A formal disciplinary investigation required top SARS official Jonas Makwakwa to explain the origins of about R2.4-million in mysterious cash and electronic payments that flowed through his private FNB account between 2010 and 2016. Describing his dismal effort, audit firm PwC concluded that Makwakwa’s explanation of only R2,200 in payments “appear to be plausible”. Makwakwa either refused, could not explain conclusively or could not remember who deposited the rest of the R2.4-million into his account. The investigation was ordered by the Financial Intelligence Centre (FIC) in May 2016 after compiling a devastating report on Makwakwa’s mysterious good fortune. Credits into his account increased by about 152% between 2010 and 2015, the investigators found. Makwakwa, they said, grew a “dependency” on these suspicious cash injections in order to maintain his lifestyle.

In September 2016 tax boss Tom Moyane, now suspended, appointed attorney Lavery Modise, chair of international law firm Hogan Lovells, to “investigate and conduct disciplinary proceedings against Jonas Makwakwa on behalf of SARS”.

Despite having the benefit of the report by PwC (who actually conducted the investigation), Modise and his team ultimately charged Makwakwa with everything he could explain, and with exactly nothing that he previously struggled to explain or simply refused to account for.

None of the significant red flags highlighted in investigations by PwC or Scorpio were put to Makwakwa in a disciplinary hearing. These include:

• Smuggling cash across the border in contravention of foreign exchange rules;
• The Biz Fire Worx payments, described by the FIC as an alleged money laundering ring, which ultimately led to Makwakwa’s resignation;
• Receiving about R250,000 – in cash – that Makwakwa claimed was for selling a property. Receiving cash for a property transaction is extremely unusual. The alleged property has also never been registered in Makwakwa’s name and cannot be traced to his profile;
• Receiving almost half a million rand in “financial assistance” from his father when times got tough, Makwakwa claimed. Yet, Makwakwa was the best remunerated official in SARS for 2016/2017 and frequently splurged on luxuries;
• Makwakwa often made several cash deposits on the same day at either the same banking location, or banking locations in close proximity of each other. His conduct seemed suspicious to investigators, saying it might have been an attempt to “avoid reporting thresholds”; and
• Makwakwa’s refusal to co-operate fully with the PwC investigation.

A Scorpio investigation further showed that the continuous flow of mysterious payments stopped right after Moyane illegally alerted Makwakwa in May 2016 that the FIC had been looking over his shoulder. If Makwakwa was innocent, and the money flows to him were legitimately explainable, one might have expected the cash injections to have continued in the same manner. After Moyane warned Makwakwa, the cash and electronic deposits stopped abruptly, his bank statements show.

Faced with formal and extremely serious allegations in the PwC report, Hogan Lovells drafted six charges that basically ignored all the allegations, as well as their own conclusions. The charges also had no relation to the allegations highlighted in the FIC report.

The first four charges against Makwakwa related to a contravention of his suspension conditions. Charges five and six related to his failure to declare ownership of a property and a business interest.

These were:

1. Breach of suspension conditions;
2. Gross insubordination;
3. Failure to act in the best interest of SARS and/or placing SARS in a position to be brought into disrepute;
4. Abuse of position and/or exercising undue influence;
5. Breach of SARS internal ethics policy – conflict of interest and code of unbecoming conduct and/or dishonesty; and
6. Breach of SARS internal ethics policy – conflict of interest. Failure to declare immovable property and rental income and/or unbecoming conduct and/or dishonesty.

Over a year after Makwakwa’s suspension, on 13 October 2017, the disciplinary hearing’s presiding officer, adv. Terry Motau SC, found him not guilty on all the charges levelled against him. The result: Moyane injected Makwakwa right back into SARS – pretending that the investigation and disciplinary hearing conducted by Hogan Lovells was done by the book and fully exonerated Makwakwa. This happened without Makwakwa conclusively explaining how he became part of a suspected money laundering ring, where he got the hundreds of thousands of rand he stuffed into ATMs and by what means he supported his lavish lifestyle.

Scorpio’s analysis is based on disciplinary documents SARS provided to Parliament – it includes PwC’s investigative report and Hogan Lovells’ summary thereof. Scorpio also had sight of the disciplinary charges drafted by Hogan Lovells, the disciplinary findings signed by Motau SC as well as Makwakwa’s FNB bank account statements from 2014 to 2016. We further conducted interviews with a wide range of sources in SARS and national Treasury.

Hogan Lovells does not agree with Scorpio’s analysis. (Read their full response here.) The law firm argues that SARS had “limited scope to investigate and charge Makwakwa, in particular, it did not have the power to compel Makwakwa to provide additional documents or answer additional questions and these limitations resulted in those charges that could be put to Makwakwa, to form the basis of an inquiry”.

