The South African Revenue Service (SARS) briefed the Committee on the Sikhakhane report and said that the report was preliminary in nature. It sought to highlight challenges that had been in the public domain about allegations of the existence of a “rogue unit” within SARS, amongst others.
The Memorandum of Understanding (MOU) between SARS and National Intelligence had sought to create a unit with the aim of combating illicit trade and protecting the economy. The unit was to reside within the National Research Group (NRG) in order to comply with the Constitution, and relevant taxation and intelligence legislation. The Sikhakhane report also aimed to investigate allegations of corrupt practices, any possible breach of the policies and processes of SARS, and any general acts of impropriety.
The findings of the Sikhakhane report showed that the establishment, existence and operations of the NRG or a high-risk investigation unit were unlawful and without the requisite statutory authority, and the unit had been operating in a covert manner that had created a climate of fear within the organisation. There was prima facie evidence that the unit may have abused its power by engaging in activities that resided in other agencies of government and which it had no lawful authority to perform, and had damaged the reputation of SARS as an organ of state.
The Sikhakhane report had recommended that the organisation should put in place processes to ensure that the unit was disbanded and the people involved in the unit were debriefed and protected from intimidation. It was incumbent upon SARS to put in place a number of processes to investigate and reverse incidences of malpractice within the organisation. SARS had brought in KPMG to work together with senior council to conduct forensic and legal evidence analysis, and the KPMG report was expected to be completed by June 2015.
Members wanted to know the person who had authorised the establishment of the unit, the funding model that had been used to fund the unit and the liabilities that it had incurred. What were the main reasons for the recent mass exodus of the senior officials at SARS? One Member strongly believed there was a need for the establishment of the Judicial Commission of Inquiry in order to get to the bottom of the problem. Members expressed concern about the current fractious environment at SARS, as this was likely to impact on the reputation and social contract of the organisation. Why had the unit never appeared in the financial statements of SARS?
There had been allegations that the resignation of the head of anti-corruption and security at SARS was as a result of a failure to deliver a car on time to the SARS Commissioner. What was the cost involved in the employing KPMG and Bain & Company as consultants? What had been done to protect the integrity of the SARS? Were there any individuals within the organisation that had been purged? The demographic representation of SARS was also highlighted, as only 6% of the auditors within the organisation were Africans and 23% were women. The resignations of competent people in the Information Technology (IT) section were particularly troubling, as this was an important platform for SARS.
The Committee was also briefed by the Tier II Debtholder Committee on the Banks Amendment Bill B-17-2014, and it was highlighted that Tier II debt was a meaningful and important source of bank funding and capital. Tier II debt was held by institutional asset managers on behalf of clients, mostly pension funds. Total Tier II debt issuance was expected to exceed R90 billion within the next five years. Curatorship was an alternative to liquidation, as it was aimed at restoring a bank to solvency. Curatorship proceeded in the expectation that all debts and obligations would eventually be discharged, and that the bank would be restored to a successful concern.
The Banks Amendment Bill B-17-2014 was contested, as it presented challenges in a number of areas and sections of the Bill were liable to challenge if the Bill was enacted and the current “Good Bank” proposal was implemented, Section 69(2C) and section 69(3) (j) and section 69(2C) introduced three new changes. First, it removed the requirement that curatorship had to be directed at restoring the bank. Second, the curator and the Minister would be allowed to consider whether creditors were treated equitably or at least no worse off than they would be in liquidation. Third, even if the proposal treated creditors inequitably or worse off than in liquidation, it may still be allowed if the Minister decided that that was in the best interests of the stability of, or confidence in, the banking sector. Splitting the “good” bank and the “bad” bank meant the good bank would be paying tax to the fiscus that would otherwise not have arisen, had the profit on the good assets been earned in the bad bank. Therefore the South African tax-payer would gain a tax asset of R5 billion to R7 billion through the curatorship and restructuring of African Bank.
A Member raised the question on how the trustees would be placed in the equation, as they appointed asset managers to become the ones who made the choice about investment, guided by the pension funds. The country needed to be careful about decisions that were being taken in the banking sector because of the fear of downgrading by the rating agencies.
It was agreed that the Parliamentary Legal Advisor would be given seven days to compile a report on the constitutionality of certain clauses in the Bill, and would then circulate it to the Members. The Committee would then bring together the interested parties during the constituency period under the leadership of a sub-committee to thoroughly process all the issues raised about the Bill.
