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Deloitte assists municipality in prosecuting tender fraud

Despite the adequate legislation to combat corruption and supply chain management irregularities, the processes and systems to implement the legislation have not been adequately designed to allow transgressors to be brought to book. Deloitte has now designed such systems to assist Saldanha Bay Municipality to prosecute and discipline those found to have put the municipality at risk amounting to more than R50 million.

Lying dormant and unused for many years, provisions of section 38 of the Supply Chain Management Regulations, which the Minister of Finance issued in terms of the Municipal Finance Management Act, allows municipalities to discipline misconduct by service providers who circumvent the supply chain management processes. The regulations are an attempt to limit unfair benefits from lucrative local government tenders.

Deloitte, working hand-in-hand with the municipality, created the systems and processes to allow the municipality to take advantage of the provisions of the regulations by adopting a policy to specifically combat tender abuse. As a result, the municipality was able take decisive action against employees and service providers who were found to have violated rules governing the supply chain process.

Using existing, unused legislation

The municipality's use of these provisions sets a precedent that is likely to be followed closely by other local governments working to rid their departments of the scourge of tender fraud.

Graham Dawes, director of risk advisory at Deloitte in the Western Cape said, "We are not aware of situations where this legislation was invoked against service providers, as the processes and systems to make it work effectively were never put in place. The municipality, with our assistance, is realising the true potential of the provisions contained in the Act and the role it can play in the combating of fraud and corruption local governments are subjected to. The primary aim of the section was to allow local government structures to take action against those looking to defraud them with underhanded and collusive supply chain schemes".

Tender fraud 'big business'

Tender fraud has become big business in South Africa, with almost every local government and municipality plagued by abuses of the supply chain processes. Saldanha Bay Municipality was no exception and Deloitte was brought in to help discover the extent of and find a solution to fight the problem which exposed the municipality to serious financial prejudice and total irregular expenditure amounting to tens of millions of Rands.

Using the provisions of the regulations, the municipality became the first municipality in the country to take disciplinary legal and administrative action against employees and service providers that flouted the rules governing the tender process.

Two years of investigation

The investigation, started two years ago, was instigated by a whistle-blower who pointed a finger at the irregular awarding of work to one service provider in particular. Deloitte was then urgently appointed by municipal manager, James Fortuin to investigate the allegations.

In the course of their intensive two-year forensic investigation, the firm identified further irregularities in the procurement process, which necessitated a full blown investigation into all the service providers identified as involved with the schemes. Actions were initiated against 18 service providers for a range of abuses, resulting in a clear no tolerance message.

The investigation revealed violations of the supply chain processes that included price fixing, collusive tendering, cover quoting and fictitious quoting and/or services. The matter was worsened by the fact that municipal employees were complicit in the blatant flouting of the rules.

Dawes said, "After the initial phase of the investigation, we found overwhelming evidence of tender irregularities. In accordance with the regulations, we assisted the municipality in adopting a policy to deal with the transgressors and our report was instrumental in building a case against the perpetrators. We are extremely happy to have helped the municipality take the lead in fighting corruption and fraud."

Saldanha Bay Executive Mayor Rosil Jager said, "It is the first time in South Africa that service providers defrauding a municipality are being prosecuted and held accountable for their illegal activities. The legislation allowing us to prosecute these fraudsters is in place and we have taken a bold step to show we will not tolerate this behaviour from our staff or service providers."

Tip off line, dismissals, blacklisting

A dedicated tip-off anonymous hotline for tip-offs and whistle-blowers to report fraudulent and irregular activities was set up during the course of the investigation and information received from the anonymous tip-offs was investigated.

To date, all except one of the implicated municipal employees have been dismissed for their respective roles in the scheme. Legal action has been taken against service providers and many may find themselves blacklisted if their conduct is found to have been unlawful.

Deloitte Western Cape regional leader Bruce Fannin concludes, "We are proud to be pioneers in the fight against corruption. This process has been a long and difficult journey that required not only forensic auditing but a multitude of skills and disciplines to bring the transgressors to book. The firm has shown it is committed to helping its clients in the public sector rid themselves of the financial and reputational risks associated with procurement process irregularities and tender fraud."

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