Hogan Lovells ignored a request to proffer the legal authority underpinning this statement.

Modise further argued that an employee cannot be expected to incriminate themselves in a disciplinary hearing.

Makwakwa did not answer any questions posed to him via various platforms. On 25 April, Makwakwa pretended to be his “cousin” so as not to verbally answer Scorpio’s questions. His legal representative Sonia de Vries, former attorney at Baker McKenzie (now Malan Scholes), declined to answer questions. Attorney Liezel David did not answer repeated questions posed to her, and did not reply to any messages or return any phone calls.

The curious case of Hogan Lovells

Hogan Lovells so grossly mishandled the Jonas Makwakwa debacle that the investigative and disciplinary process seems cooked. The law firm was appointed to conduct an “independent” investigation and disciplinary hearing into Makwakwa’s conduct, as highlighted by the FIC.

But Hogan Lovells ignored easily provable contraventions of the law highlighted by PwC; let SARS dictate the scope of the investigation so that Makwakwa’s version could not be tested or verified, and allowed SARS to water down the charges to the point of insignificance, resulting in Makwakwa’s undue return to SARS. Modise further allowed Moyane to misrepresent their report to Parliament and did not disclose that the serious allegations in their report as well as PwC’s report were ignored.

Instead of acting to the letter of the terms of reference Modise himself signed along with Moyane, Hogan Lovells seems to have erected a Chinese wall between the idea of “SARS as the employer” and “SARS as a tax regulator”.(Read their full response here.) Hogan Lovells attempts to reason that they could only focus on the labour issues – whether the conduct of Makwakwa and Elskie translated into “misconduct” – and not on any of the criminal issues that may arise. The criminal issues are supposedly investigated by the Hawks.

Said Modise: “Hogan Lovells could never, nor could SARS assume the responsibilities of dedicated and specialised units of the SAPS to investigate criminal conduct on the part of Makwakwa. Our report makes that very clear.”

This however contradicts the very spirit of the Public Finance Management Act (PFMA), the SARS Act and the Financial Intelligence Centre Act, Scorpio is informed.

Modise is also wrong that SARS cannot investigate criminal conduct on the part of Makwakwa – SARS is one of the empowered state agencies to do just that, especially when tax evasion and money laundering is involved.

On this note: Modise’s own report contradicts his statement that “money laundering” could not be investigated. Hogan Lovells appointed PwC to investigate “the source of funds” received by Makwakwa. How and why Modise attempts to differentiate between investigating “money laundering” and investigating “the source of funds” remains a mystery.

(In previous replies to Scorpio, Modise also claimed that Hogan Lovells could not have access to Makwakwa’s tax information based on provisions of tax legislation. He could not answer how PwC then gained access to tax information, and attempted to alter his comment post fact.)

Modise’s reasoning further begs the question if criminal conduct is not also by its very nature classified as misconduct. It seems that Hogan Lovells chose to ignore possibly illegal conduct, arguing that the Hawks need to investigate the alleged criminality. Apart from the failure in logic, Hogan Lovells did not report any newly found suspicious behaviour to the Hawks. Hogan Lovells’ conduct may also be a contravention of the PFMA – an act compelling the accounting authority (SARS, as represented by Hogan Lovells) to investigate any non-compliance in full, Scorpio is informed. Their argument is therefore highly questionable.

Modise lastly disagreed with Scorpio’s analysis in that an “employer cannot instruct or compel its employee to give information or documents outside the scope of the employer/employee relationship”. It seems that Modise is arguing that Makwakwa could not be instructed to explain the money flows through his personal bank account because it falls outside the scope of the employment relationship.

He continues, saying that “all employees have the right not to incriminate themselves, particularly where their conduct lay the basis of criminal prosecution. Such is a basic tenet of our constitution and a fundamental human right”.

The problem (as will be explained here under) is that Makwakwa incriminated himself willingly at least once. Makwakwa’s version has also not been thoroughly tested in a disciplinary hearing – Hogan Lovells basically argued favourably on behalf of the accused and threw in the towel before Makwakwa could be tested further.

And lastly: Hogan Lovells allowed Moyane to sabotage the investigation by refusing crucial information PwC needed in order to conclude the investigation.

Hogan Lovells’ real take on Makwakwa

Bizarrely, Hogan Lovells’ report stands in total contrast to their conduct. The law firm was highly critical of Makwakwa’s explanations.

Even in their own weak summary of the PwC investigative report, Hogan Lovells makes it clear that they are unconvinced of Makwakwa’s innocence.

