VBS: A sickening Third World Ponzi scheme fuelled by politicians

LONDON — Industrial scale pillaging enacted through mutual bank VBS, was the result of conspiracy between dirty bankers, crooked politicians and bent chartered accountants. – Alec Hogg.This is The Rational Perspective. I'm Alec Hogg..___STEADY_PAYWALL___.In this episode, VBS, a triumph of first world detection over third world crime..Uncovering of the VBS scandal is a marvellous example of the sophisticated first world portion of South Africa's economy can be practically applied to the benefit of this developing nation. The plundering of a small mutual bank that was created in apartheid Venda homeland was very third world in its application. Ditto, the reaction of conspirators whose defence was simply to deny any involvement, but as the saga unfolds hindsight is telling us that kingpins Matodzi, Ramavhunga and Malaba and their VBS stooges like Truter, Nesani, Magoola, Ramikosi and others plus a long list of elected municipal officers never stood a chance of getting away with it..It was as if they had a knife in a gunfight or bows and arrows when opponents possessed Gatling guns. Lies and subterfuge by those who perpetrated industrial scale plunder were smashed by a very first world tool, South Africa's Financial Services Regulation Act. This potent act was gazetted last August and brought into effect in April this year..Here's Chris Shone, a practicing advocate of South Africa's High Court and a driving force at Anti-corruption Activists Accountability Now..There was a lot of regulation, but it wasn't centralised in terms of a control mechanism and the result of that is that things started falling through the cracks. You had the Financial Services Board use insurance and related matters, banking regulation and the credit regulator. They weren't all going the same direction, but they were definitely linked and related and I think that the control mechanism was to say, "Well, let's get everything under one umbrella and have a standardised uniform regulatory approach where everything can be looked at by one body that has the expertise"..I think that's the essence of why it was set up and we know that from years ago, Fedsure, not dissimilar to VBS were required to deliver annual returns and insurance returns. They were delivered but the FSB didn't have the resources at the time to review those reports and we all know what happened to Fedsure, so I think that there's also an economic reason to house things together and get some level of economy and scale and build that expertise..Isn't it a coincidence that VBS investigator Advocate Terry Motau was appointed within two weeks of the new act coming into effect and applied the FSR Act very efficiently?.If you look at the versions 134 to 140, they're broad as they should be, but if you think about insolvency inquiries and other types of interrogations, commissions of inquiry as to an insolvency as opposed to a state capture type inquiry, you're dealing with one entity. The state capture inquiry is so broad, the powers to compel are not necessarily as great in all respects, and I think in fairness it also depends on the individual. Here we have a situation where he has a job to do, he has the powers to get the job done, to call people and access records, he has good backup with the likes of a Werksmans and some of the other forensic guys and as big as the fraud is, it covers from roughly 2015 to when they went into curatorship. In the ordinary event a curator wouldn't have the power to do what he does, so what the FSR has done, it's created those additional powers, which have been well used..I've described it as a third world crime because it was pretty basic how they bribed people, but applied with first world regulation. Do you think that's fair?.I think that's a fair comment and I think that's exactly how it was. I don't think that the perpetrators were overly sophisticated and it was brazen theft. A comment that he makes which was an amazing comment, very early on in his report, in fact it might be the first page about Mr Nightingale and the bank robbery many years ago, that he commends Nightingale who's never been found for putting some effort into what he did when he robbed the bank whereas with this one he's saying they didn't even make an effort, just fabricating, running Excel accounts and the DI returns to the Reserve Bank were incomplete, inaccurate. It wasn't even clever; it was literally emptying the piggy bank, which has now been dumped..However, getting away with it, presumably because of their political influence or their influence of the politicians who were involved..Yes, it is and I think that the question, which everybody seems to be asking now relates to the obvious, which is the loan to the former president. He borrowed the money that was the first time that VBS came onto the map for most people. It appears that paperwork was signed nine months afterwards on a R1m loan that's questionable. The instalments weren't paid, but I don't know whether the instalments weren't paid because they weren't due at the time and he had a grace period before he had to start paying off the instalments or whether it was for some other