Illicit Finance and Economic Threats Team
Week of Monday, December 20, 2021
Money and Documents on the South African Flag[1]
“State capture” involves corrupt politicians, businessmen, law enforcement, and other public officials exploiting their positions for personal gain.[2] This type of systemic corruption is present in South Africa, which hosts diverse criminal markets controlled by local, regional, and international criminal syndicates.[3] Motivated by their personal gain, actors involved in “State capture” likely cooperate with criminal syndicates, establishing a symbiotic relationship based on mutual benefits. Corruption and the growing presence of criminal networks involved in wide-ranging illicit activities have very likely deprived the government of revenue that could boost the country’s economy. Public trust in governmental institutions has very likely decreased, while inequalities and incentives for the population to engage in criminal activities increased. Ongoing corruption and economic instability will very likely attract criminal actors looking to exploit the country’s financial system and weakened authority. The increase of illicit finances flowing into the country will very likely undermine anti-money laundering and countering terrorist financing (AML/CTF) efforts. Without additional prioritization and resources, it is almost certain that corrupt activities for personal gain and multiple financial and economic threats will remain throughout the country.
South Africa is a sub-Saharan financial hub, likely attracting regional criminal actors to use the country’s financial system to hide illicit proceeds.[4] As a host for regional financial transactions, there are likely overlaps between legitimate and illegitimate transactions, enabling criminal actors to disguise illicit proceeds with a reduced likelihood of detection. Foreign criminal actors exploit the country’s predominantly cash-based economy to launder illicit proceeds which mainly come from fraud, corruption, and bribery.[5] Widespread use of cash in the day-to-day economy likely enables criminals to smuggle illicit money into the country and launder it through the purchasing of goods or services while avoiding traceable evidence of illicit transactions. Due to “State capture,” funds that would very likely advance the country’s economy are almost certainly redirected to increase the political and business elites’ personal wealth, increasing economic inequality. Inequality very likely fuels resentment towards the ruling elite, which will likely result in increasing violence. Economic mismanagement likely limits employment opportunities, which will likely lead to protests, lootings, vandalism, petty crime, and organized criminal activities.
The Zumas, the family of the former president, and the Guptas, businessmen accused of plundering €2,5 billion EUR of public resources who have been in exile in the United Arab Emirates, are people involved in South African “State capture.”[6] Corruption in South Africa’s political sphere also includes leaders of the African National Congress (ANC), whose secretary-general, Ace Magashule, was charged with fraud, money laundering, and corruption in November 2020.[7] Corruption within the ANC is very likely connected to illicit financial channels operating within South Africa and transnationally. The amounts taken by the government officials and political leaders as bribes are likely transferred through illicit financial channels including money laundering and cryptocurrency. A high level of entanglement between businesses and government likely led to increased corruption within South Africa’s political circles and bureaucratic structures. The ANC leaders’ close association with business elites, including the Gupta family, likely created conflicts of interest which have very likely been exploited to secure various licenses and evade regulations. Through large corruption networks, the business elites likely contributed to various political parties and leaders, creating a significant conflict of interest for leaders who approve tenders for various government-funded projects.
Corruption at almost every level of the government allows corporations to evade taxation and regulations imposed by government authorities.[8] Government intervention in various sectors, including mining, is likely influenced by businesses that bribe officials to benefit these businesses rather than ensure ethical business activity. Most business activities in South Africa very likely require contacts within the government and financial resources to bribe the officials to approve business operations. This political and economic situation likely creates an unfriendly business environment that hinders capital flows into the country’s economy. Illicit financing almost certainly has negative impacts on formal economic structures, halting revenues and investments into the formal economy. These implications likely negatively affect South African small and medium scale enterprises (SMEs) that rely on governmental regulations and protection to operate in a healthy competitive business environment. Since SMEs are likely financed by individuals without significant financial resources, they very likely struggle to survive as they cannot keep up with the corruption to procure licenses.
