SA is under pressure to clean up its act on money-laundering and terror financing after the Financial Action Task Force (FATF) placed it on its grey list in February for failing to meet its requirements. This means SA is under increased scrutiny and risks being blacklisted if it does not deal with the deficiencies identified by the FATF.
One of the main reasons SA is on the grey list is the lack of effective beneficial owner identification. A beneficial owner is the natural person who ultimately owns or controls a legal entity such as a company, trust, partnership or association. Knowing who the beneficial owners are is crucial for tax authorities to determine tax liabilities and prevent tax evasion, as well as for other authorities to investigate illicit activities such as money-laundering, corruption, fraud and terrorism.
However, SA does not have a comprehensive and reliable system to collect and verify beneficial ownership information. The current legal framework is fragmented and inconsistent, relying on various sources of information that are often outdated, incomplete or inaccurate. This creates loopholes and gaps that can be exploited by criminals and tax evaders to hide their identities and assets behind complex corporate structures and secrecy jurisdictions.
Data on the number of entities in SA that have disclosed their beneficial ownership is hard to come by, but what is not in doubt is that SA loses anything between $3.5bn (roughly R65bn) to $5bn a year in tax revenue due to illicit financial flows, according to the Organisation for Economic Co-operation and Development.
What’s more, SA has been involved in several high-profile cases of money laundering and corruption, such as the Gupta family saga, the Steinhoff scandal and the VBS Bank collapse. Most recently, Sasfin confessed to a shocking case of money laundering and fraud by its staff.
To tackle this issue, SA needs to improve its legal and institutional framework to ensure the availability and accessibility of beneficial ownership information. One of the government’s responses is to give more power to the SA Revenue Service (Sars), the tax authority. A proposed amendment to the Tax Administration Act will require taxpayers to provide beneficial ownership information to Sars and allow it to share it with other state entities such as the police, prosecutors and financial regulators.
This will improve interagency co-operation and information exchange, which are essential for detecting and combating tax evasion and money laundering. This is a positive step towards enhancing transparency and accountability in SA’s financial system.
That said, the proposal faces some challenges and risks. Giving Sars more power to share taxpayer information may infringe on the right to privacy and confidentiality of taxpayers. It is true that the proposal is subject to strict safeguards and limitations, but there is no guarantee they will be respected and enforced. Sars has a history of being abused for political purposes and leaking sensitive information to the media.
That is not to say Sars commissioner Edward Kieswetter, who inherited a tax collection agency gutted by the state capture project, is not making remarkable progress in restoring trust and the credibility of the institution. But it will know that losing credibility and reputation has severe and lasting consequences.
The government expects to have dealt with all the deficiencies identified by the FATF by 2025. That is a tight deadline given the complexity and magnitude of the reforms required. The proposal to give Sars more power to share taxpayer information is a crucial step, but not enough. The government also needs to show it can use the information effectively to prosecute and punish tax evaders and money launderers. Otherwise the country may remain on the grey list, or worse, be blacklisted. That would be a disaster for its reputation and economy.
SA has a lot of work to do to comply with the FATF standards and avoid being blacklisted. Giving more power to Sars is a necessary but risky move that requires careful implementation and oversight. The government should also demonstrate its commitment and capacity to use the beneficial ownership information effectively to crack down on money laundering and tax evasion. This is not only a matter of international reputation, but of national security and economic development.
• Motsoeneng is Business Day deputy editor
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