The woes of the VBS Mutual Bank are fairly well known by now, and very few investors believe the bank will last another six months. The question that many local residents are still asking, is how a once reputable mutual bank could have been destroyed in less than four years?
As more and more of the details of the underhanded dealings at the bank are revealed in court documents, the thousands of clients of the bank (who were all regarded as small "owners" of VBS at one stage) are stunned by the scope of the alleged fraud. Even the deputy governor of the SA Reserve Bank, Kuben Naidoo, now describes it as a Ponzi scheme and reckons roughly R1,5 billion was looted by senior staff members and directors of the bank.
What is a Ponzi scheme?
To understand what a Ponzi scheme is, one first has to look at the simplified form, the equally dangerous pyramid scheme. The difference between a Ponzi scheme and a pyramid scheme lies in the way each scheme is promoted. With pyramid schemes, the participants are aware of the fact that revenue is generated by recruiting new members. With Ponzi schemes, the participants may not always know this, and the unscrupulous drivers of the scheme can deceive investors into believing that a fair amount of legitimacy is involved. In both schemes, however, new investors' money is used to pay earlier investors or the drivers of the scheme. In both cases, the scheme crashes when the cash stops flowing in.
To properly explain how a pyramid scheme works, it is best to use an example. Let us set up a very sedate fictitious scheme where we ask people to each invest R100. We promise them 25% interest, payable at the end of the year, as long as they leave their money in the scheme. In effect this means that after four years they would have doubled their money.
We obviously will not tell the investors that we have no money to start off with. Let us also presume that we convince 1 000 people per year to invest their R100 in our little scheme. At the end of the year, the bank balance stands at R100 000. The company pays R25 000 in interest to investors and the directors take 10% for themselves, which still leaves R65 000 in the bank.
In the second year, another 1 000 people join the scheme, meaning that the interest payment has now gone up to R50 000. The directors again take a moderate 10% of new investors' money for themselves, but the bank balance is still "fine" at R105 000 (R65 000 + R100 000 – R60 000). All seems to be well, because the early investors have received half their money back and the new investors have earned 25% interest.
The scenario starts changing in year four, when the amount being paid in interest and commission (R110 000) is more than the amount being deposited by new investors (R100 000). By year six, the cash reserves have plummeted to just R15 000 and in the next year the company is in debt. It can no longer pay interest. Once word of this gets out, the investors start to panic and want to withdraw their money. They are in for a shock, because the money is gone.
How does this tie in with VBS?
What happened to VBS Mutual earlier this year is very similar to what had happened to the fictitious pyramid scheme – the money dried up. VBS could not pay its creditors and honour its interbank settlement commitments. It desperately needed more investors to pour money into the scheme and allow it to function a bit longer. The directors and senior staff members tried to woo more municipalities, PRASA and the PIC to pump in more cash, but the time frame was simply too tight. When the SA Reserve Bank received confirmation of what it already suspected, VBS was put under curatorship and the till slapped closed.
The investigations that followed showed that this may not have been a case of mere bad management. It may have been a carefully planned operation to syphon money out of municipalities, parastatals and, worst of all, ordinary citizens. Investors' money was channelled to directors, who in turn allegedly used it to finance lavish lifestyles and acquire other companies.
Was VBS Mutual a sitting duck?
VBS Mutual could have been one of the biggest success stories in South Africa's banking industry. It started life in 1982 as the Venda Building Society. It was a black-owned bank focusing on the financial needs of customers predominantly residing in the then Venda homeland.
In October 2000, the bank received a permanent Mutual Bank license and, at that stage, the customer base had already expanded to adjacent areas. It had a very conservative approach and a large section of its investors comprised stokvels and burial societies. Initially, the people who put their savings into the bank were also seen as the "owners" of the bank.
Initially the Public Investment Company (PIC) and a broad section of the local client base invested in shares in the bank, making them pro-forma owners of the bank. An annual general meeting was held each year, which these investors could attend, and they could serve on the board of directors.
