Central bank's shady past

IMAGINE that Barclays or National Westminster had been secretly given in excess of pounds 250m by Eddie George and the Bank of England. And imagine that the recipients of the donation never declared it in their accounts, that it was deliberately concealed from all but a few directors and executives of the two main shareholders in the banks, and that all the parties concerned stoutly denied the existence of the gift for years.

Go one step further and imagine that all the key participants were members of a secretive organisation dedicated to the maintenance of white minority rule. Impossible? Just such an analogous situation has unfolded in South Africa over the last few years. The recipient of the gift was a banking group called Absa (the Amalgamated Banks of South Africa) which controls some 40 per cent of South Africa's domestic banking business. The donor was the South African Reserve Bank with Chris Stals at its head, and the secret organisation was the Broederbond, the Afrikaner organisation set up in 1918 to maintain and preserve the Afrikaner nation's dominance in an overwhelmingly non-Afrikaner society.

Officially the Broederbond no longer exists, having been reformed into a purely "cultural" organisation. But few people believe that this particular leopard has changed its spots. Mr Stals was a prominent member of the Broederbond (Brotherhood). His father was a leader of the society. Leading executives of Absa and the banking group's two chief shareholders, the Rupert Group and insurance giant Sanlam, were also Broederbond members.

But perhaps most surprising of all is that none of the money has been returned to the financially hard-pressed new government, and Mr Stals remains governor of the Reserve Bank, and indeed was treated to a straightforward interview in last week's Financial Times.

Last November, South African Supreme Court judge Mr Justice HC Nel issued a damning report on Mr Stals's reign at the Reserve Bank and called for his influence on the South African business community to be "eradicated".

And a few weeks ago, the Mandela/Mbeki government received an even more damaging report from a group of international bankers including former senior officials from the Bank of England. According to sources in Johannesburg, this report savages the SARB's role in South Africa's financial life and states that the government has a sound legal case to receive some pounds 750m used to prop up certain banks in the early 1990s.

But an even greater scandal remains a possibility. In the dying days of apartheid, a secretive organisation with the deceptively bland title of Directorate of Covert Collections was established. The DCC set up a network of front companies to facilitate the grisly work of apartheid's death squads around the world. Persistent and growing allegations have circulated in South Africa that such companies were organised with the direct assistance of executives of Absa.

To date, the ground-breaking Truth and Reconciliation Commission has not examined any evidence of who exactly funded the terrorist activities of the DCC. But if and when the commission gets round to this, the reputations of a number of highly-respected businessmen may be revised. Such men include a politically well-connected English lawyer who allegedly helped to set up the front companies.

In order to understand the current crisis it is necessary to go back to the early 1990s and to appreciate the inextricably linked nature of South African finance and business and its politics. As part of their determination to retain total power, the Broederbond decided long ago that the Afrikaners needed their own financial institutions, and in 1939 Volkskas bank was formed. In 1991, Volkskas merged with Allied Bank and the United Building Society to become Absa. In 1992 Absa issued shares to acquire Bankor, the last Afrikaner bank outside its umbrella. From 1986 Bankor had been the recipient of a secret donation from South Africa's central bank, the Reserve Bank. The Reserve Bank's first assistance to Bankor/Absa was to make soft loans to them; this money was then invested in government stock yielding 16 per cent. Bankor/Absa pocketed the difference between this 16 per cent and what it paid back to the central ba nk. When Mr Justice Nel examined the circumstances surrounding a similar Reserve Bank soft loan to the insolvent Cape Investment Bank, his analysis was unequivocal. He stated in his report that these were "simulated transactions". Mr Nel, himself an Afrikaner, did not mince his words: "The standards set by the Reserve Bank, by its philosophy that the end justifies the means, and the apparent acceptance thereof by the auditors concerned, could only have had a negative influence on the auditing profession on South Africa." Mr Nel lambasts the auditors who put their signatures to Absa and the Cape Investment Bank's false accounts. In the case of Absa these auditors were local offices of Big Six accountants Ernst & Young and KPMG. Mr Nel lists their failings: as well assign ing false and misleading accounts, they failed to report the discovery of material irregularities as required by the Public Accounts and Auditors Act; they backdated auditors' reports, financial statements and letters; they failed to scrutinise minutes o f directors' meetings and they actively assisted their clients in misleading the Receiver of Revenue. Mr Nel was talking specifically about the auditors of Cape Investment Bank, but precisely the same modus operandi was followed at Absa. "Those involved seemed to believe that, in addition to auditing the books of a company, their function was to ... protect the management of the company as far as possible ... and that the end justified the means." But auditors rarely act on their own initiative. Normally, they act in conjunction with the wishes of their clients. To underline the point, Mr Nel quotes what he calls the "startling" evidence of the Reserve Bank governor, Mr Stals, in the Rail Commuter Corporation arbitration where Mr Stals expressed his view that the end did indeed justify the means. Although Mr Nel's report is specifically into events surrounding the collapse of Cape Investment Bank, his criticisms deal with the Reserve Bank's general practice and philosophy. Central to this was the repeated use of what he calls "simulated" transact ions. In plain English, a "simulated" transaction is a bogus transaction, and the truth of this was confirmed when the Reserve Bank and Absa consistently denied that any such assistance was given or received for four years after the secret arrangement - which was not made public until 1996. Mr Stals's rationale for the central bank's soft loans was that they were necessary to maintain banking stability in South Africa. Such assistance, he adds, requires complete secrecy. But this issue is specifically dealt with by the former Bank of Englan d officials and their team, who dismiss this line of defence out of hand. The British experts argue that the actions of Mr Stals and the South African central bank fitted no acceptable international pattern and were in fact illegal. Crucial to this line of argument is the fact that Absa's two main shareholders, the Rupert Group and Sanlam, were fabulously wealthy in 1992. Mr Stals characterises the Reserve Bank's action as the operation of a "lifeboat" and as such normal central banking practice. But the Bank of England team pointed out that is not normal to send out a "lifeboat" to a ship which has more than adequate res ources. As a result of the bogus "lifeboat" Absa has flourished and directors and executives of the bank have benefited from dividends usually taken by way of extra shares. Other investors were denied knowledge of this secret "buffer" of pounds 250m. Yet despite the criticisms made of Mr Stals's stewardship of the Reserve Bank, he remains governor. Pressure is mounting within the ANC for the government to tackle the reality of Afrikaner economic power. Mr Stals and his supporters have suggested that were he to be dismissed, there would be a run on the rand.