VBS Bank investment impact on Merafong City Local Municipality

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Cooperative Governance and Traditional Affairs

04 December 2019
Chairperson: Ms F Muthambi (ANC)
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Meeting Summary

The Portfolio Committee did not get the logic behind the officials implicated in the R50m investment made to VBS Mutual Bank by the Merafong City Local Municipality only getting written warnings. They had failed in their fiduciary duties as required by the Municipal Financial Management Act to act in the best interest of the municipality by disclosing any material facts available to them to the mayor or council.

Mr Romeo Mohaudi was seconded to the municipality from West Rand District Municipality to be the acting municipal manager and he instructed the acting CFO to make the R50 million investment in June 2017. The acting CFO Mr Thys Wienekus although aware that the investment went against municipal investment regulations, complied with the request. Mr Wienekus reported the incident to CFO Antoinette Ngwenya on her return but she failed to report it. Her successor, Martha Chauke, appointed in November 2017, also failed to report it. Mr Wienekus and Ms Chauke were given written warnings for 12 months and Ms Ngwenya was no longer employed at the municipality and so received no sanction. Mr Mohaudi was still CFO at West Rand District Municipality although he was facing financial misconduct charges.

What came to light during the discussion was Mr Mohaudi was seconded from West Rand District Municipality where he was responsible for investing at least R75m of the West Rand District Municipality in the VBS Bank.

The money that was transferred to VBS Bank was ring-fenced for projects. It did not come from operational funds. Some of the money was taken from unspent funds from the call account. The impact of the wrong investment would be on the cash flow for future projects. What also surfaced was that the decision to invest in VBS Bank was not the resolution of the municipal council as required. The investment policy of the municipality was that long-term investments were the competence of the council, while short-term ones were the responsibility of the municipality’s accounting officer.

The Deloitte forensic report found the investment in VBS Bank unlawful. It is in contravention of Treasury regulations under the Municipal Financial Management Act (MFMA). The regulations do not allow municipalities to make deposits with institutions that are not registered as banks, which includes mutual banks such as VBS. Four officials from the municipality were found responsible for the investment. The Auditor General report also revealed the investment policy of the municipality was violated. A disciplinary hearing was held for Wienekus and Chauke who received a written warning, and criminal proceedings have been instituted against Mohaudi who instructed the transfer of R50m. It was not clear what would happen to Ngwenya who was no longer with Merafong City Local Municipality.

The Department of Cooperative Governance and Traditional Affairs (COGTA) informed the Committee that the municipality was in a surplus position but it owed Eskom R392m and was fourth highest municipal debtor owing Eskom. The R50m VBS investment could have been used to pay Eskom. It has been decided all municipalities owing Eskom should come with payment plans by February 2020.

Members asked where the Municipal Public Accounts Committee (MPAC) was when the decision was taken to invest money to the VBS Bank; what would be done to recover the lost money; why section 71 reports did not pick up these anomalies in financial management; the reaction of the mayor and council on the loss of the R50m; why the municipality should not be dissolved according to section 139(c); and if the municipality conducted meetings with communities and stakeholders about non-payment of services. Members complained about the lack of political accountability and the cavalier reaction to the R50 million loss.

Meeting report

The Chairperson hoped the municipality would be honest with the Committee and talk about its recovery plan and consequence management for the investment made with VBS Mutual Bank in violation of the Municipal Finance Management Act (MFMA). Money meant for service delivery has been lost. She asked if the current Executive Mayor, Municipal Manager, Speaker, Chief Whip, and CFO who were present were with the municipality when the investment was made in VBS.

They all indicated they were still with the municipality.

Mr Albie Nieuwoudt, Acting Municipal Manager: Merafong City Local Municipality, stated he was new in the acting position though he has been with the municipality for a long time. He said the municipal manager responsible has been suspended since 25 July 2019.

Ms Martha Chauke, CFO: Merafong City Local Municipality, indicated she was not the CFO at the time the investment was made in VBS, but she was at the municipality in a different portfolio.

