IRREGULAR EXPENDITURE AND CONSEQUENCE...

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IRREGULAR

EXPENDITURE AND

CONSEQUENCE

MANAGEMENT

WHAT ELEMENTS REQUIRE

CONSEQUENCE MANAGEMENT?

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• Unauthorised Expenditure ��

• Irregular Expenditure

• Fruitless and wasteful

Expenditure ��

• SCM abuse ��

Focus on Irregular

Expenditure and related

Consequence Management

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1.What do we deal with?

2.Definition in law

3.Principles – the WHAT

4.Processes – the HOW

5.Way forward

LEGISLATIVE FRAMEWORK –

Irregular expenditure

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s1 – Definitions

s32 – Management and treatment

s62 – AO responsibilities

s78 – Officials responsibilities

s125 - AFS

s171 – Financial misconduct

s173-174 – Criminal proceedings

SCM TR 36 & 38(1)(b) – ratification &

investigate and act re SCM abuse

MFMA circular 68 - Guidelines

LEGISLATIVE FRAMEWORK –

Financial Misconduct

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PRESCRIPT PROVISION

MFMA s 171(4) • Investigate allegation.

• Institute disciplinary proceedings as per s 67 of the MSA.

MFMA s 173 • Deals with relevant offences.

MFMA s 174 • Deals with relevant penalties that may be imposed.

MFMA s 175 • Provides for the promulgation of regulations with

regards to the management of financial misconduct,

procedures and criminal proceedings.

Fin Misconduct

Regulations,

2014

Promulgated under Government Gazette Notice 37699, no.

R 430 on 30 May 2014.

MFMA circular

76 of 19 October

2015

Dealing with the Municipal Regulations on Financial

Misconduct Procedures and Criminal Proceedings

TEST for IRREGULAR EXPENDITURE

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‘IE: Expenditure incurred

- In contravention of OR not in accordance with a

requirement of this Act* and which has not been condoned

in terms of section 170;


requirement of the MSA or public office-bearers Act; OR


requirement of the SCM Policy of a municipality or By-law

and which has not been condoned by such Policy or By-

law.

TEST for IRREGULAR EXPENDITURE

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1. Expenditure incurred =

transaction

2. Contravention of law

3. Not condoned

PRINCIPLES for Ie –

1. EXPENDITURE INCURRED

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1. There must be a transaction

2. Event that triggers Ie = non-compliance (i.e. financial misconduct/disciplinary action)

3. Conundrum = Trigger vs payment

within 30-days – who is liable?

4. Examples:(i) Courts: Cash Paymaster judgement; Gijima

judgement& Asla judgement

(ii) AGSA: contract irregularly procured


2. CONTRAVENTION OF LAW

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• MFMA

• MSA

• POBA

• SCM POLICY

• Delegations, PPPFA, CIDBA and Regulations are included

• Practice Notes & Circulars not included as per MFMA

section 168 – MUST be adopted by Council


3 – NOT CONDONED

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3 Mechanisms:

(i) MFMA condone, section 170 NT

(ii) SCM Policy condone

(iii) Ratification

i. NT condonation �� - still maintain evidence

as part of consequence management PoE

ii. SCM Policy condonation – require process

aligned to law/NT guidelines


3 – NOT CONDONED

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Ratification (MFMA circular 68) – AO to

consider merits of each case:i. Minor (nature, circumstances, intent, financial implication

= loss/benefit)

ii. Technical (Section 217 test)

iii. SCMP

iv. Linked to delegation

v. Ratify action, not condone expenditure

vi. Must still register and section 32-committee to consider

recoverability

vii. Report as per SCM TR 36(2)

NOTE: Nature of breach NOT monetary value

guide action


LIABILITY IN LAW

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Liability determination = LAW:(i) Act says: “….Deliberately or negligently made, permit or

authorise…”

(ii) Circular 68 says: “ … Did not act in good faith… THERE WAS

A LOSS”

(iii) Admin law says: “forfeiture of statecover-liability”

Liability determination = HOW:(i) Reasonable man test

(ii) Through ‘investigation process’ and ‘labour process’

Liability determination = WHO:(i) MFMA section 32,

(ii) After investigation process, and

(iii) On recommendation of Disciplinary Board

SOP – LEGAL FRAMEWORK – Liability

in Law differs for role-players

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WHO - Liability in Law:

