Kuben Naidoo on VBS and a ‘conspiracy of lies’
Reserve Bank has learnt not to take auditors at their word
● For Kuben Naidoo, deputy governor of the Reserve Bank, one of the most painful lessons from its failure to prevent the pillaging and collapse of VBS Mutual Bank is never to assume that auditors are telling the truth.
“It’s very difficult to get to the bottom of things when there is a conspiracy of lies,” says Naidoo, also the registrar of banks.
More than a year before VBS was put under curatorship in March, the Reserve Bank suspected it was not meeting its capital adequacy requirements.
“We insisted that they hold more capital. They said they were, their financial statements said they were, the auditors said they were.
“We now know that was a lie.”
KPMG handled the external audit and signed off on the accounts each year, while PwC handled the bank’s internal audit.
The registrar of banks has the power to order reviews of audits and inspect the books.
“We had no basis not to believe them,” he says.
“We are heavily reliant on the auditors doing their job properly. You want a good internal audit, you want a good audit committee to appoint good auditors and make sure they’re doing their job.
“Now we’re going to have to be more sceptical about this, and we’ll certainly be more sceptical of the financial statements we receive from the auditors [in future].”
He says doubts about the integrity of the auditing profession are not just a problem for the big four auditing firms or the banking industry, but for the whole country.
“It’s an SA Inc problem.”
Naidoo says the Reserve Bank began warning VBS to fix problem areas at least 13 months before it went under.
“Not only did they ignore us, in some cases they went in the opposite direction.”
They were told to reduce their reliance on municipal deposits. They increased their reliance, in the end taking deposits from 15 municipalities.
He accepts that the Reserve Bank had grounds to act against VBS immediately it knew it was accepting municipal deposits, because this was illegal.
So why didn’t it?
“It’s illegal for a municipality to place a deposit in a mutual bank. Whether it is illegal for a mutual bank to accept such a deposit is a different issue.”
The National Treasury told the municipalities that they were breaking the law.
“VBS got a legal opinion to say that the Municipal Finance Management Act says you can’t have your primary bank account at a mutual bank but does not say you can’t place an investment in a mutual bank. The municipalities argued these were investments, not just deposits.”
The Treasury got another opinion confirming that this was illegal, and advised municipalities accordingly.
VBS threatened to take the Treasury to court and continued accepting municipal deposits.
“We knew they were illegal a long time ago, and advised them to pay them back.”
Instead VBS became so reliant on them that the Reserve Bank decided it would collapse if it was made to pay them back.
The question is whether the Reserve Bank failed to act more decisively because of possible political repercussions.
Treasury deputy director-general Ismail Momoniat has conceded in relation to VBS that “political pressure . . . limits how agile or how quickly you act when you need to act”.
The Reserve Bank was under threat. Public protector Busisiwe Mkhwebane had instructed parliament to change its mandate, and VBS made no bones about the fact that it had political protection.
Naidoo says the Reserve Bank was aware of VBS’s political connections, “and certainly that was a factor in the discussions”.
But he denies that this inhibited the Reserve Bank from acting against VBS.
“I don’t think that had any impact on how we reacted.”
Was there no concern that moving against VBS might precipitate a hostile political reaction against the central bank?
“No, that was never a concern. We have taken many steps that would prompt politicians to feel unhappy. We have confiscated very large amounts of money from very well-connected people.”
Should VBS’s R7.8-million loan to thenpresident Jacob Zuma have been a red flag for the Reserve Bank, given its concerns that VBS was dangerously short of capital?
It subsequently emerged that at the time of the loan it had only R24-million. It collapsed within a year.
“It was not a red flag because it did not go over the significant exposures limit. Who they lend to is their business.
“At that stage we did not know they were not meeting their capital adequacy requirement.”
In hindsight, the Zuma loan was “certainly one of the factors that could have precipitated an increase in municipal deposits”, he says.
“But we had absolutely no basis to raise an objection to the loan. There was nothing wrong or illegal as far as we knew to the loan.”
Naidoo says there is no need for tighter bank regulation.
“We’ve got a R5-trillion banking system. VBS is a R2-billion bank, a minuscule percentage of the total banking system. In general we’ve got a very sound, healthy banking system, and we are unashamedly inclusive supervisors.”
He agrees that VBS raises concerns about the Reserve Bank’s supervisory capacity, which is why it has committed publicly to an inquiry into whether there were regulatory failures.
But he says it is not the regulator’s job to stop banks making stupid decisions that, as in the case of African Bank’s acquisition of furniture retailer Ellerines, lead to their collapse.
“We don’t have a no-failure policy in our banking system. There’s a delicate balance between protecting the safety and soundness of institutions and ensuring that market forces operate.
“If banks make wrong strategic decisions then markets punish them for that.
“There must be a balance between having a sound regulatory framework and having a framework where you don’t allow failure,” he says.
He says the prevalence of white-collar crime is less about regulatory failure than the failure of “other players” to do their jobs.
“If we had a criminal justice system that took white-collar crime seriously it would be a deterrent. You do need prosecutions when people steal money.”
We insisted VBS hold more capital. They said they were, their financial statements said they were, the auditors said they were ... that was a lie