South Africa, SCORPIO

SCORPIO: The Moyane Dossier, Part 2 – Gupta VAT payments unpacked – Six Red Flags Moyane and Mokoena chose to ignore

By Pauli Van Wyk 3 April 2018

SARS is shifting gear from denying illegality in the Gupta VAT debacle to blaming the brothers for misleading them, now seemingly conceding to have been part of a probable act of money laundering. The long shadow of suspended tax boss Tom Moyane hangs over it all. Before his suspension, Moyane vehemently denied wrongdoing, threw his colleagues the hospital pass and sketched himself as an uninvolved bystander who somehow had no say in the matter. Acting SARS Commissioner Mark Kingon has now launched an investigation to get to the bottom of SARS’ latest Gupta problem after Scorpio revealed the payments were illegal. Today we unpack the six red flags that were brushed aside in order to assist the Guptas and show clearly why SARS’ and Moyane’s self-absolving arguments are unconvincing. By PAULI VAN WYK for SCORPIO.

Previously in The Moyane Dossier:

  • Scorpio: The Moyane Dossier, Part 1 – How SARS boss disregarded the law to pay Guptas’ VAT refund, in Daily Maverick

From the very beginning, the entire process of SARS’ R70-million VAT payment to the controversial Gupta family in June 2017 danced with illegality.

At least six red flags popped up in those first two weeks following Oakbay director Ronica Ragavan’s initial “urgent” request on 22 May 2017. SARS leadership either ignored, never investigated or circumvented all of these red flags. The question of paying out the begrudged VAT payments should have failed by the fourth red flag – long before SARS even attempted to interpret the VAT Act.

The advice given by mid-level to senior SARS officials, including one by the current acting commissioner Mark Kingon, were ignored or overruled.

With the help of now suspended tax boss Tom Moyane and the current Chief Officer: Legal Counsel, Refiloe Mokoena, it took SARS only two weeks in May 2017 to push a series of VAT payments of about R70-million through in the first week of June. Another two payments, that we know of, were again effected in July and August. (SARS declined to verify the exact number of payments made to the Guptas).

SARS’ preferential treatment of Gupta Inc. stands in stark contrast with reality when considering the tax ombud’s investigation and findings published in November 2017. Tax Ombud Judge Bernard Ngoepe found evidence of “intentional delays” in paying out VAT claims and “systemic” problems in SARS which enabled the tax man to unduly delay the payment of verified refunds to taxpayers.

Some tax practitioners claim to have waited for months, some up to a year, for their clients’ VAT refunds to be paid. Several small business owners told Scorpio SARS asked them repeatedly to verify their personal information.

Scorpio’s revelations on the Guptas’ VAT payments (as well as on Moyane’s handling of the Jonas Makwakwa debacle) prompted President Cyril Ramaphosa to suspend Moyane on 19 March. Kingon, acting in Moyane’s stead, has since launched an investigation into the VAT refunds. SARS also fired off a letter to the Guptas last week accusing their holding company, Oakbay Investments, of lying about its banking affairs.

Blaming only the Guptas for SARS’ failures is, however, doing a disservice to the truth.

These failures become glaring when taking note of exactly how Mokoena “applied her mind”.

Explaining to Scorpio “the important factors” Mokoena considered when “interpreting the relevant provisions of the VAT Act” in order to urgently pay out the Guptas’ VAT refund, she listed the following points, which we publish here in full and verbatim:

  • The taxpayer was conducting its day to day operations by utilising a third party agent;
  • They were making all VAT payments from the account of the said paying agent;
  • All the VAT refunds were payable;
  • Fraud was not an issue;
  • There was no law prohibiting SARS from effecting payment of VAT refunds into the nominated account provided the taxpayer had indemnified SARS against possible losses of amounts that are paid into the nominated account.

This is an extraordinary list in which each point manages to fail spectacularly.

Equally problematic is what Mokoena did not include in her list.

This is a story of how Moyane and Mokoena ignored six red flags in order to flout the law and assist possible acts of money laundering when they forced SARS officials to effect questionable VAT payments at the behest of a criminal network into the bank account of a company posturing, illegally, as a third party payment agent.

