VBS Mutual Bank

Meeting report

The Chairperson welcomed everyone and indicated the Committee would want to know what happened at VBS Mutual bank. The Committee also wanted to know why, according to the South African Reserve Bank (SARB), the bank could not be saved. He indicated Mr F Shivambu (EFF) had sent a letter questioning whether he, as the Chairperson and serving on the Central Committee and Politburo of the South African Communist Party (SACP), has a conflict of interest in chairing the sitting of the Committee meeting on Adv Terry Motau’s report on VBS Mutual, “The Great Bank Heist.” He categorically denied that he was conflicted and explained that he knew absolutely nothing about the alleged donation to the SACP and that he was informed by the party’s office bearers that the SACP received no such donation.

Mr M Ndlozi (EFF) expressed concern about the Chairperson’s dismissiveness of the inquiry from the EFF. The call was for the Chairperson to declare whether he was conflicted and if he had any vested interests. It was incorrect to trivialise the matter. 

The Chairperson insisted that he was not conflicted regarding VBS. He denied knowing anything about the said donation and said SACP Secretary General Blade Nzimande and the party’s treasurer also did not.

Mr D Maynier (DA) said it seemed attack was the best form of defence for the EFF, which allegedly received money from VBS via the brother of its deputy president who has also been accused of receiving money.

South African Reserve Bank (SARB) presentation
Mr Kuben Naidoo, Deputy Governor, SARB, said VBS Mutual Bank was put into curatorship on 10 March 2018. Initial work of the curator found fake deposits, large related party loans, significant bad loans (no repayments), weak systems and the possibility of fraud. Financial statements and data returns to the regulator were also not an accurate reflection of reality. Subsequently, Adv Terry Motau SC, with the support of Werksmans, was appointed to conduct a forensic investigation into VBS Mutual Bank, and periodic reports were provided to the Prudential Authority (PA) during the process. Based on these periodic reports, the curator successfully applied to the court for the liquidation of Vele Investments and for the provisional sequestration of five individuals. The CEO of the PA laid a complaint with the Hawks, and the Reserve Bank met the National Prosecuting Authority (NPA) to brief them on the matter, in particular the alleged fraud in relation to falsified accounts and data returns to the Reserve Bank.

On repayment of retail depositors, the R100 000 guarantee fully covered the deposits of approximately 97% of the number of retail depositor accounts (excluding related party accounts). The repayment process is proceeding well; and customers have three years to claim their funds. To date, about half of the depositors had visited a Nedbank branch to activate their accounts. Many have withdrawn their deposits in cash, some have transferred amounts to other banks and some people have kept a portion of their deposits with Nedbank. In early October 2018, the curator wrote to the PA informing it that he had compiled the restatement of the 2017 accounts on a best effort basis. This restatement shows that the bank is massively insolvent. This results in a negative equity position of circa R372 million. These results may change/deteriorate further as a result of further developments arising from the Investigator’s report. In terms of the Mutual Banks Act, read with the Banks Act, once the PA has evidence that the bank is insolvent, the PA is legally obliged to approach the courts to apply for liquidation of the bank.
On the process going forward, the court will hear the application for liquidation on 13 November 2018. Anyone who objects to the liquidation can oppose the application in court. Assuming that the court grants the liquidation, the bank will be placed in liquidation. This process will entail recovering monies owed to the bank, selling assets of the bank, closing operations; all while continuing to collect on loans owed to the bank. This process may take several years to complete. The Reserve Bank’s advice to anyone who wants to save the bank or provide similar services in the region was to use any financial resources that they have to apply for a new banking license –this will be cheaper and will avoid the system and legacy problems associated with the old VBS. A new licensee may even apply to use the same name. Any new license will be processed in terms of the applicable legislation.

Discussion
Ms T Tobias (ANC) asked if it was possible to make available the names of the five individuals that the curator sought to sequestrate. Who were the 53 individuals and companies implicated in the collapse of VBS? The recovery of funds through liquidation and sequestration should be with the intention to recoup losses incurred, guided by legal prescripts.

A DA Member wanted to know about compliance of banking legislation. Was compliance monitoring under the Reserve Bank’s purview? Treasury knew about the cases of municipalities depositing money illegally as far back as October 2016. Did Treasury inform the Prudential Authority then? What was the likelihood of recovering municipalities’ monies?

