Steinhoff matter: Ben le Grange

Meeting report

Mr Carrim welcomed everyone and asked the Parliamentary Legal Unit- which acted on behalf of the Speaker’s Office and the four Committees to give the context of the proceedings. The parameters within which the Committees must conduct their oversight role had been set out in terms of the law. Steinhoff and the regulators were to brief the Committees about where things were since the last briefing in March.

Adv Frank Jenkins, Senior Advisor, Parliamentary Legal Unit, briefed the Committees and those presenting evidence on the legal implications of the hearing. Parliament has the right to summons anyone in terms of the Constitution to conduct its legislative functions of oversight. The Committees may inquire into the cause, or nature of the cause for Steinhoff's collapse to see if it is due to a lack of performance of a regulatory body. The witnesses were protected from self-incrimination. Witnesses therefore must answer questions legitimately put before them. Members cannot inquire on the civil or criminal culpability of the witness- this is outside the mandate of Parliament.

Steinhoff presentation

Ms Heather Sonn, Chairperson, Steinhoff, said the group remained deeply aware of the current impact of events on the company’s stakeholders (including investments and pension funds) and the reputation of the company, its business and the nation. Steinhoff was doing its utmost to uncover the truth, to rectify any wrongdoings and to communicate as fully as it could on an ongoing basis. Steinhoff had cooperated fully with its regulators and would continue to do so. They were working constantly to restructure the group’s international debt. The company now employs 120 000 people, 50 000 of whom are in South Africa, and was very conscious of the importance of the retention of those jobs. The group was working hard towards further stability, to finalise the audited financial statements and to ensure that the investigations are far enough advanced to enable it to proceed with legal and other necessary steps that the group intends to take, based on the findings. Given the gravity of the situation, the Committees would appreciate that the board (including the individuals present) remain legally and otherwise quite constrained in what they were able to communicate publicly.

Mr M Booi (ANC) interjected on a point of order and expressed concern that Ms Sonn was repeating ideas. The Committees wanted to hear about what was going to be done. The Steinhoff delegation was recycling itself. Members wanted to be told about results.

Mr Carrim wanted Ms Sonn to jump to outcomes, not give background. What was being done to right wrongs and hold wrongdoers responsible?

Ms Sonn said she wanted to go through the presentation to show Members that Steinhoff had not imploded.

Mr Carrim wanted Ms Sonn to get on with it. What was the cooperation with the Hawks? Had Steinhoff handed people over, besides former CEO Jooste? Ms Sonn was waffling- she was too general, and Members were getting restless. Her presentation was disappointing and bordered on being demoralising. The report was wishy-washy and full of generalities. There is no progress substantially and this was worrying.

Ms Sonn continued with the briefing. The group had also undertaken a massive exercise to restructure its international debt. Steinhoff has managed to secure jobs in SA. As far as jobs go, the company had paid down most of its African debt to a large extent. It secured the SA aspect of the business and its Africa position. Following the meeting with the Committees in January- Steinhoff had worked to stabilise the group - stability remains a core objective. The group was also committed to finalising audited financial statements and to make sure investigations proceed and ensure further steps are taken based on outcomes. A crisis of complete implosion of the company had been averted – through a standstill agreement with banks. The standstill with banks will help Steinhoff provide an opportunity to grow shareholder value. Steinhoff had successfully repaid €2 billion of South African holding company debt and very little African debt remained. Good support had been received from international debt holders. A lockup agreement with creditors, including a standstill, was finalised in mid-July 2018 and this was providing time for the group to implement a debt restructure supported by a very high percentage of debt holders/lenders. A debt restructure will afford the group financial stability until the end of 2021. As part of the restructuring framework all debt will be restated at par within current borrowing entities with a common maturity date for all loans three years from the restructuring date. There will be no cash payment of interest on any debt excluding for Hemisphere, the sub-group that owns European property. Appropriate asset security will be provided at the current borrowing entity level where feasible and permissible. All debt instruments will retain existing guarantee claims. The proceeds from disposals will be retained to fund ongoing liquidity requirements with the agreement of lenders.

Discussion

Ms T Tobias (ANC) wanted to know if there was any accountability and if there were disciplinary steps being taken against Steinhoff executives, following the fallout. Ms Sonn’s presentation appeared to be a PR exercise. It appeared that her presentation was too general and did not deal with specifics, to Members’ frustrations. She wanted to know if there would be consequences for implicated directors.

Mr Booi asked if the laws of South Africa were so limited that Mr Jooste could not get arrested. Mr Jooste treated Steinhoff with contempt. He did everything on his own. He was undermining Parliament. Also, what was being done to domesticate Steinhoff such that black businesses are also roped in?

