FORENSIC investigation into the affairs of First Mutual Life Assurance (FML), a wholly-owned subsidiary of First Mutual Holdings Limited (FMHL) which provides primary individual and group life assurance cover, has unearthed gross abuse of policyholder funds totalling US$53 million.
BRENNA MATENDERE
FML is the second-largest life assurance company in Zimbabwe by market share and also provides retirement, medical insurance, micro-insurance and other long-term financial security products.
The forensic audit was conducted by BDO in collaboration with RIMCA Solutions who were engaged by the Insurance and Pensions Commission (Ipec), which suspected wrongdoing by the company. FML had failed to comply with the asset separation policy and law.
They investigated the treatment of realised and unrealised gains for both policyholders and shareholders over the investigation period stretching from 1 February 2009 to December 2021.
Their terms of reference, according to the Ipec and BDO contract agreement number 05/2022, entailed checking the propriety of the investment activities on assets mainly backing the policyholders’ account.
The forensic auditors also interrogated investment policies and procedures focusing on policyholder funds from shareholder funds and the level and impact of the portfolio mix on policyholder funds.
In addition, they tracked the movement of money through a time-series analysis over the investigation period to ascertain any cyclical movements that could imply transfer of funds from policyholder funds to shareholder funds.
The audit report reveals that the total of losses of policyholder funds could be up to US$53m. Unsupported loan repayments receipts stand at US$1.4m while excess withdrawals from the EB (employee benefits) bank account amount to a whopping US$31m.
Part of the report reads: “From the areas investigated, the following losses to policyholders were noted: loss of value due to locking funds in staff mortgage deals (US$3.5m) overstatement of capital guarantee fees (US$5.9m) management fees on shareholder loan US$224 663; delays in implementing IPEC order on disposal of RTGS shares (US$1.9m) management fees charged on investment in FMP US$3.6m) loans of value on FMS bond US$3.2m… Grand total of losses US$53 million.”
There were also anomalies detected by the actuarial auditors on shareholder payments from the policyholder bank accounts.
Another finding was that there were clients who had products with both risk and savings features leading to instances where, on payment of premium, the clients pay the combined premiums into the policyholders’ bank accounts.
The company’s procedure manuals required that risk product premiums, together with fees, are then transferred to the shareholder bank account. The auditors unearthed rot in that system.
“We noted that regular bank transfers and payments were being made from the policyholder bank accounts of both EB and ILB (individual life business) on behalf of the shareholder.
“The payments were not supported by computations or monthly reconciliations as required by the company procedure manual as proof that these were earned funds by the shareholder.
“We compared the actual funds earned by the shareholder with the total bank transfers and payments on an annual basis and established that EB policyholders were exposed to a potential financial prejudice of US$31 million due to potential overdrawing of the policyholder bank account. The analysis done on EB to determine if there was a financial prejudice to the policyholder could not be performed on ILB due to the unavailability of required information,” reads part of the audit report.
The auditors also red-flagged the use of group accounts and accounting treatment of investment in FMP.
FML, as a regulated entity that is assessed for solvency under the Insurance Act [Chapter 24:07], should base its statutory returns on separate company financial statements. That was the case until the 2009 financial year.
From the 2010 financial year until 2020, the Board adopted the use of consolidated financial statements for solvency assessments and filing returns to the regulator. According to the auditors, that approach was incorrect as the consolidated financial statements incorporated other entities which had nothing to do with the life business.
“The company also changed the valuation of the investment in FMP from fair value to net asset value in 2011. Both the use of the group accounts and the change in accounting treatment of the investment in FMP had an effect of significantly overstating the financial solvency of FML by over ZWL5 billion as at 31 December 2021.
“This also significantly overstated the capital guarantee fees which are calculated as a percentage of the value of assets. The fees were overstated by US$5 926 594 and ZWL202 815 955 over the US$-environment and the ZWL- environment respectively,” reads the audit report.
In 2022, it emerged that Zimbabwe’s leading financial services conglomerate, CBZ Holdings, was is in the process of taking over FMHL to build a business behemoth in the local and regional markets.
In a letter dated 8 February 2022, addressed to FML board chairperson Samuel Rushwaya, copied to FMHL chief executive Douglas Hoto, FML boss Reuben Java and FML acting principal officer Williefaston Chibaya, Ipec commissioner for insurance, pension and provident funds Grace Muradzikwa warned that a forensic investigation into the company’s issues had begun after it failed to comply with the asset separation policy and law.
“Reference is made to our letter of 31 December 2021, wherein the commission expressed concern over the failure by FML to adhere to the agreed timelines and the quality of submission thereof,” the letter said.
“Notwithstanding your late submission, and after assessing your submissions of 24 and 29 December 2021 respectively, regrettably, they were still not adequate to enable the completion of the asset separation exercise of the entity.
“To this end, the commission is proceeding with instituting a forensic investigation into FML as communicated in our letter of 18 November 2021 in line with Section 67 of the Insurance Act [Chapter 24:07]. The commission has therefore commenced tender processes to obtain a forensic investigator.
“The full costs of the forensic investigation shall be recovered from FML in terms of Section 67 (7) of the Insurance Act [Chapter 24:07]. The commission will keep your organi sation updated on the processes of the forensic investigation. Be guided accordingly.”
Section 29 of the Insurance Act [Chapter 24:07] and Section 16 of the Pension and Provident Funds Act [Chapter 24:09] require separation of assets between shareholders and policyholders; and insurance and pension businesses.
The verification of whether insurers are complying with statutory provisions relating to this is being done by Ipec retrospective to 2009. Ipec is established in terms of the Insurance and Pensions Commission Act [Chapter 24:21] to regulate the insurance and pensions industry with the objective of protecting the interests of policyholders and pension scheme members.
The commission reports to the ministry of Finance. It began operations in 2005 after it was weaned off the ministry. Benefits expected from the ongoing verification exercise included:
- Identifying assets that may have been misappropriated from policyholders to shareholders or vice versa;
- Quantifying the assets that may have been misallocated and apportioning them to their rightful owners; and
- Enhancing compliance with the legal requirements for asset separation as a way of improving good governance in the insurance and pension sector.