Mr Maynier complimented the compelling writing by Adv Motau. He asked how many possible recipients of VBS money were not included in the Motau report. Could the Reserve Bank explain whether it disclosed all the necessary information relating to the VBS payments and transactions? How many possible recipients of VBS funds were not included in the Motau report? The collapse of VBS was a result of criminality. The collapse raised questions about the actions taken by the Reserve Bank in relation to VBS since 2016. Did the Reserve Bank act timeously and robustly? Was there going to be an inquiry into the actions of regulators?

Ms N Ntantiso (ANC) asked if there had been blind spots which should have been avoided in hindsight. If the bank liquidation processes go ahead, what would happen to its employees?

Mr A Lees (DA) asked what action would be taken to recover the monies if the bank’s assets were not enough, in the event the application for liquidation is successful.

Mr Ndlozi said the Motau report did not read like a very good legal document to him. There was a lot of fiction there. He asked why certain people were interviewed before the report was released, yet others were not. What was the criteria used to identify some people in their individual capacities whilst others as companies? Investigations were not done thoroughly and the courts might decide to set the report aside. Why was there such a quick call to liquidate VBS? It was very odd that the Reserve Bank does not want to save a black bank. Many other banks have been saved and so it is wrong to not save VBS. He also questioned why some people were named in the report, such as Brian Shivambu.
The Chairperson asked if it was fair to mention people’s names in a forensic report without hearing their side of the story. What happened to the then CEO and anybody else accused of irregularities at African Bank? Unless convinced otherwise, the view of the majority in the Committee was that VBS Bank must be saved. To have four banks dominate 85% of the market in the South African context was unacceptable. The collapse of VBS has reinforced racial stereotypes that Black people are corrupt and could not run banks. The bank should be revived and nurtured. The collapse of the VBS was a severe setback for the transformation agenda. The right balance needed to be found.

Mr Naidoo said VBS was massively insolvent to the tune of about R372 million. The Reserve Bank’s October 29 court application for the liquidation of the bank will be heard on November 13. The process of liquidation could take several years to complete. The process would entail recovering monies owed to the bank, selling assets and closing operations while continuing to collect on loans owed to the bank. He believed that creditors could not hope to receive more than about 20c-30c on the rand once the liquidation was finalised. He was not optimistic that a huge amount of money would be recovered once the liquidation process was concluded. The Reserve Bank had no choice but to apply for the liquidation of VBS once it became insolvent. The names of the five individuals whom sequestration was sought for were in the public domain. Also, the curator had begun processing staff retrenchments.

Mr Naidoo added that, primarily, it is not the task of the Reserve Bank to police compliance with the Municipal Finance Management Act. The legal mandate of the Reserve Bank was not necessarily to save banks from failing. The Reserve Bank’s mandate was to protect deposits and to ensure financial stability. The Reserve Bank genuinely tried to save VBS and fully subscribes to the transformation agenda. However, there is a distinction between sheer stupidity and criminal conduct. This is not a victimless crime. There are victims and they are poor.
Under liquidation, there was a strong possibility that the bank could be saved- a cash injection might save the bank. In hindsight, regulators had relied too much on auditors- that was one lesson learned from the VBS debacle. The Reserve Bank’s advice to anyone who wants to save the bank or provide similar services in the region is to use any financial resources that they have to apply for a new banking licence- this will be cheaper and will avoid the system and legacy problems associated with the old VBS. A new licensee may even apply to use the same name. He insisted that the Reserve Bank did act on allegations made in September 2016 against VBS.

Adv Terry Motau said the status of his report is what was being missed. He was not at liberty to answer some of the question posed by Members, because the report was being challenged in a court of law. The question, who are the 53 companies? These were mentioned in the report that was published. He understood why Mr Ndlozi raised the matter of Mr Brian Shivambu being named. If Mr Shivambu takes the matter to court, the question will be raised. One of the parties threatening litigation had finally acted on the threat and the issues would be dealt with in court. On his writing, what happened at the bank affected the poorest of the poor and he wrote the report so that it could be understood by the people on the street. If that constitutes fiction and is a ground for review, again, let the courts decide.

Mr Ndlozi said Adv Motau’s responses were patronising and dishonest. It is a provocation. The poor know how to read. Did Adv Motau meet any individuals to discuss the report before it was released? On what legal basis would Adv Motau put a person's name in a report implicating that he is a looter? He asked how much was paid to the curator and by whom? He wanted to know if Adv Motau met with Minister Pravin Gordhan while working on the report, or with Treasury officials, such as Deputy Director-General Ismail Momoniat.

Adv Motau replied he did not meet Mr Pravin Gordhan to discuss the report. He added that he had not seen Minister Gordhan for quite some time. He had to report back during the investigation, and Treasury officials would be present at the meetings.