Mr F Shivambu (EFF) asked if the missing money was ever going to be recovered. He was sure if Parliament dug deeper, it would be established that Christo Wiese and Johan Van Zyl were aware about what happened at Steinhoff. The main culprits in all of this- who must be held accountable, were the directors of Steinhoff who, by the way, still play crucial roles in some companies within South Africa.

Mr D Maynier (DA) asked if contracts with former CFO Ben La Grange were suspended because La Grange may be implicated in the accounting irregularities being investigated by PwC. He asked about the nature of the fraud that compelled Steinhoff to restate its financial statements. It was purported Marcus Jooste allegedly committed mass fraud all by himself. He wanted to know who helped him.

Mr D Ross (DA) asked what would be the company’s going concern status going forward. He asked Steinhoff to identify the specific regulations which it said were being engaged upon on an ongoing basis. How was the situation stabilised without the actual audited information? The Committees would want to know about this.

Mr A Lees (DA) asked if PwC had issued its interim report following the investigations. Was it only two people who were apparently being implicated? Was it only the two suspended? What was the nature of the malfeasance? When were Steinhoff auditor reports going to be released?

Ms W Newhoudt-Druchen (ANC) sought clarity on the actual reason Steinhoff's auditors did not sign off on the financial statements for 2017.

Mr Godi wanted to know what went wrong within Steinhoff and what it was about the company which made the accounting irregularities possible. That was the fundamental question.

Ms Sonn, in response, said that the presentation was not a PR exercise and that Steinhoff was committed to concluding the processes promptly to provide certainty for pension funds. She added that even though she knew evidence presented before Parliament will not prejudice any criminal proceedings - she was making considerations of what the retailer was dealing with on a daily basis and she was not attempting to be evasive. She detailed the process leading up to Deloitte’s decision not to sign off on financial statements for 2017. At the time, Deloitte was in a process of reviewing statements when allegations came forward from various sources raised questions about the financials which raised concerns. The audit committee worked with Deloitte on the matter and asked for audit evidence to address concerns. The audits could not be produced – which led Deloitte to decide not to sign off on the statements. On December 5, 2017, PwC was approached to conduct an investigation. She also assured that Steinhoff will not stop trying to recover returns to individuals affected by the fallout of the share price. She added that leadership would continue to try to save the company. The financial statements for 2017 will be released in December 2018, the financial results for 2018 will be released in January 2019.

Mr Carrim said the responses were not helping and Members were getting worried. Legal arguments must be given for why the company would not answer specific questions. Legal arguments must be given why names were not being mentioned.

Mr Louis Du Preez, Commercial Director, Steinhoff, said two individuals were suspended- these being Mr Ben Le Grange and Stiaan Grobler. PwC has more than 100 people looking into Steinhoff issues, and preliminary findings led to suspension of the two. A judge in Amsterdam was deciding whether civil proceedings could be brought against former CEO Markus Jooste.

Ms Sonn insisted that she did not take the report back to Parliament lightly but that in answering questions, she had to consider all matters affecting the group and had to take care not to jeopardise criminal investigations under way. She was not attempting to withhold information. So far, the only executive who is the focus of a criminal investigation was Jooste, who is the subject of a Hawks investigation. She added that the PwC report is on track. The PwC investigation was making good progress and those responsible will be held accountable. The company was committed to the finalisation of the PwC investigation and the report so that the company can remain listed on the JSE. Overall, the group had been in ongoing dialogue and constructive engagement with creditors, regulators, exchanges and other stakeholders and interested parties. The group aimed to provide audited financials for the financial year 2017 before the end of December 2018, and for the current year by January 2019. The threats of imminent collapse have effectively been averted; interim arrangements have been made with creditors; and there have been structured disposals of certain assets. A Section 34 report (the Prevention and Combatting of Corrupt Activities Act) had been submitted, and various interactions with law enforcement officials are ongoing. The group intends to reclaim bonuses paid in the past to certain senior executives under the relevant Dutch code (to the extent applicable and appropriate).

Mr Carrim noted the responses and welcomed input from the former Steinhoff CFO, Mr Ben La Grange. 

