How do you hide a R1-billion fortune from the taxman? With bespoke help from offshore bankers desperate to get their hands on your portfolio, suggest documents emerging from the long-running battle between the South African Revenue Service (Sars) and its number-one target, Dave King.
A series of memos, emails and file notes from the Bank of Bermuda, which is now a subsidiary of global banking giant HSBC, show how the bank, eager to secure King as a client, helped him restructure his network of trusts and offshore companies to ”present a blind alley to any revenue investigation”.
The documents are evidence in a Pretoria High Court trial, which will effectively determine whether Sars can seize assets held by King’s offshore structures.
King made about R1,2-billion from the sale of shares in Specialised Outsourcing, the company he founded to handle treasury operations for parastatals and government bodies. The company’s share price crashed not long afterward, as news of the sales trickled out. It was pushed down further as concerns about the company’s accounting practices grew and King moved on to a new venture, Financial Insourcing Specialists.
Angry institutional shareholders racked up massive losses while revenue authorities tried to reconcile King’s apparent enjoyment of a wine farm, a Ferrari and a private jet with his modest reported income.
In late 2000 he was contacted by Sars, wondering where the government’s slice of the proceeds from the share sales were. He has since stood on the defence that the profits were a capital gain, not revenue, an incurred no-tax liability, but at the time he quickly set about making sure that the money, much of which was held through a company called Ben Nevis, stayed firmly out of reach of the fiscus.
On November 15 2000, Steve Bougourd, senior trust officer at the Bank of Bermuda, wrote to his colleague, Dave Hewitson, saying: ”Apparently DK wishes to ‘dismantle’ current structure and transfer the assets of Ben Nevis into a new company, as the ‘tax authorities are chasing him’.”
This is important for two reasons. First, it helps bolster the case that King was the true owner of Ben Nevis. Second, it suggests he restructured his holdings solely to escape tax scrutiny, which is a crucial plank in the case against him. King’s role in managing his assets was also to be kept quiet, Bougourd made clear: ”DK’s position as an adviser should be very much an ‘off the record relationship’.”
Less than a week later a summary of a meeting with King, circulated within the Bank of Bermuda, restates the case: ”DK has no tax adviser but is happy there is no problem from his point of view in closing the Ben Nevis company. His intention is just to present a blind alley to any revenue investigation.”
By March 9 2001 there was a clear plan, Bougourd wrote in an email to the bank’s Adrian Fairbourn: ”[W]e are restructuring Ben Nevis to stop the South African taxman in his tracks. To kill two birds with one stone we are also liquidating all investments, as he wishes to take stock, consolidate his position and think through his strategy going forward.”
Even at this stage, before the bank secured more of King’s business, the sums involved were substantial.
”What we are doing is selling all his investments in the name of Ben Nevis, that is, a Ã‚Â£10-million portfolio with Barclays Private Bank, and two Royal Skandia portfolios (managed by [Cape Town hedge fund firm] Alpha) amounting to approx Ã‚Â£3-million.
”There is already some Ã‚Â£50-million on depo with Barclays Private Bank (he has a long-standing relationship with Sir Anthony Richardson),” Bougourd wrote.
As the assets were sold they were ”transferred up” to King’s Glencoe Trust and then into a new holding company, Metlika, ”thus making a clean break with Ben Nevis”.
”Other assets, namely a property and shares in Murray sports, are being reregistered in the name Metlika Ã¢â‚¬Â¦ Glencoe Trust is also selling its portfolios with Old Mutual and Capel Cure Sharp, which amounted to Ã‚Â£2,5-million”, the email continues.
The net effect of this move was temporarily to obscure from Sars the more than R500-million in cash and other assets that had been inadequately concealed by Ben Nevis.
HSBC may have a difficult time proving that the Bank of Bermuda (which it bought three years later in 2004) wasn’t a wholehearted participant in a dubious arrangement.
”The timing of the visit creates a great opportunity. He is heavily encashed, he is taking time out to think his strategy through and hopefully the markets will have stabilised a little by then and therefore offer a calmer selling environment. The key, I think, is that we need to be creative … this could be significant business for the bank,” Bougourd wrote.
Sars’s efforts to recover R2,5-billion in taxes and penalties from King have been mired in a series of preliminary court battles over the seizure of assets and other technicalities — trial on the main tax charges is yet to begin.
The state is pressing a raft of criminal charges, including money laundering and racketeering, against him.
HSBC denied any knowledge of the type of services being provided to King through its subsidiary, Bank of Bermuda. Asked to comment on the evidence that its subsidiary had potentially been implicated in tax evasion and money laundering, HSBC said: ”The incident would appear to relate to the period before HSBC acquired Bank of Bermuda. We do not believe, on the evidence presented, that HSBC is implicated.”
King claimed he had no idea which court case the documents related to, saying Sars constantly changed its version. The ”bully tactic” of ”seizing everything” and forcing ”you to negotiate with them” has only made him more determined to fight the case, he said.
”We have fought for six years over the seizure of assets and still not gone to court,” he said. ”After six years they have not won anything because their [case’s] merits are not good enough.” Despite the help of the South African Reserve Bank and the Financial Services Board ”they still can’t beat me”, he said.
”I believe in the legitimacy of the trusts Ã¢â‚¬Â¦ I will do everything within my power to protect the legitimacy of my interests until I lose the tax case.”
Additional assets to seize
Last Wednesday, Sars won the first round in its latest bout with King.
The Pretoria High Court rejected with costs King’s application for the postponement of a trial to determine whether tax authorities can lay hands on assets held by Metlika, an offshore company allegedly used to hide hundreds of millions of rands in profit from the sale of King’s shares in Specialised Outsourcing.
Sars wants the court to reverse a series of transactions in which cash, shares, and property were shuffled from Ben Nevis, one of King’s main offshore vehicles, to Metlika.
Sars is leading evidence that suggests that this move was intended purely as a tax dodge.
Ben Nevis owes about R1,4-billion in taxes and penalties and if the transactions are reversed it will mean assets worth at least R500-million flow back into the company, where they can be seized by Sars and sold.
The trial, which is set down for six weeks, should help bring an end to six years of complex legal skirmishing over the recovery of money from King and set up the conditions for his trial on criminal charges arising from the affair.