A Tax Scandal Siphoning South Africa’s Lifeblood
Posted June 9, 2018 3:16 p.m. EDT
PRETORIA, South Africa — South Africa’s tax chief steeled himself. Chiding and pleading with President Jacob Zuma to get him to file his taxes — much less pay the full amount — was always an excruciating task.
And it kept getting worse. One of the president’s sons, a nephew and countless business allies had serious tax problems as well, four former senior officials said, alarming investigators and leaving them wondering what to do.
South Africa’s young democracy had depended on the faith — and taxes — of its people since the end of apartheid, so the risks were evident. If the leader of the African National Congress, his relatives and his influential associates could dodge their tax duties, the rest of the country might shirk them, too, hollowing out the government’s ability to function at the most basic level.
The tax commissioner, Ivan Pillay, said he tried to be discreet, visiting the president several times from 2012 to 2014 to prod him to comply.
“If I am in the way, just tell me and I’ll go,” Pillay said in a rare interview, recounting his conversations with Zuma. “I won’t like it, but I’ll go. I’m a disciplined member of the ANC.”
Zuma demurred, insisting there was no need to resign, Pillay said. Instead, the president dealt with the issue himself a few months later: He abruptly replaced Pillay with a loyalist who led a sweeping purge of the tax agency, setting off a blistering national scandal that is threatening South Africa in unexpected ways.
Wielding a barrage of fictitious news stories and doctored assertions by one of the world’s biggest auditing firms, KPMG, Zuma managed to thwart scrutiny into his own taxes, his family’s affairs and his allies’ finances, according Pillay and three other former senior tax officials who confirmed the account.
Then, the president and his supporters went even further. They used the upheaval at the tax agency to seize greater control over the National Treasury, further enriching themselves at enormous cost to the country, according to government officials now trying to repair the damage.
The national tax agency, as prosaic as it may sound, had once been an extraordinary triumph, even for the party that helped defeat apartheid. Just a few years after it helped usher in democracy, the ANC switched from liberation to the mundane workings of government and persuaded millions of South Africans to do the unimaginable: pay their taxes.
In a barometer of support for the fledgling new government, tax collections rose year after year, eventually surpassing some bench marks in much richer, more established democracies, including the United States. The scrappy agency, the South African Revenue Service, won plaudits from the World Bank, Princeton University and other rarefied corners of the world.
“It was the jewel in the state crown,” said Dennis Davis, a High Court judge who led a recent review of the tax system and sat on a panel in the mid-1990s to help Nelson Mandela establish the tax agency.
“What has happened subsequently,” he added, “is a very, very, very seriously sad story.” South Africa’s version of the IRS is perhaps an unlikely setting for a national saga involving spies, spurned lovers, secret brothels, double agents and one of the biggest journalistic scandals of the post-apartheid era.
But the story shows how an increasingly corrupt ANC has undermined its own successes by betraying the very people who brought it to power.
And the drama is far from over. In today’s South Africa — dangling precariously between dueling factions inside the ANC — the nation’s new president, Cyril Ramaphosa, is struggling to assert his authority and fulfill his pledge to root out corruption. He stands knee-deep in a very messy fight to wrest the tax agency from the legacy of his predecessor, Zuma, and win back the confidence of an angry nation.
With corruption and political warfare gutting the agency, more and more South Africans have simply stopped paying their taxes, a dangerous turn in a nation where tens of millions depend on government services that are enfeebled by graft and misrule. In the eyes of many experts, the government’s — and the country’s — ability to right itself is at stake.
The dismantling of the tax agency unfolded in full view of the astonished country, squandering so much of the public’s dwindling trust that officials now wonder how they will be able to restore it.
Once Zuma removed Pillay as acting commissioner in late 2014, he installed an ally who had been close to the president and his family for decades. Almost immediately, explosive leaks started coming from inside the tax agency, spicing up the pages of a major South African newspaper.
The articles said Pillay had approved the creation of an illegal “rogue unit” that had planted bugs at Zuma’s home to intercept his conversations.
The news grew juicier by the week: Hush money was paid to a former spymaster during apartheid to keep quiet about the illegal espionage. The rogue unit even set up a brothel to go undercover, the reports claimed.
As the shocking details emerged, Zuma’s new tax commissioner, Tom Moyane, called on KPMG to investigate, giving it a nearly $2 million contract to uncover the truth. A year later, KPMG came back with its results, confirming widespread abuses of power.
Trouble is, it’s not clear any of it was true.
