National Gambling Board 3rd quarter 2014/15 report; Forensic Commission Report: Minister and Department of Trade and Industry briefings

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Trade and Industry

13 March 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (dti), with input also from the Minister of Trade and Industry,  briefed the Committee on the situation with the National Gambling Board (NGB), which was created in 2009 under the National Gambling Act to regulate gambling activities in the country, focusing primarily on casinos, betting, limited payout machines and wagering. The NGB was in theory accountable to the Minister and the Department, but it was later explained that because the members of the NGB were on similar levels to the Director General, the accountability had been difficult. The NGB did not issue licences, but was supposed to assist provincial and national authorities in the application and regulation of the licence issuing process, and to interact at international level to try to regulate the various forms of gambling more effectively. As a result of reports of irregularities, the Auditor-General conducted a forensic investigation during July 2014, which revealed several breaches of the Public Finance Management Act (PFMA), failure to prevent unauthorised expenditure by the Board Members, irregular expenditure of R3.6 million and fruitless and wasteful expenditure of R66 000. The NGB had instructed law firms in breach of its Act, former Board members were continuing with their appointments although their appointments had expired, and perhaps the most serious finding was that trust accounts had been opened without seeking the necessary approval from the Minister of Finance, which generated illegal winnings that were not declared nor forfeited to the state. The trustees had since been de-registered, the accounts closed and processes initiated to forfeit these illegal winnings back to the state. The Board failed to exercise adequate oversight over spending, its cash flow was poor, and accounts overdrawn on five occasions. It had formed a new sub-committee, which held far more meetings than budgeted for, resulting in overspending, with large fee increases paid to board members, and no proper minutes were kept. Finally, the NGB had entered into a lease of premises more than twice as large as its needs, with a ten year commitment and a doubling of costs over those years. The whole Board had been dismissed and was now being administered by two co-Administrators. The final report recommendations were awaited, which would highlight actions recommended against individuals, but in the meantime the Minister noted that the NGB was to be repositioned and restructured, becoming a gambling regulator similar to the Liquor Licensing Board, with greater research competence and the capacity to act against illegal gambling, as well as achieving better coordination between national and provincial governments to create effective norms and standards.

Gambling revenue in South Africa was R17.9 million, spread, respectively across casinos, betting (primarily horse racing), limited payout machines and bingo. Gauteng dominated the market, with a 42.7% share of the national gambling revenue, followed by KwaZulu-Natal and Western Cape. Gambling had risen in the two years preceding the study, but had dropped last year. The Department needed to make choices on its policy on gambling. Casinos were, for a number of reasons outlined, most beneficial from a social and economic stance, but the mushrooming of bingo, now available in supermarkets, was seen as problematic. Since the dti was aware that it could not control all illegal activities it was focusing on better targeting irregular activities and enhancing effectiveness of policies. This was coupled with the need to tighten up controls and sanctions on money laundering, which would seemingly rely to a great extent on gambling. The dti's new policy, soon to be released, would limit bingo licences, and improve horse racing supervision.

Members were very concerned about the findings of the NGB, stressed the importance of further involving dti in the Board’s processes and initiatives, asked if legal actions would be taken against officials and Board members found cheating, and asked how such poor levels of governance had gone undetected and unchecked. Some Members were in favour of, but others did not agree with the stance on online gambling, from a pragmatic perspective, but did agree with greater regulation and tighter control of bingo machines. They suggested the need to boost capacity, agreed with the decision to suspend the NGB, suggested the need for closer cooperation with the National Treasury, and suggested that any future members appointed to the Board must sign undertakings not to personally take part in gambling. It was noted that a reform proposal would be issued in the following month. Members asked for copies of the lease.

The third quarter report for 2014/15, for the NGB, was then presented by the co-administrators of the NGB. They summarised the challenges in prosecuting online gambling, noted enhanced cooperation with the National Lotteries Board, but the proliferation of unlicensed internet cafés, hubs of irregular online gambling. Vacant posts had hindered effective working of the Board, which needed to recruit multi-skilled and professional staff. On the positive side, the underspending apparent in the second quarter, which the dti had highlighted and tried to address, was now being corrected and the NGB was likely to achieve a project surplus. The dti highlighted its work on the issue and noted that a full report had been sent to the Committee. The irregular contracts had been cancelled. A new National Central Electronic Monitoring System should bring operational changes and greater effectiveness. There was work being done to improve communication with the dti. 69% of annual targets were achieved. The Board's proposed new model was described.  Members asked for an explanation of the data and how the figures were reached, and hoped the matters would be resolved by year-end.