Ms M Tlou (ANC) wanted to know if there were plans in place to address the water leakages and burst pipe challenges facing the municipality.

Mr Nieuwoudt replied that maintenance plans for water losses were in place. There was also a water strategy that has been developed for reservoirs that have been lost. The impact has been that the municipality has been getting a direct feed of water from Rand Water, especially upstream due to fluctuation of pressure. In terms of the strategy, the municipality was looking at fixing water leaks, infrastructure, and normalising pressure valves. Water losses have gone down. The water strategy was a multi-year plan and has been rolled out already. The main infrastructure projects were continuing as normal.

Mr K Ceza (EFF) said the most crucial matter the Committee had to confront was corruption. The municipalities were the face of service delivery, yet they were failing people in terms of their mandate. He wanted to know where the MPAC was when the decision was taken to invest money in VBS Bank. Second, he asked what would be done to recover lost money. Third, he enquired about the current financial health of the municipality. Fourth, he asked the municipality to explain what it meant by 'culture of non-payment' because the municipality was well aware of the socio-economic status of its people.

Mr Nieuwoudt explained the municipality has registered a claim with the VBS Bank liquidator as a way of recovering the lost money. The claim has been accepted. The Hawks were dealing with the case of Mr Romeo Mohaudi. The case was at an advanced stage of investigation. During 2014/15 financial year, the municipality's revenue collection was around 80%. During the second half of 2015/16, mines started to withhold payments. During 2015/16, the revenue collection was between 60% and 69%. One of the mines was liquidated during this period. The municipality tried to mitigate the losses by employing water and electricity cuts, but it was taken to court by Lawyers For Human Rights who won the case. The culture of non-payment was not something new in townships. The municipality was catering for indigent people who were registered on the database. The credit control policy of the municipality has provision for making payment arrangements. The municipality was lenient in terms of accepting down payments, but people were not coming forward to pay. The municipality then had to take a decision to settle Eskom through load-shedding, but still people did not want to pay. The culture of non-payment was being fuelled by politicians.

Mr Abram Tsotetsi, MPAC Chairperson: Merafong City Local Municipality, replied that MPAC was around when the decision was taken to invest in VBS Bank. He made it clear the decision to invest in VBS was not from the municipal council. The decision was introduced to the council after the investment was already made. MPAC then made its own investigation after receiving a forensic report on the matter. When MPAC asked for the report, it was told the report was not for public consumption. That was when the problem started. The Auditor General report indicated the investment policy of the municipality had been violated, and those responsible should be arrested and the money be recovered. After MPAC made its own report, the council wanted to refer the MPAC report. MPAC has been given space in terms of the law to do its work. Unfortunately, MPAC does not have the personnel to execute its work in terms of research and legal advice.

Mr C Brink (DA) asked if disciplinary action would be taken against those officials who authorised the investment in VBS Bank. He requested that the Committee be given a list of officials who have been dismissed or resigned before the completion of the investigation to ensure those implicated did not end up working in another municipality. The Municipal Systems Act dictates that officials found guilty should resign. It was sad that Ms Chauke was still serving the municipality after she was charged for not discharging her fiduciary duties.

Dr Kevin Naidoo, Executive Manager at COGTA, made it clear that the sanction of a 12 month written warning was not a good one. It needed to be reviewed and set aside. The regulations were set out in 2014 to deal with such financial misconduct. It is stipulated 10 years have to pass before being employed by another municipality. There must be an alignment between the offence and the sanction. Merafong City owes Eskom R392m. The good thing was that the municipality was in a surplus position, but the R50m thrown out of the window should have been used to pay Eskom. It has been decided all municipalities owing Eskom should come with payment plans by February 2020.

Mr Tebogo Motlashuping, Acting Deputy Director General: Institutional Development: COGTA, explained that before senior managers are appointed to senior positions they should be screened according to the law. Those implicated resign or jump ship before the finalisation of the disciplinary hearing, or are dismissed after the investigation. Government has a database of all people implicated in wrongdoing from all provinces and municipalities. 130 officials have resigned before the finalisation of their disciplinary cases. The information should be given to the national office by the provinces and municipalities.

