Just over eight years ago, the Johannesburg High Court had to deal with the unique case of David Kassel versus Thomson Reuters.
The origin of the case was that many years earlier, presumably at the prime of his corporate career, Kassel had found himself burdened with the privilege of running a company called The New Reclamation Group which had entered into a joint venture with the government of Zimbabwe in order to run a diamond company called Mbada Diamonds.
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Running a business in partnership with the state unfortunately has some unavoidable consequences that inevitably befell Mr Kassel.
As it turns out, recent history indicates that individuals who are in critical decision-making authority and senior roles in government and within government entities tend to carry an elevated level of risk of being targeted by those who wish to sway particular decisions their way.
If an individual is responsible for lawmaking or regulatory enforcement, they have enormous power that can – in some cases – determine the fate or otherwise of a critical business venture.
If an individual is responsible for signing off on prospecting and mining licences, or sponsoring the implementation of a law or regulation that prescribes how business should be conducted, then such an individual is regarded as either an enabler or an impediment.
Tragically, the history of individuals in positions of authority accepting inducements from third parties is well-documented.
Whether these are channelled as direct bribes or acquisitions of assets in foreign jurisdictions, the prevalence of corrupt practices is wide enough to warrant a formalised process of identifying the red flags.
‘Politically exposed persons’
The development of the definition of ‘politically exposed persons’ was a response to this reality.
At the heart of this proposition is that since those who are in positions of authority are likely to be targeted for inducements and bribes, their own transactions and asset profiles should be subjected to elevated levels of scrutiny.
Creating a list of such individuals – which can include family members of those identified – enables financiers, regulators and law enforcement agents to easily identify politically exposed persons and then apply enhanced due diligence measures when dealing with them.
The proposition itself does not state that politically exposed persons are corrupt or corruptible – it merely acknowledges the reality that they are susceptible to being targeted.
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For those whose listing is due to their proximity to politically exposed persons – as close family members, senior staffers in political office, or directors of companies whose business model carries elevated risk – the listing can feel like an unwarranted intrusion that presumes guilt by association.
The Kassel case
It was this issue that aggrieved Kassel enough to warrant an approach to the courts.
Central to Kassel’s case was the theory that his continued listing as a politically exposed person in the Thomson Reuters database – regarded as the most reliable and comprehensive database of politically exposed persons in the world – was defamatory to him as it gave the impression that he was a person of ill-repute.
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Kassel’s contention was based on the fact that the company, which he had already left, occasionally found itself subject to negative coverage and his name would then pop up as someone associated with it.
The court eventually found that the listing was not defamatory, but the problem of association for those trapped in the definition remains a sore point for many.
Part of the problem is the assumption and the consequences that follow from being listed as politically exposed.
Assumptions
Some may assume that the mere listing is a red flag and avoid transacting with such people. This is likely to be the case for institutions that do not have the resources to implement safeguards that would enable them to transact comfortably with politically exposed persons.
On the consequence front, those who are listed are subjected to additional interrogation – which, when badly communicated, might create the sour impression that they are being unfairly assessed or treated.
The reality is that such associations do indeed come with scrutiny that is a bureaucratic headache.
But this should not, on its own, prevent affected individuals from accessing business opportunities.
Rather, institutions that are in the business of transacting with individuals who might fall within the ambit of politically exposed persons should simply implement the requisite safeguards to ensure they understand the exposure and financial profile of those individuals and their associates.
The IDC, Mrs Kganyago, and the Club Med deal
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This all makes the case of the Industrial Development Corporation (IDC) and Zibusiso Kganyago – wife of the governor of the South African Reserve Bank – such a strange phenomenon.
In recent weeks, the transaction – in which Kganyago has a financial stake and the IDC has a funding and shareholding agreement – has been in the news as an example of governance gone wrong.
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In a story of moving parts, the allegation seems to be that the process of accepting a consortium that has a politically exposed person (or an associate thereof) fell short of the governance standards the IDC has set.
In that iteration, the inclusion of Kganyago was late – and, given her profile, led to the planned transaction being regarded as subject to elevated levels of money-laundering, terrorism financing and reputational risk to the IDC.
At first glance, such terms would be regarded as the type of red flags that ought to have killed the deal at inception.
What the summary fails to explain is that the terms are actually extracted from the Financial Action Task Force (FATF) guidance on politically exposed persons.
The FATF itself explains that “politically exposed persons are considered higher risk because their positions can be abused for money laundering, corruption, bribery or terrorist financing”.
Such elevated risk emanates from the politically exposed person’s access to state resources, decision-making power and influence over public contracts or regulatory decisions.
The FATF emphasises that the measures aimed at addressing the inherent risks are preventative and risk-based “and not a presumption of criminal activity”.
This means that being listed as a politically exposed person is merely an alert to potential partners and places the duty for elevated diligence and scrutiny on their shoulders.
Due diligence … and context
In the case of the IDC, the question is whether its processes can explain how the risk profile of politically exposed persons is addressed and monitored.
Given the wide definition of politically exposed persons and their associates, the idea that such individuals ought to be subject to blanket exclusion from business activities is nonsensical.
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The Financial Intelligence Centre Act contains, in Schedule 3A, a list of domestic politically exposed persons that essentially covers anyone and everyone who has ever had decision-making authority in the public sphere – even in an acting capacity.
In the case of director-generals in the South African government, the definition of politically exposed persons has resulted in individuals like Themba Maseko, former director-general in The Presidency, being listed.
When one considers how South Africa routinely operates a conveyor belt of director-generals, the list of those who would be excluded from business activities if we all shied away from the ‘politically exposed’ would paralyse many who once committed the sin of working in senior roles – or were merely associated with those who have.
Perspective
What lesson is to be emphasised as the IDC scrambles to explain whatever is really going on with the Club Med deal?
It’s that conflating issues of probity and internal friction between the deal’s stakeholders, with the risk profiling of domestic politically exposed persons, is likely to undermine the essence of what the politically exposed persons listing is about.
It is simply a call for enhanced diligence rather than a licence for exclusion.
So while reasons may indeed exist for revisiting the nature and structure of the proposed empowerment consortium and its shareholders, pretending that the alerts were unknown and unforeseen as the deal was canvassed leaves many more questions about the IDC and its own processes.
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For individuals like Kassel and Kganyago, the unfortunate tragedy of the perils of association is that they are paying the price for the sins committed many moons ago and many jurisdictions away by rogue dealers, shady decision-makers and dodgy politicians.
Such players have forced us all to retreat into the caution of creating such lists.
While one might empathise, the solution lies in the ability of institutions like the IDC to do their assessments properly, rather than the dangerous alternative of abolishing a list of politically exposed persons.
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