reason. Everyone wants to know who's paying those amounts at R70,000 a month. That's not a small amount of money and it's a trail of just putting your hands in. The one individual wasn't happy with what she regarded as her Christmas of R300,000, so they upped it and as he says, literally everybody involved in the bank was somewhere involved in this heist..It was just four days after Motau's appointment that he applied the act, Comprehensive Search and Seizure Powers with support from his appointed evidence gathering specialists, Basileus Consilium. They raided VBS's head office at Makhado and then a few days later did the same at the bank's Sandton and Thohoyandou branches. The document gathering exercise was closed out on the 7th of May with a raid on the Sandton office of VBS's ostensible controlling shareholder Vele. Within a month, Motau had all the documentation he'd ever need..The act also empowered him to recruit highly skilled resources to process all of this information enter data specialists Facts Consulting, which scanned and converted the seized documents into a searchable digital format and Crow Forensics, specialised chartered accounts who focus on uncovering crime by crunching suspicious transactions and bank accounts. Also part of Motau's force was fellow senior council, Ross Hutton SC and two other advocates plus a team from Werksmans led by Bernard Hodes, head of the firm's business crimes and investigations practice..The ace in Motau's royal flash though was Section 140 of the new FSR Act, which incentivised those involved to tell the truth. During interviews conducted over four and a half months, a clear pattern emerged. The deeply implicated witnesses began by offering brazen lies, but once Section 140, which offered them criminal indemnity was explained to them, many of the thirty witnesses requested another hearing and second time round their stories turned 180 degrees with falsehoods replaced by open admission on their part in the VBS conspiracy that had been built on greed and fear. I asked Advocate Chris Shone to explain how this important section came into being..It comes from the insolvency regime and the Company's Act Inquiry regime. If you asked a question and it may incriminate you, from the criminal point of view you're not obliged to answer that question. They can force you to answer the question, but that alone cannot be used as evidence against you in criminal proceedings, which is different to a civil issue. Therefore, one of the recommendations made in the report was that the individuals involved should be sequestrated. That's civil, so what he's gathered in this investigation can be used in civil, but criminal means that it now has to be referred to the prosecuting authority and they go ahead. Therefore, the fact that someone essentially has incriminated themselves alone means that they can be convicted on that basis..Many of the thirty witnesses changed their stories after it was explained to them how a Section 140 works and if I understand it correctly en they can't go to jail for what they said, but they can be sequestrated. In other words, the money can be taken back from them..Yes, but like in most of these inquiries, they're trying to find the facts because that's always the problem. Once you've found the facts that money has been stolen, for example, then you have to lay a criminal charge and the investigating officer and inquiry will proceed. So yes, they could well be prosecuted but not purely and simply on the basis on what they said while they were being interrogated in terms of the FRS, so it gathers information that forms the basis of a case going forward, whereas let's say the civil one, sequestration, if they found somebody who took money and it's repayable, they can claim the money. If it's not to be paid then they can get judgement, they can sequestrate and follow that route, so it's two separate tasks..I suppose it's landing little fish to catch the big ones..Well, that's generally what it is. If you look at the way that the state capture inquiry is unfolding it's a well-planned process. You want to get the information and build on the information, so you have to start somewhere and people will roll over, they want the big guys, there's no doubt about it..The conclusions are detailed in Advocate Terry Motau's 139-page report, which he entitled, "The Great Bank Heist" after an initial flurry of interviews, Advocate Motau perhaps because of the political fallout that his report caused is no longer going on the record, so you won't hear his voice in this podcast, but Motau has shared more than enough of the detail for the rest of us to join the dots. Among those who have studied those 139 pages is Stuart Theobald, Chairman of financial services research and consulting house, Intellidex. Theobald is a former journalist who recently completed his doctorate at the London School of Economics..There was massive fraud on the go there, Alec, as has been widely reported obviously, R1.9bn that was gratuitously paid out of the bank. Well over half of the assets of the whole bank were effectively stolen by related parties particularly the chairman of the bank and his various companies and corporate