(i) Officials:

- Forfeited state cover

- Financial Misconduct vs Disciplinary process

(ii) Executive Authority

(iii) Suppliers:

- NT:

- PPPFA - Restricted suppliers

- Corrupt Activities Act – tender defaulters

- BBBEE - Bid rigging & Fronting

- Competition Act - collusive tendering

- Municipality:

- Abuse of SCM System

- Breach of contract

CONSEQUENCE

MANAGEMENT

AGSA and MFMA circular 68

– Municipality to adopt

processes/mechanisms

CONSEQUENCE MANAGEMENT MAIN

PROCESSES

1. Discovery:

� Notification process

� Classification

� Validation

2. Council Reporting

3. Investigation & Liability in Law

4. Treatment & Recovery

5. Reporting

6. Monitoring & Evaluation

ROLEPLAYERS

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• ‘CFO Office’ – to advise on incidents and whether such activity

resulted in an irregular expenditure, manage resultant

investigations, maintain a matrix/spreadsheet of such incidences to

monitor trends and institute improvement measures and to treat

any Ie activity (recovery), as well as to address any identified

control weaknesses and training requirements

• ‘Assurance providers’ – to advise on an incidents

• ‘SCM Unit practitioners’ – to advise on incidents of SCM System

abuse

• ‘FI/SAPS’ – to determine whether an irregular expenditure and/or

SCM System abuse activity resulted in financial offence, fraud or

corruption.

• ‘MFMA section 32 Council Committee/MPAC’ – to monitor and

advise on the management of Ie matters and to advise on the

recovery or not (condonation) of identified and confirmed Ie &

Appeals from restricted suppliers.

ROLEPLAYERS

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• ‘Legal Services’ – to provide legal support on questions of

law, the management of resultant legal actions, assist with

the determination of liability in law and the management of

restriction of suppliers

• ‘‘Audit Committee’ – to monitor the impact and control

weaknesses of Ie on the effective financial management of

the municipality.

• ‘HRM’ – to assist with financial misconduct, determination of

liability in law and resultant disciplinary actions

• ‘Disciplinary Board’ – to confirm validity, support with

investigation and advise on outcome recommendations

• ‘AO’ - ratify minor errors, reject bids and report as

prescribed.

• ‘Council’ – approve recommendations (Ie) and disciplinary

actions.

CONSEQUENCE MANAGEMENT:

MAIN PROCESSES

1.DISCOVERY

2.INVESTIGATION

3.TREATMENT

4.RECOVERY

1.1.NOTIFCATION

1.2.CLASSIFICATION

1.3.VALIDITY DETERMINATION

2.1.INVESTIGATION

2.2.POLITICAL OFFICE BEARERS

2.3.OFFICIALS

2.4.SUPPLIERS

2.5.FINANCIAL OFFENCES

3.1.Ue

3.2.IFWe

3.3.SUPPLIERS (Restriction)

4.1.UIFWe

DISCOVERY: NOTIFICATION

Who notify How Notification venues Registration and processing

Officials

Assurance

providers

Financial

Control

FIU

Public

• E-mail to CFO governance @

……

• Box @ CFO Office Reception

• Hotline @ ……

• PO Box …….

Complete

notification

template

Form CM1

(Address to

CFO)

Register

Record

Open file

Pre-lim investigation

DISCOVERY: CLASSIFICATION

Consequence Management SOP @ 2018 (Author: Helen Venter)

1.2.2.1. Minor 1.2.2.2. Material

1.2.1. Classification Test 1.2.2. Materiality Test

1.2.1.3.Irregular

expenditure

1.2.1.4. Fruitless &

Wasteful expenditure1.2.1.5. SCM abuse

1.2.1.2. Fraud

‘Fraud’ means introducing

a course of action by deceit

or other dishonest conduct,

involv ing acts or omissions

of the making of false

statements, orally or in

writing, with the object of

obtaining money or other

benefit from, or of evading

a liability to, the

municipality. This definition

includes monetary gain

and any benefit that could

be gained, including

intangibles, such as

information. Fraud causes

actual or holds potential

financial loss to any person

or entity immediately

before or after the activ ity.

