SCORPIO ANALYSIS

KPMG and Hogan Lovells still have much SARSplaining to do

By Pauli Van Wyk 24 May 2018

SARS Commissioner Tom Moyane during the budget lock-up in Parliament on 21 February 2018 shortly before Finance Minister Malusi Gigaba's maiden Budget Speech. Photo by Leila Dougan

Multinational corporations KPMG and Hogan Lovells appeared before Parliament’s standing committee on finance (SCOF) on Wednesday to explain (and deny) their crippling role in two botched SARS investigations. Suspended SARS chief Tom Moyane notably played a defining role in the outcome of both these investigations, even going so far as to actively sabotage the investigations, documents suggest. SCOF chair Yunis Carrim suggested that, for justice to be done, auditing and legal regulating bodies, as well as the newly founded commission of inquiry into SARS, must review the role of KPMG and Hogan Lovells. With new evidence in Scorpio’s possession about the KPMG’s SARS investigation, the following are the pertinent questions the two will have to answer.

Auditing firm KPMG was appointed in December 2014 to “independently” investigate the conduct of four SARS officials – Ivan Pillay, Peter Richer, Johann van Loggerenberg and Yolisa Pikie – as well as allegations about a SARS investigative unit conducting illegal investigations.

Similarly, law firm Hogan Lovells was appointed in September 2016 to “independently” investigate allegations by the Financial Intelligence Centre (FIC) over the mysterious cash flow recorded through the accounts of SARS’ second-in-command, Jonas Makwakwa.

Both investigations ended in tears for the firms involved. In both investigations KPMG and Hogan Lovells proffered “confidentiality” as the reason why the firms did not speak up.

During his thorough representation to SCOF, Treasury’s deputy director-general Ismail Momoniat labelled the much-abused “confidentiality” clause on Wednesday as a guise to cover up nefarious motives. Momoniat said confidentiality between a law or audit firm “does not cover areas of corruption”. He continued:

We’d like to point out the role of the private sector in State Capture… this also covers other departments like Eskom and Transnet and often involves international companies. An official or person heading a department will distort these firm’s ‘investigative reports’. We should look at our law and our corruption acts, is there not a duty on them to report, to the Hawks, for example, the blatant misuse of their report? Otherwise, these firms must admit they were complicit in State Capture, and they must answer for those crimes.”

Momoniat spoke from experience, of course, saying that not even Treasury was allowed all the information in two crucial SARS investigations.

The Moyane era: SARS investigations

KPMG and Hogan Lovells are prime examples of corporations conducting the investigations that were unduly influenced and distorted from the start, while the ultimate findings were misrepresented and “confidentiality” was used as a veil from scrutiny.

Acting SARS Commissioner Mark Kingon told SCOF on Wednesday that the process and implications of two investigations into SARS – those done by KPMG and Hogan Lovells – are being reviewed.

Especially, the “KPMG report caused a lot of harm in our organisation… a lot of people got hurt,” Kingon said.

KPMG’s report “divulged a lot of personal information” that detrimentally affected those being investigated, “notably those involved in investigations of illicit financial flows”.

These people must be restored to SARS in full. Our staff can’t be mentioned in a way where they do not have a right of reply.”

The fallout of these cooked investigations also backfired onto the investigating firms themselves. KPMG had to withdraw its “executive findings and conclusions” and the “recommendations” contained in its SARS report in 2017 – about two years after finalising it. Eight executives, including its CEO, resigned in the process and the firm agreed to pay back the money it received on the project.

KPMG will now have to explain:

  1. Why the version of SARS official Helgard Lombard, a star witness in the case, has never been recorded;

  2. Whether KPMG is aware of Commissioner Moyane’s instruction to Lombard to feign illness so as not to provide investigators with his full version;

  3. Why investigators blatantly copied and pasted sections of its SARS report – along with spelling errors – from a memorandum drafted by Moyane’s lawyers Mashiane Moodley and Monama (MMM). An attorney from the same firm later refused to work with Moyane, saying the 2016 prosecution of then minister of finance Pravin Gordhan was ethically dubious; and
  4. Why recordings and minutes from a meeting between former SARS official and member of the bar adv. Rudolf Mastenbroek, Alexander Forbes managing executive Bonga Mokoena and a KPMG investigator suggest that the supposed “independent” investigation was possibly unduly directed so as to include Pravin Gordhan and Trevor Manuel in its findings.

