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BSR Special: Critical analysis of the NSSA Forensic Audit (Part 1)


This is the first part of my analysis of the Forensic Audit Report into the affairs the National Social Security Authority, commonly referred to as NSSA. The NSSA Forensic Audit Report was produced by BDO Chartered Accountants (Zimbabwe) and commissioned by the Auditor General. It covered the affairs of NSSA between 2015 and 2018. There are multiple issues, so I have split my analysis into two parts. The first part covers the key issue of investments with various counter-parties, MetBank, Metro Realty, Drawcard, and Housing Corporation Zimbabwe (HCZ). The second part, to be presented later covers the remaining issues. I decided to split the two to avoid information overload. Understanding NSSA

To fully appreciate the magnitude of what will be presented in this BSR, it is important to provide a quick summary of the public character of the funds at stake. NSSA was set up by the government in the mid-1990s, to provide social security. This was a noble project, in keeping with social security laws in most progressive countries. While private insurance is available, a public insurance scheme can, if used well and prudently, be a great safety net for millions. So NSSA is a compulsory public insurance scheme. Every worker pays a monthly contribution and employers put in their share. It is a form of tax. Upon retirement pensioners can expect monthly pensions and related benefits. When it was set up, the compulsory nature of NSSA contributions was challenged in the Supreme Court by a then young lawyer, Tawanda Nyambirai. In a landmark judgment in 1994, the Supreme Court agreed that it was a tax but it ruled that it was not unreasonable in a democratic society. It was a firm legal foundation for NSSA and we have lived with it even since. No one could have anticipated that such a noble scheme would be prey to so many vultures. It is not enough to just pour money into an insurance fund. Like any insurance fund, you need clever people who invest those pooled contributions in various projects for a good return. NSSA might buy shares in companies. It might buy or build real estate, sell it on or lease it and earn rentals. It might invest in the money markets. In short, it can do anything that helps it get a return. These funds become available to pay pensioners when they retire. Put to good use, such funds can help in social protection programs including building low-cost homes, affordable to the majority. This and more is what NSSA can do since it earns millions of contributions from workers. NSSA is truly one of the proverbial cash cows in our economy. It has at its disposal lots of cash. This vast cash is also what makes NSSA vulnerable to those with predatory instincts. With weak and compromised management, it represents easy pickings for the unscrupulous. It is against this background that I analyse the relationship between NSSA and various entities as detailed in the NSSA Forensic Audit Report. The purpose is not merely to regurgitate contents of the report. It is to analyse it and shed light on the legal issues arising. Indeed, things are not always as they appear. NSSA and MetBank The relationship between NSSA and MetBank might be likened to a relationship between a parasite and a host that is captured by a coterie of enablers. It is like a relationship between two organisms whereby one literally feeds off the other, the host constantly giving despite repeated abuse and when the hosts protests, the parasite becomes even more aggressive and accuses the host of failing it. But both NSSA and MetBank are corporate entities. They have neither a physical body nor emotions. They exist only in our imagination, formalised and given the pretense of life by the law. Lurking behind and around them are real humans: the directors of NSSA and MetBank, the senior management of both, the shareholders of MetBank and the millions of men and women who contribute to NSSA, in anticipation of returns upon retirement through pensions or compensation upon injury that would have terminated their working life. Among these humans are perpetrators of grand theft; a group of enablers, that is, those who willfully or negligently assist in the grand heist and victims whose contributions are looted in the heist. As I prepared this analysis, a damning judgment has been delivered by the High Court, ordering MetBank to deliver Treasury Bills worth $37 million which it had kept in defiance of NSSA’s demands. But more on that later. "No economic sense" The verdict of NSSA Investment managers is summed up by the damning statement that “most of the transactions [with MetBank] did not make economic sense from NSSA’s point of view”. In other words the investments in or with MetBank and its associates were not in the best economic interests of NSSA and consequently were detrimental to its contributors and beneficiaries, namely, workers and pensioners. Conversely, they