Alexis Bowen, Kevin Bocaj, Sara Kulic, Illicit Finance and Economic Threats (IFET) Team
Week of Monday, July 5, 2021
The FATF decision to put South Sudan under the grey list raises
concerns over its corruption[1]
The Financial Action Task Force (FATF) decision to monitor South Sudan reiterates the issue of deep-rooted corruption in the country and its ramifications. Corruption within high political and military circles in South Sudan is economically and politically destabilizing and represents the main impediment to the country’s economic development. Natural resources serve the interests of corrupt actors. Rampant corruption, lack of accountability and transparency, and inadequate rule of law facilitate criminal and terrorist financing activities and very likely increase violence and instability. The negative impact of South Sudanese illicit flows is spreading far beyond South Sudan. If these illicit flows continue without disruption, they are likely to continue to pose a regional and become a global threat.
In June 2021, South Sudan was placed on the Financial Action Task Force’s (FATF) grey list due to failures by the state to increase efforts to reduce money laundering, terrorist financing, and other forms of illicit finance.[2] The state has been struggling to fight financial crimes, particularly those committed by state officials, since its 2011 war with Sudan for independence. Civil unrest, which has persisted since 2013, has exacerbated this struggle by increasing instability.[3] It is likely that the high levels of insecurity that have persisted since the end of the war with Sudan have made it easier for government and military officials to take advantage of their positions and steal money from state coffers. The public and government have focused their attention on physical security and political stability, which has resulted in a lack of emphasis on securing the financial system. As a result, government and military officials have been able to take advantage of the poorly developed financial system and steal from public programs and defense spending to enrich themselves.
Some South Sudanese have used their positions to steal the country’s natural resources and obtain government contracts to enrich themselves.[4] South Sudan’s last four army chiefs of staff, four high-ranking military leaders, and three opposition militia leaders have engaged in money laundering and corruption.[5] In regards to the government contracts, corrupt officials have used bribes as well as personal networks to obtain these contracts for companies that they own.[6] This has resulted in a lack of competition between companies for government contracts, which has likely impacted the quality of the product being produced if it is produced at all. This will likely cause problems for South Sudan in the future, particularly for contracts that have focused on infrastructure and other forms of building. Rather than awarding a contract to a company with the most qualifications, the government is likely to provide contracts to the companies of friends and allies. Such actions will further weaken the South Sudanese government and the state, as funds needed to consolidate state power are stolen by public officials.
To steal money from the state government, military officials have used “ghost soldiers,” soldiers that are not real but placed on the military roster, to siphon money away from the defense budget.[7] These same officials have been stealing outright from soldiers in the ranks below them.[8] Their ability to do so can likely be attributed to the poor levels of oversight maintained by the government in regards to its public spending. This poor oversight extends to the murky nature of defense contracting and the lack of actual initial and continued disclosure of officials’ assets and has very likely helped members of the elite commit financial crimes undiscovered. The lack of follow-up on contracts dispensed by the government may also be a reason for continued money laundering, as the government has failed to ensure funds provided to different sectors or allotted to contracts are used efficiently and for their actual purpose.
The corrupt activity committed by military officers is likely to increase the levels of violence and crime in South Sudan. As military officers have stolen or reduced the payments made to soldiers, they have compensated them by allowing soldiers to loot towns, commit extrajudicial killings, and commit rape. These events are likely to instill a culture of violence, given that law enforcement does not appear capable of stopping these events or does not have the incentive. It is likely that as military officials steal from their soldiers, looting specifically will go up as soldiers must find ways to provide for themselves with a reduced or even removed salary.
The large levels of success reached by corrupt officials, who have stolen at least $36 million USD, between 2016 and 2020,[9] and the weak anti-money laundering policies, make it unlikely that the government and military elite will change their activities and forge long-term peace. The large degree of success that the elite has had in South Sudan makes it unlikely that they will have an incentive to improve infrastructures and living standards for the people. Increasing stability in the state would make it more likely that citizens’ dissatisfaction and the international community’s attention would shift away from physical security towards the state’s financial security. In doing so, corrupt political and military officials would likely face greater pressure to abide by current state laws against illicit financial activity, as well as create stronger legislation on the issue. As a result, people are unlikely to receive improved health services, infrastructure, and education.