MFMA s1: Expenditure

incurred:

In contravention of OR not

in accordance with a

requirement of this Act and

which has not been

condoned in terms of

section 170;



requirement of the MSA or

public office-bearers Act;

OR



requirement of the SCM

Policy of a municipality or

By -law and which has not

been condoned by such

Policy or By -law.

MFMA s 1: Expenditure incurred:

in Vain AND Would have been

avoided had reasonable care been

exercised

•Fronting

•Collusion

•Influenced tender processes

•Misrepresentation

•Omitting information

•Fraud

•Extortion

•Falsely obtaining information

•Restrictive practices

•Non-performance

SCM TR 36: MFMA circular 68 of

2013:

•the specific nature of the breach: is

it simply technical in nature, not

impacting in any significant way on

the essential fairness, equity,

transparency , competitiveness or

cost effectiveness of the

procurement process?

•the circumstance surrounding the

breach: are the circumstances

justifiable or, at least, excusable?

•the intent of those responsible for

the breach: were they acting in good

faith?

•the financial implication as a result

of the breach: what was the ex tent of

the loss or benefit?

Does not fit in classification of

minor.

Expenditure incurred by a

municipality otherwise than in

budget and includes:

Overspending of the total amount

appropriated in the municipality ’s

approved budget;

Overspending of the total amount

appropriated for a vote in the approved

budget;

Expenditure from a vote unrelated to

the department or functional area

covered by the vote;

Expenditure of money appropriated for

a specific purpose, otherwise than that

specific purpose;

Spending of an allocation referred to in

paragraph (ii), (iii) or (iv ) of the

definition of “allocation” otherwise than

in accordance with any conditions of

the allocation; or

A grant by the municipality otherwise

than in accordance with the MFMA ‘

1.2.1.1. Unauthorised

expenditure

1. DISCOVERY: 1.2. CLASSIFICATION

DISCOVERY: VALIDATION


1.3.1. Confirm Classification 1.3.2. Confirm Materiality

1.3.1.1.No case

1.3.1.3. Irregular expenditure

1.3.1.4. Fruitless & Wasteful

expenditure

1.3.1.6. SCM abuse

1.3.1.2. Fraud

1.3.2.1.Minor =

condone 1.3.2.2. Material

1.3.1.5. Unauthorised expenditure

1.3.3. Mandate further action,

considering

1.3.2. Control weakness

1.3.1.Investigation

1.3.3. Determination of

Liability in Law

1.3.4.Prescribed Reporting

See Figure 1.2.1.2

See Figure 1.2.1.3

See Figure 1.2.1.4

See Figure 1.2.1.1

See Figure 1.2.1.5

See Figure 1.2.2.1 See Figures 2.1 - 2.5

See Figures 2.2 - 2.5

See Figure 1.2.3.2.

1. DISCOVERY: 1.3. VALIDATION

INVESTIGATION: GENERAL


General investigation Liability in Law -POB Liability in Law -Official Liability in Law -Supplier

Irregular

expenditure

Fruitless & Wasteful

expenditureFraudUnauthorised

expenditure

SAPS & SIU

Report confirms Fraud and related

UIFWe and SCM Abuse

Criminal/Civil action

Update register

Appoint invesitgating officer

ACTIONS

Sign Declaration of Interest and Confidentiality

Collect and review documents and evidence

Analyse financial and system reports

Conduct interviews and obtain affidavits, if required

Quantify expenditure

Identify implicated persons

Identify control weaknesses

Maintain a case-fie logbook

SCM Abuse

Conduct investigation

See Figures 2.1; 2.2 & 2.5 See Figures 2.1; 2.3 & 2.5 See Figures 2.1; 2.4 & 2.5

2. INVESTIGATION: 2.1. GENERAL

See Figure 2.5

INVESTIGATION: POLITICAL OFFICE BEARER


2. INVESTIGATION – 2.2. LIABILITY IN LAW OF POLITICAL OFFICE BEARERS

UIFWe, Fraud or SCM Abuse event

Inform Designated Official & Ministers of Finance(Councillor)

