Exclusive: Interrogating forensic audit report of MK577bn cashgate

The chances of recovering the US$19.6 million (equivalent to MK14 billion) that has been specifically identified as recoverable in the K577 billion audit report remain doubtful.

Malawi infamous cashgate took place under their watch: Late Bingu (L), Banda (C) and Mutharika Looting took place under their watch: Late Bingu (L), Banda (C) and Mutharika - Photo credit The Nation

Malawi infamous cashgate took place under their watch: Late Bingu (L), Banda (C) and Mutharika 

'Cashgate' cheque ro HTD LImited

‘Cashgate’ cheque ro HTD LImited

Cashgate cheque to HTD

Cashgate cheque to HTD

The Anti-Corruption Bureau (ACB) has this far shown no sign that it will act on the thirteen case files it got from the Auditor-General; while the Auditor General, Mr Steve Kamphasa, in an emailed response to this correspondent, pushed the responsibility of recovering the US$19.6 million to the Ministry of Finance.
After several emails and reminders to Dr Ronald Mangani – the Secretary to the Treasury, his response was noncommittal, saying:
“I wish to inform you that the Treasury is currently in consultations with other Government officials to determine the best way forward on the contents of the forensic audit report. The Government recognises that its systematic actions on the matter must always be in line with the country’s existing laws.”
Among other finding, the audit revealed, among others, that:
  • The government lost K10 billion when a supplier deliberately overcharged it in a contract to supply rubber bullets and tear gas, for which the government was made to pay seven times the normal price.
  • The government was made to pay twice an amount of K4 billion, the payments being made one year apart, but based on the same documents i.e. the government paid twice for the same goods.
  • The Malawi Defence Force only has 12 Eland armoured vehicles, yet the government contracted a supplier to refurbish 19 Eland armoured vehicles, for which it paid an extra K350 million for the “repair” of 7 non-existent vehicles.
The audit was conducted by RSM Risk Assurance Services, formerly known as Baker Tilly, which handed over the audit results to the Auditor-General. In turn, the Auditor-General handed over case files to the ACB for action.
Reading the report, it is clear that although the auditors revised the unaccounted-for amount down from K577 billion to MK236 billion after a forensic analysis covering the period from January 2009 to December 2014, not all bank accounts were covered by their exercise.
Expressly indicated as not reviewed is cashbook data from State Residences, Malawi Police Services (MPS) and the Malawi Defence Forces (MDF). All these three have, for several years now, escaped scrutiny under the guise that they contain sensitive information.
The secrecy surrounding these three votes, in addition to militating against independent oversight by appropriate bodies like Parliament, creates a fertile ground for committing and hiding fraud.
Therefore, although the forensic audit reduced the amount believed to be lost from MK577 billion to MK236 billion, the MK236 billion could increase if the cashbooks from State Residences, Malawi Police Services (MPS) and the Malawi Defence Forces (MDF) were to be subjected to independent scrutiny.
The auditors also report that the NBS, OIBM, MSB and FMB failed to comply with all National Audit Office (NAO) subpoenas by either providing limited replies or none at all. The auditors recommended that the Malawi Government should “consider how to deal with this non-compliance.”
In our enquiries to these banks to get their side of the story, only FMB’s Kobus Louw (Group GM – Credit and Operations) responded, contesting the findings saying:
“It is not our policy to comment on confidential matters and specific enquiries from the National Audit Office / Auditor General’s Office to our Bank would fall into that category.
Suffice to say that we are in regular contact with Malawian oversight authorities to whom we have always pledged our full and complete cooperation, including the provision of any material that may have been validly requested for whatever reason.
We therefore confidently invite you to contact the Executive of the National Audit Office /Auditor General’s Office directly to confirm that our Bank is both cooperative and responsive.”
Our forwarding this response to the Auditor General, Mr Steve Kamphasa, requesting him to shed more light, elicited no response for reasons we could not surmise.
Other major findings, category by category, are as below:
 
Basis of suppliers’ selection for the forensic analysis:
In accordance with the auditors’ initial terms of reference, focus was on 50 suppliers who received MK 83 billion and were assessed to carry the highest risk. The auditors confirmed bank accounts, then requested for bank statements and selected supporting transactional information. While most banks complied, limited or no replies to the business specific subpoenas were received from NBS, OIBM, MSB or FMB.
Analysis of the provided supplier bank accounts identified high value payments made in the form of Discounted Promissory Notes and Treasury Bills whose origin remains unclear. Supporting documents reviewed suggests that the payments relate to compensation paid to suppliers for contracts awarded by government which were subsequently either changed or cancelled.
The auditors were unable to trace the drawdown of all of these payments from the Malawi Government accounts, meaning again that  these  payments were omitted within the information in the PwC Analytical Report and yet another reason to believe that the MK236 billion is still just the tip of an iceberg.
 