interests, but also millions that were paid out to grease palms effectively including the lead partner of KPMG on the audit of the bank who received R34m in "soft loans" from the bank while he willingly signed off on clearly false financial statements and regulatory disclosures to the Central Bank, so it's an astounding case of incredible fraud in a bank. Now how did they think that they would get away with it? It's remarkable because the whole thing was creaking..The Reserve Bank was going to catch up with them because they were falsifying the balances on their interbank settlement accounts and they had begun defaulting on overnight settlements, which they then had to scrabble around to try to make good and that was setting off alarm bells. They had created fake deposits in their accounts, so they'd simply record a deposit received when no cash had been received. Now that obviously catches up with you because eventually an audit will try to get the accounts to balance and find that there's a deposit on one side, but there's no cash on the other side, no asset to match the liability..Eventually that was going to come out. They couldn't keep bribing the auditors forever, especially when there has to be a partner rotation at some point in the future and some new eyes looking at the accounts and of course, they couldn't pay back the deposits that they'd been taking. They'd been taking millions of rands of deposits from municipalities, money that municipalities needed to pay for basic service provision including paying for their own staff and suppliers and when those municipalities needed the money back the bank struggled to pay them. Therefore, you'd think that it was clear that on any of those matters eventually it was all going to come tumbling down..That's the logical position, but when you're playing a third world game where politics trumps economics such logic doesn't always guide the actions of the actors, so how did these kingpins think that they could get away with such a crude Ponzi scheme?.The directors of the bank seemed to believe that they could keep the charade going and the way that they thought they could do it was to just raise more deposits to get more money in through the front door to be able to pay off what was going out through the backdoor and they'd targeted two public sector entities to get that money. One was the Passenger Rail Association of South Africa. That's the provider of all local rail services in the country and it was in the midst of attempting to get a billion rand deposit from PRASA. It was also trying to convince the PIC, the Public Investment Corporation to give it another two billion rand..The PIC had already put R350m into it and two of the bank's directors were senior PIC people who had each benefited by over R7m from the bank, so clearly that was not kosher either. Therefore, it looks like the directors of VBS had in their minds that they could get this money out of public sector entities and keep it coming in to be able to continue to pay off everybody and support the thieving that was going on in the background. That's how they imagined that this was all going to somehow maintain itself..Here's where South Africa's dirty politics rears its ugly head. At the ANC's December elective conference, the Zuma dynasty was narrowly averted, just 179 votes in almost 5,000 that were cast gave Cyril Ramaphosa the nod ahead of the former president's ex-wife and ally, Nkosazana Dlamini-Zuma or NDZ, as she's popularly referred to..What the report said is that the billion rand that they were trying to get from PRASA would come if NDZ won that December elected conference and if NDZ became the president in waiting. It seems that the reasoning for that was that National Treasury was holding up the billion rand in effect because an acting CFO at PRASA had refused the instruction from the CEO to transfer the billion rand saying that National Treasury regulations didn't allow it. It also seems that the belief was that if NDZ won National Treasury would be dealt with and would no longer be an obstacle and that money would therefore flow and not only National Treasury of course because it would've required eventually compromising the Reserve Bank..https://twitter.com/KgaugeloSM/status/1050036649843982336.Because VBS couldn't have gone on forever without the alarm bells at the Reserve Bank becoming louder and the Reserve Bank has significant powers to intervene in banks and to be able to take action where banks are not towing the line. Therefore, it seems that the belief was that the NDZ presidency would deal with National Treasury and in time would also deal with the Reserve Bank and with those two out of the way nothing would stop the looting, it could carry on without interruption..The whole process of political interference is also amplified in the report when the role of Danny Msiza, the treasurer of the ANC in the Limpopo Province is articulated. It does appear as though this was a pretty grand conspiracy where if you happened to be in a senior position, a mayor of a municipality, this was a quick way to put money into your own pocket, 2% commissions on the amounts that were deposited being paid. Now again surely at