Presentation by Mr Ben La Grange

Mr Ben La Grange, former Steinhoff CFO, gave his version of events of what went wrong at Steinhoff. He was deeply saddened by the impact the fallout of the Steinhoff share price and the money that was lost and the majority of people affected. He was willing to cooperate with Parliament to prevent something like this happening again. He did not think he did anything deliberately wrong. He outlined the process leading up to the publication of the group’s annual statements. At no point in time did the group re-audit numbers; it relies on institutions and individuals responsible for providing the flow of information to the group. The group was responsible for consolidating statements from the different parts of the business and would then note trends or movements of large balances. If anything wrong was found in the submission, enquiries would be made and then the audited pack (of the entire group) would be resubmitted for the audit process to start. He explained that Steinhoff’s undoing happened in three ways. First of all, there were inflated profits. The main source of the inflated profits was from contributions from an external buying group. The external buying group would take volumes of products purchased by different brands and negotiate with suppliers to give additional rebates (contributions) to the group, which was reflected as profits on the income statement. But the buying group seems to be non-existent and funded with loans from Steinhoff. Essentially, Steinhoff paid loans to the buying group, the buying group paid profits to Steinhoff, which is why a profit was reflected in the income statement and a loan was reflected in the balance sheet. It has taken PwC eight months to determine this. The second are was Steinhoff’s transactions regarding its assets which were acquired at inflated values. Lastly, there were a number of transactions, which were thought to be valid transactions with valid parties. Another issue which led to problems was that Steinhoff did not have a single set of auditors of group. For example there were inflated values of the cash and cash equivalents. Steinhoff Europe had loans receivable backed by warranties reflected as cash and cash equivalents. What should have happened when numbers were consolidated at group level is that the figure should not have been reflected as cash and cash equivalents. Having a single set of auditors would have decreased the risk of what happened at Steinhoff. Explaining the inflated profits, he said a seemingly non-existent buying group, funded via a loan from Steinhoff, was set up. What transpired there was a buying group and this buying group paid additional rebates to operating entities, therefore the companies showed profits. Assets were acquired at inflated values by third parties not known to him.

Discussion

Mr N Nhleko (ANC) said Mr La Grange’s input, as brief as it was, was the crux of the matter. Steinhoff’s, on the other hand, was more of a board report. The Committees’ interest was more on the regulatory side of things. There has got to be a serious effort in unpacking the ‘what happened’ part. This would effectively guide the process. There was also an interest about what was happening to pension funds and investments. The pensions of 1.1 million government employees were at risk with Steinhoff. He was not concerned about whether the company makes money or not, but whether government pensions are safe. He wanted to understand why Mr La Grange was not given notice of his suspension in writing.

Mr D Mahlobo (ANC) said Steinhoff’s appearance was unprecedented but fundamental. The happenings at Steinhoff had a reputational damage to the country and the rand took a dive. This was corruption in the private sector of the highest order.

Mr M Hlengwa (IFP) asked what had happened to internal controls which would have detected wrongdoing beforehand. Were there no checks and balances internally? He asked whether the nature and circumstances under which Mr La Grange was suspended were consistent with the law.

Mr Maynier asked if Mr La Grange believed former CEO Jooste ever lied, misled or used him. When did he first become aware of the fraud and what did he do about it? Looking back, what in his view, did he do wrong?

Mr Lees asked about Mr La Grange’s relationship with PwC given he did his articles and worked for the company prior. What was his relationship with former CEO Jooste beyond Steinhoff? He found it difficult to accept that he was not in the know the whole time, given the very senior position he occupied. He found it difficult to accept La Grange claiming his job was simply to consolidate group financial statements. His position as CFO was the one on which investors in this group probably relied more than anything else.

Mr Shivambu asked whether Mr La Grange believed former CEO Jooste was complicit in the wrongdoings within Steinhoff. This was crucial to know as there had to be consequences and means to avert a repeat of what took place at Steinhoff.

Mr A Alberts (FF+) asked if Mr La Grange had any advice about how legislation could be amended to prevent a repeat of the collapse.   

Mr Godi commended Mr La Grange’s straight and pointed input. Did he believe Steinhoff needed PwC to have a global understanding about its challenges? Was it necessary for him to be subpoenaed to share this kind of information?

Ms Fubbs questioned the veracity of some of what Mr La Grange had said. The input appeared to lack some important pieces of information. She did not think he was being truthful. When did he become aware of "the strange smell"? Why did Steinhoff continue doing business with Deloitte- an auditing company which they knew lacks integrity? 

Mr Carrim said the Committees would want to know how regulations had failed to prevent the Steinhoff collapse. Going forward, what should be done to deter this from happening again? The Committees would like to get insights on what should be done. Steinhoff should be saved as far as possible as the implications of its collapse could be far-reaching. Mr La Grange made it seem as if he was oblivious to everything. He might not be wrong, but was he not morally complicit? Mr La Grange's testimony was the best the Committees had received since January. How was it that in 10 minutes Mr La Grange had given the Committees more than Steinhoff did? Steinhoff had been wriggling here.

