FSCA issues and withdraws warning on Ovex crypto exchange

Written by Ciaran Ryan. Posted in Journalism

All in the space of hours. From Moneyweb.

Image: Supplied

The Financial Sector Conduct Authority (FSCA) issued and withdrew a warning on crypto arbitrage company Ovex – all in the space of hours on Thursday.

The original warning issued early on Thursday claimed Ovex was conducting unregistered business and providing advisory and intermediary services without the necessary authorisation.

Ovex offers a crypto arbitrage service where clients are able to exploit price differences in crypto assets between local and overseas exchanges.

By lunchtime the FSCA had withdrawn the warning, saying that Ovex is in correspondence with the regulator “because it believes that its business model does not require it to obtain a financial services provider licence, as it does not conduct financial services. The FSCA is currently investigating these matters and therefore withdraws the previous media release until such time as the investigation is completed. The FSCA will in due course update the public on the outcome of the investigation.”

Moneyweb contacted the FSCA’s head of enforcement, Brandon Topham, for clarification on the warning, and its subsequent withdrawal. “We are not saying they’re operating unlawfully, but we are urging caution when dealing with Ovex as they are making claims of returns. Whether they need to be registered (as a financial services provider) or not, we are not 100% sure as yet. We have asked for more information, and we may amend or retract the warning as we have more information.”

That was in the morning, and the FSCA did indeed amend its statement by lunchtime.

Topham confirmed that the FSCA might have jumped the gun in issuing a public warning without giving Ovex time to respond to its request for documents.

Ovadia says the warning was damaging to its business and issued without giving the company time to respond to questions sent earlier in the week.

“We’ve been in contact with the FSCA who have asked about our advertising activity. They sent a list of questions. Our contact at the FSCA did not even know about the FSCA warning. It seems [as if] there may have been panic, and the announcement was made without proper process. Ovex always acts in a 100% compliant, legal, and ethical manner, seeking legal and compliance advice with every action. We have halted our advertising campaign until this issue is resolved, which we expect to be this week. Once resolved, we expect the FSCA to issue a full retraction, as this is extremely damaging to one of South Africa’s fastest-growing companies.”

Read the FSCA caution here.

Read the FSCA notice here.

Imagina FX founder Craig Massyn defends sequestration attempt

Written by Ciaran Ryan. Posted in Journalism

But offers no clue what happened to the estimated R2bn invested in Imagina FX. From Moneyweb.

Liquidators found there was only around R21 000 left in the bank account. Image: Shutterstock
Liquidators found there was only around R21 000 left in the bank account. Image: Shutterstock

The liquidators of Imagina FX, the failed investment company that was placed in final liquidation in November 2020, have trained their sights on the founder and chief operator, Craig Massyn.

Application has been made in the Cape High Court for the sequestration of Massyn and his wife Mara-Lee based on two claims of R9.1 million and R5.7 million owing to two companies formerly under his control: Imagina FX and Octox.

The liquidators claim that the Massyns are insolvent and are unable to pay their debts. Massyn is opposing the application, claiming it is an abuse of the court process, and that he is not insolvent, but his court filings offer no indication as to what happened to the estimated R2 billion the liquidators claim is owed to investors.

Moneyweb previously reported on the failed investment scheme, which traded under a variety of names, including Imagina FX, Praesidium and Octox.

Read: Two forex trading companies go belly-up, owing investors upwards of R1bn

According to the liquidators, the companies managed to attract more than R2 billion from investors by apparently showing annual returns of 43.5% and even as high as 74.3% in one year.

All this was nothing more than a Ponzi scheme, say the liquidators, with newer investors’ funds being used to pay older ones.

Things started unravelling last year when Covid hit

The company blamed this ‘black swan’ event for a 40% drawdown in funds under management. Just a few weeks after the ‘black swan’ announcement, things seemed to be back on track. On May 26 2020 investors were informed that the returns for that month would be about 1.5%. This was false, say the liquidators.

Several investors became nervous and started asking for their money back. Their requests for withdrawal were met with a string of messages explaining technical and regulatory hurdles that had to be crossed before money could be released.

In a letter to creditors on March 9 this year, Imagina FX joint liquidator Christian Bester advised that many investors were paying funds into the FNB banking account of Octox, believing this was the banking account of Imagina FX.

“During our investigations it was discovered that amounts totalling R1.5 billion were deposited into the banking account of Octox (Pty) limited. An application was launched for the provisional liquidation of Octox and was granted on 9 December 2020, with final liquidation being granted in the Western Cape High Court on 22 January 2021.”

Sequestration request

The liquidators of Imagina FX and Octox are now asking the high court to sequestrate the Massyns and to hold them personally responsible for the debts and liabilities of both Imagina FX and Octox in terms of Section 424 of the 1973 Companies Act.

On October 27 last year the liquidators were granted an Anton Piller order to search (without warning) the business and residences of directors of the company for information as to the whereabouts of the missing money.

Massyn claimed the Anton Piller order was unlawfully executed, and brought a case seeking to overturn this on 25 February 2021. The court rejected Massyn’s application, and he is now appealing this.

Of the R1.5bn paid into the Octox bank account, only R21k was left

According to the liquidator’s court filings, from July 2014 to October 2020 about R1.5 billion was paid into the FNB account of Octox. By October 2020 there was only about R21 000 left in the account. In all, more than R2 billion was received into the bank accounts of both Imagina and Octox.

Where did all this money go?

Massyn’s replying affidavit in the sequestration case provides almost no clues whatsoever. Last year, the Financial Sector Conduct Authority (FSCA) warned investors that most of their funds are probably lost, and this seems to have been confirmed by later statements from Massyn himself and Primus Markets International, a foreign platform used by Massyn for forex trading.

Though Antoine Papayya was registered as the sole director of Octox, Massyn was the only person with control over its bank account. He obtained sole authority to transact on the Octox bank account by fraudulently representing to FNB that he was a director of the company, when he was not, according to (joint liquidator) Bester’s affidavit.

Neither Imagina FX nor Octox were registered as a financial institutional, bank, deposit-taking institution or financial services provider, nor did they comply with the Collective Investment Schemes Control Act.