made economic sense to the counterpart, MetBank and its associates. The forensic auditors concluded that the ill-judged investigations with MetBank left NSSA exposed to the tune of $62 million. All figures in the report are in US dollars. This helps to show the true value of losses to NSSA in light of the new Zimbabwe Dollar regime following SI142 of 2019 which made it the sole legal tender. We are not talking Zimbabwe Dollars here no. A study of the report and the transactions in which NSSA was involved with MetBank shows that some, though not all, of the managers believed that MetBank was a “high-risk client” which was unworthy of new credit facilities. Yet a running and curious theme is that NSSA continued to pour loans and other generous facilities into MetBank despite its well-known financial weaknesses and its ignominious record as a defaulter. Good faith

Making poor and disastrous investment decisions in business is not new and neither is it a crime if such decisions are made in good faith. The duty to act in the best interests of the business entity does not mean every decision must always successful. Sometimes decisions are made with the best intentions, and in good faith, but they simply go wrong for one reason or another. The law has room for that and protects those who act in good faith. However, it is different matter altogether when decision-makers enter into agreements knowing too well that the other party is delinquent, has a known history of defaulting on its obligations and is so financially unsound that prospects of recovery are slim. It is not just recklessness particularly where advice against investment decisions is given by professionals employed to provide such advice but is ignored by decision-makers. In such cases, it is a wilful breach and complete disregard of established rules and conventions which fall in the category of fraud. Where public funds are involved, it is abuse of power and public funds for self-enrichment or to enable unscrupulous characters to divert public funds for personal use. The $62 million exposure to MetBank arises partly from a stock of Treasury Bills which were given by NSSA for safe custody but ended up being used by the bank for commercial purposes. Some of it relates to loans that were advanced to MetBank by NSSA during the same period. However, since NSSA decided to approach the courts for relief regarding those Treasury Bills, MetBank froze all transactions with NSSA, a conduct which affected a whole array of other transactions that had nothing to do with the Treasury Bills. It’s truly beyond incredible. Here is an indebted company which time and again has benefited from public funds held at NSSA, deciding because it is unhappy with litigation by the creditors, to freeze all other obligations it owes to that creditor. As already stated, the High Court has now thrown out MetBank’s claims, describing its resistance as a “Humpty Dumpty defence”. It’s a case that should never have been brought or defended because it had no merit whatsoever. Justice Nicholas Mathonsi, who delivered the judgment was brutally accurate in his assessment of MetBank’s fig-leaf defence,

“Other than chasing a mirage, that there is no agreement between the parties, the defendant did not advert to any lawful basis for the retention of the bills. Quite to the contrary, the argument that there exists no agreement is a self-destruct button the defendant was fervently pressing. It brought the entire edifice of the defendants’ case tumbling down in humpty-dumpty fashion. Without some semblance of an agreement the defendant would not have a right to keep that which it does not own. It should simply return it.” Undue Pressure and Political Interference Another key theme in the report that is evident in the relationship between NSSA and MetBank is the exercise of undue influence by political actors and members of the Board. This is crucial in understanding why, if managers were minded to turn down MetBank overtures for investment, NSSA nevertheless went ahead and made the investments. According to the Forensic Report they did so because they were unduly influenced by the Minister of Public Service, Labour and Social Welfare, Prisca Mupfumira and the Board Chairman Robin Vela. The report states that the Minister “directed that NSSA Board should assist MetBank despite the bank having a default history and overdue loans to the Authority [NSSA]”. In another instance involving a MetBank related company, Housing Company of Zimbabwe (HCZ) the property investment manager alleged that the then Board Chairman, Robin Vela had introduced the company to NSSA and “put pressure on NSSA officials to fast-track the awarding of the contract”. This transaction will be discussed in more detail below but suffice to say at this stage that the Forensic Auditors concluded that the management were rushed into making decisions in breach of investment rules and economic wisdom due to the “undue pressure” exerted by the Board