Mr La Grange said the losses suffered by pension funds were likely to be permanent as he doubts Steinhoff’s share price will ever return to what it was before December 2017. He painted a picture of a complex, global group with hundreds of subsidiary companies and multiple layers of reporting. There was no single audit firm that was responsible for checking out the entire group, and that this allowed for things to slip through without being picked up. Several transactions that appeared to be valid later turned out to have been done by third parties.

On the group’s financial situation, it may have to restructure its debt once more because the debt needs to be repaid. The debt was still there. On details leading about his suspension, at the beginning of the year he decided to step down in the interests of the group to maintain credibility among lenders. He stayed on in an advisory capacity to provide assistance to the management team and entered into a fixed term employment agreement. The group had to ensure liquidity, it was also restructuring its automotive group and the PwC investigation was in progress. He also could provide the corporate memory for the litigations Steinhoff was facing. He had given three months’ notice as he felt he had assisted the group enough. He would have exited the company in September. Steinhoff then suspended him in early August and the group would have to explain why it was not put in writing. He had no relationship with any persons at PwC. He believed Mr Christo Wiese was not aware of the irregularities as recounted. He was from the start willing to appear before the Committees. The initial change of dates was communicated with Steinhoff, not himself.

Mr La Grange said he became aware of the fraud at Steinhoff on the weekend of December 2, 2017. He was called into a meeting with the audit committee and was given the Deloitte report. He was shocked at what was in the report. He was surprised by Deloitte's findings that profits were inflated. He wanted to wait for CEO Markus Jooste to comment on the bulk of items on the report – Jooste was on a plane back to SA. When Jooste did not show up to an audit committee meeting, he knew something was wrong. He and Jooste were strictly business colleagues. They are not friends and they have not socialised outside the business environment.  He believed there was limited sharing of information from Mr Jooste to himself. Certain relationships between Jooste and third parties were not disclosed to him or the company. If he had known that transactions were influenced by Jooste he would have accounted for the transactions differently. The practice of stating false profits dated way back. This practice commenced a number of years back. No person, auditor or analyst could pick up any substantial growth simply by looking at the numbers as the increases are incremental over years. It started so long ago, each year it increased a little bit. It was not just a huge jump in profits. He would get the consolidated information and compare reports to the previous year- which was why he could not see a jump in profits of say 10%. He reiterated that, in his view, the practice started a long time ago.

Ms Newhoudt-Druchen asked about the relationship between the Public Investment Corporation (PIC) and Steinhoff. Were the concerns raised with the former?

Mr Maynier asked in what respect was there limited sharing of information between the Mr La Grange and the former CEO. Had he been formally interviewed by law enforcement agents or any other regulator in respect of this matter?

Mr Hlengwa failed to understand how the fallout could have been an event not a process. That in itself spoke to weaknesses within the group. Surely, concerns should have been identified way before the collapse.

Mr La Grange said PIC is second-largest investor in Steinhoff. The relationship has always been good. Together the PIC and Steinhoff, through a partnership established in 2016, support a supplier development programme to promote black suppliers in the retail environment. When things happened the group did not let PIC know immediately, but subsequently had meetings with them. Following the fallout of the share price, Steinhoff held meetings with the PIC informing them of what had happened. He was interviewed by the Financial Services Board. He had not been approached by the Hawks for an interview. No shares were accrued to him since December 2017. He received a salary from Steinhoff, regarding his fixed-term contract which was in place after he stepped down as CFO in January. Looking back if former CEO Jooste misused or misled him, he was not a lawyer so he did not want to venture into dangerous terrain, but he did believe there was a limited sharing of information from Mr Jooste to himself.

Mr Maynier asked Mr La Grange if he accepts that given his position as CFO, he was negligent.

Adv John Dickerson, The Cape Bar, said his client, Mr La Grange, could not respond to the question posed by Mr Maynier regarding whether he acted negligently and would take responsibility for what happened at Steinhoff. There are legal proceedings pending in SA and elsewhere and the question involved a legal conclusion.

Mr Carrim indicated Mr La Grange had asked to be excused for the rest of the day’s hearing and would answer additional questions from Members that may arise following presentations by regulators in writing. Steinhoff executives would stay till the end. Mr La Grange had answered very precisely even though Members might disagree or have their suspicions. He could be called back to Parliament at any stage.

Ms Tobias asked whether Steinhoff was still a going concern. What was Mr Stehan Grobler’s current position at Steinhoff?

Mr Mahlobo asked if there had been an additional acquisition of assets in light of the happenings last year. How would it be ensured that the acquisitions were done in a scrupulous manner? He asked about the authorisation processes that led to the inflation of asset prices. How did these authorisations come about?