Nor were financial statements compiled as required by the Companies Act.

‘Completely uncooperative’

“Massyn has been completely uncooperative in the winding up of the affairs of Imagina FX,” deposed Bester.

“He has also given contradictory accounts on whether there are any funds left, and where the money may be.”

Investors were enticed by the promise of returns of 39-42% a year, and it seems this is how it was able to pay out older investors. Substantial commissions were also paid to those introducing new investors.

In addition to having control of the company bank accounts, Massyn is claimed to have misappropriated large sums for his own benefit, according to Bester’s affidavit.

On one occasion he paid R2.4 million to Papayya “ostensibly for Papayya to turn a blind eye to the abuse of Octox’s bank account”.

Despite apparently roasting the rest of the market with returns of 39-42% over the previous five years, Covid arrived and was a “black swan” event that caused as 40.3% drawdown by May 5, 2020.

But things were back on track within weeks. On May 26, 2020 investors were informed that the returns for that month would be about 1.5%. This was false, says Bester.

Forex trading freeze

On July 17, 2020, Enderstein & Van Der Merwe (EDVM), the attorneys for Massyn and Imagina, wrote a letter to Praesidium that the total funds held by Primus, the Cyprus-based forex trading broker used by Massyn, was about $42 million.

By July 2020, Primus attorney Chrysses Demetriades informed Imagina’s attorneys that a freeze had been placed on all trading accounts as “there is strong evidence to suggest that your client had been providing false information to their respective clients to the level of their investments”.

Massyn later confirmed in an email to his attorneys that “the majority of the funds are gone”.

When a reconciliation was done by Primus, it turns out there was less than €120 000 as of July 2020.

“It appears that not only did Massyn falsify the account balances, but he also managed to rearrange the account names and numbers,” says Bester. “Massyn has clearly manipulated the balances in the account statements. It follows that he did so to deceive the FSCA, and to defraud investors.”

Massyn’s modus operandi

Massyn appears to have had five categories of investors, each of which would receive a different percentage returns on their investments. Investors did not hold segregated accounts, as promised by the company, but were pooled, with Massyn allocating percentage returns to each group. According to Bester’s affidavit, fellow Imagina director Carl Japhtes never saw documentary evidence of actual trading results.

“The inescapable conclusion to be drawn from the facts and documentation obtained by the applicants thus far, is that the investment scheme created and operated by Imagina FX, and more specifically by Massyn, is nothing more than an unlawful and fraudulent Ponzi type scheme, that Massyn knew that Imagina FX would never be able to honour the returns promised to the clients/investors, that the entire scheme would inevitably collapse [as it eventually did] and that the many clients/investors would suffer huge losses.”

An amount of R6.67 million was paid in 14 transactions from Imagina to the Luno accounts of Massyn and one Ricky Lee-Ann Vosloo, of which R4.17 million was transferred into Massyn’s Luno account. Massyn bought and sold bitcoin via his personal Luno account, and withdrew funds from the account which were subsequently paid into his personal bank account. He never paid any monies into Imagina’s bank account.

Japhtes also received R4.86 million from Imagina into his personal Luno account and then purchased bitcoin which he transferred to Massyn’s wallet.

So far claims worth R94.6 million from 85 claimants have been received, though this is certain to increase, as it is known that the total liabilities of Imagina and Octox exceed R1.5 billion.

Massyn responded in his court filings that the liquidators are abusing the court process in trying to bring a sequestration application against him, and that he is already engaged in extensive litigation related to the liquidation of the companies of which he was involved.

Bester responds that Massyn failed to testify at the Section 417/418 enquiries and brought several applications to postpone proceedings, set aside subpoenas, or to suspend proceedings pending applications to be placed before the court.

“The applications brought by Massyn have one object in mind: to avoid being held accountable.”

The sequestration application will be heard in court next week.

Mining prospecting rights being ‘sterilised’ by bureaucratic delays

Written by Ciaran Ryan. Posted in Journalism

Hundreds tied up in bottlenecked licensing system that is long overdue for replacement. From Moneyweb.

The Minerals Council says up to R20bn in potential investments is being tied up due to regulatory hurdles. Image: Shutterstock
The Minerals Council says up to R20bn in potential investments is being tied up due to regulatory hurdles. Image: Shutterstock

In response to a recent parliamentary question by the DA’s James Lorimer, Mineral Resources and Energy Minister Gwede Mantashe revealed how bureaucratic delays are choking the issue of mine prospecting licences.

Lorimer asked how many prospecting right renewal applications were sterilised and therefore unavailable to other applicants while awaiting bureaucratic processing.

Lorimer wanted to know how many licences had “not yet been processed, returned, granted, refused” within (a) 60 days of receipt of the application, (b) 12 months and (c) three years.

Mantashe’s reply: 19, 84 and 236 respectively.

What’s alarming about this answer is the number of prospecting rights tied up for three years or more – 236.

“They [the prospecting rights] absolutely are being sterilised,” says Lorimer.

“The reply is typically contemptuous. It actually admits rights are sterilised while saying they are not.”

He adds: “As usual – this is bad policy, badly implemented.”

Broken system

Peter Leon, global co-chair for Africa at Herbert Smith Freehills, concurs: “This shows how broken the licensing system is and where mandatory time limits are necessary. It is a problem because [correctly] a prospecting right gives the holder the exclusive right to apply for a mining right as well as a priority right on renewal. This follows international best practice on security of tenure.

“The problem is that if the Department of Mineral Resources and Energy [DMRE] does not process renewal applications in a timely manner, this effectively sterilises the right as no one can else can apply for a prospecting right.”

This is no small matter, with the Minerals Council saying that up to R20 billion in potential investments is being tied up due to regulatory hurdles, which has strangled SA’s mine exploration over the last decade.

Read:Namibia scraps black ownership rules for mining exploration licences (Oct 2018)

Africa’s pandemic-hit mining sector faces exploration challenge (Feb 2)

Mantashe wants to increase the country’s share of global exploration expenditure to at least 3% in the next five years, but this will require some urgent reform, says Herbert Smith Freehills in a recent note.

Specifically, the DMRE will have to address weaknesses in the SA Mineral Resources Administration (Samrad) system, an online database used to manage mining permits and rights.

