Capital Hill Cashgate Scandal

Capital Hill Cashgate Scandal or "Cashgate" is a financial scandal involving looting, theft and corruption that happened at Capital Hill the seat of Government of Malawi. This happened under the leadership of President Joyce Banda, the first female head of state of the country. The scandal started when an Accounts Assistant in the Ministry of Environment, Victor Sithole, was found with huge amounts of money not in consistence with his monthly income. This was later compounded with the shooting of the Budget Director in the Ministry of Finance, Paul Mphwiyo, on Friday, 13 September 2013. Subsequent days led to a lot of civil servants being found with huge sums of money lacking proper documentation on how they got the money.^[1] A number of people in high-ranking positions in the ruling party were also linked to the looting. These people were suspected to have influenced some civil servants to pay them government money while having no contract with the government. These people were later found to have made "donations" to the ruling party of President Joyce Banda which led to calls for her to resign. President Banda herself had amassed more than 40billion Malawi kwacha (1.2 billion ZAR) in just 1.4 years of power and had resisted public pressure to declare her assets.^[2][3][4]

Background

Most governments of countries have Public Financial management (PFM) systems that they use to manage the flow of funds across various levels of government. These accounting systems enable a centralised and efficient management of government funds (generally income and expenditure) across departments and enable the money a government receives or spends to be reconciled with the actual funds in the government's bank accounts, countrywide. Due to the vast sums that pass through government bank accounts, it is important that PFM systems be robust and effective at managing government funds (be they raised from taxes, donors, dividends, etc.), detecting and resolving problems.

In 1995 the government of Malawi began implementing a PFM known as an Integrated Financial Management Information System (IFMIS) backed by the World Bank. This was to replace the manual systems that were previously in place. If properly implemented and managed, the IFMIS system automatically links planned budget and actual cash budget demands, allowing managers to efficiently schedule expenditures to minimize cashflow problems and improve public service delivery. Thus, the main reasons for the IFMIS were efficient expenditure control, to provide timely budgeting and accurate financial information across government, to provide a state of the art computerised accounting system and to provide a standardised integrated financial management reporting system across government. A pilot project was launched in five ministries, but was met by many problems, resulting in the termination of the contract with the first supplier. Among the problems encountered during the pilot trial were severe mismanagement,technical problems, funding shortages, disagreements among members of the project (there were 3 distinct suppliers), insufficient training and staffing cultural challenges, resulting in long delays.^[5][6]

By 2003, the world Bank was financing an IFMIS in Malawi sourced from the CODA Group, to be implemented by a South Africa-based reseller called UES.^[7]

In 2004, Professor Lise Rakner, a Political scientist and senior researcher at the Chr. Michelsen Institute (CMI) in Norway, the largest centre for development research in Scandinavia published a report in collaboration with researchers from the DFID and Institute of Policy Research and Analysis, titled The budget as theatre – the formal and informal institutional makings of the budget process in Malawi.^[8][9] In that report, it was found that under Auditing expenditure "record keeping of transactions (for audit purposes) has been manual, but IFMIS project has opened for computerised records." Further, they found that "The proposed electronic system, IFMIS, is not being implemented. Resented for removing discretionary power to reallocate resources." Finally, the report found that in addition to Rampant fraud and corruption in procurements and disbursements, there were "no adequate records of staff and pensions and advances, leading to problems of ghost workers, especially in the education sector. Staff not paid and not motivated. Incomplete and doctored records: auditing not done."

That same year, a Peer Review in November 2004 identified 21 issues that needed to be resolved for the IFMIS to work properly. For some reason, those issues could not be resolved. In May 2005, the Government decided to adopt and implement an EPICOR-based IFMIS following the study tour to Tanzania in March 2005, and a contract with Soft-Tech Consultants was signed in July 2005.^[10]

In November 2005, the new IFMIS was formally introduced. All bank accounts in the commercial banks were closed and 8 bank accounts were opened at the Reserve Bank of Malawi. Cheques were produced and continue to be produced centrally by the Accountant General’s Department. Like before only five sites were used namely, Education, Agriculture, Health, Treasury and the Accountant General’s Department. By December 2005, one ministry was also connected to the central server in the Accountant General’s Department. By 2009, IFMIS was rolled out to District Councils, and by 2011, the IFMIS had been rolled out to all ministries and Departments except Region Offices and donor funded projects.^[11] However this rollout didn't proceed smoothly either. In 2006, an OECD report in the OECD Journal on Budgeting by Jack Diamond and Pokar Khemani titled Introducing Financial Management Information Systems in Developing Countries (that explored the merits of the IFMIS system and looked at case studies in developing countries) concluded [at page 19 / 115 (last paragraph)] that "In general, the implementation phase has not progressed well, primarily because of clearly limited involvement and some neglect of the system by the main players, including the Ministry of Finance, the Accountant General and pilot ministries. There are several significant issues to be addressed before the system can be made fully functional and rolled out."^[12] By 2009, President Bingu Wa Mutharika had ordered a review of the IFMIS, and a report was published in November 2009.^[13][14] Among the findings (according to a summary to the report by the Report's authors), were the following:

