LIFESTYLE AUDITS IN THE PUBLIC SERVICE

1. LIFESTYLE AUDITS IN THE PUBLIC SERVICE PRESENTER : MR JOHN MENTOOR DATE : 14 MARCH 2011 VENUE : BURGERS PARK HOTEL, PRETORIA

2. PRESENTATION OUTLINE • Introduction • Understanding Life Style Audits • Life Style Audits: Practical Example • Public Interest versus Private Interest • Findings by the Auditor-General • Consultations with Institutions • Actions and Issues to be raised • Conclusion

3. INTRODUCTION • The issue of lifestyle audits has received media prominence in the last few months. The Public Service interest in this issue has been fuelled, among others, by evidence suggesting that some public servants appear to be deriving income from other sources over and above their regular salary. 

4. UNDERSTANDING LIFE STYLE AUDITS • According to the Economics Dictionary, a lifestyle audit is defined as a study of a person’s living standards to see if it is consistent with his/her reported income. • When one looks at this definition the questions that immediately come to mind are: “What is to be audited? Who is to be audited and why would such a person be audited?” • A conceptual understanding of lifestyle audits can further be enhanced by another description. In this regard Steven Powel, Head of the Forensic Services division of Edward Nathan Sonnenburg describes lifestyle audits as “simply an amalgamation of reports from a variety of databases which would provide management as well as investigators with a snapshot into certain aspects of the life of an employee. The areas usually covered in a basic lifestyle audit are properties, motor vehicles, and company registrar information. These areas are publicly available data which anyone can access. Should investigators decide to do lifestyle audits on certain public servants it may use these areas to obtain relevant information.

5. UNDERSTANDING LIFE STYLE AUDIT (Cont) Steven Powell, further says the following about lifestyle audits: “Lifestyle audit is the term commonly used by forensic auditors and management companies to describe the tests that are performed to determine if the lifestyle of an employee is commensurate with that person’s known income stream. Sometimes the only clue to illicit activities is a sudden unexplained change in an employee’s lifestyle. The lifestyle audit is, therefore, a critical management tool to identify staff members who, based on extravagant lifestyles, may potentially be engaging in illicit activities.” This understanding is consistent with the description as contained in the Economics Dictionary as mentioned earlier which presupposes that it is an investigation to ascertain whether a person’s living standards are consistent with his/her reported income. However, Steven Powel’s conceptualization brings out another issue in understanding lifestyle audits and that is the issue of illicit activities. It is this issue which may become vital for investigators when they may decide to conduct lifestyle audits because the outcome of the investigations may reveal that a person may potentially be engaging in illicit activities which needs to be brought to the attention of the relevant law enforcement agencies.

6. LIFESTYLE AUDITS: PRACTICAL EXAMPLE • In order to make the conceptual understanding more clearer it is worthwhile to look at an example where it would be deemed necessary to conduct a lifestyle audit. This example is based on the definitions as described in the preceding paragraphs. • A public servant earns a net salary of R45 000 - 00 a month. He/she owns five properties with a market value of R7 500 000 - 00. The total mortgage bond payment is R90 000 - 00 a month. This public servant owns a boat with a monthly payment of R8000 - 00 a month. He/she also owns three luxury vehicles all with monthly payment of R25 000 - 00. The overall monthly payment for mortgage bond, boat and motor vehicles is R123 000 - 00 a month. The official’s living standards and spending pattern is not consistent with his/her reported income. • Upon investigation, it was found that the official resigned from four companies and his/her status is still active in another three companies. Two of his/her companies have been registered as service providers in the department which he/she is employed. One company has already rendered services to the department where he/she is employed.

7. FIGURE 1: ELEMENTS THAT CONSTITUTE OR IMPACT ON CONDUCTING LIFESTYLE AUDITS

9. UNDERSTANDING LIFESTYLE AUDITS (Cont) • What Figure 1 tells us is that a lifestyle audit is based on a four-pronged approached. An investigator would first look at the income generated by the individual concerned. This is the income that emanates from a person performing official duties and the salaries obtained from work done in companies that the individual is involved in as well as from partnerships and shareholdings. Another step is to look at a public official’s ownership of vehicles and other movable assets and the last step is to ascertain the extent of a public official’s ownership of properties. Through this four-pronged approached an investigator will obtained a picture of person’s lifestyle and whether or not it is commensurate with such a person’s income.

10. PUBLIC INTEREST VERSUS PRIVATE INTEREST • Before looking into the actual reasons for lifestyle audits in the Public Service one needs to understand the interaction between the private and public interest. • Serving the public interest is fundamental to being a public official. In serving the public interest, public officials should always make decisions that benefit the public good, without thinking about their own personal gain. Importantly, public duties should be conducted in a fair and impartial manner and, therefore, public officials are required to act in a manner that minimizes the potential for conflicts of interest. The relationship between the public and private interest is stipulated in the Code of Conduct for the Public Service. • The Code of Conduct for the South African Public Service, in the section dealing with Performance of Duties, provides that “an employee-strives to achieve the objectives of his or her institution cost-effectively and in the public’s interest…” the matter of public interest implies that the main motive of a public servant’s actions should not be self-serving, but becomes externalized for the good of others. 10

11. PUBLIC INTEREST VERSUS PRIVATE INTEREST (Cont) • The question then arises: ”What is the public interest?” An answer is provided in Chapter 10 of the Constitution. Section 195 of Chapter 10 of the Constitution, which in speaking of the values of Public Administration, says that enhancing the public interest the following needs to be adhered to: • “Services must be provided impartially, fairly, equitably and without bias. • People’s needs must be responded to, and the public must be encouraged to participate in policy-making. • Public administration must be accountable. • Transparency must be fostered by providing the public with timely, accessible and accurate information”. • A common objective is evident when one looks at the above-mentioned values and that is that in serving the public interest, public officials should always make decisions that benefit the public good, without thinking about their own personal gain.