The Chairperson wanted to know how COGTA classified those who were given golden handshakes.

Mr Motlashuping replied that there was no provision for golden handshakes in the regulations. In the database of the sector, the implicated would be identified as people to be charged and they would have to jump ship before their cases were finalised.

Mr G Mpumza (ANC) wanted to understand if the decision to invest in VBS was in line with the investment policy of the municipality. He asked if any immediate disciplinary measures have been taken.

Mr Nieuwoudt replied that disciplinary action was instituted against two officials, Ms Chauke and Mr Wienekus. Ms Ngwenya, who was also implicated, resigned. The only person implicated in the report regarding financial misconduct is Mr Mohaudi. He was the one who instructed the authorisation of the investment. There were three bids for the investment process. There was an instruction from him that the acting CFO (Mr Wienekus) should invest the money. The acting CFO and CFO (Ms Ngwenya) were implicated in the report for not exercising their fiduciary duties. When the new CFO (Ms Chauke) was appointed, the investment was already done.

Ms P Xaba-Ntshaba (ANC) asked the Executive Mayor to clarify the following questions: when was the investment made; when was the matter brought to the attention of the council; did the Mayor know the investment was illegal; what were the Mayor’s recommendations to the council; and what was the Mayor’s reaction when the matter was brought to her attention?

Ms Maphefo Mogale-Letsie, Executive Mayor: Merafong City Local Municipality, enlightened the Committee that the investment to VBS happened on 23 June 2017 at a time when there was an acting municipal manager. At the time Mr Mohaudi was seconded as municipal manager by the MEC and CoGTA, the VBS issue had not yet surfaced. The VBS matter came to the fore in March 2018 when the bank was placed under curatorship. The investment was disclosed in the 2016/17 annual financial statements but it was not raised as a finding by the Auditor General during the 2016/17 audit.
The Finance MEC was requested to institute a forensic investigation into the VBS Investment. Deloitte was then appointed by the Gauteng Provincial Treasury to investigate the matter. The forensic report was brought to Merafong City Council and four officials were implicated in the report. Three of the officials were still in the employ of the municipality. Deloitte SA advised the municipality to seek a legal opinion before implementing the forensic report recommendations. No disciplinary action was taken against the CFO, Ms Ngwenya, who was implicated in the matter, because she was not in the employ of the municipality as her contract ended 31 July 2017. During June 2017, Ms Ngwenya who was the CFO went on leave and Mr Wienekus was appointed to act on her behalf. According to the Deloitte report, Mr Wienekus was instructed by the acting municipal manager, Mr Mohaudi, to transfer the funds to VBS. Mr Wienekus reported the matter to Ms Ngwenya upon her return.
The VBS investment was part of the MFMA Section 52 report submitted to Council in July 2017. The municipality’s investment policy places the responsibility of long-term investment with council, while short-term investments are the responsibility of senior management.
The MPAC has oversight of the audit outcomes. The 2016/17 audit report did not make a finding on the VBS investment and therefore MPAC could not pick up any irregularity.
At the time of the 2017 investment, Ms Chauke, who is also fingered in the forensic report, was revenue manager. When Ms Chauke became the CFO, she made efforts to withdraw the money from VBS. The money was due to be paid to the municipality on 31 March 2018 and the bank was placed under curatorship on 11 March 2018. Ms Chauke’ intervention came too late.
The Council received a legal opinion on the implementation of the recommendations of the forensic report. Amongst them included a disciplinary hearing for Ms Chauke and Mr Wienekus, opening of a criminal case by the Province against Mr Mohaudi and advice from senior counsel on civil recovery.
The municipality opened a criminal case and continued with the disciplinary hearings. Processes unfolded, and the outcome or the report on the disciplinary hearings was presented to council. Council was not happy with the sanctions imposed and requested the chairperson of the disciplinary committee to come and present her report. The chairperson cited reasons for not coming. Then the municipality approached SALGA for an opinion which stated council must implement the sanctions as imposed by the chairperson of the disciplinary committee as informed by the regulations on discipline for senior managers.
The Merafong City council agreed unanimously about the content of the forensic report, but wrote a letter to the MEC indicating the outcome of the hearing and sanctions. It raised a concern that the outcome was lenient and for the MEC to advice accordingly. When the new CoGTA MEC was appointed, he made the forensic report public and wrote letters to mayors requesting progress report on the implementation of the recommendations which included the recovery of the money. The MEC’s letter was responded to including all the attachments with regard to the progress made. In the letter, the MEC directed the municipality to forward the report to West Rand District Municipality for implementation as they relate to Mr Mohaudi. Subsequently, the municipality also summoned Mr Mohaudi for the civil recovery of the funds invested.

