Department of Justice & Constitutional Development: Third Party Fund management

Meeting report

Department of Justice & Constitutional Development: Third Party Fund management
The Chairperson reminded Members that today's meeting was in the nature of an engagement with the Department of Justice and Constitutional Development (DoJ or the Department) in relation to Third Party Funds. A full hearing had been held earlier, but it was decided to isolate the Third Party Funds (TPF) because of numerous challenges in that area. The Committee had undertaken oversight visits to various provinces and then compiled a report. The Committee had taken a decision, in this year, to pursue areas of particular concern, and it was in this context that this engagement was called. He added, however, that the DoJ had also indicated that it wished to account on progress made.

Ms Nonkululeko Sindane, Director General, Department of Justice & Constitutional Development, said that when the Department had last met with the Committee, it was busy with a process around governance, people and the environment. A number of governance interventions had been taken. The Minister had indicated that the DoJ must provide an unqualified audit by 2012/13, and it was believed that this was possible. There was still ground to be covered. The Minister was meeting regularly with the DoJ to discuss progress and broad financial management, and met also with the Office of the Auditor-General (AG). The audit committee in the DoJ was also engaged with the process, and there were ongoing efforts to strengthen the internal audit. A brief indication was given of the other steps followed, following SCOPA's First Report. One of the issues was proper accounting for TPFs. The DoJ admitted that when it originally outsourced management of TPFs, it erred in not retaining sufficient officials in the office who would supervise this. Now, however, there was a senior management official tasked with managing TPFs, to ensure that it was led at the right level. Ms Sindane herself also commenced supervising the TPFs and was dealing with issues on virtually a daily basis, including engaging with the regions to ensure that the necessary work was done. Posts had been filled in the regions. There remained some issues around fraud and cash shortages, but these were being dealt with, and the DoJ was attending to recovery and disciplining defaulting officials where necessary.

Ms Sindane said it was important to note that TPFs centred around vulnerable people - children or women looking after their families - so it was vital to speed up the payment processes. A number of people had undergone training to ensure sufficient capacity. In relation to the accounting, it was recognised that supporting documentation must be provided, since that had been one of the points that had led to past disclaimers. Some documents from the past could still not be recovered, but the DoJ had fixed a point from which new accounts must be drawn. There were agreements with the AG and National Treasury on the accounting framework for TPF. Although a clean audit could not be provided today, DOJ was conscious of the need to do so by the end of the financial year.

Mr Johan Johnson, Acting Chief Financial Officer, DoJ, outlined what the TPF challenges were. He outlined that, over the last three years, DOJ had held R50 million TPFs, at various courts, with 477 systems. Many of those were weak, and there were poor internal controls and service delivery. He said that about 60% of the money handled related to maintenance, but other money included fines, bail money, payments into court and collection of debts on behalf of government institutions. Technically, there were two systems - one for the court, and one for the State Attorney, which were administrative systems. A financial system had to be added to these systems. There were a number of bank accounts, and it had not been possible to produce complete and accurate statements since 1994.

He summarised the receipts into the TPF for 2010 and 2011 (see attached presentation, slide 10). Over these two years the funds totalled over R3 billion. One of the challenges was the line item for "unclassified money", which was money deposited without proper referencing. He also tabled a breakdown showing a proportional allocation, and another giving a comparison by region. He explained that payments were then made from TPF into the National Revenue Fund, and the total of these payments had exceeded R500 million over the last three years.

The 2010 and 2011 financial statements were presented to the Auditor- General (AG) in March. At the end of 2011, R79 million was reflected as "receivables", still to be recouped from individuals, meaning that there was a shortfall of this amount. He explained that this was made up of R12 million dishonoured cheques, maintenance debtors (resulting from overpayments to individuals because of incorrect reference numbers) and an unidentified shortage of R63.4 million. That still needed to be investigated, as to whether it arose from theft, wrong payments or over-payments.

Mr Johnson noted that there were over 400 bank accounts held, with four banks, and the bank charges were in excess of the interest, which meant that TPF was actually running at a loss. In some towns, there was no choice of banks.

