Asset forfeiture and unlawful money schemes

Published Date: 05/13/2025
Source: By Paul Crosland, Partner & Jered Shorkend, Candidate Attorney at Webber Wentzel

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South Africa has no shortage of unlawful financial and investment schemes. In recent years, numerous pyramid, Ponzi, multiplication, and other fraudulent and unlawful schemes have appeared in news headlines as the subject of investigations and legal proceedings. In cases such as the collapse of the Crypto Mzansi scheme, these proceedings took the form of asset forfeiture applications, in terms of which the state seized funds from the alleged orchestrators. In other matters, like the now-notorious Mirror Trading International scandal, the processes involved liquidation proceedings in which investors brought claims against the scheme's estate.

 

In this challenging environment, it is necessary for retail investors, businesses, and other finance-related stakeholders to remain vigilant. Where vigilance comes too late, it is important to understand how the law deals with the aftermath of these schemes and how innocent parties can protect their rights and interests.

 

Asset forfeiture

In many jurisdictions, property used in the commission of organised crime, or which constitutes the proceeds of such crime, may be seized by the state through the criminal justice system in a process called asset forfeiture. In South Africa, asset forfeiture is regulated by the Prevention of Organised Crime Act 121 of 1998 (POCA), which was enacted to curb organised crime, money laundering, terrorism financing, and related activities. Asset forfeiture is driven by the Asset Forfeiture Unit (AFU), an office within the National Prosecuting Authority, whose motto is "making crime unprofitable". Generally, asset forfeiture may occur via two avenues:

 

Chapter 6: Forfeiture based on the nature of the property

Property may be preserved and forfeited to the state if it is connected to an offence, regardless of who holds it. This is a two-stage process:

1. The AFU applies for a preservation order, which prevents any party from dealing with the property and allows it to be seized and placed under the temporary control of a curator. A court will grant a preservation order if it is satisfied that the property: (i) is an instrumentality of an offence listed in Schedule 1 of the POCA; (ii) is the proceeds of unlawful activities; or (iii) is associated with terrorist or related activities.
2. Once a preservation order is granted, the AFU may apply for a forfeiture order. If successful, the property is forfeited to the state. If no application for forfeiture is brought within 90 days (subject to limited exceptions), the preservation order lapses.

 

Chapter 5: Forfeiture based on the ownership of property

Property may also be forfeited if it is linked to an alleged offender. Under Chapter 5 of the POCA, property is considered "realisable" if it is: (i) held by the alleged offender; or (ii) held by someone who received the property (directly or indirectly) as a gift from the alleged offender.

 

Three orders may be relevant:

1. Confiscation Order: This may be granted when an offender is convicted and found to have benefited from the offence or a related offence. The order enables the state to recover an amount equivalent to the benefit derived from the offence, i.e. the realisable property.
2. Restraint Order: Similar in effect to a preservation order, this may be granted in two circumstances: (i) where criminal proceedings are underway and a confiscation order has either been made against the alleged offender or there are reasonable grounds to believe it may be made; or (ii) where the court is satisfied that a person is to be charged with an offence and there are reasonable grounds to believe that a confiscation order may be granted.
3. Realisation Order: This requires the curator to realise the property in accordance with the POCA and the court's specific directions. It may be granted once a confiscation order has been made and finalised in the course of criminal proceedings. The proceeds are applied to satisfy the confiscation order, with any remainder distributed in terms of the POCA.

 

In each instance, the POCA provides safeguards to protect innocent parties from arbitrarily losing their property. Such parties may apply to have their interests excluded from the relevant orders, based on the criteria set out in the POCA. For example, debts or damages owed to an innocent party by the alleged offender may be excluded from a confiscation order or taken into account during realisation proceedings to ensure they remain recoverable. Additional provisions address matters such as legal and living expenses of affected parties, the role of insolvency proceedings and deceased estates, and other relevant considerations.

 

Liquidation

Liquidation refers to the winding-up of a company or close corporation (for simplicity, this section refers only to companies). Its purpose is to distribute remaining assets among creditors and shareholders before the company is dissolved. The most common cause for liquidation is insolvency, which may occur when: (i) the company cannot pay its debts as they fall due in the ordinary course of business; or (ii) its liabilities exceed its assets, fairly valued.

 

Liquidation may occur in one of two ways:

1. Voluntary liquidation: A company may elect to commence its own liquidation by way of a shareholders' special resolution. This is known as voluntary liquidation and takes place in terms of the Companies Act 71 of 2008. Voluntary liquidation is only available to solvent companies.
2. Compulsory liquidation: A creditor of the company, or the company itself, may apply to court for an order placing the company into provisional, and subsequently final, liquidation. This is known as compulsory liquidation and occurs in terms of the Companies Act 61 of 1973. Typically, a creditor who has been unable to recover a debt due to the company’s insolvency will initiate this process.

 

In both cases, liquidators are appointed to take control of the company's estate and oversee the winding-up process. Among other duties, liquidators assess the full financial position of the company, provide creditors the opportunity to prove their claims against the company's estate on affidavit, and oversee the fair distribution of assets among qualifying creditors. These creditors form a collective body known as the concursus creditorum, whose rights must be preserved collectively, no individual creditor may benefit at the expense of the others.

 

The liquidator is also responsible for recovering debts owed to the company, which are added to the company's estate for distribution. This is particularly significant in cases of insolvency, as the liquidation process may itself give rise to additional recoverable claims. For example:

• Assets disposed of by the company within two years prior to liquidation for no consideration (i.e. the company received nothing in return) may be recovered and returned to the company's estate. These are known as "dispositions without value".
• Assets transferred to creditors within six months prior to liquidation may also be recovered. These are known as "voidable preferences".

 

These reversible transactions, along with others, set in the Insolvency Act 24 of 1936, serve to protect the concursus creditorum from unjust diminution of the estate or the preferential treatment of specific creditors. Asset forfeiture and liquidation share several similarities. In both cases, property is placed under the temporary care and control of a disinterested custodian, namely, a curator in the case of asset forfeiture and a liquidator in the case of liquidation, until the relevant legal processes determine how the assets should be distributed. The custodian then facilitates the transfer of the property in accordance with that determination.

 

Despite these similarities, the two processes serve fundamentally different purposes. Asset forfeiture is a crime-fighting mechanism employed by the state. Its primary objective is the disgorgement of the instruments or proceeds of organised crime, money laundering, terrorism financing, and related unlawful activities. While victims of unlawful schemes may use the POCA's provisions to try to recover their losses, this is not the POCA's core purpose.

 

Liquidation, by contrast, is a commercial remedy available to shareholders and creditors. It is aimed at the recovery of civil debts and the orderly winding-up of the legal entity concerned.

 

In the context of unlawful schemes, both processes may be relevant and applicable. In either case, the early involvement of suitably qualified and experienced attorneys is critical to ensure the efficient and cost-effective resolution of the matter, and to secure the most favourable outcome.