Scorpio: The Makwakwa Dossier, Part One – Moyane, Hogan Lovells and the investigation that never really was

Scorpio: The Makwakwa Dossier, Part One – Moyane, Hogan Lovells and the investigation that never really was

Jonas Makwakwa’s disciplinary process seems so tailored that it borders on the realm of being cooked. Tom Moyane tried his utmost to keep the facts and the prolonged process secret and in the end attempted to mislead the public into thinking his second-in-command has been cleared of fraud and money laundering allegations. Scorpio can now reveal that the opposite is true, show how the tailoring was done and explain how Moyane was aided and abetted by the international law firm Hogan Lovells. By PAULI VAN WYK for SCORPIO.

Hogan Lovells failed to include crucial evidence in Jonas Makwakwa’s disciplinary hearing. The omitted evidence includes a damning report by audit firm PwC analysing his tax compliance as well as “suspicious and unusual” money flows through Makwakwa’s accounts. PwC’s investigation was based on an equally damning report by the Financial Intelligence Centre (FIC). The FIC ordered the probe into Makwakwa, finding that SARS’ second most powerful official has a “dependency on suspicious cash deposits and payments to maintain his current standard of living”.

The failure to include crucial evidence in the disciplinary hearing resulted in a serious deviation from Hogan Lovell’s actual mandate. The firm argues that sections 67 to 71 of the tax administration act constrained the firm’s access to Makwakwa’s tax information. All tax experts consulted by Scorpio – including a judge, two lawyers, and an advocate – labelled Hogan Lovell’s claim as “utter nonsense”.

Hogan Lovells further complained that the Hawks investigations into allegations of corruption and money laundering linked to Makwakwa and Kelly-Ann Elskie are not finalised and is therefore also missing from the disciplinary proceedings. However, Hogan Lovells admitted to not having communicated with the Hawks out of their own volition, nor having asked the investigating officer for as much as a preliminary report into his findings.

In the end Makwakwa never had to explain why he and his girlfriend Kelly-Ann Elskie stuffed ATMs with hundreds of thousands of rand in cash, if they are tax compliant, why the money flows through his account were often more than twice his salary at SARS and why certain transactions he has been linked to look an awful lot like money laundering. Both were cleared of all charges levelled against them.

This is how it happened.

Enter the asylum

The cat was out of the bag when “renowned international law firm” Hogan Lovells earlier this month admitted that the firm “did not seek to directly investigate the financial transactions identified by the FIC”.

The confession was astounding for two reasons:

One, in May 2016 the FIC ordered SARS to determine whether several “suspicious and unusual cash deposits and payments” into the accounts of Makwakwa and his girlfriend Kelly-Ann Elskie were in fact “proceeds of crime and/or money laundering”. Around R1.7-million was paid into their bank accounts over a six-year period.

During Moyane’s reign at SARS, starting in September 2014, Makwakwa has become a powerful man. Moyane restructured several departments so as to fall under Makwakwa’s jurisdiction. Makwakwa was ultimately put in charge of SARS’ Large Business Centre, the tax man’s biggest revenue-generating unit overseeing mega taxpayers. Recently, Moyane is said to have chosen Makwakwa as his successor when he retires, apparently at the age of 65 early next year. Elskie on the other hand is a low-level SARS employee linked to the legal department. Makwakwa allegedly misused his influence at SARS to secure the position for the then 26-year-old. Her supposed law degree is also said to be suspect.

Back in May 2016, Moyane tried to ignore the FIC’s request by keeping it secret  – he did, however, unlawfully disclose the allegations to Makwakwa and Elskie. But by September the news leaked into the media and Moyane begrudgingly suspended Makwakwa, and later Elskie. Only then did Moyane appoint Hogan Lovells to conduct an “independent investigation” into the FIC’s allegations to ensure “transparency, independence and integrity”.

But Hogan Lovells failed to probe the very reason the firm was appointed for.

Design the straitjacket

Reason Two: The really alarming part is that Hogan Lovells’ confession means the firm materially deviated from their own terms of reference. Scorpio can reveal that Hogan Lovells drafted four thorough “Requests” (or terms of reference) in a seven-page document saved and circulated in SARS as “05-10-2016 Final Terms of Reference Hogan Lovells.pdf”. The document, drafted on a formal Hogan Lovells letterhead, acted as a road map of how the investigation into Makwakwa and Elskie should have been conducted (more about the detail of this road map later). It was signed by Hogan Lovells chair and attorney on record Lavery Modise on 29 September 2016. Moyane concurred and signed the document on 4 October 2016.

When it came to conducting and finalising the disciplinary hearing, Hogan Lovells encountered several stumbling blocks on their charted path.

