Cellphone giant's R20m rip-off

M-Tel, the MTN-owned cellular service provider, has systematically overcharged consumers, bounced insurance claims for cellphones because of administrative negligence and deliberately supplied customers with faulty cellphones.

If you tried unsuccessfully to make an insurance claim for a cellphone from M-Tel between three and five years ago, the chances are you lost out not on the merits of your claim but because of M-Tel’s maladministration.

If you’ve been a subscriber with M-Tel insurance in the past five years, you’ve paid unnecessary VAT. You may even have had to replace phones provided by insurers up to four times, because M-Tel resold “out of box” failures to its own insurance administrators.

M-Tel went into business in 1994, offering insurance to subscribers through Aegis Insurance. After suffering large losses, Aegis pulled out of the market and was replaced in December 1995 by a Lloyds of London scheme, brokered and administered by Trafalgar Underwriting Group Ltd (TUG), a British-based company run by Simon Fullagar.

When Aegis ran the M-Tel subscriber insurance scheme, it legitimately charged VAT on premiums. But a 1991 South African Revenue Service (Sars) ruling excluded VAT on premiums paid to Lloyds. The Sars ruling says “under- writing insurance business by ... Lloyds of London is not deemed to be the carrying of an enterprise in the Republic and the premiums paid in respect of policies are therefore not subject to VAT”.

But M-Tel nevertheless did not change its system to accommodate the Sars ruling, and insisted its new insurance administrators, TUG, continue charging VAT. It appears that dropping VAT on premiums would have caused M-Tel expensive computer problems.

The Aegis system it had inherited did not permit it to distinguish between base payments and VAT in the premiums. Meanwhile, M-Tel’s auditors, Coopers & Lybrand, wrote to Sars arguing that M-Tel should charge its customers VAT. Coopers conceded that “M-Tel’s current systems do not allow a distinction to be drawn between private individuals, partly [VAT-]exempt vendors and fully taxable vendors”.

The Coopers letter succeeded in securing for M-Tel a Sars directive saying that it could levy VAT. But the Sars directive specifically stated that if M-Tel did charge VAT, it had to secure subscriber consent. The company failed ever to do this. M-Tel apparently did not want to actually ask its subscribers to pay VAT.

So it asked Sars to rather give the permission to charge VAT to TUG. Its arguments for doing so are unknown. The receiver complied, reissuing the directive as saying that TUG could charge VAT. Ever since, it has argued that it was TUG’s responsibility to get subscribers to agree to being charged VAT. TUG says it was never informed of the Sars directive.

The result of the directive was that while the Lloyds policy lasted, from December 1995 until April last year, M-Tel charged its customers VAT, which it in turn paid to Sars. Several other expert opinions, however, say the VAT payments were unnecessary.

When TUG was replaced as the administrator of the Lloyds policy by a new company, IISG Administrators, in July 1997, IISG also argued that VAT on the premiums was not necessary. The new company’s concern led to a Deloitte & Touche investigation. The latter wrote to IISG in 1998, saying that “no VAT need be charged by M-Tel on the premiums which it collects on behalf of Lloyds”.

A month ago a circular from Lloyds to the insurance industry in South Africa stated that VAT exemption for Lloyds underwriters would be removed only in January 2001. Whatever the merits of the Sars directive, it unambiguously stated that subscribers must specifically agree to being charged VAT. But M-Tel never secured that permission.

Even if M-Tel is correct in arguing that TUG should have canvassed subscribers, it should then have ensured that during the nearly two years that the Lloyd’s insurance was sold after TUG’s departure, the subsequent insurance administrators asked the question that TUG did not. Yet in correspondence with the Mail & Guardan, it has offered no evidence that it did so, protesting only that getting subscriber agreement was TUG’s responsibility.

The logic of this is unclear. TUG was not billing clients; M-Tel was. If TUG was to secure customer assent to the VAT charges, M-Tel would have had to hand over its customer database to TUG specifically for this purpose. And M-Tel was so protective of its data that it took steps to limit TUG access to its Eppix billing system.

TUG believes that M-Tel customers might be entitled to a refund, which for certain individuals might be as much as R200. In total, about R20-million in VAT was levied on the Lloyds premiums.

M-Tel also failed its customers in other ways. During 1996 M-Tel also resold “out-of-box failures” (faulty phones that had already been returned by customers) to TUG for issue to customers needing new phones. TUG was charged full price for these phones and did not know that they were faulty. Certain customers ended up going through several failed phones in quick succession.

When the problem was uncovered, the London underwriters protested. In an August 1996 letter to MTNgroup executive for finance and administration Rob Nisbet they wrote: “The situation has resulted in over 30% of those phones being replaced under the insurance programme having to be returned for a further replacement and in some cases four phones have been issued to a subscriber to achieve one satisfactory working replacement.”

According to Fullagar, MTN’s response was to promise an investigation. This never materialised, but the supplying of out-of-box failures to TUG ceased. At the same time, problems in M-Tel administration meant customers who had applied for insurance were not actually being charged. According to TUG staff, up to 30 customers a week were making claims only to discover that they were not on the list of insured subscribers.

Fullagar estimates that 8 000 individual clients, and 25% of the 5 169 corporate accounts carrying more than 10 handsets, were not being billed for insurance. TUG passed on such insurance claims to M-Tel. According to M-Tel records, in 13 months only 300 such claims were settled by M-Tel directly. Yet TUG proposals for updating the M-Tel database and clearing up the glitch were turned down by M-Tel.

When the underwriters of Lloyds of London flew to South Africa to discuss these problems in June 1996, Brian Gouldie, M-Tel’s chief financial officer, with whom a meeting had been arranged, refused to see them. MTN, questioned about the VAT problem, responded that it was within its rights in charging VAT. It suggested Fullagar has brought the issue into the public domain as “harassment”, because of his legal battle with M-Tel over TUG being dropped as insurance administrators.

On Thursday the M&G received a letter from M-Tel attorneys Webber Wentzel Bowen, in response to questions about the VAT issue. Apparently unaware of the conflict of interest, it pointed out that the general representative for Lloyds in South Africa is Ronnie Napier also a senior partner at Webber Wentzel Bowen. Despite Napier’s position, the letter professed complete ignorance of the 1991 VAT ruling.

Additional reporting by Nawaal Deane



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