Reserve Bank clampdown

The South African Reserve Bank (SARB) has taken strict action against exchange control violations, issuing over 300 forfeiture orders to individuals and companies in the last five years, with Steinhoff being the latest target.

In a Government Gazette published on Friday, 19 July 2024, the Reserve Bank announced that it had seized over R6 billion from several Ibex Investments – formerly Steinhoff – accounts.

The notice said the money will be “disposed of by deposit thereof into the National Revenue Fund”.

Steinheist author and award-winning journalist Rob Rose told The Money Show that the Reserve Bank believes there was a lot of duplicity in Steinhoff’s cross-border transfers, which resulted in this seizure.

“That’s essentially what this particular order is saying. It doesn’t speak to the wider fraud and efforts to hold you accountable for that,” he said.

However, it prevents Steinhoff from settling many of its debts to foreign debt holders, which currently stand at around €10 billion.

Rose explained that, before Steinhoff’s collapse, the firm bought many extra companies overseas and took on massive amounts of foreign debt.

For example, it bought Mattress Firm in the United States “and took out huge debts overseas to do this”.

Rose said the debt had grown to €10 billion, and once it became time to pay those debts, Steinhoff was unable to do so following its collapse in 2017.

Steinhoff was once a multinational retail giant with a vast portfolio of furniture, home goods, and electronics brands. Its collapse in late 2017 was one of the largest corporate scandals in South African history.

The scandal erupted when serious accounting irregularities were discovered within the company. These irregularities involved overstating revenue and hiding losses in off-balance-sheet companies. 

The revelations led to the immediate resignation of the CEO, Markus Jooste, who died by suicide earlier this year.

The impact on the company was catastrophic. Steinhoff’s share price plummeted, wiping out billions of dollars in market value. Investors, both large and small, suffered significant losses. 

The scandal also had a ripple effect on the South African economy and financial markets.

“Because Steinhoff wasn’t this formidable entity that the market used to pretend it was for so long, so it just didn’t have the money to settle the debt,” he explained.

Its foreign debt holders extended Steinhoff some grace, which has essentially kept the firm alive for the past six to seven years.

However, Rose said the SARB’s clampdown on exchange control violations could make it more difficult for Ibex to repay this debt.

“To an extent, they’re going to struggle to repay that debt if they’re not allowed to transfer any money across to the foreign debt holders who actually kept it going,” he said.

“These are the guys who lent enough money, who gave it credit lines when no one else would.”

“They can’t repay the people who’ve kept alive all these years if they’re not allowed to transfer money. I suppose the issue is to what extent Steinhoff has been suffering from the sins of Markus Jooste and the people who helped create this fraud.”

Rose said the problems that occurred at Steinhoff happened across institutions, and many parties hold partial responsibility.

“If you look at where the problems happened, it happened across many institutions. It was the auditors who messed up, it was the executives – there was massive fraud,” he said.

“And you could argue that the Reserve Bank itself failed at the time by not taking and not scrutinising what was happening closer.”

“I think the Reserve Bank and the government also need to share some blame for what happened at the time.”

Foreign exchange clampdown

The SARB’s freezing and seizure of Ibex’s assets is part of a broad investigation – codenamed Project Castle – into wrongdoing at Steinhoff.

However, it also comes as part of a wider clampdown on exchange control violations as the country looks to tighten its regulations to get off the Financial Action Task Force’s (FATF) “greylist”.

The FATF placed South Africa on its watchlist in February last year, citing deficiencies in tackling illicit financial flows and terrorism financing, and gave the country until the end of January 2025 to address the shortfalls.

Being on the greylist means the country is under increased monitoring for not fully complying with international standards to prevent money laundering, terrorist financing, and proliferation financing.

The National Treasury said earlier this month that South Africa is on course to exit the watchlist next year, but challenges remain in addressing system shortcomings.

“Treasury does not expect South Africa to exit greylisting before June 2025, as per the Action Plan deadlines,” it said in a statement. 

“It remains a tough challenge to address all 14 of the remaining Action Items by February 2025.”

The watchdog initially identified 22 areas that the country needs to tackle, of which eight have since been completed.

The government has initiated several measures to address these shortcomings and be removed from the grey list, including legislative amendments, institutional strengthening, and public awareness campaigns.

This has seen South Africa make significant progress, with the most recent FATF evaluation noting improvements in several areas. However, there is still work to be done, particularly in terms of effective investigation and prosecution of financial crimes.

The SARB plays a crucial role in South Africa’s efforts to be removed from the FATF grey list. 

While the government as a whole is ultimately responsible for getting South Africa off the list, the Reserve Bank’s dominion over foreign exchange control makes it a key part of the process.

The SARB is responsible for maintaining the stability and integrity of the financial system. It is actively working to enhance anti-money laundering and counter-terrorism financing controls within the financial sector. 

This includes strengthening supervisory frameworks, promoting compliance, and fostering a culture of risk management.

“Going forward, the SARB will further strengthen its supervision and further enhance the dissuasiveness and proportionality of administrative sanctions issued,” the central bank said following South Africa’s greylisting. 

“The SARB has a zero-tolerance approach when addressing the abuse of the financial system by money launderers or terrorist financiers.” 

“The SARB reaffirms its strong commitment to disrupt money laundering, the financing of terrorism and proliferation through the enhancement of its supervisory activities.”