/ 13 April 2018

VBS’s billion-rand troubles laid bare

The chairperson of the board of directors
The chairperson of the board of directors

What was initially thought to be a liquidity crisis at the troubled VBS Mutual Bank has now emerged as one of “mismanagement and poor governance”, according to the bank’s curator, Anoosh Rooplal.

He was responding to questions after alarming details about the bank’s problems emerged in court documents this week, which suggest manipulated financials, with a possible R900-million that cannot be accounted for.

The bank has R1.5-billion in municipal deposits and also holds about R370-million for the Bophelo Beneficiary Fund (BBF) and its administrator, Bophelo Benefit Services (BBS), which is owed to the widows and orphans of former mineworkers. The BBF and BBS are themselves under curatorship.

The Public Investment Corporation (PIC), the second-largest shareholder in VBS, has R368-million invested through equity and debt in the bank according to a record of the unlisted investments.

According to the treasury, the municipalities cannot turn to the national fiscus if it is established that money has indeed gone missing.

“The legislative framework regarding the transfer of funds to municipalities through the fiscus or national departments is the Annual Division of Revenue Act,” the treasury said. “The Act does not provide for additional funds for municipalities besides those already available through the various grants as contained therein.”

At least 21 municipalities held deposits with VBS at the end of 2017, the South African Reserve Bank revealed when the bank was placed under curatorship last month and all corporate deposits have been frozen until further notice.

Adriana Randall, the Democratic Alliance’s Gauteng spokesperson on finance, has revealed that the West Rand District Municipality and Mogale City Local Municipality had R81-million and R52-million respectively held at the VBS.

Neither municipality responded to requests for comment about the effect this would have on their financials.

The treasury said executive mayors and municipal councils would have to take a decision about the imposition of sanctions for financial misconduct or the institution of criminal proceedings against any municipal official found to have contravened the Municipal Financial Management Act (MFMA). This is legislated for in section 171 of the MFMA and the Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings.

At least one head has already rolled over the matter. External auditor KPMG disclosed on Wednesday that it has suspended Sipho Malaba, the partner who signed off 
on VBS’s financials, pending an investigation into the matter.

“It has certainly created additional challenges for the curatorship,” Rooplal said, but he remained committed to stabilising the bank and protecting depositors.

“We believe that we can rehabilitate that aspect of the bank,” he said, although it would go back to being a much smaller entity and with a different growth strategy, “with a better-suited risk profile”.

Rooplal said he might have to recommend a further independent review of the bank to determine whether any criminal sanctions would be required.

A picture of an institution in crisis has emerged after an affidavit from the Reserve Bank was released this week. It formed part of the court papers in a case brought by Vele Investments, VBS’s majority shareholder, to interdict the bank’s curatorship, but was later abandoned.

The affidavit revealed a possible R900-million in corporate deposits that could not be verified; suspect transactions made between the bank, related parties and staff; and the possibility of “fraudulent reporting and fraudulent transactions conducted in order to extract money from the bank … to further the personal interests of certain key individuals”, among other problems.

The bank was placed under curatorship on March 11 after it ran into severe liquidity difficulties and was unable to repay a number of deposits held by municipalities. These deposits had been unlawfully placed with VBS, according to the treasury, as it contravened the MFMA.

The affidavit, presented by registrar of banks Kuben Naidoo, revealed some of the problems discovered by Rooplal almost as soon as he took up the job.

When the curatorship began, the liquid cash position of VBS Mutual Bank amounted to just over R24.7-million, said Naidoo, despite ostensibly holding deposits of R2.9-billion.

But the curator had been unable to confirm the veracity of R900-million in corporate deposits, said Naidoo.

“It is uncertain as to whether all of these corporate deposits represent ‘true’ deposits and Mr Rooplal has to date been unable to confirm that amounts in respect of all these deposits were actually received by VBS Mutual Bank,” he said.

It also appeared the bank had been paying brokerage commissions to entities to attract deposits, mainly from municipalities, which was “highly unusual” for a bank, Naidoo said.

The curator found that the financial information at the bank was “highly compromised” and that there were “significant deficiencies in the administration and management of the bank”.

Naidoo said that, in the curator’s initial assessment, “there may have been fraudulent reporting and fraudulent transactions conducted in order to extract money from the bank in order to further the personal interests of certain key individuals”.