Chairman, Robin Vela. Of course, Mupfumira and Vela will dispute these findings of undue influence upon management and they should rightly have their day in a neutral forum to present their own defence. If it is established that there was indeed undue pressure, that would amount to abuse of power, which is unlawful. These matters can only be sufficiently exhausted through further investigation and hearings that establish the facts. That is precisely why the NSSA Forensic Report should not be the end of the matter. It does however establish, on the face of it, a case that warrants deeper investigation and either civil action or criminal prosecution. This is more so because it involves a significant loss of public funds. Public Procurement Two themes are evident from the relationship of NSSA and various related parties. In all cases, there is a breach of public procurement rules and in particular, a breach of NSSA’s own investment policies and guidelines. The auditors found no evidence that decisions that required board approval were submitted to the board. In some cases, board approval was given after the fact; long after the relationship had been formed and the contract was running. In other cases, decisions ran contrary to advice of the investment and procurement committee. In the case of housing projects which were funded by NSSA, none of them went to tender as required by law and the in-house investment policy. This meant there was no competitive bidding for the contracts which could have allowed NSSA to select a deal that made more economic sense. The Forensic Report suggests that management was rushed into concluding housing projects agreements with HCZ, Metro Realty and Drawcard. There was therefore no due diligence carried out to protect NSSA’s interests. Both NSSA and contractors knew they were getting into relationships in breach of public procurement rules. They were private arrangements which flagrantly disregarded the rules and they knew what they were getting into. Let’s’ look at each of the housing projects one by one: Housing Corporation Zimbabwe (Private) Limited (HCZ) According to the Forensic Audit Report, HCZ won a contract with NSSA worth $304 million without going to tender. Instead, its parent company, HAC was “introduced” to the NSSA management by the then Board Chairperson, Robin Vela. The Chairperson is alleged to have exerted “undue pressure” on NSSA management for the prompt consummation of the agreement with HCZ, which allegedly pressured management to cut corners and breach the public entity’s own investment rules. It is likely that Vela will contest these allegations. HCZ was formed a week before it got the multi-million dollar deal. While this raises questions as to how such a young and inexperienced company could have got such a deal so soon after birth, one explanation might be that it was a special purpose vehicle presumably to meet indigenisation and local presence requirements. (Having read a response to the Forensic Audit Report during the course of preparing this paper, this is indeed what HCZ says happened). NSSA paid a deposit of $16 million against an advance payment guarantee from Zimnat Lion Assurance guarantee. However, when NSSA sought to exercise its rights on the guarantee, alleging that the contractor had failed to meet terms of the agreement, HCZ took legal action and won an interdict against NSSA. Still, however the fact that the contract did not go to tender and was therefore a breach of public procurement rules and NSSA’s own investment policy is a damning indictment on the parties involved. There are good reasons why the law insists on rules of public procurement. Competition allows public funds to be used prudently. Open bidding is transparent, fair and helps protect public funds. Private arrangements on the other hand promote nepotism, corruption and patronage. It gives room for undue influence which prejudices public funds. (For its part, HCZ argues that this was a different type of deal which did not have to go through those procedures. That’s a matter for closer investigation by the authorities to establish who is right). The Forensic Auditors also found that the land upon which the housing project was due to take place was owned not by HCZ but by an entity called Caledonia Enterprises (Private) Limited. This they allege was a breach of NSSA’s investment policy which stipulates that the counter-party must have title to the land and the capacity to develop it. If adequate due diligence had been done by NSSA they would have discovered this deficiency and the fact that Caledonia itself is not registered at Companies House as the Forensic Auditors found out during their investigations. (HCZ contests these issues and again it’s a matter for investigation by law enforcement authorities to verify the true position). The Cost To understand the problem with private dealings in such matters, let us consider the cost of this deal. The cost of each housing unit in the HCZ contract was $38000 