Nedlac Forensic Investigation Report: Nedlac comments and responses to questions raised on 18 March

Meeting report

Nedlac Forensic Investigation Report: Meeting called to hear responses to questions raised on 18 March
The Chairperson announced that Mr Thobile Lamati, Director General of the Department of Labour, would not be attending the meeting and had sent the Deputy Director-General, Mr Shadrack Mkhonto, to lead the briefing by the Department of Labour (DOL or the Department). She noted apologies of Committee Members.

Mr Mahendra Naidoo, Acting Executive, Nedlac, said that Mr Freddie Peterson, Director of Finance, Department of Labour, would be presenting the report on the National Economic Development and Labour Council (Nedlac) to the Committee.

The Chairperson replied that the Department was firstly expected to answer the questions which were asked by the Committee at the previous meeting, prior to presenting the report.

Ms F Loliwe (ANC) said she hoped that the Department would explain the steps it followed when deciding to do a forensic investigation, and noted that various stakeholders would also be given the opportunity to raise some of their concerns about the forensic investigation.

Nedlac briefing
Mr Freddie Peterson said that at previous meetings the Committee had asked Nedlac to provide clarity on some matters, including the proof of autonomy of entities, proof that a submission was indeed sent to the Minister regarding the forensic investigation, the concept of reporting to the Minister, and which processes had to be followed in order for a forensic investigation to be performed. He would deal with each of these topics separately.

Proof of autonomy of public entities
Mr Peterson noted that Nedlac was established by the National Economic, Development and Labour Council Act, 1994, and this enabling legislation stipulated that the Council shall be a juristic person. It was listed as a Schedule 3A National Public Entity and as such it must comply with the regulatory framework as contained in Chapter 6 of the Public Finance Management Act (PFMA), its Regulations and the King Reports on good governance. In terms of Section 49(2)(a) of the PFMA, the accounting authority of Nedlac was the controlling body, which was the Executive Council of Nedlac.

As stipulated in paragraph 5(2)(a) of Annexure A, the Council may perform forensic investigations if it considers it necessary. In addition, Annexure A also stipulates that the Executive Council shall have powers to establish committees and to delegate or assign such powers to, amongst others, these committees. Section 50(1)(c) of the PFMA specifies that the accounting authority of a public entity must “on request, disclose to the executive authority responsible for that entity (Minister), all material facts, including those reasonable discoverable, which in any way may influence the decisions or actions of the executive authority.” In conclusion, it was clear that Nedlac functioned autonomously and may conduct investigations, as contemplated in paragraph 5(2)(a) of the Nedlac Act.

Proof of audit committee sanctioning decision to conduct a forensic investigation
The Portfolio Committee had requested proof of who made the final decision to proceed with the forensic investigation. During the Nedlac Special Audit Committee meeting, held on 10 November 2011, it was agreed upon that the then Chief Financial Officer, Mr Umesh Dulabh, should be placed on precautionary suspension, as he was the only person suspected to have been responsible for the alleged irregularities at Nedlac. He was later served with a letter notifying him of the suspension, but he decided to resign with immediate effect on 21 November 2011. An Acting CFO was appointed on 28 November 2011 to stabilise the financial function of Nedlac and to also establish whether there were sufficient grounds to proceed with a forensic investigation, taking into account the accompanying high costs of such an investigation. During a meeting held on 17 January 2012, it was agreed that Nedlac should proceed with the forensic audit, as the acting CFO had confirmed that gross negligence had occurred, during her preliminary assessment of the financial functions at the institution. In conclusion, the sanctioning of the forensic investigation was a collective decision and it gave due consideration to the probability that such allegations may be valid, and also would justify the costs to be incurred.

Proof of Submission to the Minister
The Director General of the Department of Labour was informed of the outcomes of the forensic investigation on 2 July 2012. Because of the sensitivity of the information revealed, he instructed Nedlac to obtain a legal opinion, prior to any further steps being taken. Haffegee Roskam Savage Attorneys were subsequently appointed and, in accordance with Section B3 of the attached Annexure E, the report was divided into three sections:

1. Legal requirements and obligations of Nedlac and the Minister of Labour
2. Comments on the forensic report
3. The summary of the forensic report’s findings and the steps that Nedlac should pursue with regard to each finding and recommendation.

