South Africa: the looting of VBS – the true face of ‘radical economic transformation’

A forensic report by investigators appointed by the South African Reserve Bank into the collapse of the Limpopo-based VBS Bank has confirmed “one of the biggest bank frauds that we’ve seen in South Africa”. Over a period of three years, nearly 2 billion rand of poor people’s money was stolen. The report has identified at least 53 individuals who, through various schemes, benefited from a combined 1.89 billion rand between 2015 and 2018.

The beneficiaries of this looting frenzy read like a laundry list of the new black elite. They include bankers, lawyers, the Venda king, auditors, asset managers, officials from state-owned companies, municipal officials and even trade unionists. And of course, there are the politicians, including officials from both the ANC and the EFF, who are supposed to be political enemies! The victims, as always, are the working class and the poorest people.

In the feeding frenzy, the bank was stripped to its bones. These “comrades” bought themselves luxury German vehicles, Italian sports cars and seaside apartments; they built themselves mansions complete with helipads; and wined and dined their girlfriends in exotic international holiday resorts. This scandal confirms what Marxists have been saying all along: that greed and corruption are inherent in the capitalist system. It doesn’t matter which political party you are from: if you accept the capitalist system and manoeuvre withinit, then you must accept the laws of the system – and its consequences. And in the process, it is always the poor who suffer and the working class who pay the highest price.

Fertile ground

VBS Mutual Bank was a little-known, regional bank in the Limpopo province. It was established in 1982, when black South Africans had little or no access to the big financial market. Unlike commercial banks, mutual banks are much smaller and do not offer the full range of banking services. The biggest difference between commercial banks and mutual banks is that depositors in the latter become shareholders, with voting rights during annual general meetings. It therefore has a direct and devastating impact on the poor if the bank collapses.

VBS became nationally known when it granted former president Jacob Zuma a home loan in 2016 of more than 8 million rand to pay back money that was spent previously on “upgrades” to his private home / Image: Wikimedia Commons

VBS became nationally known when it granted former president Jacob Zuma a home loan in 2016 of more than 8 million rand to pay back money that was spent previously on “upgrades” to his private home in Nkandla. This was after he lost this case in the constitutional court after the public protector found that he benefited “unduly” by using taxpayers’ money for the house. At that time, Zuma and the Gupta family were in the middle of a war with the country’s biggest banks. The banks closed down all the accounts of the Guptas, allegedly to combat money laundering and fraud. This might have been so, but as we pointed out at the time, this was actually a political fight between two rival wings of the ruling class over control of the ANC and the state.

The Zuma wing of the ANC launched a major counter-offensive against “white banks” and “white monopoly capital”. At the time we wrote an article, which explains that Zuma’s “radical economic transformation” was actually an attempt to benefit a layer of the upstart black capitalist class. In this outright looting spree it was always going to be the black working class and poor black people in the towns and villages who would suffer the most. This was strikingly and painfully confirmed in this instance, with frail elderly people from the villages queuing outside the banks in an attempts to salvage their meagre savings.

Feeding frenzy

Against this political background, the single biggest bank heist in the country’s history was taking place. At the same time that Zuma received the loan from VBS, he was preparing to award Toni Mphephu Ramabulana with a certificate recognising him as the next king of the VhaVenda nation and supported his coronation, despite a succession feud in the royal family, which was playing out in court. In the end, Zuma received the loan and, as it turned out, the forensic report says that the new VhaVenda King received 17.7 million rand through his lawyer – from VBS bank.

The scale of the fraud is enormous and looting was extraordinarily in its brazenness. Most of that money went to the VBS directors and companies, or entities linked to them. The biggest was Vele Investments, whose directors had links to the VhaVenda king. The report says:

“The investigation has revealed a wide range of criminality in the conduct of the affairs of VBS. That is also in regard to Vele. Indeed, it emerges very clearly that VBS and Vele have been operated as a single criminal enterprise, with (chairman Tshifhiwa) Matodzi firmly at the helm. It is imperative that those who have been identified as participating and benefiting from this criminal enterprise be charged and prosecuted.”

These banking executives defrauded depositors by fabricating accounts, creating fictitious deposits, bribing officials at other organisations, transferring funds to themselves and buying bank assets that weren’t recorded. Soon, things started to esculate very quickly. In order to cover the money that flowed out of the bank, they soon needed to pay back deposits, so the fraudsters had to get more deposits to come in. In this way, a giant ponzi scheme soon emerged.