12. PUBLIC INTEREST VERSUS PRIVATE INTEREST (Cont) • However, public officials do not always act within the public interest. This is an unfortunately reality in the South African Public Service. In a study on the “Overview of the Implementation of the Financial Disclosure Framework: Financial Year 2008/2009 the PSC, inter alia, made the following findings: • “The PSC found that 542 (21%) senior managers out of a sample of members of the SMS (2 628) may have potential conflicts of interest between their private interests and their official duties i.e. 228 from national departments and 314 from provincial departments. • The PSC found that 576 (22%) senior managers out of the sample of 2 628 did not disclose their directorship/partnerships in private companies and close corporations. This figure includes 338 senior managers from national departments. • Out of the sample of 30%, the PSC found that 101 senior managers received gifts to the value of R740 100.00. • The PSC also found that the financial interests of fifty (50) i.e. 33% of HoDs, present a potential conflict of interests to their departments”.

13. FINDINGS BY THE AUDITOR-GENERAL

14. FINDINGS BY THE AUDITOR-GENERAL (Cont) • The fact that serving officials are doing business with government is a serious concern as this is a classic example of actual conflicts of interest, which may also lead to corruption. Officials can use their influence in the Public Service to secure Government contracts unduly and to the detriment of well deserving competitors. Moreover, the Auditor-General, in its report raised the following concerns on this matter: • “Tenderers made misrepresentations by not declaring in the tender documentation that employees were related to companies and Close Corporations (CCs) that were tendering. • Departments did not always obtain three quotations for transactions with a value above R10 000 but not exceeding R200 00.00, in line with the regulations for the procurement of goods and services. • In certain instances departments did not invite competitive bids for procurement where the value of the goods or services exceeded R200 000, in accordance with the regulations, and had awarded the contracts to employee-related entities”.

15. CONSULTATION WITH INSTITUTIONS • South African Banking Risk Information Centre (SABRIC): This organization provides information regarding financial risk such as fraud and theft to the general public as well as the financial institutions. Information regarding financial positions of individuals is provided only to the law enforcement agencies upon submission of a subpoena/court order to this effect. SABRIC provide banking details such as account holders’ names and account numbers and the relevant bank which the account holders hold their accounts. In order to access the financial position of a public servant, an investigator would, therefore, need to work in collaboration with the Hawks and South African Revenue Services because such institutions may obtain information on an individual from SABRIC. The aim would be to obtain accurate information regarding the financial position of an individual. What may delay the process would be the time that would be spent as well as the procedure to be followed when requesting certain documents. 15

16. CONSULTATION WITH INSTITUTIONS(Cont) • Asset Forfeiture Unit (AFU): This Unit, also known as the “furniture removals unit”, has as its main function the tracing of assets that are owned by individuals and establish those that have been gain through illegal activities or those that are regarded as proceeds of crime. The proceeds of crime, once established, are forfeited to the state and money is deposited into the Criminal Asset Recovery Account (CARA). When tracing the public servant’ assets, an investigator would need to seek advice from the Asset Forfeiture Unit as its core business area is to trace assets owned by a particular individual. • Department of Transport: This department hosts a unit called the Transport Regulation, Accident and Incident Investigations which uses Information Technology software called the National Transport Information System (eNaTIS). The eNaTIS manages a database of motor vehicles registered in the Republic of South Africa. By means of the eNaTIS database access to the data regarding the number of motor vehicles that are registered under an individual’s identity document number may be obtained.

17. CONSULTATION WITH INSTITUTIONS (Cont) • Deeds Registration Office: This office may provide information regarding immovable properties belonging to public servants. • Companies and Intellectual Property Registration Office (CIPRO): The PSC has already entered into an agreement between itself and the CIPRO by signing an “Agreement”. Therefore, it was granted access to the database of all companies registered with CIPRO. This database enables the PSC to verify the companies as disclosed by senior managers. When conducting life lifestyle audits an investigator would be able to verify the number of companies that are registered under person’s name. It would also be in a position to verify as to how many individuals has been listed as shareholders to that particular company as well as to verify the principal description of the business. Through CIPRO, therefore, an investigator may ascertain the involvement of public officials in private companies which may interact with government departments and officials obtaining contracts from government departments illegally by using their official position and thereby enriching themselves.

18. ACTION AND ISSUES TO BE RAISED

19. CONCLUSION • The result of a lifestyle audit is an indicator or a clue that something may be amiss, but can never, without further evidence, be regarded as conclusive proof of illicit activity. There may, of course, be a perfectly reasonable explanation for what may appear to be an extravagant lifestyle; these explanations include an inheritance, or wealthy partner or family member providing financial support, unknown to the employer or investigator. Accordingly, the results of a lifestyle audit must be approached with caution.

20. THANK YOU!