AGSA on progress or outcome of forensic investigation in DSBD, with Deputy Minister

Small Business Development

04 November 2020
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

The Committee of Small Business Department met virtually to receive feedback from the Auditor- General’s office on the Department of Small Business Development (DBSD) 2018 investigation. The scope of the investigation included: compliance of the DSBD to the guidelines and standard operating procedures (SOP) of the Black Business Supplier Development Programme (BBSDP) and Co-operative Incentive Scheme (CIS); the validity of the processes followed in awarding incentives to grant applicants; confirmation of the authenticity of suppliers and quotations; verification that goods and services were actually delivered/received; and monitoring and reporting processes followed by the DSBD subsequent to the approval and payment of the incentives to the beneficiaries.

The AGSA inspected 88 application files. A total of 37 (42%) of these contained no evidence that inspections had been performed before submission of the applications to the adjudication committee for approval, in contravention of the Black Business Supplier Development Programme guidelines. All 37 applications were approved by the adjudication committee. Eight officials were implicated in this regard; 23 out of 88 applications (26%) of the sample tested were accepted and approved despite the application amounts exceeding 30% of the applicant’s previous year turnover (according to the financial statements) or there was no evidence to substantiate the 30% previous year turnover requirement, in contravention of the Black Business Supplier Development Programme guidelines/standard operating procedures.

Management intends to institute disciplinary action against officials for noncompliance with the Development Programme guidelines. Management also intends to open cases of fraud against the officials, grant applicants, and service providers with the South African Police Service. Management has decided to blacklist network facilitators that appear to have made misrepresentations in diagnostic reports and potentially colluded with officials. Furthermore, management will consider deregistering the network facilitators that did not qualify to be registered as facilitators or did not submit all required documentation.

Members commended the Auditor-General for a comprehensive report and expressed that it is encouraging to see that the government is being serious in tackling wrongdoing in various government departments. They further asked if there is any plan to attend to the issues that are outstanding given the fact that Covid-19 might be here for a long time. What is the plan?

Members also asked about the status of the nine officials that were implicated and being investigated – whether they were suspended, demoted or suspended with pay, etc. They also asked if the Committee can be furnished on the fraud cases, with case numbers, so that the Members can follow up.

Meeting report

Opening Remarks by the Chairperson
The Chairperson opened the virtual meeting, welcoming Members and the delegation from the Department of Small Business Development (DSBD). She acknowledged apologies from the Minister and the Department of Public Service and Administration. She also notified the Committee that Mr H Kruger (DA) was ill and asked the Members to pray for his speedy recovery.

AGSA Briefing: Department Of Small Business Development Investigation Feedback
Ms Aletta van Tromp, Business Executive Investigations, Auditor-General of South Africa (AGSA), started the presentation by giving a brief background. She indicated that the Auditor-General (AG) approved the investigation at the Department of Small Business Development in 2018. A letter of engagement in respect of the investigation was signed on 23 March 2018 with the former Director-General (DG) of the Department. The investigation focussed on the 2015-16 and 2016-17 financial years. The scope of the investigation included:
- Compliance of the DSBD to the guidelines and standard operating procedures (SOP) of the Black Business Supplier Development Programme (BBSDP) and Co-operative Incentive Scheme (CIS);
- The validity of the processes followed in awarding incentives to grant applicants;
- Confirmation of the authenticity of suppliers and quotations;
- Verification that goods and services were delivered/received; and
- Monitoring and reporting processes followed by the DSBD after the approval and payment of the incentives to the beneficiaries;

During the 2015/16 year, 684 applications for BBSDP grant funding were approved – which amounts to approximately R307 million; 597 of these were paid in the year (approximately R193 million). During the 2016/17 year, 738 applications for BBSDP grant funding were approved – which amounts to approximately R392 million; 598 of these were paid in the year (approximately R242 million). The findings are predominately due to non-adherence to the BBSDP guidelines and SOP in processing, evaluating, adjudicating, and recommending grant applicants for approval of the incentive schemes. The findings also point to inadequate internal controls, monitoring, and oversight in the awarding of incentives to grant applicants.

