VBS: Municipal transfers contravened regulations - Zweli Mkhize

Minister says scandal should not be used to stigmatise black professionals or black business owners

Address by Hon Dr Zweli Mkhize, the Minister of Cooperative Governance and Traditional Affairs, to the debate on the motion relation to the Venda Mutual Bank fraud and corruption report

National Assembly, Cape Town

23 October 2018

Honourable Speaker

Honourable Deputy President

Ministers and Deputy Ministers

Honourable Members,

Special guests,

Thank you Madam Speaker for the opportunity to address this House on this critical matter relating to the criminal activities at VBS Mutual Bank.

Scores of our people especially the poor who invested funds from burial societies and other monies have directly lost their individual deposits. They have also lost their money indirectly through the R1.5 billion investment made by municipalities illegally into the VBS Mutual Bank, which has impacted on the delivery of basic services such as water, sanitation or electricity.

We strongly condemn the wanton fraud and corruption that has been displayed in the VBS saga. The report of the forensic investigation which had been instituted by the South African Reserve Bank which was released on Tuesday 09 October 2018, titled “The Great Bank Heist” confirmed the 1.5 billion rand still owed to the municipalities.

The Report also blew the lid on the brazen actions that accompanied the theft of the money by certain individuals, including firstly the commission fees to middle men and secondly huge payouts to certain people who are named in the report.

The report also revealed the complicity of some senior municipal officials, through bribes and other malpractices in relation to the invested funds. It also revealed that more people were aware of this than previously disclosed.

For example, Mayors, Municipal Managers and Chief Financial Officers of several municipalities were introduced to VBS by an agent, who earned a commission on every deposit of funds subsequently made by those municipalities, including the occasions when funds already deposited were rolled-over after the term of the deposit had expired.

The involvement in bribes, theft, fraud and corruption is a criminal offence and we urge law enforcement agencies to ensure that all those responsible for such nefarious activities face the full might of the law. This VBS debacle must be made a shining example of what happens to people who steal government funds which are meant for the people. Law enforcement agencies should pursue not only the municipal officials but also those who profited from this wholesale fraud against the poor, who are outside of government.

While we condemn what happened at VBS we also wish to emphasise that the country needs many banks like VBS which are designed to assist the poor and also black business, cooperatives and SMMEs who find themselves marginalised by the mainstream banks and other financial institutions. The transformation of the financial sector cannot be postponed any further.

What happened at VBS should not be used to stigmatise black professionals or black business owners. There are many black professionals and businesspeople who can establish and run a bank professionally, ethically and with integrity. Opportunities should be opened for them as part of radical economic transformation and the ANC government remains determined to do just that.

Honourable Speaker

The investment of funds with mutual banks is not permitted in terms of the Municipal Investment Regulations. Therefore, the 14 municipalities invested funds contrary to Municipal Financial Management Act and Municipal Investment Regulations.

Those municipalities which are based in Gauteng, Limpopo and North West are the following;


Of concern to us has been the impact on the delivery of services to the people at the implicated municipalities. Some of the municipalities are already experiencing serious financial distress. They are struggling to meet their financial and service delivery obligations. Challenges include the inability to pay service providers, salaries and the implementation of projects due to financial challenges they face the risks of possible litigation due to non-payment and industrial actions. Monthly expenditure such as tax obligations to SARS, Eskom and Water Boards are adversely affected.

The impact also includes suspended or delayed projects due to lack of funds. The imperative of paying service providers within 30 days can also not be honoured resulting in interest on overdue accounts which will result in fruitless and wasteful expenditure.

An analysis of Fetakgomo Tubatse Local Municipality in Limpopo this week has indicated the level of distress. The municipality is technically bankrupt and is at a risk of litigation due to inability to meet financial obligations. Contractors for own funded projects are not paid. The conditional grants are not used for the intended purpose due to the financial pressures. The municipality has not paid its monthly office rental of R1,8 million since July 2018.

In Gauteng, West Rand District Municipality invested conditional grants at VBS and argued that a legal opinion they obtained indicated that it was legal to do so. The municipality requested and was granted advance equitable share funds in July 2018 and last week, on October 17th, the Department of Cooperative Governance was asked by the municipality to effect an early release of equitable share due to financial challenges already being experienced by the municipality.

We are working closely with the National Treasury and SA Reserve Bank to ensure that VBS matter is thoroughly investigated and that those responsible for any wrongdoing are brought to book, whoever they are, and wherever they are.

I met with the mayors, municipal managers and chief financial officers of the affected municipalities on19 June 2018. It was made clear to them that their investment with the VBS had transgressed the MFMA and the Municipal Investment Regulations, and that the matter would be investigated. I was not satisfied with some of the answers. It was clear that they had not been given the full truth of what exactly happened. On that basis we directed that forensic investigations should be done and that municipalities should take responsibility to act on those that have transgressed.

We agreed among other things that all municipalities that have lost investments should structure their budgets in such a way that they are still able to render services and to implement planned projects. Municipalities are to develop financial recovery plans and put contingency measures to ensure that planned projects are implemented.

Some municipalities have provided financial recovery plans while others have not done so, and we are pursuing those that have not done so. All municipalities were directed to institute consequence management processes and also to ensure that the loss is disclosed accordingly in the annual financial statements.

We directed the respective provincial COGTA departments to investigate the investment with VBS in accordance with section 106 (4) (a) of Municipal Systems Act. The forensic investigations are still in progress and as such, the number of municipal officials and councillors facing disciplinary charges can only be quantified upon the finalisation of forensic investigations.

The Limpopo Provincial Forensic Investigation is to be concluded by the end November 2018 according to the province.

Municipalities are also taking action albeit at different paces. The Greater Giyani Local Municipalities suspended the CFO and Director Technical Services on July 2018 for financial misconduct. The director technical services’ contract lapsed whilst under suspension.

In Vhembe District Municipality, the Council placed the Municipal Manager and the CFO on precautionary suspension pending allegations of misconduct against them. In Mahikeng in North West the municipal manager is facing disciplinary charges and Council resolved to suspend the official and to open a fraud case. In Madibeng, disciplinary processes have been instituted against three officials and one councillor.

A criminal case has been opened at the Brits police station against all implicated officials. Investigations are continuing at Moretele and Dr Ruth Mogomotsi municipalities.

We reiterate our condemnation of this brazen fraud and corruption. All who participated in it should be ashamed of themselves and should be made to pay for their actions. Action must and will be taken against those who decided to use state funds as their personal “piggy” banks.

The action taken already by various levels of government demonstrates the commitment of government to rid the public sector of all corruption and mismanagement.

We assure our people that we will play our part to ensure that there are consequences for all who acted wrongfully. We are also seeking legal advice on how we can recover the money from those responsible.

We will continue to support law enforcement agencies in the ongoing investigations.

I thank you.