All the fuss over FirstRand
This has been a tough week for the top brass at FirstRand. The company released its results for the full year to 30 June 2007 on Tuesday and despite posting a 26% jump in earnings it appears that investors and analysts were largely unimpressed. Shares in FirstRand dropped sharply as the market digested this negative sentiment.
Although the steep decline in market capitalisation would not have gone unnoticed, FirstRand executives could be excused if their minds were elsewhere. It seems there are bigger problems demanding their attention at present. In a media statement issued late yesterday, FirstRand attempts to shed some light on the allegations currently doing the rounds. They also offered motivations for their Cape Town High Court application to prevent Noseweek from publishing the names of various FirstRand clients.
FirstRand made it quite clear that the court application was not aimed at preventing Noseweek from running its story; but rather at preventing the tabloid from naming certain FirstRand clients. "The group did not go to court today to gag Noseweek we are there on a point of principle to protect our clients' right to privacy and protect them from unfounded defamation."
FAnews Online believes it would be highly irresponsible for Noseweek to publish these names, and even more irresponsible to publish the names selectively. From various reports it appears the names were obtained through legal process which would probably require said list to remain anonymous. We would expect the list to become public knowledge in the event the authorities were to charge or prosecute these individuals.
A case of a disgruntled consultant
The group believes that much of the "selective information making allegations of illegal activities by FirstRand" which is doing the rounds at the moment is aimed at embarrassing and discrediting the group. They are concerned that this information is being disseminated as part of a plot by a disgruntled consultant who is presently engaged in legal action against the group. FirstRand does not mention the consultant in their media release.
A quick look at Noseweek's allegations reveal that Barry Spitz, "a consultant and director of the International Law & Tax Institute (Pty) Ltd, which had been retained by FirstRand Bank Ltd to, inter alia, advise it on matters of compliance," is party to ongoing litigation at the moment. Spitz told Noseweek that "the advice on compliance given to FirstRand by the Institute in connection with the Ansbacher structures, including their so-called 'Duisberg' structure, was strictly in line with what FirstRand had already been informed by the Exchange Control Authorities, and was intended to assist FirstRand in the performance of duties of financial compliance."
Commercial action between the Institute and FirstRand "relates only to the payment of certain commissions owing by FirstRand to the Institute", says Spitz
Possible transgressions going back years
The problem stems from a number of questionable offshore structures created by FirstRand on behalf of wealthy clients in Ansbacher, which FirstRand owned at the time. In their media statement, FirstRand acknowledges that such structures existed, and that they had positive legal opinion for them. Transactions were stopped in March 2000 and further questions were raised in 2003 when the Reserve Bank issued Circular D405. FirstRand "brought this directive to the attention of its clients and advised those who believed themselves to be affected on the unwinding of the structures."
One of the structures was known as the "Duisberg" structure. It comprised a series of offshore trusts and companies to assist wealthy clients in avoiding tax on the income generated from their offshore investments, at the time limited by exchange control regulation to R500, 000. The structure was fairly complicated but from information in various reports we believe it worked something like this:
Initially, South African investors would transfer funds to an Ansbacher trust account in the Channel Islands. The transaction was recorded as an interest free loan. Because this structure attracted donations tax, Ansbacher's lawyers came up with a workaround. Instead of putting money directly into the Ansbacher trust account, wealthy clients bought shares in a specially established offshore company called Duisberg. Duisberg then made interest free loans to the Ansbacher trust, enabling clients to declare no income to SARS on their offshore share investment.
It appears that the Duisberg arrangement existed on paper only and that funds sent offshore never even reached the company. Instead all funds went straight to the Ansbacher trust account in the Channel Islands.
Deserving more than a slap on the wrist
It appears that FirstRand, through Ansbacher, established a number of structures and processed various transactions with the sole intention of facilitating tax avoidance by wealthy clients. Tax avoidance is supposed to be allowable, in that the 'transgressor' merely minimises his tax liability within the boundaries of the law.
It seems, however, that the wealthier one is, the quicker these tax avoidance practices approach full-blown tax evasion. So while we agree that FirstRand's wealthy clients should remain anonymous for now we also believe that South African regulators such as the Financial Services Board should combine with SARS to thoroughly investigate these structures.
Editor's thoughts:
FirstRand believes that this case is being pursued by the media largely at the behest of a disgruntled consultant who hopes to pressure the group into settling a legal claim. They claim that a number of local and international regulatory agencies have knowledge of the scheme, including the UK Financial Services Authority and US Treasury. Do you think these allegations warrant further investigation? Send your comment to [email protected]
