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Big Saturday Read: Critical Analysis of the NSSA Forensic Report (Part 2)

August 9, 2019

 

Background

 

Earlier this week, we published the first part of our critical analysis of Forensic Audit Report into the affairs of the National Social Security Authority (NSSA). If you haven't read it, that should be a good starting point because this is the second part of that analysis. The contextual background is provided in the first part

In that first part, we focused on the issue of investments, particularly NSSA’s multiple and controversial relationships with MetBank and associated companies such as Metro Realty and Drawcard Investments. We also looked at its relationship with Housing Corporation Zimbabwe (Private) Limited (HCZ).

That analysis revealed several weaknesses in NSSA’s supervision and management as described in the Forensic Report. The evidence pointed toward deliberate machinations to misuse and abuse public funds for private benefit. There was also evidence of wilful neglect of obligations and gross negligence on the part of NSSA’s governing authorities.

In this article we look at the remaining issues arising from the NSSA Forensic Report. Furthermore, there have been new developments since the report was made public, the first being the sacking of the Minister of Public Service, Labour and Social Welfare and the second being the legal challenge against the report by former Board Chairperson of NSSA, Robin Vela. This BSR also analyses those two developments in the context of the report.

Africom Loan: Why did NSSA have to guarantee a private loan?

First however, there are a few investment-related issues which raise concern and warrant further investigation. A key one is a guarantee for a loan taken by telecommunications company, Africom. According to the report, Africom owed $15.8 million for a loan obtained from the Cairo-based Afrexim Bank. However, Africom was struggling to meet its repayment obligations.

The creditor, Afrexim Bank, sought a guarantee from the shareholders of Africom so that they (the shareholders) would pay if Africom failed to meet its obligations under the loan. Since NSSA had a 4.5% shareholding in Africom, the NSSA Board resolved on 14 October 2013 to provide a guarantee to cover their portion of the shareholding (4.5%). 

However, on 12 December 2013, it became apparent that NSSA was actually the only guarantor for the entire loan, not just in respect of their 4.5% shareholding. None of the other shareholders, including Fernhaven Investments the majority shareholder of Africom had submitted their guarantees. This meant that public funds held by NSSA were exposed to the tune of $15.8 million for a private loan between a private company Africom and Afrexim Bank. 

The full guarantee was also a breach of the NSSA board resolution. Circumstances in which this happened demand investigation. Those who committed NSSA funds in this reckless way knew or must have known what they were doing. 

There was in fact a majority shareholder of Africom, Fernhaven Investments. Why did NSSA, a minority shareholder and not Fernhaven, the majority shareholder of Africom have to guarantee the full debt? The answer probably lies in the identity of the alleged controller of Fernhaven Investments. The report indicates that Fernhaven Investments is controlled by the Ministry of Defence, although the report does not actually specify how a Ministry is a "parent" to a private company. Failure to expand on the relationship between Fernhaven and the Ministry of Defence is a weakness of the report because it leaves things unclear.

 

However, going by the bare data, this transaction introduces a military dimension to the deal and the affairs of NSSA. Was NSSA coerced to guarantee a loan to a private company effectively controlled by the military? If anyone should have given the sole guarantee it was Fernhaven Investments. NSSA, a small shareholder should have had nothing much to do with it. But further questions arise: how many more guarantees has NSSA been asked to provide for other state-related entities or private entities?

Fernhaven provided one of its properties, Longcheng Shopping Mall as security for NSSA’s guarantee. This property could be used to indemnify NSSA in case it was called upon to pay the guarantee by Africom.

However, as it happened, in 2015 Africom failed to repay the loan and Afrexim Bank came after NSSA, in pursuit of the guarantee. NSSA could have foreclosed on Longcheng which had been put up as security but the Forensic Auditors found no evidence of efforts to do so.

Instead, NSSA took the debt to the Zimbabwe Asset Management Company (ZAMCO) so that the latter would take it over. The NSSA Board resolved to pay $600 000 to ZAMCO as transaction costs in the debt takeover. The Ministry of Defence undertook to pay half the fees, reducing the cost to NSSA by $300 000.