SARS apparently declined to provide Hogan Lovells with PwC’s investigative report about Makwakwa’s mysterious money flows, citing taxpayers’ confidentiality.

PwC was contracted to investigate whether Makwakwa and Elskie paid tax on the mysterious payments into their accounts. This investigation entailed an analysis of the money flows the FIC flagged. Scorpio has not seen the report, but according to a source who had sight of it, the findings are damning. The report was provided to SARS. It is this report that SARS apparently declined to provide to Hogan Lovells – a refusal which the law firm accepted without question.

PwC also conducted a second investigation into ad hoc payments by SARS to Makwakwa, which were identified as stipends for accommodation and travel costs. This report was provided to Hogan Lovells. Charges relating to it have been levelled against Makwakwa, but his explanation was accepted and he was cleared of the charges.

Makwakwa was further charged with not revealing his links to the company Biz Fire Worx, of which he was once a director. The company, providing fire extinguisher servicing, has paid R480,000 in three different payments into Makwakwa’s personal account between April and May 2015. FIC traced the origins of the money back to the Department of Water Affairs and Forestry. According to FIC investigators, the money trail looked awfully similar to a possible money laundering scheme and ordered an investigation into the matter (more on the FIC’s allegations later).

This example eloquently explains Hogan Lovells’ conundrum. Makwakwa was charged for ostensibly not revealing to SARS his links to Biz Fire Worx. When he produced evidence of (allegedly) reporting his links to Biz Fire Worx, Makwakwa was cleared of this allegation as well.

Makwakwa was however not charged with anything relating to the material issue: Is the money flow irregular? Did he pay tax on the payment? And was he part of a money laundering scheme that fleeced money from the state?

The reason: Hogan Lovells did not have access to the PwC report, and did not insist on having access to it, which rendered a proper disciplinary hearing based on all the available evidence impossible. When questioned about this omission, Modise repeatedly insisted that Hogan Lovells had no right of access to Makwakwa’s tax affairs and the investigation into his bank accounts.

Modise confirmed that he also did not ask the Hawks about the status of their investigation into the possible money laundering scheme, nor if a preliminary report could be delivered.

Strap on the straitjacket

Thus it came to be that only a fraction of the allegations Hogan Lovells detailed in their own terms of reference was offered as evidence to disciplinary chair adv. Terry Motau SC.

Motau’s frustration in the matter was recorded by Financial Mail editor Rob Rose, who quoted Motau in his column published on 16 November titled Rob RoseThe great SARS Fraud: “Speaking to the Financial Mail, Motau sounds quite frustrated by the whole process. “I have no discretion on the kinds of charges brought against an employee whose disciplinary I’m chairing. I can’t recommend new charges be added or take issue with what is excluded,” he says.

Questioned about this omission, Hogan Lovells provided several curiously different reasons.

At first, chair Modise said the firm did not have access to Makwakwa’s tax information because the tax administration act prohibited it.

Based on legal advice, Scorpio pointed out several examples of where SARS did in fact provide tax information to designated institutions or persons.

Modise replied to follow-up questions, somehow implying that law firms may not have access to tax information:

“As per the Tax Administration Act, Hogan Lovells, being a law firm and not a professionally registered audit firm, is not privy to the tax information that would be necessary to conduct a thorough investigation into those transactions flagged by the FIC which would have tax implications.”

Scorpio consulted with several tax experts. These included a judge, lawyers and an advocate. The tax experts pointed out several cases where taxpayer information was disclosed to audit firms, debt collectors and lawyers. This despite the stringent constraints of the tax administration act. When this was put to Modise, he made an about-turn:

“I realise that my email may have created the impression that I was saying that the [tax administration act] does not allow lawyers access to any tax information – which is of course not the case.

“The [tax administration act] provides for limited instances where taxpayer information can be disclosed to parties outside of SARS. Relevant to this is the purpose for which it is disclosed. In the case of Makwakwa, SARS was obligated to conduct a tax investigation – as we recommended in the Terms of Reference. They opted to use the services of an audit firm to do so. Hogan Lovells would not have been an appropriate firm to contract this investigation to, because as lawyers we do not have the expertise to conduct a thorough investigation of this nature. In the capacity in which Hogan Lovells was briefed, we were not privy to the taxpayer information.”

But the issue is not who conducted the investigation. The material issue is that there was in fact a probe into Makwakwa’s financials, that the findings of the PwC investigation were not put to Makwakwa, that he did not have to answer to any of the allegations, and that he is now back at SARS, working with mega-taxpayers once again.

While Hogan Lovells experimented with word gymnastics in order to explain away the straitjacket it found itself in, SARS neatly made use of the gap.

On 30 October Moyane issued a press release titled “Jonas Makwakwa to return to SARS”.