The Minerals Council offered to pay part of the cost of replacing the Samrad system.

Credibility issue

Says Leon: “For years the DMRE’s credibility has suffered. Key factors include permitting backlogs caused by the ineffective Samrad system, management issues, as well as maladministration in some of the DMRE’s regional offices.

“In addition, delays relating to applications for the transfer of rights [also submitted through Samrad] have resulted in delays of up to six to 18 months, further affecting investment into the sector.

“The opaqueness of the current Samrad system has discouraged exploration by junior miners and hindered investors and interested and affected parties from obtaining critical information from the DMRE.”

Some 60% of African countries make use of management software to automate mineral title workflows, improve compliance and expedite the overall mineral right application process.

Read: Mining exploration finally gets some love from regulators (Oct 2020)

Establishing and operating an open online electronic mining cadastral (land mapping) system is an important means of regaining investor confidence.

“As these systems reduce human inputs by incorporating automated processes, they significantly enhance the reliability as well as the transparency of the mineral regulatory system itself,” adds Herbert Smith Freehills.

The DMRE’s hand may be forced in part by a recent court decision (Baleni and Others v Regional Manager Eastern Cape Department of Mineral Resources and Others) that requires interested and affected parties to receive copies of mining right applications. Prior to this, interested and affected parties had to make use of the cumbersome mechanisms of the Promotion of Access to Information Act to access the information.

Leaders meet to thrash out security deal after Total declares force majeure in Mozambique

Written by Ciaran Ryan. Posted in Journalism

Terror attacks in April left dozens dead around one of the world’s largest natural gas projects. From Moneyweb.

A Dyck Advisory Group helicopter pictured landing in Palma in March. Image: Dyck Advisory Group handout via Reuters
A Dyck Advisory Group helicopter pictured landing in Palma in March. Image: Dyck Advisory Group handout via Reuters

Business and political leaders flocked to Maputo last week to thrash out a security deal that would allow workers to return safely to the Rovuma gasfields off the northern coast of Mozambique after terror attacks brought all development to a sudden halt in March.

French energy giant Total suspended works on its natural gas project in Cabo Delgado, the country’s northernmost province, when Islamic State-backed terrorists overran the town of Palma on March 24, leaving dozens dead and forcing hundreds of thousands more to flee the area.

Now it has declared force majeure and pulled its staff from the area, with thousands of contractors linked to the project returning home awaiting new of further developments.

Read:Total Mozambique LNG completes nearly $16bn financing (Jul 2020)

Dozens dead in attack on Mozambique town near total LNG project (Mar 29)
Total declares force majeure on Mozambique LNG project (Apr 26)

A group known as al Shabaab, with most of its leadership reportedly originating in Tanzania, has been able to capitalise on the local population’s feeling of exclusion and resentment over allegations of state violence.

Motive – and opportunity

According to this report, material rather than religious motivations are behind the group’s recruitment drive in the area.

This was one of the issues addressed by political and industry leaders in Maputo last week.

“Cabo Delgado is the site of one of the richest natural gas deposits in the world and it is essential we get this project re-started as soon as possible,” says NJ Ayuk, executive chair of the African Energy Chamber.

“SA has a huge interest in this project, not just because of the number of local contractors and professionals working on the project, but because of its importance to our future energy mix.

“We discussed how to get more local involvement in the project,” says Ayuk.

“This is one of the greatest poverty alleviation projects currently underway in Africa, and you cannot leave the local community out of it. This creates a fertile breeding for terrorism.”

Also discussed was the need for a cordon sanitaire around the town of Palma and its surrounds that will prevent a repeat of the March 24 attacks. It is reckoned this will need a multinational force of 2 900, backed by helicopter support and rapid intervention teams. It remains unclear who would supply the manpower and material for this operation, though regional leaders have said this must be addressed with conviction and immediacy to prevent terrorism gaining any further advances in the region.

It has also emerged that the Mozambican government cancelled the contract with SA company Dyck Advisory Group, which provided combat helicopter support to the Mozambican army.

This reportedly created opportunities for al Shabaab to move relatively unhindered in the area.

“The area has already been cleared from a military point of view. What is now required is for business and the Mozambican government to come together and ensure this kind of incident never happens again.”

Declaration ‘premature’

The Africa Energy Chamber laments Total’s “premature” declaration of force majeure, which is a legal instrument that allows it to suspend performance of contractual obligations. Total and its contractors have pulled staff from the area, with many now wondering when it will be safe to return.

Ayuk says it may take several months to get a satisfactory security deal in place to allow work to recommence on the project, which has so far achieved investment commitments of $60 billion.

He points out that Total is not unaccustomed to operating in high-risk areas where terrorism is a threat.

The company has energy projects in Nigeria, Libya, Pakistan and Iraq, countries that rank higher than Mozambique in the 2020 Global Terrorism Index.

“We are looking forward to Total taking the same stance in Mozambique as it has done in these countries more impacted by terrorism, and together with the government and other parties involved, find a solution to safely continue with its LNG Project,” says the Africa Energy Chamber in a statement.

“When energy multinationals made a decision to halt natural gas development projects in Myanmar and some declared force majeure, Total remained, and made a clear argument that the public stands to lose from electricity shortages. The field supplied about half of Myanmar’s natural gas used for power generation.”

The Chamber says Mozambique is one of the most attractive options to produce gas in the world due to its carbon neutrality, representing a viable solution for climate change.

“The energy industry continues to grapple with multiple insecurity issues, community engagement, climate change, energy poverty, greater cooperation between stakeholders is required to find beneficial solutions.”

The liquidation of iCE3 is a watershed moment for SA’s crypto industry

Written by Ciaran Ryan. Posted in Journalism

A legal battle is likely developing over who owns the crypto assets in the exchange – iCE3 or the account holders? From Moneyweb.

This case shows that crypto investors must control both the public and private keys to their wallet, and not just hope the exchange will honour its terms of service. Image: Shutterstock
This case shows that crypto investors must control both the public and private keys to their wallet, and not just hope the exchange will honour its terms of service. Image: Shutterstock

When SA crypto exchange iCE3 shut down trading in March due to “account discrepancies” and a few weeks later announced it had initiated liquidation proceedings, account holders were understandably concerned that a “friendly” liquidator would try to grab their crypto assets and count these as part of the exchange’s assets.

