Whispers from inside the wreckage of VBS Mutual Bank suggest the bank’s rapid disintegration is far dirtier than anyone could have suspected. On March 11, the small bank, which first opened its doors as the Venda Building Society in 1982, was put under curatorship. It had 23,000 clients including 7,688 stokvels. Eleven days later, new curator Anoosh Rooplal wrote a starkly apocalyptic report, revealing that the bank’s accounts might as well have been conjured up by former Steinhoff CEO Markus Jooste over a bottle of merlot.
Rooplal’s findings included that the R1.8bn held in VBS’s suspense accounts "may be a fictitious creation of deposits on the banking system", there were possible "fraudulent transactions" designed to siphon money from the bank, and nine of its largest 20 borrowers weren’t repaying their loans. To make it worse, VBS’s liquid cash was just R24.7m — even though the ostensible deposits with the bank were supposedly R2.9bn. Then again, who really knew? Rooplal wasn’t able to confirm whether R900m in corporate deposits even existed.
To sift fact from fiction, banking registrar Kuben Naidoo hired advocate Terry Motau to conduct an investigation, which is ongoing. His report, due within months, is likely to form the basis of any further action by government — including possible criminal charges.
This week, Naidoo told the FM that it has been confirmed that there indeed were "fictitious deposits" in VBS’s books. Rooplal concurs, saying that based on the preliminary results he’s seen, "it seems that [money was] moved out of the bank". It’s an intriguing revelation, and the spotlight now turns to how, even if there were rogue executives, the bank was able to get away with it.
There seem to be two places to focus, seen intuitively: either auditors KPMG botched their job spectacularly, or they did indeed warn the Reserve Bank of what was happening, and the bank ignored the red flags.
What complicates this question is that VBS had been flouting the law for years. Back in 2003, the Municipal Finance Management Act stipulated that municipalities weren’t allowed to keep cash in small and volatile mutual banks like VBS. Despite this, VBS cheerfully took deposits from 15 municipalities, most of them in financially stricken Limpopo. The Vhembe municipality, for example, which caters for 1.2m people and borders on Botswana and Zimbabwe, invested R311m with VBS — 57% of its operating budget. In all, by February, municipalities had placed R1.5bn with VBS, openly defying the prohibition.
A sense is emerging from the VBS investigation that the probe will be much more damaging for KPMG than for the Reserve Bank
— Rob Rose
So why did the Bank allow the small mutual bank (from which former president Jacob Zuma borrowed R7.8m in 2016) to take illegal deposits? It’s a question that has led to much soul-searching in the Bank’s banking supervision department.
Says Naidoo: "We’ve launched an internal inquiry into whether we missed any red flags to satisfy ourselves about whether there was any failure of supervision."
Naidoo, who is as impressive as any of the people to have headed that critical department, has withstood some fanatical criticism from VBS. On the eve of the curatorship, VBS chair Tshifhiwa Matodzi wrote a letter to Naidoo claiming the regulatory attention had intensified only "after black management was appointed".
And yet, the rationale for prohibiting municipalities from depositing cash with a small mutual bank, and the danger of it, has become crystal clear in recent months.
Asked if the municipalities now stand to lose large sums of money, Rooplal is unequivocal. "Absolutely. Unfortunately, the financial position of VBS was not great. So we’re trying to recover what assets we can to mitigate the losses," he says.
Smaller retail investors are luckier. Treasury has guaranteed that they will get at least R50,000 back, and last week Rooplal said that anyone with less than R1,000 deposited with VBS could withdraw it all. "Customers with balances of more than R1,000 shouldn’t panic — we’re working to ensure they can access their money."
But to get back to the central matter: the sense emerging from the VBS investigation is that the probe will be far more damaging for KPMG than for the Bank.
On a Sunday in April KPMG hastily convened a press conference to reveal it had accepted the resignations of two partners. One of them was Sipho Malaba, the lead partner on the VBS audit and the head of KPMG’s financial services practice. His sin, ostensibly, was to have had a personal loan from VBS that he didn’t disclose to his bosses — the sort of thing that raises questions over an auditor’s independence. But the talk is that Malaba’s full role in what happened has yet to be aired, beyond simply that he was the auditor of a bank with "fictitious deposits".
If it turns out that KPMG’s partners merrily sent off dutifully signed reports to the Reserve Bank saying all was hunky-dory when it wasn’t, KPMG could be in its worst bind yet. And that’s saying something.
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