Wealth Gap: For the love of money

2015-02-15 15:00

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The world of “grey money” is a murky one defined by secret meetings, complicated transactions and suitcases that cross borders full of undeclared contents.

It is driven by armies of dodgy lawyers, creative accountants, tax experts and risk-taking financial advisers who help the global elite shield their money and assets from tax-collecting governments.

This capital flight erodes national tax bases, limiting the amounts governments receive for public expenditure.

Conservative estimates suggest there is as much as $21?trillion (R245?trillion) to $32?trillion of global private wealth invested virtually tax free in more than 80 “offshore” havens around the world.

This is according to a 2012 report by the Tax Justice Network titled The Price of Offshore Revisited. Such estimates do not include all the yachts, racehorses, gold and real estate owned via offshore structures.

Among those who squirrelled away millions in secret Swiss HSBC accounts – exposed this week in documents dubbed the Swiss Leaks – were 1?787 South Africans with deposits worth around $2?billion. Among them were Fana Hlongwane, arms consultant and special adviser to former defence minister Joe Modise. Also on the list was former South African resident Jean-Yves Ollivier, who now lives in Switzerland.

In total, Hlongwane’s accounts held as much as $12.6?million in 2006/7, while Ollivier’s held $707?619 that financial year.

The International Consortium of Investigative Journalists (ICIJ) – with information obtained by French newspaper Le Monde – revealed data about more than 100?000 clients from 180 countries gathered by former HSBC employee Hervé Falciani.

Some of HSBC’s South African clients tried to evade tax, Falciani said.

But a spokesperson for Ollivier told the ICIJ that all was above board for his client. “Mr Ollivier became resident in Switzerland in 1994. He has paid all taxes due.” Hlongwane, however, did not respond to requests for comment.

Sars group executive Vlok Symington said on Friday they had received information on current or former South African residents who were HSBC account holders, and were “analysing the information”.

“Early indications are that some of these account holders may have utilised their HSBC accounts to evade local and/or international tax obligations.” (see Business)

However, since the 1970s, high-net-worth individuals have found an astonishing number of ways to spirit their money into offshore bank accounts in famous tax havens such as Bermuda, Switzerland, Antigua, the Cayman Islands and Monaco.

A 2012 report titled Capital Flight from Sub-Saharan African Countries indicated that between 1970 and 2010, South Africa saw at least $38?billion leave the country for offshore accounts. It is estimated that if all the capital that leaves Africa illegally were invested at home, poverty on the continent could be halved.

For the past month, City Press has been on the trail of this offshore money in an attempt to understand how high-net-worth individuals in South Africa manage to keep their money out of the public purse.

It has been a frustrating exercise. The facilitators of such offshore transactions have been reluctant to take City Press into their confidence. Private investment bankers rebuffed offers of “off-the-record” interviews, saying: “We don’t want to explain how we do it, because then the authorities will clamp down on the loopholes.”

A few brave individuals agreed to chat over a coffee, often prefacing the conversation with declarations such as “a story I have heard” or “I understand that some people do it this way”.

Based on these conversations, City Press established that a number of the creative accounting loopholes for taking money offshore have been closed by Sars and the SA Reserve Bank over the past 10 years.

Still, stories of suitcases filled with money, bags of diamonds and undeclared art sold overseas persist.

Some of the favourite loopholes that have now been closed include buying properties in the Seychelles, lending money interest free to offshore-based trusts and purchasing shipping containers, which would be leased to international shipping companies: the revenue generated would not be repatriated to South Africa.

A financial adviser, who claimed to have nothing to do with “grey money”, said it was a warning sign if a client owned property in the Seychelles.

“All Seychelles properties owned by South Africans are dodgy,” said the adviser.

The adviser said financial sector players caught facilitating the illegal transfer of funds offshore for a client could face a fine of R10?million and up to 10 years in jail. For this reason, many such transactions would be discussed in the offices of high-profile lawyers under the protection of lawyer-client confidentiality.

“It’s not normally the big law firms – a client doesn’t want to involve a whole firm in a matter like that – it’s the successful law firms of individual lawyers where these meetings take place.”

Naturally, the people involved were cagey, said one private banker, because these transactions were conducted on behalf of wealthy, high-profile clients, plus the Reserve Bank was on to some of their “wily ways”.

“The Reserve Bank is not something you want to play with,” he said. “Twenty years ago, you could get away with it, not any more.”

Reserve Bank spokesperson Hlengani Mathebula said there had been two amnesty periods for South Africans who had illegally taken money offshore, the first in 2003 and the other in 2011.

“The Reserve Bank is aware of schemes used to illegally transfer funds out of South Africa and measures are in place to detect and deal with such schemes and loopholes,” he said.

Mathebula said the central bank’s financial surveillance department used an electronic reporting system, which captured details of all cross-border payments made or receipts emanating from cross-border transactions.

Currently, South Africans are permitted to take R4?million overseas a year, plus a R1?million discretionary allowance that could be used for travel, study, wedding expenses, gifts or donations.

One popular avenue still used to get money offshore is the art market.

A source with knowledge of how this is done told City Press that family trusts were often used to get valuable South African art offshore.

“It may be unethical, but it is usually done legally through a series of loopholes to avoid paying local tax,” said the source. “I imagine most pricy William Kentridge works are bought from South Africans abroad.

“If the works are shipped over, this is done at nominal rates, with the contents cited as ‘exhibition posters’, for example, to avoid entry levies based on true values,” said the source. “The art world is completely unregulated in South Africa and around the world.”

Last month, a Kentridge drawing sold for R4?million, and last year a series of bronze sculptures by the artist sold for R16?million.

In October 2010, a portrait by South African artist Irma Stern was sold in South Africa for R12?million.

Two weeks later, it was sold on auction in London for R26.4?million.

Last night, Sapa-AP reported that former HSBC chairperson Stephen Green had resigned as chairperson of financial lobby group TheCityUK’s advisory council because of the scandal around the leaked HSBC documents. Green, who became a government trade minister after he left HSBC, declined to comment.

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