Net1 breaks silence, says allegations are false, lack merit

Net1 breaks silence, says allegations are false, lack merit

Net 1 UEPS Technologies, Inc. said it has noted with concern the on-going, repetitive and false accusations regarding our business practices, particularly those pertaining to the distribution of social grants.

The company said in its latest statement that the deal which was carried out through Cash Paymaster Services (Pty) Ltd (“CPS”), and the provision of financial services through our various wholly-owned subsidiaries, including Moneyline Financial Services (Pty) Ltd (“Moneyline”) and The Smart Life Insurance Company Limited (“Smart Life”). As we discuss below, we are convinced that these accusations have no merit.

In order to ensure that our business practices comply with applicable law, our Board relies on our internal controls and procedures, the supervision of our compliance department, and the reports that our Board regularly receives from KPMG, our internal auditors. After two of our largest shareholders recently publicly encouraged us to procure an external review of our business practices to determine the truth or falsity of the accusations made against us; our Board concluded that such a review would assist us in setting the record straight. We therefore engaged KPMG to conduct a review specifically focusing on our business practices and to provide us with a factual findings report (“KPMG report”) that addresses the accusations made against us. The KPMG report has been supplemented by confirmations from a supplier and legal opinions from our legal advisors. We encourage all interested persons to read these reports and opinions, as the Board has concluded that they verify the accuracy of all of the statements of fact, calculations and data we discuss below in this release.

The KPMG report, supplier letter, legal opinions and the Constitutional Court of South Africa judgments referenced in the Smit Sewgoolam, Inc. opinion were publsihed o its website.

See below the full statement as shared by Net1 earlier today:

The KPMG report, supplier letter and legal opinions deal with, among other things, the following matters:

  • The Constitutional Court requires CPS to provide an audited account of income, expenses and profits for the five-year contract and the one-year extension periods. CPS has not been ordered to repay any profits. Refer to legal memorandum from Smit Sewgoolam Incorporated.
  • In accordance with the Constitutional Court’s order, the addendum to the contract between CPS and SASSA contains provisions to ensure that personal data obtained in the payment process remains private and may not be used for any purpose other than the payment of grants and to preclude a contracting party from inviting beneficiaries to “opt-in” to the sharing of confidential information for the marketing of goods and services. CPS complies fully with the order and does not share any SASSA beneficiary data with other Net1 subsidiaries. Net1’s

subsidiaries that provide financial services have no access to this data. Refer to
1.1 and 1.2 in KPMG report.

– The service fee of R14.42 excluding VAT (R16.44 including VAT) charged by
CPS to SASSA is fixed per grant recipient per month irrespective of the number
of grants paid to each recipient and has remained fixed at R14.42 for the last
five years. Refer to 1.10 in KPMG report. This fee includes the cost of the
SASSA-branded smart cards issued to each recipient and the costs of capturing
and analyzing the relevant biometric information of each new grant recipient.
The price also includes the monthly payment of R11.6 billion to 10.6 million
grant recipients, of which R4.5 billion is transported in cash. Payments are made
by CPS from approximately 10,000 pay-points in urban, rural and deep rural
areas using a highly customized fleet of payment vehicles and 1,800 staff
members. Grant recipients can access their grants at any ATM connected to the
National Payment System (“NPS”) or point of sale device, at participating
merchants and at rural pay-points across South Africa. Net1’s biometric
technology has eliminated fraudulent payments in excess of over R10 billion
over the last five years. These savings to the National Treasury exceed the entire
cost of the CPS service during that period.

– Net1 subsidiaries do not sell financial services and products through CPS, or
use CPS personnel or operate inside the perimeter of any social grant pay-
points. Net1’s Moneyline and Smart Life sales teams do not market or sell
products inside the secured area of pay-points and are treated no differently
from the many other service providers present near pay-points. Refer to letter
from supplier.

– Neither CPS nor any other Net1 subsidiary force or require social grant
recipients to open EasyPay Everywhere “green card” accounts. Refer to 1.4 in
KPMG report.

– CPS processes Regulation 26A deductions for life insurance premiums payable
to third-party service providers of life insurance (excluding Net1 subsidiaries)
as authorized by the Social Assistance Act and as approved by SASSA. With
effect from April 1, 2016, Net1 itself made no Regulation 26A premium
deductions (although it is legally entitled to do so.) Recipients’ bank accounts
are regulated by the procedures and controls of the NPS, under the supervision
of the South African Reserve Bank and the Payments Association of South
Africa. The NPS allows debit orders, EFT debits, purchase transactions and
fund transfers from the bank accounts of all South Africans, including those of
grant recipients. Thousands of service providers process millions of debit
transactions against South African bank accounts every month. Net1’s
financial services subsidiaries follow the same processes through the NPS,
with no priority or preference over any other service providers. Refer to
1.3, 1.7 and 1.16 in KPMG report. Refer also to opinion from Alfred Cockrell
S.C.

