{"id":4610,"date":"2017-04-04T00:00:00","date_gmt":"2017-04-04T00:00:00","guid":{"rendered":"https:\/\/amabhungane.org\/amabhungane\/stories\/how-net-1-flouts-the-financial-rules\/"},"modified":"2024-09-23T11:21:20","modified_gmt":"2024-09-23T11:21:20","slug":"how-net-1-flouts-the-financial-rules","status":"publish","type":"post","link":"https:\/\/further.co.za\/amabwp\/how-net-1-flouts-the-financial-rules\/","title":{"rendered":"How Net 1 flouts the financial rules"},"content":{"rendered":"

South Africa\u2019s social grants distributor Cash Paymaster Services has embarked on a charm offensive, emphasising its commitment to “uninterrupted service delivery” and to new restrictions imposed by the Constitutional Court. Those terms limit the ability of CPS parent Net 1 to continue leveraging the welfare system to build a financial services monopoly.
\nBut, as Craig McKune<\/em> demonstrates below, Net 1 has previously shown little regard for laws designed to protect customers from abuse.<\/strong><\/p>\n

The Financial Services Board (FSB) is probing Net 1 over allegations that it abuses its clients \u2013 mostly social grant beneficiaries \u2013 and breaks financial laws.<\/p>\n

Net 1 is the US-listed parent company of Cash Paymaster Services (CPS), which pays social grants for the South African Social Security Agency (Sassa). Net 1 has controversially used this access to sell loans, insurance, airtime and electricity to grant beneficiaries.<\/p>\n

The probe comes after a whistleblower and I separately presented evidence and questions to the FSB, a financial services regulator, suggesting Net 1\u2019s sales staff might not be properly accredited to sell some of its financial products.<\/p>\n

Net 1 does not have its own financial services provider (FSP) license and outsources the role to a third party. The evidence presented suggests this third party might not have the capacity to make sure Net 1 sticks to the rules.<\/p>\n

Critics have accused Net 1 of abusing grant beneficiaries through its business of debiting money from social grants to pay for financial products. Many beneficiaries say money is taken without their authorisation and that they have no clear recourse to stop this.<\/p>\n

Net 1 vigorously disputes this, but my investigations show the company has a long history of flouting financial regulations designed to protect clients from abuse.<\/p>\n

Net 1 executive chair Serge Belamant did not answer detailed questions, but said: \u201cWe follow all of the rules and regulations by all authorities.\u201d<\/p>\n

The regulator<\/strong><\/h5>\n

My attention was first drawn to Net 1\u2019s financial regulatory problems in January. I was investigating the complaints of the company\u2019s alleged abuse of grant beneficiaries.<\/p>\n

Wanting to know what steps an aggrieved beneficiary should take, I looked up the terms and conditions for the Sassa grant bank cards on Net 1\u2019s website. They say that complaints can be directed to Net 1\u2019s outsourced FSP, a company called Eledon Project Management.<\/p>\n

Eledon accounts to the FSB, a statutory body established to regulate people who sell insurance, financial advice and related services. Such FSPs fall under laws like the Financial Advisory and Intermediary Services (FAIS) Act and the insurance acts. The FSB\u2019s overall job is to make sure FSPs treat their customers fairly.<\/p>\n

It is common for companies like Net 1, who don\u2019t have their own FSP license, to outsource the role to a licensed FSP like Eledon.<\/p>\n

This works well when the licensed FSP has enough staff and experience to keep its operating partner in check \u2013 and when the operating partner works in good faith with the FSP. Otherwise, it\u2019s a sham.<\/p>\n

Meet the D\u2019<\/strong>Onofrios<\/strong><\/h5>\n

I called Eledon\u2019s phone number and reached one Lenny D\u2019Onofrio.<\/p>\n

I lied to D\u2019Onofrio, telling him I was calling on behalf of my domestic worker who was having troubles with her Net 1 bank account \u2013 Net 1 was debiting money for a loan she had repaid a long time ago. What\u2019s more, she had lost her bank card and could not get her Sassa grant anymore. These are stories I have heard from a few beneficiaries.<\/p>\n

D\u2019Onofrio told me I had reached the wrong office. He said he was the \u201ccompliance officer\u201d for Eledon but that I should call the company on a different number.<\/p>\n

A man named Carl answered. \u201cHi. I\u2019m looking for Eledon,\u201d I said.<\/p>\n

\u201cWhat is the company he works with?\u201d Carl said, clearly confused.<\/p>\n

\u201cNo, it is a company,\u201d I explained. \u201cIt has an FSP license for Moneyline.\u201d Moneyline is Net 1\u2019s lending subsidiary.<\/p>\n

