled South Africa: Potential Revenue Losses Associated with Trade Misinvoicing, analyzes South Africa’s bilateral trade statistics for five year period, 2010 – 2014, using information from United Nations Comtrade and data made available from the South African Revenue Authority, according to GFI.

Import gaps represent the difference between the value of goods South Africa reports having imported from its partner countries and the corresponding export reports by South Africa’s trade partners.

Export gaps represent the difference in value between what South Africa reports as having exported and what its partners report as imported.

The average annual revenue lost due to the misinvoicing of imports was $4.8 billion.

This amount can be further divided into its component parts: uncollected VAT tax ($2.1 billion), customs duties ($596 million), and corporate income tax ($2.1 billion).

Lost revenue due to misinvoiced exports was $2.6 billion on average each year which is related to lower than expected corporate income taxes.

A key conclusion is that goods categories with a preponderance of under-invoicing tend to be associated with higher effective tax rates than other classes of imports.

The data show that the top five categories for potential revenue loss related to import under-invoicing are machinery, knitted apparel, electrical machinery, non-knitted apparel, and vehicles.

Three of these commodities (machinery, electrical machinery, and vehicles) are among the most commonly imported goods into South Africa.


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