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

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