He noted that a system had now been developed of decentralised EFT payment channels. However, it was still necessary to bring every court on line. The decentralisation was intended to reduce the turnaround times, as well as produce a full audit trail, and enable tracking of any fraudulent activity. 102 000 individuals had been paid through this system in June 2012. This not only reduced the time taken to make payments, but also saved transport costs for the beneficiaries. A schedule of maintenance payments as at June 2012 was tabled (see attached presentation for details). On average, 250 000 people received maintenance each month, and 217 000 of these were paid directly into bank accounts in June, whilst about 33 000 were still on the old systems. Although this seemed to be quite a simple intervention, it had resulted in real improvements in service delivery. The DoJ wanted to identify certain courts as a priority for this year, as tabled in slide 22. 

Mr Johnson said that the DoJ had identified a number of steps to be taken. A business case had been drawn. Proper baseline financial reporting was vital to the whole process, and this also required a review of capacity, business processes and a review of legislation. The DoJ also needed to investigate other possible channels for payment.

For the business case, there had been various options: to maintain the status, outsource through a Public Private Partnership (PPP) or enhance the public sector managed TPFs. The last option was taken, based on affordability and employment considerations. A baseline financial reporting framework for TPF had been created, taking account of the numerous courts, corporate accounts, and the fact that there were 27 million transactions over the past two years that had to be re-worked, bringing in the necessary technology. Comprehensive training manuals had been developed, and financial practitioners, senior managers and court managers and other staff had been trained, after an assessment of skills. Funding was secured for 45 finance practitioners at middle management and technical level. 25 contract appointments were made, and database administrators were also appointed.

The business processes had been standardised, there had been a systems review, and handbooks were prepared setting out the processes for each action. All court managers and officers would be trained. Decentralised payment channels were introduced at some courts, with a full audit trail, and he reiterated that this led to shorter payment times. A strategy of “lean management” had been adopted, and this had been piloted at identified courts at regional level.

A legislative review would encompass amendments to the Maintenance Act, for payments to be made directly to beneficiaries. There were plans to amend the Criminal Procedure Act to redirect local authority admission of guilt fines to municipalities. There were also options being investigated for electronic refund of bail. Mr Johnson highlighted the need to have legislation governing the TPFs, which were not covered by the Public Finance Management Act (PFMA). Draft legislation had been prepared.

The DoJ was now intending to take the regional workshops further, and was building on the process with National Treasury. The biggest challenge would lie in investigation of shortages. This would also involve engagement with the fiscus around possible write-offs. DoJ was continuing with the rollout of the decentralised payment systems, and would improve management steps further. It needed to engage with the magistracy, to promote direct maintenance payments, with the South Africa Local Government Association and local authorities around admission of guilt payments, and to finalise the systems review and legislation. Finally, he noted an instruction from the Director General that if there was a qualification, no performance bonuses would be paid.

Ms Sindane concluded that the decentralisation process was being done in a responsible manner, after full training, so that whilst the DOJ was aware of the need to try to get matters on track as soon as possible it was also being cautious to ensure that it was done properly.

Discussion
The Chairperson read out a disclaimer recently issued by an Auditor-General in relation to lack of accounting in the Court Services division, but then noted that this quotation came not from a South African, but an English report. Problems were apparent across the world.

Mr R Ainslie (ANC) said that this presentation addressed some of the Committee’s concerns, particularly around proper training, and he was pleased to see the manuals. However, he asked for further amplification on slide 9, asking whether the shortages in 2010 and 2011 arose from fraud, and what the possible figure was from 1994. 

Mr Khotso de Wee, Chief Operating Officer, DOJ, said that he could report on 68 cases, about 50 involving administrative clerks. There were 35 fraud cases, one involving mismanagement and 23 for theft. 61 of the 69 people charged were found guilty, one was not and five resigned before their disciplinary cases could be finalised. 48 matters were referred to SAPS. He emphasised that whether or not the officials had resigned, the criminal matters would be pursued, even if the disciplinary matters could not. 

Mr Ainslie was concerned to hear that R63 million was the possible figure for fraud for 2010 and 2011. He questioned why the DoJ did not know what its shortage was prior to that date.