Findings: non-compliance to incentive scheme guidelines and SOPs
The AGSA inspected 88 application files. A total of 37 (42%) of these contained no evidence that inspections had been performed before submission of the applications to the adjudication committee for approval, in contravention of the BBSDP guidelines. All 37 applications were approved by the adjudication committee. Eight officials were implicated in this regard; 23 out of 88 applications (26%) of the sample tested were accepted and approved despite the application amounts exceeding 30% of the applicant’s previous year turnover (according to the financial statements) or that there was no evidence to substantiate the 30% previous year turnover requirement, in contravention of the BBSDP guidelines/ SOP. Four officials were implicated in this regard. 34 of the 88 (39%) application samples investigated did not contain the required documentation relating to the requirement for copies of Identity documents (IDs) of key managers, directors, shareholders, and list of employees of the entity, in contravention of the guidelines. Officials submitted these applications to the adjudication committee, and they were approved without the required documentation. Six officials were implicated in this regard.

For nine of the 58 (16%) applications investigated, the Trade and Industry Advisor (TIA) did not perform site visits before submitting applications to the adjudication committee. One official was implicated in this regard; 20 of the 58 (34%) applications investigated were processed and approved without the required documentation. Five officials were implicated in this regard. For four of the 58 (7%) applications investigated, the TIAs did not confirm that three quotations were submitted for each activity applied for. Three officials were implicated in this regard. For two of the 58 (3%) applications investigated, the lowest quotation was not accepted without documenting reasons for not accepting the lowest quotation. Two officials were implicated in this regard; 12 of the 58 (21%) applications were approved by the adjudication committee with less than three quotations. However, the motivation for deviations was not approved by the AO. One official was implicated in this regard.

Findings: validity of awarding BBSDP incentives
34 grant applicants had a turnover above R1 million but these applicants were not registered for Value-Added Tax (VAT). Multiple instances were noted where preferred service providers that quoted above R1 000 000 did not include VAT in their quotations. They also failed to provide their VAT registration number on their quotations. These quotations amounting to R12 050 625 were accepted by the BDOs. One supplier was registered for VAT according to the South African Revenue Services (SARS) website but did not charge VAT on their invoice. The invoice was for an amount of R1 360 000. During the investigation, the AGSA identified that the directors of multiple companies applied for and received grants exceeding the R1m threshold.

Findings: monitoring and reporting processes followed by DSBD subsequent to the approval of grant applications
Ms van Tromp noted that after the approval of the grant applicants it was confirmed by the BBSDP Director and BBSDP Deputy Director that no post-approval site visits were conducted for the BBSDP applications approved and paid. It was also confirmed by the CIS Deputy Director that the DSBD does not conduct post-investment site visits on funded co-operatives.

Findings: possible fraudulent BBSDP claims
Another grant applicant procured imported machinery from a service provider based in the USA. However, we noted that the machinery differed from the photo evidence submitted with the inspection report and that the machinery was manufactured in 2010 by a Chinese based company. This suggests that the applicant possibly already owned the machinery before applying for the grant. Furthermore, there is a possible conflict of interest between the grant applicant and the service provider in that the director/member of the grant applicant and the director of the service provider appear to be spouses based on their social media profiles.

Reporting
A draft management report was compiled, issued to the Accounting Officer (AO) on 22 February 2019, and then discussed with the AO and Executive Authority on 28 February 2019. On 28 February 2019, the AGSA discussed the investigation and findings with former Minister Zulu. DSBD management responded to our findings and recommendations on 19 and 25 March 2019. A final management report (incorporating management responses) was issued to the AO on 25 April 2019. Management has indicated that they will arrange training for all officials working with the processing of applications and claims to ensure compliance. Training interventions will comprise of the following:
- Continuous refresher training to ensure that staff is updated on all new developments.
- A suitable course to retrain all the TIAs has been sourced and SCM processes are in the process to appoint a training provider.
- The DSBD HR Unit is assisting with the process and it is envisaged that training will resume in the first quarter of the new financial year 2019/20.

Management responses to draft report
Management intends to institute disciplinary action against officials for noncompliance with the BBSDP guidelines. Management also intends to open cases of fraud against the officials, grant applicants, and service providers with the South African Police Service. Management has decided to blacklist network facilitators that appear to have made misrepresentations in diagnostic reports and potentially colluded with officials. Furthermore, management will consider deregistering network facilitators that did not qualify to be registered as network facilitators or did not submit all required documentation.