On Internal Controls:
While the auditors noted some progress in relation to bank reconciliations, the gains made, they noted, were undermined by lack of follow up and investigation of unreconciled items.
This means that the reconciliation, without the follow-up, fails to mitigate the risks it is supposed to allay namely accounting errors, fraud, incomplete cashbook data and financial reporting. This, the auditors noted, also heightens the risk of “off account” transactions taking place increasing the risk of another ‘Cash-gate’ type event.
 
On the existence of Cartels:
The audit unearthed forensic evidence that several ‘cartels’ were in operation. This led to a wide range of frauds including goods and services not being provided, being paid for more than once, being ordered in ridiculously high quantities and/ or the prices substantially inflated.
The audit also came up with conclusive evidence of a number of cartels winning contracts through restricted tender and single source procurements sometimes to supply quantities of goods far from the actual needs of the government ministries, departments or agencies.
As long widely suspected, these cartels are owned (or controlled/influenced) by the same individuals and merely exist to “trade” with the Malawi Government.
Other than inter-company transactions within the cartels, a fact verified by analysis of the supplier bank accounts, they all have limited business dealings with the private sector.
In addition to pointing to the fact that these companies exist for the sole purpose of milking tax-payers’ funds, their inter-company dealings were indicative of ‘layering’, a crooked process used to prevent or hinder investigators in accurately tracing the source or destination of transactions and flow of funds, a classic feature of large scale money laundering schemes and grand corruption.
To lend weight to this thesis, the frequent use of bank cheques to move funds between these related suppliers can be interpreted as a deliberate and calculated attempt to conceal the audit trail.
In such cases, the supplier’s name is not captured on the cheque image forwarded by the commercial bank and the payee can only be traced by contacting the bank from which the transfer originated.
One banker, speaking on condition of anonymity said this would work to the advantage of the insiders who smoothed the fraud as the trail to the final beneficiaries gets lost.
Looking at this in retrospect, it explains why this far, no minister or senior government official is directly mentioned as they are well hidden beneath a maze of financial transactions whose concealment only needs a crooked banker and detection needs massive resources poor economies like Malawi can ill-afford.
 
‘Middlemen’ par excellence:
Evidence also pointed to the suppliers involved in these practices not being manufacturers nor on the basis of evidence available, being the most suitable businesses to supply the goods or services.
This is indicative of a scenario where contracts are awarded on the strength of “orders from above” all which is vindicated by the spirited effort with which government machinery wants to downplay the massive fraud.
 
Cash-gate continues:
If all the above is deemed historical and hence of less concern, the forensic audit amassed evidence that “manipulated procurements” were still taking place as late as December 2015 and are probably continuing, despite the Executive’s continued finger-pointing to its predecessor.
Payments reminiscent of “Cash-gate” cases’ where the bank account is opened prior to one or more high value deposits being transferred inwards; then the funds transferred on to other group businesses within a short period of time are still in evidence.
 
On Contracts:
The auditors further bemoaned the scantiness of evidence to support many of the procurements, and that where available, documents lacked detail and genuine supporting evidence, such as import documentation, due diligence records and minutes of internal procurement committee meetings, and information on the sizes and specifications ordered.
In the cases where contracts exist, the auditors noted that contractual terms were not always followed and in one particular case, the contract was so inexplicably redacted so as to be of maximum benefit towards the supplier at the expense of tax-payers.
 
Compensation and Refund budget line:
Several payments were effected from this budget, whose supporting evidence of loss, or failed contract is, at best, limited.
 
