Lessons From the SME Bank Saga

VILHO MBANGUTHE SME bank LIQUIDATORS Ian McLaren and David Bruni, revealed through documents filed in the High Court of Namibia last month that close to N$350 million was stolen from the Bank through dubious transfers and investments.

They further revealed that the people responsible for these fraudulent activities were the bank’s top officials, most of whom were foreigners. The narrative among the public is that foreigners swindled and misled the government. This narrative is reasonable but, in fact, wrong.

The truth is that the bank was run into the ground due to failure to observe proper corporate governance.

Corporate governance is defined by The Governance Institute as a system of rules, practices and processes by which a company is directed and controlled. The rules, practices and processes referred to here are internal rules and procedures, as well as external national regulatory provisions that a company must adhere to.

Corporate governance identifies who has power and accountability, and who makes decisions. Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced.

Corporate governance must achieve three key things: transparency, accountability, and maintain stakeholder confidence in the company.

In the case of the SME Bank, the main stakeholder was the government of Namibia (the public), which held a 65% stake in the bank. The government, particularly through the Bank of Namibia (BoN), failed to exercise proper oversight of the operations of the SME Bank.

The editorial of The Namibian on 8 March 2019 stated that several years before the collapse, the technical staff of BoN were concerned about the SME Bank’s failure to adhere to basic banking rules, and that for at least three years, no audited financials were published, and the bank did not hold a minimum amount of deposits with the central bank, as required by law.

Furthermore, it was reported that BoN’s own investigations flagged Enoch Kamushinda, the chief culprit in the saga, as “not a fit and proper person” to hold such a position. Additionally, even after the governor of the BoN and his team discovered the illegal activities, according to court documents, the central bank allowed Kamushinda time to cover his tracks or flee.

It is standard practice for entities such as the SME Bank to have someone in the role of compliance officer. This person ensures that the company adheres to internal policies and national laws, identifies and monitors potential risks, and then reports to the board accordingly.

Additionally, BoN has a department dedicated to overseeing that banking institutions comply with all banking regulations in Namibia.

BoN maintains that it adopts a risk-based supervision (RBS) approach. This approach places more emphasis on understanding and assessing the adequacy of each banking institution’s risk management systems, which are in place to identify, measure, monitor and control risks in an appropriate and timely manner.

Individually or collectively, compliance officers at either BoN or the SME Bank should have spotted red flags with the bank’s operations.

BoN did not follow its own banking regulations in allowing Kamushinda to be appointed, allowing the SME Bank to go three years without publishing its audited financials, and further allowing Kamushinda to escape from taking responsibility for his actions.

There was simply no oversight over the bank’s operations with regard to the publishing (or lack thereof) of transparent financial statements to reassure stakeholder confidence, or ensuring that those responsible are held accountable. The result is N$350 million of taxpayers and depositors’ funds unaccounted for, and only a small portion recovered thus far.

The whole saga resembles the Enron Corporation scandal in the United States of America. Enron was an American energy, commodities and services company which, by the use of accounting loopholes, special purpose entities, and poor financial reporting, was able to hide billions of dollars in debt from failed deals and projects. In 2001, it was revealed that Enron’s reported financial condition was sustained by institutionalised, systematic, and creatively planned accounting fraud, which eventually led to the company filing for chapter 11 bankruptcy.

While those responsible for the Enron scandal were, just like in the SME Bank saga, the senior executives, financial and legal experts have argued that none of it would have been possible if it were not for the negligent oversight by the USA’s Securities and Exchange Commission, the credit ratings agencies and the investment banks.

Enron was enabled by failed oversight, manipulation, and the deceptive practices of these organisations. In the same vein, the public should not be clouded by the “foreigners misled us” narrative. They were enabled by inconsistent and unlawful practices by the SME Bank, and by those trusted with oversight, especially the BoN.

On 14 March, auditor general Junias Kandjeke reported 24 local authorities to the National Assembly for their perennial failure to submit financial statements to his office, as required by law. This shows a growing trend in SOEs, councils and most government organs.

A culture of utter disregard for internal policies as well as national regulations put in place to govern entities trusted with managing state resources is evident. Even worse than that, those trusted to ensure that entities such as the SME Bank comply with rules and practices are effectively enablers because they sit back and do nothing while taxpayer funds are plundered.

Until the day SOEs and state organs have proper checks and balances, underpinned by responsible corporate governance, the narrative of “we were misled” will be a recurring theme.

* Vilho Mbangu is a candidate attorney with certification in risk management. Twitter: VilhoMbangu.

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