Special Investigations Unit findings on investigation into the Department of Correctional Services

Meeting report

Special Investigations Unit (SIU) investigation into Department of Correctional Services
Adv Willie Hofmeyr, Head of the Special Investigations Unit, which was part of the Asset Forfeiture Unit (AFU), dealt with the background to the Special Investigations Unit (SIU). This had originally been the Heath Commission Special Investigating Unit. The Constitutional Court then ruled that it was not proper for a judge to head such a body. Adv Willie Hofmeyr was then appointed to head the Unit. In 2001 the new SIU was set up in terms of the SIU Act.

SIU was independent of other law enforcement agencies. During its early years it was staffed by criminal investigators and lawyers. During the last five years, it had developed a multidisciplinary forensic capability, consisting of forensic investigators, lawyers, forensic accountants, cyber forensics experts, data analysts and project management professionals. It provided a service compatible to what the private sector had to offer, but at less cost to the State. It was a Standing Commission of Inquiry. It defined its success through statistical and systemic impact.

The mandate and legal scope of the SIU were to investigate corruption and maladministration in State departments, and to institute civil legal action to correct any wrongdoing. The primary purpose of the SIU was to recover money lost as a result of unlawful or corrupt action. SIU could also intervene – for instance by canceling contracts - in order to prevent losses and facilitate systemic improvements. The SIU had no power of arrest and prosecution, but could subpoena, search, seize, and interrogate witnesses under oath. This evidence could be used to institute civil action only. It worked closely with the South African Police Service (SAPS) and the National Prosecuting Authority (NPA) to ensure arrest and conviction.

Adv Hofmeyr outlined the threats to departments, which included corruption, fraud and maladministration, and the nature of the threats evolved over time. It was also a challenge to protect the integrity of systems and processes, for example social grants, service delivery, the issuing of drivers licenses, procurement, and tax collection. There were occurrences of opportunistic and organised exploitation of gaps in the system. Organized fraud was on the increase, in the absence of proper systems to monitor the movement of money and goods in government departments. Poor administration posed as big a threat as fraud. According to the Auditor General's reports, 30% of Departments had expenditure-related qualifications. 

Adv Hofmeyr noted that fraud, corruption and maladministration normally came to light as a result of escalating losses. In order to deal effectively with the problem, there would have to be co-operation between the departments and other key agencies such as the Auditor-General, the Accountant-General, Standing Committee on Public Accounts (SCOPA), the State Attorney, SAPS, the NPA and others. The SIU tried to offer to State departments a one stop solution, to cover all facets of the problem that they faced. These ranged from forensic audits and investigations, to remedial legal action, which could be civil, criminal or disciplinary, and extended to systemic improvements and risk management. Assistance to Departments with risk management included primary fraud or corruption risk and system and process risks, fraud risk assessments and assistance with fraud prevention plans, as well as the transfer of skills to departments and assisting with governance capacity.

Traditionally, the forensic function was outsourced. However, in recent years, the SIU provided a full forensic service to State institutions at less than half the cost of a private service. It was also instrumental in setting up and developing the Departmental Investigative Unit, to equip the Department itself with skills to prevent, detect and minimise fraud within its ranks, and to take action where it was discovered. It also had the added advantage above a private company that it was situated within the State and could make sure that its recommendations were implemented, unlike the situation with a private company, which often produced a voluminous report, but had no power to follow through on implementation.

Adv Hofmeyr described the methodology used by the SIU. Over the last eight years the SIU had grown from 70 to over 600 people, which resulted in strain on its resources. It restructured itself and its methods to function optimally. From there it took a decision to provide a project based and client focused forensic service. It provided a forensic audit, investigation and civil litigation. It focused on the client department's needs. Its project management methodology included the instituting of Service Level Agreements, time lines, regular reports, and investigation plans. It employed integrated forensic teams consisting of lawyers, accountants, investigators, computer specialists and data analysts.

Adv Hofmeyr noted that the Department of Correctional Services (DCS) had requested the SIU's assistance, primarily in response to the Jali Commission, which was set up to investigate numerous allegations about corruption on the part of correctional centre officials. The DCS then approached the SIU. The SIU had focused on corruption in correctional centres, as well as the medical aid scheme. The first partnership agreement for investigation was signed in October 2002.