Chairperson’s opening remarks
The Chairperson welcomed everyone to the meeting and indicated that the purpose of the meeting was to get briefings from the South African Revenue Service (SARS) on the Sikhakhane report, and then from the Tier II Debtholder Committee on their submission on the Banks Amendment Bill. The Committee would also continue briefly with its deliberation with SARS on their strategic plan and Annual Performance Plan (APP).
Briefing by SARS on Sikhakhane report
Mr Thomas Moyane, Commissioner, SARS, indicated that the Sikhakhane report was preliminary in nature and it sought to highlight challenges that were in the public domain, which referred to allegations of an existence of a “rogue unit,” amongst others. The Memorandum of Understanding (MOU) between SARS and National Intelligence had sought to create the unit with the aim of combating illicit trade and protecting the economy. The unit was to reside within the National Research Group (NRG) in order to comply with the Constitution and relevant taxation and intelligence legislation. It was important to highlight that this MOU between SARS and National Intelligence was never formalised. A number of findings had prompted the appointment of the Sikhakhane panel of investigation as per the SARS Act, and this had happened in August 2014.
Mr Moyane said that the Sikhakhane report sought to investigate the allegations of corrupt practices, any possible breach of the policies and processes of SARS and any general act of impropriety. The findings of the Sikhakhane report showed that the establishment, existence and operations of the NRG, or a high-risk investigation unit, were unlawful and without the requisite statutory authority. The unit had been operated ostensibly in a covert manner and had created a climate of fear and sabotage within SARS. It had been indicated that there was prima facie evidence that the unit may have abused its power and resources by engaging in activities that resided in other agencies of government and which it had no lawful authority to form. There was also prima facie evidence that the activities of the unit may have included a “rogue” activity or behaviour that had the potential to damage the reputation of SARS as an organ of state.
Mr Moyane underlined that the Sikhakhane report also had some recommendations. These were that the Commissioner should put processes in place to ensure that the unit was disbanded, and that the persons involved in the unit were debriefed and protected from intimidation and be integrated into the surveillance structures of SARS’s. The report indicated that it was incumbent upon SARS to put in place a number of processes to investigate and reverse incidences of malpractices within SARS. SARS had brought in KPMG to work together with senior council to conduct forensic and legal evidence analysis, and the KPMG report was expected to be completed by June 2015. SARS believed that it would be construed as prejudicial to release the Sikhakhane report in full at the moment, given the nature of the report and processes that were dependent on the report.
Mr Moyane said that the Minster had established the Advisory Board, headed by retired Judge Frank Kroon, and on 20 March the full complement of the Board had been appointed and announced to the public and media. The Board comprised five women and men who were external and two senior officials at SARS, who would also be serving on the Board. The duties of the Board were to advise on the outcomes of the Sikhakhane report and to look into the long-term perspective to test administration within SARS and also review the business and strategic plans. The Board would also review and advise the Minster and the Commissioner on major operational plans, including modernisation and technology systems the operating model. The Board was also mandated to advise the Minster and the Commissioner on the budget of SARS, but also the governance structure which was critically important to any organisation.
Mr Moyane highlighted that work at SARS had continued as usual and the focus was on looking at the reorganisation and the refocus of the organisation, and also to do performance enhancement on the operation of SARS. The current operating model of SARS and the modernisation strategy had been introduced in 2007 for a seven-year cycle, ending in 2014. SARS had taken steps to ensure that there was transformation within the organisation. The annual report of SARS for 2013/14 indicated that Parliament would review the current operating model. The Commissioner had decided to bring Bain & Company (management consultants) to deal with the broader operating model of SARS, and analyse value for money for investment made by SARS in the modernisation process, looking at the return on investment. The Bain & Company would also look at the efficiency of the systems in place and the ownership of the Intellectual Property (IP). It would also build on the internal capacity to build long-term sustainability of the organisation and deal with broader government processes in the organisation.
He said that the Minister had highlighted in the strategic plan that SARS was not about individuals, but a group of people working together to ensure that the organisation achieved its mandate of tax collection. He wanted to assure Members that SARS still had capable people who had the potential to take the organisation to a higher trajectory. The Commissioner had convened a SARS National Revenue Forum (NRF) meeting on 29 February 2015 consisting of all senior managers across the whole country, which was addressed by the Minister. The establishment of the NRF was to address issues that were associated to the mandate of SARS -- that was, to collect all the revenue that was due to the state and ensure optimal compliance with tax and customs legislations. It also provided a customer service that would optimise revenue collection, protect the country’s borders and facilitate trade. He assured the Members that SARS would be able to execute its mandate amicably, given the support from the Minister.