Carl put me on hold for a minute to consult with his colleagues. When he returned, he said: \u201cI think you have an incorrect number,\u201d and ended the call.<\/p>\n

I tried a second number for Eledon\u2019s Daniela Anderson. On social media, she uses the surname D\u2019Onofrio. I was later told she is D\u2019Onofrio\u2019s sister, although Eledon did not confirm this.<\/p>\n

Anderson dutifully listened to my story. She said I should speak to Lenny D\u2019Onofrio.<\/p>\n

Completing the circle, I called D\u2019Onofrio again, revealed that I was a journalist and recounted my experience trying to lay a complaint with Eledon.<\/p>\n

It appeared likely that grant beneficiaries with real problems would be given the run-around when they tried to sort out financial problems through Eledon, I said.<\/p>\n

I told him that Net 1 was distributing terms and conditions for one of its bank cards that erroneously listed someone else, not Eledon, as the FSP. It was Eledon\u2019s job to fix this \u2013 so beneficiaries knew who to contact with problems \u2013 and it had clearly failed.<\/p>\n

I said that Net 1 had hundreds of salespeople through the country. They are convincing grant beneficiaries to open new bank accounts, where their social grants are automatically transferred every month. To protect consumers, the FSB requires anyone dispensing financial advice to obtain certain qualifications. Yet Net 1\u2019s salespeople are not accredited with the FSB, Eledon\u2019s profile on the FSB website suggests.<\/p>\n

The bottom line, I said, was that Eledon appeared to be ill-equipped to make sure Net 1 treated grant beneficiaries fairly when it sold them financial products.<\/p>\n

I also suggested to Lenny D\u2019Onofrio that the family relationship between Eledon\u2019s compliance officer (him) and a \u201ckey individual\u201d (Daniella Anderson aka D\u2019Onofrio) might be a conflict of interest \u2013 these are statutory positions.<\/p>\n

FSPs are supposed to have their own checks and balances to further protect consumers, including a compliance officer that oversees the FSP\u2019s operations.<\/p>\n

And I pointed out that a third D\u2019Onofrio \u2013 said to be Lenny\u2019s wife \u2013 was a senior manager within Net 1 and, according to a press release, \u201chas worked with Net1 for the majority of her tenure in banking, which has allowed her to establish working relationships with executive and management teams across most business units\u201d.<\/p>\n

How, I wondered, did all the D\u2019Onofrios and Eledon act impartially when dealing with each other and Net 1?<\/p>\n

Report to the headmistress<\/strong><\/h5>\n

Lenny was outraged.<\/p>\n

He emailed me: \u201cYour line of questioning and reading of the facts and the law regarding amongst others, a perceived conflict of interest and any wrongdoing on behalf of any of the parties mentioned in your questions are at best misstated, speculative and at worst baseless. To my knowledge, no client has been prejudiced or \u2018given the run around\u201d\u2019.<\/p>\n

He concluded: \u201cYour self-confessed conduct in pretending to be the employer of a client with a legitimate complaint to elicit information is both unethical and a potential breach to the [press code]. In light of your actions to date, I have no confidence that you will report on the matter in a fair and unbiased manner, and accordingly do not intend making any further comments.\u201d<\/p>\n

The press code permits misrepresentation if in the public interest.<\/p>\n

I sent similar questions to the FSB and within days Net 1 and Eledon were in trouble.<\/p>\n

The FSB demanded documents and contracts from them and, in short order, Net 1\u2019s top managers and Lenny D\u2019Onofrio were on a plane from Johannesburg to Cape Town, where they endured two days of tense interviews with regulators.<\/p>\n

FSB spokeswoman Tembisa Marele told me: \u201cThe FSB has already begun its engagement with Eledon regarding the allegations. A regulatory onsite visit has been scheduled to determine, among others, Eledon\u2019s operational ability to oversee the financial services activities rendered by [Net 1].\u201d<\/p>\n

But the D\u2019Onofrios are by no means the beginning of Net 1\u2019s dubious relationship with South Africa\u2019s financial laws.<\/p>\n

License fail #1<\/strong><\/h5>\n

Net 1 launched its plan to leverage South Africa\u2019s welfare system by founding The Smart Life Insurance Company in 2011. At the time, Net 1 was hoping that its subsidiary CPS would win the Sassa contract to distribute social grants nationally.<\/p>\n

Belamant cut in financial services consultant Chris van der Walt to Smart Life in 2011 as Van der Walt held an FSP license.<\/p>\n

Van der Walt, who later became embroiled in litigation with Belamant, explained in a sworn affidavit how it was Smart Life\u2019s initial business plan to leverage CPS\u2019s expected Sassa contract to sell funeral insurance policies to grant beneficiaries.<\/p>\n