Corruption involving local police officers and the police firearms registry is a major contributing factor to arms trafficking in South Africa.[9] Between 2002 and 2019, over 26 thousand police firearms were reported lost or stolen.[10] While some police weapons are likely lost or stolen by criminals, it is also very likely that police officers sold the majority of firearms to organized crime gangs, as has been proven in the past.[11] Given the complicity of the country’s police firearms registry, these transactions are almost certainly challenging to uncover and trace. Through these acquisitions, criminal gangs almost certainly grow stronger and conduct their illicit activities more efficiently. Many weapons acquired by the criminal groups are likely sold to other gangs, strengthening the illicit flow of money and weapons within South Africa. Due to widespread corruption among police officers, arms trafficking is unlikely to slow down. The government’s ability to counter organized crime groups will very likely be significantly undermined.
South Africa is a transit point and growing market for cocaine, mostly coming from Latin America on its route to Europe, Australia, and Hong Kong.[12] The country is the largest market for heroin in eastern and southern Africa, with law enforcement and border officers being involved in the trade,[13] and is a large market for methamphetamine.[14] The growing domestic drugs supply will likely lower the prices, increasing the accessibility of drugs. This will likely increase local demand, strengthening the domestic drug market. As some consumers will likely be unable to finance their addiction, involvement in petty crime and organized criminal activities will likely increase. An increase in domestic demand will likely increase the competition between domestic, regional, and international criminal syndicates to infiltrate the growing domestic drug market. The increased competition will likely result in increasing violence between criminal groups.
South African methamphetamine networks are divided into transnational supply chains, including Nigerian, Pakistani, and Chinese criminal syndicates, with Johannesburg and Cape Town being the primary hubs for import, production, and distribution in the country.[15] With an increasing influx of drugs, either transiting or being distributed locally, there is a roughly even chance criminal syndicates will continue to coexist due to their mutual benefits. Methamphetamine precursors have been supplied by local criminal groups to Chinese criminal syndicates in exchange for poached abalone.[16] Due to mutual benefits, Chinese demand will likely persist, strengthening local methamphetamine production in response. This overlap between drug and wildlife trafficking very likely increases the resilience of criminal networks. Besides wildlife trafficking, the drug trade likely overlaps with other prominent criminal markets, including human trafficking. The potential increase in domestic drug use will likely result in increased recruiting of drug users for sex work or forced labor in exchange for drugs.
In late 2019 and 2020, there were reports of Afghan methamphetamine shipments arriving in South Africa through Pakistani intermediaries.[17] As methamphetamine production is growing under the Taliban, some of it will likely continue to reach South Africa.[18] Pakistani intermediaries are likely used to disguise the product’s origin, considering the international condemnation of the Taliban-controlled government. The growing South African drug market will likely attract more regional and international actors looking to expand their businesses. Consequently, criminal activities in South Africa and other countries with strong drug markets, such as Nigeria or China, will likely increase. This will very likely negatively impact these countries’ stability, particularly those already experiencing conflict and instability, as actors involved in a conflict are likely to join the drug business to sustain their operations.[19] Corruption and bribery will almost certainly increase with the expanding drug market, particularly in larger cities where collusion with corrupt officials, including customs, port, law enforcement, and border officials is likely most prominent. Corruption and bribery are also likely to increase in source, transit, and destination countries, which will very likely impede the detection and disruption of drug supply chains.
South Africa has become a hub for human trafficking rings that recruit individuals from poorer, rural areas and transport them to larger cities where they are forced into sex trafficking and other forms of labor.[20] Criminal networks also run the human smuggling industry in South Africa, moving undocumented foreign nationals across borders, generally with assistance from South African police and immigration authorities.[21] The size of South Africa’s land border likely makes it difficult for law enforcement not affiliated with the criminal networks to efficiently secure all the crossing points and identify those involved. Corruption very likely heightens trafficked and smuggled individuals’ suffering, as enabling the operations likely allows captors to inflict physical harm on their victims with impunity. Victims are unlikely to have the financial resources or the freedom to receive appropriate medical treatment, leading to serious illness or death.