some point in time this had to come to the surface..Yes, and some of these deposits were well over R100m, so 2% was a significant amount of cash that was flowing through the system to grease it. It's a grand conspiracy in a sense, but it's also astounding how amateurish some of it was and Motau's report quotes WhatsApp messages that were going between those municipal officials, the VBS and the ANC people and they talk about this person needing a Christmas, not being happy with R300,000, need to give her more and it's language like that in the WhatsApp messages flying between them discussing how much they need to grease palms to both get the deposits into the bank, but then to get them to leave the money in there because of course the bank couldn't afford to pay them out. Therefore, once you'd paid a bribe to get the money in you then had to keep paying bribes to keep it there and this was all a very active conspiracy going on in which, as you say the senior provincial leadership of the ANC is deeply implicated..The ANC has moved quickly to address this embarrassment with its Limpopo leadership called in to meetings today, but the fallout stretches a lot further. The VBS scam is yet another blow to the already tattered reputation of Big Four accounting business KPMG, not least because the chartered accounted mastermind Matodzi did his articles at the firm, so he knew exactly where to look for fellow licensed crooks. KPMG's involvement has already hit global headlines with international industry publication, "Accounting Age" commenting this morning, "As if the Gupta scandal wasn't enough, KPMG South Africa is wrapped up in another new catastrophe"..It's pretty devastating for KPMG. Advocate Motau even suggests that the Reserve Bank should file some kind of claim against KPMG because of the failures in the audit. It's astounding that the lead partner on the audit that is the head of KPMG's financial services division, so a very senior auditor, was deeply implicated in falsifying financial information at the bank. That's despite KPMG having some oversights and review mechanisms that should've picked up that things weren't kosher. The report makes it clear that some of the clerks on the audit had flagged various issues and that the senior partner had basically said to them, "Don't worry, I've got that covered" and got them to essentially drop the opposition that they had mounted. It's a very serious matter for KPMG..I should think that the Reserve Bank would follow Motau's advice and would look to some kind of claim against KPMG, perhaps motivated by the cost that bailing out VBS's retail depositors are going to cost us. The National Treasury has guaranteed to pay out R100,000 to each of the bank's 22,000 retail depositors. From reading Motau's report, I'm not at all sure that there are going to be the assets to cover that. The taxpayer in other words is going to be stuck with the bill for the difference and that is going to be a significant amount of money that the Reserve Bank might wish to try to recover from the auditors who were meant to be keeping things on track because a there are some elements that are not hard to double check..Read also: A billion-rand pickle for 14 SA municipalities – budgets swallowed by dud bank.One can see the Central Bank and see for instance what the deposits the banks hold within their central bank accounts for one thing and it doesn't take much to double check against those and the interbank settlements accounts as well. Therefore, there are various procedures that I think the Reserve Bank will figure out and implement and ensure that this never happens again, but something like VBS is just an astoundingly rare example. I don't think that there are similar cases anywhere else in the world where you have this incredible conspiracy happening from between the political level, the bank itself and its auditors. It's an astoundingly rare event, but that doesn't mean that there aren't lessons and procedures that should be implemented to ensure that such a thing could never happen again..There are heroes though. The Chief Financial Officer at the Capricorn Municipality who was suspended for her trouble after blowing the whistle, but she did manage to get the money back in and also the CFO at PRASA, both females, both prepared to, with more testicular fortitude than it appears their male colleagues had..Yes, they are named in the report as having resisted others and resisted pressure to direct money into VBS and they do stand out as heroes. I'm sure that they're not the only ones. It's quite hard to find people, who say, "No" after the fact, but not every municipality had their money in VBS and it's always hard to prove the negative, to find ones who refuse to tow the line. There were undoubtedly more than that, but they were very brave and they suffered the consequence that both of them faced severe harassment and were effectively forced out of their jobs because they resisted the pressure to direct money into the bank..This has been the Rational Perspective. I'm Alec Hogg, until the next time, cheerio.

VBS: A sickening Third World Ponzi scheme fuelled by politicians

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