Mr S Motau (DA) said he was impressed by the commitment the group seemed to have in saving the company. That was good to hear as it was in the best interest of everyone that the company survives. He asked if Steinhoff was factoring in any form of restitution at a later stage for the savings and investments lost following the collapse of the share price. 

Mr Du Preez said that as information becomes available, Steinhoff will identify claims against third parties and will institute civil proceedings. Mr La Grange had fully cooperated with the investigation processes thus far. Mr Grobler currently holds no position within the company. Before January 2018, he was the company secretary. The going concern status, in terms of solvency and liquidity, was being assessed on an ongoing basis.

Ms Sonn said the group was convinced it could secure some form of return to shareholders, but for now it was prioritising saving the company and trying to grow it again. Some shareholders had joined a litigation process to make recoveries and they have a right to do that. Steinhoff was considering what form the restitution would be, what the size is and possible costs to stakeholders – for example if employees may have to take pay cuts. The first priority was to attempt to save the company and attempt to grow it. It was difficult to make assurances regarding pension funds. There are so many circumstances beyond Steinhoff’s control, but the group had committed not to jump ship and to see the process through. Having stabilised the situation, the group was determining how they will use what they have to service existing debt and then consider growth. This strategic decision was better than a decision to do a wind down, and sell all assets.

Mr Carrim welcomed inputs from regulators. The joint committee wanted to know what had been done since the last briefing, what form of assistance they needed from external sources, and what could be done by Parliament to strengthen legislation.

Johannesburg Stock Exchange (JSE) presentation

Ms Nicky Newton-King, JSE CEO, told the Committees about plans to recalibrate regulatory scrutiny, including of dual and secondary listings – a white paper is being drawn up. In December the Steinhoff share was R50, and was at R2.20 the previous day. Market cap was down from R217 billion to R10 billion, affecting all shareholders. On regulatory response since March 2018, there were various questions to Steinhoff about their financial statements from 2012-2016, some answered and some awaiting PwC Report. A penalty was levied on Steinhoff after failing to publish an announcement on SENS in respect of Moody’s rating action of 7 Dec 2017 as well as for the late announcement of Moody’s further rating action on 28 Dec 2017. Further, the JSE was considering the following: White Paper; consideration of future regulatory and governance refinements; market regulation; continual monitoring of trading activity as part of routine surveillance; and continued support to the FSCA in their insider trading investigations. The JSE White Paper, to be released in coming days would see possible changes to the JSE Listing Requirements such as: initial listing criteria; compulsory training for audit committees and Company Secretaries; non- binding vote on corporate governance report; disclosure of directors’ dealings; and strengthened regulatory oversight on secondary listed companies. The JSE had thoughts around possible improvements on disclosure of short sales, disclosure of progress on market abuse investigations, responsibilities of other guardians of governance such as Boards of Directors; audit firms; analysts; large asset managers and shareholders. However, not all the aforesaid proposals fall to JSE to implement.

Discussion

Ms Tobias identified the need to look into listings equivalence as it would be fundamental to assess the risk appetite of companies listed at the JSE.

Ms Newhoudt-Druchen asked about Steinhoff’s inflated prices and false profits before the collapse. What was the JSE’s perspective on this so that it is prevented from happening again?

Mr Mahlobo welcomed the input by the JSE as it demonstrated a tightening of regulation and vigilance, especially in relation to businesses and entities which operate in more than one jurisdiction. Most of the challenges had everything to do with lapses in accountability and transparency.

Ms Newton-King, in response, said the R1-million which Steinhoff was fined for not revealing its downgrade by Moody’s Investors Service timeously was quite a harsh punishment. Especially since the people being punished are the people trying to save the company, and not the people who caused the crisis. The JSE would work very hard to reach a level of equivalence. Regulatory changes and listings requirements take time to implement but the JSE certainly takes its role seriously and would continue to monitor the regulatory environment going forward.

Companies and Intellectual Property Commission (CIPC) presentation

Mr Asogaren Chetty, CIPC, said Steinhoff had identified specific individuals that have been directly involved in the falsification of the accounting records of the group. A specific criminal case had been opened against these individuals. The names of these individuals, as well as, the monthly reports that have been received by the CIPC have been provided to the Regulator under cover of confidentiality as provided for by section 22 of the Companies Act. The CIPC has accepted the confidentiality claim on the basis that the disclosure of the identities of the specific individuals as well as the monthly reports at this stage may jeopardise the criminal investigation by the SAPS.