Few officials have been charged and imprisoned for issues regarding money laundering and other financial crimes, decreasing the likelihood that military officials will change their activities in the near term. This is compounded by the fact that the South Sudanese President, Salva Kiir, is known to protect allies who commit illicit activities, stifling attempts by the judicial system to prosecute the accused.[10] The inability of the justice system to successfully imprison guilty individuals is likely to further erode trust in government and the governing system amongst the public. It is highly likely that this will create greater unrest in the state, and result in a larger civil conflict.
Oil is a crucial part of South Sudan’s economy, representing 98% of the country’s revenue.[11] One of the most important companies in the country, Dar Petroleum, is controlled by Chinese and Malaysian companies that hold 81% of the shares, with tight, corrupted links to South Sudanese high-level politicians and the National Security Service (NSS).[12] The government’s corrupted deals and the subsequent lack of the rule of law attract various actors looking to increase their wealth by exploiting South Sudan’s natural resources. As a result, the economy is deteriorating as oil increases the wealth of a small elite, while the country is deprived of a significant amount of revenue from the oil industry. As the oil control is in the hands of corrupt South Sudanese political and security actors, the oil will likely continue to fund the conflict, providing a source of revenue for armed groups serving corrupt government interests. Corruption within the oil industry is likely to spread to other industries in the country, undermining the possibility for economic growth.
The gold mining and trading is controlled by political, military elites and foreign actors also involved in the smuggling of gold to Uganda, Kenya, Sudan, and Democratic Republic of Congo (DRC), and then to final destinations, Dubai and China.[13] Corruption is very likely a crucial part of the gold mining process, as it allows foreign and local actors to circumvent national regulations for obtaining mining licenses. This reduces the likelihood for companies, without close ties to the political and military elites, to obtain mining licenses. As a result, it is likely that companies and locals, living in gold-rich areas, are engaged in illegal mining. There is a risk of increased violence between the military elites, aiming to spread their control over gold mines, and locals. The gold mining process is likely followed by human rights abuses, environmental crimes, and displacement of people in gold-rich areas.
During the trade process, corruption enables the smuggling of illicit gold to neighboring countries. The illicit gold trade deprives South Sudan of a significant amount of revenue that could be collected through taxes and royalties, undermining economic development and increasing the wealth gap between the political elite and South Sudanese civilians. A corrupted environment and vast natural resources such as gold allow armed groups to engage in the gold trade to secure funding. In such a case, gold is likely financing and prolonging the conflict and instability, with a risk of a spill-over to neighboring countries.
Illicit gold trade from South Sudan negatively affects neighboring countries facilitating bribery, corruption, and tax evasion. As gold can be used for money laundering through investments such as real estate, it is likely that neighboring countries, as smuggling hubs, foster such illicit financial flows. Gold smuggling is likely accompanied by violence and criminal activities, particularly in border areas, where smuggling is the most prominent. It is very likely that during the gold supply chain, smuggled gold is mixed with legally obtained gold, and placed on a global market. With the disguised origin of the gold, there is a risk that gold circulating on the global market funds armed groups and the government with a record of human rights abuses.
Power vacuums and a lack of accountability, facilitated by corruption, present an attractive environment for bad actors looking to expand illicit businesses. For example, South Sudan gave citizenship, lucrative business contracts, and the title of honorary consul to the Lebanese businessman Ali Khalil Merhi, who fled Paraguay after facing piracy and terrorist financing charges, connecting him to Hezbollah.[14] Prioritizing the increase of the elite’s wealth, instead of the country's economic development and the rule of law, is very likely to have significant repercussions. If such an environment continues undisrupted, South Sudan will likely become a haven for terrorist financiers and money launderers. If they continue, South Sudan’s current levels of corruption are likely to negatively affect relationships and cooperation with other countries, as the present environment enables criminals and terrorist actors to evade accountability.