Contrary to what was later reported, the bank did not give loans to people residing in rural areas under the jurisdiction of tribal authorities. Home loans were only approved to customers in structured municipal areas where title deeds were issued.
The mutual bank, because of its unique Venda character and approach, became very popular, but stayed relatively small. The bank systematically upgraded and modernised its systems, moving from the old "bank books" to a card system.
A large percentage of the bank's initial funding came from the pension fund pay-outs of the then Venda government officials. With the transition to a democratic South Africa, which meant re-incorporating the former homelands, the pension schemes were transferred to the Public Investment Corporation (PIC).
In the mid-2010s, VBS Mutual was pressurized to change its ownership structure and issue permanent shares, to comply with the changes in legislation. The bank issued shares to the value of R25 million, of which R1,25 million was reserved for an employee incentive scheme. The PIC then became by far the biggest single shareholder.
At about the same time, Dyambeu Investment, under leadership of Vhavenda King Toni Mphephu Ramabulana, entered the scene. Dyambeu took up 25,22% of the shares, creating a power block (together with the PIC) within the mutual bank and setting the stage for dramatic changes.
A bank capture?
The 2013 annual general meeting proved to be a Rubicon moment for the bank. In the past, these meetings were rather boring, with directors rotating according to the set rules and with not many surprises. Suddenly, a group of very demanding investors pitched up, demanding that new blood be pumped into the bank.
In an interview with the City Press newspaper a few years later, VBS chairman Tshifhiwa Matodzi said that when he and a group of black investors had "acquired" the bank it was "an obscure and lossmaking entity" hidden in Thohoyandou. The new directors were to embark on a turnaround strategy that would forever change the character of the bank.
The first couple of months showed very few obvious changes. The number of directors grew from nine to 11 and some of the bank's senior staff members resigned. These were quickly replaced by new, externally recruited staff members. At the end of 2013, clients' deposits stood at a fraction below R300 million and the mortgages and short-term advances below R240 million. A moderate loss of R1,8 million was recorded.
The signs of the new direction of the bank were clearly evident in the 2015 annual report. "During the current financial year, the bank introduced new lending products which are aimed at small and medium enterprises (SMEs)," said the bank's new CEO, Andile Ramavhunga. This was significant because, up to that stage, VBS had primarily been a bank for small investors and lenders.
The same report sheds more light on the type of businesses targeted. The targets were not small businesses, but rather the growing number of tenderpreneurs, aptly described as "contract financing business". The exact details of the new financing philosophy only transpired much later.
VBS became involved in a very lucrative scheme whereby six companies started acting as middle men to buy diesel from Sasol and sell it at highly inflated prices to Eskom. Eskom provided the guarantees and VBS effectively provided the money for the fuel to be bought. Eskom spent R10.5 billion on diesel in the 2014/15 financial year. The Denton Commission later said that serious irregularities occurred when the tenders for the diesel contracts were evaluated.
For VBS it meant that another very useful revenue stream opened, namely non-interest revenue. The fees generated from these transactions added to the company's bottom line and at the end of the financial year, a R1 million profit was shown.
You need money to make money
For VBS to be able to deliver to its newly acquired clientele, it needed money, and lots of it. The first stop was at a member of the "family", the PIC. "During the current financial year, we concluded a revolving facility of R350 million from PIC," Ramavhunga reported.
The R350 million credit line from PIC was not enough and VBS could not wait for its small depositors to put more of their savings into the bank. The new board found a shortcut. "A focus was placed on sourcing funding from institutions and municipalities. This strategy has worked as we have managed to obtain funding to the tune of R31 million from municipalities and R15 million from an institutional depositor," said Ramavhunga.
In the same report, the Vhavenda king is thanked for his "marketing collaborations and interventions", which made a 54% growth in cash holdings possible.
In the next year, the quest to get more cash intensified. The permanent interest-bearing shares jumped from R23,75 million to R70,47 million, without any explanation given. It also did not affect the shareholding percentages.