The former Director General of the Department of Labour, Mr Nkosinathi Nhleko, also indicated in the submission of 2 July 2012 that the Deputy Director-General, Mr Les Kettledas, would meet with the Minister to discuss the content of the forensic report. The Minister requested a meeting with the Audit Committee, the Forensic Auditors, and the former Executive Director of Nedlac, Mr A Smith, ans well as with Deputy Director Generals of the Department of Labour, Mr Sam Morotoba and Mr Les Kettledas. This meeting took place at Birchwood Conference Centre on 7 September 2012. During this meeting the forensic auditors were asked to further investigate certain matters with a view to presenting a final report by the end of September 2012. The Minister was presented with a follow up report on 28 May 2013, which was signed on 24 June 2013. In the Minister’s response to the submission, the Minister requested a meeting with the Director General, the previous Acting Director General, Mr S Morotoba and Mr Les Kettledas, the former Executive Director of Nedlac, Mr A Smith, the Overall Conveners of Nedlac and the Chairperson of the Audit Committee.

The concept of reporting to the Minister
Mr Peterson told the meeting that Paragraph 27.1.9 of the Treasury Regulations stipulates that an audit committee must have explicit authority to investigate matters within its powers, as indicated in the written terms of reference. The audit committee must be provided with the resources it needs to investigate such matters and shall have full access to information.”

Paragraph 27.1.11 of the Treasury Regulations states that “Should a report from internal audit (or any other source) to the audit committee implicate any member(s) of the accounting authority in fraud, corruption or gross negligence, the chairperson of the audit committee must report this to the executive authority and the Auditor-General.”

What process is followed to perform a forensic investigation?
Mr Peterson said the steps to follow to perform a forensic audit are discussed in detail in the legal opinion which was obtained. He drew Members' attention to Annexure E and submitted that all steps were duly followed during the forensic audit, and no steps had been omitted.

Nedlac's concerns on the process
The Chairperson gave Nedlac members the opportunity to raise some of their concerns regarding the investigation.

Mr Dumisani Mthalane, Overall Convener: Community of Nedlac, submitted that the process to investigate was not followed properly. The chairperson of the Audit Committee and the administrator who was involved in the process worked for the Department of Labour. For this reason, he suggested that the investigation was not fair because an employee of the Department was part of the committee that handled the investigation. When Nedlac had raised this issue it was not recorded. The final report was never given to Nedlac. During a meeting, at which the Minister was present, one of the members of the Audit Committee said that they knew who was involved in the corruption and fraud.

Discussion
Mr I Ollis (DA) asked if Nedlac had a copy of the documents which proved that more people had in fact committed corruption and abused their power. Mr Mthalane had made some serious allegations about things being said in front of the Minister during a meeting.

Mr Mthalane interrupted Mr Ollis saying that those words were said during an audit committee meeting, and not in front of the Minister.

Mr Ollis said that Mr Mthalane was now changing his statements. The Committee had it on record that Mr Mthalane had said that the Minister was present at the meeting and this thus implicated her in a plot. He added that it had been claimed that Mr Herbert Mkhize had admitted to owing Nedlac and the government money, but no evidence had been provided to the Committee to prove this statement.

Ms Loliwe noted that the Council was allowed to take legal action, and asked whether this power also extended to the audit committee. She also asked if any powers were delegated to the audit committee to conduct the investigation.

Ms S van Schalkwyk (ANC) asked who the "targets" were that Mr Mthalane was referring to.

Mr Peterson replied that as set out in Annexure C 6.3, the Executive Director reported that the Overall Convenors agreed to the suspension of the previous CFO, Mr Dulabh, while the allegations levelled against him were investigated. He further added that the investigation was initiated by Nedlac; and this information could be found in Annexure D.

Ms Loliwe said that if someone was suspended this would not always lead to an investigation. She wanted to know the reasons for Nedlac deciding that a forensic investigation should be performed.

Mr Peterson replied that once the Special Audit Committee had considered the allegations, it made the following recommendations:
a) A forensic Audit must be conducted
b) The then-CFO must be placed on precautionary suspension pending the outcome of the investigation
c) The Executive Director must consult the Overall Convenors on the recommendations

The Chairperson said the Committee had asked what had prompted Nedlac to conduct a forensic investigation, who sanctioned the investigation and who had written the letter which was submitted to the Minister. The Department must explain these procedures to the Committee so that there was clarity on whose idea it was to conduct the investigation.

Ms Loliwe said the resolution stated that the Audit Committee must conduct a forensic investigation, but it did not specify whether the investigation must be done before or after there had been consultation with the overall convenors. She asked for clarity on which of the two steps was to come first.

Mr Ollis asked whether the PFMA gave the audit committee the powers to conduct a forensic investigation.

Mr Mkhonto replied that the PFMA does in fact give an audit committee the powers to initiate and conduct an investigation if they feel it is necessary. However, the information regarding the investigation should not be made public while the investigation is on-going.

Mr Thembinkosi Mkalipi, Chief Director: Labour Market Policy, Department of Labour, said the Department would have to treat all allegations as case sensitive, so that an investigation had to be conducted. Since the allegation emanated internally, an urgent Audit Committee meeting was convened, in terms of resolutions 27.1.9 and 27.1.10 of the Treasury Regulations. There was consultation with the Overall Convenors although they had no scope to change the powers.