Mr Johnson said that this was an extract of the balance sheet, showing the position as at the end of 2011. For the first time, the DoJ had worked with transactions and liabilities, and was able to come up with a total figure. Without those financial statements having been prepared, it would not have been possible to have any starting point. Now that this had been done, it was possible to get a breakdown per court and have more specific discussions with court managers.

Ms Sindane added that prior to 2010 there was very weak investigative capacity in the Department. There had been improvement of that capacity, and, for the first time, a vetting process was undertaken for all those working in supply chain management. Previously, no numbers of cases were available. She reminded the Committee that a question had been asked previously about the types of investigations and the recoveries, and stressed that the DoJ was attending to recovery. In respect of the shortages in 2009/10, R800 000 was recovered and in the following year R250 000 was recovered. Recovery was ongoing as the clean-up process was being done. This was a start.

Dr D George (DA) asked about accountability. Whilst he was not a Member of this Committee previously, there was obviously a history behind the DoJ matters. He asked who was taking accountability now in the clean up process.

Ms Sindane said that the final accountability rested with the Director General, from an administrative point of view. However, each level of the DoJ, as pointed out, was accountable to a person as part of the decentralisation process. Part of the investigations involved a decision as to whether, for instance, checking officers had been derelict in their systems. This whole process had helped the DoJ to identify areas of accountability at the right level. Previously, the court manager would deal with everything other than TPF, and there was no "owner" of TPF. This was now brought within the ambit of the regional heads, who were being held accountable for TPFs. The Minister was meeting with the audit committee to deal with issues.

Dr George said that there was a considerable amount of "unclassified money". He thought it made little sense to open so many bank accounts. He also said that some banks had systems that allowed a “blocking” of any moneys paid in without proper referencing and asked if the DoJ had discussed this possibility with the banks.

Ms Sindane said that whilst "lean management" was making matters easier, from an administrative point of view, it was necessary also to seek solutions from officials managing the accounts. In all the regions, various groups of personnel were being asked to suggest ways to deal with the problem of unclassified amounts, and had, for instance, suggesting innovations to deal with the schedules. In that way, much unclassified money had been cleared. She was also in discussions with the banks, and was seeking assistance from them, including the matter of insisting on a reference.  One of the courts had already managed to clear its unclassified amounts, and this was an area of focus.

Mr N Singh (IFP) congratulated the DoJ on its initiatives and efforts to date. He noted that other systems, apart from the JDAS system, were being investigated at some stage, and asked for a follow up.

Ms Sindane sad that there had been engagement with National Treasury on putting a new system in place, but the system that had been discussed at one stage was not finally procured, for various reasons. It was felt that instead, the whole work ethic, morale and accountability needed to be addressed first. Her personal view was that people must be in the right space to interact with the systems. The DoJ still needed to work a lot more on change management, to ensure that correct data was inputted, to achieve correct outcomes, and that was seen as the first priority. In addition to that, although National Treasury had already given an allocation for this system, over a period of time, DoJ still thought that the tool would be very expensive, and so was looking at alternatives. However, she stressed that the main part of the whole exercise was to identify exactly where the main weaknesses were. It was clear that not all the problems with TPF were related to the systems. The DoJ was in the process of "tweaking", and, over the medium to long term, the DoJ would have to look again at an affordable and efficient system.

Mr Singh noted that the findings made by the Committee from its oversight visits showed that at one stage there were insufficient court sheriffs, and problems around referencing that started elsewhere. He asked if the DoJ held any consultative forums with other departments and other bodies with whom it worked, for instance, including Department of Social Development, who might allocate reference numbers.

Ms Sindane said that the DoJ was trying to ensure that all paysheets were put in order, and National Treasury was assisting with transversal systems to allow better referencing. Where there was decentralisation, regions must be able to interact quickly

Mr Singh was worried about the statement that sometimes bank charges exceeded interest. He said that it was important to deal with this issue and wondered if the DoJ was engaged with the national discussions on this.

Ms Sindane said that more South Africans were now using bank accounts, so that EFTs were able to be used. However, there would always be a small pool of people who did not have bank accounts. There would need to be engagement with the public before these accounts could be cancelled entirely.

Mr Singh asked if the DoJ was satisfied that it was not possible for staff members to create false beneficiaries and asked what checks and balances were in place.

