On 12 September 2019, the South African Financial Sector Conduct Authority (FSCA) announced the conclusion of its investigations into Steinhoff International Holdings N.V. (Steinhoff). The FSCA found that Steinhoff provided false, misleading or deceptive statements to the market and accordingly breached the provisions of the Financial Markets Act No. 19 of 2012 (the FMA). As a consequence of this breach, the FSCA has fined Steinhoff R1.5 billion but has remitted a portion of the fine due to the precarious financial position of the Steinhoff group, resulting in Steinhoff paying a penalty of R53 million. This is the largest fine ever to be levied by the FSCA.
The Steinhoff investigation and enforcement action
In December 2017, Steinhoff’s shares plunged following the sudden resignation of its CEO, Markus Jooste, and allegations of accounting irregularities. Following a lengthy internal investigation conducted by an independent expert, it was revealed that a range of “fictitious and/or irregular” transactions “substantially” inflated the profits and assets of the group by over €6.5 billion between 2009 and 2017. The investigation also found “a pattern of communication” showing that executives “instructed a small number of other Steinhoff executives to execute their instructions, often with the assistance of a small number of persons not employed by the Steinhoff Group”. These “fictitious and/or irregular transactions were entered into with parties said to be, and made to appear to be, third party entities independent of the Steinhoff group and its executives” but which the investigation found appeared instead to be “closely related to” those executives who were issuing the instructions to perform these transactions.
Although the fine’s quantum remains R1.5 billion, the FSCA took into consideration Steinhoff’s financial position, the losses already sustained by Steinhoff’s shareholders and the cooperation of the current management of Steinhoff in the investigations, and decided to remit a portion of the penalty resulting in Steinhoff being required to pay an amount of R53 million. Brandon Topham, the divisional executive for investigations and enforcement at the FSCA, said in an interview that “if you look at the financial statements you will see that it is actually insolvent and there is just no way it would have been able to pay a fine of R1.5 billion.”
While the investigations into Steinhoff itself have been concluded, Mr Topham confirmed that “the perpetrators behind the actual misrepresentation … are still on our radar and we are busy with investigations into that”. Mr Topham also warned that those behind the fraudulent actions are unlikely to receive the same treatment that Steinhoff did in respect of the remission of a portion of the fine, and that the FSCA would be making further announcements in this respect in the next 8-12 months.
Going forward – higher fines to come from the FSCA?
The magnitude of the fine issued by the FSCA against Steinhoff not only demonstrates the significant impact that the Steinhoff scandal had on millions of South Africans (through losses in investments and retirement/pension savings) but also suggests a change in behaviour of the FSCA – issuing fines far beyond the levels previously seen and more in line with the penalties administered by foreign regulators such as the US Securities and Exchange Commission. While the FSCA did remit a large portion of the fine in order to assist the embattled company, the comments from Mr Topham suggest that the fines to be issued against the individuals involved may be as significant and with no remittance possible. Entities subject to the provisions of the FMA should be cautious of this development and ensure that their corporate governance protocols relating to insider trading and other market abuse matters adequately protect against any conduct which may expose such entities or their management to the new agenda of the FSCA.