or Mayor (Speaker) and deal with matter as per Code of

Conduct for Councillors in Schedule 1 of the MSA

DO submit report to Council on the outcome

of the investigation within 5-days

DO authorise formal investigation and informs

POB and allow 5-days to respond

Investigation confirms potential Financial Offence of POB

Inform Designated Official [DO] if offence does not ammount

to breaches of the Code of Conduct for Councillors in

Schedule 1 of the MSA

Submit report to Ministers for Local Gov and

Finance wihtin 5-days after submission to Council

See Figures 1.2; 1.3 & 2.1

INVESTIGATION: LIABILITY IN LAW OF OFFICIALS


Fraud

SAPS & SIU

Civil/Criminal action

Investigation confirms potential Financial Misconduct of officials

Inform Council, PT & NT (AO or SM) or AO (other officials) within 7-days

Council/AO mandate Disciplinary Board to

conduct pre-lim investigation wihtin 7-days

Invalid

Decision by Council to commence

with Disciplinary action

Disciplinary outcome:

Valid

Senior Managers as per MSA Disciplinary Codes and Procedures

Officials as per Collective Bargaining Agreement

SCM Abuse eventUIFWe

Inform official and allow 7-days to respond

Terminate

processInform

Council within

7-days

Full

investigation

See FMR 5&6

Inform

Council within

30-days

Recovery sanction

Sanction (MSA section 57A(3)

Reporting as per FMR 14, within 5-

days & Annual Report.

MFMA s 32 to consider

recoverabiity of funds at special

meeting

2. INVESTIGATION – 2.3. LIABILITY IN LAW OF OFFICIALS

See Figures 1.2; 1.3 & 2.5

See Figures 1.2; 1.3 & 2.1

INVESTIGATION: SUPPLIERS


Fraud/FO

SAPS & SIU

Investigation confirms SCM Abuse

Other SCM Abuse events

Inform supplier of resolution and allow

them 14 days to respond

Consideration of evidence by relevant Body

Written/Hearing

Decision by relevant Body

No action

Inform bidder

Restriction

Collusion/Restrictive Practices

Competition Commission


UIFWe

Investigation confirms

UIFWe resulting from

SCM Abuse


Appeal to Council Committee

Confirm decisionReject decision

Inform bidder

2. INVESTIGATION – 2.4. LIABILITY IN LAW OF SUPPLIERS

See Figures 1.2; 1.3 & 2.1

See Figures 1.2; 1.3 & 2.5

See Figures 1.2; 1.3 & 2.1

INVESTIGATION: FINANCIAL OFFENCES


UIFWe, Fraud and/or SCM abuse event linked to a financial

offence as per MFMA section 173

Council or AO report matter to SAPS After formal investigation

confirms Financial Offence of AO, officials or other persons

Likelihood of further financial loss, Council or AO must immediately

report matter to SAPS and not wait for completion of invstigation

Inform NT after successful prosecution


2. INVESTIGATION – 2.5. LIABILITY IN LAW FOR FINANCIAL OFFENCES

TREATMENT: Ue


Council authorise through Adjustments Budget

Unforeseen and

Unavoidable Expenditure

MFMA s 29(3)

Within 60 days

Main Adjustments

MBBR 23(6)(a)

By 28 Feb

Special Adjustments

MFMA s 32(2)(a)(i) &

MBBR 23(6)(b)

With Annual Report

No authorisation by Council

Recovery

See Figure 4.1

3.TREATMENT: 3.1. Ue

TREATMENT: IFWe


Irregular

expenditure

Fruitless & Wasteful

expenditureFraud

SAPS & SIU

Report confirms Fraud and related

UIFWe and SCM Abuse

Criminal/Civil action

Update register

Appoint investigating officer

Conduct investigation

Prepare Draft Report

Independent Certificate of Review

Finalise report

Formal decision

Condonation/Irrecoverable Recovery

SCM Abuse

See Figure 4.1


3.TREATMENT: 3.2. IFWe

See Figure 2.5

TREATMENT: SUPPLIERS (Restriction/Rejection)


Rejection event

Inform supplier of resolution and allow

them 7 days to respond, unless

restricted (then just notify)

Consideration of evidence by relevant Body

Written/

Hearing

Decision by relevant Body (A0)

No action

Inform bidder

Right to appeal (MSA section 62)

Rejection

See Figure 2.4

3.TREATMENT: 3.3. SUPPLIERS (Restriction/Rejection)

See Figure 3.3

RECOVERY


Investigation confirmed liability in law (POB/Official/Supplier)