The Chairperson wanted to confirm whether Adv Motau, in his response, meant neither Pravin Gordhan nor Ismail Momoniat influenced the report.

Adv Motau answered in the affirmative.

Mr Naidoo said that under normal circumstances, the cost of curatorship is for the account of the bank but because the bank did not have enough money, it was paid by Treasury. The forensic report found that considerable fraud was committed with about R1.9 billion looted from the bank. The lead audit partner from KPMG was complicit in the fraud and the cover up.  VBS was essentially a Ponzi scheme for seven groups. It is insolvent and R372 million in negative equity. That is how much it will cost to save the bank. He reiterated a new licence would be best way to save bank.

National Treasury input
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said Treasury does not get involved in the day-to-day running of banks. The curatorship was an attempt to save the bank and ensuring the interests of depositors are protected. Since the forensic report was received, Treasury had interacted with investigators to try and see how the matter could be taken forward. The forensic report identified clear issues of non-compliance with the Public Finance Management Act. During Treasury’s interactions with investigators, the question was about what more could be done subsequently. As pointed out in the report, some income might not have been declared to SARS. Authorities needed to talk to each other to strengthen oversight and control systems. However, it was one thing to deal with regulatory failures and weakness- which will be addressed through Twin Peaks, and another to protect depositors’ interests. Therefore, having deposit insurance was one urgent need. He added the political climate also had a role to play in the non-compliance and subsequent collapse of VBS. It is an unpopular thing to say but it definitely contributed.

National Prosecuting Authority (NPA) input 
Adv Silas Ramaite, Acting Head, NPA, said at least five senior prosecutors and top officials from the agency's Asset Forfeiture Unit were part of the multi-pronged investigation, which also included the Financial Intelligence Centre. It was still too early to indicate which individuals were likely to be prosecuted but the issue at hand was bigger than fraud and theft. There has been a lot of focus on the fraud and the theft that took place but the issue was actually much bigger than that, from a prosecution point of view. This had been raised with the prosecutions team and was currently under discussion. It was in fact racketeering at its worst and that was in respect of the prevention of organised crime because it involved fraud and theft, and it also involved reckless trading, which is one of the lesser-enforced crimes in SA. Once the investigations were complete, NPA would then be able to start working on draft charges.

Hawks input
Adv Godfrey Lebeya, Head, Directorate for Priority Crime Investigation, told the Committee that statements from at least 65 potential witnesses had been obtained as part of the Hawks’ investigation into the looting of VBS Mutual Bank. Preliminary witness statements had been obtained from 65 individuals familiar with how “The Great Bank Heist” took place and this did not include any of the 53 politicians and executives and other associates implicated in Adv Terry Motau's report. Ten investigators had been dedicated to the prosecution-led VBS probe.

Independent Regulatory Board of Auditors (IRBA) input
Mr Bernard Agulhas, CEO, IRBA, said IRBA began monitoring the VBS Mutual Bank developments from the time the bank was placed under curatorship by the Reserve Bank. An investigation commenced on 16 April 2018 into two registered auditors –the engagement partner and another partner who both allegedly had undisclosed financial interests. Both Respondents had responded to the initial investigation letter; however, not all requested information has been provided by the Respondents. IRBA had also opened an investigation into an internal auditor. The scope of investigation had been extended to include the engagement quality control review partner on 12 October 2018.
IRBA does not conduct criminal investigations. Its investigations involve a review of the audit working papers and any supporting documentation in order to determine whether the auditor complied with auditing standards and the professional code of conduct. Investigation was therefore into the quality of work performed and the conduct of the auditor. He assured the Committee that IRBA will work with other relevant authorities wherever the Act allows. Due process had to be followed in the investigations. IRBA was busy reviewing the Motau Report published on 9 October 2018 and called for further evidence for investigators to work through and assess before completing the investigation. At that point, proposed charges for recommendation to the Investigating Committee will be formulated. IRBA was committed to fast-tracking and prioritising the investigation. The scope of the investigation had increased dramatically and therefore IRBA was not able to advise how much additional time is required. Progress would rely on cooperation from all parties.
SA Institute of Chartered Accountants input
SAICA said there were ongoing deliberations on the conduct of two of its members who were involved at VBS matter. The professional conduct and disciplinary committee has a sanctioning mandate of up to R500 000 per charge as well as expulsion from the profession. Further details would be provided to the Committee if need be. 

