DRAFT REGULATIONS RELATING TO THE SCRAP AND WASTE METAL TRADE IN SOUTH AFRICA

?While the draft regulations for controlling the trade in scrap metal in South Africa are well-intended, they primarily target legal traders, burdening them with additional compliance requirements. However, they also present opportunities for exploitation by well-resourced criminal syndicates, including international ones. Here is a critical and technical analysis reflecting my opinion on the proposed system's workability and potential pitfalls.

1. Enhanced Registration Requirements

The draft regulations enforce registration for both buyers and sellers of scrap and waste metal, only granting registration to businesses with satisfactory Tax Compliance Status. However, there is no detail on how value-added tax (VAT) issues are to be dealt with.

Potential Loopholes and Complications:

• False Information: Criminals or syndicates may use fraudulent documentation, including fake business identities and tax compliance certificates, to obtain registration.
• Front Companies: Syndicates might establish multiple front companies to circumvent registration requirements and obscure illicit activities.
• Waste Picker Exemption: Waste pickers are exempt from registration, which criminals could exploit to funnel illicitly obtained metals through unregistered individuals. In the case of illegal gold mining, for example, the so-called “Zama zamas” form part of Level 1 in a 5-level criminal pyramid structure.

?

2. Enhanced Reporting Requirements

The introduction of an input-output reporting system mandates monthly electronic reports detailing all transactions, including acquisition and disposal records by volume and value.

Potential Loopholes and Complications:

• Data Manipulation: Reports can be falsified to misrepresent the volume, type, and value of traded metals, making it difficult to detect illegal activities.
• Complex Metal Alloys: Differentiating between the gross and fine mass of metals in alloys is challenging. Policing this without adequate funding and expertise will be daunting. For example, portable XRF machines, often used for field applications, can be erroneous and are costly.
• Intermediary Dealers: Syndicates may use intermediary dealers who submit falsified reports, obscuring the trail of stolen metals.

3. Inclusion of Semi-Finished Metals

The regulations extend the registration regime to include semi-finished metal products, requiring these businesses to be registered.

Potential Loopholes and Complications:

• Misclassification: Metals could be intentionally misclassified as finished or semi-finished products to evade stringent reporting and registration requirements.
• Cross-Border Trade: Semi-finished products can be easily transported across borders, making monitoring and enforcing compliance challenging.

4. Copper-Specific Measures

Registered buyers are required to only purchase copper products from registered sellers, aiming to curb copper theft.

Potential Loopholes and Complications:

• Unregistered Sellers: Despite restrictions, unregistered sellers might continue trading through black markets or by falsifying seller identities.
• Import/Export Loopholes: Copper scrap could be smuggled across borders and misrepresented as imports or exports to evade regulations.

5. Electronic Payment Requirement

Transactions must be conducted via electronic payment to create an audit trail.

Potential Loopholes and Complications:

• Cash Transactions: Despite regulations, cash transactions might still occur off the books, especially in informal markets.
• Shell Companies: Payments might be routed through multiple shell companies to obscure the true source and destination of funds.

6. Record-keeping and Inspections

Dealers and recyclers are required to maintain electronic registers that are accessible for police inspection and retain records for five years.

Potential Loopholes and Complications:

• Incomplete Records: Dealers may intentionally keep incomplete or falsified records to avoid detection.
• Delayed Inspections: Inspections might be infrequent or delayed, giving criminals time to alter or destroy records.

7. Application of the Precious Metals Act

The applicability of the Precious Metals Act (read with the Second-Hand Goods Act’s cross-reference) to secondary or scrap precious metals is pending in court, creating uncertainty.

Potential Loopholes and Complications:

• Legal Grey Areas: Until the court ruling, criminals can exploit a legal grey area to trade precious metals without stringent oversight.
• Regulatory Gaps: Discrepancies between the Precious Metals Act and the Second-Hand Goods Act could be leveraged to bypass regulations.

?

Conclusion

While the proposed regulations enhance the regulation of the scrap metal trade, they face significant challenges due to potential loopholes and the industry's complex nature. Effective implementation requires robust verification processes, frequent inspections, and stringent penalties for non-compliance to deter criminal activities and ensure the system's workability. However, without addressing these potential pitfalls, the regulations may inadvertently burden legal traders while providing opportunities for exploitation by criminal syndicates.

Source: https://legalacademy.co.za/news/read/scrap-metal-input-sought-on-revised-draft-amendments-to-second-hand-goods-regulations