Address by Deputy Minister of Finance Mondli Gungubele on the debate of the VBS Mutual Bank report in the National Assembly
23 October 2018
Madam Speaker and Honourable Members.
Honourable members, we are here today debating the circumstances that surround the failure of a mutual bank that society and government desperately wanted to succeed. Many things have been said in the public domain by political parties, but very little is based on the facts that are available before us.
The only facts out in the public domain are that VBS Mutual Bank was put under curatorship, the civil legal proceedings instituted by the curator against certain individuals and entities, as well as details that emerged from the forensic investigation into the affairs of VBS conducted by Advocate Terry Motau SC are not in the public domain. Instead, they have been handed over to law enforcement agencies; the prosecuting authorities, National Treasury and the South African Revenue Services, amongst others, for the purposes of conducting criminal investigations.
We know that from the 2008 global financial crisis, bank failures are particularly detrimental for the well-being of the poor and middle-class of any society. The failure of a large banking institutions, also known as SIFIs (systemically important banks), in many instances can have harmful consequences for the economy and the fiscal position of a country. The failure of Lehman Brothers not only led to a recession in the United States of America (U.S), but caused bank failures in the United Kingdom (U.K) and Europe; this had a trickle-down effect, affecting many countries including South Africa, resulting in major job losses.
Though not a systemically important banks, we experienced the failure of African Bank in August 2014 and that of VBS in March this year. Both were traumatic events, even though they did not impact the broader economy adversely, they hurt the poor, who deposited their savings into these banks. Yes, we paid-out most retail depositors up to R100 000, but shareholders lost almost all their value in shares. Many retirement and savings funds also suffered big losses. So many ordinary working and middle class people also lost out on their savings.
HOW VBS WAS REGULATED
Banks have been traditionally regulated for one reason only, to protect depositors. Trust is central to banking, which is why the public deposits their savings in banks they trust, for safe-keeping.
Regulators such as the Prudential Authority do not manage banks, nor do they oversee the operations of a bank on a day-to-day basis. Instead, since they monitor and regulate all banks, and have limited resources, they have a risk-based approach in determining how much time is spent on each registered bank, taking into account which banks are systemically important and which banks are not.
VBS is a mutual bank that suddenly grew very fast from about mid-2016. Indeed, up till then, it was a good and safe bank, making loans that other banks did not. It focused mainly on making home loans to its depositors, who did not own the land they built houses on, but living in a tribal area and had a PTO (permission to occupy) land. So when this bank suddenly grew very rapidly from a R400 million bank to a R2 billion bank within 3 years, the South African Reserve Bank (SARB) recognised this as higher risk, and put it under intensive supervision from around May 2017.
The SARB placed reliance on the internal control systems of VBS including its internal audit unit (under PWC) and audit committee, and its external auditor (KPMG) to oversee what management was doing. Both the chair and CEO of VBS are qualified Chartered Accountants (CA's), and many of its board and management members are CAs, lawyers or professionals. There was good reason for the SARB to believe that VBS was in good hands. Like with doctors who have a proper certificate to practice medicine, they could rely on registered auditors to audit VBS without fear or favour. It was reasonable for the regulators to place reliance on such professionals and systems.
When VBS experienced problems, the SARB engaged with its management, and tried to protect depositors and save it by putting it under curatorship. National Treasury also engaged it when it realised that the bank was accepting deposits from municipalities, when this was clearly not allowed by the law.
On the 11th of March 2018, the Minister placed VBS under curatorship. This decision followed the recommendation of the then Registrar of Banks, and was taken after months of intensive supervision going back as far as May 2017. By February 2018, VBS was failing to honour its financial commitments and the SARB was forced to take action in the interest of depositors and in the hope of saving VBS through curatorship. However, such action had to be accelerated after the Chair of VBS and Vele, wrote an open letter to the Registrar on 9 March 2018 blaming the SARB and Treasury for the failure of VBS, rather than the looting that he led, and instead blamed " a well-organized and powerful system which does not tolerate growing black banks and black excellence."
The Motau report on VBS is the only fact-based report based on sworn statements from VBS managers and board members. It was made public by the SARB on 10 October 2018. This is the only report we can rely on at this stage.
The report found that the Chair of Vele and VBS is "the most central character in this whole saga" and "kingpin in the fraudulent" Ponzi-type scheme. What the report found was that at least 53 persons of interest appeared to have received millions of Rand in a manner deemed to be in an unlawful manner. The report finds that the leadership at VBS was unscrupulous, and though many of them are professional CA's and lawyers, they allegedly went into a frenzy of looting after taking over a healthy bank in 2014. They not only abandoned their previous model of PTO home loans, but provided what they said were off-balance contract financing.
This proved simply to be a scheme to loot depositor funds, and effectively run a Ponzi scheme by targeting municipalities who they bribed to deposit and maintain their funds at VBS, even though this meant that they would not deliver basic services and infrastructure to their residents. They showed no regard to the poor and vulnerable victims of their crime, and ignored government's commitment to transforming the financial sector and making a black-owned bank like VBS succeed. Today, the suffering of these victims includes some of the poorest people, in the poorest municipalities, who were determined to improve the lives of their children and community. This suffering has only been exposed and by the speedy actions of government and the Reserve Bank. The Reserve Bank's decision to place VBS under curatorship -even in the face of intense criticism, and strong lobbying (including from opposition parties that appear to have directly financially benefited) still took speedy action, to secure a guarantee, to repay stolen retail depositor's funds to ordinary savers, and to prevented an even greater tragedy.
No regulatory system in the world can guarantee no failures, this is especially true in the case of fraud. VBS represents an extraordinary conspiracy of bank staff, audit professionals, management, and the board to deceive regulators (including falsifying regulatory reports) as well as defrauding depositors. All this seemingly aided by local and national political figures.
Honourable members, let us for a moment consider the events that have brought us here.
Honourable members, the forensic investigation concludes with some key recommendations which amongst others include:
- That the report (and detailed annexures) be handed to the DPCI (Hawks), SARS, Asset Forfeiture Unit and NPA
- That criminal charges be filed against key protagonists
- That the SARB, NT and curator should consider suing KPMG
This house should strongly pay attention to these recommendations.
I want to conclude by calling on the criminal justice authorities to take all the information provided by the SARB, and act against those looting VBS; starting with Chair and managers of VBS. And then to follow up on those who benefited from receiving funds via their personal or trust accounts from the primary beneficiaries of VBS funds. I want to end by challenging all members of this Parliament who may be associated with those named, to subject themselves to a full lifestyle audit, and to make available all their banking and trust accounts to the parliamentary ethics committee for their consideration and investigation.
When a bank fails, both the Reserve Bank and National Treasury always try and get the truth behind such failure, the truth and nothing but the truth, on all failures or weaknesses, be it of management, auditors or regulators. We learn lessons from every failure, to learn the lessons and improve the regulatory system. We will look at any and every regulatory weaknesses, so we can strengthen our regulatory system.
I thank you