The Public Investment Corporation (PIC) missed the red flags around the now defunct VBS Mutual Bank because it relied excessively on the reports of assurance providers.
Advocate Terry Motau’s forensic report titled The Great Bank Heist found that 50 individuals, including the executive management, directors and politically exposed persons, colluded to defraud the bank of close to R2 billion.
The PIC – which controls over R2 trillion in government pensions and other social funds – is the second biggest shareholder in VBS, with a 25% stake through its biggest client, the Government Employee Pension Fund (GEPF). It granted a R350 million loan VBS, to be used as an extended credit facility.
It’s difficult to say where the blame lies when all three different lines of defence at the bank could not defend the massive fraud, said Khaya Zonke, senior manager of portfolio management and valuations in the Isibaya Fund, a division within the PIC responsible for its developmental investments.
Division tasked to ‘mitigate against impairments’ didn’t
The division monitors the performance of investments throughout the lifespan of the deals to identify any deterioration and distress in performance in order to mitigate against impairments.
Zonke told the PIC Commission of Inquiry probing issues of governance and administration at the state asset manager that the PIC had relied on assurance providers – including internal audits by PwC, external audit work by KPMG, and oversight from the South African Reserve Bank (Sarb).
“We placed a lot of reliance on these assurance providers and if we get audited statements from a reputable audit firm there was no reason to second-guess them,” Zonke said.
Different investments are placed into four categories that are reviewed on a quarterly basis, namely performing, underperforming, watchlist and distressed.
VBS was “rated green”, which means it was performing, and almost overnight “moved from performing in line with our expectations to distressed”, skipping two categories, said Zonke.
He said before then the PIC was happy with the mutual bank’s performance and supported its 2021 strategy to move from a regional mortgage bank to a national, corporate retail bank.
The strategy involved increasing its balance sheet to R11 billion from a combination of municipal, small business, church and taxi association deposits.
The bank raised R360 million from municipalities and R350 million from the PIC.
‘We thought it was legal’
At the time, said Zonke, the PIC did not know it was illegal for a mutual bank to receive municipal deposits because VBS was specifically targeting them as part of its growth strategy. “We thought it’s something that was legal.”
When the bank collapsed, the PIC’s total exposure was around R458 million, with equity of R108 million and a R350 million credit facility.
The credit facility, which was meant for loans to fuel suppliers, is currently not being serviced as VBS is undergoing a liquidation process directed by the Sarb’s Prudential Authority. Last year the GEPF announced a write-off of R375 million in its VBS investment.
Zonke said the PIC had legally sanctioned quarterly meetings for updates on the facility, where VBS would present a list of clients they had lent money to and their repayment profiles.
Motau’s report found that VBS created fictitious loan applications in order to draw down on the R350 million facility.
“Perhaps we should have done a bit more work on verifying the companies,” said Zonke, adding that he did not know if they were real or fake.
Commission assistant Emmanuel Lediga said the concern was that this could happen again so it was imperative to know “what are the lessons learned” by the PIC.
Khoza could not provide any assurance, saying that the transactions were concluded on trust and that when the investments are put together one does not anticipate that fraud will happen “at the highest level”.
“I still don’t know how we could have done it differently,” he said.