Ms Sindane agreed that it was necessary to ensure that there was proper checking of the loading of beneficiaries, including holding all officials liable for any mistakes. She said that whilst she believed the majority of her staff were committed to working well, it was likely, in any department, that a few “rogue elements” were present. However, ongoing investigations would reveal this.

Ms M Mangena (ANC) noted the large amounts of unclassified monies, and agreed that it would be easier if women could collect money directly from banks. She too stressed that the DoJ must ensure that banks provided referencing numbers. She questioned how it was possible that people were not collecting their money and said the figures indicated that the amounts had surely been building up for some time.

The Chairperson agreed that when money was paid out, without proper referencing, the practice should be that the money was returned.

Mr S Thobejane (ANC) said that he was at last getting a sense that DoJ was improving. However, there were still some issues. The first related to the disciplinary matters against the clerks dealing with money. He wanted to know whether there was sufficient management and monitoring over those clerks.

Mr de Wee explained that of the 68 cases, 50 involved administrative clerks and he summarised the remaining breakdown. He noted that whilst it was accepted that the Minister and Director General had overall accountability, there was also a devolvement of accountability to regional heads, and court managers, and they were being made aware of their responsibilities. The 68 cases were those already reported, but there were continuing investigations. Altogether, there had been 264 reported cases, of which about 205 had been finalised, and the disciplinary actions were continuing.
 
Mr Thobejane asked about the dishonoured cheques, and also wanted clarification on the maintenance debtors. He also wondered if these problems were linked to the high bank charges, and why there was not engagement with the bankers to try to reduce the amounts. Some interventions were needed.

The Chairperson thought that bail had to be paid in cash, and therefore requested clarification as to how cheques could be dishonoured.

Mr Johnson explained that dishonoured cheques included amounts paid for maintenance or fines. After investigation, the amounts had been reduced, and money was recovered. In the past, when DoJ received a cheque, it would make payment to the beneficiary without waiting for clearance of that cheque. In relation to the maintenance debtors, he noted that this situation should not in fact arise, but it had happened in the past. The main benefit of concluding the financial statements was that, for the first time, the DoJ was made fully aware of exactly how much it was paying in bank charges. He agreed that the DoJ needed now to speak to the financial institutions. No beneficiary, to date, had called upon DoJ for payment of interest on the amounts that were held in the TPF, but technically speaking they were entitled to it. It was necessary now also to decide who would pay the bank charges.

Dr P Rabie (ANC) wanted a figure of the number of vacancies at regional level.

Mr Johnson said that the temporary positions would be made permanent as soon as possible. In senior finance management, the positions of Chief Financial Officer and Chief Director: Budgeting were vacant.

Dr Rabie noted that DoJ had spent R486 million on consultants and asked why it was not possible for the DoJ to do the work internally. Dr Rabie also wanted clarity on what outsourcing would entail.

Ms Sindane said that the consultants were engaged at the time when DoJ had no managerial oversight over the outsourced matters. Until such time as it managed to get its own staff to deal with TPFs,  DoJ had to issue a tender in specific terms, for a limited period, covering a wide scope. Primarily, the consultants had to assist with preparation of the financial statements, and getting historical information, including bank statements, from banks. DoJ’s own staff had been working closely with the consultant, the firm of PriceWaterhouseCoopers. When this firm left, there would be internal staff who would be able to run with the process on their own.

Mr Johnson noted that the figure for consultants was not R486 million, but R40 million and their contract came to an end by the end of August. The consultants had assisted with the first set of financial statements, and had provided technical assistance only with the second set, whilst the DoJ staff had prepared those statements. The third statement would be produced by DoJ alone.

Mr I Fundisi (UCDP) said it seemed the choice of banks was left to the regions and he wondered if the Department did not have "banks of choice". He thought that the DoJ should look more carefully at interest and charges.

Ms Sindane said that the choice of banks was historic as the DoJ had started by banking with the "big four", in line with instructions from government. In future, there would be investigation of other options, including the post office and receiving payment through shops such as Pick’n’Pay. DoJ was seeking value for itself and its clients. The audit committee had discussed how best to manage investments, and had also suggested that the question of bank charges was another area needing attention.