In his 2016 annual report, the new chairperson, Tshifhiwa Matodzi, states that "more than R450 million have been advanced to SMEs during the financial period." The bank was clearly on a lending spree, but money was needed to supply in the demand. The CEO, Ramavhunga, mentions in his review that R280 million was raised from municipalities and institutions.
Good business or dark dealings?
In the 2015/16 financial year, VBS reported a net profit of R4,9 million and much was made of the success of the "turnaround strategy". The biggest revenue driver was the non-interest revenue, escalating by 167%, or R15 million.
When one browses through the 2016 annual report, it seems as if the drivers of the new strategy started taking their toll on the bank. Prior to 2013, directors' loans did not really feature in the financial figures. In 2015, almost out of the blue, advances totalling R801 875 were made to non-executive directors. The two executive directors borrowed only R103 623 from the bank. The same year, a new entry appeared on the report, namely a "closed vehicle finance scheme" for shareholders. Just over R6,06 million was given to shareholders for this purpose.
In 2016, the figures became much more lucrative. The executive directors suddenly received advances totalling almost R4,2 million. The non-executive directors borrowed R2,1 million and the shareholders' vehicle finance scheme had to fork out another R7,2 million. A small part of the debt was repaid, but at the end of that financial year, the shareholders (mostly directors) owed the bank more than R14 million.
By 2016, the board had grown to 12 non-executive and two executive directors.
The manner in which the bank's business model had changed, was also clearly visible in the 2016 report. Contract financing, for the first time, became the biggest money earner, representing 41,36% of the bank's business. Home loans dropped to 34,52%. Overdrafts and vehicle finance combined made up 23% of the business.
The quest for absolute power and control
What had happened in 2017 is a bit more difficult to tell. VBS's 2017 (audited) financial report was retracted, following the discovery of several irregularities.
From affidavits filed in court the past couple of months, it transpired that the "capture" of the bank was completed early in 2017. The stage was set by then for a new player, Vele Investments, to enter the scene. Vele acquired a 53% stake in VBS in March 2017, and the fact that it shared many of its directors with the bank gave it almost unfettered control of the bank.
In an overview presented to the VBS board, it was stated that Vele Investments was founded by Vhavenda King Toni Mphephu Ramabulana and his financial adviser, Tshifhiwa Matodzi. Matodzi, also the chairman of VBS Mutual, served as director and chairman of Vele Investments. The leadership of Vele is, however, disputed. Robert Madzonga, the previous chief operations officer of VBS Mutual, said he was the group chief executive officer of Vele Investments. Maanda Manyatshe made a similar claim.
Vele Investments took up a majority share in VBS, firstly by "paying" R80 million for permanent shares. Exactly when and how many shares were taken up by Vele Investments is not clear, with figures varying between R90 million and R170 million. The reality, however, seems to be that Vele never paid for the shares, effectively using an "overdraft" facility at VBS to "pay" for their shares.
If ever a Scary Movie is to be made where the plot concerns the banking world, the events in 2017 at VBS would provide the perfect script. The administrative functions at the bank were split up and the decision-making process seemingly moved to the Johannesburg branch. The bank's EMID system, which regulated transactions, was manipulated, causing fictitious transactions to be recorded.
The biggest benefactor in this situation seems to have been Vele Investments. In an affidavit filed in court, the curator's representative, Anoosh Rooplal, states that Vele Investments went on a buying spree, acquiring a stake in about a dozen companies. The company acquired an investment in Insure Group Managers (Pty) Ltd for an amount of R250 million.
"Vele did not pay a single cent in respect of any of the acquisitions," said Rooplal. The acquisitions were all funded through fictitiously created VBS deposits. Vele's shopping basket included shares in Malibongwe Petroleum, Anglo African Finance, Mvunonala and Fairsure. Rooplal's investigation estimates Vele's acquisitions at R697 million.
But how could it be done?