On the civil action front Steinhoff has a statutory cause of action against directors who have caused it harm. Steinhoff has requested the Court in Amsterdam to join Mr Markus Jooste in the VEB matter. Furthermore, the PwC report which is anticipated to be completed by December 2018 will identify further individuals by name and quantify amounts which will form the basis of the further civil action against these individuals. Although not part of the Compliance Notice, the CIPC in its monthly meetings with Steinhoff have endeavoured to ensure that the jobs of the innocent employees that have been caught in this cross fire be preserved. Steinhoff has managed to preserve virtually all of the approximately 130 000 jobs which existed in the Steinhoff group.

Furthermore, Steinhoff an external company with no legal obligation to have a Social and Ethics Committee have post December 2017 now established a Social and Ethics Committee thus proving that it is not an insurmountable barrier for an external company to have such an important committee. From a policy perspective the CIPC would strongly recommend that section 214, read with section 216 and Regulation 43 of the Companies Act be amended to include external companies. The CIPC was satisfied that there has been compliance with the requirements of the Compliance Notice and will be issuing a Compliance Notice to this effect. Section 187(2) of the Companies Act allows for monitoring proper compliance with the Act, the CIPC will continue its monthly meetings until the end of February 2019 with Steinhoff, being a month after it is anticipated that the audited financial statements for Steinhoff for 2018 will have been presented and any clarification that the CIPC may have from the PwC Report to be ventilated with Steinhoff.

Discussion    

Mr Mahlobo noted the important steps that had been taken by CIPC. To what extent was CIPC content with the progress being made in getting into the bottom of what happened with Steinhoff?

Mr Maynier noted that the CIPC had indicated it was unable to release the names of the persons who were allegedly involved in the Steinhoff collapse at this stage. On what basis was this the case? What was the total number of individuals allegedly involved in the falsification of the statements?

Mr Carrim asked whether CIPC believed it had sufficient power to reduce the prospects of a Steinhoff collapse from happening in the future. The majority believed that some of this was inherent within the market system, but even by that measure- the prospects of it happening should be reduced. Why was that these incident happen and regulators appear to be always caught unawares. What had been the degree of cooperation between CIPC and the police?

Mr Chetty reaffirmed that, according to information they had received, four people were involved in the forging of profit numbers. CIPC was awaiting PwC report, and would want external companies to fully comply with Companies Act. This had more to do with greed than need. CIPC was glad the company has saved almost all jobs in its SA operation, and had set up a social and ethics committee in parent company though not required to outside SA. The names of those implicated in inflating values could not be divulged as this may compromise criminal investigation. The PwC report due December should identify further individuals and amounts. This was a criminal matter and it could only be handled by the SAPS and the National Prosecuting Authority. Because Steinhoff is an external company, CIPC has no jurisdiction over it to a meaningful extent.

Financial Sector Conduct Authority (FSCA) presentation

Mr Solly Keetse, Head: Directorate for Market Abuse, FSCA, took the Committees through a presentation outlining the progress of the four investigations on Steinhoff which were underway.  The investigation on insider trading focuses on the trading account of a foreign company that sold Steinhoff shares during August 2017. FSCA was investigating whether unpublished price sensitive inside information had crystallised before the selling transactions took place. FSCA liaised with foreign regulators to assist in collecting evidence from witnesses/ legal entities. Witnesses have been questioned and provided the requested information. This investigation was currently being finalised. The second investigation on insider trading focused on numerous trading accounts that sold Steinhoff shares during the period September 2017 to 5 December 2017. The investigation on possible trading using inside information by Steinhoff/ its executives/ Steinhoff related parties/ others was currently being finalised.

The investigation on false statements focuses on the alleged accounting irregularities in 2015 and 2016 financial statements and the 2017 interim results; to finalise investigation we are awaiting: publication of 2017 financial statements; restated 2015 and 2016 financial statements; PwC report. The information will allow FSCA to evaluate the misstatements and who knew/ought to have known that the statements were false/misleading/ deceptive at the time of publication. In the interim, evidence had been collected from foreign regulators and Steinhoff. Steinhoff executives and other key witnesses have been initially questioned.

The fourth investigation on insider trading and false statements dealt with the 7 December 2017 Viceroy Report after Steinhoff announced that it had registered an investigation into alleged accounting irregularities and that its CEO had resigned. The other three market abuse investigations will provide the information necessary to finalise this investigation.

Discussion

Ms Tobias was encouraged by the work done by the FSCA thus far.

Mr Maynier asked the name of the foreign company being investigated. Had Mr Markus Jooste been investigated as part of FSCA investigations?

Mr Carrim noted the progress that had been done given the Committees expressed concern about the slow progress during the last briefing. There had been an improvement which was welcome and appreciated. He urged FSCA to expeditiously conclude the investigations. He asked whether interactions with foreign regulators was yielding any positives. Was there anything that could be done government to government, without interfering with the work they were doing.

