PIC cash used by VBS as a slush fund
A R350m credit facility that the Public Investment Corporation (PIC) extended to VBS Bank in 2015 was used to hand out special “loans” to clients that were not monitored for repayment.
Officials at the bank also created fake loan applications using the information of existing clients to justify drawing down on the PIC funds, which were then used to plug the growing cash hole in VBS.
The details of the defrauding of the PIC form part of the report by advocate Terry Motau into the collapse of VBS commissioned by the SA Reserve Bank and published on Wednesday.
Motau’s report revealed blatant theft by executives and gratuitous payments made to a range of politically connected individuals. The PIC’s R350m credit facility was used by VBS to fund its “contract finance” book.
About 90% of the loans on the “contract finance” book were nonperforming, VBS executives told the investigation.
The contract finance book was kept on an Excel spreadsheet and never integrated into the bank’s operating system, making it easy to manipulate.
The PIC, which invests R2trillion in funds on behalf of government pension and other social funds and is the continent’s biggest asset manager, owns 26% of VBS through its biggest client, the Government Employees Pension Fund (GEPF).
The GEPF inherited its shareholding in VBS when it absorbed the pension fund of the Venda bantustan government.
The PIC subsequently put new capital into the bank in 2002, and in 2015 provided a further R350m credit facility.
The PIC was considering a request for further funding of R2bn when VBS collapsed.
The cash it provided in 2015 appears to have been passed directly on to VBS clients in loans that were not subject to “normal credit granting procedures” or used as a slush fund by bank executives.
Motau says “it was very plain to me that contract financing was a prime location of the looting of the funds from VBS”.
The CEO of VBS, Andile Ramavhunga, told investigators that different rules applied to the contract finance book because it was “off balancesheet” funding and had been ring-fenced and provided by the PIC for that purpose.
Motau rejected this explanation, which he said was in the “realms of absurdity”.
Few, if any, loans in the book were serviced. The CFO of VBS, Philip Truter, testified that
“80% to 90% of the contract finance book should have been impaired on the basis of nonperformance”.
Instead, falsified financial statements showed that only a small portion of loans – less than 1% – were impaired.
VBS officials created fake loan applications by copying and pasting client signatures and details from existing loans to new addenda, which could then be used to draw down more funds. The report says the drawdowns were used to “improve VBS’s liquidity position”.
The same officials created entirely fake loans in the contract book in order to inflate VBS’s earnings.
Two PIC representatives on the VBS board, Paul Magula and Ernest Nesane, confessed to the investigators that they had turned a blind eye to the fraud in return for large payments.
Both received more than R7m in gratuitous payments, which Motau says were “buying silence from those who could speak the truth”.
The two have since left the PIC, which is pursuing criminal charges against them and has had them disbarred from professional organisations.