Meeting report

Forensic Reports commissioned on National Gambling Board: Minister of Trade and Industry briefing
The Chairperson acknowledged the relatively poor attendance of Members of the Committee, but noted that many were constrained by party obligations, such as Mr F Shivambu (EFF).

She welcomed the Minister of Trade and Industry, Dr Rob Davies, to the meeting, and the delegation from the Department of Trade and Industry (dti or the Department).

Dr Rob Davies reminded Members that as a result of allegations of serious shortcomings in the National Gambling Board (NGB or the Board) a forensic investigation had been commissioned. He contextualised the role of NGB, as accountable to the Department and to himself. However, he explained that the issuing of gambling licenses was taking place at a provincial level of government. The NGB’s role was to assist provincial and national authorities in the application and regulation of the process, with a potential additional objective, in the long run, of interacting with foreign authorities in the regulation of the gambling phenomenon, which was addressed across casinos, racing, betting and wagering. 

The forensic investigation was undertaken by the Auditor-General (AG) during July 2014, and the interim report revealed several breaches of the Public Finance Management Act (PFMA), such as failure to prevent unauthorised expenditure by the Board Members. The final report was expected by the end of last year, and the document now presented to the Committee was a provisional one, which additionally stipulated its focus on general irregularities rather than specific allegations against individuals.

Dr Davies  described some of the findings that followed allegations directed to the NGB. In an overarching statement, the AG noted that R3 610 263 was  found to have been allocated to irregular expenditures, while R66 000 were allocated to fruitless and wasteful disbursements.

Amongst these abnormal expenditures, R2 211 600 was spent by the NGB on the appointment of a law firm, in non-compliance with section 217 of the Constitution and Section 68 of the National Gambling Act (the Act). Another unapproved appointment of a law firm resulted in an additional irregular expenditure of R435 229, amongst other anomalous spending.

The Minister then described what action had been taken as a response to these findings, stressing that the fraudulent contracts had been cancelled, and that internal monitoring had been put in place.

Additionally, former Board Members were found to be continuing their service beyond the expiry dates of their contracts, in contravention of Section 67 of the Act, leading once again to irregular expenditure. The findings on trust accounts, which had been opened without seeking the necessary approval from the Minister of Finance, also corresponded to supplementary abnormal expenses. The latter generated illegal winnings, which were not declared nor forfeited to the state.  The trustees had since been de-registered, the accounts closed and a process had been initiated to forfeit these illegal winnings back to the state. 

NGB failed to exercise adequate oversight and to control the cash flow process. Its accounts had been overdrawn on five occasions, with a highest withdrawal  estimated at R125 268. Dr Davies reported that in response, there had been a re-prioritisation of the budget allocation, and the approval of a new financial scheme.

The Minister further stated that the NGB had formed a new sub committee, under the name of National Central Electronic Monitoring System (NCEMS). The management of the process was soon displayed as seriously flawed, since there were no recordings or minutes for the majority of NCEMS Committee meetings. Unwarranted increases were seen in the holding of these meetings, resulting in large fee increments by certain Board Members, ranging from 21% to 58%. This was followed by a ministerial intervention, reducing the administrative regulatory burden, while further recommendations were still awaited.

Dr Davies then addressed the issue around the NGB office and its lease. The Committee, which requires 714 square metres for its effective functioning, had leased a building of 1 800 square metres, leading to a gross under-use. In addition, the lease signed by the NGB required a 10-year commitment, and it had consented to an almost 100% increase in its cost. The building was today unoccupied, for the whole Board had been dismissed. This situation once again led to irregular over expenditure, and the Department was awaiting further recommendations on the action to be taken in respect of this mismanagement.

Dr Davies said that all these issues showed that the NGB had poor governance, "riddled with irregularities and financial issues". These forensic findings had highlighted serious weaknesses, although they purposely omitted targeting specific individuals. There were some positives, for the NGB had more accurately fulfilled one of its primary functions, knowing its capacity for research and analysis.

Following these findings, the Minister proposed the repositioning of the NGB. He noted again the ambiguity in its functioning, saying that the Board itself did not issue the gambling licenses, for this function was fulfilled by provincial levels of government. He stressed the need for the Board to become a National Gambling Regulator, using an analogy with the Liquor Licensing Board. Such shift in the structure, acting within the framework set up to deal with the gambling phenomenon, should enhance research competence and the capacity to act against illegal gambling. This change was also useful in order to emphasise coordination between national and provincial governments, in establishing effective norms and standards. This decision would follow on the Department of Trade and Industry’s initiative to remove the previous Board.