The curator found that nine out of the bank’s largest advances were deemed nonperforming, amounting to R400-million, and there was no apparent effort to recover these funds.

The affidavit also details the difficulties that Rooplal had in accessing key documents, notably the bank’s trial balance and general ledger, which were provided only on March 19.

Rooplal told the Mail & Guardian that former chief executive Andile Ramavhunga and VBS chairperson Tshifhiwa Matodzi had resigned on the first day of the curatorship. Other executive committee and board members were stripped of their powers as part of the curatorship process.

“My interaction with other members of management is ongoing and I am constantly assessing their contributions to the curatorship process,” he said.

According to the affidavit, preliminary analysis of the trial balance and general ledger revealed suspense accounts containing large balances, which raised concerns that “these may be a fictitious creation of deposits on the banking system”. For example, about R1.8-billion worth of assets was reflected by a suspense account entry but the curator could not obtain any information to confirm that this “constitutes real and tangible assets of VBS Mutual Bank”.

When asked for more detail, Rooplal said these accounts were being investigated.

“The bank’s year-end is 31 March 2018. As part of that process, the finance team is also busy with the process of unpacking these items where possible,” he added.

Meanwhile, Vele said it had initiated its own forensic investigation of the bank.

The company said it was “very concerned” about developments there and had since replaced its former chairperson, Tshifhiwa Matodzi, who also chaired the VBS board of directors. This would give it the “opportunity to examine ourselves and see where we might have gone wrong”.

The board became aware of the Reserve Bank’s concerns only when they met after the bank was placed under curatorship, Vele’s newly appointed chairperson, Maanda Manyatshe, said. “We were under the impression that the bank was healthy and able to meet its obligations.”

No wrongdoing would be swept under the carpet, Manyatshe said. “We are talking about depositors’ money. Many ordinary people have been negatively impacted by the placement of the bank under curatorship. The board of VBS and executive management must take accountability to what has happened.”

Vele was working with all involved to make sure the bank returned to normality, he said.

In a letter leaked to the media just ahead of the curatorship, Matodzi criticised how VBS had been treated. He accused the Reserve Bank and the treasury of precipitating the VBS crash because the treasury had notified six municipalities in August last year that depositing money with VBS was in contravention of the law. The municipalities began withdrawing their money, which created a run on the bank. He added that VBS was being punished by a system that did not want a black-owned bank to succeed.

The Reserve Bank denied this and said it had been in discussions with VBS about its reliance on municipal deposits as early as 2015.

The court papers further illustrate that VBS had been in trouble for some time before the authorities acted.

In a letter to former finance minister Malusi Gigaba in February, Naidoo warned of distress at the bank, which required immediate remedial action. He listed three prior liquidity crisis in June and November last year, when the bank was unable to settle its accounts and unable to meet its obligations to the national payments system. These liquidity difficulties would continue into 2018.

Naidoo also raised other supervisory concerns about operations at the bank.

These included inadequate corporate governance practices, a deficient compliance function and culture, “regular and significant losses caused by high operating expenses due to infrastructure expansion and an increase in the staff complement” and “inept” risk management functions and practices.

Matodzi did not respond to requests for comment.

Uncertainty over widows, orphans funds

The fate of money held by Bophelo Benefit Services (BBS), the administrator for the Bophelo Beneficiary Fund (BBF), remains uncertain while VBS Mutual Bank curator Anoosh Rooplal unravels the extent of the problems.

Both BBS and BBF were placed in curatorship by the Financial Sector Conduct Authority (FSCA) — formerly the Financial Services Board. This was after it emerged that at least R255-million of the BBF’s money had been misappropriated.

The FSCA’s Olano Makhubela said the authority was concerned about the possibility of fraud or misappropriation of money by any financial services provider.

“Any potential or actual prejudice to beneficiaries will depend upon whether the full amount of the funds held at VBS are repaid,” Makhubela said.

He added that this had not as yet been finalised, so it was premature to speculate.

The treasury does not guarantee privately provided pension funds but the curator of VBS is working closely with the curator of the BBS and BBF “to ensure that the losses to these two groups are minimised”, the treasury said. — Lynley Donnelly