How Economic Crimes Occur In South Africa

The People’s Tribunal on Economic Crime in South Africa took place at Constitution Hill in Johannesburg this past week. Social activist and lecturer Khaya Sithole presented to the Tribunal on Tuesday on white collar crimes and state capture.

The People’s Tribunal ran from 3 – 7 February and addressed crimes of corruption and theft. The organisers included Right2Know, Open Secrets, Foundation for Human Rights, Corruption Watch and the Public Affairs Research Institute. The Tribunal looked at pre and post apartheid corruption under the theme of Joining the Dots. Some 15 witnesses and whistleblowers testified.

The evidence was led before a panel of six adjudicators: ex United Nations High Commissioner for Human Rights Navi Pillay, former Constitutional Court justice Zak Yacoob, labour activist Dinga Sikwebu, the Social Justice Coalition secretary-general Mandisa Dyantyi, Yasmin Sooka the executive director of the Foundation for Human Rights and community rights advocate Allyson Maynard Gibson. They will compile findings and publish a final report.

Sithole explained that corruption was “various forms of fraudulent activities and fraudulent endeavours whose impact is that particular people receive financial gain or more importantly other people are worse off because of those activities”.

He said corruption can be passive where “we struggle to quantity their impact on affected entities and broader society”. He gave the example of a company shifting its operations to a tax haven and said there was nothing illegal about that because a place was identified where you can pay less taxes than South Africa. This depriving South Africa of potential earnings that it would otherwise be entitled to.

“Corruption is a crime in its essence,” he said. Unfortunately in the South African context the idea of understanding economic crimes is very limited. “When our judicial system has a very limited understanding of economic crimes it means the enforcement and way to punish those crimes is also severely limited,” he said.

He said these crimes happen in well-cultivated economic systems, making it either easy to hide crimes from the public eye or have enough loopholes within the existing legislation, making it hard to prosecute.

If one had to narrow down the essence of state capture Sithole explained, it would be a state that exists but does not have the capacity to do what it needs to do and starts outsourcing.

Types of economic crimes

He said money laundering was a unique crime which happens when funds are removed from one agency to another agency without receiving equal benefit. He gave the example of Eskom that gave McKinsey a contract which then subcontracted Gupta linked Trillian who charged R1.6bn in fees for “turnaround” advice to Eskom.

The exploitation of tax laws happen in the context of a global system, he said. In every country and jurisdiction, it is free to set their own tax laws. Some countries go shopping for entities and identify a company like MTN which is South African. A country like Mauritius can say to MTN that if it moved its headquarters to there, it would be given a better tax rate or not charge tax for particular period. That creates an incentive for a company to move a different jurisdiction. “This is not essentially illegal or wrong in law when MTN decide it want to move its headquarters but in reality you have simply exploited the tax gap that exists between the two countries,” Sithole said.

Cartel conduct is more explicitly exhibited in the South African context. This can be described when there are a limited number of role players in a particular sector or industry. These are highly concentrated industries. If you have a few role players that are part of a particular sector it means the ability to shape the commission is even greater regarding prices and structure. This means they have the ability to collude. “For me, that weakness that we have in our economic system where high concentrations in particular sectors leaves us exposed to cartel behaviour,” he said.

Financial statements fraud has been referred to as accounting irregularities. Most information that is accessible to us from private enterprises are its financial statements. We use these to determine if we want to invest in the company based on the value of their assets. If it turns out that those statements were fabricated it means the basis for your decision making had been compromised. In this instance you would have to look at the economic loss you would suffer.

Why business cartels thrive in South Africa

How do these crimes occur?

Auditors are meant to remain sufficiently independent to ensure fraud does not occur. Sithole said in the case of Steinhoff, CEOs benefited in remunerations from fabricated financial statements. So these remunerations were already paid to them and leaves others like investors worse off.

Sithole said the legal profession is more creative than others in that it found and abused legal loopholes. If a company is going to enter into some form of tax law exploitation, the first thing it are likely to do is call in lawyers and say this is what we are doing and this is the outcome we are trying to achieve and ask how far it can get with what they are doing without being seen as a crime. “The role of the legal profession in identifying legal loopholes and then advising clients on how to capitalise on those loopholes is unfortunately a big player in this ecosystem,” he said.

Image by Rumana Akoob