SA’s public procurement landscape is a minefield for accountable institutions striving to comply with the Financial Intelligence Centre Act (Fica). While the intention of Fica’s “economic sense” clause is quite clear — to flag transactions that lack a logical commercial rationale — its application in a tender-flooded economy, where organisations frequently pivot their services, is fraught with complexity.
This environment, easily exploited by criminal networks, demands a level of vigilance beyond the norm, especially given the regulatory gap around identifying firms with politically influential persons that bid for tenders.
The “economic sense” test under Fica becomes particularly murky in the public procurement context because many organisations apply for tenders opportunistically. This isn’t inherently suspicious; for example, SMEs might broaden their offerings to increase revenue and expand their business. However, for compliance officers, big and small, it introduces a critical need for robust risk-based thinking.
If a company registered yesterday as a logistics provider is suddenly bidding for a multimillion-rand information and communication technology (ICT) tender, it may technically meet basic due diligence checks but fail the economic rationale test. The challenge lies in separating legitimate entrepreneurial adaptation from fronting or the abuse of procurement processes.
We need to move beyond simply verifying documents and assess the plausibility of a tender bid by considering the organisation’s experience, capacity, supplier relationships and track record. However, in many instances that’s easier said than done.
Regulatory grey zone
The General Laws Amendment Act introduced a crucial obligation linking public procurement and beneficial ownership transparency. This requirement hinges on the minister’s declaration of an as yet unestablished financial threshold, which would provide clarity on which tenders should trigger enhanced scrutiny.
Without this threshold, compliance teams are left in a grey zone, potentially under-detecting risks because no materiality threshold exists. This absence of clear guidance in such a key space creates uncertainty and ultimately hampers the intention of deterring undue influence or state capture risks in procurement. It is also precisely the type of uncertainty that Fica has spent the past few years clearing up in other spheres — to great, and essential, effect.
Given the legitimate tender system’s repeated exploitation by criminal networks and malicious politically connected individuals in SA, relying solely on normal due diligence is obviously insufficient. Even if a business appears legitimate, opportunistic participation in tenders, especially high-value ones or those outside a client’s core business, should be a red flag for enhanced due diligence, immediately. It is crucial to treat each client and transaction holistically, applying critical thinking beyond simply confirming a business is registered or tax compliant.
Increased potential risk may exist where:
- There is limited operational history, the organisation is newly formed, or its ownership or control has recently changed;
- The client lacks relevant experience compared with the tender requirements;
- Beneficial ownership overlaps with politically influential persons; and
- The company receives unusually fast payment from the state.
Economic (non)sense
Beyond formal documentation, accountable institutions must look for qualitative indicators when assessing the “economic sense” of a client’s activities in the public procurement space. Key qualitative indicators include:
- Capacity mismatch. The scale of the tender is vastly disproportionate to the size and staffing of the entity.
- Sudden cash flow spikes. Large, irregular payments after the award, especially from government entities, or where the cash flows do not align with the expected tender delivery timeline.
- Unusual payment routing. Use of unrelated third-party accounts or offshore accounts not aligned with the business’s usual operations.
- Contract circularity. Signs that the client is subcontracting work to organisations they own directly or are affiliated with to obscure true beneficial ownership or move money around.
SA has unfortunately seen numerous infamous examples of “economic nonsense” in the tender space over the past decade. The Digital Vibes scandal is a prominent case, but just one of many. In the Digital Vibes case the department of health awarded a R150m contract to a company controlled by close associates of then health minister Zweli Mkhize, ostensibly for communication services for National Health Insurance and Covid-19 awareness.
Despite lacking legitimate operational capacity, the company subcontracted the actual work while charging grossly inflated fees. The Special Investigating Unit investigation found that Mkhize and his son, Dedani Mkhize, received more than R3.8m, with most of the funds paid by Digital Vibes through electronic transfers to a wholesale cash and carry, which then delivered the equivalent in cash in discreet boxes. Payments were also made directly to Dedani Mkhize and a car dealership.
This scandal laid bare how state funds were laundered through layered financial flows, how multiple individuals and organisations were complicit, and how easily procurement processes could be exploited due to a lack of effective anti-money-laundering and anti-corruption controls in the public sector. It also served as a wake-up call to many who wrongly still assumed that money-laundering wasn’t something the average, smaller accountable institution would ever come across or have to worry about.
Just some of the many other examples include:
- Personal protective equipment contracts awarded to beauty salons during the Covid-19 pandemic;
- Digital solutions awarded to shelf organisations with no IT infrastructure or employees;
- School nutrition contracts granted to organisations without kitchens or delivery capacity;
- IT procurement at 10 times the market price, often with non-delivery of services; and
- Consulting tenders awarded to relatives of senior officials for advice freely available in the public domain.
These examples underscore that not everything that looks legitimate on paper withstands scrutiny when assessed more thoroughly.
Navigating complexity
While the enactment of a ministerial threshold in the General Laws Amendment Act would help by creating clarity for accountable institutions and assisting them to target limited resources at higher-value and higher-risk tenders, it will not be a silver bullet. Without accurate, transparent and accessible tender registries to screen clients against, the job is still a huge challenge — in most cases overly relying on client disclosure, which, if they are involved in illicit activities, is unlikely to be reliable.
This is where technology becomes indispensable. When smaller but no less important accountable institutions need to navigate such complexity, the only way to level the playing field is to use technology.
To identify transactions that lack economic sense, especially when faced with the challenges of public procurement and the unfulfilled politically influential persons threshold, the challenge is hard enough in principle but in reality the sheer volume of relevant data is daunting even to banks. What if you’re a single high-end art dealer?
The level of advanced analytics that’s de facto becoming almost “expected” in a greylisted economy where penalties alone can be devastating, things like adverse media monitoring is becoming necessary for even the smallest of compliance desks.
But most people find it hard enough to stay on top of the news in their personal capacities. Adding a business imperative to constantly keep an eye out for adverse media coverage of potential clients (or their associates) is just not feasible in most cases — but no less essential these days. The cost of conducting Fica compliance is significantly lower than the financial and reputational risks associated with noncompliance and involvement in a money-laundering scandal.
In SA’s complex public procurement environment, where opportunistic tender bids can mask illicit activities but tendering will remain a key part of economic development and redress, a robust, technologically driven compliance strategy is not just about avoiding penalties. It’s about safeguarding the integrity of the financial system, protecting an organisation’s reputation, and contributing to the broader fight against corruption and financial crime while promoting economic growth.
• McEwan is director of risk & compliance at nCino KYC Africa.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.