Bid fixing:
Evidence was found to indicate bid splitting had potentially occurred in Malawi Police Service (MPS) where contracts were awarded to businesses controlled by one individual implying that businesses in the same group are apparently “competing” against each other, while at the same time being the only bidders (i.e. the only bidders are businesses from the same group or businesses who appear to be controlled by the same individuals).
This is a characteristic of bid fixing / tender splitting.
In one extreme case, one family group of companies, it was noted, invoiced for 240,015 PRS Fatigues Dresses to the MRS within a one month period. This baffled the auditors because this equated to approximately 14 PRS Fatigues for every police officer serving at the time.
And furthermore, further review of documentation proved that each company delivered similar goods for the same period, to the same MDA to the value of MK 4.627 billion. As if this was not enough, a payment of USD$ 5,438,000 was paid twice to one company based overseas; payments one year apart but using exactly the same documents to facilitate payment.
 
Procurement of tear gas and rubber bullets:
Tear gas and rubber bullets, it was observed, were procured at almost seven times the recommended retail price resulting in a loss of at least $13.6m to the tax-payer. The strangest thing with the procurement was that the items were procured from a business not listed as an Organisation for the Prohibition of Chemical Weapons’ (OPCW) compliant manufacture; and no export approval certificates have been provided.
In like manner, the Malawi Defence Force (MDF) paid a service provider for the refurbishment of more vehicles than it has, wasting a total of the tax-payers’ USD$486,945.
 
Panama, in the mix:
As the auditors were reporting, they traced companies awarded multi-million dollar contracts to businesses or persons listed in the Panama Papers, and such payments made with limited evidence of legal contracts in place.
RSM Risk Assurance Services, LLP (RSM) was contracted by the German Government through Deutsche Gesellschaft für Internationale Zusammenarbeit (GiZ) to forensically review the initial findings of PwC report of May 2015 that noted K577 billion as unreconciled and to further, amongst other things, identify any linkages between different entities by seek information from banks and other sources.
“APM’s 13” and Analysis:
All these are symptomatic of a phenomena termed State Capture, a type of systemic political corruption in which cartels take over a country’s fiscus, something that cannot happen at this scale without collusion and tacit consent of very high-level officials.
What makes this phenomena even of more concern in Malawi’s case is that the same cartel(s) have succeeded in capturing not one, not two, not three but in all likelihood four successive governments and presidents.
All the individuals and companies which have been code named: “APM’s 13” have since 2005 been named in audit reports as benefitting from double payments, over-pricing or charging for good that they simply did not deliver.
In the next of these “Exclusive” series, names of the companies i.e. “APM’s 13” whose case files are the subject of an embargo facilitated by Mr Kalekeni Kaphale, in his capacity as Attorney General, will be revealed complete with how they have been systematically stealing from the Malawi taxpayer going as far back as 2005.
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Muli
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Muli
22 days 17 hours ago

Popeza achakwera ndi MCP yawo ya akabwira sakutithandiza, can someone sponsor me. Ndikufuna kulowa mu dzalanyama forest ndikwapulane ndi anyamata aPitala.

duka
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duka
22 days 22 hours ago

Macheke a 2013, koma kuti Lyolyolyolyoooooo

Mbava
Guest
23 days 7 hours ago

This Audit was not done by Kamphasa so the the figure remains 577 billion we dont evil pple to control these two bodies Audit G and ACB here. Let the company which did the auditing come out with the original copy full stop and we rest the case as long as we know who did what kenako mudzibisana otherwise malawians are not stupid they know what is happening

kings
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kings
23 days 8 hours ago

Malawi is crying. These thieves have milked this country up to the last penny.AXMrV

chimzimu Chonyasa
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23 days 8 hours ago

Zonse ndi mbava ndipo zimadziwapo kanthu.

Franz Van Gwire
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Franz Van Gwire
23 days 9 hours ago
I salute you Garvey Karvei for this article which has left me and many people awe. This is overwhelming evidence that no sane person can dispute and all those who were involved should start growing goose pimples and fear for their dear lives. The most fascinating thing is that the report highlights all the four governments and presidents going back have been involved in this. Nyasa Times I salute you for unveiling this and it is up to us Malawians and not Britain, USA and Germany to act now. We have had enough. If we don’t act now then there… Read more »
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