On Wednesday Hogan Lovells still attempted to wash its hands of the Makwakwa nightmare it saddled itself with, despite enduring Momoniat’s severe criticism. Chairman and attorney on record Lavery Modise has repeatedly and consistently over the past six months denied any deliberate wrongdoing. Modise said Hogan Lovells was “not in any stretch of the imagination part of a masterfully designed ‘whitewash plot’ to ensure that Makwakwa was permanently reinstated, as suggested by some in the media, who unfortunately did so without the benefit of studying our report”.

A Scorpio investigation however, suggests the firm cooked Makwakwa’s disciplinary to the point of insignificance. Makwakwa could only explain R2,200 in cash flowing through his account, while he was investigated for, for R2.4-million. He even admitted – probably unwittingly so – to at least having contravened foreign exchange controls. Yet, Modise persistently states Hogan Lovells was merely contracted to investigate possible “misconduct” by Makwakwa and therefore charged him with the most insignificant of charges. The result: Makwakwa was parachuted back into SARS without having explained any of the mysterious money flows running through his account.

Moyane also shielded Makwakwa from scrutiny, contravened several laws in order to assist him in his defence and refused Hogan Lovells access to crucial information. The firm must explain why:

  1. Moyane was allowed to sabotage a supposed “independent” investigation;

  2. Its lawyers are building a Chinese wall between “misconduct” and clearcut acts of wrongdoing;

  3. Modise did not immediately correct Moyane’s misuse and misrepresentation of its investigative report;

  4. Makwakwa was never charged with serious allegations unearthed in an investigation conducted by auditing firm PwC.

Let’s consider the answers to these questions which KPMG and Hogan Lovells will have to answer.

KPMG

The missing star witness

Tom Moyane stands accused of actively sabotaging the KPMG investigation by instructing SARS official Helgard Lombard to feign illness so as not to give his version to investigators.

Lombard made the allegation under oath, attaching a transcription of a recorded telephonic conversation dated 7 May 2015 that Scorpio has seen.

Let’s deal with case KPMG,” Moyane allegedly said.

Let’s deal with it… you are not going. You are not going to them. Ehh… Luther (Lebelo, SARS HR official) is going to tell them that you are not well.”

After every sentence Lombard only said “okay”, the transcription, classified as “confidential”, shows.

Moyane continued, saying: “Ja, you not going today, you’re not going tomorrow… so you… you… you have a challenge… ja, you’re not well.”

Lombard seemed to have been confused by the instruction, to which Moyane replied “… I just want you to be calm Helgard… You can even don’t go to work… don’t just go… stay at home, pull your mind together. I am very happy with what you have shared with me… and just send a message to your immediate superior and say that you are… you are not feeling well and… and… that’s it.”

KPMG recorded the event on page 98 of its SARS report, saying: “Lombard was contacted and he unfortunately fell ill.”

Lombard provided an affidavit describing his recollection of Project Sunday Evenings. It appears that he was not questioned further on other events he could shine light on. (Lombard’s evidence also contradicts the ultimate findings that KPMG blatantly copied and pasted into their report – but more about this later).

Lombard’s evidence was crucial to KPMG’s understanding of especially allegations of “spying equipment” acquired by a “rogue unit” in SARS. Official documents suggest Lombard would have refuted the allegations conclusively. The accusations were egged on by Sunday Times, relying on sources within and linked to SARS. The skewed KPMG report was misused to support these accusations. Both Sunday Times and KPMG were later forced to apologise and withdraw their findings.

How a copy-and-paste job goes bad

A wide range of documents suggests that the KPMG investigation into former acting SARS Commissioner Ivan Pillay and company was everything but independent. (See also  SARS Wars: KPMG report – the Firm, the Lawyers, the Auditor and the Blame Game)

One of these documents is a memorandum to KPMG drafted by law firm Mashiane Moodley and Monama (MMM), dated 21 August 2015. The date is important – by August 2015 KPMG was under pressure to finalise its SARS report.

