Scorpio

VBS liquidator looks to claw back the money by suing KPMG for R864-million

By Pauli Van Wyk 24 February 2021
Caption
VBS Mutual Bank's liquidator Anoosh Rooplal has argued in court documents that auditing firm KPMG is liable for reparations. (Photo: Leila Dougan)
KPMG's role in State Capture was a failure of its core professional mandate, says the writer. (Photo: Leila Dougan)

VBS Mutual Bank has filed papers suing KPMG for R864-million, alleging its audit partner Sipho Malaba bagged millions in benefits and cash, lied to the Reserve Bank, acted in bad faith and breached his obligations to VBS. Liquidator Anoosh Rooplal filed the summons on Tuesday in the High Court in Johannesburg. The audit company now has 10 days to indicate whether it will defend the claim, and 20 days to file its plea.

VBS Mutual Bank’s liquidator Anoosh Rooplal has argued in court documents that auditing firm KPMG is liable for reparations because its auditor Sipho Malaba wilfully and in bad faith breached his obligations to the bank.

Rooplal aims to retrieve R863,597,526.86 in looted money from KPMG.

VBS Mutual Bank was looted into insolvency by its managers and their sidekicks, notably several politicians, auditors and business people. The fraud was made public when the SA Reserve Bank (SARB) put the bank under curatorship and ordered a forensic investigation. In essence, VBS’s electronic accounting system was used to create fictitious account entries reflecting as deposits and credits in VBS bank accounts which benefited its managers and their associates. VBS’s managers in effect robbed their clients to stuff their own pockets and then distributed the loot to politicians, fixers and associates to help keep the secret.

Advocate Terry Motau and law firm Werksmans, conducting the forensic investigation, found that Malaba lied to the SARB to cover up a giant hole in the bank’s finances. For being a team player, Malaba in return received R34-million in cash and benefits, including property and vehicle finance, which he benefited from through two front companies managed by his wife.

The breach of obligations

Rooplal argues that Malaba breached his duties in four material ways.

Assigned by KPMG, Malaba was responsible and accountable for VBS’s 2017 audit. He also signed the auditors report on 17 July 2017, stating that:

“In our opinion, the financial statements present fairly, in all material respects, the financial position of VBS Mutual Bank as at 31 March 2017…”

But, Rooplal says in court documents: “The 2017 financial statements were materially misstated and did not present fairly, in all material respects, the financial position of VBS as at 31 March 2017; nor did they present fairly its financial performance and its cash flows for that year in accordance with IFRS and the requirements of the Mutual Banks Act. More particularly, the account balance in respect of cash and cash equivalents recorded in the 2017 financial statements was significantly inflated.”

This means the bank managers pretended VBS had much more cash and cash reserves than it actually had, and Malaba rubber-stamped the claim.

Rooplal’s investigation found that VBS’s cash and cash equivalents were stated as R802-million when this figure was R112-million.

Assets were similarly overstated by at least R690-million.

VBS’s liabilities exceeded its assets by at least R451-million, which rendered the bank insolvent.

These are “material misstatements and irregularities of which KPMG was aware or ought to have been aware,” Rooplal argues.

The root of Malaba’s breaches lies with his VBS money flows for his own benefit and the conflict of interest with VBS this created.

Scorpio’s investigation suggests Malaba used as a front the two companies his wife was a sole member and a director of. The attempt was to shield Malaba’s hand in the looting of VBS. These companies – Ihawu Lesizwe Trading CC and Betanologix Pty Ltd – failed to service two overdraft facilities and three luxury vehicle finance facilities. The effect was that Malaba’s family enjoyed the benefits without having to worry too much about paying for them.

Malaba did not disclose his ‘client’ relationship with VBS to KPMG.

Motau’s investigation record shows further that VBS credit managers allowed the non-payment and therefore didn’t treat the Malaba-linked companies like they did other clients of the bank.

Motau found this to be a consistent method in the looting of VBS – managers dished out loans to their cronies that were likely never meant to be repaid.

In summary, Rooplal argues that in the absence of Malaba being beholden to VBS bank managers, KPMG would have uncovered the fraudulent scheme, would not have lied to the Reserve Bank about VBS’s financial position and would have raised the alarm over the big cash hole. Timeous red flags from KPMG could have, at the very least, stopped the ongoing bleeding of cash and stopped the fraudulent scheme.

Says Rooplal in court documents: “Mr Malaba was aware of the fraudulent scheme and/or was aware that the balance in respect of cash and cash equivalents recorded in the 2017 financial statements was significantly inflated which he deliberately failed to disclose and report because of his conflict of interest and compromised position”.