Ponzi scheme

It soon became clear that small deposits were not going to cover the gaping hole in the bank’s finances. What they needed were large injections of cash. VBS, which was historically a small lender and a depositor for retailers and burial societies, embarked on an extraordinary campaign to attract substantial deposits from bigger entities, starting with municipalities. (Incidentally, this is against the law. But as everyone knows, bankers are above the law.) Later, it set its sights on the Passenger Rail Agency of South Africa (PRASA) which operates the world’s sixth-largest rail network. It devised a scheme to do this through a proposed system of paying "commissions", i.e, bribes. It also targeted bigger state entities, including Transnet: the giant, state-owned, freight logistics company; and even SAA, the national carrier!

VBS needed large injections of cash to cover its fraudulent transactions. It even set its sights on deposits from the Passenger Rail Agency of South Africa (PRASA) / Image: Flickr, GovernmentZA

But to achieve this, VBS needed serious political backing. This is where the politicians came in. Zuma opened the door and the rest came pouring in. A system of payments was devised to bribe public officials, which were in a position to influence the making of such deposits, as the report says:

"Payment of very large sums of money was made to the various perpetrators of the scheme of looting as a reward for their participation, and substantial bribes were paid to certain of VBS’ directors and other related parties in order to buy their silence and to look the other way while the looting was going on."

The whole bank was soon consumed by corruption, as the report says:

“It is corrupt to the core. Indeed, there is hardly a person in its employ in any position of authority who is not, in some way or another, complicit”.

Political connections

The political connections soon began to pay off. VBS received deposits of more than 3 billion rand from various municipalities in Limpopo province. Danny Msiza, who is the provincial treasurer of the ANC in Limpopo, is described as a “kingpin” in a scheme to connect municipalities to VBS. Soon, the money from the municipalities came pouring in. The bank’s financial report for 2017 revealed enormous growth in total assets, which almost trebled from just 337 million in 2015, to 1 billion in 2016; and then doubled again to 2 billion in 2017. But then things suddenly began to unravel. In March this year, the Reserve Bank placed the bank under curatorship, after it experienced a sharp and severe liquidity crisis. The trigger was its inability to repay deposits to municipalities. In total, this amounted to 1.6 billIon. The Reserve Bank then ordered a forensic investigation into the bank.

The forensic report reveals the extent of the fraud and all the people involved in the looting of the bank. It states that the bank had been engaging in fraudulent transactions that benefited certain key individuals and companies connected to the bank and arranging loans to its own directors and shareholders, which were covered with fraudulent transactions.

The looting left a trail of destruction and, as always, the victims were the workers and poor. Seven ANC-run municipalities in Limpopo, one of the poorest provinces, have lost at least 1.5 billion rand and are now facing insolvency. These poor municipalities now face new budget cuts, which means even more cuts to basic services like schools, health, houses, and sanitation.

VBS never managed to get the deposits from PRASA, but the investigation has found that the directors had attempted to solicit 1 billion rand from PRASA in late 2017 in the hope of keeping the bank solvent. But in order to achieve this, a bribe of 1.5 million rand was paid to a group of trade union officials from the South African Transport and Allied Workers Union (SATAWU), who claimed to be able to facilitate such a large deposit from PRASA. VBS paid the money to the SATAWU officials, through a front, in anticipation of the deposit being made.

The report also implicates Dan Matjila, the CEO of the Public Investment Corporation (PIC), who may have received 5 million rand in cash from the VBS. The PIC is the country’s biggest asset manager and is responsible for managing the pensions of more than 1.3 million public sector workers. This is a clear reason why the pensions of the workers should be managed under their own control.

The report also implicates auditing giant KPMG. This is the same firm that audited the Gupta-linked Linkway Trading, which facilitated the 30m of public money of the Free State government, which was diverted to pay for the infamous Gupta wedding at Sun City in 2013.

These revelations are particularly damaging to the EFF, who have been implicated in the scandal: evidence of their opportunist and rightward drift / Image: GovernmentZA

The corruption of ANC leaders are well known. But these revelations are particularly damaging to the EFF, which exposed the corruption of former president Jacob Zuma during the Nkandla scandal. The report implicates Brian Shivambu, younger brother of EFF deputy president, Floyd Shivambu, of receiving 16 million rand from this looting scam. Allegedly, 10 million of this then found its way into the account of Floyd and a further 1.3 million into the account of the EFF itself.