Mr Mpumza asked why the Mayor indicated the matter should be referred to the district municipality. He asked why section 71 reports had not picked up these anomalies because this was suggesting there was no financial management capacity within the municipality.

Ms Mogale-Letsie replied that the forensic report suggested the MEC should open a criminal case, and to alert the district municipality about the case against Mr Mohaudi because he was currently in the employ of the district municipality. The investment was disclosed in the MFMA Section 71/52 report. The investment was done on 23 June 2017. The Auditor General and external and internal audit did not raise anything about the investment as disclosed in the financial statements.
Ms Chauke explained that the section 71 reports were signed during December 2017 and had indicated the amount of money the municipality had in investments. During February 2018, the Provincial Treasury conducted mid-term assessments and other issues related to finance and VBS investment was not raised as a matter of concern. The 2018/19 audit indicated the municipality has received 26 findings compared to the 48 findings of 2017/18. The municipality has received an unqualified audit with matter of emphasis. Non-compliance had to do with not paying creditors within 30 days. The municipality has lost revenue of R142m due to the negative outcome of the mine valuations. As a result, it had to reduce expenditure and reduce contracts such as grass cutting which is done internally.
Ms Chauke went on to state section 71 reports were compiled monthly and signed off by the Manager of Budget, CFO, MMC Finance and the Executive Mayor. The same applied for section 52 reports, except they have to be presented by the CFO in front of the audit committee. She stated the forensic report revealed the instructions given to Mr Wienekus by Mr Mohaudi to transfer money to VBS.
Ms Chauke explained that she wanted to withdraw the money from VBS. Then VBS indicated the money had been re-invested and interest would be paid after March 2018. Unfortunately, by March 2018, VBS was under curatorship.
Mr W Letsie (ANC) appreciated the sequence of events, saying talk was small and cheap. He said the Mayor did not speak about the abdication of political responsibilities. Political oversight failed. It was not good to tell the Committee a man came and took out the money. The fact that the Auditor General did not pick up the matter should be underlined.

The Chairperson asked what drastic measures were taken to ensure the implicated were brought to book.

Mr Nieuwoudt replied that Ms Chauke and Mr Wienekus were given written warnings for 12 months. Mr Wienekus was acting CFO for few days when the investment was made. Criminal proceedings have been instituted against Mr Mohaudi. Ms Ngwenya was no longer with the Merafong City Local Municipality. He noted that the money transferred to VBS were funds that were ring-fenced for projects, not operational funds. Some of the unspent funds were taken by Mr Mohaudi from the call account. Projects were completed during 2017/18. The impact of the wrong investment would be on cash flow for future projects.

The Chairperson asked why the operating budget was overspent by 12% and asked if that was not the effect of the investment.

Ms Chauke replied that during 2016/17 R49.3m was disclosed as an unspent conditional grant, and an application was made for a roll-over.

The Chairperson asked what the reaction of the council was when it learnt the R50m was gone.

Mr Elvis Mphithikezi, Speaker for Merafong City Local Municipality, explained when the report came to the council, a disciplinary body dealt with the disciplinary cases. The councillors were not happy with the report. A legal opinion was sought on the outcome of disciplinary hearings. The legal opinion indicated the council did not have the powers to review the matter.