The system does not have any alert system to detect any fraudulent activities or any deviations to normal operations within the system such as overriding system controls without appropriate approval process and any system performance issues let alone a functional audit trail to track system usage
From a budget execution perspective, the EPICOR based IFMIS system is working perfectly as a budget expenditure control system since no funding or expenditure can take place where there is no budget unless overridden, however the system does not block budgets that have already been expended to the equivalent of expenditures
The IFMIS infrastructure does not have any intrusion prevention and detective system or mechanism to easily gain visibility and monitor any potential security threats considering that the access in mainly by user ID and password which can easily be accessed
The current payments management system is weak and prone to exploitation or abuse by colluders as access into the system and Accounts Payable module in particular is not physically authenticated beyond normal user ID and passwords due to lack of appropriate tools.
The current structure of the CPS[Central Payment System] within the EPICOR based IFMIS lack appropriate tools and effective controls for checking, verifying and authenticating or validating payment transactions within key units before issuing cheques or effecting transfers to third parties, hence difficult to detect any fraudulent payments from within the financial system. For instance the Receiving unit of the AGD’s[Accounts General Department] CPO [Central Processing Office] does not have any means for verifying the authenticity of signatures on the payment vouchers and electronic voucher list from the MDAs [Ministerial Departments and Agencies], hence it is difficult to establish any instances of forgery.

all of which suggests that not only was cheque fraud happening within government payment systems, but misappropriation within the IFMIS was easy if one had a username and password; collusion within various government departments in principle meant that a user could overspend and get the Reserve Bank of Malawi to honour it, even when in actual fact that money didn't exist.

Mphwiyo shooting

On the night of Friday 13 September 2013, Paul Mphwiyo, Budget Director in Malawi's Ministry of Finance, was shot by armed men who were lying in wait to ambush him, just outside the gate of his house in Lilongwe Area 43. When he arrived at the house, the armed men fired several shots at the 37-year-old as he drove in. Mphwiyo's wife rushed him to the Area 43 MASM Clinic around 11:30 p.m, to find Dr Hetherwick Ntaba, formerly personal physician to the late Dr. Hastings Kamuzu Banda, on call. The nurses rang Ntaba and he arrived at the clinic within 10 minutes. After a harrowing frenzy during which nurses and the doctor battled to save Mphwiyo's life, they managed to stabilise his condition. He was transferred to Kamuzu Central Hospital and the next day flown to South Africa for specialist treatment.^[15] A couple of days later, stories began to emerge that millions of dollars had been embezzled by government officials colluding to defraud the state. Some claimed Paul Mphwiyo was clean, and acting to close the loopholes,^[16] others claimed that he was implicated and part of the colluders syndicate.^[17] Before long, a web of plots of how officials were siphoning funds from government coffers were rife on social media, blogs and online news sources,^[18][19] but no official statement came from the government.

Initial reaction

Soon after the shooting, President Joyce Banda told a gathering that she knew the people who had shot Mphwiyo.^[20] Speaking in chichewa at a 9th Ijtima meeting (a gathering of Muslim women) in Lunzu, the president said Mphwiyo was shot at his house because he was on the verge of busting a corruption syndicate, and the people who shot him wanted to prevent that. About a month later, Joyce Banda claimed that her earlier comments had been misquoted, that in fact she did not know who shot Mphwiyo.^[21] Some officials claimed that the IFMIS was to blame for the scandal and the system was suspended.^[22] The Vice President, Khumbo Kachali – who strangely was given the task of relaying the events that had unfolded, and the action government was taking to parliament – claimed there were loopholes in the IFMIS.^[23] Donors rejected this claim that the IFMIS was to blame, with the Germany Ambassador to Malawi Peter Woeste telling the local media that "Thanks to the IT-System used – IFMIS – we seem to be able to trace who and where people took money. So please: Do not blame a computer for corruption – that would be a distraction from the real issue. It's some criminal elements who are committing fraud.^[24]