He said: \u201cIt was envisaged that CPS\u2019s infrastructure, such as its staff members who effect the payment of government benefits at payment sites across the country, could simultaneously market and sell long-term insurance products, notably funeral policies.\u201d<\/p>\n

Van der Walt\u2019s job was to make sure Smart Life obeyed the financial regulations. His FSP license meant that he had to account personally to the FSB if anything went wrong.<\/p>\n

He said: \u201cCPS confidently expected that it would be awarded the tender,\u201d and in February 2012, it was \u2013 although the constitutional court later ruled that the contract was invalid because Sassa badly botched the tender in favour of CPS.<\/p>\n

Report to the headmistress too<\/strong><\/h5>\n

Things quickly went wrong for Smart Life.<\/p>\n

By early 2012 Van der Walt had received legal advice that Smart Life\u2019s strategy might be anti-competitive. CPS also did not have an FSP license.<\/p>\n

So, Van der Walt and the Smart Life board changed tack and started to roll out a Smart Life branch network completely independently of CPS and the Sassa contract.<\/p>\n

But Belamant stopped this, Van der Walt said, and a power struggle ensued with Net 1 as the controlling shareholder versus Van der Walt, the FSP.<\/p>\n

In a letter to his regulator, the FSB, Van der Walt complained that Net 1 would \u201csteamroller\u201d decisions \u201cthrough the board at threat of dismissal of the directors\u201d.<\/p>\n

Van der Walt recounted one board meeting: \u201cBelamant expressly told the independent directors that if they can\u2019t keep him out of regulatory trouble, they serve no purpose on the board and they can F*&^ off.\u201d<\/p>\n

Van der Walt claimed that Belamant and Net 1\u2019s chief financial officer, Herman Kotze, \u201chold the FSB in low esteem and have been very vocal about what they believe to be undue interference in Net 1\u2019s right to conduct business\u201d. He said Belamant routinely referred to a certain financial regulatory framework as \u201cthat b##^sh*t\u201d.<\/p>\n

One of Van der Walt’s Smart Life co-directors resigned in protest over similar complaints, while CPS continued to sell Smart Life policies without a license.<\/p>\n

Then the FSB intervened. In February 2013, its long-term insurance registrar, Jonathan Dixon, ordered Smart Life to stop selling insurance policies immediately.<\/p>\n

Dixon pointed at Belamant, who he said \u201cdoes not function within the confines and parameters of the [Smart Life] board as a collective and unilaterally approves or rejects key decisions\u201d.<\/p>\n

Dixon said Belamant was conflicted as both Smart Life chair and Net 1 executive chair, and this endangered Smart Life\u2019s clients\u2019 policies, which had to be sustained for the rest of their lives.<\/p>\n

\u201cLawfare\u201d<\/strong><\/h5>\n

Not long after, Belamant fired Van der Walt.<\/p>\n

\u201cDuring a board meeting, Belamant admitted that he simply wanted me \u2018out\u2019,\u201d Van der Walt said in a letter to the FSB. \u201c[Belamant said] he had instructed attorneys to find contractual reasons for it regardless of merit, and if the independent directors did not support his resolution, he would convene a shareholder meeting and dismiss them all.\u201d<\/p>\n

Van der Walt sued Belamant, who countersued. Net 1 also laid criminal charges over documents Van der Walt removed from Smart Life. Ultimately, they settled out of court and the charges went nowhere, Van der Walt said.<\/p>\n

Meanwhile, the FSB continued its own probe, finding that both Smart Life and CPS contravened financial regulations.<\/p>\n

Van der Walt was in trouble because Net 1\u2019s breaches happened on his watch as the FSP license holder. The FSB also found that Van der Walt provided contradictory versions on other matters. It decided that he \u201cdoes not comply with personal character qualities of honesty and integrity\u201d and debarred him.<\/p>\n

Van der Walt appealed to an FSB panel, but Judge Yvonne Mokgoro upheld the decision. She ruled that Van der Walt\u2019s duty was to make sure Net 1 obeyed the law. He knew \u201cthat none of the people employed by CPS who sold the Smart Life policies had been duly qualified and authorised by Smart Life or any FSP for that matter, to serve as representatives. Besides, CPS was not an authorised FSP.\u201d<\/p>\n

Van der Walt has applied to have Mokgoro\u2019s decision reviewed in a high court.<\/p>\n

License fail #2<\/strong><\/h5>\n

Then Net 1 signed on with a new FSP, Libra Financial Services.<\/p>\n

Libra\u2019s people refused to speak to me, but I was otherwise able to collect enough information to piece together some of their story. It is no less worrying than Van der Walt\u2019s.<\/p>\n