MMM’s memorandum “suggests” certain findings and recommendations to be added to KPMG’s report. There are several problems with this memorandum – the most glaring is that MMM had no business in directing KPMG how to do their “independent” investigation or to suggest any findings and recommendations.

Another crucial problem with the memorandum is it pretends only to summarise already existing information in the report. This is however untrue. In fact, MMM’s summary directly contradicts information contained in KPMG’s own report.

The very first point in MMM’s memorandum states:

On instructions of Mr. Pillay, the [SARS] unit unlawfully monitored, intercepted communication, recorded and transcribed recordings at the NPA offices.”

KPMG blatantly injected this sentence in the findings and recommendations section of their report, but has no evidence to back this statement.

That is because KPMG records on page 99 in the very same report that:

The installation was allegedly instigated by Nel and Leask and the purpose was to provide the ability to Nel and Leask to monitor activities and discussions occurring in certain offices and general office space in the [Scorpions] and NPA.”

KPMG’s statement on page 99 is based on two affidavits, one by Lombard, as well as an information note, also partly drafted by Lombard, that Scorpio has seen.

This contradiction between information gathered by KPMG and findings drafted by MMM (and then copied into the KPMG report) suggests that KPMG was unduly influenced to the point of directly contradicting their own gathered information.

Even more detrimental to KPMG is that this exposes them to a possible civil claim by Ivan Pillay.

Project Bessie: The role of Pravin Gordhan and Trevor Manuel

Bizarrely, KPMG code-named its SARS investigation “Project Bessie”. Investigators recorded and minuted their meetings with every person they interviewed or briefed on Project Bessie’s progress.

One such meeting, again, suggests undue influence in KPMG’s investigation.

The meeting, dated 7 August 2015, was attended by former SARS official adv. Rudolf Mastenbroek and Alexander Forbes executive Bonga Mokoena, KPMG investigator Johan van der Walt and SARS officials Jonas Makwakwa and Luther Lebelo.

At the time, Mastenbroek and Mokoena served on the Kroon panel – an advisory board initiated by then minister of finance Nhlanhla Nene. The panel was set up under Section 11 of the SARS act to advise the minister and the SARS Commissioner. It was envisioned to be an “independent” body, supposedly removed from operational SARS matters in order to provide expert advice.

According to the minutes, Mokoena indicated that their presence at the meeting was mandated by the Kroon panel and that he and Mastenbroek were to “engage” with KPMG about the findings of its SARS report. Mokoena further states that they remain “independent and views shared are [the Kroon panel’s] views”.

Mokoena and Mastenbroek’s attendance of a meeting with the KPMG investigator is in itself problematic and raises the question of independence. Members of a supposed independent body should not and cannot advise investigators on the drafting of a report when they are the ones who would ultimately vet the very same report before advising the minister on the investigation they themselves influenced.

Yet, this is what happened. More worrying is that the minutes suggest a hands-on engagement where Mastenbroek directed KPMG’s attention to what is “important” to the Kroon panel, and who the report should focus on.

The minutes describe Mastenbroek’s instructions as follows:

We come from a different place and therefore open to make comments due to the political nature of the findings and therefore we should make sure that it’s bulletproof. There is a lot at stake. Good work overall. The executive summary should include a recommendations page. The role of the then [SARS] Commissioner [Gordhan] is important for us. The [Kroon panel] wants to make comments about Leadership and accountability and execs that hold high stakes. The facts in the report can do with further factual conclusions. Should be more direct, especially Gordhan and Manuel.”

Mastenbroek then continues to ask questions, seeking clarity about the sequence of events leading up to the formation of the SARS unit under investigation.

(Read the complete set of recorded minutes here.)

Later in the conversation KPMG’s Van der Walt reminded Mastenbroek and Mokoena that investigators “can only comment on what we saw based on documents”.

Questioned about the meeting, Mastenbroek said “what was conveyed were not my own views but that of the [Kroon panel]”. Mokoena did not react to various messages, that he read, or seven phone calls.