However, according to the Forensic Auditors NSSA was left exposed to the tune $300 000. On the other hand, former Board Chairperson Robin Vela argues that the Forensic Auditors should have given him some credit for rescuing NSSA from the $15.8 million liability which was sitting on its books following the guarantee which was given before his appointment. He argues that there was no loss to NSSA but a profit restatement of $15.5 million.

The reasoning might be helpful to Vela in his defence but it does not absolve those who were responsible for landing NSSA in the initial predicament. There is no good reason why NSSA was made a full guarantor for Africom’s debt to Afrexim Bank when it only held 4.5% shareholding in Africom. This looks like a misuse of public funds to help a private company which was having known challenges. Fernhaven Investments, the majority shareholder should have taken the responsibility.

But why did they pick on NSSA? That’s probably because cash-rich NSSA is a free for all for the capitalist elites who pretend to hate the State but actually depend on it. When their businesses run aground, they seek refuge in public funds often at no cost to them at all. NSSA and later ZAMCO provided a bailout to Africom, a private company.

The fact that Africom’s debt is now under ZAMCO is also scandalous abuse of public facilities. Now the taxpayer is landed with an expensive loan which was a private arrangement between Africom and Afrexim Bank. Why should the taxpayer be bailing out Africom? NSSA should never have had to pay the $300 000 “transaction cost” to ZAMCO.

Executive Appointments and Promotions 

There were a number of themes from the recruitment of senior staff and the remuneration policies up to board level.

A common theme in all areas was a failure to follow existing rules as embodied in the NSSA legislation and policies. So for example approvals were not given by the Minister as required or where they were given they were given by the wrong authority for instance the Permanent Secretary instead of the Minister. Failing to comply with the rules appears to have become part of the institutional culture at NSSA. A system is useless if the rules of best practice are wilfully ignored to make way for whimsical decisions. When rules are ignored, it creates room for nepotism, favouritism and corruption.

A second discernible theme was that candidates who performed best in interviews were often overlooked in favour of candidates below them. The Forensic Auditors reveal a number of interview results in which second or third places candidates got the job ahead of top performers. For example, for the office of the General Manager, Rachel Kupara and Tanya Chikanza were ahead of the candidate who was eventually appointed, Elizabeth Chitiga. For the head of Finance the second best candidate Emerson Mungwariri came second to Michel Gotore who was overlooked. The Forensic Auditors found no evidence that the best performer, Gotore had been offered but rejected the post. Regarding the Director of Investments, top performer Mathias Ndlovu was overlooked in favour of David Makwara. It also revealed that for the Head of Legal, the top performer had been overlooked in favour of the one who got the job. These are findings, which affected parties may wish to challenge if they are inaccurate. 

There may be sound reasons for deviating from the rules and overlooking the top performers in interviews. Indeed, it may be that there is another criterion which is applied beyond the interviews. However, in the interests of fairness and transparency, this criterion should be revealed to all candidates and reasons for rejection must at least be known and given to all who participate in the process. It seems the interviewers had no idea what happened once they had chosen their preferred candidates and those lists could be disregarded at the Minister’s or General Manager’s whim.

We have observed in recent times that this practice of overlooking top performers in interviews and choosing others is present at the highest level of government. It happened for example, in the appointment of the Prosecutor General. It relegates to nonsense the whole process of interviewing candidates for top jobs when interview results mean nothing.

Candidates who feel aggrieved, as is clear now from the NSSA Forensic Audit have the option to take legal action not only to challenge the process of appointment but also to demand reasons why they were excluded and they may even seek damages.

Remuneration

There appears to be a pattern consistent with what was happening in state entities and parastatals in the early dollarisation era whereby senior executives and board members were paid excessive remuneration. At some point the General Manager was earning $24 000 a year while other directors were in the $12 to $16 000 a year range.

These high wages were later reduced but not by a significant margin. The benefits paid to pensioners pale into insignificance compared to these remuneration packages which show the huge gap between the directors/management and the core constituency that they are supposed to serve. To show the difference, when all non-managerial staff were given a 100% bonus (13th cheque) it cost NSSA $800 000 but when managerial staff were offered 60% of their monthly wage, the bill for that was just over $1 million.

In some cases, bonuses were paid with relevant approval. There were also allegations that the Board Chairperson made misrepresentations that the Board has approved bonuses before the Board had actually made the decision. There was also no evidence that the bonuses were related to performance.

