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PIC relied heavily on auditors and Sarb in its oversight of VBS

Says there was no reason to doubt reports by reputable firms such as PwC and KPMG.

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).

Read: KPMG reports ex-partner to police over VBS scandal

“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.

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[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.”]

So no due or incomplete diligence was done by the PIC? Dereliction of duty by the Directors, methinks …. 😉

Totally agree – the real worry is that the SARN knew it was illegal and failed to act. Worrying insight into the ability of the bank to conduct effective prudential regulation of any deposit taking institution outside the big four banks at a time when more challenger banks are entering the market.

Argos:

Remember there was a long of political interference in both PIC and VBS. The knew everything. there is no “incomplete diligence”.

Is it true that VBS bank did not have I.T systems?

they ran on spreadsheets?

Don’t blame the Auditors…an Audit is merely a reconciliation of information provided. Auditors are not responsible for the information at source.
And being ignorant is no excuse for wrongdoing.

That is right-in true ANC lie and deny mode always blaming someone else. And it just “happened”. Amazing. Billions missing. Hau.

Utter rubbish, how can the PIC rely on the Auditors reports only?

Don’t they read newspapers and watch the news channels?

I sensed something was very wrong when Ex-President Zuma was promoting the VBS bank.

Government looks like a lame duck, no one in jail yet.

It is apparent that the PIC, GEPF, and VBS have either no business acumen, investigative capabilities, real dodo’s for employees at senior level or they were all out and out corrupt. It can only be one or the other – if it was the former then what were they doing holding such senior positions and also being allowed to make such stupid decisions

This on going saga of reliance placed on Audited Statement is a farce.IT goes to show that in experienced Interns at all Auditing Firms do 90 % of the work,and have no practical experience o how a business is run and even today most of these interns do not know how to reconcile,check bank statement,and how entries in a cash book is generated.Auditing staff and interns in the 70s and 80s did proper audits from based documents as opposed to computer based analysis.

For any investor to rely on audited accounts are a joke,and is not worth the opinion give or trust.Just look at major Top Listed companies failure,where clean Audit reports were given

Hopefully we will now stop hearing that the SA banks were saved by the SARB during the GFC and we only avoided the disaster by their prudent management.

SARB had ABIL and now VBS fall over on their watch. Surely everyone at the SARB should all pay back their bonuses for this incompetence.

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