Public Protector on Report: briefing

Meeting report

AD HOC COMMITTEE ON REPORT NO. 13 BY THE PUBLIC PROTECTOR
4 April 2000
BRIEFING BY PUBLIC PROTECTOR

Documents Handed Out:
Briefing Submission by the Public Protector, Adv. S. Baqwa
Public Protector Report No 13: Report on the alleged irregularities with regard to the affairs and financial statement of the SFF Association, and on the relevant reports of the Auditor-General to Parliament

SUMMARY
This meeting provided the Public Protector, Adv. Baqwa, assisted by his staff, an opportunity to explain to the Committee his Special Report on alleged irregularities regarding the affairs and financial statements of the SFF Association, et al., and the Auditor General’s reports on same.

MINUTES
The meeting was opened by the Chairman, Mr. Nel (ANC), who welcomed the Public Protector and his retinue, commenting that, as discussed at the Committee’s February 25 meeting, Baqwa’s presentation would be the starting point for its work. Nel also noted that the Committee is acting as the public’s representatives and in the public interest, and must proceed with due diligence in order to present Parliament with a full and comprehensive report.

Baqwa began by reviewing the Briefing Submission, emphasizing that at the time of the actions reviewed an atmosphere of distrust due to "historical factors" prevailed concerning the activities around the Strategic Fuel Fund Association (SSF), and the Auditor General’s investigation thereof. This resulted in poor communication among the role players, which led to misunderstanding and culminated in the matter having been referred to his Office. He stressed that his investigation was justified because of the SFF being a company wholly owned by the government worth more than R13B, and the nature of the alleged irregularities. He added that, despite the magnitude of the legal fees and other expenses incurred in the course of the investigation, the costs had been worthwhile inasmuch as the scrutiny served as a catalyst for transparency within SFF, and adjustments in its standard operating procedures.

After the review of the Briefing Submission Nel opened the floor for questions, with the direction that Report No. 13 ("the Report") itself, rather than the Briefing Submission, be considered section by section as the basis for questions. This format was adhered to, over the objections of Mr Gibson (DP) and Ms de Lille (PAC).

Concerning the general background of the Report, Ms F Mohamed (ANC) asked whether Baqwa was satisfied that it is full and complete in terms of the investigative mandate he was given. Baqwa answered that he was satisfied that it was complete.

In response to a query from Mr Masutha (ANC), Baqwa stated that applicable laws were adequate to deal with the situations investigated. He also noted that Section 41 of the Constitution, concerning "cooperative government", which is designed to redress secrecy and past practices of state organs, is effective, but that it contains no sanctions for violations of its provisions, and suggested that Parliament could consider adding appropriate clauses to address this.

Responding to Adv Nonkonyana’s (ANC) question about whether there was adequate investigation of SFF management practices, and manipulation of Board of Directors decisions, Baqwa noted that Section 7 of the Report extensively deals with questions concerning corporate governance of SFF. His assistant added that while no evidence of manipulation had been found, there was a recommendation that, as a future safeguard against same, the Board consist of both executive and non-executive members. It was also noted that the then Minister of Mineral Energy Affairs, Mr Maduna, had representatives on the Board, and therefore should have been fully aware of SFF’s more recent activities.

Mr Gibson (DP) noted the technical error in Section 9.101 of the report that the date should read "18 June 1997", rather than "1996". He went on to assert that since Maduna knew, by his own admission (as noted in the Report), by 24 June 1997 (as confirmed by the Auditor General on 31 July 1997) that there had been no "actual loss" of the R170M related to strategic oil stock transactions (the loss being attributable to a change in accounting practices), he should have withdrawn his allegations then. Gibson further stated that this would have avoided the need for the Public Protector’s involvement, and the incursion of much expense (including R6M by the Mineral and Energy Affairs Ministry), and suggested that in view of this background the CEF and the Ministry should not pay Maduna’s legal fees.

Baqwa replied (after agreeing with Nel’s comment that consideration of such assertions in this forum was inappropriate), that it was not his responsibility to make such determinations. He also noted that perhaps Maduna was justified in initiating further internal audits, as there were other matters besides the R170M "loss" issue deserving scrutiny. He also stated that as a matter of public policy, one must be careful in penalising public servants acting in good faith.

Concerning Section 3 of the Report, an ANC member asked whether the "margin commission transactions" which resulted in money paid by SFF being used to finance election campaigns in the Ivory Coast merited further scrutiny (and perhaps punishment) at this stage. In response Baqwa suggested that it is probably sufficient that it has now been made clear that such "irregular actions" will not be tolerated in future. In reply to Nel’s question about whether the Ivory Coast funding via SFF transactions was an isolated incident, Baqwa’s assistant noted that there was no evidence of other such incidents, but that a full forensic investigation of all SFF files had not been conducted. She added, however, that payment of the "margin" was a well-entrenched practice at the time because of international sanctions against the apartheid regime, but that use of margins diminished as the sanctions eased. Baqwa elaborated by noting that Mr Abdelnour was the last middleman receiving margin payments, but that this continued with proper corporate authorisation for business reasons. These reasons included the desire to maintain what was a profitable arrangement for SFF, and to eventually use Abdelnour’s contacts to establish a direct link to Egyptian oil sources, thus avoiding the need to pay margins in future. (Baqwa also commented in this regard that while it was not within his ambit to comment on business decisions, these appeared sound, and he added that SFF was generally "well-run".)