Mr Fundisi wondered if the implementation of new flow charts would necessitate additional staff.

Ms Sindane said that capacity differed from region to region. It was necessary to balance the level of investment with the size of the holding of TPFs in each region. The lean management project investigated how to do more, with less resources. She gave an example of a recent visit to a court, to find out how many maintenance investigators were needed. A desktop analysis would have suggested that a larger number of investigators were needed, but a visit showed a smaller number as ideal, both in terms of the work to be done, and the space in which the personnel were housed. Personnel would be expected to multi-task.

Ms G Saal (ANC) asked how long the Acting CFO had been with the DoJ.

Mr Johnson responded that he was appointed as Chief Director: Budgets in 2006, but he had been acting as CFO since June 2011.

Ms Saal said that in the last year, when the Committee visited DoJ, there was a problem with the JDAS system, and she noted the comment that although a new system was investigated, it eventually transpired that the problem lay with staff. She questioned who was monitoring the various systems in the DoJ, and if the multiplicity of systems was responsible for some of the problems.

Ms Sindane clarified that the 400 bank accounts related to different accounts at banks, not different systems. JDAS was the system presently running. She agreed that the multiplicity of bank accounts had been a mistake and it was being sorted out. In addition, JDAS was being tweaked to ensure that wrong beneficiaries would not be paid, and there were other improvements.

Ms Saal also questioned the disciplinary cases, asking how much of the funding misappropriated was recovered.

Ms Sindane responded that there had been recovery of stolen funds, but added that although the figure seemed large on its own, it must be put into perspective against the total held. The losses were about R80 million, from 1994 to date, but more work was needed to ensure that the situation was turned around. DoJ always took steps to recover from its own employees committing fraud (and then also generally terminated employment, and claimed from their pension fund if they were unable to repay immediately). There was a set process that was followed.

Mr Ainslie asked a follow up question around false beneficiaries. He pointed out that the South African Social Security Agency (SASSA) had been able to clean up its systems and wondered if the DoJ could do the same. He also said that during the oversight visit, the Committee had discovered that payments could be done without authorisation, and there was no guarantee that the correct person was being paid. He asked if these discrepancies had been sorted out.

Ms Sindane noted that the DoJ was trying to ensure credibility in the whole system. The basic minimum had been done, including issuing of passwords. Some controls were put in place to ensure that there was less chance of fraud. None of the systems were, however, entirely foolproof, nor would they reach that stage; money was lost everywhere in the world. However, DoJ was determined to do all it could to minimise the risk.

Mr Johnson added that DoJ was not yet at the stage when it could say with absolutely certainty that no false beneficiaries were being paid, but controls were in place to check that the correct people were now being paid.

Mr Singh asked whether it was possible that a maintenance claimant would be paid even if the person responsible for paying the maintenance into court had not paid in a particular month.

Ms Sindane said that DoJ would not pay out amounts without that money having been received, and although there may have been errors with this in the past, controls were now in place to ensure that this was not done. She reminded Members that the DoJ was acting merely as an agent for the TPFs. There had been historical problems with the dishonoured cheques. The DoJ was hoping to move to a system where, eventually, all transfers were done directly and cheques were eradicated from the system altogether. The DoJ had responsibilities to the beneficiaries. However, it must also be remembered that  if there were shortages in the TPF, the money had to be found to reimburse, and that effectively meant that the vote allocation to the DoJ for its projects would be reduced.

Dr George followed up on the cash flow. The DoJ had said that the claims of the beneficiaries were not covered under the figure for current liabilities. He said that, technically, the fact that there was a shortfall meant that TPF was bankrupt. In the unlikely event that all claimants might lodge claims simultaneously, the TPF would be unable to pay, and he asked if anyone was underwriting this risk.

Ms Sindane agreed that this was a major concern. The total shortfall was R79 million. Management was interacting with the question of who bore responsibility, and she wanted to engage with National Treasury on this point. If all claimants did claim simultaneously, this would have an enormous impact on the vote allocations, and the DoJ would not be able to continue to function. At the moment, TPF was already "eating into" the vote money. There were other aspects still under discussion with National Treasury, and she asked that she be allowed to report further on this when the issue was finalised, at the next meeting.