Mr Moyane indicated that SARS had also introduced a progressive plan to deal with the number of competent people who had left the organisation. The departure of people had not created any inability of SARS to perform efficiently. The key Human Resource (HR) interventions in the organisation included managing the disciplinary processes across the organisation equitably, without fear or favour, strengthening HR governance processes and dealing with the broader succession plan and sustainability of SARS. He reiterated that SARS was comprised of passionate men and women who were committed and dedicated and driven by high purpose, and who strove to make the country tick by collecting all forms of revenue due. He was confident that the organisation would be able to achieve its targets.
Mr Mcebisi Jonas, Deputy Minister, Department of Finance, added that the Sikhakhane report was one step towards improving the current situation within the organisation. The involvement of KPMG and Bain & Company would feed into the Advisory Board headed by retired Judge Kroon and the Board would be able to collate all the reports and make proper recommendations and advice to the Ministry. He wanted to accentuate that there was indeed a lot of work around the reorganisation and enhancement of performance of SARS so as to improve the capacity of the organisation as a key institution in the country
Mr D van Rooyen (ANC) commended the Ministry for complying with the Committee’s request for a briefing on what had been happening at SARS. He agreed that in the light of the severity and magnitude of the matter, the Sikhakhane report should not be released in full so as to give due processes an opportunity to take their course. How far was the institution in implementing the recommendations in the report? He expressed concern that the Commissioner had stated that the Advisory Board would also advise on the results of the report, and wondered if there was a way to ensure that the two officials from SARS did not end up having undue influence in the process of the investigation. Who had authorised the establishment of the unit?
Mr Van Rooyen asked about the funding model that had been used to fund the activities and the operation of the unit. The Committee should also be made aware of the resources that had been used for the operation of the unit and the liabilities it had incurred. He wanted to know whether there was any relationship between the rate of turnover at SARS and the cited “rogue unit”.
Mr D Ross (DA) said that everyone had the impression that SARS used to be a pillar of strength and had achieved fantastic results in terms of revenue collection. However, there was now an apparent erosion of this reputation, as some of most competent individuals were being purged. There was a need to deal with administrative incompetence at SARS so as to respond to the queries and concerns raised by taxpayers. It was difficult to find a connection between the reports by Sikhakhane, KPMG, Bain & Company and the Criminal Advisory. He commended the involvement of Bain & Company in the investigation, as it was a reputable organisation in terms of instruction. What was the time-line for the completion of the report? The Committee would require additional information on the Sikhakhane report and the dismantling of the so-called “rogue unit.”
Mr Ross stated that it would be critically important for SARS to accelerate the process of closing the vacancy rate, especially in critical skills. He requested more information on the issue of broader government processes, and whether this was part of the new mandate. What kind of processes should expected by the Committee? What was the opinion of SARS on the allegations of Nkandla unaccountability in tax compliance? He also wanted more information on allegations that the holding up of a multi-million rand consignment of ANC campaign T-shirts before the April elections had been one of the factors that had led to the leadership purge at SARS.
Dr D George (DA) commented that the briefing on the Sikhakhane report was too little and too late, considering that this matter was very important. He had submitted a Promotion of Access to Information Act (PAIA) application on 11 December 2014 to gain access to the Sikhakhane report, which had been stalled on procedural grounds by SARS officials on two separate occasions. It was concerning that following the conclusion of this investigation, and on the basis of the Sikhakhane report, there had been a mass exodus of senior officials who had either left the organisation, been suspended, or had been redeployed to other divisions. These officials included: Mr Ivan Pillay: Deputy Commissioner; Mr Peter Richer: Strategic Planning and Risk Group Executive, Mr Barry Hore: Chief Operating Officer (COO), Mr Jerome Frey: Deputy Chief COO; and Mr Clifford Collings: Anti-corruption and Security Head.
The Chairperson interrupted and asked whether there was any necessity to mention the specific names of the individuals while legal issues were still pending. He requested that Members should rather defer from mentioning the name of the individuals, as this was not a tribunal process but a Committee meeting. He asked for a legal expert to advise on the subject.
Adv Frank Jenkins, Senior Parliamentary Legal Adviser; indicated that Members of Parliament (MPs) in Committees had the same immunity as in the National Assembly (NA). However, it was important to highlight that this immunity pertained to sworn-in MPs, not necessarily to state officials.
