Nugent Commission recommendations: progress report by SARS

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Finance Standing Committee

17 September 2019
Chairperson: Mr M Maswanganyi (ANC)
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Meeting Summary

Nugent Commission of Inquiry into SARS: interim findings and recommendations
The Committee was told that it would take two years to undo the damage done by the “massive failure of governance” as described by the Nugent Commission, under the former SARS Commissioner.

Treasury Deputy Director General Ismail Momoniat said both SARS and government would have to consider how to deal with international consultancies which had legitimised the seizure of SARS and other state-owned entities. Chapter Three of the Nugent Report went into “shocking detail” on the role of Bain Consulting at SARS. Companies used their international brand to secure work in South Africa but then disassociated themselves from SA operations when they ran into trouble. Aside from breaking South African laws, the question was whether they had broken their home country laws. Mr Momioniat said he shared the frustration of everyone that no one had been charged yet. However, over the past few months there had been very positive interactions with law enforcement agencies.

Several Nugent Commission recommendations on governance at SARS would require legislative changes. These included additional powers for the Minister of Finance to participate in aspects of SARS governance, while ensuring its autonomy remained intact. The Nugent Commission believed strongly that an Inspector General should be appointed to detect abuses. Cabinet had expressed broad support for the recommendations. A discussion paper would be published later this year and a draft Bill tabled early next year.

SARS Commissioner Edward Kieswetter spoke about what was being done to implement the Commission’s recommendations. SARS’s capabilities had been deliberately fragmented by operating model devised by Bain Consulting. Steps were now being taken to restore the Large Business Centre, Compliance Unit and High Court Litigation Unit. SARS’s capacity to deal with the illicit economy was also being restored to deal with tax evasion in the tobacco, liquor and cash and carry industries and to crack down on syndicated tax fraud.

Procurement processes were being reviewed. The contracts with Bain and the consultancy firm, Gartner, had been referred to the Directorate of Priority Crimes. SARS would recommend that the firms be included on the National Treasury’s list of suppliers with whom the government would not do business.

Mr Kieswetter said efforts were being made to attract skilled IT staff. Senior employees who had been displaced and marginalised by the Bain operating model had been put into meaningful jobs and there were attempts to rehire staff who had left in what the Nugent Commission referred to as an "exodus of skills".

The activities of the SARS executive committee had been paused while performance reviews were conducted following the Commission’s finding that some members had been appointed without the prescribed processes being complied with and that some had been compliant in the decline of SARS.

 

Meeting report

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasur, said he would speak on policy issues raised by the Nugent Commission, while Mr Kieswetter would provide an update on the implementation of the Commission’s recommendations.

The Commission found that the failings at SARS which were listed in its terms of reference stemmed from a massive failure of governance at SARS under its former Commissioner. Its key recommendation that the Commissioner be removed was implemented immediately by the President. Other recommendations were aimed at improving governance and developing robust mechanisms to preclude such failures in future.

Mr Momoniat outlined the legislation governing SARS. The SARS Act gave SARS and its Commissioner a high degree of autonomy in organisational structure and staff matters. SARS reported to the Minister of Finance, who approved the terms of appointment of senior managers. However, the Minister was not allowed access to taxpayer affairs and could not take over any of the Commissioner’s functions. The Tax Administration Act instituted checks and balances on the powers of the Commissioner, provided for taxpayer confidentiality and set up the Office of the Tax Ombud. Other legislation set out policy on income tax, VAT, customs and excise duties.

Mr Momoniat said several proposals on the governance of SARS would require legislative changes. The Commission had proposed that the Minister of Finance be given additional powers to participate in some aspects of SARS governance, for example, in approving its business plan. However SARS autonomy should remain sacrosanct. The SARS Commissioner should be appointed by the President, after consulting with the Minister, according to a transparent process.

The Nugent Commission believed strongly that an Inspector General should be appointed to detect abuse and protect taxpayer confidentiality. It recommended that there should be a mandatory executive advisory committee, including one or more deputy SARS Commissioners. The Nugent Commission was not in favour of an oversight board, which was recommended earlier by the Davis Tax Commission. The Nugent Commission also affirmed the current role of the Tax Ombud which was confined to broadly addressing taxpayers’ rights without being involved in the governance of SARS.

The Cabinet had expressed broad support for the recommendations and recognised the importance of strengthening the autonomy of SARS and its capacity to collect all revenue due.

The Minister of Finance would publish a discussion paper later this year to be followed by consultation and the publication of a draft SARS Amendment Bill for public comment. It was expected that the Bill would be tabled in Parliament early next year.

Mr Momoniat said both SARS and the Government would have to consider how to deal with international consultancies. These firms had legitimised the seizure of SARS and other state-owned entities. Their activities included the firing of officials and production of so-called "independent” reports to protect officials implicated in criminal activities. Chapter Three of the Nugent Report went into “shocking detail” on the role of Bain Consulting at SARS, including secret meetings one year before the appointment of the former Commissioner.