Ms D Direko (ANC) commented that the responses from the municipality were wobbly. She stated that in the Eastern Cape one mayor was sentenced to two years for a deviation which cost the municipality R3m. It was clear there was weak political leadership and oversight of the municipality.

Mr Mpumza said that the municipality did not appear to have an investment policy aligned to its delegation policy framework. The acting municipal manager indicated to the official to make an investment in VBS Bank in contravention of the policy of the municipality. This was collusion in the act of violating the law. The acceptance of the legal opinion and granting written warnings to the officials was indicative of an incompetent decision taken by the council.

Mr Letsie proposed the Committee should recommend to the Minister to disband the Merafong City council because R50m was wrongly invested in VBS Bank, and the implicated officials got written warnings of 12 months. After 12 months, it was clear, they would do it again. Ignorance of the law was punishable. The municipality was busy wanting to recoup R650m, yet it could not take a good decision about R50m. He asked the municipality to furnish the Committee a profile of the municipality. It was not clear what interests Mr Mohaudi was representing in the investment because he was the CFO of West Rand District Municipality while seconded to the acting municipal manager position of Merafong City Local Municipality.

Mr Ceza enquired why the municipality should not be dissolved according to section 139(c). He asked how many times has the municipality conducted meetings with the communities and other stakeholders about the payment for municipal services.

Mr Mphithikezi explained that when the municipality adopted its turnaround plan, it decided to engage stakeholders, and there was a programme designed by the Speaker to engage communities in Merafong, Khutsong and surrounding areas. Communities raised concerns that were genuine. The progress report was then given to the communities after seven days. Contributions were sought from the communities about the municipality's programmes.

Mr William Mosiane, Chief Whip: Merafong City Local Municipality, added the municipality has engaged robustly with communities for payment of services. The municipality was targeting people who were working. The municipality further approached members serving in the legislature. Then people started to realise the importance of paying for services. The Office of the Speaker was also involved in the campaign. He pointed out that during the payment for municipal services campaign, the VBS matter came out strongly from the communities. They could not see the need to pay for services when the municipality had invested money that should have been used for service delivery.

Mr Mphithikezi indicated there were a number of steps that have been taken by the municipality since the VBS matter. The province has appointed an independent body to investigate the municipality and the report has been presented to the council. All the recommendations were being implemented. The poor handling of the VBS investment did not mean the municipality has to be dissolved.

Ms Xaba-Ntshaba observed it was puzzling that Ms Chauke and Mr Wienekus who had been implicated in wrongdoing have been kept in the employ of the municipality. Everything happened under the nose of the Speaker. She asked if the Speaker acted on the video clip that went viral where the Mayor said the money invested in VBS was not needed. Many people were struggling with water and electricity, yet R50m went to VBS because it was not needed. She stated the officials should give their salaries to the people of Merafong for service delivery and then claim their money from VBS. It was embarrassing to utter such comments on TV and then blame communities for not wanting to pay for services.

Mr Mphithikezi said there was a misunderstanding about the Mayor's statement. What the Mayor said was that the money was not meant for projects. The video should be understood in its entirety, not only the clip.

The Chairperson countered the argument, stating the Speaker could have released a media statement to clarify the matter and use social media.

Mr Mphithikezi replied that when the matter was raised, he clarified it to stakeholders. The council took the R50m investment very seriously. It decided not to investigate itself but approached COGTA to do the investigation, using an outside body. When Ms Chauke was appointed CFO, it was before the tabling of the forensic report, not knowing she was implicated. Mr Mohaudi was the one who instructed the then acting CFO, Mr Wienekus, to transfer money to VBS. Mr Mohaudi assured Mr Wienekus that he would handle all questions raised by the council. All those details were contained in an email. Mr Wienekus faced two charges. One charge was withdrawn, and he pleaded guilty to the second one. Hence the disciplinary committee gave him a written warning for 12 months. An investigation report was presented to the council and it guided the council on what should be done. Criminal charges against Mr Mohaudi were opened. The suspended municipal manager was suspended for different cases not related to VBS Bank. COGTA seconded Mr Mohaudi to be at Merafong City. At that time, Mr Mohaudi was the CFO of West Rand District Municipality where, it is reported, he authorised an investment to the tune of R75m to VBS Bank.