The growing money exchange business is closely linked to the government elite and those close to the elite that manage money exchange businesses and maintain close ties with businessmen in Kenya and Uganda.[15] Money exchange business represents a convenient cover for money laundering, challenging the detection of illicit flows due to the overlap of legal and illicit activities. Illicit financial flows from South Sudan undermine the financial legitimacy of other countries in the region. For example, Kenya’s aspirations to grow as a financial hub are likely to be undermined due to the illicit flows from South Sudan.[16] If illicit financial flows from South Sudan continue undisrupted, it is likely that neighboring countries, as main hubs for illicit funds, will also be placed on the FATF grey list. A widespread flow of illicit funds is likely to increase criminal activities in sectors like banking, and real estate, as sectors prone to money laundering.
With the increase of money exchange businesses, there has been an increase in the black market of the US dollars, with 1 US dollar being traded for almost 400% more than it is traded legally.[17] The widespread black currency market causes shortages of currency, leading to inflation, and furthering economic deprivation in the country. This is likely to fuel grievances and resentment towards the government and result in an increase in violence across the country. The fact that the FATF put the country on the grey list, due to the lack of counter money laundering and terrorist financing efforts, is likely to reduce foreign investments in the country. Corrupted political circles saw the COVID-19 pandemic as a lucrative opportunity, creating profiteering schemes and taking advantage of large amounts of foreign aid that poured into the country.[18] The FATF monitoring and profiteering from the Covid-19 is likely to influence subsequent large, cash-based aid decisions. This is likely to negatively affect South Sudan’s economic development and stability.
South Sudan’s current anti-corruption and anti-money-laundering framework are still embryonic, and the countermeasures implemented so far have been of little effect. The country has not yet signed any international conventions against corruption.[19] This lack of international cooperation weakens the country’s path toward political and economic development and displays the little effort put so far to amend structural deficiencies. International pacts such as the 1988 Vienna Convention, the 1999 Terrorist Financing Convention, and the 2000 Palermo Convention constitute a widely recognized benchmark of high financial standards. These formal statutes would likely represent a foundational framework for South Sudan to enhance corruption tracking, anti-money-laundering detection, and ultimately political and financial accountability. Thus, a gradual adaptation to such conventions is recommended. This process is bound to take time, but engagement with the Eastern and South African Anti-Money Laundering Group (ESAAMLG) is likely to speed it up thanks to peer monitoring and mutual assessments.
As of now, international organizations such as the IMF, the World Bank, and the UN sustain most of the country’s debt.[20] However, South Sudan has little accountability for those funds, which are misplaced in a cycle of corruption and mismanagement. Closely working with such organizations, which fuel the country’s economic recovery, would likely ensure the recovery itself is not tainted by corruption. Pending the IMF and World Bank’s approval, a mandatory balanced-budget with appropriately prioritized allocations would constitute a pragmatic recommendation that would aid South Sudan’s path towards financial accountability
This strategy would render the government accountable for its funds, thus inhibiting corruption networks.[21] In addition, the partners might provide more technical assistance (e.g legislative provisions) to sustain the country in adhering to FATF standards. Due to the potential dangers to the smooth functioning of these processes, development partners should set up recurring investigations to stem the flow of the proceeds of corruption out of South Sudan. These investigations work as pressure mechanisms that incite accountability and disrupt spoiler activities.
The commitment to a solid legislative framework must underpin South Sudan’s path of institutional reform. The current anti-corruption and anti-money laundering laws are few and largely flawed due to the compliance loopholes they contain.[22] The existing AML/CTF Act (2012) nudges government or military officials to submit financial declaration forms.[23] However, there is no penalty for failure to comply, indicating the need for mandatory compliance that would put strings on corruption flows because of the enhanced accountability. Increased oversight and transparency around officials’ asset declarations and military procurement processes are likely to reduce corruption and violence. The current Anti-Corruption Commission holds (SSACC) little power to bring any government official to court. This indicates a lack of independent and empowered overarching authorities, which only a brushing up of the legislative and criminal code can amend.