compared to a cost of $25000 per unit on a similar project undertaken by NSSA’s subsidiary National Building Society. While the managers were trying to negotiate the price downwards, they alleged pressure from the Board Chairperson, Vela, prevented them from doing so. The result, according to the Forensic Auditors was that NSSA was left financially exposed to the time of $104 million on this project alone. Vela is likely to contest this and HCZ might argue that the two types of units were different hence the difference in cost. Still, it’s a matter for closer investigation to establish whether this was the most prudent decision and if NSSA was financially prejudiced as a result). More pertinently, the Forensic Auditors found that HCZ failed to meet the contractual requirements completing just 53 units, with 57 still under construction compared to a requirement to deliver 250 houses in 180 days. The Forensic Auditors reported that when they visited the site six months after the delivery date there was no activity taking place - this notwithstanding that NSSA had paid a deposit of $16 million. When NSSA tried to recover the deposit that’s when HCZ applied for and got an interdict at the High Court. Did HCZ ever have the capacity to deliver? The Forensic Auditors argue that it had no track record of carrying out such projects. Why did NSSA Board and management commit public funds to a project without due diligence or going to tender as required by law? It’s not just negligence. It’s wilful disregard of the law, putting public funds at risk. Someone must be held to account. Missing from the Forensic Auditors’ Report Nevertheless, in the interests of balance, it is important to note that the Forensic Audit Report does not include full details of the litigation and arbitration case between NSSA and HCZ. HCZ sought and won an interdict stopping NSSA from getting back its deposit from Zimnat Lion Assurance which had given an advance payment guarantee on behalf of HCZ. The judge stopped it because there was an arbitration case to which NSSA had agreed to participate and was pending. My own investigation has revealed that the arbitration case between NSSA and HCZ was concluded in March 2019. The arbitrator awarded HCZ $30 million in compensation to HCZ. This means NSSA lost the case and exposed $30 million in public funds. This is a significant loss, all due to NSSA’s failings. It’s not clear why the NSSA Forensic Audit Report did not include this information. This is truly a bombshell of huge proportions. What this means is that ZACC or other law enforcement authorities must investigate why NSSA exposed public funds in this way. Whoever is responsible for the failings that led to the loss of the arbitration case must be held to account. It can’t be swept under the carpet. Metro Realty and Drawcard These two are grouped together because they are related parties and, in any event, both are linked to MetBank, the bank whose toxic relationship with NSSA has already been presented at the start of this analysis. However, the role of these two entities shows that the toxicity spread beyond the banking arm. The fact that Forensic Auditors came to the conclusion that all these entities are related, with MetBank as the common denominator, is hugely significant. It means when the corporate veil around the entities is lifted, the people behind MetBank are the same people behind Metro Realty and possibly Drawcard. It also means if these people were not accessing NSSA money through MetBank as “investments”, they were doing the same thing through these other entities disguised as separate businesses. Indeed it is significant that when MetBank froze all relationships with NSSA and refused to give back Treasury Bills or to repay loan obligations, Metro Realty also stopped meeting its obligations to NSSA as part of the same protest. Nothing illustrates that they are just different fingers of the same hand than this unity of action against NSSA - their Common creditor. If Metro Realty was truly separate from MetBank it would have continued to meet its obligations to NSSA unaffected by NSSA’s legal dispute with MetBank. Herein lies the problem: NSSA management had already expressed its unwillingness to invest in MetBank because of its unsound financial footing and its bad credit history. Why would management deal with an entity that was essentially part of MetBank, albeit with a different name and corporate veil? They would and should have seen through the veil and refused to deal with Metro Realty because the same concerns applicable to MetBank were applicable to it, too. If there was undue pressure on management, as is alleged in the Forensic Report, it’s a matter that requires deeper investigation. Indeed, given the losses incurred by NSSA the criminal element is more than abuse of office. It’s fraud on a grand scale. In all cases, there were various breaches of the governing legislation, namely the NSSA Act and in-house investment policies; there was evidence