Financial Sector Conduct Authority (FSCA) input
Mr Olano Makhubela, Divisional Executives: Retirement Funds, FSCA, said the FSCA was engaging Treasury to consider offering some form of assistance in the form of a guarantee to the most vulnerable groups in society having deposits with VBS. The Bophelo Benefit Services and Beneficiary Fund deposited substantial monies at VBS, and caters for widows and orphans. Directly interested parties were also being engaged to see if they could possibly inject funds as part of their social responsibility mandate to stabilise the aforementioned beneficiary fund. He added the existing curatorship was in the process of being reviewed. 

Discussion
Ms Tobias asked about the steps taken to collate information deemed to be admissible in court. She asked if assets forfeited by the Asset Forfeiture Unit would be used to compensate losses before liquidation of the bank. There were vulnerable beneficiaries who needed immediate reprieve.

A DA Member said the case of municipalities depositing funds at VBS was brought to Treasury’s attention as far back as October 2016. Treasury only got to issue its directive in August 2017. He then asked why these municipalities were permitted to carry on making those deposits after the directive. Does Treasury need more teeth to deal with such cases of non-compliance? How likely was it that the matter would be handed over to the NPA for prosecution?

Mr Maynier asked for an indication when the investigation by the Hawks would be completed and when prosecution should be expected. Was the seizure of assets of the individuals who received gratuitous payments from VBS being considered? Was Treasury going to launch an inquiry into how the VBS matter was dealt with from the outset?

Mr N Nhleko (ANC) noted that the Adv Motau report dealt with individual alleged transgressions but spoke little about lapses in regulatory oversight. It would be important to conduct a study to determine how the collapse happened without regulators identifying cracks timeously.

Mr Ndlozi said the VBS failure was not on the part of regulation but the absence of conviction to protect black people. Regulators ought to have known the objectives of the National Democratic Revolution. Looking back at previous Reserve Bank interventions with troubled banks, it was the practice to try to save them. But this was not the case with VBS which the Reserve Bank was hell-bent on killing. Everyone else is allowed to fail, but if black people have been found to fail, you bury them. This is the first time VBS has any problems and the first reaction is: kill them. It kept the finance industry "lily-white". He had no doubt that there will be swift criminal prosecution. The matter was being publicised by the predominantly white-owned media. Law enforcement is very swift on blacks.

The Chairperson said there was a perception that SAICA was reluctant to sanction errant auditors. He would engage with them further offline. There has to be some sort of formal inquiry on the VBS matter. The sense was that investigations were moving excruciatingly slow. The confidence in the criminal justice system wanes if matters are not being expeditiously concluded. He thanked Adv Motau, who had requested to leave earlier, for coming before the Committee. He would be called at a later date, if and when Committee required his assistance.

Mr Momoniat, in response, pointed out that the Reserve Bank now does have more teeth with Twin Peaks, although it was going to take time to implement. However, SARB does not run banks; it only plays a supervisory role. He emphasised that lifestyle audits had to be done. The audits are being talked about, but it is time that these are conducted. He had volunteered to have one done on himself. The questions that should be asked are; did the Financial Intelligence Centre (FIC) pick up any suspicious transactions, was this income declared to SARS, no matter how illegal it might have been.

Adv Ramaite said, generally investigations are ‘excruciatingly slow’- more so if they are complex in nature. The Motau report was insufficient to take the NPA up to prosecution but gives a glimpse into the matters which needed to be investigated. No charges had been formulated against any individuals yet but the crimes are more than fraud and theft, main offense is racketeering. An application for sequestration in respect of an entity that does not necessarily fall in the categories of companies and individual was underway. Sequestration would targets assets. The NPA was trying its best to finalise the matter as speedily as possible.

Adv Lebeya said the admissibility of evidence would be guided by the prosecution. Also, there is never an element of negligence in fraud. Fraud, in essence, is a premeditated crime.
 
Mr Naidoo, in response, said the last time fraud was found at a bank was at Regal Bank. Mr Jeff Levenstein, the founder and CEO, was doggedly pursued and the Reserve Bank fought huge battles for him to be prosecuted. He is serving a sentence of eight years for fraud. The bank collapsed in 2001 and was liquidated in 2004. We don't care whether you are black or white, if you loot a bank we're going to come for you.

The Chairperson, in closing, said at this stage it would be reasonable to note that the gap between the majority in the Committee and the Executive has narrowed. The focus should be on rescuing the banking services as far as possible, and the Committee would pursue the matter further with Treasury and the Minister over this parliamentary term and beyond. The Committee would like to see a mutual bank in the Limpopo area. The main concern was transformation and diversification as well as the interest of depositors. The Committee was not going to give up on its views. 

The meeting was adjourned.