Mr Momoniat accused Bain and other companies like Gartner and Hogan Lovells of double standards. They used their international brand to secure work in South Africa but then disassociated themselves from SA operations when these ran into trouble. Aside from breaking South African laws, the question was whether they had broken their home country laws such as the Foreign Corrupt Practices Act in the US. He asked: “Would Bain have visited the home of the US President to secure work from the Federal Government?”

SARS Commissioner, Mr Edward Kieswetter, spoke on the steps being taken to implement the Nugent Commission’s recommendations.

The Commission had found that a review of the SARS operating model which Bain was contracted to review sought to deliberately render SARS incapable of fully serving its mandate. Trusted functional capacity was dismantled, including the Large Business Unit, Compliance Unit and High Court Litigation Unit. SARS capacity to deal with the illicit economy was also affected. The Bain review impeded SARS modernisation programme, marginalised senior employees and executives and triggered an exodus of experienced and capable staff.

The Commission found that there was a decline in employee morale and confidence and a decline in hard-won public confidence in SARS.

Procurement
Mr Kieswetter said procurement processes were being reviewed in accordance with concerns raised by the Commission. Contracts for information technology and debt collection had been reviewed, but no action had been taken to have them set aside as they had already lapsed. SARS had engaged the legal teams of the IT company to address questions about the lack of value for money and to make certain disclosures. The contracts with Bain and the consultancy firm, Gartner, had been referred to the Directorate of Priority Crimes in April. SARS would recommend that the firms be included on the National Treasury’s list of suppliers with whom the government would not do business.

Large Business Centre
Mr Kieswetter said steps were being taken to re-establish the Large Business Centre to rebuild relationships with large businesses and high net worth individuals. The Bain review had fragmented the end-to-end service offered by the unit and had misplaced key employees dealing with issues such as auditing, transfer pricing and legal matters.

Compliance Unit
The Compliance Unit had been re-established after being dismantled by Bain. This had left SARS extremely vulnerable as it was unable to scientifically assess tax compliance levels. The unit was currently developing a compliance and risk strategy and its resources and capabilities would be expanded.

High Court Litigation Unit
Mr Kieswetter said that, before the restructuring of SARS, the High Court Litigation Unit had worked closely with the large Business Centre in dealing promptly with High Court revenue litigation. The new model had splintered the unit into regional structures which became dysfunctional. A new unit would be rolled out by October following research into international benchmarks.

High-level Integrity Unit
The Commission had recommended that the High-level Integrity Unit be re-established and this would be done by November. In the meantime, there was an intensive effort to set the tone from the top and reinforce the culture envisioned in the SARS Code of Conduct.

Staffing
Mr Kieswetter said the Commission had pointed out shortcomings in SARS information technology. The IT division had been stabilised by temporarily filling key positions with experienced IT professionals. A technology strategy would be finalised by October.

Mr Kieswetter had met with all the employees whom the Nugent Commission found to have been displaced into meaningless roles by the Bain operating model. Some had been reinstated in their original jobs and new, meaningful roles had been found for others. Steps were being taken to re-recruit skilled staff who had left the organisation.

The activities of the SARS executive committee had been paused while performance reviews were conducted, as required by the Commission which found that some members had been appointed without all the prescribed processes being complied with and that some had been compliant in the decline of SARS. National Treasury was reviewing the SARS Act and a new executive structure would be finalised. The review would also provide clarity on the determination of performance bonuses for senior management.

Mr Kieswetter briefed the Committee on operational issues raised by the Nugent Commission:

Illicit trade
A capability for investigating illicit trade had been re-established in the SARS enforcement division early in the year. It would focus on customs and excise evasion schemes in, among others, the tobacco, cash and carry, textiles and alcohol industries.

There would also be a focus on other abusive practices:
• illicit financial flows such as advanced import payments and currency smuggling;
• the practice of phoenixism - conducting trade through successive entities which were declared insolvent;
• Abusive liquidation and business rescue practices;
• Syndicated refund fraud and organised VAT fraud, such as carousel structures.  

Mr Kieswetter said investigators were working on 17 projects which included 700 audit cases.

Vat refunds
Mr Kieswetter said the Nugent Commission had called for the removal of obstacles that prevented timeous repayment of VAT due to taxpayers. Since October 2018, SARS had repaid VAT without applying a monthly refund target. Adjustment of risk parameters had minimised repeat audits on compliant vendors.

Litigation by former Commissioner
The Commission had found that litigation and other costs were incurred in the personal interests of the former Commissioner. SARS had engaged legal counsel to recover the costs from him.

Settlements
Proposed amendments to the terms of reference for settling tax disputes were being reviewed. A draft amendment that would have given the former Commissioner sole authority to settle disputes of over R100 million had not been approved by the acting Commissioner who succeeded him.

Case selection
New processes for selecting investigative audits were being developed to allow for greater vigilance in dealing with “”persons of ostensible wealth.”

Reputational matters
Mr Kieswetter said the Nugent Commission had pointed to denunciatory media statements issued by SARS which had brought the organisation into disrepute. Steps had been taken to restore authority for media matters to designated staff reporting to the SARS Commissioner’s office. There was ongoing engagement with the media and the public to restore confidence.

