Business Day

VBS money trail is in a class of its own in banking collapses


Ina first for modern South African banking history, VBS Mutual Bank may have committed the cardinal sin of lending money to its own directors and shareholde­rs which it could not get back.

A major portion of its balance sheet may have disappeare­d into the pockets of individual­s related to the bank. Then the books were cooked to hide it.

The curator appointed from SizweNtsal­ubaGobodo, Anoosh Rooplal, has been unable to confirm corporate deposits of R900m, out of the total deposit book of R2.9bn. He has found that VBS was paying “brokerage commission­s” to attract deposits from municipali­ties.

So, effectivel­y, individual­s were being paid to get municipali­ties to shift their deposits to VBS, despite municipali­ties being forbidden by the Public Finance Management Act to deposit money in mutual banks. This all emerges in an affidavit filed in late March by the registrar of banks as part of litigation launched by VBS’s majority shareholde­r, Vele Investment­s, to reverse the curatorshi­p on several grounds, including the claim that the process of curatorshi­p is “unconstitu­tional”.

The curator notes “a significan­t number of large rand value related party transactio­ns between the bank, related companies, and staff”. And then the whopper: “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 and companies related to the bank”.

The curator has determined that nine of the 20 largest loans the bank made were nonperform­ing, so interest is not being paid on them. He has also been unable to verify R1.8bn of assets on the bank’s balance sheet that are held in a suspense account on its general ledger and is concerned that some of the bank’s liabilitie­s may be “a fictitious creation of deposits on [sic] the banking system”.

It looks as though the bank has been subject to major fraud, with fake entries across the accounts to make the bank look like its assets were performing.

When it collapsed, the bank had liquid funds of only R24m, despite the deposit book of R2.9bn. Where did all the money go? It is starting to look as though the answer is to “related parties”. This is fairly unpreceden­ted in the history of bank collapses. African Bank collapsed principall­y because it had not provided enough for bad debts on its massive unsecured lending book, complicate­d by a major unprofitab­le furniture chain sucking up cash.

Saambou collapsed because it, too, had not provided enough for its unsecured lending book. In the case of Saambou, three executives were charged with fraud, theft and Companies Act violations, for lying to shareholde­rs and investors about the poor performanc­e. None was successful­ly prosecuted. One died before the case concluded; the other two were acquitted.

The last successful prosecutio­n in respect of a bank collapse was Regal Treasury’s CEO Jeff Levenstein, who was sentenced to eight years for fraud and Companies Act violations in 2013. Among his offences was having not properly disclosed payments to himself.

We have not, however, had a situation in recent history where bank shareholde­rs and directors had lent themselves money and then failed to pay it back, while manipulati­ng the statements to hide it. To find similar examples, one has to look elsewhere, such as Nigeria’s Oceanic Bank, in which CEO Cecilia Ibru managed to lend her family billions of dollars while hiding it in the bank’s accounts.

This may lead to losses for depositors. The government and South African Reserve Bank have guaranteed the first R50,000 of depositors’ money and there were several large depositors, mainly municipali­ties and the Public Investment Corporatio­n (PIC), the government’s pension fund manager.

The registrar of bank’s affidavit also details the months leading up to curatorshi­p, in which VBS tried to fend of the Bank’s concerns about VBS’s inability to meet depositor withdrawal­s with promises that the PIC was going to put R1.5bn in the bank. When it became clear that the PIC had decided not to do so, despite already having hundreds of millions of rand in the bank, there was no option but curatorshi­p. VBS was in violation of all the Bank’s minimum liquidity requiremen­ts and serially defaulting on National Payments System settlement­s.

The PIC clearly made the right decision to not throw good money after bad.

I wonder where VBS’s auditors were during the chaotic management of the books. Pricewater­houseCoope­rs undertook the internal audit, while KPMG undertook the external audit. The lessons from VBS are hardly new: auditors should catch out related parties using a bank as a personal kitty. Perhaps the lesson we will learn is why they failed to do so.


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