EDITORIAL: Interference in investigations
Its not Hogan Lovells’s fault that its own client [SARS] stymied its investigation
Are professional services firms being sufficiently sceptical about why the government and state-owned corporations are asking them to conduct investigations? The answer is undoubtedly "no" and the consequences are unquestionably dire.
The latest to get caught up in the morass is law firm Hogan Lovells, and its position is tricky, to say the least. Broadly what happened is that while former finance minister Pravin Gordhan held office, serious accusations of impropriety were brought against newly appointed second in command at the South African Revenue Service (SARS) Jonas Makwakwa.
The accusations were made in the context of a kind of cold war between Gordhan and SARS head Tom Moyane, who had set about removing Gordhan’s old allies from the service over allegations that they had constituted a "rogue unit". This was not a happy time.
It was alleged that R1.3m in "suspicious and unusual" payments were made to Makwakwa and his girlfriend Kelly-Ann Elskie. The payments were picked up by the Financial Intelligence Centre (FIC). For several months, Moyane failed to act at all and then, pushed, said a probe would be conducted. The brief was given to Hogan Lovells. The firm did the report and, ironically, this was not where the trouble ended but where it began.
Moyane triumphantly announced on October 30 that Hogan Lovells had found Makwakwa not guilty "of any of the charges levelled against him". This was about a year after Makwakwa’s suspension, during which he happily bided his time at home.
After some investigative press work, it turned out that the scope of the Hogan Lovells investigation had been severely crimped. It said its probe was "limited to identifying whether any misconduct had been committed by Makwakwa and Elskie as employees of SARS. It did not seek to directly investigate the financial transactions identified by the FIC. We understand that all criminal-related allegations arising from the FIC report were referred to the relevant authorities for investigation."
So now it turns out we have an investigation that excluded the precise thing that any investigation would seek to discover: did anyone do anything illegal? That is miles away from the investigation finding that Makwakwa was "not guilty" of any of the charges levelled against him.
But it gets worse. It then turned out that accounting firm PwC had in fact already investigated and reported on these "unusual payments". Hogan Lovells requested this report but was told it was not permitted to scrutinise someone’s tax affairs according to the Tax Administration Act. This is nonsense. The act generally does protect taxpayer confidentiality but it specifically allows the disclosure in no less that five different situations, the most relevant here being that the commissioner authorises it. Hence we may conclude that Moyane chose not to allow Hogan Lovells that dispensation here.
Obviously, this is shameful on the part of SARS. The organisation is effectively stifling an inquiry into one of its own, undermining its moral authority to do so against others. This is no trifling issue. Already tax receipts are expected to be R51bn under budget. SARS has provided ammunition to every tax avoider out there, and there are plenty of those.
But the fallout has endangered Hogan Lovells too, partly unfairly. On the one hand, it is not the law firm’s fault that its own client stymied its investigation. But on the other hand, the law firm is at fault for not being more sceptical about why it was being asked to do the investigation in the first place.
The problem is that when politicians paint themselves into a corner, they try to escape by announcing they intend having an investigation in which "no stone will be left unturned". Then they try to do everything they can to ensure that some stones remain decidedly unturned by limiting the scope of the probe. Professional services firms should be more inclined to walk away if they discover their investigation is being stifled.