In the course of investigating the Medical Aid Focus area, a forensic audit was also done of the database of the medical aid scheme. R22 million was recovered. R 3.4 billion was saved in potential future claims. 26 doctors and 10 DCS officials were criminally charged with corruption offences. DCS officials were disciplined and medical practitioners were deregistered. R8 million was recovered in the last 2 years. The level of claims halved over the three years, because of the action taken against doctors and DCS officials, and the closing of some of the systemic loopholes. There had been inflated claims by doctors; one of the doctors investigated had claimed R12 million in one year. An additional 423 DCS officials were disciplined. No new cases of fraud had been identified since. The medical scheme was now changed to a contributory medical aid scheme, not funded solely by the State.

In the course of investigating the correctional centres, SIU had visited 179 correctional centres, interviewed 143 887 inmates and 33 132 DCS officials. 426 disciplinary cases and 289 criminal cases were registered. The DCS developed an understanding of corruption in correctional centres. The DCS then established its own Departmental Investigative Unit (DIU) to investigate irregularities internally, and SIU assisted in the set up of this Unit. This investigation had triggered spin-off investigations into pharmacies at correctional centres, as well as investigations into First Auto Card use. New cases were referred to the DIU, and it worked in close co-operation with the SAPS and SIU.

IN its analysis of the DCS payments database, the SIU scrutinised 750 000 transactions, to investigate excessive expenditure in Petrol Card use. 145 DCS officials were recommended for disciplinary action, and two were charged criminally. The DIU was now able to conduct these types of investigations and deal with similar matters internally.

Adv Hofmeyr noted that in 2006/07, the contract with DCS was renewed, and it had developed a list of priority risk areas. The risk areas identified included non-compliance with policy and procedures, lack of internal controls for procurement, problems with pharmacies, inadequate asset management procedures, lack of effective monitoring and evaluation systems, including those for First Auto Card, and inadequate corruption prevention systems.

The integrity of the financial systems and control over assets was also investigated. The SIU / DCS partnership had been extended for a further three years in March 2006. The SIU was requested to focus on firstly, procurement, because there was concern regarding the integrity of officials, financial systems and procurement processes. Secondly there was concern about Asset Management at correctional centre farms, and thirdly, there were concerns about pharmacies at correctional centres. The SIU was acting under Proclamation R44 of 2007,dated 28 November 2007, which authorised investigations into the above focus areas.

Under the Procurement Focus Area, the 200 most lucrative contracts were audited, and 23 cases were identified for investigation. The DCS had referred 10 cases. R6.9 million was recovered. R12 million worth of assets were under restraint .R4.8 million was saved in terms of potential future losses. Twenty two DCS officials were recommended for disciplinary action for undisclosed private business interests. The DCS was making systemic improvements to its financial systems and disciplining DCS officials found to be out of order.

Another focus area was Audit Management of 160 correctional centre pharmacies nationally, and the review of management of twelve correctional centre farms. Current management policies were being reviewed for the farms, and SIU recommendations regarding pharmacies were being implemented.

The SIU had then reviewed the top 200 contracts in the areas of the Repair and Maintenance Programme (RAMP) and tenders for nutrition, clothing and Correctional Centre building and security contracts. The irregularities identified were Black Economic Empowerment (BEE) fronting, bidders submitting false qualifications, lack of contractual performance by service providers, tender rigging, including manipulations of tenders' specifications, and collusion between DCS officials and suppliers. Systemic concerns were the absence of a vetting process for procurement of personnel or service providers, low compliance with procurement policy, poor document management systems and the unavailability of important source documents in many cases.

Adv Hofmeyr described the Designed Procurement Red Flag Database. This system centralised the different disciplines involved, using one tool focusing on people, processes and finance. Databases included DCS procurement by tender and the three-quote system. This tool used a centralised integrated data approach to identify anomalies such as systemic problem areas, and it measured changes over time in terms of statistics, trends and patterns, assessed effectiveness of programmes in an organisation, and measured the impact of corrective actions. The methodology involved reaching an understanding of the client environment to design and set up the systems, with available data and data dictionaries. If would then process the flow of information, find the risk level, assess the previous exposure and understand the business. It would design tests to red-flag potential areas of risk, such as invoices filed and paid on the same date, or payments made prior to invoice dates. It would then review and interpret results, and present them to the Department. One hundred tests were designed, for one-off or continuous monitoring.