Starting late in 2013, Libra put together an emergency rescue plan for Net 1. It assessed Net 1\u2019s compliance with the FAIS Act and other laws and took steps to fix problems.<\/p>\n

Under Libra\u2019s watch, Net 1 was able to resurrect Smart Life and get the insurer its own FSP license.<\/p>\n

Libra used its own FSP license to cover for CPS, Net 1\u2019s loan company, Moneyline, and Net 1 Mobile Solutions, which sells electricity and airtime. The latter is responsible for many grant beneficiary complaints about unauthorised deductions.<\/p>\n

But by late 2015, Libra \u2013 like Van der Walt before them \u2013 was battling to keep Belamant and Net 1 on the straight and narrow.<\/p>\n

In one email, a Libra staffer notified Net 1\u2019s executives that Net 1 found itself in a \u201chigh risk position\u201d because it was \u201cnon-compliant\u201d with financial laws.<\/p>\n

According the email, Net 1\u2019s managers improperly bypassed Libra to instruct financial staff \u201cin direct and flagrant disregard of the FAIS Act\u201d.<\/p>\n

The Libra staffer also wrote that when grant beneficiaries complained about Net 1\u2019s debits from their accounts, they were \u201cnot being responded to within mandated timelines\u201d, and Net 1 had been \u201cextremely reticent\u201d to provide information about the complaints to Libra.<\/p>\n

Libra also complained that Net 1\u2019s hundreds of sales employees were giving financial advice \u2013 as defined by the FAIS Act \u2013 when they convinced beneficiaries to open new accounts so that they could take loans.<\/p>\n

To give such financial advice, the salespeople must be properly FAIS accredited, a cumbersome and expensive process involving exams, training and monitoring. According to Libra, Net 1 didn\u2019t want to get them accredited.<\/p>\n

When I asked one Net 1 salesman if he and his colleagues had been accredited to give financial advice, he said: \u201cNo, we don\u2019t have that… None of us has ever been trained with FAIS. We were not even given some sales training, including the one which is FAIS. None of us ever attended or have got any certificates of FAIS compliance.\u201d<\/p>\n

I asked if his Net 1 branch manager was trained in financial services. He said: \u201cNothing, nothing.\u201d<\/p>\n

However, FSB spokeswoman Marele said: \u201cThe question whether or not financial services are being rendered is both a factual and legal question which should be answered on a case-by-case basis. This will also be looked at during the regulatory onsite visit [of Eledon].\u201d<\/p>\n

I received separate correspondence from a senior FSB manager who explained that in her opinion Net 1\u2019s staff were indeed dispensing financial advice, so they should be properly accredited.<\/p>\n

In the Libra staffer\u2019s email to Net 1, he said: \u201cThis has unfortunately become an untenable situation, as no remedial action, nor response to our communications, has been forthcoming.\u201d<\/p>\n

Not long after, Libra fired Net 1 \u2013 and the D\u2019Onofrios stepped in.<\/p>\n

If at first you don\u2019t succeed<\/strong><\/h5>\n

Two years ago, Net 1 applied to the FSB for CPS, Moneyline and Net 1 Mobile Solutions\u2019 own FSP licenses. If successful, Net 1 would no longer need to use outsiders like Van der Walt, Libra and Eledon.<\/p>\n

To get its licenses, Net 1 needs to demonstrate to the FSB that its managers and staff are fit and proper for the job, that it can stick to the rules and that it will treat its clients fairly.<\/p>\n

The FSB was expected to decide on these licenses in February, but this appears to have been delayed by the probe. FSB deputy executive officer Caroline Da Silva told me that Net 1\u2019s applications were taken to a license committee in March \u201cand are still under consideration\u201d.<\/p>\n

In a separate reply, FSB spokeswomen Marele said: \u201cIt would be inappropriate to make any comments in a public forum in respect of the applicants\u2019 appropriateness to hold FSP licenses.\u201d<\/p>\n

In response to detailed questions for this article, sent in February, Net 1\u2019s Belamant said: \u201cThis week is not good for me to respond as it is the week of our board meetings and investors update. I can assure you however that all is good on our front and that we follow all of the rules and regulations by all authorities.\u201d<\/p>\n

Through a new PR advisor, Bridget von Holdt, Net 1 responded to follow up questions last week. She said: “The comments made by the individuals concerned are false, misrepresented or inaccurate. Net 1 has referred to the relevant reports, judgments and affidavits regarding the disciplinary action taken by the FSB and criminal charges brought against these individuals and FSP for dishonesty, fraud, etc. Based on this, it is not recommended that you rely on their interpretation of events (sic).”<\/p>\n

She would not give details of the criminal charges.<\/p>\n

Get more on this topic<\/h5>\n