South Africa represents a source, transit, and destination country for the illegal market of animals and plants.[22] Traffickers send most of the wildlife to China and Vietnam, often with the help of individuals working in the private sector and public officials, including soldiers directly involved in poaching and transporting wildlife.[23] The cooperation of government officials and private sector individuals combined with widespread corruption likely allows criminal groups to smuggle the merchandise with relative ease. Due to the involvement of the public and private sectors, the sourcing of wildlife very likely occurs in both government and privately-owned reserves, providing criminals a considerable potential supply of illicit wildlife products. The use of illegal wildlife in Asian countries for traditional medicine and as status symbols will almost certainly increase demand for endangered species, bringing them closer to extinction and almost certainly weakening entire ecosystems.[24] With no action to counter the illegal wildlife trade, demand from Asian countries will very likely continue to increase, strengthening the illicit supply chain.
Illegal gold mining has been a lucrative industry in South Africa for decades, with miners and criminal networks stealing billions of rand from the South African economy through illegally-exported gold.[25] Illegal mining networks can very likely evade detection by bribing corrupt leaders in the South African government and exploiting the lack of combat against the illicit trade. Approximately 49 percent of adults in South Africa live in poverty, earning less than $71 USD per month.[26] Due to high poverty levels, the majority of South African illegal miners are likely desperate for employment, engaging in illegal gold mining to generate income. The loss of tax revenues from legal exports of gold very likely undermines the South African economy; however, “State capture” very likely means taxable profits from gold would fail to benefit society and instead would be directed towards corrupt officials. The loss of revenue due to corruption and failure to combat illegal mining is almost certainly damaging the South African economy, as additional revenue would very likely be used to support poorer communities in the form of education and employment opportunities and reduce the need for individuals to resort to illegal gold mining to generate income.
Despite having the smallest global cryptocurrency economy, South Africa was the location of the world’s largest cryptocurrency scam of 2020 when a fraudulent investment platform stole $588 million USD in Bitcoin from investors.[27] South African-based cryptocurrency scams have increased; in April 2021, a South African company stole a further $3.6 billion USD from cryptocurrency investors.[28] Widespread corruption driven by monetary gain means authorities are unlikely to prioritize the cryptocurrency market’s security, placing more individuals at risk of scams. Despite the prevalence of scams, the South African cryptocurrency market will almost certainly continue to expand, likely leading to more South Africans investing in cryptocurrency. The lack of cybersecurity measures combined with the success of previous cryptocurrency scams in South Africa will very likely lead to more criminals targeting South Africans in digital transactions. Cryptocurrency scam victims will likely struggle to financially recover from their loss. Some individuals will likely resort to loan sharks to cover rising debts, further exacerbating their financial problems due to excessive interest rates.
In October 2021, the Financial Action Task Force (FATF) stressed South Africa’s significant shortcomings in implementing an effective anti-money laundering and countering terrorist financing (AML/CTF) system, including a failure to pursue serious cases. This means that there is no effective regulation and implementation of protocols to detect and combat terrorist financing and money laundering.[29] The FATF report will likely lead to less foreign direct investment and financial aid, very likely negatively impacting the South African economy. The increasing use of cryptocurrency in South Africa will very likely lead to criminal and corrupt actors exploiting the decentralized and anonymous nature of cryptocurrency to launder their illicit proceeds. Corrupt government officials' direct involvement and potential cooperation with actors involved in money laundering activities very likely prevent money laundering prosecutions. Lack of accountability for money laundering will likely incentivize more actors to engage in such activities, worsening economic inequalities.
