The audit report was conducted by a British accounting firm, Baker Tilly Business Services Limited, which was contracted by the Department of International Development (DfID) following revelations of massive fraud in the Malawi government in what has become to be known as cashgate.
The report is dated February 21, 2014 and covers financial transactions of the Malawi government for the period April to September 2013.
The report does not mention specific names of individuals and companies involved for legal reason but the auditors give assurances that such information has been provided to the Malawi Police, the Anti-Corruption Bureau and the Auditor General for their appropriate actions.
The auditors clearly state that following their investigations, they believe that fraud; theft or unethical actions took place in the period under review which saw the Malawi government losing K13.6 billion.
The report says the funds were through a variety of means, including extraction of cash in Malawi kwacha through systematic money laundering activities through private companies as well as through fraudulent payments to dubious overseas companies in foreign currency.
“These were premeditated and planned (transactions) and not opportunistic,” reads the report, in part.
In the first type of fraud, the auditors say over K6 billion was involved payment of huge amounts to companies which had not provided any good and services to government and deletions of the transaction data from the government’s Integrated Financial Management Information System (IFMIS).
A thorough scrutiny of documentation reveals that some of the companies involved opened new bank accounts two or three months prior to receipt of government cheques and that some cheques were paid into accounts of companies which were either dormant prior to payment or showed limited transaction activity through the banks.
Transactions were paid from the Malawi Government Development Account under expenditure lines of construction of irrigation schemes, consulting, contracts, maintenance of buildings as well as rehabilitation of roads and bridges.
The ministries involved included Office of the President and Cabinet, Irrigation and Water Development, Local Government and Rural Development and Tourism, Wildlife and Culture. However, cheques for Irrigation and Water Development were not cashed.
Baker Tilly classified transactions under this method as “theft of government funds and subject to appropriate legal action”.
Separate to cashgate, the British audit firm has unearthed another type of fraud which involves dubious companies which were contracted without following procedures and were paid billions of kwacha for goods either heavily over-valued or not received. These firms ended up externalizing the money.
“Their funding (payments) were transferred internationally to overseas jurisdictions in foreign currencies mainly US dollar and South African rand,” reads the audit report.
In these transactions, high value payments made to two newly formed companies amounting to K3.6 billion. Additional payments totaling K3.9 billion made to the same companies.
The auditors have since partition some of the blame for the frauds to the Accountants General’s Office, the Reserve Bank of Malawi (RBM) and commercial banks.
[highlight style=’peach’] Accountant General’s Office[/highlight]
The report reveals that 14 of the cashgate cheques were signed by the Accountant General valued at K424.6 million while 28 were signed by the Assistant Accountant General valued at K2.6 billion with limited supporting documents.
It faults the two officers for their failure to detect the fraud despite their responsibilities in the policing of government payments as outlined in the Public Finance Management Act.
“Both the Accountant General and the Assistant Accountant General should be considered to have failed in their duties by not challenging and checking the validity of the payments,” reads the report, in part.
It, however, expressed surprise that instead of being held accountable, the key individuals in the Accountant General’s Office have just been transferred to other ministries.
[highlight style=’pear-green’] Reserve Bank and commercial banks [/highlight]
Baker Tilly says although government rules demand that any cheque of K2 million and above should be signed by three signatures, 18 cashgate transactions valued between K13 million and K209 million contained only two signatures but all were honoured by RBM.
The report says huge sums of money were being withdrawn in cash from banks in shorter periods of time, often significantly higher than cash holding limits of commercial banks but the banks failed to identify these unusual transactions with a limited number of suspicious transaction reports sent to the Financial Intelligence Unit.
The firm believes that such level of withdrawals should have increased cash calls by commercial banks and should have been identified by the banks and the Reserve Bank of Malawi.
“RBM operates as a banker and advisor to government – and the advisor element suggests active and not passive involvement in managing client funds,” reads the report.
It quotes the Malawi government and RBM agreement which states that “the bank, in collaboration with government, shall ensure that not fraudulent cheques and not cleared”.
“We have particular concern that high value cheques including those with exact values on consecutive cheque numbers, were withdrawn on the same day,” reads the report, in part, adding: “These payments were not challenged. We believe these could have been stopped were they subjected to more robust secondary checks.”
The firm also says even its contacts with RBM during the investigations of the fraud showed that some elements within the central bank wanted to conceal some information.
[highlight style=’pear-green’] Reads part of the report: [/highlight]
“We were initially provided with bank statements by the RBM in electronic format whose extraction was not independently supervised by the audit team. In addition, we requested extraction of the same data under supervision. A comparison of the two statements was undertaken and noted a number of transactions missing between the two sets as well as differences in the opening and closing balances.”
According to the report, nineteen banks were involved in the suspected cashgate and fraudulent transactions targeted in the investigation, of which 11 were Malawians banks and eight foreign banks.
Seven of the 11 Malawian banks initially refused to provide requested information, citing client confidentiality. The Auditor General then issued a subpoena to these banks, which led to five of them complying. One demanded a court order which was provided and it released the information. One bank was yet to cooperate.
[highlight style=’pear-green’] IFMIS [/highlight]
The forensic auditing has revealed that 598 entries were deleted from IFMIS using user IDs of four individuals.
It also notes that 259 of the 598 records deleted were done outside office hours, between 10 pm and 7am
Quoting a report from Soft-Tech – a company that supplied the IFMIS to the Malawi government, the report says 144 voucher journals and 133 payment journals totaling K5.6 billion and K8.6 billion respectively were deleted following circumvention of network firewall and system security.
However, the auditors believe the IFMIS has no problem as it operates effectively globally on a daily basis but states that IFMIS data will only be as good as the data input into the system and the application of security controls around it.
“Deletion of entries and subsequent payment is not a fault of IFMIS. It stems, instead, from weak application of controls by individual users and by staff circumventing the controls,” reads the auditors’ report.
[highlight style=’pear-green’] Conclusion [/highlight]
The report makes recommendations on various measures to be introduced within the government financial management systems to prevent similar cases from happening in future.
It is however pessimistic about the safety of resources in the government accounts in the meantime.
“The apparent level of collusion and circumvention together with limited challenge by those charged with accountability and lack of detained external audit would suggest that there is no guarantee or assurance that future occurrences would not happen regardless of any control improvements implemented,” reads the report, in part.
It is yet to be seen donor partners – who have withheld their aid to Malawi due to uncertainty regarding the safety of their money in government hands, would respond to the report, especially the part quoted above.
[highlight style=’magenta’] Full cashgate report here:… [/highlight] http://www.scribd.com/doc/208837376/CASHGATE-901
- The author is an economic journalists with Times Group and posted this write-up on his blog