Existing authorities such as the National Audit Chamber, designed to supervise the financial performance of the whole government and reconciling government accounts with the annual budget, fail to deliver tangible results due to the corruption ties at their heads. This calls for the launch of independent audits which are extra-parliamentary. Such a measure would entail amending the Public Financial Management and Accountability Act (2011), in which the election procedure of committee chairs is not specified, thus increasing the likelihood of corruption. Assistance from external experts fosters righteous investigations that better address systemic violence and corruption, and simultaneously dismiss officials with tainted records. Independent audits are also likely to lead the government to regulatory actions and controls. Similarly, general inspectors and ethics units in different branches of the military would likely revisit government chains of commands to free them from military power, thus ensuring the separation of powers.
An additional concern prohibiting accountability in South Sudan is the lack of laws granting public access to government information.[24] This erases any chance of making anyone accountable and tracking any illicit funds coming from corruption. The establishment of an overarching national anti-corruption and money laundering authority, appointed to collect and share data with relevant stakeholders, is vital toward effective financial regulation. This authority would ensure and verify the accuracy of all financial transactions, and ultimately the beneficial collection of information that informs both policymakers and development partners with timely reports. Moreover, the South Sudanese government should set up whistleblower provisions, which foster better transparency while ensuring no retaliation due to the lack of anonymity takes place.
Lastly, to avoid political corruption that feeds off financial instability, authorities should tackle the dual currency exchange system. The current system gives rise to rent-seeking and reduces inflows of foreign exchange into the country because of the unclear regulation around it.[25] Normalization of the foreign exchange market would likely reduce uncertainty around the currency market. Strategies include canceling special benefits to domestic accounts and allowing banks to determine their buying and selling rates. This strategy would take the process out of the hands of corrupt officials and shift it to separate authority of market institutions such as banks.
The Counterterrorism Group (CTG) will continue to monitor developments in South Sudan’s policies within the reports of its development partner’s issue. Specifically, the AFRICOM Team will closely produce reports on any terrorist threat linked to the corruption ties established in the country and the nearby region. The IFET Team will monitor any changes to the FATF reports’ status and follow developments aimed at deterring the financial threats that corruption causes to improve understanding of the frail political and economic situation. The W.A.T.C.H. Officers will report on any Item of Interest/Concern to keep track of the progress of South Sudan’s efforts locally and internationally. The Behavior and Leadership (B/L) will observe and report on the dynamics within government officials to trail any change in leadership's behavior and patterns.
________________________________________________________________________ The Counterterrorism Group (CTG)
[1] “South Sudan” by Gordon Johnson, licensed under Pixabay
[2] Global Dirty Money Watchdog Adds Malts to ‘Grey List,’ Keeps Pakistan, Reuters, June 2021, https://www.reuters.com/business/global-dirty-money-watchdog-adds-malta-grey-list-keeps-pakistan-2021-06-25/
[3] Advisory on Political Corruption Risks in South Sudan, U.S. Department of Treasury Financial Crimes Enforcement Network, September 2017, https://www.fincen.gov/sites/default/files/advisory/2017-09-06/South%20Sudan%20Advisory_09-06-2017_0.pdf
[4] Alert Issued on the Illicit Finance Risks Associated with South Sudan, National Crime Agency UK, March 2020, https://www.nationalcrimeagency.gov.uk/news/alert-issued-on-the-illicit-finance-risks-associated-with-south-sudan
[5]Making a Killing: South Sudanese Military Leaders’ Wealth, Explained, The Sentry, December 2020,https://cdn.thesentry.org/wp-content/uploads/2020/05/MakingAKilling_TheSentry_May2020-u.final2_.pdf.
[6] South Sudan, Know Your Country, June 2021, https://www.knowyourcountry.com/southsudan1111.