Read:Crypto exchange iCE3x suspends trading after discovering account discrepancies (Mar 18)

Crypto exchange iCE3 to be liquidated, suspends all withdrawals (Apr 8)

Social media chatter is alive with concerns that liquidators in the iCE3 matter will attempt to gorge themselves on assets that don’t belong to the estate – and commentators on the iCE3 Concerned Telegram Group have pointed to more than a few examples of where this has happened in the past. They are keeping a hawk eye on who gets appointed liquidator of iCE3.

Some iCE3 clients are preparing a potential legal challenge should the court-appointed liquidator attempt to claim their crypto as assets belonging to the exchange.

Legal precedent

They point to a New Zealand court precedent involving crypto exchange Cryptopia, which had more than 900 000 account holders and NZ$170 million (R1.76 billion) in crypto assets at the time of liquidation.

The exchange was hacked in January 2019 and somewhere between 9% and 14% of its cryptocurrency was stolen, equivalent to about NZ$30 million (R311 million).

The New Zealand court was asked by the liquidators to assess the legal nature of the digital assets in the Cryptopia case, and to determine whether digital assets held on the exchange were “property” and whether they were being held in trust for clients. And, if the digital assets are held on trust, was there a separate trust for each account holder or one trust for the benefit of all account holders?

Based on the evidence before it, the court found that all cryptocurrency holdings were held on trust by Cryptopia, meaning these assets could not be counted as part of the property of the liquidated estate.

Account holders in iCE3 are gearing up to make the same arguments before the SA courts, should the court-appointed liquidator try to grab their cryptocurrencies for the account of iCE3.

MTI

This is different to Mirror Trading International (MTI), now in provisional liquidation, which was ranked the world’s biggest investment scam of 2020 by Chainalysis.

MTI was a multi-level marketing scheme that roped in bitcoin from tens of thousands of people around the world with promises of returns of up to 10% a month. The Financial Sector Conduct Authority (FSCA) issued warnings on MTI in August last year and urged investors to demand their money back, arguing that the scheme was basing its promises of 10% returns on a computerised algorithm that was claimed to have lost only one day out of 200. When the FSCA investigated, it found no evidence of his algorithm, and declared MTI to be a scam.

In the MTI case, the liquidators recently recovered R1.1 billion in bitcoin and sold this through the Luno exchange.

Why liquidators would have to power to sell digital assets in the MTI case, and not in the cases of Cryptopia and iCE3, is because both these exchanges include terms of service that spell out the nature of the relationship: the digital assets are held in trust on behalf of the client.

In the case of MTI, there are no similar terms of service on which investors can rely.

In New Zealand’s Cryptopia case, the court found that account holders were the owners of their cryptocurrencies, and it was never envisaged that ownership would transfer to the exchange in the event that it went into liquidation.

All the terms and conditions on the Cryptopia website indicated that account holders were the beneficial owners of their cryptocurrencies: “Our mission is to enable the widespread adoption of digital currencies to give people control back of their money through faster, cheaper, and more efficient financial services.”

iCE3’s terms of service

Though iCE3’s terms of service are no longer shown on its website, the Waybackmachine was able to recover this: “All Deposited Currency credited to User’s Account will be maintained in trust in a bank account with a reputable deposit-taking institution under the Company’s name or in the name of a custodian appointed by the Company.”

This is an explicit admission that the exchange is holding clients’ assets on trust, and that these do not therefore form part of the estate of iCE3 in the event of liquidation.

The terms of service is a legal contractual obligation, which is exactly what was determined by the New Zealand court.

There is a provision in the SA Insolvency Act that an insolvent cannot prefer one creditor above another. The implication is that if the clients of iCE3 are creditors of iCE3, then all payments made six months prior to the liquidation must be recovered by the liquidator. This will lead to absurd consequences, hence the need for legal clarity on crypto exchanges and their relationship to clients.

Oddities in the Cryptopia case

There were some oddities about the Cryptopia case highlighted by the New Zealand court: those holding Ethereum lost 100% of their holdings in the hack. “Thus, if the digital assets were divided by currency and in proportion to an accountholder’s holding of each currency, those holders would receive nothing,” reads the New Zealand court judgment.

The court also considered whether the remaining digital assets on the exchange, amounting to some NZ$ 217 million (R2.25 billion), were to be made available to account holders and creditors on an equal basis – in which case each creditor would receive over 85% of their total claims, as against less than 50% if these digital assets were deemed to be held on trust.

In the event that stolen digital assets are recovered, the New Zealand court found that they were to be distributed pro rata to account holders “for the digital asset concerned according to the amounts recovered assessed against the amounts stolen”.

Says iCE3 client JJ van Vlees: “It remains important that one person or a group of assets holders should initiate action in order to gain control/delivery of their assets. This will force the liquidator to oppose the applications and hopefully, this will then play out in the courts and in this manner, all the traders are protected under the outcome of that court case. I will financially contribute towards the legal fees, even more than the value of my holdings on iCE3. This is a pivotal point for digital assets in South Africa and we must get a correct court decision now to establish or confirm the nature of a digital asset and also the relationship between the exchange and the trader on an exchange.”

Pointers for the regulators

As SA readies itself for crypto regulations in the coming months, ownership of exchange assets by account holders – which is governed by common law and is usually spelt out in each exchange’s terms of service – may require some legislative attention from the Consumer Protection Council and the Department of Trade and Industry.

It would be naïve to think hacks and liquidations will not occur in the future.

The legal position of account holders in crypto exchanges must be solidified at this relatively early stage in the development of crypto and digital assets.

Crypto exchanges refer to ‘wallets’ which are supposedly secure accounts for the holding of crypto assets, but this is often no more than an entry in a database or spreadsheet. As we have seen in the case of iCE3, unless you control both the public and private keys to your wallet, you have invested in the hope that the exchange will honour its terms of service.

iCE3 was run out of a house in Klerksdorp

Moneyweb has sent questions to iCE3 founder Gareth Grobler, and iCE3’s technology partner Merkeleon.com, between whom there appears to have been some dispute giving rise to the aforementioned “account discrepancies”. Neither party responded. Nor have they posted any meaningful updates on the iCE3 website.

