Municipalities that invested in VBS to be probed

The Limpopo municipalities that invested large amounts of money in the beleaguered VBS Mutual Bank will be the targets of forensic audits by the province’s provincial treasury. The municipalities include the Vhembe District Municipality (VDM), the Makhado (MM) and the Collins Chabane Municipality (CCM). Together, these three municipalities had invested R386,5 million at VBS Mutual Bank.

The MEC for finance in Limpopo, Mr Rob Tooley, said last week that a forensic audit would be implemented at all municipalities that had invested with the mutual bank. Tooley is quoted in an article that appeared in the Mail & Guardian newspaper, saying that the situation at each of the municipalities would be assessed and analysed before a decision was taken regarding the appropriate interventions.

The gravity of the situation is slowly starting to sift through to all concerned parties. The SA Reserve Bank placed VBS under curatorship in early March this year because of the bank’s severe liquidity crisis. In court papers filed shortly afterwards, the bank’s curator, Anoosh Rooplal, said that R900 million could not be accounted for and there was evidence of large loans made to directors and related parties that might not be recoverable.

Who will get their money back?

In a report presented to parliament by the national treasury, it is stated that municipalities might only be able to recover between 10% and 40% of their deposits. The report describes the pay-out to municipalities as “highly uncertain”. VDM invested R311 514 197 at VBS, almost 35% of the municipality’s annual operating revenue. CCM invested R122 410 521, or 35,52% of their operating revenue, while MM invested R61 712 340 with VBS Mutual.

According to the treasury report, the curator will prioritise the more than 13 000 ordinary depositors of VBS Mutual. These depositors include “rural retail depositors, funeral insurance stokvels, and other vulnerable groups.” Municipalities will not be at the front of the line waiting for pay-outs, it seems.

Who benefitted from this?

In articles that appeared in national newspapers over the past two weeks, mention is being made of middlemen who facilitated these deals. The middlemen allegedly earned handsome commissions for convincing municipal officials to invest huge amounts with VBS. The middlemen who received commission allegedly include a top politician in the province.

Last Wednesday, the mayors, municipal managers and chief financial officers of the municipalities that had invested in VBS had to appear before the provincial legislature’s co-operative governance and traditional affairs committee.

In a report that appeared in the past weekend’s Sunday Times newspaper, a senior member of the legislature, San Sebabi, is quoted as comparing what had happened to organised crime. “We are dealing with an organised criminal syndicate, a group of criminals who will take service delivery money and invest it in a hole that is bottomless,” Sebabi said. He was concerned that, once the news got out, it would lead to widespread anger among communities.

“You are plunging Limpopo into a ball of fire. You tell our people you invest money when they don't have water, when they don't have roads. What do you expect our people to say? How do you expect them to respond?” he asked.

During this meeting, the question was asked as to why most of the officials who had signed off on the investments had bypassed their own councils. Eddie Makamo, the acting municipal manager of the CCM, explained that the responsibility to make investments was delegated to the administration, the municipal manager and those to whom he or she delegated the responsibility. This was confirmed by Tinyiko Muchavi, the chief financial officer of the VDM, who had signed off on the investment.

The CFOs were questioned as to why National Treasury’s directives barring municipalities from investing in mutual banks had been ignored. Makamo said that they had only been made aware of these directives after the money had been committed. “We made an assumption which we later realised we did not test correctly,” he is quoted as saying. According to Makamo, they were under the impression that VBS was registered as a “normal” bank.

High profits – high risks?

The Sunday Times article quotes from the National Treasury report, in which it is pointed out that municipalities were promised suspiciously high returns on investments over short periods. The example of Fetakgomo Greater Tubatse Local Municipality is mentioned, where the municipality was apparently promised 8% interest over a four-month term. The R30 million that the municipality invested would have earned them an extra R2,4 million over that period. The following month, it invested another R40 million, from which it was supposed to earn R3,5 million in three months. The municipality eventually invested R230 million in VBS.

If the information is correct, the municipality would have received an effective interest rate of more than 24% per annum. This is highly unrealistic, given that the Reserve Bank’s prime lending rate is only 10%. The rate at which the Reserve Bank lends money to commercial banks is 6,5%.

The woes continue

On Tuesday, the Bank Supervision Department released its annual report, indicating that, in 2017, the SA Reserve Bank had fined VBS Mutual Bank R2,5 million for failure to comply with the Financial Intelligence Centre Act. R2 million of the fine was suspended for a year.

The report states that the bank, as well as several others who had contravened the act, was penalised for “not identifying and verifying their customers’ details, not keeping records of customer identification, inadequate controls and working methods pertaining to the reporting of suspicions transactions.”

VBS Mutual will also be the subject of yet another parliamentary discussion this week. On Wednesday (30^th), the finance committee was to discuss the latest situation with regard to Capitec Bank and VBS Mutual.

Date:03 June 2018

By: Anton van Zyl

Anton van Zyl has been with the Zoutpansberger and Limpopo Mirror since 1990. He graduated from the Rand Afrikaans University (now University of Johannesburg) and obtained a BA Communications degree. He is a founder member of the Association of Independent Publishers.

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