Adv Hofmeyr stated that the biggest problem with the State databases were that they did not talk to each other, which meant that it was impossible to cross reference between databases. With the SIU tool, all these databases were integrated. It was possible to point out fictitious vendors, by checking on addresses and making sure they existed. It could also compare employee and supplier data to see whether anything coincided. It could red flag invoices irregularities by pointing out duplicates, instances where invoice amounts did not match contract or purchase orders. It could pick up fixed bidding. It could summarise the values per vendor over several years. It could also calculate days between closing-for-bids and contract submission dates. If the last vendor to submit always won, this too would be red flagged. Discrepancies between purchase quantities and contract quantities would be red flagged. Identical invoice numbers and payment amounts or repeat refunds for invoices paid twice would be red flagged. It could check for inflated prices by comparing prices across vendors, to see whether prices were realistic. As an example, it came out in an investigation that a particular supplier of bread charged R26 per unit. It would pick up excessive quantities purchased. It would pick up an unexplained increase in inventory. It could determine if quantities were appropriate for production levels. It could compare quantities over a number of months. It could search for duplicate cheques as well as gaps in the cheque numbers. It could pick up terminated employees who were still on the payroll. It could reveal transactions not matching contract amounts by linking accounts payable file to contracts and inventory files.

As a pilot project this Red Flag Data Base Tool was run at the Pretoria Central Correctional Centre, looking specifically at the three-quote system. This was partly done to test the tool for accuracy. Transactions to the value of between R2 and R32 000 were targeted for the three and a half year period 2004 to 2007. Of the 6 000 transactions checked, 1 000 (16%) contained irregularities. This was a projected figure as the test sample was smaller than 6 000. The types of irregularities were over-quoting to the value of R 2.6 million, the splitting of orders to keep the value below R30 000, to the value of R1,4 million, and irregular expenditure where the proper procurement processes had not been followed. This was presented to DCS and the way forward would be to run this system on a wider scale.

Adv Hofmeyr said that he could mention names in one case because the company was already on trial. He recounted the case of GST, who made itself guilty of BEE fronting. Tenders to the value of R18 million were awarded to this provider. It misrepresented, to the State Tender Board and DCS, that it was conducting a project that would empower three African women who would share in the profits of the tenders awarded. The people involved established three front companies to commit the fraud. Money paid to these three companies was redirected to GST. The women in whose names the companies were established received a nominal fee for filling in the tender documents, when they won the contracts. The shortcomings identified by this case were the lack of vetting of the service providers. The information supplied by the service providers was not verified, especially information concerning its BEE status. The investigation had been finalised, the accused, including the Directors, were arrested and were awaiting trial. The Asset Forfeiture Unit was launching an application for freezing of the assets.

The second case study showed the work that could be done with the data and it concerned the undisclosed business interests of DCS officials. 23 investigations were finalised to date. DCS officials had private contracts with DCS without authorisation and without the knowledge of the DCS. The SIU established that the officials did not request permission from the Commissioner to conduct private business. This was a disciplinary contravention of the Public Service Act. The business dealings with the Department were a criminal offence in terms of Section 118 of the Act. The concerns that this case highlighted were the adherence to procurement policies and the integrity of officials. The DCS was pursuing disciplinary action, and the SIU was assisting the SAPS in a criminal investigation. With the aid of the Red Flag Database Tool, the SIU had picked up more officials who were contravening the Public Service Act.

In order to further illustrate the work done, he cited allegations of numerous contracts allegedly being awarded to entities owned by Mr X, after bribing DCS officials, and cover-quoting. The investigation involved a complex analysis of financial source documents, bank statements and Supply Chain Management (SCM) policies as well as interviews to back up the documentary evidence. During this process other irregularities involving other service providers were discovered. The investigation established corruption involving eight service providers and 3 DCS officials, and also showed that the DCS officials did receive money from service providers. The concerns raised were once again the integrity of DCS officials as well as adherence to procurement policies. The matter was referred to the NPA for a decision on criminal prosecution and to the DCS for disciplinary action.

The fourth case study was done in relation to certain high value contracts. These contracts were red flagged during the initial procurement investigation. The case ended up being published in the press. There were investigations by the Public Service Commission and the Auditor General, who approached the SIU to investigate the case. This case involved corruption in awarding tenders to certain service providers, bid rigging by drafting specifications and several other irregularities. No names would be mentioned because the case was not in court yet. Four tenders were investigated. These four tenders all related to a single service provider and its affiliated companies.

With the first contract there were irregularities, including clear and obvious deviations from the Treasury Supply Chain Management Policy which governed the procurement processes of the Department at the time. Instead of the end-user departments being involved in drafting the specifications of the product or service, the CFO, the Accounting Officer and the service provider company participated in the drafting of the specifications. In addition, no financial planning, feasibility study or needs analysis was done. The security aspects concerned provided the company with a clear advantage above all the other bidders.

The second contract, granted to an affiliate company of the first company, showed the same deviations from the SCM guide. In addition, the submission period was reduced from 30 to 21 days, for no apparent reason, leaving very little time for other bidders to submit tenders, giving this company an unfair advantage. Again the CFO and service provider company drafted the specifications, not the end user department. The budget was also significantly exceeded. In addition, contrary to the procurement policy that a company had to be in existence for a minimum of five years in order to qualify for a contract, this particular company was registered seven days before the closing date for bid submissions.