In response, the Board Chairperson Robin Vela explained that there was no Minister on 17 November 2017 so the Permanent Secretary gave the approval. That was the period of the coup and one wonders what else went on under the guise that there was a power vacuum in government. There may be a case for reviewing all important decisions that were made between 15 and 24 November when the country was in limbo following the coup that ousted Mugabe.

Interference with the Executive

In the last BSR we dealt with the issue of alleged undue influence by the former Minister, Prisca Mupfumira and the former Board Chairperson, Robin Vela. A letter has since emerged allegedly written by a former Chairman of the Zimbabwe Tourism Authority (ZTA) who resigned in July citing the close proximity between Minister Mupfumira and the Acting Chief Executive Officer, Ruth Likukuma. If that letter is authentic and the allegations of by-passing the board are accurate it presents a similar pattern of conduct which is also worthy of investigation.

Back to NSSA, Robin Vela has vehemently disputed allegations of interference into operational matters in his application for review. The allegations contained in the Forensic Audit Report were that he applied pressure on management which caused NSSA to enter into toxic relationships with MetBank and its associate companies as well as the Housing Corporation Zimbabwe. There are also allegations that Vela overrode management regarding computation of board fees which ended up being double the previous rates.

These allegations in the Forensic Audit Report and defences submitted by Vela have to be thoroughly scrutinised by ZACC investigators to determine whether there is adequate ground for prosecution. It’s a matter of whom the investigators or the court believes between Vela and any witnesses against him. A weak case will certainly collapse at trial and that would be an embarrassment.

Potential fraud in property transactions

The Beitbridge Hotel which NSSA built for RTG Hotel chain was supposed to cost $3 million but it ended up at $49 million. There had been no due diligence and NSSA had paid “abnormal consultancy fees” to various consultants on the project. Unfortunately the Forensic Audit Report does not specify these consultancy fees and what standard they used to determine that they were “abnormal”. It is these generalisations that weaken the report.

Other losses cited include the debt swap deal with MetBank where NSSA allegedly lost $23 million and Celestial Park properties where the organisation lost $11.8 million. NSSA also bought a property for $650 000 but ended up paying far more ($890 000) to refurbish it. The economic sense of buying a property that requires far more to refurbish it calls for more scrutiny.

There was also a pattern where NSSA bought properties at valuations that appeared inflated. For example, it bought a property called Christmas Gift for $7.5 million but just four months earlier the same property had been valued at $4.8 million. Another property at Celestial Park was initially valued at $25.6 million before it rose to $32 million just 20 months later. A third property, Ballantyne Park was bought for $2.2 million but a recent previous valuation was in the range of $1.4 – 1.5 million.

In all cases, either the initial valuation was grossly erroneous or the new valuation at which NSSA bought the properties was heavily inflated. To adapt a common cliché, one such transaction might be an ordinary mistake. A second similar transaction might be regarded as a coincidence. But three or more instances of similar conduct suggest a deliberate pattern of conduct that raises serious concern and warrants investigation. The initial valuations can’t all have been so wrong in all cases.

These cases suggest fraudulent conduct where a property is sold at an inflated price. The transaction looks legitimate but it belies the grossly inflated price resulting from over-valuations. The difference is shared between the participants in this form of organised crime. We would suggest a thorough re-look at all NSSA property transactions where it either bought or sold properties. This may have been going on for a very long time, knowing that there is weak scrutiny.

Vela’s challenge - Judicial Review

As already hinted at the start of the BSR, the former Chairperson of NSSA, Robin Vela has challenged the NSSS Forensic Audit Report. He challenges the manner in which it was presented and in doing so also raises questions over the substance of the report. Since the matter is before the courts, we will not get into much detail. However, it is necessary to explain the nature of the application and its implications on the Forensic Audit Report and potential investigations by ZACC or other law enforcement authorities.

The application filed by Vela is called a review. A judicial review is an application that challenges the process by which a decision was made by a public authority. In this case the public authority being challenged is the Auditor General and its agent BDO Chartered Accountants. Since the BDO was commissioned by the AG, its investigation and report may also be attributed to the AG.

Judicial review is the perfect procedure where a party is aggrieved by the process in which an adverse decision was arrived at. In this case, Vela is named and implicated in various forms of misconduct in the Forensic Audit Report and as he is aggrieved, he is entitled to make such an application.