The newspaper, The Sunday Times, retracted its articles. KPMG was forced to publicly dismiss its own conclusions as well, admitting that it had essentially copied a memo from its client’s lawyers and passed off the allegations as its own, fully investigated findings. “Whoever pays the piper calls the tune, unfortunately,” said Bobby Johnston, former chairman of the Johannesburg Stock Exchange who sits on a panel investigating KPMG.
The retractions came much too late for the tax agency. Pillay and leaders of the rogue unit had resigned or been forced out, undercutting the agency’s capacity to investigate and pursue tax dodgers, according to current officials and independent tax experts.
Hundreds of the tax service’s best employees also left during the upheaval, many going into private practice, and some to tax agencies as far away as New Zealand.
Even more damaging, the lurid tales of corruption and intrigue inside what was once an ANC showcase of good governance contributed to sharp drops in the nation’s tax collection: more than $6 billion short of what the government had expected in the previous two budget years.
The shortfalls have left the nation with fewer resources to tackle its most pressing needs — housing, education, health — in a society that has grown even more unequal under the ANC.
And in a stinging blow to the impoverished South Africans who have voted the party into power and kept it there for decades, the gaps have forced the government to raise the value-added tax on products for the first time since the end of apartheid — a move expected to hurt poor people the most.
Much of the national ire over the scandal has focused on KPMG, which helped the chaos along by rubber-stamping some explosive accusations it could not prove. Now the firm is facing collapse in South Africa, raising withering questions about the role Western companies play in providing a sheen of legitimacy while enabling corruption.
KPMG is facing two inquiries in South Africa, and a few weeks ago the country’s auditor general terminated all contracts with the firm. Private banks like Barclays Africa, one of the largest on the continent, have also ended their relationship with KPMG, citing the risks to their reputations.
Yet the fate of the tax agency is still up in the air. It is only one of many government institutions that have been weakened through years of infighting and corruption by the party that built them. The ANC has especially chipped away at agencies and posts that hold the powerful accountable, like the national police, prosecutors and the public protector’s office.
But the tax service’s fall was so dangerous that Ramaphosa, immediately after taking office in February, vowed to save the agency. He suspended Moyane, though the bitter, public fight to fire him is still being waged. The president’s office has accused Moyane of meddling in the KPMG inquiry, misleading Parliament and failing to properly investigate allegations of corruption, money laundering and tax evasion by his own deputy — charges that Moyane is preparing to rebut in court.
“The tragedy is that SARS was a world-class institution,” said Ismail Momoniat, the National Treasury’s deputy director general for tax and financial sector policy. “Tax collection is very critical for nation building, because it’s the kind of underlying foundation for the state.”
The Politics of Tax Evasion For the leader of a country that often symbolizes the historic pursuit of democracy in Africa and beyond, Zuma certainly seemed to have grown weary of it himself, current and former officials say.
During one of his visits to the president, Pillay said, Zuma started off making small talk but was clearly exasperated, openly complaining about the questions lawmakers expected him to answer.
“He said, ‘Listen, I’m so tired and tomorrow morning I’ve got to go to Parliament,'” Pillay recalled Zuma saying. The president had faced volleys of outrage, especially over the lavish use of public money to upgrade his private homestead.
“'Why must I go and answer questions in Parliament? Putin doesn’t go to Parliament to answer questions,'” Pillay recounted Zuma saying.
“That’s where he was” in terms of being open to scrutiny, Pillay said.
On top of that, one of Zuma’s sons was suspected of hiding profits from contraband cigarettes. Red flags had also emerged with a nephew’s used-car business and a foundation established by one of Zuma’s wives — all of which caught the attention of tax investigators, the four former officials said.
Pillay insisted that he never wanted to pursue Zuma directly through a formal investigation, but that the president seemed convinced otherwise.
“He got it into his head that we are monitoring him,” Pillay said.
Pillay was no stranger to conflict. He had been a commander in the military wing of the ANC in exile, and later coordinated a clandestine operation to smuggle weapons and people into South Africa. Years later, at the tax agency, he led enforcement operations, hiring a coterie of former spies, police agents and investigators to go after tax cheats aggressively. His efforts earned him international recognition. Under apartheid, people had avoided paying taxes altogether, many as a form of protest against the government. But democracy brought legitimacy and, with it, compliance, according to a World Bank study. Government records show that from the end of apartheid in 1994 through 2010, the number of people paying taxes nearly quadrupled.
During the presidency of Thabo Mbeki, people cheated, of course, but the revenue service was largely protected from political interference, Pillay said. And while party loyalists enriched themselves in many ways, he said, “there was order at the trough.”