The Chairperson said she could not understand why all the municipalities that have been declared dysfunctional have invested money in VBS Mutual Bank.

Mr Mosiane indicated that their role as speaker, chief whip, and chairperson was to play political oversight. When the VBS investment was raised in the council, it went through a robust debate because it was not taken lightly. That was why there was a need for legal advice. The matter went to a law firm, De Swardt & Myambo Attorneys, after Deloitte tabled the forensic report. The report from the law firm was presented by SC Motsepe to the council. The councillors indicated they were not happy with the outcome of the disciplinary hearings. The council then asked the SC Motsepe to explain how he came to the recommendations. The advocate refused to account to the council, stating in a letter he wrote to the council he was not accountable to it. COGTA was then asked to intervene after seeing the advocate was not interested in engaging with the council. It was then the council decided to write a letter to the MEC.

The Chairperson noted the sanction was too lenient. There were councillors who wanted to take the recommendations on review. Decisions were not taken that served the interests of the community. The council, she reasoned, only entertained the view of the majority members in the council because they stand to benefit. It could be that the minority view was to take the report on review. This was suggesting the municipal council was divided. The written warning of 12 months should have been subject to a legal opinion.

Mr Mosiane replied that the council was not pleased about the person who performed the transfer being given a 12 month written warning. He admitted he had not seen the letter sent to the MEC.

The Chairperson asked for clarity on irregular and fruitless and wasteful expenditure. She asked the municipality to comment on the media allegations about the unfunded budget of the municipality.

Ms Chauke replied that R9.6m has been disclosed as irregular and fruitless and wasteful expenditure. The report on irregular and fruitless and wasteful expenditure had been tabled before the council which then referred it to MPAC for investigation and to inform the council whether to recover or condone. The R9.6m  expenditure stemmed from deviations during 2017/18. The deviations were for transactions for fuel, fleet maintenance and fitment centre. However, in 2018/19 the municipality went on a competitive bidding process to avoid these deviations. The Auditor General also found additional information on irregular expenditure. The fruitless and wasteful expenditure was a result of interest from Eskom. Ring-fenced money has been kept in the call account of Nedbank. She made it clear that before VBS was placed under curatorship, already there was correspondence to VBS about returning the money to the municipality. Had VBS not been placed under curatorship, Merafong City would have got its money back. The municipality has engaged with Provincial Treasury to ensure a cash-funded budget. R14m meant for the filling of vacancies was reduced by 50%. The tampering of electricity meters, especially in Khutsong, was affecting the viability of the municipality. The adjustment budget was going to be passed soon.

Mr Kiba Kekana, Gauteng Provincial COGTA Chief Director: Intergovernmental Relations, confirmed the MEC corresponded with West Rand District Municipality and Merafong City Local Municipality about VBS and media statements that had been made. The correspondence was about municipal management of finances and consequence management. Mr Mohaudi’s case was being handled, but he did not know about Ms Ngwenya. He noted that Emfuleni Local Municipality and West Rand District Municipality were not dysfunctional, but were at risk. Their situation was being addressed. About Ms Ngwenya, he stated the Deloitte forensic report noted the role of Treasury in dealing with municipal officials and the control environment. The MEC directive given to Merafong City has been given to other municipalities as well for cases similar to that of Ms Ngwenya and Mr Mohaudi.

The Chairperson requested that the MEC directive issued to Merafong City be sent to the Committee, including the municipality’s stakeholder engagement report, investment policy, and recovery plan. She said the Hawks and SIU would be appearing before the Committee to report on their progress with investigations and  the cases that have been opened regarding the municipality.

The meeting was adjourned.

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