An ongoing criminal proceeding, initiated in 2017 against former South African President Jacob Zuma, includes charges of corruption, bribery, fraud, racketeering, and money laundering related to the country’s arms purchase in 1999.[30] The time between the alleged crimes and the proceeding indicates Zuma’s presidency and corrupt links very likely prevented earlier investigation and prosecution. The length of the proceeding indicates there is a roughly even chance Zuma still relies on his corrupt political networks to stall and impact the proceeding. If the proceeding results in a conviction of the former president, investigations and prosecutions of the political elites involved in such crimes will likely increase. The country’s Financial Intelligence Centre effectively produces operational financial intelligence that law enforcement agencies are using for criminal investigations and asset tracing.[31] Despite potential successful actions against money launderers and enablers of illicit financing, without additional resources and prioritization, the AML/CTF threat will almost certainly remain high. Consequently, illicit cash flows will likely continue, and the recovery process of assets and proceeds lost due to “State capture” will likely be ineffective. A lack of enforcement capacity and long-term dedication will very likely continue to expose South Africa to terrorism financing risks associated with potential foreign and domestic terrorists or third parties acting on their behalf.
The Counterterrorism Group (CTG) recommends strengthening anti-corruption efforts in South Africa through international cooperation and training of South African officials. Establishing transparency and accountability mechanisms within all levels of the government will likely reinforce the rule of law and public trust in the government. The increase in efforts to effectively implement FATF’s AML/CTF regulations will likely prevent potential FATF greylisting of the country and boost the economy through potential foreign investments. To tackle the South African criminal market, international cooperation between governments, law enforcement, and financial institutions will likely be crucial. Through cooperation and information sharing between the source, transit, and destination countries, criminal activities will likely be detected and deterred.
CTG and the Illicit Finance and Economic Threats (IFET) Team will continue monitoring patterns of corruption and financial threats relating to the criminal markets in South Africa. The IFET Team will consult with the AFRICOM Team to determine the level of threat to other countries in Africa while reporting any imminent threat to the proper channels. Future reports will track and outline developments of threats of corruption, as well as implications for any local, regional, or international groups. CTG’s Worldwide Analysis of Threats, Crime, and Hazards (W.A.T.C.H.) Officers and Threat Hunters will continue to provide up-to-date reports on threats in the region.
The Counterterrorism Group (CTG) is a subdivision of the global consulting firm Paladin 7. CTG has a developed business acumen that proactively identifies and counteracts the threat of terrorism through intelligence and investigative products. Business development resources can now be accessed via the Counter Threat Center (CTC), emerging Fall 2021. The CTG produces W.A.T.C.H resources using daily threat intelligence, also designed to complement CTG specialty reports which utilize analytical and scenario-based planning. Innovation must accommodate political, financial, and cyber threats to maintain a level of business continuity, regardless of unplanned incidents that may take critical systems offline. To find out more about our products and services visit us at counterterrorismgroup.com.