Mr Jurgen Boyd, Executive, FSCA, said the name of the company and individuals involved in the investigations into insider trading linked to Steinhoff could not be divulged as Section 88 of the Financial Markets Act prohibits such given the sensitivity of the matter. Getting the audited financial statements was critical as it would give a sense of the extent of the falsifications. A full report would be availed after the matter is concluded. FSCA had not received any information from foreign regulators in the Netherlands and Germany. He could not speculate on the reasons but the FSCA was assured that the investigations were underway, although still at the early stages. 

Ms Fubbs said it seemed South African has solid regulatory institutions but, on the other hand, effective engagements and collaboration was a challenge, and that had to be looked into.

Independent Regulatory Board for Auditors (IRBA) presentation
Mr Imran Vanker, Director of Standards, IRBA, told the Committees that IRBA’s investigation into Steinhoff was mostly complete. The investigation was one of the biggest investigations the Regulatory Board has ever done. The investigation; in respect of the audit matters, based on the currently available evidence, had been substantially completed. Finalisation of charges would require the restated audited financial statements to be issued by Steinhoff. Steinhoff in turn is awaiting the completion of the PWC forensic investigation. Scope and timeframe for completion of audit investigation therefore could not be determined until there is progress by multiple entities in providing clarity on the internal processes of reporting and accounting. On investigation process limitations, resource constraints were foremost, and IRBA had already made application to Treasury for additional funding to increase investigation capacity. On increased number of cases and increased complexity of investigations, IRBA continued to prioritise high-profile matters to bring to the investigating committee within 18 months or shorter period without impacting the rights of any parties. The investigation into the auditors span a number of jurisdictions. APA amendments (issued last week for comment) apply to investigation and disciplinary process –amendments provide the IRBA with subpoena powers in the investigation process, seek to simplify the disciplinary hearing process, and provides the Minister with power to determine maximum fines.

Discussion

Mr Mahlobo asked if IRBA drew any lessons from Steinhoff in terms of auditing standards.

Mr Maynier noted that key to the commission of the alleged fraud was the use of boutique auditing firms in the foreign components of Steinhoff International. He asked if IRBA was satisfied that the investigations by its counterparts in other jurisdictions were traversing the dealing of these boutique firms.

Mr Lees believed IRBA had done a tremendous job given the resources it has.

Ms Tobias expressed disappointment that IRBA had not furnished an interim compliance report on Steinhoff, particularly in relation to the conduct of audit firms.

Ms Newhoudt-Druchen wanted to know about the perception of IRBA on the malpractices at Steinhoff exposed by Mr La Grange, which put pensioners’ savings in a precarious position.

Mr Carrim said the rotation of auditors that was now happening was impressive. Overall, IRBA had done more between the last briefing and now. The Committees had expressed reservations about the pace of the investigations prior.  

Mr Vanker said two thirds of all SA pension funds were invested in Steinhoff adding to thousands of individuals invested in the company- this was a big deal. IRBA was expecting its team to bring a new code of ethics into effect by the end of this week. This would see the strengthening of oversight by regulators. IRBA has substantially completed its work and awaiting the PwC report to explore further work-streams if need be. At a global level, there is a tightly knit group of regulators, led by the International Forum of Audit Regulators. This was a good foundation for facilitating collaborative efforts.

Hawks presentation

Major-General Alfred Khana, Head: Specialised Commercial Crimes, Hawks, highlighted that there are three cases of investigation into Steinhoff, but none of them could reveal what happened at the retailer. There are three cases, but with no substance to them. The three cases lodged were based on media reports and failed to contain details investigators required such as who committed what offence in which way and at what cost. Without such details, the elements of a crime were not established. The Hawks were still waiting for the sworn statement to go with the Section 34 report under the Prevention and Combatting of Corrupt Activities, related to the criminal complaint filed by the company eight months ago, from Steinhoff’s audit committee chair Steve Booysen. The statement would set the tone for the investigations. But the delay has been a constraint to the investigation and before the Hawks could proceed they need the statement. Further, the Hawks could not approach former CEO Markus Jooste for questioning without that statement under oath. The primary focus of the Hawks investigation was on matters dealt with in the PwC report – which was still outstanding and would only be finalised in December 2018. He stressed the importance of having access to the PwC report, for its own investigation. There would be a better understanding of what happened at Steinhoff, once the report is released. The interim report from PwC should shed light of what happened and will inform the statement of Booysen as to what really happened. He added that the mandate of the PwC investigation must be given – as that would indicate what to expect in the report. He also gave an update on matters with Interpol. The investigations in Germany and in the Netherlands were of great importance, to give context of what was happening. The Hawks have also made progress with authorities in Germany and will be of assistance for an application to Interpol.