[7] Advisory on Political Corruption Risks in South Sudan, U.S. Department of Treasury Financial Crimes Enforcement Network, September 2017, https://www.fincen.gov/sites/default/files/advisory/2017-09-06/South%20Sudan%20Advisory_09-06-2017_0.pdf
[8]Advisory on Political Corruption Risks in South Sudan, U.S. Department of Treasury Financial Crimes Enforcement Network, September 2017, https://www.fincen.gov/sites/default/files/advisory/2017-09-06/South%20Sudan%20Advisory_09-06-2017_0.pdf
[9] South Sudan Government Figures Embezzled $36m: UN Panel, Al-Jazeera, September 2020, https://www.aljazeera.com/news/2020/9/23/south-sudan-government-figures-embezzled-36mn-un-panel
[10] Making a Killing: South Sudanese Military Leaders’ Wealth, Explained, The Sentry, December 2020, https://cdn.thesentry.org/wp-content/uploads/2020/05/MakingAKilling_TheSentry_May2020-u.final2_.pdf.
[11] The Taking of South Sudan, The Sentry, September 2019, https://thesentry.org/reports/taking-south-sudan/
[12] The Taking of South Sudan, The Sentry, September 2019, https://thesentry.org/reports/taking-south-sudan/
[13] Illicit gold markets in East and Southern Africa, Global initiative against transnational organized crime, May 2021, https://globalinitiative.net/analysis/illicit-gold-east-southern-africa/
[14] The Metamorphosis of Ali Khalil Merhi: How a One-Time Fugitive Found Fortune in South Sudan, The Sentry, April 2021, https://thesentry.org/reports/metamorphosisofmerhi/
[15] Why Reduction of Illicit Financial Flows that Fuels South Sudan’s War Economy is in Kenya and Uganda’s Interest, Institute of Economic Affairs, November 2018, https://www.ieakenya.or.ke/publications/bulletins/why-reduction-of-illicit-financial-flows-that-fuels-south-sudana-s-war-economy-is-in-kenya-and-ugandaa-s-interest
[16] Why Reduction of Illicit Financial Flows that Fuels South Sudan’s War Economy is in Kenya and Uganda’s Interest, Institute of Economic Affairs, November 2018, https://www.ieakenya.or.ke/publications/bulletins/why-reduction-of-illicit-financial-flows-that-fuels-south-sudana-s-war-economy-is-in-kenya-and-ugandaa-s-interest
[17] Why Reduction of Illicit Financial Flows that Fuels South Sudan’s War Economy is in Kenya and Uganda’s Interest, Institute of Economic Affairs, November 2018, https://www.ieakenya.or.ke/publications/bulletins/why-reduction-of-illicit-financial-flows-that-fuels-south-sudana-s-war-economy-is-in-kenya-and-ugandaa-s-interest
[18] Corruption claims spark new concerns about aid to South Sudan, Aljazeera, April 2021, https://www.aljazeera.com/news/2021/4/7/corruption-claims-spark-new-concerns-about-aid-to-south-sudan
[19] Multi-Country Report: Building Fiscal Capacity in Fragile States, IMF, June 2017, https://www.imf.org/en/Publications/CR/Issues/2017/06/14/Multi-Country-Report-Building-Fiscal-Capacity-in-Fragile-States-Case-Studies-Press-Release-44982
[20] IMF staff completes visit to South Sudan, IMF, March, 2019, https://www.imf.org/en/News/Articles/2019/03/18/pr1979-south-sudan-imf-staff-completes-visit-to-south-sudan
[21] Making a Killing: South Sudanese Military Leaders’ Wealth, Explained, The Sentry, December 2020, https://cdn.thesentry.org/wp-content/uploads/2020/05/MakingAKilling_TheSentry_May2020-u.final2_.pdf.
[22] The Taking of South Sudan, The Sentry, September 2019, https://thesentry.org/reports/taking-south-sudan/
[23] Anti-Money Laundering and Counter Terrorist Financing Act (2012), World Trade Organization (WTO), 2012, https://www.wto.org/english/thewto_e/acc_e/ssd_e/WTACCSSD6_LEG_3.pdf
[24] The Taking of South Sudan, The Sentry, September 2019, https://thesentry.org/reports/taking-south-sudan/
[25] IMF staff completes visit to South Sudan, IMF, March, 2019, https://www.imf.org/en/News/Articles/2019/03/18/pr1979-south-sudan-imf-staff-completes-visit-to-south-sudan