Mr. Gibson (DP) also asked whether there was any evidence of "margin money" from other transactions being used to finance political movements in South Africa, including the ANC, but this was not responded to.

Afternoon session
Summary
The Chairperson commenting on the change in accounting policy, noted that, if one looks at the political situation of the past, the activity that the SFF was involved in at the time was a breach of international law. When they came closer to 1994, suddenly, there was a change in the accounting policy. He noted that ‘’he could not escape the discomfort’’ that this change in accounting policy was designed to keep information from the new government. The panel said that they investigated this allegation and decided that the change in policy was purely for accounting reasons.

Another issue which the committee looked at was the fact that the Board Audit Committee was not mandated to finalise the 1992/93 financial statements, and that the directors were also not authorised to sign the financial statements for this period. Thus, the process for the change in accounting policy was not properly minuted.

The panel explained that the change in the accounting policy itself was documented, it was only this one technical aspect of that change [the process for changing the accounting policy] which was not. The panel said that while this omission to document the process properly was not acceptable, they did not believe the whole process must fall down because of a technical error.

Mr Gibson (DP) demanded an explanation for the Ministers insistence that there had been a loss of 170 million rand, even after he discovered that there was in fact no such loss. He accused the Minister of lying to parliament. The panel explained that the Minister’s explanation to them for his conduct was that he did not believe the explanation which was given to him regarding the money as it was ‘’too simple’’. His feeling was that if the explanation was that simple then the Auditor General would have included it in his report to parliament.

 

Minutes
The Chairperson, Mr Nel, commented that the overall conditions which existed in SFF were conducive to wrong practices occurring. This, he said, made him wonder whether the problem was not in fact more widespread. He asked if a more informal inquisitorial approach would have yielded a different result.

Advocate Baqwa replied that there was an eagerness to ‘’bring out the wrongs that were there’’, and that the legal representatives had ‘’left no stone unturned’’. At the end of the day, he said, they ‘’got the same out’’. Another member of the panel added that there was a large measure of adversariality built in, and that the investigations by the Public Protector were always inquisitorial.

Ms Jana (ANC) asked whether the balance [the result of the enquiry] outweighed the cost [of the enquiry].

The panel replied that they were dealing with a very valuable asset of the State, and, that ‘’not all was well with it’’. The rumours had to be investigated. Even if they were found to be untrue, the State had to be reassured that the rumours were unfounded. This, he said, was the purpose of the management audit which then ballooned into the issue it is now.

The Chairperson commented that the SFF became involved in an "underhanded deal’’ and that the whole affair ‘’screams for further investigation’’.

The panel replied that they could rehash the whole SFF investigation, but that this would cost millions. They did not think that it was called for as there was no basis for further investigation. The decision to conduct an audit was found to be a financial and a business decision. The panel noted that they did not have a sufficient number of suspicions to justify a forensic audit, and that there must be a sufficient basis for a forensic audit.

Mr Gibson (DP) asked if Mr Pik Botha had been called as a witness to ask if he had sanctioned the deal that SFF had entered into.

 

The panel replied that they had not. They could have called him but they thought that it was unnecessary as the primary roleplayers were the SFF and Shell. Whether calling him would have made a better investigation was described as a ‘’debatable issue’’.

Change in accounting policy (Section 5)

The Chairperson asked what had led to the need for this juggling [he was referring to the change in accounting policy], and asked quite simply whether the State got ‘’conned’’.

The panel replied that the State did not get ‘’ripped off’’ or ‘’conned’’. The problem was simply that the amount was mis-recorded internally.

Ms Mahomed (ANC) asked if the whole truth had been revealed when the secrecy provisions had been lifted, and whether the Board of Directors had approved of this.

The panel replied that the change in the accounting policy took place when it was clear that the 170 million rand was not a loss, indicating that the change in accounting policy was not designed to conceal or hide anything.

Ms Mahomed asked them if they had assessed why the policy was changed and whether the change in policy was reasonable.

They replied that the process [the change in policy] was a reasonable procedure, and, that the Board was fully consulted and ‘’nothing was hidden’’. They described it as a ‘’sound business decision to present information that way’’.

The Chairperson commented that if one looks at the political situation, the activity they were involved in at the time was breaking international law. When they came closer to 1994, suddenly, there was a change in the accounting policy. Is it conceivable that the accounting policy was changed to keep information from the new government?

The panel replied that the accounting profession sets the standard, and that nothing secretive or under the table had gone on. They continued that they had to have a basis for review, and the fact that the accounting policy had changed around 1994 was not a sufficient basis for such review. The machinery is only sufficient for review if there is any discomfort about the policy.

The Chairperson reiterated his earlier point by saying that the SFF had a policy, then, with the change of government, suddenly they changed to a new policy. He said that he was not trying to say that the new policy was inherently bad, but the information was now being presented in a different way. Because of this, he said that he could not escape the discomfort that the change may have been made to make the information look different to a new government.

