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THE FURORE about the handling of trust accounts by top estate agency Wendy Machanik Properties (WMP) has exposed deep fault lines in the supervision of the industry exercised by the Estate Agency Affairs Board (EAAB). The announcement by the EAAB last week that it was instigating a widespread probe into almost 70% of South Africa’s 9 500 registered estate agencies and 28 000 individual agents suggests it can’t rely on its established oversight mechanisms, which include annual reviews of audited accounts for firms and their respective trust accounts.
What’s alarming about the WMP case is that despite the fact that Machanik was called before the board as far back as 2007 to answer questions about apparent irregularities in its management of trust accounts, she was appointed by the Department of Trade & Industry – under whose auspices the EAAB falls – to sit on its board later that year. The EAAB saw no reason in subsequent years to verify whether audited financial statements submitted by WMP accurately reflected the management of trust accounts. EAAB CEO Nomonde Mapetla says there had been no need to question the statements, as they’d already been audited.
The official probe into the agency’s affairs was only launched last year as a result of a detailed tip-off by a whistleblower. While a preliminary report failed to dredge up any damning evidence, details of alleged misappropriation emerged in a later full-blown forensic investigation.
Machanik’s appointment to the EAAB board so soon after her 2007 dressing down further complicated the issue. Machanik, who has refused to be interviewed since news of the scandal broke – beyond issuing a brief statement in which she denied any wrongdoing – is understood to have served one term as a board member. She was offered the opportunity last year to retain the seat, but Mapetla says Machanik “gracefully declined” when it was pointed out to her the position was incongruent with the ongoing investigation into WMP’s financial affair.
Agencies and the agents who work for them are all required to have annual Fidelity Fund certificates issued to them by the EAAB. In order to qualify, the EAAB must be satisfied the legal requirements in terms of the Estate Agency Affairs Act are met. With the rapid growth in the industry in the mid-2000s, many of the checks and balances that might have been adequate previously came under enormous pressure, say industry sources.
Initial investigations into the whistleblower’s allegations that trust accounts were being used to fund Machanik’s personal expenditure and buyers’ deposits were being used to make up shortfalls in operating expenses at WMP resulted in a full-blown forensic investigation by risk consultancy Pasco Risk Management. Court papers indicate WMP was losing up to R400 000/month and more than R25m of trust account money was allegedly misused between March 2007 and February 2010. A statement by WMP didn’t deny the allegations but insisted deposits were safe and that the company hadn’t ever been in a position where it was unable to pay anyone owed money held in one of its trust accounts. WMP said it would legally challenge the findings of the forensic report. Meanwhile, the South Gauteng High Court has appointed a curator to manage the trust accounts, prohibiting access to any employee, including Machanik.
The EAAB is also seeking a court order to block Machanik from operating as an estate agent until she again has a Fidelity Fund certificate, which only it can issue. WMP is yet to apply for a 2011 certificate. The broader investigation will reveal whether there are any other agencies in the same boat.
The issue of paying deposits into estate agents’ trust accounts is a contentious one. Although trust accounts at both lawyers and estate agents enjoy the same legal status, property lawyer Julian Scher, at Strauss Scher Attorneys, recommends using lawyers’ trust accounts instead, which adds a level of protection to property buyers who might default on a purchase. Agents tend to take first dibs on deposits in order to extract their commission and may or may not be within their right to do so if a deal collapses. Also, argues Scher, lawyers have a lot more to lose when it comes to fiddling with trust accounts and can be barred from practising law altogether if found guilty of breaking the rules.
What’s alarming about the WMP case is that despite the fact that Machanik was called before the board as far back as 2007 to answer questions about apparent irregularities in its management of trust accounts, she was appointed by the Department of Trade & Industry – under whose auspices the EAAB falls – to sit on its board later that year. The EAAB saw no reason in subsequent years to verify whether audited financial statements submitted by WMP accurately reflected the management of trust accounts. EAAB CEO Nomonde Mapetla says there had been no need to question the statements, as they’d already been audited.
The official probe into the agency’s affairs was only launched last year as a result of a detailed tip-off by a whistleblower. While a preliminary report failed to dredge up any damning evidence, details of alleged misappropriation emerged in a later full-blown forensic investigation.
Machanik’s appointment to the EAAB board so soon after her 2007 dressing down further complicated the issue. Machanik, who has refused to be interviewed since news of the scandal broke – beyond issuing a brief statement in which she denied any wrongdoing – is understood to have served one term as a board member. She was offered the opportunity last year to retain the seat, but Mapetla says Machanik “gracefully declined” when it was pointed out to her the position was incongruent with the ongoing investigation into WMP’s financial affair.
Agencies and the agents who work for them are all required to have annual Fidelity Fund certificates issued to them by the EAAB. In order to qualify, the EAAB must be satisfied the legal requirements in terms of the Estate Agency Affairs Act are met. With the rapid growth in the industry in the mid-2000s, many of the checks and balances that might have been adequate previously came under enormous pressure, say industry sources.
Initial investigations into the whistleblower’s allegations that trust accounts were being used to fund Machanik’s personal expenditure and buyers’ deposits were being used to make up shortfalls in operating expenses at WMP resulted in a full-blown forensic investigation by risk consultancy Pasco Risk Management. Court papers indicate WMP was losing up to R400 000/month and more than R25m of trust account money was allegedly misused between March 2007 and February 2010. A statement by WMP didn’t deny the allegations but insisted deposits were safe and that the company hadn’t ever been in a position where it was unable to pay anyone owed money held in one of its trust accounts. WMP said it would legally challenge the findings of the forensic report. Meanwhile, the South Gauteng High Court has appointed a curator to manage the trust accounts, prohibiting access to any employee, including Machanik.
The EAAB is also seeking a court order to block Machanik from operating as an estate agent until she again has a Fidelity Fund certificate, which only it can issue. WMP is yet to apply for a 2011 certificate. The broader investigation will reveal whether there are any other agencies in the same boat.
The issue of paying deposits into estate agents’ trust accounts is a contentious one. Although trust accounts at both lawyers and estate agents enjoy the same legal status, property lawyer Julian Scher, at Strauss Scher Attorneys, recommends using lawyers’ trust accounts instead, which adds a level of protection to property buyers who might default on a purchase. Agents tend to take first dibs on deposits in order to extract their commission and may or may not be within their right to do so if a deal collapses. Also, argues Scher, lawyers have a lot more to lose when it comes to fiddling with trust accounts and can be barred from practising law altogether if found guilty of breaking the rules.