Way forward
 Ms van Trump said that on 25 April 2019, the acting DG requested assistance from the AGSA in providing information and evidence that was solicited during the investigation, as well as for the investigators to provide testimonies at the disciplinary hearings. On 29 April 2019, the AG acceded to the request. AGSA subsequently provided the DSBD with relevant information/evidence as well as input on the disciplinary charges; this process continued until December 2019. Disciplinary processes were scheduled to take place beginning 2020 but were halted due to Covid19. Disciplinary processes subsequently proceeded and in October 2020 the investigators were called to provide testimonies. This process is ongoing and further hearing dates have been scheduled for November 2020. A public report will be issued, on completion of the disciplinary processes.

Discussion
Mr Z Mbhele (DA) thanked Ms van Tromp for the presentation which her office did to investigate various issues. He asked if the AG’s office from the investigation was able to ascertain if it was negligence in the main or actual intention to violate financial control for the culprits.

Secondly, Mr Mbhele asked about blacklisting. He was aware that there is going to be a potential of the blacklisting. But will this blacklisting be happening within the Department or will the Department also engage the National Treasury (NT) so that the wrongdoing is also not transferred to other departments?

Ms K Tlhomelang (ANC) expressed that it is encouraging to see that the government is being serious in tackling wrongdoing in various government departments. She further asked if there is any plan to attend to the issues that are outstanding given the fact that Covid-19 might be here for a long time. What is the plan? She reckoned that the issues are very solvable and as Members they need feedback on them so that they can inform the communities in their constituencies.

Mr F Jacobs (ANC) commended the AG’s office for such a comprehensive report but was disappointed by the slow pace in implementing management letters. There is a need to ‘walk the talk’ on consequence management. He argued that the findings make it very clear that a lot of things went wrong and that if there is real consequence management or just a talk show. He pointed out that it has been almost two years since these management letters were released.

He also asked about the status of the nine officials – whether they were suspended, demoted or suspended with pay, etc. He also asked if the Committee can be furnished on the fraud cases, with case numbers, so that the Members can follow up a position also echoed by Ms B Mathulelwa (EFF)

Response
In her response to the questions, Ms van Tromp thanked the Members for their good and questions and helpful inputs.

She responded from the AG’s side they cannot find someone guilty of criminal intent but from their side they can give indications of what they would have gathered during investigations. Only the courts can do so after their findings. Some of the findings indicate a balance that some cases were a result of negligence and some as a result of not having sufficient training on the due process that was supposed to be followed. She said that she cannot go into details of each case of the individuals but from the affidavits they have, they found out that there are incidences where misrepresentation of facts was done by officials.

On blacklisting, she said that she could not comment on behalf of the Department – if they were going to send the blacklisted to the National Treasury. But she said that there is enough evidence to support that process. From the blacklisting perspective, she thinks the Department, on its own, can do that and be able to blacklist these suppliers on the National Treasury database.

Ms van Tromp indicated that the AGSA believe that the disciplinary process will be finalised by the end of the year and that the public report has been drafted but yet to be finalised  as they are still looking at some of the individuals and their charges so that the report can be finished and be published.

On the status of the nine officials, she said that she is not sure about their status, but the Department is better placed to answer the question. She also said that since the Department suffered the loss, they should have opened the case and received a case numbers from the police.

The Chairperson thanked Ms van Tromp for the responses and noted that as the Committee they need to demonstrate that they are fighting corruption. She argued that they need to push the Department to avoid negligence and if it lacks capacity the Committee needs to make sure they advocated that they be capacitated to tackle corruption.

Deputy Minister of Small Business Development, Ms Rosemary Capa, thanked the Committee for their oversight role and noted that it is important that they fight corruption in the Department. She noted that it is important as well that the Department is fully capacitated such that issues of incompetence are dealt with.

Consideration and adoption of meeting minutes
The Committee considered and adopted Committee minutes.

The minutes were all adopted without any objections or any comments.

The Chairperson thanked the Members for attending and called again on the Members to pray for the recovery of Mr Kruger.  

The meeting was adjourned.




 

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