of undue pressure from superiors and NSSA suffered significant financial losses. This was not just gross negligence. Almost all parties involved knowingly took part in arrangements that they knew or should have known were in breach of the law and would result in a loss of public funds. Meticulous reconciliation To be sure, while the matters raised in the report are shocking and look straightforward, there is some complexity because they involve many people, entities and a wide variety of evidence. What they do show however is a shocking disregard for public property and the interests of the most vulnerable in society: pensioners who get only a pittance out of their contributions. Millions of dollars are pooled from them every year during their working lives but those who prey on them in millions are the capitalists - executives and businessmen - who when things go wrong refuse to be accountable. While a lot of the information in the Forensic Report points towards malfeasance and abuse of power and public funds, there is need for a meticulous reconciliation of evidence given by the different parties to arrive at a clear conclusion as to what actually happened. Some of the executives who gave evidence to the Forensic Auditors appear to have acted in scandalous ways and may be conflicted and biased. The issue of credibility of witnesses and their evidence is a matter for investigators and the courts to verify using established rules of evidence gathering and assessment. It is also important to note that the Forensic Auditors findings may be challenged by those implicated. (Indeed at the time of writing this paper, challenges have already started coming through). It might turn out that some that are presented as angels or not mentioned at all in the report may also end up in the dock and those alleged to have done wrong may have strong explanations and defences for their conduct. However, that there is potentially criminal conduct in some cases is not in doubt, which is why law enforcement authorities have a duty to carry out further investigations. ZACC must not rush into action. They must be meticulous in their investigation so that they build strong cases. If they rush, given the complexities, there is a risk that all or most cases could crumble before a court of law and those who abused public funds or acted fraudulently could walk free. The Forensic Report has useful data but it is inadequate and needs enhancement for allegations cited in it to stand the test in a court of law. Pentiti (the ones who repented) My view is that if ZACC wants to be more effective where many, if not all, parties appear have dirty hands, it may have to offer immunity deals in return for full and frank testimony from the small fish which secures conviction of the big fish. They will sing for their freedom or leniency, in order to get the big thugs who have stole big from the people. They must take a leaf from the US system where the Securities and Exchange Commission makes deals with a few in order to catch the big culprits. The Italian system is no different, when it deals with members of the notorious Mafia. They identify pentiti (the repentant ones/those who have repented) and give them protection in exchange for testimony against the bigger and more notorious bosses.

From what I have read so far, not many executives and board members at NSSA or elsewhere in the public service have clean hands. But some have stolen small - the so-called lubricant corrupt ones who lubricate the corrupt system for survival and the big criminals who are wealthy but steal out of pure and unbridled greed. ZACC may have to make deals with some of them, the lubricators, offering them deals in return for testimony against the big fish. After reading the report and having previously studied the Auditor General’s reports, I got the sense that many of these individuals should never occupy public office or be placed anywhere near public funds. They are ticks that relentlessly suck blood out of the host. But if ZACC rushes without good evidence, the lawyers will have a field day on ZACC. ZACC might make a lot of noise with arrests, but they will suffer ignominious defats in the courts of law if they don't get cogent testimonies from those who know what really happened.

NSSA's defeat against HCZ is an ominous example. NSSA may have succeeded against MetBank, but the defeat against HCZ is a huge embarrassment. It's not that there is no problem. It is that NSSA was never sufficiently prepared in that case against HCZ. And they fell short. Now NSSA and the public face a $30 million bill to a company that is paid a $16 million deposit but failed to meet its part of the bargain. There can be no greater disaster for a company that is sustained by public contributions. If they had a conscience, they would have tendered their resignations. But they don't. And Zimbabweans let them. .

Part 2 will be presented in due course. WaMagaisa

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