This leaves customers guessing as to what happened to their crypto assets, whether they were subject to a hack, admin errors or outright criminal theft.

A closer look at iCE3 shows it was run out of a house in Klerksdorp, which also appears to have doubled as the headquarters for as toilet paper business, and possibly more.

Source: CIPC website

No financial statements were submitted to the Companies and Intellectual Property Commission (CIPC) as required under the Companies Act.

Source: Google Maps

The bottom line when choosing an exchange: check the terms of service to make sure you own the crypto assets you have bought in the event of liquidation.

And does the exchange have proper offices, credible directors and, perhaps most importantly, understand what’s involved in securing your crypto assets?

The extent of SA’s municipal problem? R51bn, says Ratings Afrika

Written by Ciaran Ryan. Posted in Journalism

Latest survey shows no reversal of the 10-year slide into ruin. From Moneyweb.

Cape Town is the only metro still considered financially sustainable, with a score of 71. Tshwane has the lowest score, at 21. Image: Moneyweb
Cape Town is the only metro still considered financially sustainable, with a score of 71. Tshwane has the lowest score, at 21. Image: Moneyweb

It’s almost clichéd to say SA’s municipalities are poorly run. Virtually every Ratings Afrika and Auditor-General survey reminds us of this.

You see it with your eyes as you venture home over potholed roads, passing the street litter that is left to accumulate until it’s washed away by rain or wind, and when you open your monthly rates and taxes bill and wonder what you are paying for.

There’s not much good news from the latest Ratings Afrika Municipal Financial Sustainability Index (MFSI) for the fiscal year to June 2020 which examines the 105 largest local municipalities plus eight metros in SA.

Cost to avoid total collapse

The survey authors conclude that government has a R51 billion municipal problem.

That’s what it will take to prevent a total collapse of municipalities and bring them on a level footing to pay their creditors as stipulated by the Municipal Finance Management Act (MFMA).

“Unfortunately, this R51 billion burden will have to be carried by the already overstressed taxpayers,” notes the survey.

There’s simply no room in the cupboard for that. Last year R20 billion additional revenue was made available to municipalities to tide them over the Covid shock, but that was nowhere near enough.

The Ratings Afrika figures are up to June 2020, so they’re already 10 months out of date, and we know that revenue collection rates at the municipal level have been falling to 82.3%, against the benchmark 95%.

That means nearly R18 out of every R100 owing is going uncollected, and the collection rate will likely have deteriorated since then.

Read: ‘Eskom owes us R4.8bn’ claims beleaguered municipality (Oct 2020)

The MFSI comprises six financial components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development. Municipalities are scored on a scale of one to 100.

Top performers

The best performing municipality in the country is Mossel Bay in the Western Cape with a score of 74. Four of the top five best run municipalities are in the West Cape (Mossel Bay, Swartland, Overstrand, Saldanha) and the fifth is Midvaal in Gauteng – all DA-run.

The Western Cape is again far and away the best run part of the country, with an average MFSI score of 53. The worst is the Free State with 17, followed by North West (21) and Eastern Cape (25). The DA set out to prove that, given control, it would outshine the ruling party at local government and provincial level.

And what about 34-year-old Midvaal mayor Bongani Baloyi, who has been running the municipality since 2013 from the age of 26 and year after year comes out tops in the Ratings Afrika survey for Gauteng?

“I am really proud of this result,” he said.

Moneyweb asked him what his winning formula is.

“It’s a culmination of our collective hard work that has produced this improved performance year on year. This achievement is proof that local government can be functional, through prudent financial management, competent staff, good governance and ethical leadership.”

Midvaal actually improved on its score over the last year as it seeks to wean itself off the Eskom grid by way of solar energy plants, while introducing a public-private sector partnership to recycle waste water and sell any surpluses back to Rand Water.

Read: Emfuleni and Midvaal enter the record books, but for very different reasons

Right across the fence from Midvaal lies Emfuleni, the worst run province in Gauteng with a score of 12, where residents have complained about just about everything from sewage spillage into the Vaal River system, to garbage going uncollected for months.

Highest scoring by province in 2020
ProvinceMunicipalityScore
Eastern CapeSenqu (Lady Grey)59
Free StateMetsimaholo (Sasolburg)31
GautengMidvaal (Meyerton)70
KwaZulu-NatalKwaDukuza (Stanger/Ballito)65
LimpopoLepelle Nkumpi62
MpumalangaSteve Tshwete (Middelburg)58
Northern CapeSol Plaatje (Kimberley)44
North WestJB Marks (Potchefstroom)42
Western CapeMossel Bay74

Source: Ratings Afrika

Say Ratings Afrika analyst Leon Claassen: “These high-scoring municipalities demonstrate consistency over the five years mentioned. They normally have well-entrenched financial policies and their budgets are based on sound long-term financial strategies. They adhere to good budgetary practices, strict financial control and good revenue collection even through tough economic conditions.

“The sound levels of financial sustainability place these municipalities in a very strong position to invest in infrastructure and it gives them the capacity to absorb the financial shock caused by the Covic-19 lockdown.

“Cape Town is the only metro that is still considered to be financially sustainable in 2020 with a score of 71, outperforming the rest of the metros by a large margin.”

Lowest scoring by province in 2020
ProvinceMunicipalityScore
Eastern CapeEnoch Mgijima (Queenstown)9
Free StateMatjhabeng (Welkom)12
GautengEmfuleni (Vereeniging)12
KwaZulu-NatalNewcastle14
LimpopoModimolle (Nylstroom)12
MpumalangaLekwa (Standerton)13
Northern CapeEmthanjeni (De Aar)20
North WestNaledi (Vryburg)9
Western CapeBeaufort West18

Source: Ratings Afrika

“A common feature of the municipalities with the lowest scores is that their liquidity positions are extremely weak,” says Claassen.

