OPINION: VBS - Saambou Bank: More in common
The Minister of Finance, upon the recommendation of the Registrar of Banks, placed the VBS Mutual Bank under curatorship with effect from Sunday, March 11.
Following up on the never-ending VBS saga, we decided to have a look at the root cause of the bank's seizure.
The system on which the VBS Bank operated was the Emid system, a system on which thousands of people, the Reserve Bank and many other stakeholders relied to provide a solid platform on which business can be conducted safely, securely and accurately.
Now who would ever believe that? We quote from the Emid web page: “Emid was established through a management buy-out of the Saambou Group's information technology assets. Emid offers comprehensive end-to-end banking solutions, based on an application solution provider and third-party processor model.
"BSVA Integrated Services was acquired by EOH and renamed back to Emid. As an EOH company, Emid is part of one of the largest, JSE-listed, information technology providers in South Africa."
It turns out that Saambou failed as a bank (no directors were found criminally liable), yet the remains of one of its assets finds its way from the grave to VBS Bank, where the system was open to manipulation in such a manner as to bring to an end the hopes of many a faithful customer and bring disaster to struggling municipalities trying to support a bank which they could relate to.
Municipalities used their scarce and earmarked cash resources destined to alleviate service delivery issues to support an undeserving institution.
We are now well entrenched in the Fourth Industrial Revolution and everyone is digitalising and integrating, seamlessly and in real time, across all devices anywhere in the world on a 24/7 basis, and more and more business is done on some or other digital platform as per technology.
Digitisation is the conversion of data into a digital format with the adoption of technology. The adoption of digitalisation is crucial for the banking sector.
By embracing digitalisation, banks can provide enhanced customer services. This provides convenience to customers and helps in saving time. Digitalisation also reduces human error and thus builds customer loyalty.
Today, people have round-the-clock access to banks due to online banking. Managing large amounts of cash has also become easier.
Digitisation has also benefited customers by facilitating cashless transactions. And customers need not store cash any more, as they can make transactions at any place and anytime.
Are we making progress? It certainly seems that some have made little progress in the past decade.
Is it not amazing that it was not some whizz-kid from New York or some geek from Germany or a super nerd from Norway who managed to beat the system.
With due respect to our locally-bred fraudsters, we learnt a lesson from unlikely candidates far less sophisticated, yet efficient to manage "The Greatest Bank Heist" in South African history.
The Prudential Authority will probably take a closer look at the systems banks operate from now on. The Financial Sector Regulation Act (FSCA) gave effect to important changes to the regulation of our financial sector. We quote from its website:
"First, it gave the South African Reserve Bank an explicit mandate to maintain and enhance financial stability. Second, it created a prudential regulator, the Prudential Authority (PA). The PA is responsible for regulating banks, insurers, co-operative financial institutions, financial conglomerates and certain market infrastructures."
But things are getting messy. We once again set out the role-players:
1.The Registrar of Banks has placed VBS Mutual Bank, with effect from Sunday, March 11, 2018, under the curatorship of Anoosh Rooplal.
2.Insure Group Managers (IGM) is a registered collection agency and its main business is the collection of premiums on short-term insurance products. It’s what IGM does and has been doing since 1998.
Following a review by the Financial Sector Conduct Authority (FSCA) of the regulatory solvency of IGM, the company agreed on September 14, 2018, to a proposal by the FSCA to be placed under voluntary curatorship. Pieter Bezuidenhout was appointed as curator.
3.Acting Deputy Judge President Moroa Tsoka wasted no time on Tuesday, July 31, 2018, in granting a final liquidation order against Vele Investments, the bank’s controlling shareholder. The application for the liquidation of Vele had been brought by the bank’s curator, Anoosh Rooplal.
What the parties (both curators) now need is to establish whether the transaction between Vele Investments and Insure was done at arm's length and in the normal course of business.
Vele Investments contemplated the purchase of an interest in Insure shares, with the intervention and participation of VBS Bank. The purchase price at R250million for a 26percent interest in a company with liquidity problems raises some serious concerns.
