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Structuring the Capture of the State

The nexus between the constitutional and shadow states depends on the integration of a range of skills similar to those present in most international corporations. The composition of the Zuma-centred power elite is, in many respects, highly organised, following the structure of what, in academic terms, is called a ‘war economy’.¹ In a war economy the ‘shadow state’ establishes a number of informal structures which produce systems of ‘profit, power and protection’² that, in turn, serve to further their operations, making possible continued preferential access to resources and power through an exploitative economic system. The cycle can, therefore, continue.

One of the key requirements in establishing these shadow structures is the ability to secure a system of command and control over the way the resources are accessed, moved and distributed. At the outset, control must be established over the sources of extraction, including the ability to respond flexibly to any changes in the operating environment.³ Once access to the source of extraction is secured, networks of middlemen or brokers must be established that can move resources externally, usually transnationally, to sustain loyalty (this is critical to ensuring the survival of the network). The ability to transact within this network is facilitated by establishing political marketplaces where support is traded through the provision of access to resources.

The skills of this patronage network are localised within a number of groups. The networks consist of three elements: the controllers, the elites and the entrepreneurs (also known as brokers), as shown in Figure 1.1.

The controllers, or patrons, of resources sit at the apex and are usually the strongmen directly responsible for predation and exploitation. Their function is to secure access to and maintain control over resources.⁴ A patron or controller typically favours one group over another (or others), resulting in the exclusion of those who are out of favour. This sets up a competitive set of nodes around the patron or controller, which has the ultimate effect of rendering elites (the next layer down) unable to cooperate effectively as they fear being ousted by their partners, or falling out of favour with the patron. Jacob Zuma and the Guptas have been controllers.

Figure 1.1. Generalised model of a patronage network that extracts and administers rents

The elites are responsible for establishing and maintaining patronage networks, which facilitate the distribution of benefits. In the South African context the elites would be such players as Free State premier Ace Magashule, ministers Faith Muthambi, Malusi Gigaba and Mosebenzi Zwane, Eskom’s Anoj Singh and the ubiquitous Brian Molefe.

The entrepreneurs, who are also known as brokers, are middlemen who facilitate the movement of funds, information and/or goods both domestically and across transnational networks, using ‘recruitment networks, lending networks, remittance transfers and smuggling networks’.⁵ Examples are Transnet’s Iqbal Sharma; Eric Wood, CEO of Gupta company Trillian Partners; Gupta associate Salim Essa, a former partner of Sharma; and Ashok Narayan, former managing director of the Guptas’ Sahara Computers.

Networks of brokers secure domestic and cross-border operations through which resources can be moved to international clearing hubs and enter legitimate trade activities. Brokers are often of a different nationality or ethnicity from the controller or patron – usually a minority group – so that they cannot mount a significant challenge. They have commercial ties to different clusters of communities through which they are able to achieve networked competence, and they have access to ports of entry. Brokers and ports are ‘choke points’ for intervention in patronage networks.⁶ If brokers are identified and their ability to operate is significantly reduced, the patronage network is weakened and may collapse.

Dealers are groups that are able to move the money transnationally (for example, the professional money-laundering syndicates in Hong Kong, the United Arab Emirates and elsewhere).⁷

An essential requirement is to secure and establish cross-border networks to move illicit proceeds into international clearing hubs where they enter the legitimate trade and accrue value to the members of the network.⁸ In many instances the networks use clandestine methods to mask the origins of resources in order to protect their members from external scrutiny.⁹ From an operational perspective, these networks of brokers and dealers must perform a number of functions.

They collude with customs or corrupt officials to create false records pertaining to the types of goods traded, quantities and the identities of parties involved in the transactions.

They provide licences for others to obtain illicit goods in violation of the law.

They launder cash generated from illicit activities in collusion with formal financial institutions in order to establish legitimate business entities that can generate funds.

They use shell companies in order to hide ownership details and move assets offshore (for example, the Gupta entities Homix, Regiments Asia, Morningstar International, and so on).

They exchange one potentially traceable commodity, such as oil or timber, for another less traceable one, in a process also known as trade misinvoicing.

They purchase legitimate goods outside the country with the proceeds of illicit activities, then import the legitimate goods back into the country to generate ‘clean revenues’.¹⁰ The R200 million temple the Guptas are building in India and their R448 million villa in Dubai, reportedly the most expensive house in the United Arab Emirates, may fall into this category.

Ultimately, the key to realising the full potential of control over resources is the ability to strip assets and convert them into monetary resources – typically through money laundering – that can fund the patronage operations.¹¹

The conversion of such assets also requires the existence of an appropriate infrastructure for handling and moving them. Such infrastructure includes banking and ‘alternative remittance systems … import-export firms that participate in false invoicing schemes, precious metal markets, and the use of trusts, international business companies, and non-transparent jurisdictions as mechanisms to hide funds’.¹²

Money-laundering procedures

Money laundering is the process of transforming illicit money into ostensibly legitimate assets. It typically follows a three-stage process: placement, layering and integration. Placement involves moving funds into activities or accounts from which they can be legitimised through layering (blending illegitimate with legitimate funds, recycling them through cash-based operations, moving them into ‘legitimate companies’ or moving them around in complex transactions, and so on). These funds are then integrated back into the revenue stream of the money launderer (often by purchasing property and other goods).