Hogan Lovells informed SARS that Makwakwa’s explanations “are not satisfactory”, his actions were “suspicious” and he “showed reluctance” to explain the origins of the suspicious payments into his account.

According to Hogan Lovells, Makwakwa was so eager to “clear his name” that he compiled a comprehensive response even before being approached by investigators.

The law firm added: “It was only when his explanation was tested by a request to provide clarity on some aspects of his version that he questioned the investigators’ mandate.”

Hogan Lovells concluded that the “majority of the cash deposits…remained unverified”. (Makwakwa actually only explained R2,200 in cash payments – the origin of rest of the R2.4-million flowing through his bank account remains unexplained.)

In its recommendations, Hogan Lovells further states that the Labour Relations Act imposes a “duty” on an employee to “speak in an internal investigation to protect the employer’s interests and assets” in order to “avoid dismissal, even where there is no evidence directly linking any employees to alleged conduct”.

Hogan Lovells continued, saying it is “arguable that Makwakwa’s conduct in refusing to provide the clarity to his explanation constitutes misconduct”.

But not one of these serious statements made it into the case against Makwakwa. Instead, Hogan Lovells’ recommendations to SARS turns on its head in the next paragraph when the law firm stated that SARS would be “limited” in its ability to investigate an employee’s sources of income and that the Hawks should investigate Makwakwa’s suspicious behaviour.

Said Hogan Lovells: “Based on the information in our possession, there is no basis, save where indicated in our recommendations… to make findings that Makwakwa committed misconduct arising from the receipt of the money.”

This is an astounding assertion. The set of documents SARS provided to Parliament is voluminous and is riddled with PwC’s misgivings over Makwakwa’s explanations. In the following paragraphs Scorpio will highlight three that contradicts Hogan Lovells’ explanation of why there was “no basis to make findings that Makwakwa committed misconduct” when receiving the mysterious payments.

Financial assistance from ‘dad’

Makwakwa claims that his father financially assisted him during troubled times.

Payments from his father can be divided into roughly two themes: How a cash payment of R147,850,65 was smuggled over the border, as well as 14 miscellaneous cash payments totaling R330,900.

An affidavit signed by a Mr Motlisie Mokoena, who claims to be Makwakwa’s father, was submitted as an explanation for what was labelled as a “forex payment”. The veracity of the claimed kinship has not been probed. Mokoena states he is a farmer and runs a “thriving business in livestock”, residing in Zimbabwe. Mokoena says he gifted Makwakwa 25 cattle in 1996, of which 21 were sold in 2014 for US$14,200. Makwakwa’s attorney Sonia de Vries explained to PwC that US$13,500 “was delivered to [Makwakwa] by a relative”.

On their own version, De Vries, on behalf of Makwakwa, confirmed that US$13,500 (R147,850,65) in cash was smuggled over the Zimbabwean border. This is a contravention of foreign exchange policies.

SARS’ own website states that cash amounts exceeding US$10,000 must be declared to customs officials, or stands the chance of being confiscated. When PwC attempted to probe further, De Vries blocked their questions by claiming investigators are moving beyond the scope of the investigation.

Her explanation: “In any event, this was a cash transaction as they typically are, without any receipt being issued.”

She explained further: “It is inconceivable that deposits of this nature could be suspicious or unusual. They are not.”

It is uncertain what De Vries views as a “typical” cash transaction smuggled over the border. That Makwakwa’s whole version is highly suspicious, unusual and possibly criminal is, however, confirmed by three tax and foreign exchange experts from three big South African law firms.

PwC seems to have agreed. The audit firm warned Hogan Lovells that potential contraventions of foreign exchange regulations must be investigated. Hogan Lovells did not test Makwakwa’s own version to the law, did not alert the Reserve Bank about the matter and did not charge him for contravening foreign exchange regulations.

Makwakwa further claimed that his father assisted him with rent and legal expenses when he ran into a spot of family trouble – these payments continued right up to 2016. He received R330,900 in total from his father.

Yet Makwakwa was the best remunerated SARS official in the 2016/2017 financial year with an annual salary of R3,3-million and bonus of R930,000. He splurged R200,000 on a car for his girlfriend, the FIC showed. A Scorpio investigation confirmed this, and proved that Makwakwa frequently bought luxury clothes and dined regularly at expensive restaurants.

Hogan Lovells did not probe Makwakwa’s version further, did not query him about the veracity of the payments, and did not charge Makwakwa for refusing to co-operate with the investigation.

