The National Prosecuting Authority’s first indictment in the Steinhoff case has exposed two fraudulent schemes that generated more than R20.7 billion in fake profits and income over three years.
The NPA presented the 92-page indictment against former chief financial officer Andries Benjamin la Grange (49) and former director Stephanus Johannes Grobler (62) in the Pretoria Specialised Commercial Crimes Court on 26 June during their court appearance.
La Grange and Grobler are the only South African Steinhoff executives facing charges for the accounting scandal that led to the retail giant’s collapse in 2017. The charges against them include racketeering, three counts of fraud totalling R21bn, manipulating financial statements, and failing to report fraudulent activities. Both are currently out on bail.
Read: Steinhoff’s former chief financial officer appears in court
Had it not been for Markus Jooste’s death on 21 March, Steinhoff’s former chief executive would probably have joined them in the dock last week. As it stands, Jooste’s name is all over the indictment, describing his involvement in the “systematic and organised” fraud.
In the indictment, the NPA describes how the Steinhoff Group went about falsifying profits through two elaborate schemes – the TG Group fraud and the BNP Paribas commission transactions.
According to the NPA’s calculations, the first generated illusory profits totalling €1 043 633 135 during the 2014 to 2016 financial years, while the second inflated the Steinhoff Group’s income with fictitious commission transactions totalling €376 586 768 in the 2014 and 2015 financial years.
Together, this amounts to €1 420 219 903. The NPA puts the average euro/rand exchange rate for the past five years at 14.6:1. If you do the maths, it comes to R20 735 210 583.8.
House of cards
During the 2014 to 2016 financial years, Steinhoff Group, a listed holding company, operated with numerous subsidiaries in about 30 jurisdictions.
In 2014 and 2015, Steinhoff International Holdings Limited (SIH) was listed on the Johannesburg Stock Exchange. After 2015, the group’s structure changed. On 7 August 2015, SIH proposed a scheme where shareholders would exchange their SIH shares for shares in Steinhoff International Holdings NV (SINV), based in the Netherlands. This made SIH a subsidiary of SINV, which would be managed and taxed in South Africa. SIH’s JSE listing ended on 7 December 2015, and SINV shares began trading on the Frankfurt Stock Exchange and the JSE.
The scheme was approved on 7 September 2015, making SINV the holding company from 2016 onwards.
The Steinhoff group structure contained three components: the “listed holding companies” (SIH followed by SINV), the “intermediate holding companies”, and the “operating companies”.
The latter, which operated in various countries, were engaged in manufacturing and retail, purchasing goods from suppliers.
According to the indictment, the fraud began within 16 of these companies via the issuance of fraudulent invoices, which inflated their profits.
On the date marking the beginning of the alleged fraud, 1 July 2013, the group’s share price was R22.55. Three years later, on 30 August 2016, the SIHN share price reached a high of R93.60.
But the centre did not hold.
On 6 December 2017, SINV made a public announcement (dated 5 December), via SENS, headed “Steinhoff announces investigation into accounting irregularities, resignation of CEO”.
Just two months before the announcement, the closing share price of SINV on the JSE was R60.03 (30 September 2017). This declined to R55.81 on 1 December 2017, and then to R45.65 on 5 December 2017.
A mere two days after the announcement, the share price fell to R6 (8 December 2017). It declined further to an all-time low of R0.82 on 20 December 2019.
During 2022, the shares traded between R2.50 and R1.72 each.
Steinhoff was officially liquidated on 13 October 2023.
According to a calculation shared in the indictment (Schedule 12), the actual or potential loss to shareholders who held shares on 5 December 2017 was about R230bn to R250bn.
‘Sophisticated washing machine’
The indictment laid bare the machinations of two fraudulent schemes: the TG Group fraud and the BNP Paribas commission transactions.
According to the indictment, the TG Group fraud aimed to inflate the Steinhoff Group’s financial position and profits by treating loans as assets and fictitious payments as revenue, without corresponding costs.
When it came to generating “fictitious payments”, the scheme relied on two commercial concepts: buying group and commercial know-how.
A buying group is an independent entity that negotiates discounts from suppliers by combining the purchasing needs of several competing companies. It does not buy or sell supplies itself but secures volume rebates, also known as kick-backs, which are distributed to the companies based on their orders, minus a margin for the buying group.
The concept of commercial know-how involves proprietary methods developed by businesses to gain a competitive edge. These methods can be sold or licensed to other companies. The TG Group fraud relied on the fictitious development and sale or licensing of such know-how within and outside the Steinhoff Group.