By the time the third contract was granted, in late 2005, the Department had published a user manual for prospective bidders. Again there was s clear deviation from the user manual. All the irregularities mentioned in the first case, applied again. In this case the budget was overspent by R150 million at first, but was increased further by another R100 million, due to variation orders. Payment was also made too soon. In this tender there was a heavy weighting given to integration of the goods required with computer software that the first company had introduced through its tender. This gave its affiliate company an unfair advantage over other bidders. The integration was most probably not necessary. 90% of the contract price was made on the delivery of raw materials. This fiscal dumping was suspicious. According to the user manual, there should have been a commitment by the service provider to complete the project by a specified date. Although the contracted company made no such commitment, it was still awarded the contract.

In the case of the fourth contract, all the abovementioned irregularities were repeated. Again it involved an affiliate of the first company, and the budget was exceeded. The first invoice arrived three days after the signing of the contract, and R106 million was paid into the account of the company. Ten days later, another payment was made as a clear case of fiscal dumping. Again budget was exceeded. The SIU investigated how the CFO and his family benefited from this service provider, and found that the CFO benefited to the tune of at least R2.1 million. The CFO received a car and financial contributions to two other cars, his son and daughter received a car each, and his daughter's overseas trip was sponsored by the company. He also received six Blue Bulls Season tickets and the company financed the development of a house for him, worth more than R1 million. He had renovations done to the kitchen for R 180 000 and received R80 000 from the company towards a retirement home. In addition the company paid three amounts totaling R48 000 into the credit card account of the CFO. The accounting officer of the Department received R 5 500, as well as R58 000 from this company to pay architects for plans for the construction of his house.

The general findings of the SIU in relation to these four tenders were that the proper procurement processes were not followed by DCS. This was aggravated by the payments made to the CFO and Accounting officer at the time that tenders were being awarded to this company and its affiliates. It was also aggravated by the fact that there was such a close working relationship between the CFO, the accounting officer and the service provider company and its affiliates. The SIU was satisfied that the procurement process was undermined, in the sense that this company and its affiliates had an unfair advantage over its competitors in respect of these tenders. This prejudiced the DCS. The SIU was also satisfied that this close relationship undermined the procurement process itself and that DCS was significantly exposed to civil claims by the companies that lost out in the tender process.

Adv Hofmeyr, in his capacity as the Head of the SIU, submitted a report to the DCS in terms of Section 5.7 of the Act. On the strength of the evidence presented that was in possession of the SIU, the DCS could institute legal proceedings to recover the losses it suffered from this company and its affiliates. The SIU had also submitted a report of Section 4.1 of the Act to the National Director of Public Prosecutions to make a decision regarding prosecution.

Discussion
The Chairperson described the findings of the SIU as “horrific”. He cautioned the Committee, however not to prejudice pending cases by mentioning names or saying anything that could endanger the chances of the perpetrators in these cases being brought to book. He also expressed his wish, aim and intention that by the time he and other Members left the Committee, the Department it would be in a much healthier state than it was currently.

He asked that Adv Hofmeyr should respond only to questions and comments where he felt that he could do so.

The Chairperson asked who owned the new investigative tool that the SIU had developed, and whether it would be available to the Department to use on an ongoing basis.

Adv Hofmeyr replied that the SIU owned the intellectual property to the tool. It was still in development and as such, new databases would be added, but it would be free for all of government to use.

The Chairperson asked how closely the SIU worked with the Auditor-General.

Adv Hofmeyr replied that the Minister of Finance had set up a group to look at tender and supply chain irregularities. The Auditor-General (AG), Accountant General and other Treasury institutions were part of that group and this tool would be used extensively in Government. However the IT capacity in government was a challenge. One single process ran on the SIU's computers for eight days on end. The real challenge at this stage was at local government level, because each municipality had its own IT systems. The SIU collaborated regularly with the AG in cases where the AG saw the need for a forensic investigation. Currently the SIU was working with the AG on 3 000 public servants who had undeclared business interests. There was a need for even further co-operation and integration.

Mr J Selfe (DA) said that this was the most shocking presentation that he had ever heard in his 15 years in Parliament. He was pleased that there seemed to be a conclusion to a long saga in this respect. He however objected to not being able to name people and entities.

The Chairperson interjected and cautioned Members again about endangering pending cases by mentioning any names. The objective was to achieve successful prosecutions, rather than having cases dismissed on legal technicalities.