Dr George responded that the names of the people who had either resigned or suspended were already in the public domain, and therefore he did not see the need to defer from mentioning the names of those individuals. It was concerning that most of the senior officials at SARS had resigned, as this was likely to impact on the overall collection of revenue. What were the main reasons for the recent mass exodus of the senior officials at SARS? It was hard not to reach the conclusion that the recent exodus over the past months was merely a front for a politically motivated purge within SARS. The resignations in the Information Technology (IT) section were particularly troubling, as this was an important platform for SARS. It was important to remind Members that if SARS failed to collect revenue effectively then the country’s deficit of R162 billion would get bigger and the economy would wobble even more than it was currently.
The Chairperson indicated that indeed the current situation in the country and globally was very grim, as the global economy had been very sluggish.
Dr George highlighted that these events did nothing but increase the suspicion already held, and point towards an emerging trend where the independent institutions had been gradually eroded, with evidence now suggesting that even the state bureaucracy had been involved in preventing access to the report. He strongly believed that in order to get to the bottom of the problem, there was a need for the establishment of a Judicial Commission of Inquiry instead of an Advisory Board. He expressed concern about the current fractious environment at SARS, as this was likely to impact on the reputation and social contract of the organisation.
Dr George asked whether SARS would do anything to rectify its reputation in the public domain, as it was important for people to see value for their money. How had the unit been funded? Why had the unit never appeared in the financial statements of SARS? There had been allegations that the resignation of the head of anti-corruption and security was as a result of a failure to deliver a car on time to the SARS Commissioner. It was also apparent that a lot of money had been spent on the unit, but it was not quite clear as to where the money came from. Even the Auditor-General (AG) had not seen the flow of money running into the unit. It was alleged that the unit had suddenly been dismantled because it had started to investigate politicians, including the President. What would the KPMG report do differently from the AG? It was extremely troubling to see a stream of taxpayers’ money flowing into the unit without any accountability. He opined that the Committee would not get to the bottom of the issue of the Sikhakhane report today, as the Members had not been given access to the full report.
Dr M Khoza (ANC) indicated that SARS remained a world-class institution, but this did not mean the organisation was immune to various challenges. All the challenges that engulfed the organisation needed to be resolved in order to maintain its world-class standard. There had been an on-going challenge in the country, where people would be raising genuine concerns but punctuated them with covert racism that would synonymise a black person with incompetence, and this was a problem that needed to be dealt with. It was indeed important for the Committee to know the person who had authorised the establishment of the so-called “rogue unit” and why the proper procedures had not been followed.
Dr Khoza highlighted that the Committee was aware of the positive investigations and accomplishments that had been made by the unit. The Committee could not accept the situation where the law was conveniently applied in some instances, and proper procedures and regulations needed to be followed. What had prompted the involvement of KPMG to further conduct the forensic report? This raised suspicion that there might be prima facie evidence of some wrongdoing in the process. It was indeed concerning that there had been a mass exodus of senior officials at SARS who had either left the organisation, been suspended, or had been redeployed to other divisions. Were there no other South African companies that could have been consulted to conduct the forensic investigation? What was the cost involved in the consultation of KPMG and Bain &Company? What was the tangible thing that had been done to protect the integrity of the SARS? Were there any individuals within the organisation that were being purged?
Ms P Kekana (ANC) stated that the Committee had the responsibility to play an oversight role and would not allow anything to be swept “under the carpet,” as it represented the general public. The Committee wanted to be formally given access to the Sikhakhane report and other reports, after the investigations had been completed. Why was it not in the interest of Dr George to also name the individuals who had been expelled at SARS?
Ms T Tobias (ANC) indicated that the Standing Committee on Finance was linked to the market and the continuous assessment by rating agencies. She pleaded with Members to exercise patience, as they would be given ample time to engage with all the outstanding reports about the pending forensic investigations at SARS. The oversight intervention of the Committee should not be seen as political posturing, but as effective oversight over government. The Members represented the taxpayers, and not any individuals affected by any decision taken by the state. The Members should accept the first preliminary report on the so-called “rogue unit” so as to apply their minds correctly when given access to the final report.
Dr George commented that it was weird and bizarre that he had to be subjected to racial commentary, as he did not even know the race of the people that had been expelled or suspended at SARS. It was very unfortunate and totally irrelevant for Members to racialise the current fractious environment at SARS.
The Chairperson mentioned that it was in the interest of everyone to ensure that the credibility of SARS was improved. The Joint Standing Committee on Intelligence had also been looking at the issue of the formation of the so-called “rogue unit,” and the legality of the unit. The Members were only responsible for looking at the implications of the Sikhakhane report on the performance and functioning of SARS. The Minister assured the Committee that they were still on course with the investigation of the unit at SARS and hinted that there might be some surprises to observe in the results. The Chairpersons of all the parliamentary committees had been made aware that the committees were not entitled to all the reports that had been released by the Executive.