  171030_SARS Presser_Makwakwa Coming Back 

“SARS wishes to confirm that advocate Motau SC has submitted the final report which found that Mr Makwakwa was not guilty of any of the charges levelled against him. This concludes the disciplinary action against Mr Makwakwa… he will return to SARS to resume his position…”.

Moyane’s statement was coupled with blunt refusal of requests by various media houses for more detail.

When Scorpio questioned SARS on the existence of the PwC report that was so vehemently denied as well as the details of the Makwakwa investigation, we were met with a stony silence.

After several probes, SARS spokesperson Sandile Memela attempted the same stale tactic that worked so effectively on Hogan Lovells:

“SARS does not wish to engage with the contents referred to in the letter dated 29 September 2016 in the public. In fact, the query is best directed to Hogan Lovells chairman, Lavery Modise.

“As you are aware, Chapter 6, especially Section 69 of the Tax Administration Act 201, it is a criminal offence for anyone to disclose or divulge information about any taxpayer’s affairs to the public. As a result SARS cannot be seen to be contravening the law and thus cannot comment.”

Administer the chemical restraint

The above sequence of events stands in stark contrast with Hogan Lovells’ actual mandate. It also stands in conflict with the firm’s statement that there was no direct investigation of the financial transactions. In their terms of reference, finalised and signed by Moyane on 4 October 2016, Hogan Lovells concluded that the Hawks must investigate allegations of Makwakwa’s mystery payments. The FIC investigators claimed Makwakwa might be involved in corrupt activities and that the mystery payments could be proceeds of crime and part of a money laundering scheme.

  160929_Hogan Lovells Legal Opinion Makwakwa

Said Hogan Lovells at the time in their terms of reference document:

“It is “imperative” for SARS to “undertake this investigative process (through its attorneys) in conjunction with the [Hawks], the outcome of which will inform the nature of the formal complaint(s) to be laid with the [Hawks]”.

  160929_Hogan Lovells Legal Opinion Makwakwa 

The Hawks’ investigation formed Request A and D in the terms of reference document Hogan Lovells drafted to SARS. If Makwakwa and Elskie have “committed a crime… then disciplinary action must be taken against them,” the firm continued.

Now we know Hogan Lovells have not communicated with the Hawks about the status of the investigation and none of the facts the Hawks may have been willing to disclose were put to Makwakwa.

It is therefore incorrect of Moyane to say Makwakwa has been cleared.

But it is with Requests B and C in Hogan Lovells’ terms of reference document that the wheels really came off.

Request B put the onus on SARS: The revenue service had to investigate independently whether Makwakwa and Elskie committed tax evasion and contravened the tax administration act.

In their terms of record document Hogan Lovells said:

“Should the investigation find that there has indeed been a contravention of tax legislation or commission of a tax offence, this would constitute misconduct on the part of the employee.

“It is part of [Hogan Lovells’] mandate to assist [SARS] to institute disciplinary action against the employee(s) concerned,” the firm continued.

As mentioned above, audit firm PwC was appointed to this task. Details are scant, but according to sources the analysis and findings are damning. Said one source:

“The PwC report provides at the very least grounds for serious questions to be put to Makwakwa at a disciplinary hearing. At most, it is prima facie evidence of criminal activity.”

Request C had two parts to it. The first was suspicious ad hoc payments by SARS to Makwakwa flagged by the FIC. As mentioned above, these were also probed by PwC. It was found the payments related to travel costs. The allegations were put to Makwakwa and he was cleared of the charges.

In their terms of record document Hogan Lovells said:

“We are of the view that this process be undertaken in conjunction with Request B (the tax investigation) as that process will be able to establish the source of the funds, and whether there has been any contravention of [SARS’] policies and the Public Finance Management Act. Once the investigation into Requests B and C is completed, [SARS] will be in a position to determine the appropriate disciplinary action against the employees.”

Now we know the PwC investigation into Makwakwa’s and Elskie’s tax affairs has never been put to them in the disciplinary process.

The last part of Request C referred to Makwakwa’s links to Biz Fire Worx from which he received R480,000. Hogan Lovells advised that this matter should also be referred to the Hawks for investigation. As mentioned above, nothing has come of this allegation either.

When faced with Scorpio’s questions, Modise attempted to be appeasing, saying that Makwakwa was not fully exonerated as SARS seem to be indicating.

“The (disciplinary) hearing does not exonerate [Makwakwa] in any way from the potentially more serious charges which could result from the outcome of the investigations into his tax affairs as well as the criminal investigation currently being conducted by the Hawks… we wish to clarify now that Makwakwa could still face further disciplinary and potentially criminal charges.”

