At the centre of it: VBS Mutual Bank in Thohoyandou, Limpopo. Picture: ANTONIO MUCHAVE/SOWETAN
At the centre of it: VBS Mutual Bank in Thohoyandou, Limpopo. Picture: ANTONIO MUCHAVE/SOWETAN

It is thankfully not too often that a bank supervisory authority is lied to by a partner of one of the top four global audit firms, which has falsified bank final financial statements in return for monetary gain. Prior to the VBS Mutual Bank scandal it is not something that had happened in SA before.

So the fact that the Reserve Bank trusted the annual financial statements as submitted to it by VBS and audited by KPMG on the strength of KPMG’s reputation is understandable. The central bank’s explanation of how VBS was looted and failed under its nose has centred on this defence.

VBS was also quite different from many other banks in that what happened at VBS tended to mostly stay at VBS. There were limited interactions with other banks. Money came in through deposits and was paid out to individuals, almost all of whom also had VBS accounts themselves. Millions moving out into accounts with other banks would have raised a red flag at the Financial Intelligence Centre.

It was eventually in August 2017 — two years after the fraud began — that VBS defaulted on several payments to other banks, alerting the Reserve Bank to the fact that things were not as they seemed. The bank was placed under curatorship eight months later.

These two factors — the unprecedented nature of the crime and VBS’s relative isolation within the system — count in the Bank’s favour that it did all it could. But if there is nothing more the Bank could have done to detect what has happening at VBS, then it follows that such a situation could occur again.

Knowing what we know now about the depth of corporate corruption in SA, that is something that when it comes to small banks it may have to do in the future, that when it comes to small banks.

One of the biggest lies in the VBS books was in what is called the SA Multiple Option Settlement (Samos) account, which is an interbank settlement system run by the Reserve Bank. VBS’s books overstated what was in the Samos account by millions.

One of the puzzles the auditors had to solve was the “massive difference” between what the books showed was in the Samos account and what a record of the account showed was actually there. This is where the allegedly corrupt KPMG partner Sipho Malaba stepped in, and in the words of a third-year audit clerk who had been battling to reconcile the amounts, “specific procedures were performed”.

Malaba, who allegedly benefited from gratuitous payments by VBS to the tune of R34m, resigned from KPMG with immediate effect in April. Despite being implicated in fraud in the forensic report, with the authors recommending that he be criminally charged for his role, Malaba is threatening court action to have the report nullified and set aside.

There are questions about whether the Bank could have done more to verify what was in the Samos account against what VBS reported was there. Knowing what we know now about the depth of corporate corruption in SA, that is something  it may have to do in the future, when it comes to small banks.

Other lessons are also clear with hindsight. Among reflections within the Bank are that greater due diligence could have been done on the individuals involved in VBS, especially after its main shareholder changed to Vele Investments in 2015. It was also unwise to let VBS,  a mutual bank with a R400m book, grow to R2bn without compelling it become a fully fledged commercial bank where levels of supervision are higher. The Bank had tried to pressurise VBS to convert its licence but it had resisted.

Small banks are difficult to supervise. For one, there is only one set of auditors, while big banks must have two, making it harder for the auditors to form part of the conspiracy. But as SA is moving towards an environment where a greater number of small banks will be encouraged, the Bank will need to gear up to pay greater attention to auditing the auditors. For this, it is going to need to gear up its capacity. For peace of mind for all us, that will be worth doing.

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