This places a value of close to R1billion on Insure. However, serious erosion of value was probably caused due to the reputational risk profile of Insure. Reputational risk is the risk of possible damage to their brand and reputation, and the associated risk to earnings, capital or liquidity, arising from any association, action or inaction which could be perceived by stakeholders to be inappropriate, unethical or inconsistent within acceptable levels of stakeholders’ values and beliefs.
With regard to the value of Insure's ordinary shares, the other issues at Insure need a further look. We received the following answer from the curator: "The regulatory solvency concerns raised by the FSCA resulted from the investment of funds by IGM into long-term and illiquid investments, which funds are required to service short-term obligations. These short-term obligations refer to premiums due to Insure.”
The nature of these investments are stated as: "The investments referred to are a mining rehabilitation operation located in Springs, Gauteng; a property portfolio comprising a number of high value property developments located in various parts of the country.”
We think solvency is a strong word implying more than just illiquidity.
Since VBS Bank was placed in the hands of the curator, Independent Online (IOL) asked some other questions. The answer is stated below:
“The intention was for Vele (not VBS) to subscribe for shares in Insure. The transaction was not consummated as the conditions precedent were not fulfilled. The transaction was accordingly void ab initio."
This response has prompted us to ask a legal expert Mr De Klerk from De Klerk Mandelstam the following: (at time of print we have not yet received his reply, which we will publish once received).
Our question to Mr De Klerk:
a)Is it correct that since Vele Investments is being liquidated, they (the liquidators) will be seeking to attach the shares held in Insure, irrespective that both parties colluded with VBS?
b)Can the Insure curator correctly claim that the transaction was not consummated? It seems clear that money was withdrawn against the R250m deposit as per Advocate Motau’s report. (They are co-creators of a factious scenario and could be barred from relying on the reality?)
We quote from Advocate Motau's report: “Paragraph 134: Once the R250m fraudulent deposit was created in a 32-day notice account in Insure’s name, Insure made numerous draw-downs on the account over the following months."
The curator of Insure told us that the contemplated sale of Insure shares would have been a transaction between the shareholders of Insure and Vele Investments, yet he expresses the opinion that the deal was void ab initio. At the same time he does not wish to disclose the sale agreement to IOL as he states he is not the curator for Insure’s Holding company. Perhaps this is a contradiction that he may expand on.
Charl Cilliers (suspended chief executive) initially indicated his willingness to discuss the Insure issues with IOL, but has since not responded to requests for a meeting to state his version of events. The exact words of the curator we repeat here: “The intention was for Vele (not VBS) to subscribe for shares in Insure."
It is therefore not correct to state that the transaction with Vele Investments was with the shareholders of Insure Group Managers as Vele would have subscribed for new shares in Insure. It seems more likely that the deal was with Insure, the company, as the deposit created was in the Insure name and money was withdrawn from there. It seems to us that the draw-down of the R250m was still insufficient to solve the liquidity problem as the curator has withheld premiums due to the Insurers of between R1250000000 and R1400000000. As per our question to the curator of Insure: “IGM collects approximately R15 to R17bn of premiums per annum.” The SAIA website indicates that the total market value of all premiums is R108.2bn per annum.
The following is an extract from Insure Group Managers: market update number 3, September 19, 2018: “I have been updating all insurers on the process to be followed in terms of the retained premium for the August collection period.”
IOL will try to establish if the various investigations that are to follow will investigate, among others, the possibility that the groundwork was laid to create a money-laundering operation. Certainly from Vele Investment’s view, the investment in Insure did not make prudent investment sense. Why would they fork out R250m even with fictitious money for a company with a liquidity problem? Perhaps their eyes were on the large cash handled by Insure. The illiquid investments are perhaps more than illiquid; perhaps the difference in book value and market value is the main problem. Insure does not have a good track record of investments in unlisted entities.
Corrie Kruger is an independent correspondent.