When the knockout blow lands like a feather

But let’s first put the VAT Act and the interpretation thereof aside, for a moment, and focus on glaring facts in Oakbay’s documents that should have hit SARS management right on the nose, but somehow failed to.

On 22 May 2017 Oakbay financial director and acting CEO Ronica Ragavan sent an “urgent” request to then tax boss Tom Moyane, asking for a VAT refund.

(Clarification: It is important to point out that Scorpio has no way of establishing whether the Gupta companies were actually owed the calculated VAT amounts – a full-scale review of the initial audit must be done to verify the purported fact. We therefore have to take Moyane and Mokoena on their word that the refunds paid out, however many, were legitimately calculated and owed to Oakbay and its subsidiaries.)

Ragavan’s request landed on current acting Commissioner Mark Kingon’s desk (then Group Executive: Relationship Management), who shot it down. Ragavan wanted SARS to pay the VAT refund into the trust account of an attorney – a request so contradictory to local and international law and best practice that Kingon’s decision was a no-brainer. He communicated his decision on 26 May 2017. Neither Mokoena nor Moyane saw this illegal request as the first red flag indicating that the Guptas were up to mischief.

On 30 May 2017 Ragavan circumvented Kingon and his colleagues and wrote directly to Chief Officer: Legal Services, Refiloe Mokoena, and acting Chief Officer: Business and Individual Tax Dan Zulu. Mokoena’s job was to “provide legal advice on the payment of a VAT refund into a third party payment-agent”, she told Scorpio. But her focus was selective to the extreme and so narrow that the list of companies claiming VAT went unscrutinised.

Attached to Ragavan’s letters to Mokoena and Zulu is a list of companies that Ragavan described as such:

Oakbay Investments (Pty) Ltd., its holding, subsidiary and affiliated companies, as referred to in Annexure A hereto, hereby indemnifies and holds [SARS] harmless against payment of VAT refunds…”.

This sentence seems to mean the companies included in Annexure A claims VAT refunds and these same companies indemnify SARS from any harm.

The bullet to the brain that should have been obvious here:

Included in Annexure A are Koornfontein Mine Rehabilitation Trust and Optimum Rehabilitation Trust.

It seems these two rehabilitation trusts were claiming a VAT refund, which means the mining rehabilitation trusts were trading and generating an income.

This is illegal, and is the second red flag to have been overlooked.

Mine rehabilitation trusts are extremely strictly governed, including by the Income Tax Act. Legislation around mining rehabilitation funds are written with SARS and the relevant or punitive taxes in mind.

The fund, for example, may not be used as security or collateral for loans or used for any other purpose than the rehabilitation of the specific mine. Its sole objective is to use the fund for the environmental rehabilitation of mining areas.

These funds qualify for a tax deduction for payments made into its dedicated trust account. And when a mine has been rehabilitated, and there are funds left in the trust, the fund can either transfer its assets to a similar company, or another trust approved by the SARS Commissioner.

Non-compliance with these rules carries penalties where the Commissioner again may exercise some discretion, including slapping the fund and the mine with an income tax bill. SARS has no discretion over whether they want to exercise their authority over a mining rehabilitation fund, but must comply with existing law. For Mokoena not to have considered any of the mining rehabilitation fund rules – written with SARS in mind – is simply stunning and a probable dereliction of duty.

Quizzed on this second red flag before he was suspended, Moyane gave an extraordinary answer:

SARS cannot comment on whether the Guptas traded with the trust accounts referred to above. This question is best referred to the Guptas.”

Mokoena, too, totally missed the fault line in her argument:

The Chief Legal Counsel [Mokoena] only received correspondence from Ragavan, and did not engage her or any other of the taxpayers mentioned.”

Moyane and Mokoena did not consider any of the legislation relating to mining rehabilitation funds, whether the funds were in contravention of the law or whether it would be proper and legal to pay out the VAT seemingly claimed by the two rehabilitation funds. Neither asked for more information. In fact, from their conduct and subsequent answers it seems as if neither Moyane nor Mokoena is aware of the stringent tax legislation governing mining rehabilitation funds.