But under Zuma, especially in his second term, which began in 2014, corruption began consuming nearly every corner of government — from the national utility giant, Eskom, to provincial agricultural departments, according to parliamentary hearings and the nation’s former public protector.
Inevitably, the tax agency’s investigations into offenders, including Zuma’s relatives and business allies, encountered stronger pushback, the former officials say.
“Almost every big tax evader we were after would pull a political leader,” Pillay said. “All sorts of politicians were unhappy with us. It became a perfect storm,” helping seal his removal as the nation’s chief tax officer, he argued. He and two other former officials face criminal charges in a case that many experts see as politically motivated.
Neither Zuma nor his choice for a replacement, Moyane, agreed to be interviewed. But Moyane, a little-known development economist who had been plucked from running prisons to lead the tax agency, has strongly defended his independence.
“I am not lackey to anybody,” Moyane insisted on television. “I am a man of my own. I am not owned by anyone.”
Even so, in his four years as the nation’s top tax official, Moyane earned a national reputation as Zuma’s hatchet man, still guided by his loyalties to ANC leaders who believe in the supremacy of the party over the country.
A former anti-apartheid operative as well, Moyane had known Zuma for nearly four decades. They met in Mozambique in the late 1970s, when Zuma led the ANC’s underground operations in exile. Their families were close, too.
Barely two weeks after Moyane took office, the wild stories began appearing in The Sunday Times, fed by unnamed sources inside the tax agency. The paper reported that Pillay had created the rogue unit, and that the tax agency had paid a former spymaster nearly $230,000 to keep quiet about surveillance devices planted at Zuma’s home.
“Spy Scandal. Blondes, Brothels and Rhinos,” blared one headline. In the article, an unnamed tax employee told the paper that an agent of the rogue unit had set up a brothel, and even hounded a colleague for the money he owed for “two blondes.”
The Sunday Times retracted most of the articles — 18 months later. It settled with Pillay and another tax agency employee named in the accounts.
But the coup de grâce had been delivered.
Citing the news reports, Moyane quickly suspended Pillay, who resigned a few months later. More than 1,000 other employees, most of whom had nothing to do with the so-called rogue unit, left in a wider purge that impaired the agency’s ability to pursue big companies and other offenders. Many investigations into the tax problems of politically connected individuals came to a halt.
The impact on the nation goes far beyond that, threatening to drag South Africa back toward the days when people looked at the state of their government — and decided not to support it.
While the tax agency blames the economy’s slow growth and a drop in imports for the recent revenue deficit, it also acknowledges “a deterioration in compliance.” Businesses collected taxes on the goods they sold and the employees they hired, but then did not turn over the money to the government, the agency said.
Beyond that, nearly half the shortfall in the last budget year came from personal income taxes that officials had expected to collect but never did, according to the National Treasury.
The trend worries the government, which relies heavily on personal income tax, about half of which is paid by the top 1 percent of South Africans. The tax agency says it has made 1 million calls to remind taxpayers of their obligation to pay.
For Davis, the leader of the recent review of the tax system, the erosion of the public’s faith in the agency and the government itself has been striking. He had expected a recent amnesty program, which allowed taxpayers to declare their offshore wealth and avoid penalties, to net as much as $1 billion. But by the time the program ended last year, it had collected just over $265 million.
“When you asked people, ‘Why was that?'” Davis said, “there were two or three reasons that were given. One was the erosion of tax morality, which was caused by increasing levels of government corruption.”
“Secondly,” he added, the tax agency had been so thoroughly gutted that “people said they’re never going to get caught.”
‘Looking for Cover’
The scandal did not end with the wreckage at the tax agency. The torrent of unproved accusations gave Zuma and his allies enough ammunition to grab control over another prize — the state coffers in the national Treasury.
This chapter of the story, in particular, relied on the cooperation of a Western company that carried great weight and credibility in South Africa: KPMG.
In December 2014, as The Sunday Times kept churning out headlines about the rogue unit, Moyane commissioned KPMG South Africa to investigate. A year later, the firm produced a report confirming that a division inside the agency — officially known as the High Risk Investigation Unit — had been set up illegally and gone rogue. It was the proof that seemed to justify Moyane’s sweeping purge.
A longtime partner and forensic auditor at KPMG, Johan van der Walt, led the investigation. He had joined the firm just a few months after Mandela was elected South Africa’s first post-apartheid president in 1994, and over the years he had made a name for himself in many high-profile inquiries. Testifying in an arms-deal case involving Zuma, van der Walt described himself as a “bloodhound.”