The Chairperson said that it was interesting there had been a racialised subtext to the issue of SARS. The Committee had raised concerns around the demographic representation of the organisation, as 6% of the auditors within the organisation were Africans and 23% were women. However, he warned the Members not over-racialise the matter without looking at individuals’ contribution to the struggle. It was indeed important to highlight that there had been a failure to deracialise the country in key institutions.
Mr Jonas responded that it was at the core of SARS to maintain its credibility and reputation in the public domain, as this was a key institution. SARS had adopted a comprehensive approach to respond to all the key challenges and the Sikhakhane report highlighted a number of recommendations that needed to be undertaken to revitalise the organisation. It was critically important to strengthen and sustain the performance of the organisation and ensure that the structure of SARS, its operation and processes remained world-class, hence there had been a decision to involve KPMG and Bain & Company. He wanted to put it on record that the Department would not be conducting investigation in the media around the Sikhakhane report.
Mr Jonas said it was crucial to have another intervention that would look at broader tax administrative and governance issues in relation to SARS, and it was for this reason that it had been decided that there should be a committee that would oversee all the reports on the unit. The Department’s response had been focused on a long-term goal to prevent the recurrence of such an incidence in the future. The presentation had deliberately deferred from the naming the individuals implicated in the Sikhakhane report, as the investigations were still pending. It was against the law to publicly discuss and declare tax matters related to individuals, and SARS needed to maintain the same standard. The Committee would be given access to the full report after all the right channels had been followed.
Mr Jonas said it had also been decided that the Sikhakhane report should not be released in full in order to avoid the public persecution of individuals and the possible disruption of the process of forensic investigation. The Department was concerned about the performance of SARS, as it needed to protect and improve the levels of collection and tax administration so as to encourage the tax compliance of individuals and companies. The reorganisation and refocus process had been very important, as it had achieved some results. There was now momentum internally in the organisation, most regions had been mobilised and there were revenue committees all across the country. There were a lot of internal activities and better commitment to stabilise the situation at SARS. It was important to place it on record that any revenue agencies would have the requirement of having some investigative capabilities and this had not been questioned in the Committee. However, the concerns were around the process of the establishment of the unit, the funding model that had been used and how it was linked to other agencies of state.
It was important for the Members not to seek a short-term approach to the matter and it should rather be seen as an approach to broadly strengthen the tax administration in the country, instead of politicising the matter. The role of the unit had not been to collect tax, but to do investigations, and revenue collection had remained intact within the organisation. Bain & Company had been looking at the issue of filling the vacant posts at SARS, as the organisation had lost a lot of competent senior members, especially in the IT platform. There had been programmes of training and up-skilling of people so as to reduce the racial and gender divide within SARS.
Mr Moyane indicated that the mandate of SARS was very clear -- that all the focus should be on tax collection across the country, as the consequences of SARS not being able to meet its targets were dire. SARS had made a pledge and a covenant with the Minister that it would focus on revenue collection, despite all the noises that were taking place in the public space. SARS would follow every instruction and direction that was given by the Ministry. He also reiterated that there had been concerns around the erosion of the reputation and integrity of SARS, as this was known as a world-class organisation.
Mr Moyane pledged that he would run SARS to the best of his capabilities and continue to build the ethos of the organisation on his predecessors’ successes. He said that there was no reckless approach to changing things at SARS in order to follow a narrative of which he was not aware. The fight to combat illicit trade was very important to any economy and SARS needed to have an instrument to be able to deal effectively with this matter. There was a “dashboard” in the organisation that gave an indication on the matter of dealing with illicit trade. Illicit trade and its effect on the economy needed to be tackled at its core, which meant focusing on organised crime syndicates, as they deprived the country of the potential revenue which was due to the state.
Mr Moyane said that the so-called “rogue unit” had been disbanded as recommended by the Sikhakhane report, and the Committee would be provided with a full report at an appropriate time, as the investigations were still pending. The distribution of the Sikhakhane report now would be interpreted as prejudicial, and it was not in the interests of SARS to keep anything hidden from the public domain. The report would also delve into some of the questions that had been asked by Members, including the person who had authorised the establishment of the unit and the funding model that had been used. SARS was currently in discussion with competent authorities in the country in order to look into the resuscitation and the establishment of capability that was within the law to combat illicit trade and protect the economy. It was important to keep the confidentiality of the names of the people implicated in the report, as the tax law prohibited the discussion of taxpayers’ names in tax affairs.
