More dirt In MSB deal

Malawi Savings Bank (MSB) management allegedly concealed a loss of around K1.2 billion and understated Mulli Brothers Group loan balance by at least K3.5 billion, documents show.

The alleged double misinformation on the bank’s financial position may have propped-up MSB’s balance sheet and profitability levels, but it has left its buyer FDH Financial Holdings Limited feeling short-changed.

The decisions could also burden the taxpayer with reimbursements to the new shareholder, FDH, which has already written the Malawi Government demanding back most of the roughly K1.2 billion loss, but which MSB chalked as part of its assets.

Since the figure was presented as “other assets”—not losses—it may have falsely raised the value of MSB, especially given that it was only disclosed to the Public-Private Partnership Commission (PPPC), transaction advisers Deloitte and the then preferred bidder FDH Financial Holdings after the sale agreement for MSB was sealed.

MSB’s failure to properly account for the loss also led to overstated profits that resulted in the bank’s employees being paid K56 million in bonuses that may not have been paid had the accounts statements factored in the loss.

According to a forensic audit report by FDH Internal Audit Department dated October 2015, the K1.2 billion loss was only written off in MSB’s financial statements for the year ended December 31 2014, yet it originated in 2012.

According to the FDH report, the non-provision for the loss was first reported by MSB’s Internal Audit Department in an October 2013 report to the Ian Bonongwe-led management, but action was only taken around April 2015.

“After that report [by MSB Internal Audit Department], the standing items were not addressed. The figure was not written off or provided for in the financial statements for the year ended 31 December 2013, which were signed on 27 March 2014. As a result, those profits [K511 million] were overstated and members of staff were paid bonuses based on the overstated profits,” reads the FDH forensic audit report in part.

The report said the MSB board was only made aware of the issue during an extra-ordinary board meeting held on April 10 2015 after external auditors insisted that they would not sign the financial statements for the year ended December 31 2014 if the K1.2 billion was not written off.

When the FDH forensic auditors contacted then MSB chief executive officer Bonongwe, financial controller James Salaka and finance manager Million Hera, they all confirmed that the loss was not written off or provided for.

Bonongwe is quoted in the forensic report as explaining thus: “The observations are correct. The figure arose largely from foreign exchange revaluations of 2010 and 2011 and these figures were not correctly and timely recognised in the financial statements of the bank…

“Based on the information provided in the exhibits, it can be said that management, as led by the team from the Finance Department, had grossly misinterpreted the figures and lived under false hopes for almost three years that the figure was going to be reconciled. It, therefore, turns out that up until the preparation of the 2013 audit, this figure was still wrongly being recognised as a recoverable asset and did not trigger a provision.”

As part of his response, Salaka said management did not write off or make a provision for the loss because they believed they would reconcile and clear it later then reallocate it in appropriate accounts.

On his part, Hera said it was not up to him or Treasury to make or propose for provision of the loss, but rather the financial controller.

Meanwhile, FDH has reported the then MSB external auditor, KPMG, to the Institute of Chartered Accountants (ICAM) for “failing to recognise fictitious assets” in the former State-owned bank’s Treasury, having certified the accounts that listed the K1.2 billion loss as “other assets” instead of recognising it as loss.

ICAM’s Ethics and Investigations Committee, in its September 6 2016 letter to FDH Financial Holdings Limited, acknowledges receipt of the complaint. It also wrote KPMG for their position; a letter the auditing firm acknowledged receiving from ICAM.

FDH has also lodged a complaint against Salaka, who was financial controller of MSB, for failing to recognise the fictitious assets and writing them off or providing for the losses.

But ICAM chief executive officer Evelyn Mwapasa said she was not aware of the FDH complaint.

FDH head of marketing Sobhuza Ngwenya confirmed the MSB cover-ups in an interview last week, saying the matter was only discovered later, after the acquisition was finalised. But he refused to shed more light on the way forward.

Minister of Finance, Economic Planning and Development Goodall Gondwe also confirmed the errors and said the issue was dealt with together with management of FDH.

“Yes, I am aware of all those issues, about how some accountants and auditors at MSB factiously misrepresented losses as profits, I know all that, and the matter was dealt with,”  he said.

The minister he did not respond to several of our calls at the time he said he would provoide more details.

Public Accounts Committee (PAC) of Parliament chairperson Alekeni Menyani said FDH could be using this belated query to force government to pay back the money deemed inflated.

On June 14 2016, Secretary to the Treasury Ronald Mangani seemed to question why FDH is only bringing up the K1.2 billion loss months after the bank was sold.

In response, in a letter dated July 8 2016, FDH chief executive officer Thom Mpinganjira reminded Mangani that the matter was first raised on December 16 2015, but was only responded to on June 14 2016.

“The due diligence was not comprehensive, it was limited. In a normal due diligence, you provide a  list of information that you require, but in the case of MSB, we were only provided with information that management of MSB decided to make available.

“Furthermore, this information was available from the Data Room, which we could only access by appointment and for a specified time and under supervision [watchful eye] of head of MSB audit. Information [relating to the exchange loss], was not available in the Data Room,” Mpinganjira stated.

The Mulli saga

Meanwhile, it has also transpired that MSB management understated to government Mulli Brothers Group’s outstanding loans with the bank by at least K3.5 billion.

FDH review of the statement for Mulli Brothers’ loan account shows that as at March 31 2015, the loan balance was around K8.5 billion.

But in his April 15 2015 letter to Treasury, MSB chief executive officer Bonongwe only stated that of the bank’s K6 billion toxic assets, around K5 billion was for Mulli Brothers, leaving out the K3.5 billion.

In his response to the forensic auditors, Bonongwe said the discrepancy between the said value of the toxic assets and the loan account balance was due to how the definition of toxic assets was coined and applied to represent the portion of the loan deemed “uncollectable” on account of under securitisation; hence, the roughly K5 billion represented the unsecured portion of the loan that was why it was the only part that was reported to Treasury.

Government issued promissory notes for the K6 billion toxic assets to prop-up MSB’s balance sheet—effectively forcing the taxpayers to repay loans obtained by private sector players.

Although government set up a Special Purpose Vehicle to recover the money, the entity has not made any tangible progress due to red tape in rolling out.

The under-declaration of what Mulli owed MSB, says FDH in its forensic audit report, means that the new owners may end up losing the K3.5 billion that Mulli still owes, but which was not covered under the government toxic asset bailout and does not fit into the terms of reference for the Special Purpose Vehicle to help FDH recover the money.

Meanwhile, MSB has terminated contracts of three senior officers for their alleged role on the issue. The three include head of credit at MSB George Sibale, financial controller Salaka and finance manager Hera.

The trio has since sued MSB—with the matter initially pursued in the High Court, which then pushed the case to the Industrial Relations Court. n