The suspension of senior executives within South Africa's arms manufacturer Denel in September and the punitive fines on Japanese conglomerate Hitachi Mitsubishi by the US Securities Exchange Commission for paying bribes to Chancellor House - an in-house investment firm for South Africa's ruling African National Congress - relate to the Financial Intelligence Communications Act Amendment Bill.
The Bill seeks to combat corruption, money laundering, terrorism, and also enable South Africa to implement UN sanctions relating to asset freezes, such as the ones which were imposed on Iran by the US with regard to its nuclear program.
All these issues are being addressed by this ambitious Bill which was released for public comment earlier this year and is aimed at amending if not strengthening the existing Financial Intelligence Centre Act (FICA) in South Africa. The envisaged Bill is unique in that, in addition to addressing public and private sector corruption, it includes provisions aimed at combatting such crimes within the diplomatic community. This brings the Bill into the country's international relations realm with potential ramifications for the country's image.
The Financial Intelligence Communications Act Amendment Bill joins a host of other laws that have a bearing on the country's competitiveness and investment climate. These range from the Protection of Investment Bill, Mineral and Petroleum Resources Development Amendment Act, the Valuation Bill, the Expropriation Bill and lately the Immigration Regulations.
According to the government these regulations are consonant with the second leg of the national democratic revolution that is aimed at economic liberation. While these instruments tend to place a damper on the country's Foreign Direct Investment (FDI) attractiveness, it is the current amendments directed at the Financial Intelligence Centre Amendment Act that might be the last straw for foreign investors.
The Financial Intelligence Centre Act is meant to monitor financial transactions with a view to preventing money-laundering activities. It is an institution envisaged by the Constitution. However, the amendments to the FICA are aimed at expanding the powers of the Financial Intelligence Centre with a view to fighting terrorism, allowing South Africa to implement UN sanctions on asset freezes, money laundering and corruption.
The new FICA Amendments, like the Immigration Regulations, are informed by a noble intent which is combatting the triple evils of money laundering, corruption and terrorism. A closer reading of the Bill however reveals that it might have gone too far in trying to regulate these. Just like its sister instrument, the immigration regulations, the FICA Amendment Bill might have debilitating consequences on the country's financial competitiveness. This is due to the way in which it seeks to regulate such criminal activities.
There are two main issues in the Bill which might compromise South Africa's financial competitiveness. Firstly, the Bill empowers banks to engage in a more expansive due diligence on their clients. Banks are for instance required to investigate the sources and beneficiaries of finances being deposited into their accounts. This has an effect of encroaching on clients' privacy and that of those around them. The current status quo dictates that the Financial Intelligence Centre (FIC) investigates clients based on Banks' suspicions. In a disturbing departure the Bill now gives the FIC powers to initiate investigations or background checks based on its own suspicions. In addition, the Bill introduces whistle blowers to the matrix.
The linked risks of giving too much powers to the FIC on the one hand, and allowing whistle blowing on the other, could lead to the abuse of the FIC's powers. South Africa has witnessed the abuse of intelligence and other state institutions in the past and the FIC when now vested with these intrusive powers might not escape possible abuse. The institution has suffered from benign neglect. However with the newly acquired powers under the Bill it might become a magnet for those who have scores to settle.
The FICA bill is also problematic in the way in which it identifies parameters for those clients which it deems to be high risk and who should be automatically subjected to extra due diligence. It lists three different categories of people.
Diplomats (both foreign and local), CEOs and Directors of companies and senior public servants from the President, Deputy President, Mayors among others are listed as high risk clients. That the persons listed are high risk by virtue of their office, is debatable. Listing people as high risk in this nature confounds the sense of justice as there is a presumption of guilt until proven innocent. The case of foreign diplomats is even trickier as these individuals are generally covered by diplomatic immunity. To have them being subjected to scrutiny by commercial banks and the FIC could be violating the sacrosanct principle of diplomatic immunity.
The FICA Bill might have unintended consequences of reducing South Africa's competitiveness as a financial hub in sub-Saharan Africa, as potential clients and some of the best talent in the corporate world might feel uncomfortable investing in a jurisdiction where there is potentially intrusive scrutiny of personal finances.
Importantly, the Bill lists juristic persons such as companies also eligible for scrutiny. When it comes to the scrutiny of foreign diplomats it is recommended the government run checks on the legality of particularly this aspect of the Bill.
South African cannot run the risk of another diplomatic embarrassment in the wake of the Al Bashir debacle. There is need to tread more carefully when legislating around a sensitive area such as diplomacy. It is important to bear in mind that South Africa is home to the largest diplomatic community after Washington DC and this should not be tampered with under the pretext of combatting terrorism, money laundering and fighting corruption. The issue of visa regulations and their Frankenstein effect on the economy comes to mind. Unpacking these triple evils and having appropriate agencies deal with them separately will minimize potential damage to the country's standing and international competitiveness in banking.
To date, South Africa has not been used as a hub for money laundering not to mention financing of terrorism. It would be prudent to pay attention to the adage 'do not to fix what is not broken' in the name of pleasing a few of our international partners to the detriment of our financial competitiveness as an African country with sound financial management and markets. More so, at a time when Mauritius, Botswana and Kenya are positioning themselves as competing financial centres on the sub-continent. The government could best take a cue from Switzerland who when its banking secrecy laws came under scrutiny and criticism addressed the specific concerns of its partners in a specific and targeted manner rather than to overregulate its banking and financial systems out of the market.
South Africa's best response would be to leave the money laundering and terrorism issues to security agencies. Establishment of an anti-money laundering and terrorism unit within the national intelligence framework (if it does not already exist) would be most advisable. There could then be intelligence sharing between the FIC and the traditional intelligence units.
Domestic corruption would best be addressed by policy dedicated to addressing it. For instance, calls were made, by Zwelinzima Vavi when he led COSATU for lifestyle audits; that would be a good start. The Asset Forfeiture Unit within the National Prosecution Authority already has the powers and mandate to embark on conduct akin to that. In addition, the Asset Forfeiture Unit should be given more political backing since private sector corruption is usually neglected
. An instrument dedicated to fighting such corruption, while respecting the privacy of individuals is preferred over one that leaves too much discretionary powers to regulatory institutions and prone to abuse. Above all, it should be recognised that corruption is a culture and cannot be regulated away. The best way of dealing with corruption in the longer term is through concerted social engineering that instils a value system that disapproves of and punishes corrupt activities.
Azwimpheleli Langalanga a visiting researcher at the SAIIA.