The Public Protector’s Bankorp Report

22 June 2017

Introduction

The Public Protector released her report on 19 June 2017 on the subject of the failure of the South African Government to recover public funds, following the financial assistance granted to the banking group Bankorp over the period 1985 to 1995.  The media has given much prominence to this report and its conclusions, and it is not the aim of this brief to go through much of what has already been reported on by the press.  However, there are some extremely disturbing aspects concerning the report which have not received the attention necessary for a proper understanding of it. We therefore raise these issues below, together with a summary of the factual background.

The factual background

The South African Government entered into an agreement with a UK-based asset recovery agency (CIEX) in October 1997 to investigate and assist in recovering assets that had allegedly been misappropriated prior to 1994.  The CIEX report dealt with public funds that had been made available by the South African Reserve Bank to Bankorp.  Bankorp was later taken over by ABSA Bank.   

In 1985, the South African Reserve Bank granted a R200 million loan to Bankorp, which was experiencing financial difficulties in its banking operations.  The South African Reserve Bank acted within the framework of its general duty to ensure confidence in the banking system, to protect depositors and to avoid contagion.  In 1988, this loan was increased to R300 million.  Bankorp was unable to commence with scheduled repayments of the loan in 1990 and following a request for further assistance, it was agreed that a loan of R1 billion would be advanced (this included the initial R300 million).  The proceeds of the R1 billion was to be invested with the South African Reserve Bank or in Government Bonds and would earn 16% interest, but only 1% interest on the loan was to be paid to the South African Reserve Bank.  In 1991, a further loan of R500 million was made, on the same terms as the initial loan, thus bringing the total loan to R1.5bn.  This arrangement meant that Bankorp was able to benefit from an interest rate differential of 15%, representing the difference between an interest rate of 16% and the 1% interest payable to the South African Reserve Bank.  The investment was ceded to the South African Reserve Bank as security.  

The annual amount of R225 million earned by Bankorp was to be available for five years, resulting in a total of R1.125bn.  It was intended that these funds would be applied to the writing off of bad loans.  After 5 years, the R1.5bn principal would therefore be repayable, but not the interest differential of R1.125bn.  In 1992, ABSA Bank took over the assets and liabilities of Bankorp and ABSA Bank replaced Bankorp in the agreements with the South African Reserve Bank.  The agreement terminated in 1995, with the principal of R1.5 billion being repaid.

The findings of the Public Protector

The Public Protector found that the South African Government had failed to implement the CIEX report and to recover an amount of R1.125 billion from Bankorp/ABSA Bank.  Her report finds that the conduct of the South African Government and the South African Reserve Bank constituted improper conduct and maladministration.  

The Public Protector therefore decided to refer the matter to the Special Investigating Unit in order to recover the misappropriated public funds from ABSA Bank and to issue instructions for a change to the Constitution, which is deal with in more detail below.

Disturbing aspects of the report

There are some disturbing aspects to the Public Protector’s report.  

First aspect: R1.125bn to be recovered from ABSA Bank

A panel of experts was appointed by the Governor of the Reserve Bank in 2000, with Judge Dennis Davis as chairperson (referred to below as the Panel).  The Panel found the financial assistance given by the South African Reserve bank in this case was seriously flawed and that, in using a simulated transaction, it meant that the Reserve Bank had acted outside its statutory powers.  There is therefore no dispute between the Panel’s report and that of the Public Protector that the nature of the assistance provided was unlawful.  It should be noted that it was just the particular kind of assistance rendered to Bankorp that was found to be unlawful and not other methods that may be used by the Reserve Bank to assist banks in distress.

As far as the remedial action is concerned, the Panel found that the price that ABSA paid in its acquisition of Bankorp, included the value of the Reserve Bank’s assistance and that it was therefore not unjustly enriched.  The beneficiaries of the assistance were therefore the selling shareholders (mainly Sanlam, as the majority shareholder).  The following is taken from the Panel’s report:

The Reserve Bank’s assistance conferred benefits on Sanlam’s policy holders and pension fund beneficiaries and on the minority shareholders of Bankorp. That is contrary to public perception published in the media, and contrary to the conclusions of the Heath Special Investigative Unit. Those perceptions and conclusions have incorrectly asserted that major benefits were received by the shareholders of ABSA.