Yet, Mokoena said she “applied her mind” to the thorny issue and overruled her colleagues on the decision to make the VAT payment “without fear, favour or prejudice and strictly in compliance with legislation”.

These claims from the two top officials in SARS are even more frightening when keeping in mind that SARS has an obligation to investigate and report any suspected illegal act under existing corruption laws.

Each of Mokoena’s five points of consideration mentioned earlier will have failed by the second red flag. Mokoena disagrees and denies all wrongdoing, describing herself as a “fit and proper person to be appointed in whatever position, including as the Chief Legal Counsel of SARS”.

The third red flag, or, the absence of it

The third red flag is based on what was absent in Ragavan’s documentation:

Ragavan was a director of Oakbay Investments, but not a director of all 39 entities listed in Annexure A.

This means Ragavan (along with other directors of Oakbay Investments and its board) could have made a decision and submitted requests to SARS on behalf of Oakbay Investments, but not on behalf of the other entities.

For Ragavan to legally request SARS to pay a VAT refund into the account of a third party, she needed to produce a power of attorney for each entity along with board minutes and resolutions supporting the request.

The importance of this third red flag lies in the following analogy: Your mother cannot rock up at the bank and change your banking details, claiming that you authorised her to do so. The bank has strict rules and will need very specific documents, including a power of attorney, to ensure that you as the bank account holder are not being defrauded.

Now, back to Ragavan and the Oakbay subsidiaries: This is an important point for SARS to have kept in mind when considering, for a moment, that a director can go on a frolic of her own and defraud her own company.

There is no evidence that Ragavan submitted any of these documents, which means SARS did not follow the correct legal route in ensuring that it does not participate in a scam.

When quizzed on whether Ragavan provided SARS with a power of attorney and board minutes to motivate her request, Mokoena hid behind a confidentiality clause relating to tax matters:

The Chief Officer: Legal Counsel gave guidance on the enquiries and documentation that should have been obtained. The information requested relates to confidential taxpayer information and, as you are aware, SARS is prohibited from disclosing the information in terms of section 69(1) of the Tax Administration Act, 2011.”

From Mokoena’s list quoted above it seems that she did not consider this red flag either.

SARS paid the Guptas’ VAT to an illegal ‘payment agent’

The fourth red flag is about the legitimacy of the third party SARS paid the Guptas’ VAT refund to. After Kingon shot down Ragavan’s request for the VAT payment to be effected into the trust account of an attorney, she made another plan.

On 30 May 2017 Ragavan requested Mokoena to pay the VAT refund into the account of what she called a third party payment agent named Terbium Financial Services.

Oakbay Energy and Resources had a contract with Terbium Financial Services, a company posturing as a paying agent, between July 2016 and August 2017. Its job was to assist Oakbay with financial services, including the payment of salaries, when it became impossible for Oakbay to do so directly as its affiliates became unbankable almost overnight.

Any company that wishes to act as a third party payment agent must be registered with the Payments Association of South Africa (PASA), which is regulated by the Reserve Bank (SARB).

PASA’s website shows that Terbium Financial Services is not registered with PASA. It is therefore not a third party payment agent. No entity, and probably least of all SARS, was therefore allowed to pay Terbium Financial Services any money at the behest of any client.

When quizzed about whether she did a proper due diligence on Terbium Financial Services, Mokoena said:

The Chief Legal Counsel [Mokoena] only made a decision on the legal position surrounding the payment of a VAT refund.”

Terbium Financial Services illegally acting as a third party payment agent is, according to Mokoena, not included in the “legal position” she needed to consider.

Mokoena further reveals in her list of five points that she had considered that the Guptas’ VAT has been paid to SARS by Terbium Financial Sources, and argues that for this reason SARS may legitimately pay Oakbay and subsidiaries’ VAT refunds back to Terbium. This reasoning is destined to fail because SARS did not consider any of the stringent laws governing VAT payments, or any of the red flags mentioned above.

Consider another analogy: Your mother can deposit cash into your bank account on your behalf. She may however not change the details of your account when the bank owes you money. Then the stringent banking rules kick in and your mother (and you) must jump through a line of hoops to get your money paid into a different account than where it was supposed to go.