Mr Singh asked if the new systems were operating in all cash halls in all courts, and if staff were aware of the new systems.

Mr Johnson said the essence was management oversight and control at all courts. The booklets, process maps and other documentation should be deployed at every court, within the next three weeks. He invited Members to ask court managers and the head of the cash hall to produce these process maps (which should be visible) when they visited the courts.

Ms Mangena commented that ideally a process should be instituted whereby if a person failed to collect her money at the Magistrate's Court, the court should inform the parties and ask them to regularise the situation.

The Chairperson asked when the decentralisation process was expected to be completed, and how the prioritisation of courts was decided. He also wanted to know when the roadmap process would be finalised.

Mr Johnson said that the audits on the Guardians Fund, President’s Fund and Criminal Asset Recovery Account had been done. He hoped that the investment into the systems of TPF would clear the problems. DoJ had already produced the first two outstanding financial statements and intended to get a clean audit. It was necessary still to attend to outstanding matters, such as getting amounts written off, staff change management, looking at other service channels and legislation. He had not meant to imply that decentralisation would solve all problems, but it had a number of advantages. He said that there had been "tough talking" with the regional offices around the service delivery. Steps would be taken, one after the other, in a planned manner. The first aim was to get the EFT rollout extended to all courts, by December 2012, and he noted that so far, 146 courts were included. The legislation was to be tabled before the end of the financial year. The third year financial statements were being produced at the moment, and the AG should conclude the present audits soon. The last outstanding statements were expected by the end of August. The future steps would include the conceptualisation of the new system and the necessary changes to ensure that it filled the DoJ’s needs. Ideally, matters should be completed by the last quarter of the 2012/13 financial year.

The Chairperson said that Dr George's questions around accountability raised also issues around the court management. SCOPA's investigations indicated that there were no particular academic requirements for employment of these managers, and that had an impact upon the standard.

The Chairperson said that he did not get a sense that there was uniformity around performance management of TPF. In Johannesburg, the courts were managing to do the reconciliations, although other courts were raising all manner of complaints about the very same system, and claiming that it was unworkable. This was an indicator that the problem lay with people, not systems. He asked to what extent the DoJ was trying to set and hold people to minimum standards of performance.

Ms Sindane agreed that levels of accountability were different, due to historical reasons. At one point, TPF was a Head Office issue, but the decision had now been taken to move it down to the regional offices. The Standard Operating Procedures could be seen in all nine regions with participating courts. Until it had been possible to standardise the operations throughout the DoJ, there would be differences.

Ms Sindane also agreed with the comments about the standard of court managers. She said that a few years ago, there was a decision to concentrate on technical qualifications, rather than their practical experience in the courts, but that had led to complaints from presiding officers because of the lack of general understanding of the courts. The present requirements for appointment were that a court manager should have an understanding of what was happening in court, but must also be technically competent. She added that although, in the past, they did not have to have financial skills, because Head Office was dealing with TPFs, they would now be required to show these skills.

Ms Sindane added that there were quite a number of courts doing good work. A manager in Kwazulu-Natal had been taken to Temba Court, to impart good practices, and skills had also been seconded from the regional office in Western Cape, which had managed to get clean audits, although it was necessary also, when seconding, to ensure that the capacity of the original court was not depleted.

The Chairperson agreed that there was a need to continuously strengthen the internal audit function. This implied that the right people must be hired, with the scope to deliver. This did not need to be a long process, and so he wanted when that unit would be at optimal level.

Ms Sindane said that the audit committee was also playing an important role in guiding the internal audit unit. People were being appointed, and the DoJ was continuing to capacitate these officials, although it did have some problems in retaining internal audit and risk management staff. DoJ was looking into this. It was aware that the right attitude must prevail, to enable the officials to do their job properly. She would advise, in due course, who was auditing what. There had been discussions with National Treasury around overall capacity in the internal audit unit.

The Chairperson thought that continuous interaction was needed on the progress of matters. He asked that this Committee be kept abreast, at least quarterly, of developments, rather than waiting for a formal briefing. He emphasised that the areas of particular challenge should also be outlined.

Ms Sindane gave a commitment that this would be provided, and thanked this Committee for its guidance and support to date.

The meeting was adjourned.