KPMG’s duties

Rooplal’s claim is based on the strength of an agreement between KPMG’s Malaba and VBS CEO Andile Ramavhunga, dated 15 May 2017. The agreement committed KPMG to audit VBS’s annual financial statements for the year ending 31 March 2017.

KPMG had a duty to perform the 2017 audit with “reasonable skill and diligence” and “without negligence or fraud, in accordance with generally accepted auditing standards”. KPMG also had a duty not to conduct the audit if the company or its auditing partner (Malaba) had a conflict of interest with VBS.

Rooplal argues that Malaba should have noticed in the period he was auditing that fraudulent beneficiaries – companies and people – looted VBS funds in the sum of R863,597,526,86. Rooplal, therefore, claims this sum in damages from KPMG, plus interest at the rate of 7% per annum from the moment the debtor is in default to the date of final payment. DM

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    • I’m open to correction but I think I saw that the VBS trial is likely to start towards the end of 2021 or early 2022. The wheels of justice do indeed grind slowly. Hopefully they do grind on though!

  • I don’t disagree with the intent here. My big question though is – where is the criminal charges against all those who stole AND accepted money from VBS? Those who had overdraft facilities and did not pay a single cent back? Somehow it seems that the intent is for KPMG to carry the bucket, so that the pursuit of criminality against the likes of Floyd et al, is diluted??

    • I don’t think that the other charges will be dropped but it’s more a case of KPMG being seen as an easy target as they probably have a couple of hundred million rand in insurance cover for this type of claim. The insurers in turn would have a right to claim against those that caused the loss.

      • “A couple of hundred million” is only R200 million. What about the remaining R663,597,526,86? Will KPMG be able to pay that without disintegrating?

        • I for one would like to see them disintegrate. I would also like to see jail time. It’s called accountability. (the single most important word in our country today)

          Everyone says “shame, what about all the jobs lost”. I’d just like to point out that a provider disappearing makes no difference to the number of consumers. The demand will simply move to other hopefully more ethical providers, so presumably they’ll be hiring.

  • In SA we seem to believe that only government and its employees (“and cadres”) are capable of looting. Of course, the assumption is the private sector is incapable of involvement and in facilitating and abetting the looting. But in reality, time and again, we see how the looting is enabled by private corporations. Remember how Big Business went to the TRC and declared that business is not in the business of ethics, but in the business of profit? What we are seeing is simply a perpetuation of that same enabling of looting and corruption that happened pre-1994. The truth is that Capital knows no colour, except the colour of money.

  • The interesting thing is that when it comes to global companies, seemingly no matter how pernicious their practices it doesn’t appear to affect their reputation.

    I guess that’s why PR is so important. But in SA I guess it’s also consistent with the fact that we generalise the positive for ingroups and generalise the negative for out groups (and vice versa). So for Bain, McKinsey, KPMG et al. their blunders are just viewed as isolated missteps. Mere errors. And this practice isn’t just something individuals do. It’s businesses as well as they continue to rely on Bain, KPMG and McKinsey services unaware or unconcerned of the impact those decisions have on perpetuating and supporting corruption in our generally corrupt society.

  • Surely before an audit partner signs the accounts of an enterprise his work is peer reviewed by the other audit partners in his firm to hold him accountable! If not, then KPMG has no excuse. If there was a peer review then clearly it was not rigorous enough and KPMG must be held accountable. Clearly KPMG must pay back the money.

  • Great news and good on the liquidator!!!
    My suggestion, once all these crooks are found guilty, apart from going to prison they should be forced to do community service in those communities where poor gogos and others who were robbed of their life savings have no food and no hope! I wonder how long they would last??

    • Problem is this – the liquidators are gunning for the low hanging fruit, i.e. insured KPMG. If they succeed, they will pocket easy fees and move on. They will consider their job done, and will no longer pursue the thieves who stole the money. That means our hapless prosecution services will carry that burden – and we all know what that outcome will be. It will be bungled procedurally, evidence will “mysteriously” disappear from court records, prosecution attorney offices will be burgled, laptops, files and notes stolen. Etc Etc.

  • The board of directors constitute the mind and physical presence of the company. They institute the financial and operating controls to protect the company’s assets and business. The auditors are responsible to assess the controls and test the information to the extent necessary to express an opinion on the financial statements. The audit firm, KPMG, appoints partners who have demonstrated the appropriate knowledge, technical and ethical levels. A partner is assigned to each client to fulfill the firm’s functions. In this case it appears that the B of D and it’s appointed management conspired to bribe the individual audit partner so that he became a beneficiary of the fraud and ensured its concealment. In other words, they are responsible for the failure of the auditor, KPMG. Laurence Erasmus’s comment about peer review is very pertinent here.

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