These four red flags that Moyane and Mokoena ignored in order to flout the law, relate to the simple act of due diligence and proper process.

Moyane and Mokoena failed the basic tests four times over.

SARS switching gears …

Since Moyane’s suspension, SARS suddenly changed tack on the legality of the Guptas’ VAT payments. Where SARS under Moyane’s leadership claimed that the payments were legal and proper, SARS under Kingon claims the Guptas lied to SARS, Fin24 revealed.

SARS legal specialist Erick Smith accused Ragavan in a letter penned last week of falsely claiming in April 2017 that Oakbay and its affiliates had no bank accounts in the country. Smith wrote:

It has… reliably come to the attention of SARS that, at the time you escalated your request for the VAT refund to be paid to a third party bank account on the basis of the Oakbay Group’s bank accounts being closed, you, in fact, had a bank account open with the Bank of Baroda.”

The claim is as astounding as it rings hollow.

It now seems that SARS effectively concedes being duped by Gupta Inc. into having assisted probable acts of money laundering and fraud. This letter will most certainly be used in legal proceedings against Moyane.

The letter further contradicts Mokoena’s answers to Scorpio where she claims to have “applied her mind”, acted “strictly in compliance with legislation” and “correctly interpreted and applied the law in this case”.

The claim rings hollow mostly because a simple internet search would have showed SARS they are “being lied to”. On 6 April 2017 Deputy Editor of Financial Mail Sikonathi Mantshantsha published a story titled “Why the Guptas still bank on Baroda”. Mantshantsha goes on to say that the Guptas’ “accounts with Bank of Baroda are still open, and the Oakbay group of companies still uses the Indian bank to pay salaries”.

It is further known that such large refunds are usually subject to audit. The question then is why did a VAT audit not pick up that the various vendors held bank accounts with the Bank of Baroda?

SARS has also been investigating the Guptas since around 2013. A thorough investigation and due diligence – if the investigation was not shelved – should have highlighted the Bank of Baroda link.

Now let’s get back to the VAT Act

The fifth and sixth red flags relate to the VAT Act and the Guptas’ reputation.

Ragavan’s request caused a feverish debate in SARS in which the top legal minds effectively yelled “hell, no!”. Mokoena, on the other hand, invoked Moyane’s name to rush her decision through, while refusing her colleagues’ request to consult an independent VAT expert. She had “applied her mind”, Mokoena said at the time.

Let’s consider the internal SARS debate, without getting too bogged down by the legalese.

Their problem: A taxpayer that purported to have no active bank accounts after all banks in South Africa closed their accounts. In closing down the Gupta accounts, the four biggest banks’ decisions were based on suspected money laundering, fraud and reputational damage. Based on the family’s reputation, the Guptas can also not be seen as any ordinary taxpayer. Their requests should have been met with more stringent scrutiny. Yet, Mokoena attempts to argue that “fraud was not an issue” when she decided to allow the VAT payments.

We’ll ignore that SARS “missed” the true facts around the bank accounts for sake of this argument.

The debate in SARS: Talks over the Guptas’ VAT refund centred on a provision known as the “commissioner’s discretion”, captured by section 72 of the VAT Act, and how the provision should be read with the rest of the Act and other relevant legislation. Included in the relevant legislation is section 44(3)(d) of the VAT Act as amended, which was written specifically to curb fraud. According to s44(3)(d) of the VAT Act a VAT vendor must be refunded using a bank account in its own name. Only non-resident companies or subsidiary companies are allowed to use a different bank account, and also only under certain circumstances.

Based on answers provided to Scorpio, Moyane’s and Mokoena’s reasoning seems to be that the Guptas were down and out, didn’t have a bank which would bank them, and that SARS was obliged to pay the VAT refund into the third party’s account for the benefit of the Guptas, because it was legitimately owed to them. As noted above, Scorpio has no way of knowing whether the Guptas were truly owed the VAT refunds paid to them, so we’ll let that part of the argument slide for now.

In his response to Scorpio, before his suspension, Moyane wrote:

As Commissioner, I exercised my discretion in terms of section 72 of the VAT Act due to the anomalous situation created by the closure of the Oakbay bank accounts, particularly in view of the fact that the refunds were due and payable in law to Oakbay. The allegation of illegality therefore has no basis.”