The grounds upon which judicial review may be based include the following:

Illegality - that the decision is fraught with illegality. The decision may have been based on an error of law and can be set aside; 

Irrationality - that the decision is so unreasonable that no reasonable public authority could have made such a decision. This might lead the court into considering substantive issues, to determine whether the decision was substantively fair and reasonable;

Procedural impropriety - that there were violations of the rules of fair conduct such as giving a party their right to be heard, or affording them reasons for rejecting their defence. An aggrieved party may also argue that the decision-maker was biased; and finally

Proportionality - that the decision is proportionate to the offence. While it’s accepted that punishment follows the finding of guilt, it has to be proportionate to the gravity of the offence. In other words, it should not be excessive.

Vela's Grievances

 

A reading of Vela’s affidavit shows a man who is deeply aggrieved and feels he was grossly mistreated by the Forensic Auditors. He attacks the professionalism of the Forensic Auditors suggesting that they don’t qualify to hold that title and argues that in any event the quality of their work is so poor that it cannot be regarded as a forensic report.

He also argues that his explanations were disregarded but no reasons were given for ignoring them. He accuses the senior partner of the Forensic Auditors firm, Ngoni Kudenga of having conflict of interest which caused bias against him. He argues that the Forensic Auditors set about their task with a pre-determined decision and believes he was selectively targeted and that this is all part of a nefarious agenda against him.

Vela also argues that the Forensic Auditors were selective in their investigation so that other matters that could have attracted its attention were excluded and that information that was favourable to him and adverse to the said agenda was also excluded. In respect of the exclusion of alleged abuses of funds by a former minister Vela asks “Is it because the auditors had a wider political audience to satisfy or otherwise to not offend?” clearly pointing to a political agenda as motivation for the forensic audit and its influence upon the forensic investigation.

It will be interesting to read the response of the respondents and if it does make it to court, how the application fares on the merit. Arguably, some of the issues raised in the affidavit may fall within one or more of the traditional grounds of judicial review.

Issues arising

 

However, whatever the fate of the application for review, it raises some matters of interest to ZACC. First, Vela alleges that former Minister of Public Service, Labour and Social Welfare Petronella Kagonye who was elevated by Mnangagwa in his first coup-Cabinet before she lost her role after the 2018 general elections of abusing NSSA funds.

Vela accuses Kagonye of spending $400 000 on two separate events which he describes as “vote buying, done through pensioners’ funds for private benefit”. One was “sponsorship” of a “disability conference” in Caledonia Constituency and another was $200 000 donated to a school in Ruwa. This raises an issue for investigation not just by ZACC regarding abuse of public funds but also by the Zimbabwe Electoral Commission for violations of the Electoral Law there being allegations of vote buying.

Political witch-hunt?

Vela’s line of argument raises a more fundamental concern about the current anti-corruption thrust: is it genuine anti-corruption drive or is it merely a political witch-hunt aimed at specific targets but excluding other culprits? So far Minister Prisca Mupfumira has been the most high profile casualty given that she is a serving Minister. Previously, arrests for corruption were perceived to be targeting Mnangagwa’s political opponents within ZANU PF. Even then, none of the cases brought to court had achieved any significant results. Much will depend on how wide the investigations and prosecutions by ZACC will be. If they are limited to a few, excluding other known suspects, it will soon be dismissed as yet another political gimmick.

What to do: some suggestions

As we indicated in the first BSR, ZACC must not rush to arrest or prosecute without having built a strong case against the accused. A good case can collapse on account of procedural bungling and the corrupt will walk free. Another issue is the quality of prosecution. The accused are often spoilt for choice when it comes to legal talent. The bulk of legal talent is in private practice. The State is limited. 

However, this can be improved if the State opens up and hire special counsel to advise on investigations and to also conduct prosecutions. The system works well in advanced jurisdictions like the U.K. where the best barristers are in private practice but they are hired to conduct prosecution in high-profile and complex cases. If the accused is going to have the best representing them, the State needs a lawyer of similar stock. That way it can be a more level playing ground.

