He who pays the piper …
The state ‘didn’t have the budget’ to probe Steinhoff’s fraud, so the retailer gave it R30m to do so — a direct conflict of interest
ý Retailer Steinhoff says it has agreed to give investigators from the Hawks and National Prosecuting Authority (NPA) R30m to finance the investigation into the immense fraud at the company because the state doesn’t “have the budget”.
Speaking to the FM this week, Steinhoff CFO Theodore de Klerk said the Hawks and NPA first approached the company to ask if PwC (which had already completed a forensic investigation for Steinhoff) could “assist” the state because it “hasn’t got the resources” to probe such a complex case.
“Then [they] said: ‘Well hang on, we just actually don’t have the budget to pay these guys.’ … [Steinhoff reasoned that] it’s in the company’s interest that this thing goes forward, so we’ve made available an amount of R30m, which PwC can draw on,” he says.
It’s an arrangement irretrievably contaminated by conflicts of interest. Steinhoff is effectively financing an investigation of itself; should it not like where the probe is going, it could potentially pull the funding lines, and leave the Hawks investigators high and dry.
De Klerk stresses that the company just signs the cheques, and has no insight into the actual investigation: “All we get is invoices — we’ve got no idea where the investigation is.” In its annual report last week, Steinhoff said the money was provided “on an arm’s-length basis, with Steinhoff having no ongoing involvement in the investigation”.
Nonetheless, experts say it sets an awful precedent.
“Any private funding for independent state institutions runs the risk of creating a perception of lack of independence,” says University of Cape Town constitutional law expert Pierre de Vos.
He says the fact that the state asked for help from Steinhoff because it supposedly hasn’t got “the resources” raises awkward questions about the government’s funding priorities. If it can pay R118m for a piece of land in New York to house diplomats, yet can’t find R30m to ensure accountability for SA’s largest fraud, it speaks volumes.
“The Steinhoff investigation is surely the most important investigation about private corruption, so it should be first in the queue for funding,” says De Vos.
Iraj Abedian, founder of PanAfrican Investment & Research Services, says it’s an indictment of the NPA and the Hawks. “They should surely know that this case is a national priority for SA as an investment destination. If corporate maleficence of this order of magnitude is allowed to go unpunished, it is very negative for SA as an investment destination.”
It’ll also set a terrible precedent, suggesting that cases involving large companies that can finance investigations will be prioritised over cases involving smaller companies. “This will mutate ultimately to a de facto capture of the law enforcement agencies by the rich and the powerful. Such an abdication of institutional responsibility by the Hawks or NPA is not acceptable, nor is it conducive to rebuilding their lost credibility,” says Abedian.
Tracey Davies, executive director at Just Share, says: “The ethical problems with paying a private entity — of which you are already a big client — to assist state authorities with what should be an entirely independent criminal investigation, are myriad.”
Sipho Ngwema, spokesperson for the NPA, says safeguards have been put in place. “Steinhoff is the complainant, but should evidence arise that suggests we may need to add the company itself as a suspect, we’ll reassess things. And we have insulated PwC from Steinhoff’s current executives to limit any conflict,” he says.
On the issue of Steinhoff’s funding, Ngwema says the reality is, there are serious capacity issues that affect the state’s investigative
capacity — and not just in terms of funding. “This is why we aren’t winning the war on corruption yet,” he says.
However, you can almost understand why Steinhoff agreed to finance the criminal probe, given the Hawks’ inexplicable delay in investigating.
It is more than three years since Markus Jooste resigned as CEO on December 5 2017 and Steinhoff admitted to “accounting irregularities”. In early 2019, PwC confirmed that its investigation had shown there were “fictitious or irregular” transactions of R106bn over more than a decade. Eight people were named as the prime suspects, with Jooste as the alleged mastermind. And yet, no arrests have been made.
In Steinhoff’s annual report, chair Moira Moses said the company is “concerned at the slow pace of progress” in bringing to book those responsible for “past failings”.
De Klerk echoes this, telling the FM that accountability for the fraud is vital for the investor community. “We think it’s very important for corporate SA [and] our credibility as business. Everybody’s criticising the government, but we’ve also got to look at cleaning our own houses first,” he says.
While the NPA may be cashstrapped, it’s not as if Steinhoff has much money to spare either.
Not only does the company have debt of €9.5bn (R172bn), it is facing legal claims from investors amounting to more than R136bn. Needless to say, were all these claims valid, Steinhoff would be hopelessly insolvent.
To address this, it is trying to get the claimants to accept a “settlement” of just R17bn, which will see them forgo part of their claim, but allow Steinhoff to remain in business.
But even if the legal claims are settled, the debt remains an albatross. De Klerk says Steinhoff’s options include selling a stake in its main UK retail asset, Pepco, by listing it on a European stock exchange.
But that’s perhaps looking too far. As De Klerk says: “Until the legal settlement is in place, Steinhoff’s balance sheet [and] everything is under attack. So it’s a little premature to start making plans.”
The often overlooked silver lining is that the actual business of Steinhoff isn’t doing too badly — partly thanks to its 68% stake in Pepkor, which generates plenty of cash, and Pepco. But even Mattress Firm, the US company bought shortly before Steinhoff’s crash in 2017, surprised the market by turning in an operating profit of €97m for the year to September, compared to a €63m loss the previous year. Overall, the actual operations produced profit of €474m (R8.5bn) before adjustments. Unfortunately, the R300bn in debt and legal claims dwarfs this profit.
Not only does Steinhoff have debt of R172bn, it also faces legal claims from investors of more than R136bn