Net1 Understated South Africa Profit to Court, Group Says

Updated on
  • Net1 unit’s submission to Constitutional Court audited by KPMG
  • Company rejects report’s findings, calls for retraction

Net1 UEPS Technologies Inc., a unit of which distributes welfare payments in South Africa, understated its profit from the government contract in a submission to the country’s Constitutional Court that was audited by KPMG LLP, a report released by a development-economics research agency said.

The company rejected the allegation and demanded the report be retracted.

The court demanded the submission from Net1’s Cash Paymaster Services this year because the company continued to distribute more than 150 billion rand ($10.7 billion) of payments annually even though its government contract was ruled illegal in 2014 after tender procedures weren’t followed. The court this year said CPS couldn’t profit from an illegal contract.

The statement submitted to the court “appears to underestimate the pretax profits of CPS from the unlawful contract by between 214.2 million rand and 614.4 million rand,” the Alternative Information & Development Centre said in the report. “The figures in the statement do not match the revenue from social-grant distribution in South Africa in annual reports from Net1.”

The report adds to criticism of the conduct of both Net1 and the state welfare agency, which put payments of 17 million monthly grants under threat by failing to comply with an earlier court order to find a replacement for Net1. That forced the court to allow CPS’s contract to be extended until April next year to keep the money flowing. It also drags KPMG into a fresh controversy less than three months after most of its senior South African staff quit following an internal probe that questioned their work for government and a family that does business with relatives of President Jacob Zuma.

Expensed Bonuses

The AIDC also said that CPS classified a 117.1 million-rand transaction to include black partners into the business, a practice encouraged by the government, and 41.8 million rand of bonuses for management as expenses when they should not have been. The CPS statement also doesn’t clarify whether the figures presented include profits from subsidiaries that are also involved in grant distribution and security arrangements for those. In May CPS said it made a profit of 1.1 billion rand from the welfare contract in its submission to the court.

Net1 said it had complied with the court’s order to compile and submit an audited statement of expenses incurred, income received and net profit earned under the completed contract, and that it was only made aware of the AIDC report on Sunday.

“The report contains numerous factual inaccuracies and many components are based on conjecture and speculation,” the company said in an emailed response to questions. “Engagement with Net1 would have willingly provided the author with information to assist him to compile the report and cleared any misconceptions and errors.”

The report used the wrong period to calculate CPS’s revenue and used the wrong exchange, rate, Net1 said. It also queried the treatment of its black economic empowerment transaction and bonuses by the AIDC.

KPMG said in a statement that it had noted the report and would comment once it had studied it.

The AIDC’s report was commissioned by the Centre for Applied Legal Studies, a legal center based in Johannesburg, and the Black Sash Trust, a South African human-rights group.

“The report demonstrates that CPS has not disclosed the full extent of its profits from the unlawful contract,” the groups said in a statement accompanying the report. “This report also suggests additional staggering costs to the state.”

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