The Chairperson asked Mr Mkalipi if Nedlac could have conducted a different investigation instead of the forensic investigation. She also requested clarity on who had consulted the Minister regarding the investigation.

Mr Mkalipi replied that it was not a requirement for Nedlac to consult with any individual, or ask for permission to conduct a forensic investigation, because the PFMA gave the institution the authority to perform a forensic investigation without consultation.

Ms Loliwe reminded the Department that a forensic investigation is an investigation of the highest order, and for this reason consultation with the Minister should be done before the investigation. The executive authority of the Department needed to be made aware of the investigation.

The Chairperson asked which laws gave Nedlac the powers to perform investigations before consulting with the Minister. She asked that the legal experts should comment on the law for the Committee's full understanding. Some of the people who were being investigated were employees in the Office of the Minister, and for that reason the Minister should have been consulted before the investigation took place.

Mr M Bagraim (DA) said whether the Minister knew about the investigation or not was not in fact relevant at this point. The agenda for this meeting set out that the Committee should discuss the report which the Department had presented; so the report must be debated and questions should be asked. He was concerned to know why certain people were not being held accountable for their actions, why were they not paying back the money which they stole from Nedlac and the government, and who were the people that were responsible for these crimes. Until today, the Minister has not made any objections to the report, the report had been handed to the Committee, and the Committee should proceed with the debate which was scheduled for today, and not try to shield anyone from blame.

Mr Ollis reminded the Committee that South African law did not recognise ‘poison-fruit evidence’, and the argument of who was in the right position to give authority to perform an investigation was not relevant. He added that the Acting Director General had not shown the Committee any section in the PFMA which stated that the Department should inform the Minister about investigations before they took place.

Ms Loliwe agreed with Mr Ollis but reminded the Committee that although the investigations had been done, there was no proof that the Minister had endorsed the report. The purpose of the present discussion was to establish whether Nedlac had followed the law when it decided to conduct the investigation.

Ms van Schalkwyk asked why Nedlac decided to do a forensic investigation, instead of an internal audit.

The Chairperson said the Committee members would have to be patient with each other. There would be time to discuss the report, but she was trying now to establish if the proper and lawful procedures were followed to get the report.

Ms Laurraine Lotter, Overall Convenor: Business, Nedlac, said the PFMA gave the Audit Committee authority to conduct investigations without having to consult the Minister, especially if there had been some allegations which had been made against an employee in the Department. The letters, as well as the audited financial statements led to the investigation.

Mr Mthalane said the documents implicating individuals in crimes of corruption and fraud had been given to the Executive Director of Nedlac. He added that the person who had initiated the investigation was present at the meeting but it seems that this person did not want to tell the truth.

The Chairperson requested that the documents should also be sent to the Committee.

Mr Ollis said that Mr Mthalane had made serious allegations which could not be ignored, but there was no proof of his allegations. He added that the Committee could not take any action without the evidence.

The Chairperson said the letter which was meant to authorise the forensic investigation did not go through the Director General’s office, and this was the reason why the Committee asked who has the powers to authorise an investigation.

Mr Takwana Makaya, Coordinator of Community, Nedlac, said that Nedlac’s internal processes included making recommendations to ManCo and ExCo. The recommendations should then be adopted and implemented by ManCo and ExCo.

The Chairperson asked if Nedlac’s audit committee had an open mandate.

Advocate Shami Kholong, Chairperson of Audit Committee, said the Audit Committee does not have an open mandate. It was a mandate which was enabled by the Constitution. The Audit Committee had the powers to delegate.

Mr Ollis agrees that the audit committee was right to investigate the allegations, and it should also investigate the outstanding allegations. He asked if the audit committee had filed a police report against the individuals that allegedly stole money from Nedlac and why it had taken so long to take legal action against those individuals.

Mr Mkalipi said the Department conducted the investigations based on the evidence which was given to Nedlac. The report dealt only with the allegations which were made openly and whether the Committee was satisfied with the report or not should not be a problem.

Mr Mkhonto said the procedures were followed properly. The Department had sourced legal opinions and to its best knowledge Nedlac was in the right position to conduct a forensic report without having to consult the Minister. The case had been submitted to the police, and he suggested that now the law should be allowed to take its course.

Mr Mahendra Naidoo, Acting Executive Director: Nedlac, said the audit committee, with the management committee of Nedlac, had discussed the allegations during a meeting on 6 February 2015. These were the events which prompted an investigation taking place.

Mr Peterson said various people had contacted him regarding certain irregularities in the financial statements and this led him to write a letter requesting that the Audit Committee should conduct a forensic investigation. The Audit Committee had suspected only the then-CFO of committing corruption and fraud, but once the investigations were done, it was found that there were more people who were involved in these actions.