Mr Moyane reaffirmed that SARS would be able to execute its mandate despite all the challenges, especially at the capacity level. The resignations of the skilled people at SARS were voluntary. Some of them had been taken in advance and they had prepared their exit before his arrival -- it had nothing to do with purging. He wanted to place it on record that the prospect of purging people was not part of SARS’s vocabulary. There were capable people that had the potential to fill the vacant posts in the organisation, especially in the IT platform. The National Revenue Fund (NRF) was functional and the technology was still being maintained and the restructuring of SARS had been made with the sole principle of being able to make the organisation to function efficiently. The involvement of KPMG was to ensure that the matter had been concluded efficiently and amicably, so that SARS could move forward with its duties.
He pointed out that there was a need to have a succession plan within the organisation so as to maintain its high trajectory and reputation, and to identify leaders among the staff to contribute to the overall mandate of SARS. The human resource (HR) element should become the pillar upon which technology had to be embedded. He confirmed that there was stability at SARS despite what had been written in the media and the organisation had made it very clear that it would not contest what was in the public space. The tangible example of stability of the organisation would be proven by the ability to meet the targets, and he wanted to remind the Committee that SARS could be divorced from the international crisis that was also affecting the country. SARS still prioritised taxpayer education in order to make it “cool” to pay taxes, as a failure to engender this type of mentality would make it difficult for the organisation to achieve its mandate. The establishment of the Advisory Board Committee was because of anxiousness about the erosion of the reputation of SARS.
The resignation of individuals within SARS should also be seen in the trajectory that had been travelled since the introduction of the modernisation strategy in 2007. This was where SARS had been commended as a world-class organisation that had achieved 99% e-filing, and the turnaround time with respect to responses to taxpayers had been 72 hours maximum. Therefore, there could be no reckless approach to changing a strategy that had been working, except to strengthen the gaps that had been identified.
Mr Moyane added that there were certain risk engines that needed to be put in place to avoid fraudulent activities which many taxpayers might want to exploit, having seen the weaknesses that had appeared in the system. He indicated that there had been only one resignation at the top of whole leadership at SARS, and the rest were referred as “middle-management”. He dismissed the insinuation that the current exodus at SARS had been caused by his arrival, as there were always resignations within any organisation. He promised that the Committee could be provided with information on the number resignations within the organisation, with proof that these resignations were indeed voluntary and planned in advance.
Mr Moyane once again promised that the Committee would be provided with all the necessary reports regarding the pending investigations. He did not want to get involved in triviality, as the Commissioners did not deal with the issue of cars that were provided to them, and when he joined SARS the car issue had already been resolved. The narrative that had been in the public domain that SARS pushed people to buy cars was a complete and malicious lie. The other narrative that had been created in the public domain around the issue of the car seemed to create an impression that the Commissioner liked the limelight. He rejected the impression in the media that the resignation of the head of anti-corruption and security was as a result of a failure to deliver the car on time.
The Chairperson indicated that the Committee would come back to the Sikhakhane report after further consultation with the Joint Standing Committee on Intelligence. What was the time-line for the completion of all the pending investigations? Who were the members that were involved in the Advisory Committee? Did they have any expertise on tax issues?
Mr Jonas responded that the Advisory Committee was headed by retired Judge Frank Kroon, Adv Mfanelo Mbenenge, Ms Mmakgolo Maponya, Mr Lazarus Mokoena, Adv Rudolph Mastenbroek, Mr Jonas Makwakwa and Mr Matsobane Matlwa. All of those members had an extensive knowledge and expertise on issues related to tax.
Mr Moyane said that the Bain & Company report was very laborious, and was likely to take 18 to 24 months, but a periodical report would be provided.
Tier II Debtholder Committee briefing
Mr Lionel Shawe, Partner, Allen & Overy, said that Tier II debt was a meaningful and important source of bank funding and capital, and amounted to approximately R63.5 billion of the R259 billion listed bank debt. Tier II debt was held by institutional asset managers on behalf of clients, mostly pension funds. Tier II debt redemption/regulatory replacement was at R58.6 billion, and R32 billion in new debt was expected to be issued (assuming 8.5% growth).Total Tier II debt issuance was expected to exceed R90 billion within the next five years.