Dr Davies then addressed the strategic focus of the NGB, using the previous years’ data. He stated that the gross gambling revenue in South Africa was R17.9 million, which could be divided into four main categories, namely:
- casinos, generating R12.9 million
- betting (which related primarily to horse races) with a revenue of R2.6 million
- limited payout machines (LPM) engendering R1.5 million
- bingo with a revenue of about R800 000 a year.

Geographically, Gauteng was dominating the market, with a 42.7% share of the national gambling revenue, followed by KwaZulu-Natal and Western Cape with, respectively, shares of 18.5% and 15.5%. He noted that the propensity to gamble in South Africa, which had been on the rise in the two years that preceded the study, had dropped last year.

Dr Davies summarised the substantive conclusions and recommendations on the policy path that the Department should follow. He stated that the dti needed to make important choices on which modes of gambling were the most beneficial to society. In this regard, reminding the Committee of his non-biased and objective background, he argued that casinos appeared the most beneficial of the existing gambling channels. Indeed, this growing sector seemed to bear highly positive externalities, by its investments in fixed sites, its influence on the tourism and hotels industry, its capacity to organise cultural events, and its strong ability to create employment, through the construction as well as the actual operation of casinos. The Minister was aware that the casino sector faced many challenges, but also praised its positive outcomes at a social and economic level.

Additionally, he mentioned the importance of horses races, linked to horse breeding, and indirectly agriculture, albeit on a relatively small scale.

He assessed online gambling as a much poorer sector in terms of societal externalities. He described the small interest of the sector in terms of job creation, which in most cases used systems relying on information and communication technologies located off-shore.

Dr Davies stressed that his Department was not robust enough to wipe out all illegal activities. Thus, it would be necessary to draw a line somewhere, in order to better target irregular activities and enhance effectiveness of policies. He mentioned the lack of benefit from online casinos, as well as from electronic bingo. Because it was already so difficult for current illegal operations to be regulated, he said that it was unlikely that any new forms of gambling would be licensed in the country. He reminded the Committee and the public that there was no recourse in cases of individuals being scammed and tricked through illegal online gambling, and thereof no possibility of legal support. Furthermore, any wining at an illegal game would not be available, for payment would be prevented by the competent authorities.

In the light of this strict pattern of regulation, Mr Davies stated the need to tighten up controls and sanctions on “money laundering”, which would seemingly rely to a great extent on gambling.

Additionally, he insisted on the need to limit bingo licenses, which were currently spreading across the country, in shopping centres for instance, enhancing the availability of gambling to the general public, which posed risks for individuals, including addiction, mismanagement of household’s budget and irresponsible behaviour, among others. He also mentioned the need to improve horse racing supervision.

The Minister finally stated that the new policy would hopefully be published by the end of the month, and would still be driven by an objective of achieving no irregularities in the gambling sector, while reaching effective oversight in the future.

Mr D Macpherson (DA) acknowledged the hard work undertaken by the Department. He was extremely concerned at the report that Board members of the NGB were actually gambling with  taxpayer money. He stressed the importance of further involving dti in the Board’s processes and initiatives, and cited also his concern about the lease agreement, signed at a much higher price than the normal market rate.

Mr Macpherson, in respect of the forensic investigation and its consequences, asked if legal actions would be taken against officials and Board members who had been found cheating. He asked whether the money would be recovered. Finally, he asked how such a poor level of governance was able to go unchecked for such a long period of time.

Mr Macpherson noted his disagreement with the Department's stance on online gambling, on the basis that the structures to practise online gambling from South Africa were already in place, and that this illegal gambling was occurring anyway. He noted that bingo machines, regardless of their ambiguous regulatory norms, were already in place in many shopping centres, and suggested that they should be more regularised, and that further spreading of bingo availability should be under much tighter control. 

The Chairperson asked that other Members keep their questions and comment short.

Mr N Koornhof (ANC) indicated his support for the Department’s work. He asked for details on the legal firms mentioned in the report. He also stressed the importance of a greater, but cost-effective capacity for the new regulatory institution that would be developed.

Mr A Williams (ANC) firmly agreed with Dr Davies' stance on the great need to regulate online gambling. He described how it was linked to a system of banking credit and a negative cycle at individual levels, bearing consequences for many households.

Mr B Mkongi (ANC) welcomed the Minister’s report and proposed measures. He agreed with the emphasis that had been placed by the dti on gambling that effectively created jobs for the local communities. Additionally he agreed on the serious issue raised by bingo, quipping that even many MPs could become addicted to gambling, but said that the extent of the phenomenon was serious, particularly when so many underprivileged people were also being addicted to this practice. The Members had a duty to protect the vulnerable from scams and addictions.