Biz Fire Worx payments

Tom Moyane’s misconduct in the Makwakwa debacle cannot be over-emphasised. In a series Scorpio labelled the Makwakwa Dossier, Daily Maverick described in detail how Moyane shielded Makwakwa from scrutiny, only appointed an investigation when public scrutiny became unbearable, contravened several FIC prescripts in order to assist Makwakwa’s case, and lied to Parliament and the public. Moyane was suspended in March and must now answer a series of disciplinary charges based on these revelations.

Equally devastating is how Moyane refused PwC and Hogan Lovells access to crucial information in order for investigators to conclude the Makwakwa investigation, PwC’s report reveals. This list includes the tax records and audit trails for 16 entities and individuals linked to the Biz Fire Worx payments – as well as the SARS officials involved in each case. Moyane further refused PwC access to Makwakwa and Elskie’s SARS-issued cellphones and computers.

The Biz Fire Worx payments are a crucial part of the FIC’s allegations against Makwakwa. It was so serious and so indefensible that it led to Makwakwa’s ultimate resignation. (The series of Biz Fire Worx payments included debt collecting company New Integrated Credit Solutions (NICS) – the same company Makwakwa gave a lucrative debt collecting tender to. Even Moyane could not shield Makwakwa from the fallout – a day after Scorpio and Sunday Times revealed the matter, Makwakwa resigned).

According to the FIC, government’s Department of Water Affairs and Forestry paid R17.8-million in February 2015 into the account of NICS. In the next month the money trickled down 12 entities before R600,000 landed in the account of company Biz Fire Worx which once listed Makwakwa as a director. The money trail made a strange loop that prompted the FIC to describe it as an alleged money laundering ring. Makwakwa received three payments totalling R480,000 from Biz Fire Worx in April and May 2015.

According to Makwakwa, he was in an advisory role involved in Biz Fire Worx and the money was owed to him. When PwC attempted to probe deeper, Makwakwa fobbed them off by questioning the investigator’s mandate. PwC turned to SARS in order to find out whether Makwakwa may have worked on the audits or tax cases of any of the individuals involved. Moyane blocked this request. PwC also wanted access to the computers and cellphones of Makwakwa and Elskie. Again, SARS pruned the probe. And Hogan Lovells let them.

(It is not the first time that Moyane is accused of sabotaging an investigation. Moyane will also have to explain in his disciplinary hearing why he secretly ordered a SARS employee not to provide his version of events to KPMG in their botched SARS investigation.)

Makwakwa further claimed that he was “aware that NICS did some work for SARS approximately 10 years ago though he was never involved in the procurement of its services”. Yet, Makwakwa was part of SARS’ National Adjudication Committee that approved NICS as a debt collector for SARS earlier in 2018. So serious was the fallout that Makwakwa resigned.

PwC’s findings show that Makwakwa’s story does not make sense and that the money is not traceable. The audit firm was “not able to confirm the source of these transfers nor the taxable nature thereof”. Yet, Hogan Lovells did not probe further or charge Makwakwa for not co-operating with the investigation.

Cash for a property sale

Another strange explanation Makwakwa had for R250,000 in his bank account was the selling of a vacant stand in Dzanani, Venda. He claims to have bought the property in 2012 for R89,000 and to have sold it to “Rym Construction” in 2015 for R250,000. The company is untraceable – the telephone and website address have been suspended and official company documents suggest the company has closed down or changed its name. There is also no indication that the property was ever transferred to and from Makwakwa’s name.

When PwC asked for more information, De Vries and Makwakwa once again rebuffed their questions saying they were probing beyond the scope of the investigation. PwC highlighted that the R250,000 was paid to Makwakwa in cash, and cautioned that the explanation “appears plausible… but it is not standard practice to receive proceeds of property transactions in cash”.

Where are we now?

Thanks to Hogan Lovells, Makwakwa returned to SARS without ever having to answer any of the allegations highlighted by the FIC. The law firm allowed SARS to misuse its report, dictate the scope of the investigation and lie to Parliament about the extent of the investigation. Was it not for Scorpio’s investigations and Parliament’s probes, the public would not have been any the wiser.

Parliament’s standing committee on finance has done a good job to get to the bottom of the SARS/Makwakwa mess. Chairman Yunus Carrim asked hard questions, and ensured that he got the answers, which often resulted in unexpected concessions.

According to Treasury’s head of tax and financial sector policy Ismail Momoniat, the “key point” in the Makwakwa debacle is that “institutions like Hogan Lovells and PwC should be compelled to set the record straight when their public sector ‘client’ distorts their report, and should be compelled to set the record straight with the Treasury, Auditor-General and Parliament. Why do their ethics not allow for this? Their role in State Capture also needs to be investigated”.

Carrim will have his work cut out to make sense of Hogan Lovells’ convoluted conduct. DM