On 11 October 2013, Norway froze all budget support to Malawi.^[25][26] In November 2013, Britain followed Norway to delay budget support.^[27] The American government said it did not plan to suspend aid since the aid it gives goes to NGOs, not directly to the government,^[28] and the IMF delayed a loan worth $20 million.^[29] The aid suspended by the EU, Britain and Norway collectively amounted to around $150 million.^[30] By December Civil Society groups were protesting against the government's handling of the scandal, saying the government was not doing enough to get to the bottom of the matter, and to finalise the investigation.^[31] There were numerous calls for the president to resign. President Joyce Banda rejected these calls, saying the scandal was a "golden opportunity" for her government to clean up the civil service in Malawi.^[32] A forensic audit that was backdated to 2005 was commissioned, with the help of the donor community, in order to find out how much money the government had lost since the fraud/theft began.^[33]

Cabinet reshuffle

On 10 October, a few days after returning from a trip to the UN, President Joyce Banda sacked her cabinet.^[34] On 15 October, a new cabinet was appointed, and notably the former Finance Minister Ken Lipenga, and the former Justice minister Ralph Kasambara were dropped from the new cabinet.^[35][36] People began to speculate whether the two were implicated in the saga because no formal explanation was given as to why they were dropped.

Arrests and money trail

On 7 September 2013, an Accounts Assistant in the Ministry of Environment, one Mr. Sithole was found with huge amounts of money (K120 million) not consistence with his monthly income, the police arrested him.^[37] A few days later Mphwiyo was shot, and the scandal broke out. The Anti-corruption Bureau ACB claimed that there was an ongoing investigation into civil servants which had been launched a while back,^[38] and began making arrests. In particular, several days later, the ACB arrested two suspects, one Alice Namata, a Principal administrative Officer in the Ministry of Wildlife and Tourism, and a Robert Nantchito, an Accounts Assistant in the Ministry of Lands who was working with Ministry of Trade.^[39] Soon after, one Pika Manondo, a suspect believed to be behind Mphwiyo's shooting was put on an Interpol list.^[40] An investigation was opened by the Malawi government. Shortly after, another suspect, one Maxwell Namata – whose name had appeared in the various rumours regarding the thieving schemes by civil servants on social media – was arrested.^[41]

By October 2013, the ACB continued to make arrests, with Chazika Munthali – The Principal Accountant in the Office of President and Cabinet – arrested on 7 October for approving three vouchers totalling K1 billion (~US$2.3 million) to International Procurement Services, a company belonging to one Osward Lutepo, a senior official in the ruling People's Party, who was Deputy Director of Recruitment and Sensitisation.^[42] The high profile arrests continued, and by the end of October two other suspects had been arrested over payments amounting to K200 million, when they had not provided any service.^[43] By November, over 50 people had been arrested in connection with the scandal, and on 8 November, the former Justice Minister Ralph Kasambara was arrested for allegedly masterminding the shooting of Paul Mphwiyo.^[44] Kasambara would be rearrested on 27 January 2014, for money laundering charges, which he denied.^[45]

Government institutes control measures

By November, the new finance Minister Dr Maxwell Mkwezalamba had announced that the Malawian government had implemented strict financial control measures, including a ban on both local and international non-essential trips for government officers including the President.^{[46][47][48][49]} But it soon became clear that the president did not intend to abide by these controls, not as far as local travel was concerned.^[50][51] President Joyce Banda continued travelling, making unessential trips including those to elevate chiefs.^[52] The opposition parties accused the president of arrogance for defying the Malawi expenditure control measures.^[53] Further, her frequent private trips to Nigeria (which included several visits to the Nigerian televangelist TB Joshua) also solicited severe criticism from across the board.^[54]

Parliament's response and investigations

The Vice President Khumbo Kachali was instructed to address parliament regarding the scandal. This was followed by a week long deliberations in parliament regarding the scandal. During those deliberations, some members of the opposition accused the vice president of being implicated.^[55]

On 14 November 2013, two months after the story broke, a London-based Malawian political commentator who is a Researcher in Law and Anti-corruption and Political governance, and is also a Barrister of the Middle Temple, Z. Allan Ntata, released a report on the cashgate scandal.^[56] The report, titled "Licence to Loot" caused a stir in Malawi as the country's citizen were shocked by the impunity and marvelled at the intricacies of the scandal, the plots of which sounded like stuff from movies.^[57] The popularity of the report forced the Malawian government to respond, with an official writing a lengthy and defensive rebuttal to dismiss the report as hearsay.^[58]

