Posted on June 29, 2018

Corruption Gutted South Africa’s Tax Agency. Now the Nation Is Paying the Price.

Selam Gebrekidan and Norimitsu Onishi, New York Times, June 10, 2018

The nation’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.


Wielding a barrage of fictitious news stories and doctored assertions by one of the world’s biggest auditing firms, KPMG, Mr. Zuma managed to thwart scrutiny into his own taxes, his family’s affairs and his allies’ finances, according Mr. 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 A.N.C. 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 benchmarks 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.


South Africa’s version of the Internal Revenue Service 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 A.N.C. 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 A.N.C. — the nation’s new president, Cyril Ramaphosa, is struggling to assert his authority and fulfill his pledge to root out corruption. He now stands knee-deep in a very messy fight to wrest the tax agency from the legacy of his predecessor, Mr. 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 already 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 Mr. Zuma removed Mr. 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 Mr. Pillay had approved the creation of an illegal “rogue unit” that had planted bugs at Mr. 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, Mr. 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, later 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.


Even more damaging, the lurid tales of corruption and intrigue inside what was once an A.N.C. 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 A.N.C.

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.


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 A.N.C. has especially chipped away at agencies and posts that hold the powerful accountable, like the national police, prosecutors and the public protector’s office.


The Politics of Tax Evasion


“‘Why must I go and answer questions in Parliament? Putin doesn’t go to Parliament to answer questions,’” Mr. Pillay recounted Mr. Zuma saying.


On top of that, one of Mr. 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 Mr. Zuma’s wives — all of which caught the attention of tax investigators, the four former officials said.


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, Mr. Pillay said. And while party loyalists enriched themselves in many ways, he said, “there was order at the trough.”

But under Mr. 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 Mr. 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,” Mr. Pillay said. {snip}


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 of 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 one million calls to remind taxpayers of their obligation to pay.

For Judge 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. {snip}


“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 Mr. Zuma and his allies enough ammunition to grab control over another prize — the state coffers in the National Treasury.


By the time KPMG started digging into the tax agency, however, Mr. van Loggerenberg [a chief tax official] had become embroiled in a personal scandal that added even more fuel to the national bonfire.

By his own admission, Mr. 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.


In the end, the 139-page KPMG report found no evidence of a brothel or illegal wiretapping of Mr. Zuma.

But it argued that members of the so-called rogue unit [headed by Loggerenberg] 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.


This sentence gave Mr. Zuma and his allies the tools to go after an even bigger target: the National Treasury, which Mr. Gordhan had moved on to oversee as finance minister. The authorities publicly summoned Mr. Gordhan in late 2016 and charged him with fraud.


From there, KPMG might have simply moved on to other government projects, had it not been for a surprising development.

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 that it did not have evidence to support the statement it had made about Mr. Gordhan, the finance minister Mr. 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.


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.


The legal problems facing Mr. van Loggerenberg and Mr. 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 A.N.C. 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.


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.”


Restoring Taxpayer Trust


With opposition figures gaining control of the nation’s biggest cities, the A.N.C. removed Mr. Zuma as president of the country 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, the chairman of KPMG International at the time, promised “an independent investigation” into the rogue unit report last September.


But KPMG has not followed up in the eight months since Mr. Veihmeyer’s pledge. KPMG International declined interview requests, saying only that it “continues to cooperate” with inquiries.


At a recent hearing, the agency’s new acting commissioner, Mark Kingon, delayed its start by a couple of 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, Mr. Kingon refused to speak under oath.


Now, South Africa is waiting to see how far its new president, Mr. Ramaphosa, will carry his anti-corruption drive. Many are skeptical, contending that he did little to prevent his fellow A.N.C. leaders from undermining the tax agency and other institutions during his nearly four years as Mr. Zuma’s deputy president.

Yet another inquiry, this one ordered by Mr. 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’s faith in government and persuade them to do what may seem, once again, unimaginable — pay their taxes.