Mr Bagraim said when an employer opened a case against its employees there was a fine dividing line between civil and criminal law. The criminal process said that one would have to prove something beyond reasonable doubt, but in the civil process the proof was on the balance of probabilities. There was a possibility that the police would not be able to prove the case within the next two years – which meant that the tax payers would have to pay for the case. He suggested that Nedlac had to take legal action against these employees now, instead of waiting on the police investigation. The employees who were being investigated were still receiving salaries from the government whilst on suspension, and that was not fair.

The Chairperson asked the Committee Members at this point not to jump into discussing the report. They should focus on the legal procedures for this section of the meeting.

Mr Ollis asked if the Minister had received the final report before or after she appointed Mr Herbert Mkhize as her advisor. He directly asked the Deputy Director General if he thought it was fair that some employees being investigated were still receiving salaries from Nedlac, even after the report had suggested that they were involved in stealing money from Nedlac and the government.

The Chairperson reprimanded Mr Ollis, and reminded him that all questions should be directed to the person who was chairing the meeting, and not to specific individuals. She further said that she was satisfied with the answers the Department had provided to the Committee, especially the question on who had sanctioned the investigation. The forensic report had been handed over to the police for further investigation, and she believed that the Committee could thus not debate  a report until the police had completed their own investigation.

Mr Ollis replied that the police would only deal with the crime which had been committed and not the report itself, and suggested that the Committee would be doing nothing incorrect by asking the Department if it had taken any internal measures  to deal with the people who were being investigated by the police.

The Chairperson agreed that Nedlac should indeed report to the Committee on what measures it had taken as a public entity, and what steps would be taken to ensure that the same thing did not happen again. She asked that the Director General be present as well, when the Department presented that report to the Committee.

Mr D America (DA) said that he believed that Members should discuss the contents of the report. It seemed as if the African National Congress (ANC) Members were protecting the Minister and Mr Mkhize.

Ms Loliwe answered that the Democratic Alliance had no evidence to prove what it was suggesting about the ANC protecting the Minister and Mr Mkhize.

Mr Ollis reminded the Committee that Nedlac’s mandate was also to ensure that there were internal procedures which should be taken when a crime had been committed by an employee, and that is what it should be reporting to the Committee. However, the Committee should not ignore the report and its findings.

The Chairperson said it would not be useful to discuss a report without all the relevant people being present. She asked that the Department must send the Committee all of the evidence which it had uncovered while doing the investigation.

Mr Ollis was not satisfied with the way the meeting had proceeded, and said that the Members had side-lined the agenda of the meeting. The Committee had only discussed issues concerning the report, but not the report itself.

Mr America said the Committee has a duty to play an oversight role over the executive, and it was of paramount importance that the meeting progress as it was planned.

Mr Bagraim said that the first hour of the meeting was devoted to the Committee and the Department discussing whether the Minister may or may have not known about the investigation. Therefore, the Minister may as well attend the next meeting, when the Committee met with the Department again. In addition, the Minister was the only one who had the authority to give the go-ahead for any disciplinary hearing, and a majority of the individuals who were implicated in the fraud and corruption charges worked in her office.

Ms Loliwe asked the Committee to respect the Director General. She said the Minister should only be summoned to Parliament if the Committee was not satisfied with the Director General’s responses.

Mr Ollis also asked that the Minister be present when the Department presented the report. The Minister would have to tell the Committee everything that she knew about the investigation and what she knew about the individuals who were being investigated.

Ms van Schalkwyk agreed with Ms Loliwe.

The Chairperson said the questions regarding what the Minister knows, and her knowledge of the investigation, were directed to the Director General. Some of the Members were suggesting that the Director General should report to the Committee first, before the Minister came to Parliament. If the Committee was not satisfied with the Director General’s responses, then the Minister would be asked to report to the Committee.

Mr Ollis asked that the minutes of the meeting should indicate that the Democratic Alliance has requested that the Minister should be present at the meeting, to explain why Mr Mkhize was appointed after being investigated.

The Chairperson said that the minutes of today’s meeting would be drafted and if the DA was not satisfied with the minutes they could be amended.

Ms Loliwe repeated that the Director General should not be summoned at the same time as the Minister. The Minister would have her own time to report to the Committee.

The Chairperson thanked the Department for answering the questions of the Committee. She asked the Acting Director General to brief the Director General about the meeting, and what the Committee expected from the Department when it returned to present the report. The Committee would be expecting the Department to explain what it planned on doing to ensure that corruption and fraud did not take place in the Department, and how it planned to deal with the individuals who had been suspended.

The meeting was adjourned.