Direct cost of fraud and corruption at Denel is over R4 million – Gordhan

8078

State-owned defence conglomerate Denel has suffered a direct loss of more than R4 million due to fraud and corruption over the last five years, according to the Department of Public Enterprises.

Minister Pravin Gordhan, in response to a query by the Democratic Alliance’s Farhat Essack, revealed in a written reply that Denel has directly lost R4 351 614.40 over the last five years, and R596 387 is being recovered through a settlement agreement with the Special Investigating Unit (SIU), while R1.6 million is being recovered in accordance with a court order.

In September last year the SIU said it was investigating multiple state capture-related corruption cases at Denel.

Some of the biggest probes undertaken by the SIU into Denel have been over steel fabrication contracts awarded as part of Project Hoefyster for the manufacture of Badger infantry fighting vehicles (IFVs). A R229 million contract for hull fabrication was “fraught with irregularities” – Gupta-linked VR Laser was in November 2014 chosen to manufacture hulls instead of Denel subsidiary LMT as originally specified.

Another matter investigated by the SIU concerned a contract with Chad. R13.8 million was paid to a service provider to deliver Sinotruck chassis from China that would be used as donor trucks. “Denel approached the service provider for the Chad contract on the belief that it owned the IP. The service provider then demanded a payment of outstanding invoices for other contracts and Denel Land Systems settled an amount of R15 million from the Chad funds. After the payment was made, the service provider failed to render services and did not even sign the order for Chad contract,” the SIU reported. Four Denel employees were disciplined over the Chad debacle.

Last year the SIU was seeking to recover R4.6 million paid by Denel to Telspace after it was alleged that in the procurement of or contracting for IT security assessment services, Denel did not follow any formal procurement and/or competitive bidding process.

Mid-last year Denel told the Standing Committee on Public Accounts (SCOPA) legal action was taken against four former Denel executives over the awarding of R2.8 million in bursaries for pilot training to three students, in contravention of Denel policy. One of the recipients agreed to repay the bursary.

Denel also found that there was improper transfer of intellectual property worth R328 million to Halcon (part of the Edge group in the United Arab Emirates, which is a shareholder in the joint Barij Dynamics partnership with Denel). One employee has been dismissed, while the SIU was investigating possible criminal conduct.

In Denel’s R855 million acquisition of Denel Vehicle Systems, executives failed to obtain approval of changes in payment terms and conditions, but Denel – after consulting with legal advisers – ascertained it will not be able to recover any damages from former executives involved in buying what became Denel Vehicle Systems from BAE Systems.

In another incident, it was found that Denel acquired legal services (R10 million) from Khampha Attorneys, contravening the PFMA as Khampha Attorneys was not an approved service provider. The Group CEO, Group CFO and Board chair were responsible for their appointment but the CEO resigned before disciplinary process could be instituted while a delinquency application against the previous board chair was initiated.

Another strike against Denel was improper financial assistance being provided to LMT to the tune of R334 million, in violation of the PFMA and Companies Act. Consequences were under legal review.

Gordhan, in his reply to Essack, said the Department of Public Enterprises has introduced changes to address governance weaknesses identified during the State Capture period affecting state-owned companies (SOCs). “The department has introduced a hotline aimed at providing a platform for reporting of malfeasance in the department and the SOC. As part of governance reforms, the SOC tender committees were scrapped and the MOIs [memoranda of incorporation] were updated in this regard.”

Other initiatives undertaken to implement the recommendations from the Seriti Commission into state capture include the institution of criminal, civil and director delinquency proceedings. “Furthermore, the department has undertaken referrals to professional bodies; and red flagging of natural persons who perpetrated state capture as they seek to pursue employment and prohibition of juristic persons from accessing procurement opportunities availed by the state. Lastly, the department is working with the Special Investigating Unit (SIU) to implement proclamations relating to maladministration concerning the affairs of SOCs,” Gordhan concluded.

Meanwhile, this week it emerged that Denel had placed top executives responsible for the entity’s financial affairs and reforms on precautionary suspension over possible misconduct. Daily Maverick reported that acting chief financial officer Thandeka Sabela, Michael Kgobe (who also served as acting CFO and CEO), and Gawie van Zyl, the head of corporate finance and treasury, were placed on precautionary suspension in early April.

“Daily Maverick has been informed that the precautionary suspension of Sabela, Kgobe and Van Zyl was related to a case of fraud and theft opened by the Democratic Republic of Congo (DRC) embassy against that country’s former defence attaché to South Africa, Brigadier Ngoy Timothee Makwamba. According to the National Prosecuting Authority’s Asset Forfeiture Unit (AFU), Makwamba allegedly misappropriated a refund of R43 million from Denel for his benefit,” the publication reported.

The National Prosecuting Authority recently secured a preservation order against Makwamba to recover the R43 million by attaching his assets, including four properties and two bank accounts.

As the defence attaché to South Africa, the AFU said, one of Makwamba’s duties was to buy weapons from Denel. “The DRC embassy then made a payment of R49.6 million to the Denel group. However, the Denel Group could not process the order and arranged to pay back the money to the DRC Embassy,” the AFU said.

In December 2022, the DRC government terminated Makwamba’s employment. The AFU said Makwamba “fraudulently and unlawfully represented himself to Denel as the delegated representative of DRC”, allowing him to tell Denel where to make the refund payment. The refund then found its way to bank accounts belonging to Makwamba. The funds had allegedly been used to buy properties in the name of his children.

Denel’s financial and treasury function would have been involved in the process of effecting the refund, and Denel has had to look into improper conduct in this regard.