Ms P Mantashe (ANC) agreed with her colleagues on the general trend of the reform. She also, on another point, asked that the Chairperson ensure that Members did not interrupt each other.

The Chairperson welcomed the Minister’s initiative to suspend the National Gambling Board, which had been formed by legislation in 2009. She also agreed with the Department's stance on restricting  online gambling, and stated that many “first world countries” did ban online gambling. She then suggested that the Department could analyse and research details about the actual processes and how other states enforced this suggesting also the benefit of closer cooperation with the National Treasury.

The Chairperson emphasised the need for the dti to ensure the integrity of the new Board members who would replace the former NGB. She suggested that each one should sign an undertaking proving that they did not take part in gambling in their personal life. This document should contain a clause to note that serious sanctions would be taken should the member fail to abide.

The Minister answered that he could not make any comment on individual cases in respect of the NGB's various irregularities. Final recommendations were still to be followed, but the Department would not shield any Board member found to have been involved in illegal activities. Dr Davies then stressed that his personal role remained at the policy design level, with a strategic focus on new measures, but he was concerned about the weakness of the enforcement and implementation of these policies. He re-affirmed that the Department does not hesitate to act and take serious measures when whistle-blowers indicated any form of irregularities or any case of irregular governance by the Board.

Mr S Thomo, Advisor, Department of Trade and Industry, addressed the major issue linked to the office leased by the NGB, agreeing that far too much space was rented for the Board's accommodation. The complex path in addressing the problem had attracted high levels of criticism from the media and the judiciary. He then focused on the bingo's current spreading in commercial areas, stressing the need to roll back this trend. He also mentioned the need to be careful with regard to the casino industry, often correlated with peripheral industries of a far poorer social outcome, including pornographic retail outlets, which he had seen for himself. He noted the proliferation of internet cafés in urban areas, and cautioned that many appeared to work as a hub for irregular online gambling, particularly affecting low income individuals.

The Chairperson noted the numerous comments about online gambling and stressed the need to limit it as much as possible. In this regard she mentioned that Singapore had just banned online gambling, while China also had a policy to constantly close down illegal gambling websites. Addiction to gambling was also compared to alcohol dependence. She reminded the Committee that neither this Committee, nor the NCOP Select Committee, should be prey to lobbying by any private party, and all Members should still be striving to improve society through regulation of gambling in the country.

Mr Lionel October, Director General, Department of Trade and Industry, further addressed the case of NGB shortcomings. He stressed that the Department should revise its governance model, for the National Gambling Board members had been, up until now, of an equal status to dti officials, hence preventing the Board from falling effectively under the Department’s control and audit. In the light of this deficiency, he emphasised the need to develop a clean and consistent audit mechanism to supervise the Board’s action in the future.

Mr October stressed that the dti had not been involved in the incorrect signing of the NGB’s building lease, and he suggested that a copy of the lease and the report assessing its nature should be made available to every MP requiring it. He furthermore stated that a proposal for reform would be submitted within the next month.

Mr Macpherson challenged Mr October's assertion, saying that the document stated that the lease was signed under dti authority, and asked why the dti officials were not also targeted in the forensic investigating process. He agreed on the importance of the proposal for reform as a core to the Board’s new structure.

Mr October stated that no dti official had been mentioned for review at the moment. The Board itself was considered as the independent accountable authority.

Mr Koornhof asked that the Department should provide a copy of the lease to all Members, to give them a clearer understanding of the situation.

The Chairperson summarised that the Committee needed to be more rigorous in the future. She argued that electronic bingos remained a core issue that should be targeted by the new Board, appointed by the dti.

The Minister concluded by emphasising the need to follow up and address corruption continuously.

National Gambling Board: Third quarter financial and non-financial performance 2014/15  
The Chairperson noted that the NGB's 3rd quarter report was to be presented under the supervision of Ms Zodwa Ntuli, Deputy Director General: Corporate and Consumer Affairs, dti.

Ms Caroline Kongwa, Co-Administrator, NGB, began the presentation by describing the major challenge that the organisation faced in its attempt to prosecute online gambling. In the light of this issue, the Board had enhanced cooperation with the National Lotteries Board (NLB) and reached key agreements. Additionally, she noted that NGB had gathered national statistics which could sustain policy design in addressing gambling in the country.

The Board had faced other core challenges, particularly linked to the proliferation of unlicensed internet cafés, hubs of irregular online gambling. It also struggled to collect statistics on illegal gambling, due to the much unregulated and secretive nature of the phenomenon. Finally, the number of vacant posts within the NGB kept hindering its effective operations.