Commence

Recovery

Raise Debtor

Debt Policy

Resolution by Authority

See Figures 2.2; 2.3; 2.4 & 2.5

4.RECOVERY

CONSEQUENCE MANAGEMENT SOP content

PART 1 ABBREVIATIONS, DEFINITIONS AND DESCRIPTIONS

PART 2 CONTEXT

PART 3 OBJECTIVES

PART 4 APPROACH

PART 5 APPLICATION

PART 6 MAINTENANCE

PART 7 IMPLEMENTATION

PART 8 GOVERNANCE AND REGULATORY FRAMEWORK

PART 9 ROLEPLAYERS ROLES AND RESPONSIBILITIES


PART 10 MANAGEMENT AND TREATMENT OF

UIFWe:

• RATIFICATION OF MINOR BREACHES

• UNAUTHORISED EXPENDITURE

• IRREGULAR EXPENDITURE

• FRUITLESS AND WASTEFULL

EXPENDITURE

• CONSIDERATION OF

CONDONATION/IRRECOVERABILITY

• ACCOUNTING TREATMENT



FINANCIAL MISCONDUCT/OFFENCES• NOTIFICATION

• RECORDING

• DETERMINATION OF VIABILITY

• FORMAL INVESTIGATION

• FORMAL DISCIPINARY PROCESS

• REPORTING AFTER FINALISATION OF

DISCIPLINARY PROCESS

• CONFIDENTIALITY OF PROCESS AND

OFFICIALS

• CLOSURE, MONITORING, EVALUATION

AND GENERAL REPORTING



SCM ABUSERESTRICTION OF SUPPLIERS/SERVICE PROVIDERS OR REJECTION OF BIDS:

• DUTY TO ACT

• POWERS OF THE MUNICIPALITY TO RESTRICT SUPPLIERS

• RESTRICTION OF SUPPLIERS/SERVICE PROVIDERS:

o NOTICE

o ACCESS TO INFORMATION

o ADJUDICATION MATTERS

o SANCTIONS

o NOTIFICATION OF DECISION

o INFORMING NATIONAL TREASURY

o UPLIFTING SANCTIONS

o ONUS

• REJECTION OF BIDS:

o NOTICE

o ACCESS TO INFORMATION

o DECISION

o NOTIFICATION OF DECISION


PART 13 GOVERNANCE STRUCTURES:

• MFMA section 32 COMMITTEE

• DISCIPLINARY BOARD

• SUPPLIER RESTRICTION COMMITTEE

CONSEQUENCE MANAGEMENT SOP contentPART 14 COMMITTEE FUNCTIONS:

• BUSINESS CASE

• TERMS OF REFERENCE

• BUSINESS OF COMMITTEE

• ETHICAL STANDARDS AND CONFIDENTIALITY

• ADMINISTRATION

• MEETING PROCEDURES

• MANDATES

• COMMITTEE FUNCTIONS

• COMMITTEE POWERS

• COMMITTEE HEARINGS

• APPEALS


PART 15 TAKING AN AFFIDAVIT

PART 16 FORM CONTROL

Consequence Management SOP templatesCM 001 Notification Form

CM 002 Case file cover page Form

CM 003 Checklist Form

CM 004 Registers

CM 005 Classification

CM 006 Declaration of interest and confidentiality

CM 007 SCM system abuse Management Decision Form re validity/viability of allegation

CM 008 IFW&U Management Decision Form re validity/viability of allegation

CM 009 Financial Misconduct Management Decision Form re validity/viability of allegation

CM 010 Referral to CFO Form

CM 011 Reporting to AO/Mayor Form

CM 012 Reporting to [State] Attorney Form

CM 013 Reporting to Ministers/AGSA/PT/NT Form

CM 014 Reporting to HRM Form

CM 015 Referral to FI/SAPS Form

CM 016 Referral to Chief Audit Executive Form

CM 017 Affidavit and Oath Form

CM 018 Case file logbook

CM 019 Report on IFW&U investigation to Committee

CM 020 Review Certificate Form

CM 021 File Closure Form

CM 022 Mandate for Investigating Officer

CM 023 Letter of demand

CM 024 Submission for condonation template

NOW FOR YOUR INPUTS

[email protected]

082 440 1886

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