Gupta-linked bank under curatorship

• Finance minister Godongwana acts in response to governance, compliance and operational failures

Habib Overseas Bank, the local unit of a Pakistanbased lender that became a buyout target by associates of the Guptas, has been placed under curatorship due to governance, compliance and operational failures. Finance minister Enoch Godongwana placed the lender under curatorship based on the recommendation of the Prudential Authority, the financial regulator.

Habib Overseas Bank, the local unit of a Pakistan-based lender that became a buyout target by associates of the Guptas, has been placed under curatorship due to governance, compliance and operational failures.

Finance minister Enoch Godongwana placed the lender, which received an SA banking licence in 1990, under curatorship on March 26 based on the recommendation of the Prudential Authority (PA), the financial regulator that falls under the authority of the Reserve Bank.

Habib Overseas Bank is the local division of a lender founded in India in 1941 before relocating to Pakistan, and is not linked to Habib Bank AG Zurich, which also operates in SA.

“Over the past four years, the PA had intensified its supervision of Habib Overseas Bank because of identified weaknesses in the bank’s governance process, its internal control environment as well as the various investigations and reviews which have repeatedly confirmed the bank’s noncompliance with a number of financial sector regulations,” the PA said in a statement on Monday.

“This noncompliance also relates to significant findings relating to breaches of exchange control regulations.”

In November 2016, the Mail & Guardian reported that Habib Overseas Bank became the target of a buyout attempt by individuals linked to the Guptas, the family that has become synonymous with state capture.

The newspaper said that Salim Essa — a business associate of the Guptas who held stakes in Gupta-linked VR Laser Services, Tegeta Exploration and Resources and a company called Vardospan — and one Hamza Farooqui had offered to buy Habib Overseas Bank’s SA assets for a reported R450m.

At the time, the Guptas were struggling to access financial services after four of SA’s largest banks closed their business accounts after allegations of illicit financial activity mentioned in then public protector Thuli Madonsela’s report on state capture. The Competition Commission approved a proposed merger between Vardospan and Habib Overseas Bank in January 2017, though the proposed deal rested on regulatory approval being granted.

On March 31 2017, the Pretoria high court struck down an application by Vardospan to compel the Reserve Bank, the Treasury and the registrar of banks to approve the deal, scuppering the merger plan. A day earlier it had emerged that then finance minister Pravin Gordhan was fired by previous president Jacob Zuma, himself a close associate of the Guptas.

The PA said on Monday that Habib Overseas Bank’s board of directors and management had failed to deal effectively with weaknesses in controls and the lender’s poor regulatory compliance. This posed what the PA described as “growing risks” to its ability to meet future obligations as required by the Banks Act, as well as the associated regulations required of lenders.

The finance minister appointed PwC as the curator with Craig du Plessis as the audit firm’s representative. That means the board and management of Habib Overseas Bank have been relieved of all their powers, which now become vested with the curator, subject to the supervision of the PA.

As curator, Du Plessis not only has authority to make decisions about the bank’s continued granting of loans and sound banking activities generally but is also required to recover and take possession of all the assets of Habib Overseas Bank. Nevertheless, the bank is permitted to continue operating during the curatorship period, subject to the assessment of the curator.

The PA said that Habib Overseas Bank remains liquid and has a liquidity coverage ratio above the regulatory requirement. That means there are no immediate concerns for depositors and that their funds remain safe at the bank.

“The curator will keep customers informed of any significant new developments at the bank,” the PA said. “The governance challenges and reasons for this curatorship are not related to the recent difficulties with banks in the US and Switzerland. SA’s banking sector remains healthy and robust, and it is unlikely that other [local] banks will be negatively affected by Habib Overseas Bank’s current situation.”

“THE PA HAD INTENSIFIED ITS SUPERVISION OF HABIB OVERSEAS BANK BECAUSE OF IDENTIFIED WEAKNESSES”

Nevertheless, as a precaution the curator closed Habib Overseas Bank for an initial 72 hours, a period that can be extended, during which time the lender will not be open for any banking activity, whether online or inbranch. This was presumably done to prevent a potential run on bank deposits.

Even so, customers with credit facilities provided by Habib Overseas Bank are still legally obliged to continue paying their monthly instalments.

The curatorship order against Habib Overseas Bank comes just over a month after the Parisbased Financial Action Task Force put SA on the greylist of 25 countries deemed to have inadequate antimoney-laundering and counterterrorism financing controls. That assigns SA to the ranks of Albania, Syria, South Sudan and Yemen in being regarded as having insufficient measures to combat financial crimes ranging from funding terrorism to proliferation financing.

At the time of publication the PA had not responded to questions from Business Day on the curatorship of Habib Overseas Bank. Du Plessis referred questions about the bank having been targeted for acquisition by associates of the Guptas to the Reserve Bank.

He declined to comment on Habib Overseas Bank’s asset base in SA, or whether its curatorship related to offences linked to SA’s greylisting.