All of this is, of course, subject to the criminal investigation that is currently underway. But what is not in doubt is how the EFF has opened itself up politically to these events. During this whole saga, the EFF leaders have been the most vociferous defenders of the VBS bankers. “We can't have the black-owned bank attacked and we fold our arms. We must defend VBS Bank”, EFF leader Julius Malema tweeted in March when VBS started to have liquidity problems and was put under curatorship.

Even then, it revealed the opportunist direction in which the EFF leadership had been moving. This has been the case ever since Jacob Zuma was removed as president in February. Since then, the party had moved substantially to the right. The fact that it defends the bank on the basis that it is black owned is a striking confirmation of this. It is also inconsistent with the party’s radical-sounding programme, which calls for the nationalisation of the banks.

The truth is that the EFF leaders have been consistently moving to the right over the last period. This was in contrast to the first three years of the party’s existence, when it more or less put forward a left-wing stance on the core issues facing South African society, like housing, healthcare, the unemployment crisis and corruption. The fact Malema and company now share a stage with the ultra-reactionary Black First Land First (BLF) is a further indication of this rightward drift.

Fight for socialism, not black capitalism

The origins of this scandal are rooted in the attempt to manage capitalism and create a so-called black bourgeoisie, which is supposed to be more ‘progressive’ than its white counterpart. These events exposed this lie. There is no such thing as a progressive bourgeoisie. Corruption is inherent in a system of private ownership and mutual competition between capitalists for markets.

In South Africa, there is peculiar variety of corruption, which has its origin after the 1994 negotiated settlement. The revolutionary movements of the 1980s and 1990s did not lead to the overthrow of capitalism. Under the theoretical justification of launching a “National Democratic Revolution’’, which meant postponing the fight for socialism to a distant future, the liberation movement led by the ANC set itself the task of creating a so-called “de-racialised’’ capitalism.

Through mechanisms like the Black Economic Empowerment (BEE) programme, the government set itself the task of creating a black bourgeoisie (nowadays this is called creating Black Industrialists). The problem was that the weak, black bourgeoisie would now have to compete in an economy whose most important and profitable industries were already concentrated in the hands of the established big bourgeoisie. The only avenue opened to it was to use its close proximity to high political office and the state as a primary source of plunder through the tender system.

This tender system has now grown into a monstrous source of corruption. It has built a whole parasitic layer of crude “businessmen’’ with direct ties to government officials, state functionaries and politicians. In the South African lexicon, this parasitic layer is called “tenderpreneurs” or the “predatory elite’’. This is a completely reactionary phenomenon. This new layer of so-called “black bourgeois’’ derives its income completely from state tenders through corruption. It does not play any progressive role. Through a combination of its own repugnant nature and the organic crisis of capitalism, it does not (and cannot) reinvest the proceeds of its profits back into the economy to develop the means of production, which is the historic justification for the existence of the bourgeoisie. Its only function is syphon off the state and loot its resources.

The new layer of so-called “black bourgeois’’ does not play any progressive role. The South African revolution must expropriate all the capitalists, white and black! / Image: Flickr, GovernmentZA

For this “predatory elite’’, access to state resources is paramount. Therefore it must do everything to gain access to political office. Parallel with this, another process unfolded involving the even-more-corrupt traditional big bourgeoisie. The formal overthrow of Apartheid brought it face to face with the very real possibility of being overthrown by the militant South African working class. Having to concede democratic rights to the black majority or face being expropriated, the ‘old guard’ of the ruling class faced the dilemma of how best to rule society. The massive growth of the proletariat meant that the balance of class forces has favoured the working class.

This meant that the forces of the ruling class were too weak and too small to govern the country directly. The ruling class was forced to rule society for the last two decades through the leaders of the ANC. The ruling bourgeoisie used all legal and illegal mechanisms of corruption including bribery, BEE deals, and the creation of a revolving door between business and government in order to chain the ANC leaders to itself. When this has reached its limits, sections of the upstarts were prepared to plunder smaller, black capitalists such as VBS.

The task of the South African revolution is the expropriation of the entire bourgeoisie, not to create black capitalists. Its only salvation lies in fighting both of these wings and to expropriate all capitalists: black and white! The problems of housing, water, unemployment, inequality and hunger can begin to be solved only when the capitalists are overthrown. Only by taking over the means of production would it be possible to use them for the benefit of all, not just for a few capitalist fat cats.