Ms Kongwa mentioned some potential solutions, which included the creation of a self-funding model, which would ensure adequate and sustainable financial resources. She also praised the acceptance of the need to ensure detection of illegal gambling, through a greater capacitation of the organisation. Moreover, a fast tracking of the legislative reform, and greater empowerment of all licensing bodies would improve the policy implementation process. She finally emphasised the need for recruiting multi-skilled and professional staff.

Ms Kongwa noted that the NGB achieved a project surplus of R1.8 million, a case of where there had been effective financial performance. She also noted the cancellation of the irregular contracts that had been highlighted by the forensic investigation.

She described the involvement of the new National Central Electronic Monitoring System (NCEMS) in the Board’s structure, which ought to bring operational change to the committee meetings and enhance its effectiveness. She noted the suggestion by Members that part of the reason for failure of the NGB seemed to be the lack of effective communication with the dti as a whole. Hence, Ms Kongwa stressed that in the third quarter there had been attempts to improve the relationship with the dti, including the participation of the Board in shareholder forums.

Ms Kongwa highlighted the rising of every category of expenditure in this financial year, and noted that indeed the Board Members' personal costs had peaked as a primary expense.

In conclusion, Ms Kongwa argued that 69% of the annual performance targets had been achieved to date in the financial year, and the financial situation of the institution was now achieving stability, with a surplus projected for the end of the financial year. The Broad Based Black Economic Empowerment (BBBEE) levels in the industry ranged between 2-3 and 1-5.

Mr Williams said that he was unable to understand some of the figures in the presentation, particularly the report on the post audit implementation plan. It was not clear how the data had been used, and there appeared to be very vague criteria.

Mr Tumelo Baleni Co-Administrator, NGB, detailed how, during the external audit, the entity had developed a certain audit response matrix, on 97 findings. These were set out in more detail on page 35 of the report. The response matrix created indicated certain key processes and objectives of the Board, designed subsequently to the audit, and assessed the status on these by showing whether the task was completed, in progress or had not started yet, as well as the proportionate achievements.

Ms Kongwa added that the detailed report was available on the dti's website.

Ms Zodwa Ntuli, Deputy Director General, dti, expanded on the dti's role in the process. She had seen the quarter's report, looking at results also from the rest of the financial year. She had identified certain major concerns already in the second quarter. She had attempted to question the Board committee on this at the time, but the committee claimed to be too busy at that time to answer her questions. However, the high overspending which had occurred in the second quarter, was adjusted later on in the year. Ms Ntuli also emphasised the importance of bingo as a major issue that should be targeted. Moreover, she described the great need for the NGB to hire more staff and receive greater funding. In this regard, she underlined certain interrogation around the self-funding potential model, described earlier. She referred to a report that had been forwarded to the Chairperson.

The Chairperson notified the Committee that  she had had problems in accessing the report from her computer, which was causing problems, and apologised to the Committee that she had thus not been able to make it available.

Mr Baleni added to the comment on the overspending in the second quarter. He described the trend at the NGB of scheduling far more meetings than were initially planned and budgeted for, and said that since each involved additional costs, the budget had been over-stretched.

Ms Kongwa also described how vacancies in the office impacted on the budget of the Board, highlighting the need to advertise vacant positions in the future. She also mentioned that the prospect of a self-funding model would take place in coordination with NCEMS, and would aim for the improvement of NGB’s revenue.

Mr Baleni stated that the NGB could potentially collect 6% of the gross gambling revenue in the country. Such collection of revenue would be at the core of the self-funding project suggested by the NGB.

Mr Macpherson expressed his full support to both Mr Baleni and Ms Kongwa. He then asked whether the 6% mentioned by Mr Baleni, under a self-funding model, corresponded to a certain share of contracts with gambling organisations or if it was part of a broader opportunity. He stressed the importance of including these considerations on self-funding and the new budgeting of the Board at the core of the proposal which was being re-drafted at the moment. He then asked which direction the re-drafting was taking at the moment.

The Chairperson reminded the Committee that the former Board had been suspended in September 2014, following their irregular activities, and therefore asked what the status of the functional Board was today.

Ms Kongwa responded to the questions on the self-funding model, stating that 6% of the actual gross revenue could be collected. However, the legislation does not currently provide for the direct collection of revenue by the Board and greater cooperation should therefore be established with provincial governments, which operated as "tax collectors". Ms Kongwa referred in this regard to Section 27 of the NCEMS Act.

The Chairperson stated that the forensic report went a long way, and that steps were taken to address over expenditure and deficits. She described the current position as one of transition for the regulation of gambling. It was hoped that these matters would be resolved by the end of the year.

The meeting was adjourned.


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