The laundering process usually requires a financial system with lax regulations and controls. Rents are also often distributed in cash and, indeed, this may be preferable in many instances, but there are limits to how beneficiaries can make use of cash in formal transactions because large cash dealings can trigger high-risk alerts with banks. The benefit of cash is that it can be moved overseas, through both formal and informal channels, including the use of diplomatic immunity to traffic large sums of cash across borders (which could raise further questions about the Guptas’ apparently preferential access to the Waterkloof Airforce Base) and the use of informal money exchange networks such as the hawala network, a method of transferring money without any actual movement of cash.

The broker network in action: Transnet and Hong Kong transactional flows

With the patronage network model in mind, the Guptas’ apparent access to lucrative Transnet work and the subsequent movement of related funds, both domestically and transnationally, is instructive.

Controller/patron and elite stages

Zuma appointed Malusi Gigaba as minister of public enterprises in November 2010, about 18 months after he became president.

Brokers established

Gigaba succeeded in moving Gupta brokers into Transnet, thus enabling Gupta-linked entities to benefit from Transnet tender opportunities. Chapter 2 describes the way in which he did this.

Brokers at work: extracting the resources

Locomotives

While he chaired the Transnet Board’s Acquisitions and Disposals Committee, Iqbal Sharma oversaw the adjudication of a R51 billion tender for the purchase of 1 064 locomotives, which was ultimately split among four companies: China North Rail (232 diesel locomotives at R7.8 billion), China South Rail (359 electric locomotives at R14.6 billion), General Electric (233 diesel locomotives at R7.1 billion) and Bombardier (240 electric locomotives at R10.4 billion). Chapter 2 gives details about how the Guptas apparently aggressively represented China South Rail, one of seven bidders then vying to supply the Passenger Rail Agency of South Africa (Prasa) with 600 commuter trains, as documented by former Prasa CEO Lucky Montana.

While, in this instance, they were not successful in their bid to position the rail company, the Chinese company’s success in the Transnet locomotives deal appears to have benefited the Guptas. Information seen by the group of researchers who prepared the Betrayal of the Promise report suggests that the Chinese company, now called China South Locomotive & Rolling Stock Corporation Limited, following a merger with China North Rail, has been paying large sums of money into Gupta-linked entities based in Hong Kong.

Just before the successful bidders for the locomotives tender were announced, Sharma emerged as a buyer of VR Laser Property, which was in a highly advantageous position to benefit from supplying component parts to the successful bidders in the locomotives deal (who were required by state procurement policy to source a large proportion of their components from South African sub-contractors). In addition, the size of the locomotive deal meant that advice was needed about financial arrangements and corporate structures.

As we will explain in Chapter 2, after a series of highly questionable events a Gupta-linked company, Trillian Asset Management, ultimately benefited from this opportunity to the value of at least R170 million.

Information technology

Chapter 2 details how a national multi-billion-rand telecoms company, Neotel, benefited from significant Transnet work, but seemingly only as a result of an obscure Gupta-linked shell company, Homix, which acted as a broker between Neotel and Transnet. In addition, global software giant SAP was strongly encouraged by Transnet to partner with a Gupta entity, Global Softech Solutions, in order to win Transnet work.

Procurement

Liebherr Africa, a German maker of cranes and a supplier of Transnet, was reportedly pressured by Transnet to partner with Burlington Strategy Advisors, which is a subsidiary of Regiments Capital (see Chapter 2) and which also ultimately paid money into Homix.

Brokers at work: moving the resources

In July 2015 amaBhungane presented the first detailed analysis of how the Guptas allegedly laundered the proceeds of their business activities in an operation that centred on Homix.¹³

This pattern displays the three classic money-laundering characteristics of placement, layering and integration described above.

In moving their money transnationally the Guptas appear to have made extensive use of Hong Kong, which is infamous as a money-laundering capital and where, in the 1960s, 1970s and 1980s, money launderers and couriers made a living out of providing access to underground financial services. While regulations have been significantly tightened, professional money-laundering networks remain active in the country.

The Guptas’ movement of their money through Hong Kong is likely to prove to be only a subset of the full extent of their transnational organisation and movement of rents. The Gupta-linked companies that feature most prominently in the Hong Kong movement of money are Regiments Asia Ltd (unrelated to the South African company Regiments), Tequesta Group Ltd and Morningstar International Trade Ltd, which shares a Hong Kong address with three companies in which Salim Essa is listed as the director: Regiments Asia, Tequesta Group and VR Laser Asia (Table 1.1).

Table 1.1. Known outflows from Gupta-linked companies and individuals