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SARB slams CIEX report on Bankorp in fresh court bid

Johannesburg – There are factual errors in the Public Protector’s report on the Bankorp bailout, the South African Reserve Bank (SARB) said in its affidavit.

The Reserve Bank filed its second application on Thursday. It calls for the North Gauteng High Court to review the report and set aside the remedial action ordered by Public Protector Busisiwe Mkhwebane.

READ: Reserve Bank launches fresh court review against Public Protector

It wants the court to review and set aside the obligation placed on the Special Investigating Unit (SIU) to approach the president to collect alleged misappropriated funds from ABSA to the value of R1.125bn. Mkhwebane also wants the Health Proclamation Order to be reopened, to investigate misappropriated funds given to institutions, mentioned in the CIEX report.

The SARB’s advocate Johannes de Jager explained that the remedial action is flawed because it is “based on a misunderstanding” of the role central banks play.

In extraordinary circumstances, central banks provide liquidity to banks in financial distress, as lenders of last resort. Further, Mkhwebane's order to have the president reopen the concluded SIU case is unlawful. The remedial action also exceeds the Public Protector’s jurisdiction and is a “product of an unfair process”, the affidavit read.

CIEX report

The Public Protector’s investigation is based on a complaint by Paul Hoffman, lodged in November 2010. It relates to government’s failure to implement the recommendations of the CIEX report. The CIEX report, commissioned in 1997, found that the bailout to Bankorp during the apartheid era was unlawful and monies paid had to be recovered.

In the affidavit, De Jager explains Bankorp approached the SARB in 1985/86 for assistance as it was facing collapse. During the time South Africa was facing international sanctions. The failure of Bankorp would result in a “domino effect” in South Africa’s small banking system, exposing other banks.

The bailout was made to avert a crisis in the banking system.

READ: Stals opens up on Bankorp bailout

According to the SARB, ABSA made the last payment with interest in October 1995. ABSA bought Bankorp at fair value for R1.230bn, more than the assistance provided by the Reserve Bank to Bankorp. ABSA did not benefit from the assistance, it paid for it, De Jager said.

Any interest earned by ABSA went towards covering liabilities in Bankorp’s bad book. The liabilities were not incurred by ABSA, and had nothing to do with ABSA. “They were incurred prior to ABSA coming into existence and ABSA was therefore not responsible for initially acquiring the non-performing bad assets to which the liabilities were related.”

In the affidavit, SARB slates the CIEX for not interviewing the Reserve Bank and not affording it the opportunity to comment on the findings.

The CIEX report was “a bounty hunter’s tender” - CIEX stood to earn substantial commission on amounts recovered. CIEX recommended that government coerce payments from those alleged to have benefited under various schemes under the apartheid regime.

These institutions include Armscor, Nedbank, Volkskas, Trust Bank and the governments of Switzerland and Germany.

The SARB criticised the CIEX report for having no methodical discipline. “It makes sweeping claims about large sums of money that could be recovered from various individuals and entities.” There is no basis for the claims nor an indication of the extent of the investigation to arrive at these conclusions, said De Jager.

CIEX made recommendations to government with the “strategic objective” to bring the Reserve Bank under government’s control and to manage the replacement of Dr Christian Stals.

The Public Protector perpetuated these inadequacies of the report, said De Jager. The remedial action is based on “wild and unsubstantiated claims” made by the CIEX report. “Not even government regarded the report worth implementing,” De Jager said in the application.

Mkhwebane wants the SIU to investigate the alleged misappropriated funds. The problem with this is that some of the institutions listed in the CIEX report no longer exist, and there is no outstanding debt because it was settled 15 years ago, the affidavit read.

SIU investigation

An investigation by the SIU in 1999 revealed that if one major bank is in trouble, it poses a real systematic risk. If one bank goes down, it would cause danger to other banks in the sector as well.

Secondly, the SIU found that if legal processes were instituted against ABSA and Sanlam, which were subjects of the investigation, it could pose reputational risk. This would have a negative impact on investor confidence.

Lastly, the financial impact of the recovery of “misappropriated funds” would far outweigh the financial benefit arising from a successful litigation, which is not in the public interest. This would warrant the SARB to step in again to provide a lifeboat, far greater than the one paid to Bankorp. This would inevitably impact the stability of the economy.

Also, the investigation was concluded in 1999, and the president has no power to reopen an investigation by the SIU which has been concluded. Mkhwebane's report was flawed in this regard, De Jager highlighted.

Davis Panel

Former Reserve Bank governor Titp Mboweni commissioned a panel of experts, including Judge Dennis Davis, to investigate the bailout following public interest. The panel found that the beneficiaries were Sanlam shareholders, and not ABSA shareholders. This was problematic as the benefits could not be quantified, nor could the beneficiaries be identified.

The panel also found that SARB’s role in helping financial institutions in distress was in line with international standards. After these findings, the Reserve Bank regarded the Bankorp matter as concluded.

The matter resurfaced later in 2013 when former Public Protector Thuli Madonsela confirmed to the bank that she was investigating the CIEX report, and not the bailout. The SARB was not called on to comment until the end of 2016, when Mkhwebane took over and submitted a preliminary report to the bank.

The SARB submitted its comment in early 2017 and commented on the Public Protector’s jurisdiction on the matter, and pointed out factual errors. The bank asked Mkhwebane to issue a warning before issuing a final report with a “drastic” and unwarranted remedial action.

But the Public Protector failed to give “proper consideration” to the SARB’s representations and she failed to give a warning of the serious remedial action. The SARB also said the final report had no resemblance to the preliminary report; it also had no opportunity to comment on the remedial action, indicating the process was unfair. 

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