Not surprisingly, van der Walt’s dive into the tax agency focused on the leader of the so-called rogue unit, Johann van Loggerenberg. The two men, both Afrikaners, had carved out distinct roles for themselves in South Africa’s new order. Now, they found themselves on opposite sides of a showdown roiling the nation. Van Loggerenberg, the tax official, had an especially unusual background. Before joining the agency in 1998, he had worked as an undercover police agent. His work, venturing deep into organized crime, had left him estranged from his family.
“Even my parents believed I was a criminal,” he recalled.
Back then, as a young man in his 20s, van Loggerenberg was aware that he had been “a beneficiary of the apartheid system,” he said, but he also saw himself playing a “part in the renewal of the country.”
After his police unit was disbanded, he considered an offer from the national intelligence service. But a prominent ANC acquaintance told him to consider the tax agency instead.
South Africans, the ANC member told him, had been liberated in 1994 but did not have social or economic freedom. The new government needed money to erase the legacies of apartheid. The thought stuck in van Loggerenberg’s mind.
“The more taxes this government can bring in, the better equipped it will be to implement its programs to build homes and schools and hospitals,” he recalled the official telling him. “It has to work. It can’t not work.”
By the time KPMG started digging into the tax agency, however, van Loggerenberg had become embroiled in a personal scandal that added even more fuel to the national bonfire.
By his own admission, van Loggerenberg, who was leading an investigation into the tobacco industry, had a brief romantic relationship with a double agent — a lawyer who represented a tobacco manufacturer and had also operated as a government informant.
When that relationship came to a tumultuous end, the lawyer gave The Sunday Times her WhatsApp exchanges with van Loggerenberg. In them, the couple simultaneously fight and discuss a tax settlement with a political leader, further eroding the public’s confidence in the tax agency.
KPMG even took on the relationship in its report: “It may be that either party had clandestine intentions and that the ‘love’ fired by physical and emotional sharing with each other was used to extract information of common interest (but with different application).”
The KPMG investigation claimed to be exhaustive. Van der Walt’s team of “20 to 30 professionals” perused 860,000 emails and an “excess of 1.36 million documents,” according to the firm.
One Friday evening, from 6 p.m. until past midnight, a KPMG team took out documents from the tax official’s safe, creating a detailed inventory of each item.
“It was a clinical process,” van Loggerenberg, the tax agent, said of the interactions with KPMG and its lead investigator. “I was actually very hopeful that he would uncover the truth because of the reputation he had for being a meticulous forensic investigator.”
In the end, the 139-page KPMG report found no evidence of a brothel or illegal wiretapping of Zuma.
But it argued that members of the so-called rogue unit had bugged the offices of national prosecutors in an operation called Project Sunday Evenings, eavesdropping on the investigation of a crime boss and a former police commissioner who wound up in prison.
Equally important was a single sentence, in KPMG’s executive findings and conclusions, about Pravin Gordhan, the man who was widely credited with building up the tax agency as its commissioner from 1999 to 2009.
Gordhan said KPMG “ought to have known of the existence of the unit,” which it said had been established illegally.
This sentence gave Zuma and his allies the tools to go after an even bigger target: the national Treasury, which Gordhan had moved on to oversee as finance minister. Authorities publicly summoned Gordhan in late 2016 and charged him with fraud.
The charges were quickly withdrawn, but they gave Zuma political cover when he fired Gordhan from his post as finance minister a few months later.
Zuma and Gordhan had often been at odds over the use of government money. Under Gordhan’s stewardship, the national Treasury had become a bulwark against the freewheeling spending at state enterprises that was enriching Zuma’s allies. Gordhan was widely respected in financial and business circles. But when he was ousted in March 2017, the president replaced him with an ANC politician under whose leadership corruption had flourished in the Ministry of Public Enterprises.
A few days later, South Africa’s credit rating was downgraded to junk status, creating yet another major challenge for the nation. Just as the chaos at the tax agency was depressing tax revenues, it suddenly became more expensive for South Africa to borrow money, compounding its problems.
From there, KPMG might have simply moved on to other government projects, had it not been for a surprising development.
Audits Draw Suspicion
Emails leaked last year revealed the chummy ties between close Zuma allies and top KPMG officials. The supposedly ironclad audits KPMG had performed quickly fell under suspicion. Some of the companies the firm had cleared were even being investigated for money laundering and other illicit activities.
Forced to audit itself, KPMG acknowledged it did not have evidence to support the statement it had made about Gordhan, the finance minister Zuma had removed. In a staggering mea culpa, the firm said it was withdrawing the report’s main conclusions and recommendations — including the assertion that the investigative unit had been established illegally and was operating in a rogue manner.
“We recognize and regret the impact this has had,” the firm said in September. “KPMG South Africa had no political motivation or intent to mislead.”
