FNB'S DIRTY DISCOVERY

Oh dear! Bady boy Adrian Gore! Very bad boy! The problem that I have with all of this is that as a discovery member, I am appalled at the amount of my monthly subscription - it is quite disgusting (but then I suspect that everyone feels the same about whatever medical aid scheme it is that they belong to), and now we know why. The senior guys get to stash huge quantities of money off shore, whilst the rest of us struggle to even make the monthly subscriptions!

As for FNB - well I am sure that if you dig deeply enough, you will find that all the banks are doing it! Why should FNB be any different to the rest of the 'shite' that we as South Africans are forced to put up with. As fast as it is brought to light that we as South Africans, pay the highest bank fees in the world, so they find different ways to charge us more and more,under the guise of 'bank fees'!

Disgusting, on two points!

FNB's dirty discovery
Nic Dawes and Sam Sole
08 September 2007 06:00
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A nasty little reputation problem has emerged for financial services group FirstRand Bank and its subsidiary, Discovery. This comes as Discovery has been trumpeting its results while downplaying disputes with doctors and the registrar of medical schemes -- and as FirstRand has been talking up its proposal to unbundle its majority shareholding in Discovery.

The problem flows from abandoned offshore tax structures that FirstRand's then-private-banking arm, Ansbacher Trust, offered to a group of rich clients -- including directors of Discovery, most notably chief executive Adrian Gore. Such structures were offered by many financial institutions in the wake of the 1998 decision by the government to allow South Africans to invest up to R500 000 offshore, but some of them were more aggressive than others, raising questions about their legality.

Two related schemes developed around 1999 by Ansbacher (since sold) have come under scrutiny now because of a protracted legal dispute between FirstRand and tax consultant Barry Spitz -- and some detailed reports on that dispute in the investigative magazine noseweek. FirstRand heavyweight Laurie Dippenaar admitted Ansbacher had botched the administration of the schemes, but insisted the bank believed the underlying scheme was legal. Spitz was brought into Ansbacher Trust Services in South Africa in 2001 to advise on such schemes, designed to minimise the tax paid by local high earners. Part of his remuneration was to be based on improved income achieved by the local Ansbacher unit. Spitz, who is viewed by the FirstRand Goliath as more of a greedy troll than a plucky David, soon fell out with his client and his services were terminated. In November 2001 Spitz launched court action against FirstRand, claiming R2,3-million.

In essence Spitz argued two things: first, that FirstRand had been incorrect to claim he had not met his targets; and second, that he had struggled to do so because Ansbacher had demanded he provide services that were not legally compliant. He demanded that Ansbacher disclose details of the relevant transactions, both so that he could challenge its calculation of fee income and to test his case over the legality of the firm's conduct. Spitz cast his net wide and FirstRand fought to limit his access to its internal documentation. Ansbacher was forced to disclose internal documentation relevant to its dealings with Spitz and noseweek latched on to two sets of transactions -- those involving Gore and an offshore structure, Duisberg Holdings. Because there is a grey area between legal tax avoidance and illegal tax evasion, it is difficult to pin down whether the transactions were legal or not. But the documents obtained by Spitz raise serious questions about both the morality and the competence of the services provided by Ansbacher.

The transaction relating to Gore is sketched only vaguely in the documentation seen by the Mail & Guardian, but FirstRand confirmed it related to a "loop structure", which is designed to avoid certain local tax and foreign exchange rules by using an offshore entity to purchase local assets. What is of concern are accounting entries reflecting more than R2-million relating to Gore coming into a local Ansbacher account in September 2000 and then going out a day later to Gore, minus a R137 000 fee for Ansbacher. The outgoing funds are described as "dividends", effectively making them tax free.

FirstRand said these were legitimate dividends earned by Gore from preference shares and the deductions related to other fees owed by Gore to Ansbacher. The situation regarding Duisberg is clearer. Duisberg was a scheme designed to avoid clients having to pay any tax on income generated by their R500 000, once it was offshore. Initially the way this was achieved was by having clients transfer money to an Ansbacher trust in the Channel Islands. But this would attract donations tax if the amount was "given" to the Ansbacher trust.

In the case of a R500 000 interest-free "loan" to the Ansbacher trust, provisions of the Income Tax Act would require that local taxpayers declare income as if they had received interest. Lawyers acting for Ansbacher came up with a scheme to avoid these niggles. Clients would buy R500 000-worth of shares in an offshore company, Duisberg, set up by Ansbacher in the British Virgin Islands. That company would then make a R500 000 interest-free loan to an Ansbacher trust in the Channel Islands, meaning that local taxpayers could declare they received no income from their share investment. The problem was that the Income Tax Act does not recognise a scheme or arrangement constructed simply to evade tax -- and for Duisberg to have even a semblance of legitimacy it would have to exist at arm's length from its South African clients.

Instead Ansbacher ran Duisberg as a paper fig leaf and did not even route funds via Duisberg. It sent its clients investments directly to the Channel Islands trust.