Discussion

Mr Carrim asked why the Hawks thought Steinhoff was not availing the said statement- unless if the Committee was being misled. Why was Hawks not arresting those not cooperating if it had the power to do so? It reinforced the belief that it was not handling the matter with the seriousness it deserves. The Hawks’ job was precise and clear. One gets the sense that the Hawks was not taking this matter seriously. He suggested that the head of the Hawks appear before the Committee at the next briefing. It seems the Hawks was the weakest link to these investigations. Something should be done to ensure progress on this matter. He put it to Khana that the Hawks needed help. If, as seems to us, the Hawks does not have capacity because of the complexity of these issues, then what capacity do you need and why could it not you get external capacity?

Mr Maynier said it appeared there was no investigation underway by Hawks. How many investigators did the Hawks have and did it have enough capacity and resources to spearhead an investigation of this magnitude. How many investigators were allocated to this specific case? He asked why Jooste had not have been interviewed?

Mr Lees asked if the reports received by the CPIC were also forwarded to the Hawks. He found it quite strange that other regulators appeared to be moving forward whereas there was no progress on Hawks part. What had the Hawks acted on since the last briefing?

Ms Fubbs asked why the Hawks could not move forward given the amount of information within the public domain, adding to the one sitting with other regulators. What was blocking Interpol from releasing said information? It was concerning that brakes had been put on the investigations.

Major-Gen Khana, in response, said the team dealing with this case consists of approximately six investigators, with a R5 million annual budget. The audit function was being outsourced. Information under oath was not forthcoming thus the Hawks had to rely on media reports. Other regulators such as IRBA had also not been forthcoming in sharing their own information they had gathered. The Hawks could not just arbitrarily make arrests, procedure had to be adhered to. Ms Sonn had furnished a statement under oath. There was not a shred of evidence under oath that would allow the Hawks to approach anyone for questioning. Despite several meetings with Steve Booysen, that statement has not been forthcoming. Not for the past eight months since the Section 34 report was filed in January. As police, that statement will set the tone for the investigation and this statement had not yet been received.

Mr Carrim asked why Steinhoff had not furnished the said sworn statement.

Mr Maynier said it appears to have been a lie that Steinhoff had lodged a charge initially.

Ms Sonn was unhappy with the suggestion that the company is not doing everything in its power to cooperate with the Hawks. She was extremely disheartened, given the information shared and details provided. Mr Booysen had been sent a text and had replied that he had no idea that the Hawks was still awaiting a statement from him. Steinhoff was making every effort to ensure that the case with the Hawks is solid and had fully adhered to Hawks’ instructions. Steinhoff’s legal representatives made themselves available to the Hawks on several occasions.

Adv Robert Driman, Werkmans Attorneys, outlined how the company had met a colonel, captain and brigadier from the Hawks on more than one occasion. Ms Sonn’s sworn report had been submitted on official advice. During a meeting in July, Steinhoff representatives sat in a room with 20 people or more. Only five were from Steinhoff. The rest were regulators and law enforcement. If that team of the Hawks was not the one doing the investigation, then it should be known to Steinhoff.

Ms Sonn added she was unhappy that the Committees got a sense that there was no cooperation. Steinhoff needed to do what it had been asked to, try and pull the whole team together, including the general, and get to the bottom of it. But she was extremely disheartened.

Mr Carrim said the Committees felt that, overall, the regulators had made some progress since the March meeting with them in pursuing those who committed irregularities in Steinhoff but felt that they should and could do more and need to do so expeditiously. The prime concern though was the abysmal performance of the Hawks. Of course, the Committees realise the complex and global nature of the investigation, but it was clear that the Hawks were doing very little beyond having meetings with no results. The Hawks need to be provided with the necessary capacity and the resources to conduct an effective and expeditious investigation. This could include drawing in expertise from elsewhere. After all the collapse of the Steinhoff shares is the biggest corporate scandal in South Africa’s history, and those responsible must be made to pay. The private sector in this country gets away too easily with its crimes. There were huge discrepancies between the accounts of the Hawks and Steinhoff on the extent of cooperation between them and the Committees recommended that they meet urgently and report back in writing on progress within two weeks.  The Committees will write to the Police Minister, Mr Bheki Cele and the Chairperson of the Portfolio Committee on Police, Mr Francois Beukman, to urge them to ensure that the Hawks do their Steinhoff investigation effectively. The Committees will meet with former Steinhoff CEO, Mr Markus Jooste, on 5 September.

The meeting was adjourned.