Even more damning was KPMG’s later admission in a hearing before Parliament that the report’s conclusions and recommendations had not been the product of KPMG at all.
Instead, they had been copied “by and large verbatim” from a memo drafted by lawyers employed by the tax agency, said Roy Waligora, KPMG South Africa’s head of forensics.
But the firm stopped short of disavowing other sections of the report, sowing even more national confusion over whether anything in it had actually been true. The lead investigator, van der Walt, left the firm last year. He declined to be interviewed.
No other individual received more attention in the report than van Loggerenberg, the former head of the so-called rogue unit. But he said KPMG officials had never interviewed him, even after he “begged” on several occasions to present his side of the story, he said.
The legal problems facing van Loggerenberg and Pillay are not finished. Both still face criminal charges linked to Project Sunday Evenings, accused of eavesdropping on national prosecutors.
Legal experts say the case appears politically motivated, part of a continuing attempt by the national prosecutors — still led by a staunch Zuma ally — to maintain the narrative of a rogue unit at the tax agency. In recent years, the National Prosecuting Authority, which has been compromised by intense meddling by ANC politicians, has increasingly been used for political ends, the experts said.
The national prosecutors’ spokesman declined to comment.
For KPMG, the inquiry into the tax agency was a lucrative and prestigious contract, bringing in about $2 million and giving the firm a toehold on future work in government. Now critics accuse it of acting as little more than a hired gun in this case, ready to craft reports that fit its client’s wishes.
The investigation was one of many scandals involving KPMG in South Africa and elsewhere. Federal prosecutors in New York indicted four of the firm’s former employees on conspiracy and wire fraud charges in January.
Last month, two British parliamentary committees said KPMG was “complicit” in endorsing the misleading financial statements made by Carillion, a construction giant that collapsed this year. KPMG, the company’s auditor for 19 years, never raised questions and signed off on management’s “increasingly fantastical figures,” the committees said.
Alex Cobham, chief executive of the Tax Justice Network, a British organization, said the KPMG case in South Africa provided the clearest example of a major Western auditing firm bending the rules to provide governments with “assurance services.”
“What you saw” in South Africa, he said, “is the government very much looking for cover to do something that appears to have been broadly illegitimate, and in order to get some cover for that, looking to these international players to give a stamp of approval.”
Restoring Taxpayer Trust
In the end, Zuma’s own party turned against him.
With opposition figures gaining control of the nation’s biggest cities, the ANC removed Zuma as president in February. The corruption he presided over had become too much of a political liability ahead of elections next year.
But pledges of transparency in the aftermath of the tax scandal have yielded little. John Veihmeyer, chairman of KPMG International at the time, promised “an independent investigation” into the rogue unit report in September.
“Given the significance of the issues involved in this matter to the country of South Africa, and the damage our actions have caused, the public deserves to know the full facts as quickly as possible,” he said in a statement.
But KPMG has not followed up in the eight months since Veihmeyer’s pledge. KPMG International declined interview requests, saying only that it “continues to cooperate” with inquiries.
That is not how some investigators describe it. Lawyers in one inquiry, conducted by the South African Institute of Chartered Accountants, were denied access to key documents, according to Dumisa Buhle Ntsebeza, who leads the organization’s inquiry panel and once headed South Africa’s Truth and Reconciliation Commission’s investigation unit.
“We’re still stuck,” Ntsebeza said. Ntsebeza has also leveled his frustration at the new leadership of the nation’s tax agency.
At a recent hearing, the agency’s new acting commissioner, Mark Kingon, delayed its start by a couple hours in an attempt to expel journalists, though the hearings had been open to the public since the inquiry began early this year.
Then, unlike all previous witnesses, Kingon refused to speak under oath.
“In order for us to be comfortable that you’re serious about what you’re saying, we need you to bind yourself to what you’re going to say — the truth, the whole truth and nothing else but the truth,” Ntsebeza said, unable to conceal his anger.
Now, South Africa is waiting to see how far its new president, Ramaphosa, will carry his anti-corruption drive. Many are skeptical, contending that he did little to prevent his fellow ANC leaders from undermining the tax agency and other institutions during his nearly four years as Zuma’s deputy president.
Yet another inquiry, this one ordered by Ramaphosa, has promised to reveal the real, complete story behind the rise and fall of the tax agency. But it is far from clear whether it will restore the people’ faith in government and persuade them to do what may seem, once again, unimaginable — pay their taxes.
“We should put behind us the era of diminishing trust in public institutions and weakened confidence in leaders,” Ramaphosa said in his first address to the nation in February.