The conclusion that the Reserve Bank acted ultra vires leads to a consideration of restitution. It is the view of the Panel that, in principle, restitution from the beneficiaries may be sought, but that it may well be difficult and extremely costly to achieve through litigation, because of the difficulty of determining the exact class of beneficiaries, apportioning the enrichment and the fact that duly appointed officials of the Reserve Bank made the key decisions.

The Panel is of the view that the difficulties pertaining to the quantification of the enrichment and the identity of the beneficiaries (e.g. as a mutual society at the time, much of the enrichment would have been enjoyed by Sanlam’s policy holders) renderproblematic the prosecution of an enrichment claim.

In her report, the Public Protector confirms being presented with ABSA’s argument that it had paid fair value when it acquired Bankorp (ie. including the assistance by the South African Reserve Bank), but says that this argument cannot be sustained since the Special Investigating Unit and the Panel established that the R1.125bn was an unlawful gift.  That is the end of the matter as far as the Public Protector is concerned.  In reaction, ABSA announced on 21 June 2017, that it will approach the High Court for a review of the Public Protector’s conclusions, stating that her report misrepresents or misconstrues the findings of the Panel and that it is irrational in this respect.   

The issue here is who benefited and whether it is realistic to attempt to retrieve the funds from those recipients.  The Panel dealt with this in some detail, but the Public Protector has simply avoided the issue, except to say that as the assistance was unlawful, therefore ABSA, having acquired Bankorp, has to pay.  The legal issue at play here, has not been understood.

Second aspect: comments on the role of the South African Reserve Bank in general

The following is taken from the Public Protector’s report:

5.3.23 It is evident that the status of the South African Reserve Bank as the lender to (sic) last resort has commercial benefits only in respect of the financial sector market.  The benefit which involves vast amounts of public money does not improve the socio-economic conditions of ordinary citizens of the Republic but of a particular financial sector.

5.3.24 Leading authors advocating and promoting the ideology of state banks and nationalisation of monetary currency believe that the notion of the lender of last resort’s status that is inherent to central banks internationally would cease to exist if governments take sole power in creating money through the establishment of state banks.

5.3.25   It is this belief that once the state takes control of creating money and credit, numerous benefits aimed at alleviating economic ails (sic) of ordinary economically disadvantaged people may be achieved, unlike our current purely commercial transaction system which only seeks to improve a particular financial sector.

5.3.26  The debate on nationalisation of monetary currency and creation of state banks is one that has found its way in to our democratic society and is a debate which must reach its conclusion by the people of South Africa.

Where does all of this come from?  The report offers no references and the whole debate on the issue of governments being empowered to print money is confined to these four paragraphs.  The way in which these opinions are presented shows a staggering lack of analysis and understanding of what, at the best of times, is a very intricate and tricky subject.  Does she have appropriately qualified economists on her staff who are willing to put their names to theories of this nature?

These comments then lead on to one of her other proposed remedial actions, which entails nothing less than a change to the Constitution.  The report states, in peremptory fashion, that the Chairperson of the Portfolio Committee on Justice and Correctional Services “must initiate a process that will result in the amendment of Section 224 of the Constitution”, which “should thus read:”

224 (1) The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are (sic) protected.

(2) The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, while ensuring that there must be regular consultation between the Bank and Parliament to achieve meaningful socio-economic transformation.

Quite apart from the question whether the Public Protector has the power to issue instructions of this nature (and it seems clear she does not), the content of these amendments raise the same questions as we have posed above.  Was this properly thought through?  If so, by whom and on the basis of what logic?  Or are there other agendas at play here?  

The South African Reserve Bank has already announced that it will bring urgent review proceedings to have her direction set aside, as it is outside her powers and is unlawful.  The international ratings agency S&P has also already warned that any interference in the independence of the central bank could well lead to further ratings downgrades.

Conclusion

The report of the Public Protector on this subject has not only discredited her office in a serious manner, but it leads to questions being asked not only about the level of rationality employed in a prominent state institution such as the Public Protector.  Are there hidden agendas behind this disastrous report ? One can only speculate about this, but the fact remains that any additional policy uncertainty around such a vital state institution as the Reserve Bank, is very damaging in the current turbulent atmosphere.

Anton van Dalsen, Legal Counsellor, HSF, 22 June 2017