On 28 January 2014, Pika Manondo, one of the suspects in the shooting of former Malawi Budget Director Paul Mphiyo accused President Joyce Banda and police bosses of shielding some people involved in the cashgate corruption scandal. Speaking at the Lilongwe High Court, Manondo said the state was only concentrating on 'small fish' while protecting those who stole huge sums of money.^[59] This echoed an allegation which had been made by various others, including by Dr Lazarus Chakwera, the MCP leader and presidential candidate for the May 2014 election,^[60] when he said authorities needed to bring to book the 'bigger fish' other than sacrificing low ranking officers

In October 2013, Baker Tilly was asked by DFID to provide forensic and system security audit services support to the Government of Malawi, following the discovery of the Capital Hill Cashgate Scandal. In February 2014, a report by Baker Tilly which was designed for DFID and the Malawian government was leaked on the internet, in which were revelations that the Government of Malawi had lost $30 million between April 2013 and December 2013.^[61][62] By the time the original report was officially published, activists in Malawi were already demanding why the names of those accused had been withheld. The report stated that the government Ministries that topped the "cashgate list" were as follows:

(1.) Tourism, Wildlife & Culture: MK 3,736,791,727 (61%) (2.) Office of President & Cabinet: MK2,126,654,976 (35%) (3.) Local Govt & Rural Development: MK151,635,967 (2%) (4.) Ministries not known at present: MK 81,408,035 (1%) Totals: MK 6,096,490,705

The report was met with a largely negative response since it did not disclose the names of those who were responsible for the looting, and there was at least MK81 million which could neither be traced nor accounted for. Further the report did not investigate any irregularities which may have occurred between April 2012 (when Joyce Banda became president), and March 2013 (or even those which may have occurred under Bingu wa Mutharika's government), leading many Malawians, observers and political commentators to dismiss the report as a deliberate attempt at misinformation, and no more than a carefully orchestrated political cover-up.^[63][64] Calls for the resignation of President Joyce Banda were renewed.^[65][66] A protest march was organised for 27 February 2014 to mark the start of civil disobedience against the government of Joyce Banda.^[67]

Presidential response

During her return from the United Nations General Assembly the president made conflicting statements that she had no knowledge of the people who shot the Budget Director, in sharp contrast to what she had said earlier.^[68]

This scandal shook the whole financial sector of the Malawi Government where among other things the political commentators demanded the resignation of the Reserve Bank Governor as large amounts of money cannot be withdrawn from the Government Account without his knowledge. The President and her party were also linked because some of the assets (mainly vehicles) were donated by people who were linked to the looting of the money. Osward Lutepo, who was a top-ranking member of the party, was suspected to have donated 22 vehicles to the ruling party which the general public wanted sold and the proceedings given to the state but the call fell on deaf ears.^[69]

President Joyce Banda hired UK public relations firm Bell Pottinger to prop up her image in the eyes of the international community following the damage the Cashgate Scandal had done to her reputation.^[70] The move was met with widespread criticism, as many wondered whether the president was concerned about the plight of Malawians or merely her own reputation. Further, opposition parties and CSO's questioned how the PR firm would be paid when the country had overspent its budget, when the donors had withheld aid, and when there were reports of lack of medicines in hospitals, with some civil servants going months without pay.^[71][72] The government initially refused to comment, with Steve Nhlane, the Presidential Press Secretary, saying: "All we can do is to assure you that there is no charge to the Malawian taxpayer". Later it was disclosed that the services of Bell Pottinger were being paid for by a 'well-wisher', who was not disclosed. However it was quickly discovered that Bell Pottinger had a bad reputation of representing brutal regimes and other autocrats.^[73][74]

It was further discovered that Bell Pottinger was known for other questionable practices such as ghost writing speeches and news copy and manipulating the web in its clients' favour. Wikipedia's Jimmy Wales criticized them for 'ethical blindness' after the company made hundreds of alterations to Wikipedia entries about its clients in 2010, with some of the changes adding favourable comments while others removing negative content.^[75] It was later disclosed by the The Daily Telegraph newspaper in the UK that Bell Pottinger's costs were being paid for by a Foundation with links to an African Arms dealer firm.^[76][77] By December, after all the pressure and criticism president Joyce Banda had received following revelations about her relationship with the PR firm, the Nation newspaper reported that the president had ended the deal with Bell Pottinger.^[78]

References