Three individuals were named by Rooplal as being the "controlling minds" behind the saga. They were Tshifhiwa Matodzi, Robert Madzonga and Andile Ramavhunga. Matodzi was the "main architect" behind the fraud scheme, said Rooplal.
In an affidavit filed in the High Court, asking for the sequestration of, among others, Vele Investments, Rooplal tried to explain exactly how the fraud happened. Firstly, Matodzi and partners needed the assistance of senior bank officials. Philip Truter, the bank's chief financial officer, and Phophi Mukhodobwane, its general head of treasury and capital management, were allegedly instrumental in this part.
Truter and Mukhodobwane, on instruction of Matodzi and his partners, were told to create fictitious general ledger entries that reflected as "deposits" in VBS bank accounts. The "deposits" were then transferred to a suspense account, much the same way as if one were to receive money in one's bank account and one does not know where it came from. While trying to find out who the depositor is, the entry lies in a suspense account. Truter and Mukhodobwane then transferred the "deposited" money from the suspense account to the accounts held by, among others, Vele Investments.
Once the money reflected in the accounts of the different companies and individuals, the money was withdrawn or transferred to another bank. The fictitious entry was thus turned into real money. Some of this money was used "to fund their lavish lifestyles, purchase immovable property, buy high-end motor vehicles and take up shares and interests in other entities," said Rooplal.
The bulk of the money was, however, used to clear the overdrafts of a list of connected companies, described by Rooplal as those on the "Eagle Canyon List". Eagle Canyon refers to the place where Matodzi allegedly gave instructions for the overdrafts to be cleared. The amount involved is nearly R930 million, with Vele Investments being the big "winner", with R745 million of its debt disappearing. The names of numerous other companies, such as the Vhavenda Heritage Trust (R1 million), Dzata Trust (R9 million), MML Food Services (R19 million) and the Shimba La Ndou Family Trust (R7,5 million) are mentioned in the affidavit.
Not only the companies and Vele-linked individuals allegedly benefitted from the capture of the bank. The senior officials were handsomely rewarded. Vele Investments not only paid bonuses to its own directors, but also allegedly paid Mukhodobwane R10 million and Truter R5 million. None of them was employed by Vele.
The money must come from somewhere
While the alleged looting was continuing, VBS had to get its hands on some "real" money. The strategy was to get more municipalities to invest in the bank. State entities such as PRASA, as well as the PIC, were approached to invest large amounts of money. Allegations are made of millions in bribes being paid to strategic decision makers at these institutions.
VBS resorted to a system whereby commissions were paid to municipal officials to secure deposits. Political leaders were also roped in to assist in luring deposits to the bank. To try and hide these payments and not make these show up in VBS's statements, a separate company, Robvet, was set up to handle these payments. Robvet's overdraft stood at R8,43 million before it was "cleared" as part of the Eagle Canyon instructions.
For a variety of reasons, VBS's attempts at opening revenue taps were not successful. Some say it was the unexpected election of Cyril Ramaphosa as ANC leader and subsequently as new president of the country that spoiled the plans. The sentiment in the country started to swing, and perhaps the people in powerful positions who needed to sign off on the deals became scared.
National Treasury became aware of what the municipalities were doing and issued warnings to the local councils. Many of them, including three in Limpopo, ignored the instructions and put their taxpayers' money at risk, but most of them were more careful. What seems very likely is that some crooks have even less of a conscience than other crooks (if that is possible) and took bribes without delivering on their promises.
Early in 2018, the bank's vaults ran dry. The liquidity crisis prompted the SA Reserve Bank to step in and appoint a curator. Vele Investments initially tried to fight and stop the intervention, but they were outclassed and left abandoned. The investigations are still continuing, but the curator reckons more than R1,5 billion was sucked out of the bank by the perpetrators.
The losers in this "Ponzi scheme", as Naidoo described it, are the multitude of small investors, the municipal taxpayers and the pension schemes. The Reserve Bank provided guarantees for deposits up to R100 000. The municipalities and the PIC are the big losers, with very little chance of ever claiming back the money invested with VBS.