– All Grindrod account holders, including grant recipients, can purchase prepaid
airtime and electricity utilizing the Grindrod Bank mobile channel. Net1
provides the technological platform for this service. Net1 subsidiaries make no
recurring or unauthorized monthly deductions or debits for prepaid airtime or
electricity. Customers, including grant recipients, buy airtime or electricity
on demand and cannot subscribe for a recurring service. The costs of such
purchases are settled as sales/purchase transactions against their bank accounts
in the same manner as done by all other South African banks and similar service
providers and merchants. Refer to 1.11 in KPMG report.

– Smart Life is a licensed long-term insurance company and an authorized
financial service provider and is subject to the regulation and supervision of the
Financial Services Board (“FSB”). Refer to 1.17 in KPMG report. Smart Life’s
activities are executed in accordance with the business plan submitted to the
FSB. Smart Life sales staff members are appropriately registered as
representatives and receive the required training. Refer to 1.19 in KPMG report.
Smart Life does not charge excessive funeral policy premiums. A comparative
study shows that its premiums are amongst the lowest when compared to the
other long-term insurance companies with significant market share in this
segment. Refer to 1.20 in KPMG report.

– Moneyline does not charge any interest or excessive fees on its loans. Net1’s
comparative study shows that its total costs (which only comprise a service fee)
are materially lower than the total costs (comprising one or more of initiation
fees, service fees and interest) of other regulated micro lenders. Moneyline is a
registered credit provider and conducts its business under supervision of the
NCR. As required by legislation, Moneyline clearly provides the “credit cost
multiple” as part of any quotation for a small loan, as this is the most appropriate
measurement to indicate the total cost of a loan. Converting the credit cost
multiple into an annual interest rate is an inaccurate measurement. Moneyline’s
loan products have terms of between three and six months and have a credit cost
multiple of between 1.2 and 1.44 – in other words, for every R100 borrowed the
total repayment is between R120 and R144, depending on the specific product.
Refer to 1.9 in KPMG report.

– Customers of Net1’s financial services businesses can easily make enquiries or
cancel products or services at any time at any of Net1’s 132 Financial Service
Centres or by phoning the Net1 Call Centre. Specifically, Net1’s technology
allows Smart Life customers to amend or cancel a policy by approaching any
representative – whether in a branch or not. The Call Centre comprises 80 staff
members and operates 18 hours a day on business days, with stand-by operators
for the remaining six hours. The Call Centre number is clearly indicated on all
contracts and policies and printed on every bank card issued by Net1.

– Net1 has not been advised by the FSB that it is under investigation for
unlicensed activities, insufficient supervision or inadequately trained staff
members.

– Net1’s South African businesses make no donations to South Africa political
parties and have never done so. Refer to 1.13 in KPMG report.

We also note that the International Finance Corporation (“IFC”), a member of the
World Bank Group, performed a six-month due diligence on us last year, including our
business practices, following which IFC invested $107 million for an 18% interest in
us. With IFC’s assistance, we are currently conducting a responsible finance advisory
assessment to achieve Smart Campaign Client Protection Certification. We aim to
complete the certification during the next three months and will be one of the first South
African lenders to achieve such certification.

Certain shareholders have also called for “improved governance.” As we recently
announced, our Board has determined to separate the roles of chairman and chief
executive officer. The chairman is now an independent non-employee director. Our
Board also stated that it has been conducting a search for additional independent
directors, including an IFC-approved director. It has been difficult to attract suitable
additional independent directors over the past few years while regulatory investigations
into our company were in process but now that most have been closed with no negative
outcomes to us at all, a new agency-led search commenced towards the end of calendar
2016.

As a U.S. company with a primary stock exchange listing on NASDAQ, we are subject
to rigorous corporate governance and disclosure standards and anti-corruption laws.
Our corporate governance practices are described in detail in our annual proxy
statement, which together with our corporate governance documents, are available on
our website.

Finally, our external auditors, Deloitte & Touche, are engaged annually to report on the
consolidated financial statements and related internal control over financial reporting.
Their latest reports relating to the audit for the June 2016 annual financial statements,
are dated August 25, 2016, and are also available on our website.

About Net1 (www.net1.com)

Net1 is a leading provider of alternative payment systems that leverage its Universal
Electronic Payment System (“UEPS”) or utilize its proprietary mobile technologies.
The Company operates market-leading payment processors in South Africa and the
Republic of Korea. Through Transact24, Net1 offers debit, credit and prepaid
processing and issuing services for Visa, MasterCard, ChinaUnionPay, Alipay and
WeChat in China and other territories across Asia-Pacific, Europe and Africa, and the
United States. Through Masterpayment, Net1 provides payment processing and enables
working capital financing in Europe.

UEPS permits the Company to facilitate biometrically secure, real-time electronic
transaction processing to unbanked and under-banked populations of developing
economies around the world in an online or offline environment. Net1’s UEPS/EMV
solution is interoperable with global EMV standards that seamlessly enable access to
all the UEPS functionality in a traditional EMV environment. In addition to payments,
UEPS can be used for banking, healthcare management, payroll, remittances, voting
and identification.
Net1’s mobile technologies include its proprietary mobile payments solution – MVC,
which offers secure mobile-based payments, as well as mobile banking and prepaid
value-added services in developed and emerging countries.

Net1 has a primary listing on the NASDAQ and a secondary listing on the Johannesburg
Stock Exchange. Allan Gray is its largest shareholder will date.