“Their operating revenue and expenditures are not evenly matched, resulting in relatively large operating deficits, and the quality of their infrastructure is deteriorating, caused by low spending on repairs and maintenance which could threaten long-term service delivery an sustainability.

“The going concern status of these municipalities is extremely doubtful. Tshwane is the lowest scoring metric metro with a score of 21.”

Ratings Afrika says another very concerning aspect highlighted by the financial analysis is the very low level of spending on repairs and maintenance.

Given the huge maintenance backlogs built up over the years, the spending should be between 6% and 8% of the carrying value of the fixed assets. Currently the average maintenance spending by local municipalities is only 1.5%, which is hopelessly inadequate to keep the infrastructure in good operating condition.

Read: Proposed new taxes to help dysfunctional municipalities (Jul 2020)

‘Visible everywhere’

According to the survey report: “The deterioration of the infrastructure, such as crumbling roads, sewer spillage, and water or electricity disruptions is visible everywhere as a consequence.

“Increasing the maintenance spending dramatically is imperative to prevent a total breakdown in services in many municipalities.”

All this has a disastrous effect on the quality of life of most South Africans and the business located in these malfunctioning municipalities.

Covid-19 will have a prolonged effect on the finances of municipalities even after the lockdowns have been lifted. The full effect of the financial sustainability of municipalities will only be visible in a year or two.

At the moment it is only the Western Cape municipalities that have some capacity to absorb the devastating financial effects of the coronavirus pandemic.

Read: AG: How to improve the state of our municipalities (Jul 2020)

Ethereum cracks R40k, hits another all-time high

Written by Ciaran Ryan. Posted in Journalism

The second biggest crypto has doubled since the start of the year. From Moneyweb.

The latest price surge comes after the listing of a batch of exchange-traded funds on the Toronto Stock Exchange in Canada. Image: Akos Stiller, Bloomberg
The latest price surge comes after the listing of a batch of exchange-traded funds on the Toronto Stock Exchange in Canada. Image: Akos Stiller, Bloomberg

Ethereum, the second biggest cryptocurrency by market cap after bitcoin, hit a new all-time high this week when it cracked R40 000.

Earlier in the month another milestone was reached – ether (ETH), the name of the Ethereum network’s currency, blew past the 1o ounce Krugerrand (currently worth about R26 200).

By way of historical comparison, bitcoin smashed through R40 000 in July 2017 before rallying to more than R300 000 before the end of that year.

Price-surge push

The latest push behind ether’s price surge comes after the listing of a batch of ETFs (exchange-traded funds) on the Toronto Stock Exchange, which now makes it possible for institutional and high-net-worth individuals to invest indirectly in funds such as the CI Galaxy Ethereum ETF (ETHX).

Many investment funds are prohibited from directly owning cryptocurrencies, but are allowed to invest in companies that hold cryptos like bitcoin and ETH.

The first ether ETF to be launched was the Grayscale Ethereum Trust, which tracks the ETH market price, less fees and expenses.

The fund enables investors to gain exposure to the price movement of ETH through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping Ethereum.

Another reason behind this week’s price surge is the overcoming of some technical obstacles to the expansion and smooth running of the Ethereum network in a series of upgrades called ETH 2.0.

Read: Why Ethereum has been on a tear

Ether has been gaining in strength against bitcoin since the start of 2021.

These two cryptocurrencies have entirely different use cases: bitcoin is seen as a store of value because of its hard cap of 21 million coins that will ever be minted, while the Ethereum network allows developers to build applications that can generate revenue in a variety of different ways. There are currently 115 million ETH in circulation, a figure hard-coded to increase by 12 million a year.

Will the rise continue?

AltCoinTrader CEO Richard da Sousa sees Ethereum at R50 000 in the near future.

“I’ve been predicting that Ethereum would be worth more than an ounce of gold for some time, and now it has happened. I don’t see it stopping here.”

Some analysts are cautious of the parabolic rise of cryptocurrencies, but others are not so sure, arguing that Ethereum remains undervalued and could hit $3 000 (around R42 740) in the next few months.

Some even see it at $10 000 (close to R142 500) in the next two years.

Prominent investor Raoul Pal sees a price potential of $20 000 for Ethereum, while Mark Cuban likens the current run in cryptos to the internet bubble. In January he tweeted that cryptocurrencies like ether, bitcoin and a few others will be analogous to those tech companies built during the dot.com era that survived the bubble and went on to thrive. Other cryptocurrencies may not be so lucky.

Ethereum-bitcoin price: Ethereum is gaining relative to bitcoin

Source: TradingView

Joburg’s Weltevreden Park residents fix potholes themselves for R10k

Written by Ciaran Ryan. Posted in Journalism

Because the Joburg Roads Agency has been ‘socially distancing’ from the community for the last year. From Moneyweb.

Getting the job done. Image: Supplied
Getting the job done. Image: Supplied

If you’re a Joburg resident, you might have noticed the untended potholes in the area where you live.

The Panorama Residents Association (PRA) in Roodepoort to the west of Joburg says it tried every avenue to get the potholes in its area fixed, to no avail. Despite escalating their complaints up the chain of command at the Johannesburg Roads Agency (JRA), the potholes multiplied, until it became too much for residents to bear.

They complained of buckled wheel rims until they could take it no longer.

Read: Joburg’s woes continue

The association realised the JRA wasn’t going to get to the job any time soon, so it took matters into its own hands.

For the princely sum of R10 000, the PRA went out and bought one ton of pre-mixed tar and got some local residents to volunteer their time, while a local company EC Security provided a machine and labour to compact the tar.

One day later, nearly 100 potholes on the key arterial routes had been filled.

The association is funded by R250-a-year membership fee. Image: Supplied

Oddly enough, a day after starting their volunteer project, the JRA must have read about it in the local Roodepoort Record, because suddenly it sent out a team to start mending potholes in the area.

The PRA is responsible for the area bounded by Jim Fouché Road, Hendrik Potgieter Drive, Tennis Road, JG Strydom Drive and the N1 highway.

Chair Dave Baxter says the association is funded by R250-a-year membership fee, which is used to clear overgrowth near sidewalks and green areas, mend fences in public spaces and, now, to fix potholes.

This does not include a 64-strong volunteer force involved in local community policing to keep crime under control.