The panel responded by saying that they had not look at the technicalities of the change in policy, but that this particular aspect [raised by the Chair] was alleged, and therefore addressed by them. They concluded that the change in policy could not have affected what the government thought about the affairs of SFF. Thus this allegation was found to be untrue. They said that they were satisfied that the change in the accounting policy was justified. To alleviate the Chairperson’s concerns, they referred him to section 5.27 of the Report which listed the names of those persons involved in the change of accounting policy.

Mr Gibson (DP) made the point that the Minister had lied to Parliament when he had said that there was a loss, and that he had never withdrawn his statement or apologised for it.

Ms Jana (ANC) countered that the Minister had found grounds for suspicion, and that he had not intentionally misled Parliament.

Mr Gibson reiterated that the Minister had a responsibility to the Auditor General when he discovered that there was in fact no loss.

The panel said that the Minister was not aware of the correct facts when he had spoken in Parliament.

Mr Gibson asked if Minister Maduna had explained to the Public Protector why he had pretended that there was a loss, even after he discovered that there was no loss. He referred specifically to the comments made by the Minister at a press conference on 13 August (section 1.11 of the Report).

The panel replied that the Minister had made these comments because he was not satisfied with the explanation that was given to him and he still believed that something was wrong.

Mr Gibson did not accept this explanation, saying that this appeared contradictory.

The panel said that the Minister’s evidence to them was simply that if the explanation was that simple, then why did the Auditor General not say so in Parliament. This is why he did not believe the explanation.

The Chairperson indicated that he did not want to go into this issue too deeply at this time.

There was no evidence that the Board of Directors approved the change in accounting policy

Ms Mahomed referred the panel to Section 5. 38 – 5.41 of the Report and asked on what basis this was looked at. [In terms of these sections, it is explained that, technically, the Board Audit Committee was not mandated to finalise the financial statements for the year 1992/93, and the Directors were not authorised to sign the financial statements for that period.] She asked this question in light of the fact that the Constitution says that financial statements are very important.

The panel replied that the allegation was that technically the change in accounting policy was not correctly approved because the Board did not mandate the committee to approve it. They said that there was no formal minuting, but that this had ‘’no consequence’’. In spite of this technical shortcoming, a completely normal procedure was still followed, and this was only a ‘’minor technical infringement’’.

Ms Mahomed expressed concern at the fact that this was regarded as ‘’minor’’.

The panel explained that ‘’the same people who had signed the previous year, signed now’’. The lack of authorisation occurred only in the minutes but there was no change in the actual process. They continued that they had found no evidence of anything underhanded as the change in accounting policy was minuted, it was only one technical area which was not.

Ms Mahomed said that they had admitted that the Board was not properly mandated, and asked what indicators came to mind to find this acceptable.

They replied that they did not find it acceptable. However, this was a huge area of change, and they had to ask themselves whether the issue would be that the process was not properly documented, or, whether the whole process must fall down because of a technical error. They acknowledged, however, that not documenting the process properly was wrong.

Ms Jana asked the panel if they thought that it would be in the public interest to refer the matter further to another committee.

They replied that it would not be in the public interest.

Ms Mahomed asked the panel if they thought that it was good enough to deal with the matter by simply saying that it should not happen again.

They replied that this would be stretching the point somewhat. They felt that the information that they had received on this particular point explained the matter to their satisfaction.

A committee member asked if an outsider looks at the results that this change in policy brings out (that there may have been a loss), could he possibly assume that there was a loss?

The panel replied by saying that, if by ‘’outsider’’, one meant ‘’Minister’’, then, ’’if someone does not understand something then this person needs to ask questions in order to understand it’’. There is a duty upon someone to do further research, and to seek further information for things that they do not understand. The panel then referred to Section 9.102 of the report, and explained that the Minister’s suspicions were raised by the fact that the 170 million rand was reflected in the financial statement, but not in the Auditor General’s report to Parliament.

Mr Gibson then said that if the outsider stumbling across this information is a Minister, and one week later he realises that there was no loss, why did he continue with his course of conduct. (He explained that the Minister knew the truth by 24 June, but in the press conference on 13 August, he continued to say there had been a loss when he knew that there was not.)

The panel replied that they were being questioned about the mental state of a person. The explanation Minister Maduna had given to the Public Protector regarding his actions was that he was not satisfied with the explanation that had been given to him regarding the 170 million rand. The Minister said that the Auditor General had not given this explanation when he had made his report in parliament, and his view was that, if the explanation was that simple, then, why hide it. ‘’Simple things do not get hidden’’. Advocate Baqwa then posed the following rhetorical question; ‘’Was he [Maduna] wrong not to be satisfied [with the explanation given to him]?

Advocate Baqwa continued that, at the end of the day, Maduna did not act correctly. He should have acted differently because as Minister he was in a unique position to enquire further. He said that Minister Maduna admits his own error, and one can debate at what point he knew, and at what point he did not know, but in the end, where "will you come out?"

The Chairperson adjourned the meeting at this time as the panel had a flight to catch. He said that the committee would probably reconvene on 18 or 19 April.