________________________________________________________________________ The Counterterrorism Group (CTG)
[1] “South Africa corruption money bribery financial law contract police line for a case scandal government official” by Bakhtiar Zein licensed under Shutterstock
[2] State capture: Zuma, the Guptas, and the sale of South Africa, BBC, July 2019, https://www.bbc.com/news/world-africa-48980964
[3] Is South Africa a transit hub for dirty money and organised crime?, All Africa, November 2021, https://www.theafricareport.com/142674/is-south-africa-a-transit-hub-for-dirty-money-and-organised-crime/
[4] South Africa's measures to combat money laundering and terrorist financing, FATF, October 2021, https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-south-africa-2021.html
[5] Is South Africa a transit hub for dirty money and organised crime?, All Africa, November 2021, https://www.theafricareport.com/142674/is-south-africa-a-transit-hub-for-dirty-money-and-organised-crime/
[6] South Africa’s Gupta siblings, Nigeria’s Diezani…Africans wanted for corruption charges, The Africa Report, October 2021, https://www.theafricareport.com/125130/pt-1-leila-ben-ali-komi-koutche-chakib-khelil-africans-who-are-wanted-on-charges-of-corruption-or-misappropriation/
[7] Top A.N.C. Official Charged With Corruption in South Africa, The New York Times, November 2020, https://www.nytimes.com/2020/11/13/world/africa/anc-corruption-south-africa.html
[8] Communities, mining corporations and corruption in South Africa, The Conversation, February 2019, https://theconversation.com/communities-mining-corporations-and-corruption-in-south-africa-111007
[9] “Gun Licenses for Sale: South Africa’s Failing Firearms Control”, Global Initiative Against Transnational Organized Crime, 2020, https://globalinitiative.net/analysis/south-africas-firearms-control/
[10] “How to Silence the Guns? Southern Africa’s Illegal Firearms Market”, Global Initiative Against Transnational Organized Crime, 2021, https://globalinitiative.net/analysis/southern-africas-illegal-firearms-markets/
[11] “Gun Licenses for Sale: South Africa’s Failing Firearms Control”, Global Initiative Against Transnational Organized Crime, 2020, https://globalinitiative.net/analysis/south-africas-firearms-control/
[12] South Africa Raises Profile as Cocaine Trafficking Hub, Insight Crime, September 2021, https://insightcrime.org/news/south-africa-major-cocaine-transit-hub/
[13] “A Shallow Flood: The Diffusion of Heroin in Eastern and Southern Africa”, Global Initiative Against Transnational Organized Crime, 2021, https://globalinitiative.net/analysis/heroin-east-southern-africa/
[14] “A Synthetic Age: The Evolution of Methamphetamine Markets in Eastern and Southern Africa”, Global Initiative Against Transnational Organized Crime, 2021, https://globalinitiative.net/analysis/meth-africa/
[15] Ibid
[16] Ibid
[17] Ibid
[18] Meth and heroin fuel Afghanistan drugs boom, BBC, December 2021, https://www.bbc.com/news/world-asia-59608474
[19] Digital Press Briefing on U.S. Efforts to Combat Terrorism in Africa, US Department of State, March 2021, https://www.state.gov/digital-press-briefing-on-u-s-efforts-to-combat-terrorism-in-africa/
[20] South Africa Profile, Global Organized Crime Index, 2021, https://ocindex.net/country/south_africa
[21] Ibid
[22] “Insights From the Incarcerated: An Assessment of the Illicit Supply Chain in Wildlife in South Africa”, TRAFFIC, 2020, https://www.traffic.org/publications/reports/insights-from-the-incarcerated/
[23] Ibid
[24] “Financial Flows Associated with Illegal Wildlife Trade in South Africa”, South African Anti-Money Laundering Integrated Task Force (SAMLIT), 2021, https://www.fic.gov.za/Documents/SAMLIT_IWT%20Report_November2021.pdf
[25] Fears rise for illegal South African miners hiding underground in virus lockdown, Reuters, April 2020, https://www.reuters.com/article/us-health-coronavirus-safrica-exclusive-idUSKBN22B1F9
[26] 5 Facts about Poverty in South Africa, The Borgen Project, August 2020, https://borgenproject.org/poverty-in-south-africa/
[27] Africa: new playground for crypto scams and money laundering, Institute for Security Studies, August 2021, https://issafrica.org/iss-today/africa-new-playground-for-crypto-scams-and-money-laundering
[28] Ibid
[29] South Africa's measures to combat money laundering and terrorist financing, FATF, October 2021, https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-south-africa-2021.html
[30] South African court rules Zuma’s corruption case to continue, Associated Press, October 2021, https://apnews.com/article/africa-money-laundering-south-africa-jacob-zuma-87b8accb7f37accbe168ff8104c4bbcf
[31] Who is the FIC, Financial Intelligence Centre (FIC), https://www.fic.gov.za/aboutus/Pages/WhoWeAre.aspx