Wendy’s house bat­tered

Un­der the spot­light as reg­u­la­tor is concerned over­sight is in­ad­e­quate

Finweek English Edition - - INSIGHT - BRUCE WHIT­FIELD brucew@fin­week.co.za

THE FURORE about the han­dling of trust ac­counts by top es­tate agency Wendy Machanik Prop­er­ties (WMP) has ex­posed deep fault lines in the su­per­vi­sion of the in­dus­try ex­er­cised by the Es­tate Agency Af­fairs Board (EAAB). The an­nounce­ment by the EAAB last week that it was in­sti­gat­ing a wide­spread probe into al­most 70% of South Africa’s 9 500 reg­is­tered es­tate agen­cies and 28 000 in­di­vid­ual agents sug­gests it can’t rely on its es­tab­lished over­sight mech­a­nisms, which in­clude an­nual re­views of au­dited ac­counts for firms and their re­spec­tive trust ac­counts.

What’s alarm­ing about the WMP case is that de­spite the fact that Machanik was called be­fore the board as far back as 2007 to an­swer ques­tions about ap­par­ent ir­reg­u­lar­i­ties in its man­age­ment of trust ac­counts, she was ap­pointed by the Depart­ment of Trade & In­dus­try – un­der whose aus­pices the EAAB falls – to sit on its board later that year. The EAAB saw no rea­son in sub­se­quent years to ver­ify whether au­dited fi­nan­cial state­ments sub­mit­ted by WMP ac­cu­rately re­flected the man­age­ment of trust ac­counts. EAAB CEO Nomonde Mapetla says there had been no need to ques­tion the state­ments, as they’d al­ready been au­dited.

The of­fi­cial probe into the agency’s af­fairs was only launched last year as a re­sult of a de­tailed tip-off by a whistle­blower. While a pre­lim­i­nary re­port failed to dredge up any damn­ing ev­i­dence, de­tails of al­leged mis­ap­pro­pri­a­tion emerged in a later full-blown foren­sic in­ves­ti­ga­tion.

Machanik’s ap­point­ment to the EAAB board so soon af­ter her 2007 dress­ing down fur­ther com­pli­cated the is­sue. Machanik, who has re­fused to be in­ter­viewed since news of the scan­dal broke – be­yond is­su­ing a brief state­ment in which she de­nied any wrong­do­ing – is un­der­stood to have served one term as a board mem­ber. She was of­fered the op­por­tu­nity last year to re­tain the seat, but Mapetla says Machanik “grace­fully de­clined” when it was pointed out to her the po­si­tion was in­con­gru­ent with the on­go­ing in­ves­ti­ga­tion into WMP’s fi­nan­cial af­fair.

Agen­cies and the agents who work for them are all re­quired to have an­nual Fidelity Fund cer­tifi­cates is­sued to them by the EAAB. In or­der to qual­ify, the EAAB must be sat­is­fied the le­gal re­quire­ments in terms of the Es­tate Agency Af­fairs Act are met. With the rapid growth in the in­dus­try in the mid-2000s, many of the checks and bal­ances that might have been ad­e­quate pre­vi­ously came un­der enor­mous pres­sure, say in­dus­try sources.

Ini­tial in­ves­ti­ga­tions into the whistle­blower’s al­le­ga­tions that trust ac­counts were be­ing used to fund Machanik’s per­sonal ex­pen­di­ture and buy­ers’ de­posits were be­ing used to make up short­falls in op­er­at­ing ex­penses at WMP re­sulted in a full-blown foren­sic in­ves­ti­ga­tion by risk con­sul­tancy Pasco Risk Man­age­ment. Court pa­pers in­di­cate WMP was los­ing up to R400 000/month and more than R25m of trust ac­count money was al­legedly mis­used be­tween March 2007 and Fe­bru­ary 2010. A state­ment by WMP didn’t deny the al­le­ga­tions but in­sisted de­posits were safe and that the com­pany hadn’t ever been in a po­si­tion where it was un­able to pay any­one owed money held in one of its trust ac­counts. WMP said it would legally chal­lenge the find­ings of the foren­sic re­port. Mean­while, the South Gaut­eng High Court has ap­pointed a cu­ra­tor to man­age the trust ac­counts, pro­hibit­ing ac­cess to any em­ployee, in­clud­ing Machanik.

The EAAB is also seek­ing a court or­der to block Machanik from op­er­at­ing as an es­tate agent un­til she again has a Fidelity Fund cer­tifi­cate, which only it can is­sue. WMP is yet to ap­ply for a 2011 cer­tifi­cate. The broader in­ves­ti­ga­tion will re­veal whether there are any other agen­cies in the same boat.

The is­sue of pay­ing de­posits into es­tate agents’ trust ac­counts is a con­tentious one. Al­though trust ac­counts at both lawyers and es­tate agents en­joy the same le­gal sta­tus, prop­erty lawyer Ju­lian Scher, at Strauss Scher Attorneys, rec­om­mends us­ing lawyers’ trust ac­counts in­stead, which adds a level of pro­tec­tion to prop­erty buy­ers who might de­fault on a pur­chase. Agents tend to take first dibs on de­posits in or­der to ex­tract their com­mis­sion and may or may not be within their right to do so if a deal col­lapses. Also, ar­gues Scher, lawyers have a lot more to lose when it comes to fid­dling with trust ac­counts and can be barred from prac­tis­ing law al­to­gether if found guilty of break­ing the rules.

WENDY MACHANIK

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