Splurge central: Regal has nothing on the rot at VBS

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Splurge central: Regal has nothing on the rot at VBS

How execs and shareholders used it as a money machine eclipses another bank collapse in 2001

Stuart Theobald

Will VBS Mutual Bank be the second bank in modern South African financial history to see its executives in prison?
The last banker to go to jail over a bank collapse was Jeff Levenstein, former CEO of Regal Treasury Private Bank, which fell into curatorship in 2001. He was sentenced to eight years for fraud, although an inquiry had heard about a litany of sins ranging from share price manipulation to hiring ex-apartheid spooks to throw pipe bombs at competitors.
The Regal case looks like small fry compared with VBS. As the curatorship of that bank unfolds, it is emerging that its executives and shareholders used it as a money machine to fund lifestyles of supercars, boats and even a helicopter.
Depositors consisted of a mix of rural savers, many saving through stokvels, and municipalities who illegally deposited money meant to fund service delivery. Their money was siphoned out of the bank into loans to shareholders and related parties to splurge. Those loans, some in the hundreds of millions, had no prospect of being repaid.The bank even made up deposits which were then used to pay for other businesses that its main shareholder, Vele Investments, was buying. The bank collapsed because the cash flowing out was greater than that flowing in.
According to the curator Anoosh Rooplal, at the centre of it all was the bank’s chairman, Tshifhiwa Matodzi, who pocketed the biggest amounts, aided closely by senior executives.
The criminality appears widespread, limited not only to directors and shareholders who were extracting the money, but also to those who deposited the money.
Rooplal alleges that an unnamed senior executive of the Public Investment Corporation (PIC), one of the bank’s biggest depositors and a 28% shareholder, was given a briefcase with R5-million in cash in return for ensuring the PIC’s money kept flowing.
He also says the ANC’s Limpopo treasurer, Daniel Msiza, and the ANC Youth League’s Gauteng leader, Kabelo Matsepe, helped direct municipalities’ money into the bank while receiving loans themselves.There are hard questions to be asked about how such a massive abuse of depositors could go undetected for so long. Banks are the most regulated institutions in our society. There are a barrage of laws and strict oversight.
VBS had two global audit firms checking its accounts. KPMG handled the external audit and signed off on the accounts each year. PwC handled the bank’s internal audit. The KPMG senior partner who headed the audit, Sipho Malaba, has resigned in disgrace amid allegations that a company he controlled had R16-million in loans from the bank.
His colleague, Dumi Tshuma, resigned too, with a company he allegedly controlled receiving R9.7-million of VBS loans.
The Mail & Guardian reported last month that each have slapped KPMG with R30-million lawsuits for defamation.
The Reserve Bank regulated the bank. The registrar of banks had the power to order reviews of audits, inspect the books and interview any staff member. The bank also approves the appointment of auditors and can withdraw its approval if the auditor has any conflict of interest. The Banks Act compels the appointed auditor to notify the registrar of banks if he or she becomes aware of any irregularities.As far as I know, KPMG did not make any such notifications.
As recently as August 2017, the bank conducted an inspection at VBS focused on Financial Intelligence Centre Act (FICA) compliance, which concerns anti-money laundering and terrorism financing. While that inspection would not have looked at the deposits of the bank, it was a missed opportunity to detect that all was not well.
The bank fined VBS R2.5-million, R2-million suspended, for Fica failures. The bank seems to have only become really concerned about VBS in February this year when it began defaulting on its settlement obligations through the national payments system.
The fact that the bank did not detect widescale fraud at VBS shows how critical the role of external auditors is. Banking supervision cannot work without reliable and honest auditors.If there are lessons to be learnt from VBS, it is that the regulator needs to consider the risk that auditors are lying to it.
The Finance minister has appointed a forensic investigation into VBS, being led by advocate Terry Motau. The results of that investigation will probably include potential criminal charges. From the looks of it, there should be grounds for many people to be prosecuted.Meanwhile, the curator’s primary task is to try to recover as much depositor funds as possible. The clear majority of the deposits in the bank were from municipalities and a facility from the PIC. Retail deposits appear to have been of relatively small amounts, though stokvels may have deposited larger sums on behalf of groups of savers.
Last week the Reserve Bank announced that R100,000 of retail depositors’ money was being guaranteed, up from the R50,000 guarantee announced at the time of the curatorship. It is unclear why this increase was made. The Bank says it was done to align the guarantee with the amounts contemplated in the proposed deposit insurance scheme the Bank has been developing, but the real reason may be that the shift in amounts allows many stokvels to be bailed out.
Municipalities, and the rural poor who rely on them for service delivery, will not be so lucky.

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