Curatorship was an alternative to liquidation, as it aimed at restoring a bank to solvency. Curatorship proceeded in the expectation that all debts and obligations would eventually be discharged, and that the bank would be restored to a successful concern. By choosing curatorship, the registrar forgoes the power of liquidation contained in section 68, at least temporarily.
Mr Shawe indicated that it was still unclear whether section 69 empowered the curator to subordinate the claims of the Tier II Noteholders in curatorship, even though this was not contemplated by the terms and conditions or the Banks Act. Section 69(3)(b) made it very clear that the Minister may empower a curator to “make payments, whether in respect of capital or interest, to any creditor or creditors of the bank concerned at such time, in such order and in such manner as the curator may deem fit.” This section allows the curator to prioritise certain creditors for early payment. The power listed in section 69(3) (b) had to be read in conjunction with the other provisions of section 69.
Section 69(2C) (b) (ii) provided that the curator may not dispose of Asset-Based Lending’s (ABL’s) assets outside of the ordinary course of business, unless there was a reasonable probability that this would enable ABL to pay its debts and become a successful concern, which was the purpose of the provision or crux of curatorship. The curator could prefer creditors for payment only if his/her election to do so was rationally related to the aim of making ABL a successful concern. The curator could not select creditors for payment in the knowledge that after he/she had done so, there would be no prospect of the remaining creditors being paid.
The terms and conditions, read with reg. 38(14) and section 69(3) of the Banks Act, did not entitle ABL to subordinate claims of Tier II Noteholders in the absence of dissolution, liquidation or winding-up of ABL. The curator would not be entitled, in terms of section 69 in its current form, to subordinate claims of Tier II Noteholders in circumstances not contemplated by the terms and conditions. The Tier II Noteholders contend that the Bill unjustifiably infringed the rule of law (section 1 of the Constitution), the right to equal treatment before the law (section 9 of the Constitution) and the right to property (section 25 of the Constitution). The passing of the Bill would be constitutionally challenged at enactment or at restructure.
Mr Shawe took the Committee through the constitutional challenges of the Bill and these included:
- Sections of the Bill were liable to be challenged if the Bill was enacted and the current Good Bank proposal was implemented: namely section 69(2C) and section 69(3) (j);
- Section 69(2C) introduced three new changes:
- First – it removed the requirement that curatorship had to be directed at restoring the bank;
- Second – the curator and the Minister would be allowed to consider whether creditors were treated equitably, or at least no worse off than they would be in liquidation;
- Third – even if the proposal treated creditors inequitably or worse off than in liquidation, it may still be allowed if the Minister decided that that was in the best interests of the stability of, or confidence in, the banking sector.
- Section 69(2C) authorises the curator to select some creditors for better treatment –or worse treatment –in curatorship, if the Minister thinks that would promote stability and confidence in the banking sector;
- Stability and confidence in the banking sector was promoted by planning and certainty as to outcomes, not by allowing a free hand to change creditors’ and investors’ rights;
- The differentiation may not be underpinned by a rational purpose.
Mr Shawe said that Tier II’s alternative proposals on the Bill focused on a number of factors and acknowledged that the Bill was an interim measure for ABL. A curator could transfer assets and/or liabilities if that transfer was approved by each class of the creditors of the bank under a compromise procedure. This gave the curator the required legislative framework within which to effect the proposal, but subject to the approval of majority creditors.
Tier II Noteholders would agree to a proposal that they would be prepared to vote for. Senior creditors would also vote for a proposal but under this proposal all the senior creditors would be a single class and could participate in a single vote under section 155. This proposal required the removal of the “no creditor worse off” principle, and the retention of the “deadman” clause.
In Europe, the Bank Recovery and Resolution Directive (BRRD) required European Union (EU) member states to introduce a bail-in resolution tool. EU member states must implement this into national law by Jan 2016. England and Germany had implemented this already, ahead of the January 2016 deadline. Protection was built in for creditors. There was a requirement that no creditor should incur greater losses than would have been incurred if a winding up or administration/curatorship had been carried out under normal liquidation proceedings. A valuation must be carried out by an independent person to assess whether shareholders/creditors would have received better treatment under those proceedings. If the valuation determined that a creditor had incurred greater losses than they would have done in normal proceedings, then they would be entitled to payment of the difference in the form of compensation. Without such valuation provisions, the curator and Minister would have unfettered discretion to decide what amount to pay creditors. The greater return on instruments held by Tier II creditors was compensation for the risk that Tier II Holders had assumed in liquidation. Tier II provided a shield to Senior Debt in that Tier II was subordinated in liquidation and would therefore absorb the first loss.
