Geordin Hill-Lewis, the leader of the DA, brushes off suggestions that the standoff between the party’s finance chief, Mark Burke, and the Reserve Bank has tarnished the DA’s “good governance” proposition.
“I think our opponents will obviously try to drive that narrative, but hopefully enough people will see what is actually true: this is not public money, this is not malfeasance. This is a company in a dispute with its regulator about the interpretation of exchange control regulations,” he told the FM this week.
Still, this illustrates the two distinct problems that Burke faces: first, a legal challenge over whether the company he founded, Kastelo, broke the laws around how money can be transmitted out of the country, and second, a political problem rooted in the very same allegations.
Legally, Kastelo may yet be cleared of these claims in the Bank’s investigation. But politically, the stain of a lawmaker being implicated in an arguably illegal business could be harder to shake.
Let’s start with the politics, where the timing for the DA is awkward.
Here is a party on the eve of an election that built its brand on a promise of clean governance, now scrambling to defend its finance spokesperson in a messy row over whether Kastelo illicitly shunted R4bn offshore.
It’s a scandal you’d more readily associate with the ANC. And, perhaps because of the novelty of the situation, the DA froze in the headlights.
On Wednesday, DA federal council chair Ashor Sarupen declined to take any action against Burke. The very next day, the party did a U-turn, as Burke quit all his parliamentary positions.
“The DA perhaps realised that its initial full-throated defence of Mark was misguided, which accounted for its U-turn,” says Ghaleb Cachalia, a former DA MP who has since left the party. “But he hasn’t been found guilty of anything and the Bank investigation will take months, so the party may leave it at this while the focus is on local issues.”
Still, several DA insiders have told the FM this ordeal has rattled the party.
“There’s a huge sensitivity towards the fact that the DA’s brand is good governance and this is how it appeals to donors,” says one former DA official. “The ANC has a step-aside rule and the DA can hardly afford to do less than that.”
That Burke resigned as an executive director of Kastelo in 2024 and as its chair in February almost seems a technicality. Likewise, his explanation that he had disclosed this case to the DA and had recused himself from every parliamentary committee that discussed the Bank.
Hill-Lewis says he has heard no grumbling from donors. “When presented with the facts, the DA acted properly to ensure there is no conflict of interest. We can’t really do more than that right now,” he says.
But a DA insider says this is complicated by the proximity of the election.
One person close to Burke says: “The top leadership understands that there is no guilty finding and that the Bank is only investigating a suspicion. But perception is another matter — it’s possible to be legally right and politically wrong.”
Burke’s continued presence is just about tenable. But if this continues to drag out, or more awkward evidence emerges, the collateral damage may prompt the DA to take more decisive action.
‘Renting’ allowances
Now to the legal question, where much hinges on the facts.
Last month the Joburg high court ruled that the Bank “had reasonable grounds to suspect that Kastelo had contravened exchange control regulations” and that it was justified in freezing R13m in its accounts last November.
So what did Kastelo do, exactly?
Essentially, it offered clients the opportunity to benefit from the difference in price of cryptocurrency in other countries and South Africa. For instance, in South Africa one bitcoin costs R1.27m, but it’s just R1.23m in the US.
It works like this: Kastelo’s clients would use their foreign exchange allowances to buy dollars, say, which are then deposited into an overseas bank account. This money is used to buy cryptocurrency in that country, which is then transferred back to a South African exchange and sold at a premium.
The cash is transferred out the country in one of two ways: either through the single discretionary allowance, which lets people take out up to R2m per year, or via a foreign investment allowance, which allows people to take out up to R10m.
Ultimately, clients can make about 1% profit on the trade — not huge, but it adds up. Now, this is bog-standard financial arbitrage, which has been a feature of global markets for years.
“Companies that have worked in the crypto arbitrage space for years are legitimate actors who have often been careful to take legal and tax advice,” says Bridge Capital partner Steven Boykey Sidley. “The reporting about Kastelo has been mostly nonsense and I am pretty sure that should this go to court, it will be thrown out immediately.”
In all, 891 Kastelo clients used R891m in single discretionary allowances and R8.9bn in foreign investment allowances.
But the Bank has accused Kastelo of doing far more than simple arbitrage.
Andre Malherbe, an official in the institution’s financial surveillance department, accused Kastelo of “renting” clients’ foreign investment allowances to make a profit for itself.
Malherbe said in an affidavit that Kastelo “loaned its own funds to individuals to enable them to utilise their single discretionary allowances and foreign investment allowance, which constitutes a simulated transaction designed to circumvent exchange controls”.
Malherbe said clients were allegedly induced to do this through “bonuses” offered by Kastelo.
He argued to the court that the clients “did not understand the implications [and] were unaware that foreign bank accounts were opened in their names”.
He relied on a suspicious transaction report from Kastelo’s foreign exchange dealer, Access Bank, which said Burke’s company had, at times, loaned up to R249,000 to clients who earned only R15,000 per month.
Kastelo denies all of this. Its trading model is “lawful in structure and implementation”, while no funds are “concealed, dissipated or spirited away”, it says.
And the Bank’s decision to block funds was done “on the strength of untested, incorrect and biased allegations and an echo-chamber engagement with a small number of Kastelo’s clients”.
‘Influencer marketing'
Scepticism about Kastelo had been swirling for months, however.
One whistleblower who contacted the FM months ago said the problem was that Kastelo lends money to consumers and monetises their exchange allowances, while those funds are ultimately only ever controlled by Kastelo.
“This indicates a use of personal allowances as a rentable conduit for cross-border crypto/forex purchases financed by credit provided by the same operator, not the client’s own capital,” the whistleblower said. “The profit predominantly accrues to [Kastelo] under service fees, and the client is only paid a bonus."
Kastelo’s marketing was aggressive, including advertising on Facebook and relying on social media “influencers” to win clients.
As one advert put it: “As a South African over the age of 18, you have an annual foreign investment allowance. Many people are unaware of this and miss the opportunity to make a profit.”
Another advert said many clients “sign up to use their single discretionary allowance (SDA) for the Kastelo bonus”. It added: “As the markets are favourable, we’ll trade for you, and you can earn a total of R2,000 with the Kastelo bonus.”
Kastelo argues, however, that it is “incorrect” to claim clients are unaware of what’s happening. Equally, it is wrong to claim “that the clients do not participate on their own account and risk”, it says.
Ultimately, this question of fact will be settled by the Bank’s investigation, but that could take up to three years. This would reduce Kastelo to a zombie company and potentially neuter Burke’s political career.
Burke himself described the furore as a “witch-hunt” aimed at nullifying his efforts to hold the ANC accountable for meddling at the Public Investment Corporation. “The ANC will not succeed in this smear campaign,” he said. “They know, of course, that they have actually stolen public funds repeatedly.”
Politically, Cachalia says, this could yet damage the DA’s fundraising efforts, since Burke remains the DA’s finance chair.
“The large donors to the DA are unlikely to worry too much, but the smaller donors — the guys donating R40,000 or so, of which there are many — will quite rightly ask questions,” he says.
Nonetheless, this ordeal isn’t likely to hurt the DA in the election.
“People are worried about potholes now, so this isn’t likely to feature,” says Cachalia. “Of course, it may have a lingering tarnish on the party, because the DA holds itself to a higher order, so it has to be absolutely firm on this perception.”