Follow the money

One of the golden rules of money-related investigations is: “Follow the Money”. In other words, check and pursue the money trail - where did it come from and where did it go. For example if money was paid from NSSA into a bank account, the strategy must be to follow where it went next. Given the volume of money involved, these transactions are likely to have left a trail. ZACC can work with the RBZ which is the financial regulator to demand and get this information from the banks. Sometimes in following the money, ZACC might discover that it would have been moved to foreign jurisdictions. It needs this information.

Co-operation and assistance

The fact that information sought by ZACC may be held in financial institutions within and outside the country is why it is fundamental to have platforms for co-operation and assistance with other authorities. These authorities include financial regulators such as the RBZ, the police, insurance regulator, etc. These organisations also often have existing international assistance and cooperation agreements which ZACC can ride on as it develops its own platforms.

All this is important because evidence that is obtained illegally may be thrown out by the court. Ordinary people may fail to understand why what appear to be clear-cut cases collapse. Sometimes it is simply because the evidence, however true, would have been adjudged to be inadmissible by reason of how it was obtained.

Secondments

While ZACC was established over a decade ago, its success has been limited partly because of political interference which has made it lethargic but also because of limited resources. It hasn’t been able to recruit or retain experienced staff. Even now it has to rely on secondments from the Zimbabwe Republic Police. ZACC should make it a priority to develop its capacity in terms of skilled and experienced staff.

One way to do so is to get staff seconded to investigators that have a longer history of financial-related investigations such as the Securities and Exchange Commission in the US or the National Crime Agency in the U.K. or equivalents in other countries.

Since there are international organisations and countries that have expressed an interest in helping in the anti-corruption drive, ZACC should take up the offer and ask for training and secondments. Indeed, expert investigators from other countries who are unattached and therefore unaffected by local actors could be brought in to help especially in these early stages of ZACC’s work. Indeed, those countries offering help should look into these forms of assistance. 

Sacking Prisca

President Mnangagwa finally sacked Prisca Mupfumira, long after she was arrested. Nothing significant has happened since then apart from the invocation of an unconstitutional law to keep her in jail and a reserved judgment in her bail application that explains the delay in wielding the axe. 

Her supporters will plead the presumption of innocence until one is found guilty but when public officers find themselves in such matters the right course of action is to step down voluntarily, not to be pushed. They could also return after exoneration. However the idea of resignation does not exist in our political landscape. 

Mnangagwa’s backers want to use the arrest and sacking of Mupfumira as a sign that the regime is getting tough on corruption. But she is not the first Minister in history to arrested or tried while she was in office. Neither is she the first to be fired from office. Indeed, Mnangagwa’s apologists forget that it was Mnangagwa who reinstated Mupfumira as a Minister after she was sacked by Mugabe in 2017, just weeks before the coup that eventually toppled Mugabe. 

While the authors of the coup claimed to be targeting criminals around Mugabe the coup regime actually brought back people like Mupfumira whom Mugabe had fired on grounds of corruption. Instead of claiming credit for Mnangagwa, there should be some remorse that he brought back someone who had already been accused of and sacked for corrupt behaviour. Mnangagwa is after all the appointing authority and he knew the kind of person he was appointing.

The fact of the matter of course is that Mupfumira is not the only Minister who has unclean hands. Until such time that the net spreads more widely to the bigwigs in ZANU PF known to have looted heavily over the years, the current anti-corruption thrust will be tainted with claims of partisanship, bias, and factionalism.

Conclusion

On the whole, having read the NSSA report and the responses to it, it is fair to say that the problem at NSSA is not the absence of good rules and standards, but that these rules and standards are deliberately ignored and never implemented by those who should. It might, indeed without stretching the bounds of reason, be argued that corruption at NSSA is institutionalised. In other words, the culture at the institution is so corrupt that those who work in or around it do not even believe that they are being corrupt or that their conduct is wrong. In their eyes, the catalogue of wrong things that they do is perfectly normal.

I have spoken to a number of public officers, including former ministers who express genuine surprise when we tell them that certain conduct, such as conflicts of interest, is unacceptable. They actually justify their conduct believing they are the victims. This is an indication that corruption is institutionalised and solutions to it lie partly in criminal prosecution but also that there is need for much more than that.

As I stated in an earlier BSR, there is need for a complete overhaul of how the public sector works and how public funds are managed. That job is not for ZACC alone. The government itself has to take the lead. But does it have the appetite?

 

WaMagaisa

 

wamagaisa@me.com 

 

 

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