‘Broken window’ policy

Baxter has been monitoring crime stats in the area for years and says these combined efforts have resulted in a 20% drop in local crime rates. “The Covid lockdown certainly helped because everyone was under curfew, but we have found that keeping the area clean and neat also helps keep crime away.”

Baxter and his fellow PRA members are strong advocates of the ‘broken window’ policy which is credited with reducing crime in New York City during the 1990s by addressing minor infractions such as loitering and public drunkenness.

In other words, fixing broken windows creates a sense of order which makes residents feel safer, whether or not crime rates are actually reduced.

One of the authors of the ‘broken windows’ policy, the late George L Kelling, discovered that putting police on foot patrols, rather than in vehicles, also creates a sense of safety and wellbeing.

Community policing

SA has experimented with community policing forums, and some still exist around the country, but many areas are now policed by private security firms, in part because of an overstretched police force. This study also suggests that the police have some work to do to build public trust.

Community policing has made a robust comeback, with the support of the PRA and its 12 neighbouring residents’ associations.

The Honeydew Community Policing Forum is headed by 67-year-old real estate businessman Jon Rosenberg, who has built a 64-strong volunteer force that patrols a large area to the north and west of the city. It is this ‘eyes and ears’ on the ground that has reduced crime by an estimated 20% since the volunteers started patrolling the streets. It also provides victim support when needed.

Rosenberg says community policing forums fell into disfavour in parts of the country due to cowboy-type behaviour among some volunteers.

“This is why we put our volunteers through basic and ongoing training to make sure they know what they are allowed – and not allowed – to do,” he says.

“We are there to assist the police and report suspicious behaviour when we spot it. Our volunteers are kitted out with uniform shirts and jackets, and soon we will be providing bullet-proof jackets. Unfortunately, the criminals of today are often armed and think nothing of shooting a member of the public, so we have to take steps to protect ourselves.”

That’s one example of local residents taking back their streets.

Parallel service delivery

As Moneyweb previously reported, Free State residents of the Lesotho border town of Ficksburg have started to run a parallel local government because of the perceived ineptitude of the local municipality. Funded by residents and local businesses, they send out teams each week to clean up litter and clear overgrown brush from the side of the road. This had the effect of driving criminals, who had taken sanctuary in the overgrown brush, out of the area.

Read:Free State residents put down their pens and take to the streets

North West residents take matters into their own hands, and get court’s blessing

The revolt of the ratepayers

The Institute of Race Relations (IRR), under its #StopCitizenAbuse campaign, has adopted the PRA programme and wants to see similar campaigns being replicated across the country.

Says Amy-Claire Morton, spokesperson for the #StopCitizenAbuse campaign: “The IRR encourages communities either struggling with getting their municipality to attend to infrastructure and service delivery, or taking the initiative to fix things themselves and thereby acting to stop citizen abuse, to reach out to us.”

She adds: “Doing so will enable us to use such examples to inspire other communities and arm us with the real-life examples of citizen abuse that will help to put pressure on the government.”

Court orders suspended municipal manager’s reinstatement, mayor to pay costs

Written by Ciaran Ryan. Posted in Journalism

Jerry Mononela got caught up in the North West’s ANC factional war. From Moneyweb.

Losing two key court cases and being hit with costs in the latest case may dampen the municipality's enthusiasm for running up legal costs at taxpayer expense. Image: Shutterstock
Losing two key court cases and being hit with costs in the latest case may dampen the municipality’s enthusiasm for running up legal costs at taxpayer expense. Image: Shutterstock

This week the North West High Court ordered the Dr Ruth Segomotsi Mompati District (DRSMD) Municipal Council, its speaker and mayor to foot the court bill for unlawfully suspending the municipal manager, Jerry Mononela, after claiming he was guilty of financial misconduct.

“What’s interesting about this case is that the high court judge awarded punitive costs against the mayor, the municipal speaker and the municipal council,” says Mandla Mpempe of the Centre for Good Governance and Social Justice, a non-profit aimed at restoring accountability at local government level.

“This is not the first time that public officials have been held accountable for wasting public funds by bringing frivolous or vexatious cases before the courts.

“But this judgment sends a welcome and powerful signal to public officials across the country that the days of using public funds to wage their personal political battles are coming to an end,” says Mpempe.

“They will be held liable for the costs in their personal capacities.”

Dr Ruth Segomotsi Mompati District Municipality

Source: Google Maps

The court ruled that Mononela had been unlawfully placed on precautionary suspension on February 22, 2021, without being given adequate time to defend himself.

Unlawful

The municipal manager was placed on suspension by Mayor Kgalalelo Sereko, without a council resolution, which was supplied after the fact without hearing representations from Mononela.

All this happened just days after the previous executive mayor was removed from office by the municipal council by way of resolution.

Three days later, newly-appointed mayor Sereko removed the municipal manager and issued a media statement claiming the suspension was as a result of an advance payment to R16.1 million to a company called HT Pelatona, and for “failure to prepare budget adjustments”.

An internal municipal report provided to Moneyweb appears to show that the R16.1 million was not a pre-payment to HT Pelatona as alleged by the council, but was paid in terms of a contract for services already delivered for the installation of a tank and pump station.

Motive

Mpempe says none of this makes any sense unless one understands that an internal political war is raging within the ANC in North West Province, and those who stand on the wrong side of this factional battle are being sidelined.

“We strongly suspect that with the ANC conferences coming up in North West, this is an attempt to remove people who stand in the way of those who intend to misuse public funds to advance their own political agendas.”

Mononela was replaced as municipal manager by Teko Gaanakgomo, who reportedly does not have the required qualifications for the job.

Mpempe says he continues to hold this position, despite the municipality being ordered to remove him due to lack of qualifications by the provincial MEC for Cooperative Governance, Human Settlement and Traditional Affairs (Cogta).

Read: North West residents take matters into their own hands, and get court’s blessing

Also removed from her position was former executive mayor Boitumelo Mahlangu, who successfully challenged her suspension in the North West High Court. The municipality appealed this ruling last week, and the appeal ruling is being awaited.

Meanwhile the mounting legal costs associated with these irregular suspensions are being paid for by taxpayers.