In the same set of answers to Scorpio, Moyane also reasoned that he actually didn’t “participate” or provide an “opinion” on the matter, but allowed Mokoena to make the decisions for him. This contradicts his assertion that he exercised discretion as contemplated in s72.

Nonetheless, Moyane and Mokoena therefore say that the discretion they exercised in effect overruled the relevant legislation.

But their assertion cannot be, simply because any discretion in law must be exercised where the law has already been satisfied. In other words: A discretion cannot set aside or override existing legal provisions. A discretion must be exercised within the confines of the law.

The Oakbay companies did not qualify for exemption under s44(3)(d). This provision of the VAT Act cannot be overruled at a whim.

This is the fifth red flag.

The sixth red flag also relates to the discretion exercised by Moyane and Mokoena and is based on the Guptas’ reputation.

Any legal discretion is also subject to rationality.

By May 2017, not one of the big banks in South Africa wanted to touch anything Gupta-related with a bargepole, based on suspicions of money laundering, fraud and corruption. This was confirmed by communication between Standard Bank and former CEO Nazeem Howa at the time.

On 28 May 2017 Sunday Times and City Press broke the news of an email leak they labelled the #GuptaEmails. The newspapers had evidence that the Guptas corrupted government officials to enrich themselves while ensnaring the Zuma family and international corporates in their self-enrichment schemes.

Moyane and Mokoena seem to have lived on another planet, though. Mokoena explained to Scorpio that at the time, “fraud was not an issue”, despite the Sunday papers claiming to have evidence of fraudulent transactions relating to the Guptas, government and international companies.

Mokoena was also cautioned in a letter by a top legal specialist in SARS that the amendment to the VAT Act (s44(3)(d)) has specifically the curbing of fraud in mind. Mokoena paid no heed.

By 30 May 2017, two days after the Sunday papers’ revelations, Mokoena wrote to her concerned SARS colleagues:

The Commissioner [Tom Moyane] has been copied on all the communications herein and has not opposed my views. I am comfortable that Dan [Zulu, who also declined to effect the payment, but who was forced to do so] proceed to discuss same with the Commissioner preferably today as I have requested that matter be dealt with by close of business today. I place on record that I have applied my mind on this issue and unless the Commissioner doubts the correctness of my views on the matter, I don’t think it will be necessary to obtain outside opinion herein.”

The VAT payments were effected soon thereafter, followed by at least two more VAT payments in around July and August. In the meantime, more and more government officials confirmed the veracity of the Gupta email leak.

Explaining her decision to Scorpio, Mokoena wrote:

The responsibility of Chief Legal Counsel [Mokoena] is to provide legal counsel within the prescripts of the law without fear or favour, and without undue influence by external factors including media reports. However, there may be other business divisions in SARS that may use third party data such as media reports in the conduct of their operations.”

Using the bogeyman

President Cyril Ramaphosa suspended SARS Commissioner Tom Moyane on 19 March, who resisted subsequent offers and requests for his resignation. Moyane defended himself against the media and Ramaphosa while throwing Mokoena the hospital pass. According to Moyane, he only noticed the email communication about the Guptas’ VAT request running rapidly through his email inbox, but had no say in the matter.

Scorpio’s sources maintain that Moyane was directly involved with the Guptas’ VAT refunds.

Moyane’s assertion further rings hollow: He allowed Mokoena to invoke his name to put pressure on SARS officials to decline consultation with an independent VAT expert, and to rush through VAT payments that seem to be illegal for a myriad reasons.

In a decision that may struggle to clear the rationality test, neither Moyane nor Mokoena took any notice of the revelations in Sunday Times and City Press providing prima facie evidence that the Guptas are deeply involved in state corruption and money laundering.

Instead, Moyane and Mokoena ignored six red flags in order to flout the law and assist possible acts of money laundering when they forced SARS officials to effect questionable VAT payments, at the behest of a criminal network, into the bank account of a company illegally posturing as a third party payment agent. DM

Original photo: The suspended SARS commissioner, Tom Moyane (Leila Dee Dougan for Daily Maverick)

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