The Commission had found that SARS relationships with other state organs had been eroded. SARS was at various stages of improving working relationships and completing memorandums of understanding.

SARS was also restoring its membership and participation in international organisations.

Mr Kieswetter ended his presentation by saying that the damage done to SARS meant it would take time, effort and persistence to rebuild the organisation, restore its values and culture and rebuild public confidence and trust.

Discussion
Dr D George (DA) said the Nugent Commission report “reads like a horror story.” However, it was pleasing that progress was being made in rebuilding SARS. Referring to executive bonuses, he asked what the executive was doing when SARS was “falling over.”

Dr George said that there should be consequences for Bain and Gartner as well as for the former Commissioner. “Tom Moyane should be in prison for the damage he did to SARS and the economy”.

He agreed it was vital to rebuild the Large Business Centre, but asked how damaged trust could be rebuilt. He asked if SARS now had the capacity to deal with illicit trade.

Dr M Ndlozi (EFF) said it would be misleading to say the appointment of the new SARS Commissioner was done transparently. Interviews were done in private and not reported in the media. He asked about Mr Kieswetter’s relationship with Mr Trevor Manuel who served on the selection panel. He wanted to know whether they were related or whether they were friends, saying Mr Manuel had recused himself from Mr Kieswetter’s interview but not from the selection process.

Dr Ndlozi referred to allegations that a “rogue unit” had operated within SARS. He wanted to know if SARS had conducted “intelligence surveillance” and what sort of surveillance equipment it possessed.

On illicit financial flows, there should be serious investigation of the mining industry and multinational companies.

Dr Ndlozi added that he took exception to the fact that the National Treasury Director General and the Minister had not attended the meeting.

Mr G Skosana (ANC) welcomed the steps being taken to rebuild SARS and the action taken on Bain and Gartner. A review of all SARS contracts for value for money was a positive step but this should be handled sensitively to avoid accusations of a witch-hunt. He asked about the different views on whether oversight of SARS should be done by an inspector-general or by a board as recommended by an earlier commission.

Ms M Mabiletsa (ANC) said it appeared from Mr Momoniat’s presentation that National Treasury was treating the challenges at SARS as “business as usual”. The restructuring process should move a bit faster and timelines should be given.

On the illicit economy, Ms N Abraham (ANC) asked what steps were being taken against drug dealers who were making serious money. She asked what progress was being made in the matters of Bain and Gartner and for more information on SARS’s engagements with large businesses and high net worth individuals.

Response
On consequences for illegalities at SARS, Mr Momioniat said he shared the frustration that no one had been charged yet. However, over the past few months there had been very positive interactions with law enforcement agencies. “I have a sense that there is movement”. He added that there was no doubt that Bain should be charged.

On the proposal for an inspector-general, Mr Momoniat said the concept was a new one. There were limits to what an oversight board could do, given taxpayer confidentiality. Greater clarity on this and the role of a tax ombud would be provided in the discussion paper in October.

On surveillance, Mr Momoniat said SARS did need an “intrusive unit” to deal with illicit flows of money, but this intelligence capacity was “not what spooks do.”

Mr Momoniat said the Nugent Report had dealt with the process for appointing the SARS Commissioner, and this had been followed. Mr Manuel had taken the allegations of a conflict of interest to court and won the case. The credibility of SARS should not be undermined by unsubstantiated allegations.

Mr Kieswetter thanked Members for the support they had expressed.

On Dr George’s question about the executive’s role when SARS was collapsing, the Nugent Commission had found that some members were compliant when they should have acted independently.

On the Large Business Centre, its role was to deal with companies with a turnover of more than R1 billion. The cut-off for high net worth individuals would be determined according to the unit’s capacity.

On questions about surveillance and a rogue unit, Mr Kieswetter replied that SARS was entitled by law to gather intelligence and use whatever equipment it required - but only in pursuit of its mandate. A cell phone could be used for surveillance and equipment per se was not overt or covert. The matter of a rogue unit was being engaged with by the Public Protector so he would not comment on it other than to say staff investigating illicit trade would conduct themselves in a professional manner. People had a right to hold SARS accountable for its actions.

Dr Ndlozi disagreed that SARS was empowered by law to gather intelligence, saying the Constitution provided that only intelligence agencies set up by the President could spy on citizens. He asked again what surveillance equipment SARS used.

Mr Kieswetter replied that SARS had 4 000 recording devices and cameras in offices around the country. Taxpayers were recorded only with their permission.

Mr Momoniat said he agreed with Dr George that what happened at SARS “really is a horror show”. It would take two years to undo the damage and restore revenue collection. It was important to restore SARS reputation and tax morality generally. It was necessary to deal with corruption and establish good governance in the country so that people would be prepared to pay their taxes.

In closing the meeting, the Chairperson said there were several ambiguities arising from the recommendations of the Nugent Commission and the Davis and Katz Commissions that had preceded it. Greater clarity was needed on the role of an inspector-general, SARS autonomy and the Finance Minister’s role in appointing executives and approving the business plan. The National Treasury needed to be clear on which of the recommendations of the three Commissions were in the best interests of the country.

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