Mr Shawe pointed out that Reg. 28 of the Pension Funds Act allowed pension funds to invest up to 75% of their assets in the equity of corporates, including banks, regardless of their rating. All equity held in African Bank Limited by pension funds had been lost. Equity was always more risky than debt, and accordingly it was more prudent to invest in Tier II debt than in equity. The Tier II debt of all major South African Banks was majority owned by pension funds, and so was the equity. Instruments that offered higher returns were important investment tools as they allowed investors to diversify their portfolios and get exposure to instruments that provided different returns.
Tier II had submitted an alternative to the current proposal in December 2014. This proposal had been prepared without any access to information and was based on a single entity. It was only one alternative. Creditors had to date still been denied access to the financial information of African Bank. It had been indicated that once the financial information was available it would be convenient to work on other alternatives. It was important to note, however, that the alternative proposal by Tier II creditors did not envisage the use of any additional taxpayer money to make the proposal work.
Mr Shawe added that loans advanced to African Bank under the guarantees provided by the South African Reserve Bank (SARB) and backed by National Treasury (NT) were expected to be fully repaid with interest from the collections on the “bad book,” which SARB would be taking as security. African Bank had under-provided for loans and had over-stated profits. Therefore, it had over-paid tax to the fiscus of R5 billion to R7 billion. In the normal course of business, future profits would have been offset against this tax asset. Splitting the “good” bank and the “bad” bank meant the good bank would be paying tax to the fiscus that would otherwise not have arisen had the profit on the good assets been earned in the bad bank. Therefore the South African tax-payer would gain a tax asset of R5 billion to R7 billion through the curatorship and restructuring of African Bank.
In conclusion, Mr Shawe said Senior Debt should be offered a transfer of 90% of debt (plus all unpaid interest) to the Good Bank, plus retaining a residual claim in the Bad Bank. Tier II holders offered nothing at all. Recent talk was that Senior Debt may get more than 90c. Tier II had equal rights, but proposed to remain in the Bad Bank with a deeply subordinated claim with no value, and had the right to insist on also moving to the Good Bank. However, Tier II was open to a partial settlement of debt at a discount to face value.
Dr Khoza welcomed the presentation by Tier II Debtholder Committee, but expressed concern about certain aspects that were problematic, especially the trustees which had not been brought into the equation, but who appointed the asset managers and became the ones who made the choice about investments, guided by the pension funds. She indicated that she was sympathetic about who would be affected by the amendment of the Bill, but could not see how the trustees would be placed in the equation, and the people who made those decisions and the asset managers. Parliament could not afford to take a decision that would set a precedent that would make the banking sector unstable.
Dr Khoza was also not persuaded about the process of curatorship versus liquidation, because curatorship on its own was not a guarantee, although a better alternative than liquidation. The country needed to be careful about the decisions that were being taken in the banking sector for fear of a downgrading in the rating agencies. She doubted that the presentation had persuaded the Committee, as some of the legal matters had not been properly covered. Why was the Pension Fund Act not included in the presentation? It was unlikely that the investors would be attracted to invest in the Good Bank, as the Bank would be construed as having risky assets.
The Chairperson indicated that Adv Jenkins would be given seven days to compile a report on the constitutionality of certain clauses in the Bill, and would then circulate it to the Members. The Committee would then bring together the interested parties during the constituency period under the leadership of a sub-committee to thoroughly process all the issues raised about the Bill. It was decided that the Tier II Debtholder Committee should respond to some of the outstanding questions in writing.
The Members agreed with the suggestion.
Ms Kekana also emphasised the importance of constitutionality of certain clauses in the Bill, as it would be pointless for the Committee to discuss an unconstitutional Bill. She wanted more information on the African Bank Act, as she was not aware of the ratification of such an Act in Parliament.
The Chairperson requested Members to focus on the outstanding matters in the strategic plan and annual report of SARS.
Dr Khoza indicated that the issue of regular submission of tax clearance certificates needed to be reviewed, as this would put a further burden on small businesses.
Mr Moyane requested to be allowed to submit a written response to the issue of tax clearance certificates and other outstanding questions asked by the Members from the previous day.
The Chairperson agreed to that request, and agreed that the regular submission of tax clearance certificates would put a heavy burden on small businesses.
The Committee agreed that National Treasury was performing very well, despite all the challenges. The Committee had managed to achieve all of the three sub-tasks, including establishing a good relationship with the Parliamentary Budget Office (PBO), and would finalise the appropriate research needed. It was also working very closely with the Appropriations Committee.
The meeting was adjourned.
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