Adv Hofmeyr supported the Chairperson. He said that the SIU was involved in heavy litigation around this matter. The SIU was given legal advice not to risk harming the cases, as there was a criminal investigation as well as civil action.

Mr Selfe expressed concern about the SIU contract that was not going to be renewed. He wanted to know what the implications would be for ongoing investigations.

Mr Hofmeyr said that the SIU and its function were instituted by a Presidential Proclamation. SIU did not have a contract in the traditional sense. It always had the mandate to investigate. The mandate had not been renewed yet, but it would be, albeit on a smaller scale.

Mr Selfe asked whether the Departmental Investigative Unit could continue the work. The Departmental Investigative Unit was growing and its capacity had improved, but co-operation between it and the SIU would yield better results. Mr Selfe said that he had asked this question as a Parliamentary question at a previous occasion.

Mr Selfe noted that Bosasa Operations (Pty) Ltd was given another three year contract and no feasibility study had been done. He asked on what basis was a company that was already under investigation could be given another three-year contract. He wanted to know whether another investigation was needed.

Mr Selfe asked whether the SIU had a look at the similarity between the two Bosasa Operations contracts, and when the reports were handed over to the Department. He also asked if moneys lost could be recovered.

Adv Hofmeyr replied that the 2008 contract of Bosasa Operations was not within the scope of the SIU current investigation. He disagreed that similar irregularities occurred in both. The SIU made recommendations to the Department. The report was handed over in August 2008. The law stated that the report National Director of Public Prosecutions would assist the police. There were some damages to be recovered. It was difficult to specify amounts to be recovered, because this depended what could be proved in terms of contract law. The Department signed away Intellectual Property Rights to computer software developed for its use. It was a problem that needed to be addressed. 

Ms M Mdaka (ANC) expressed her shock at the content of the report and the Committee's concern about the management of farms, as well as pharmacies in correctional centres. She asked where the asset registers were and who controlled them.

Mr S Abram (ANC) declared his dismay at what had transpired. He thanked the SIU for what they had uncovered. He wanted to know what happened to senior staff involved in activities that caused the State to lose money. He asked whether staff were vetted adequately before being placed in these positions and whether there were thorough enough investigations into candidates' pasts. He also expressed concern about the asset registers and control over them, as well as the documentation involved. He said that he agreed that the State needed good systems, but even good systems were corruptible. Instead, he thought that the State needed good honest officials. He said that the CFO and his Accounting officer did not do what they did on their own, but clearly had assistance. He therefore asked what happened to whistle blowing.

Adv Hofmeyr said that the control over assets on correctional farms and in pharmacies in correctional centres had improved, but it was not perfect. There were preventative measures in place, but there were still gaps in the systems, which were being exploited by dishonest staff and others. Part of prevention was to institute deterrents. There had to be repercussions for the perpetrators. Whistle blowers were important, but this was a culture that still needed to be created. Things had improved, but the SIU was still dealing with the remaining challenges.

The Chairperson said that Members should remember that this particular session was a briefing session by the SIU to the Committee to empower the Committee. Many of these questions were actually directed at the Department. Points of clarity would be entertained.

Ms M Phaliso (ANC) took cognisance of the work that was done and the actions taken by the SIU. She expressed her shock at what had occurred. She said that the Department had a lot to explain to the Committee and that drastic action was needed.

Ms M Nyanda (ANC) also expressed shock at what was reported and said that the law should take its course.

Adv Hofmeyr said that the report covered a long period. A lot had been done and achieved, but there were still significant challenges. In the pharmacies in correctional centres, deadly and expired medicines were all mixed together. There were grey medicines and illegally imported medicine. There were no systems or organisation. Things had improved significantly since then. He gave credit to the Department of Correctional Services for calling in the SIU and paying them to bring about the necessary changes.

The Chairperson thanked the SIU for empowering the Committee. He would like the follow up from this session to continue – on the one hand by hearing about the continued work of the SIU and the legal action implemented by the NPA, and on the other hand by hearings from the Department what it was doing to implement the recommendations of the SIU, and the quarterly interactions between the Committee and the Department. The Committee would monitor all these processes.

Committee business: Adoption of Committee report and minutes
The Chairperson tabled a report dated 23 September 2009, on an oversight trip made by the Committee to Pollsmoor and Malmesbury Correctional Centres. Members agreed that the Report was a true reflection and adopted it.

Members then adopted minutes of meetings held on 8 July, 18 August, 26 August, 2 September, 8 September, 9 September, 16 September, 14 October and 4 November 2009.

The meeting was adjourned.