Shocking financials

report by Municipal Money, a database of local government finances run by National Treasury, shows the municipality is hardly a bastion of financial rectitude.

The latest figures available for the 2019 fiscal year show that irregular, fruitless and wasteful expenditure accounted for 93% of operating expenditure.

The Auditor-General issued a disclaimer for the municipality in 2019, on the grounds that there was insufficient documentation to form an opinion on its financials.

Municipal Money also shows that nothing was spent on repairs and maintenance for the two years from 2017 to 2019.

For every R10 spent on building and replacing infrastructure, R0.80 should be spent every year on repairs and maintenance, equivalent to 8% of the value of property, plant and equipment.

The municipality relies on 98.4% of its income from provincial and national government, with only 1.6% being generated locally, and virtually all of this is from interest and investments.

The municipality’s loss of two key court cases involving the suspended mayor and municipal manager, and the awarding of punitive costs in the case of the latter, may dampen enthusiasm for running up legal costs at taxpayer expense.

Taxpayers are paying for all this

Mpempe points out that it’s all South African taxpayers who are footing the bill for these legal extravagances, as the municipality is almost entirely reliant on transfers from the national and provincial governments.

Read: Confirmation that municipalities are a huge burden on taxpayers

“It’s time for the provincial and national Cogta departments to start paying attention to these shenanigans at DRSMD municipality, which is part of a pattern we are noticing in North West, in particular.”

Nearby Taung Municipality reportedly ran up legal bills of R27 million in less than two years, most of them related to internal disciplinary matters.

Read: Taung municipality whistleblower’s 10-year battle for justice

Mpempe says the Centre for Good Governance and Social Justice has addressed its concerns over these issues to the provincial MEC, but has yet to receive a reply.

This is an admission, says Mpempe, of paralysis on the part of the department.

Retailers assisting the black market for cigarettes – Study

Written by Ciaran Ryan. Posted in Journalism

Nearly three-quarters of retail outlets in Free State, Gauteng and Western Cape are selling illicit cigarettes, according to study. From Moneyweb.

Image: Suzanne Plunkett, Bloomberg News
Image: Suzanne Plunkett, Bloomberg News

A study commissioned by British American Tobacco SA (BAT) – said to be free of interference from BAT – suggests the cigarette market has been given over to black marketeers, with four out of five outlets surveyed in the Free State offering smokes at below the minimum collectible tax (MCT) of R21.61 for a pack of 20.

Any pack of 20 cigarettes selling below the MCT of R21.61 is deemed to be illicit. Some packs were selling for as little as R10 and even R6 – meaning no tax could have been paid on these cigarettes.

The study says this is a consequence of the government’s imposition of a ban on cigarette sales in the early part of the Covid lockdown last year (now lifted). The ban allowed a black market for cigarettes to flourish, with the fiscus losing R8 billion a year in excise revenue.

Illicit cigarette sales were most prevalent in the Free State, where 81% of outlets visited were selling below the MCT price level, against 70% of outlets visited in Gauteng and 71% in the Western Cape, according to the Ipsos study.

“That’s almost a 10% increase on the figures recorded only a month ago before the big hike in tobacco sin taxes,” says Yusuf Abramjee, founder of Tax Justice South Africa.

“It is shockingly clear that the excise increase, which was double the rate of inflation, has triggered a full-scale price war among tax-evading manufacturers, who’ve been gifted more customers and even bigger profit margins.

“The government lit a fire under the illicit cigarette trade with the five-month lockdown tobacco sales ban last year that handed the market to criminal operators.”

The government had unleashed this monster and has a duty to get it back in its cage, added Abramjee. Illegal cigarettes are known to be pouring across the border from Zimbabwe, Mozambique and even Zambia, where SA’s high excise rates of cigarettes provide a god-sent opportunity to black marketeers.

The Fair-trade Independent Tobacco Association (Fita), which represents smaller tobacco producers based in SA, is unconvinced by the study findings and Abramjee’s conclusions, which point to some of its clients as the main culprits.

According to Ipsos, cigarettes produced by Gold Leaf Tobacco Zimbabwe (not part of Fita), Carnilinx and Afroberg Tobacco were most frequently found to be selling below the MCT level. According to a July 2020 study by University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep), 93% of smokers were able to buy smokes on the black market.

The same study found that the market share by multinational tobacco companies (British American Tobacco, Philip Morris International, Japan Tobacco International and Imperial Tobacco) had collapsed from 74% to just 17%.

Says Fita chair Sinenhlanhla Mnguni: “These so-called independent reports are now also being used as ammunition by Big Tobacco for anti-competitive purposes to smear the names and brands of independent local cigarette manufacturers as a way to strong-arm retailers into removing the products of smaller independent manufacturers off their shelves. This is an attempt to maintain the status quo and to keep certain players in the informal trade in order to protect the profits of multinationals in an anti-competitive manner. This perpetuates the illusion that the brands of local cigarette manufacturers must be illicit, given that they can only be procured from informal traders and not in formal retail spaces.”

Tax Justice SA has called for a commission of inquiry into the collapsed tax revenues from cigarette sales due to black market activity, though Fita says this will not achieve anything other than wasting taxpayer money and time.

“Fita members are all compliant with the relevant laws of this country which govern the tobacco industry and have at all times been co-operative with Sars in as far as its efforts in implementing measures to curb non-compliance in the industry along its value chain such as that of installing production counters on the machines of our members.”

Gold Leaf Tobacco Company (GLTC) is a member of another industry body, SA Tobacco Organisation (Sato), which issued a statement in January that Gold Leaf was paying tax of R200 million a month.

“Our member’s market share, as researched by independent researchers, confirms that our member’s sales are in conformity with [their] tax contributions, thereby rubbishing all and any allegations concerning any illicit activity of GLTC,” said Sato.

Fita has turned the spotlight back at BAT, which was itself the subject of a report by Tax Justice Network in 2019 claiming it was shifting profits out of poorer countries to tax-friendlier jurisdictions.

Sato has called for all tobacco manufacturers, multinational and local, to open up their records for scrutiny by the public to determine where the tax leakage in the SA economy is occurring.