(Read Mastenbroek’s full response here.)

According to Mastenbroek there was in his view “nothing untoward about [the meeting] taking place, its purpose, or the contents of what [was] conveyed by the members of the committee. Neither myself, nor the committee, ‘directed’ the KPMG investigation. The purpose of the engagement was to convey the views of the committee on a preliminary report it had seen and discussed the day before… This included the findings and documents relating to the establishment of the [SARS] unit. From the documentation collected by KPMG it appeared at face value as if the executive leadership of SARS had acted in a manner contrary to what was proposed to and approved by the then Minister of Finance [Trevor Manuel].”

A problem Mastenbroek may have is that he may not be perceived to have independent views on Gordhan. Mastenbroek was accused by investigative journalist Pearlie Joubert in an affidavit as being severely conflicted in his role as a member of the Kroon panel. According to Joubert, Mastenbroek leaked damaging stories “falsely implicating Gordhan”, Pillay and Van Loggerenberg to her in 2013 and 2014. Joubert explained that Mastenbroek was biased against the former SARS officials, yet accepted a brief from the ministry of finance and SARS to cast judgment on them.

An anonymous complaint was subsequently laid against Mastenbroek at the Johannesburg Society of Advocates. The Professional and Fees Committee of the Johannesburg Bar Council decided that the “complaint does not sustain a case of unprofessional conduct”.

In 2017 KPMG conceded to detrimental mistakes in their report and withdrew their recommendations, conclusions and findings – including those egged on by Mokoena and Mastenbroek.

KPMG declined to answer specific questions posed by Scorpio:

The matter of the SARS report, and KPMG’s involvement with it, is the subject of a number of independent inquiries and public hearings. KPMG is fully committed to co-operating with those inquiries. It would be inappropriate for KPMG to comment further at this point.”

Hogan Lovells

PwC was appointed to conduct the Jonas Makwakwa investigation Hogan Lovells was contracted for. PwC did a thorough investigation, highlighting various red flags about the conduct of Makwakwa and his partner Kelly-Ann Elskie. Hogan Lovells never charged Makwakwa with any of the serious allegations unearthed by PwC or Scorpio because, argued Modise, they were limited in their mandate.

Treasury’s Ismail Momoniat, in Parliament on Wednesday, epically described the untenable situation:

This (Makwakwa) investigation went nowhere. The most trivial of charges were put forward. PwC’s findings said SARS should investigate contraventions of foreign exchange control. But SARS did not investigate that matter, it appears there was no interest. There was an overwhelming enthusiasm in investigating the KPMG report, but you only hear about the limitations in the Hogan Lovells investigation. And then I’m not even going into Makwakwa’s tax investigation.”

A series of Scorpio investigations shows that Moyane lied to Parliament about the content and extent of the findings in Hogan Lovells’ and PwC’s reports on Makwakwa. Hogan Lovells only attempted to correct Moyane’s deliberately skewed representation of its work once Huffington Post’s editor at large Ferial Haffajee critically wrote about the Makwakwa disciplinary outcomes in 2017. And even then Hogan Lovells did not fully correct Moyane’s lies.

The firm also allowed Moyane to refuse PwC crucial information in an attempt to conclusively trace the mysterious money flows through Makwakwa’s account. Hogan Lovells was supposed to conduct an “independent” investigation and disciplinary procedure, but has so far not proved that it has done so.

Where are we now?

Momoniat told Parliament that terms of reference for the commission of inquiry into SARS will be announced this week. President Cyril Ramaphosa on Wednesday announced that former judge Robert Nugent will head the SARS inquiry.

The commission is expected to consider the adequacy and legality of steps that SARS took to address revenue shortfalls, including Moyane’s unauthorised bonus payments to top executives while withholding refunds to ordinary taxpayers.

Tax administrative processes will also be scrutinised, including VAT refunds to the Guptas, sanctioned by Moyane and SARS head of legal Refiloe Mokoena. Mining rehabilitation funds and adherence to customs and excise provisions, particularly the tobacco industry, will be considered. DM

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