The TG Group consisted of five companies, four of them Swiss and one Austrian.
- TG Sourcing Services SARL, a buying group;
- TG Retail Concepts SARL, which ostensibly provided valuable know-how regarding retail and manufacturing operations;
- TG Treasury Services SARL, which ostensibly provided valuable know-how regarding the financial operation of retail and manufacturing operations;
- TG Management Holding GmbH, which borrowed funds from the Steinhoff lending companies; and
- TG Management Holding SA, which similarly borrowed funds from the lending companies.
The NPA alleges that the TG Group companies were shell entities used solely for the TG Group fraud and did not engage in any genuine business activities.
The indictment claims that “ostensible ‘negotiations’ with the TG Group companies were carried on almost exclusively by Jooste”, without involving any other members of the senior management of the Steinhoff Group other than Grobler and Dirk Schreiber, the chief financial officer of Steinhoff Europe.
It further alleges that Grobler was “involved in the drafting of the ‘contracts’ supposedly resulting from these ‘negotiations’, based on the instructions from Jooste as to the agreements supposedly reached”.
The NPA alleges that altogether 16 operating companies benefited from the scheme by way of payments received from the TG Group companies in terms of the TG Group contracts, “ostensibly in payment of invoices which were in fact fictitious”.
In turn, these payments to the operating companies were financed by loans from two other Steinhoff companies. These lending companies were Steinhoff Mobel Holding Alpha GmbH (an Austrian company) and Steinhoff Europe AG (a Swiss company).
“Loans which were themselves fraudulent in that they were not intended to be and could never be repaid, but which nevertheless were represented as assets in the relevant Steinhoff AFS (annual financial statement),” the indictment reads.
The indictment states that the only two directors of both companies “at all material times were Jooste and Schreiber”.
The TG Group invoices were processed through the operating company’s accounting process and the Steinhoff Group consolidation process. The TG Group loans were processed through the lending company accounting process and the Steinhoff Group consolidation process.
Cash flowed in a circle: from lending companies to TG Group companies and back to operating companies, facilitated by Steinhoff’s central treasury and cash pooling.
The TG Group invoices was reflected as profit, and the total of the TG Group loans were reflected as assets in the form of cash or cash equivalents.
“This sophisticated washing machine generated entirely illusory profits totalling €1 043 633 135, representing a substantial portion of the profits of SIH and SINV for the 2014 to 2016 financial years,” the indictment reads.
Apart from Deloitte, which audited SIH and SINV, the 16 operating companies implicated in the TG Group fraud were audited by five other auditing firms. This fragmented oversight meant that no single auditor had a comprehensive view of all transactions involved in the TG Group fraud.
“The TG Group fraud could only succeed if all the facts were hidden from the auditors of all the relevant companies. The complexity of the TG Group fraud lies in the methods used to disguise the true position and avoid detection,” the indictment reads.
The BNP Paribas commission transactions
The NPA alleges that the BNP Paribas commission transactions, like the TG Group fraud, were fraudulent transactions processed through SIH’s accounting systems. These transactions were included in SIH’s 2014 and 2015 AFS.
The indictment names the parties involved in the transactions as BNP Paribas SA, a multinational bank based in Paris; Triton-KLS Beteiligungs GmbH, a German-incorporated entity; Steinhoff Finance Holding, an Austrian-incorporated entity; and Steinhoff Europe AG (SEAG Austria), an Austrian company.
Siegmar Schmidt was the sole director of Triton B, while Jooste, Grobler, and Schreiber were directors of Steinhoff Finance.
According to the indictment, Jooste, Schreiber, and Schmidt, “in concert and under the guidance of Jooste”, allegedly presented that BNP Paribas had entered an agreement with Steinhoff. This agreement purportedly involved commissions to be paid by Paribas to Steinhoff Europe for its co-operation in consumer finance activities in Europe and/or a joint consumer finance project.
The commissions owed to Steinhoff were allegedly funnelled through an intermediary, Triton B, totalling €376 586 768 in transactions in 2014 and 2015.
According to the NPA, SEAG Austria supplied Triton B with the funds needed to make this payment to Steinhoff Finance.
“This was done to create the impression that actual money exchanged hands, when in fact it was just Steinhoff Group money that was being round-tripped,” the indictment reads.
In an affidavit, La Grange informed the court of his intention to plead not guilty to the charges, asserting his innocence. Grobler has similarly stated his intent to clear his name.
Both are scheduled to appear in court again in early October.