The problem, of course, is who would bring about those “further disciplinary and potentially criminal charges”?

Back to reality: Electric shock therapy

The FIC’s concern over Makwakwa’s sudden and questionable good fortune can be divided into four issues. Notably, Makwakwa’s prosperity seems to coincide with Tom Moyane’s arrival at SARS in September 2014.

  160517 FIC Extract Makwakwa 

The first was a notable increase in the amount of money flowing through Makwakwa’s main FNB account. Payments into this account approximately increased by 152% over five years – from about R1.3-million in 2010 to just over R3.4-million in 2015, FIC investigators note.

Investigators further isolated 75 cash deposits into Makwakwa’s bank accounts between 2010 and 2016. The bulk of these – 48 payments totalling R726,400 – was deposited between 2014 and 2015.

The FIC was concerned over the “volume and value” of the cash deposits and described it as “highly unusual”, particularly considering that Makwakwa is permanently employed.

Scorpio has established that Makwakwa’s income from SARS remained around R110,000 per month in 2014, increasing to about R140 000 per month by 2016 during this phase.

The FIC noted that the amounts flowing out of Makwakwa’s account also increased over this period, “creating a dependency on suspicious cash deposits and payments to maintain his current standard of living. These payments and cash deposits are of concern as they originate from unknown sources and undetermined legal purpose”.

FIC instructed SARS to investigate whether the cash deposits are “proceeds of crime arising from corrupt activities” because the “volume and value of the cash deposits are highly unusual”.

The third issue isolated by FIC was the peculiar payment we have by now traversed – the payment of R480,000 into Makwakwa’s account in 2015. It originated from the Department of Water Affairs and Forestry.

On 11 February 2015, the department paid R17.8-million to a company described as a service provider. Over the course of two months the money moved through 12 different bank accounts. With each transfer, the amount decreased.

At one stage the payments flowed back to companies earlier in the chain, creating a circular movement that the FIC described as a possible act of money laundering.

Right at the end of the chain, R600,000 was transferred to Biz Fire Worx, a company providing fire extinguisher servicing that listed Makwakwa as a former director. Between April and May 2015, R480,000 was transferred in three payments to Makwakwa’s personal account.

The FIC instructed SARS to investigate the payments in order to determine whether it is “proceeds of crime arising from corrupt activities” and to conclude if the “concealment and disguising of the true source of these funds constitute acts of money laundering”.

Six days after receiving the last payment by Biz Fire Worx, Makwakwa bought Elskie a Mercedes Benz C220, the FIC investigators said.

FIC’s fourth issue was with Elskie. Between 22 and 24 December 2015, cash deposits totalling R450,200 were deposited into her account. Two cash deposits of R160,000 and another of R130,200 were deposited over three days into the ATMs of three different branches of the same bank – all located within an approximate 10km radius. Video footage at the ATMs confirmed Elskie as the depositor in two of these instances.

“The source of these funds is unknown and the value of these cash deposits is suspicious and unusual considering the financial profile of Elskie,” FIC investigators found.

Elskie used the money, along with the funds from the sale of another property, to buy a new property.

It is important to note that the FIC’s allegations are just that at the moment – allegations. Although it is based on a thorough investigation, the allegations must be substantiated by the relevant authorities. This process has become Moyane’s and Makwakwa’s biggest ally. The media’s vociferous questions have since September 2016 been tempered with the notion that Makwakwa has not been found guilty of a single allegation. It seems as if the pair, with the aid of Hogan Lovells, intend to keep it that way.

Facing the facts

SARS is scheduled to appear before Parliament on 28 November to present its annual financial report. The late filing is due to another scandal where Moyane was at loggerheads with the Auditor-General over R3-million in bonuses irregularly paid to his executive.

Yunus Carrim, chairperson of the standing committee on finance, has called on Moyane to provide the full report into Makwakwa’s disciplinary hearing in the public domain.

“It’s particularly important because SARS is being challenged in many respects and we need confidence in it. It’s in its own interests that it releases the report.”

The End

Scorpio has revealed the existence of the damning PwC report and that Makwakwa has only answered to a fraction of the allegations levelled against him.

At the moment, little is known about the details of Elskie’s disciplinary hearing, other than that she, too, was cleared of all charges.

If this were a country where law reigned supreme, Moyane would have no choice but to initiate another disciplinary procedure in order for the new set of charges to be put to Makwakwa and Elskie. In an equally ideal world, Moyane would also have little choice other than to be frank with Parliament about the true scope of the Makwakwa and Elskie investigation. What he will do in the real world remains to be seen. DM

Photo: Jonas Makwakwa.

Scorpio is the Daily Maverick’s new investigative unit. If you’d like to support its work,  click here.


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