Information technology services provider EOH on May 26 said evidence uncovered and reported by law firm ENSafrica into corrupt and problematic legacy contracts showed how below-cost contracts and payments for work not done had been used to steal almost R900-million.

ENSafrica forensics department head Steven Powell presented this and other evidence to the Commission of Inquiry into Allegations of State Capture, chaired by Deputy Chief Justice Raymond Zondo, on May 25.

The forensic investigation conducted by ENSafrica showed that, as was the case in the Department of Home Affairs (DHA) contract for an automated biometric identification system (Abis), the modus operandi was that perpetrators in EOH bid for government work with contracts below the value of the cost of delivery of the contract in order to secure the work.

ENSafrica believes the intention was for the perpetrators to open a contract account in EOH finance to submit invoices to siphon off money. This was done, in many instances, before any payments had been received for the contract.

More frequently than not, the payments made by EOH to subcontractors for work not done were related to parties who were not part of the tender process. ENSafrica’s view is that the perpetrators' belief was that, in the future, they could get change orders signed off, or work around the procurement requirements and increase the contract amount.

“This contracting practise has cost EOH significantly, as it has concluded the delivery of services under these problematic contracts. Almost R900-million has been stolen from EOH through the siphoning process.

"The new EOH board and management faced enormous challenges and have had to work to repay R2-billion of the R4-billion legacy debt that was racked up owing to poor management and looting,” the company said.

Meanwhile, EOH also detailed the handover and cession of Phase 2 of a Department of Home Affairs (DHA) contract to another subcontractor.

It noted that accounting and auditing firm Nexia SAB&T had presented its findings into the DHA Auditor-General South Africa Forensic Investigation regarding the appointment of EOH Mthombo for the DHA Abis to Parliament on May 24.

The DHA Abis agreement was awarded in 2015 to migrate the Home Affairs National Information System (Hanis) to an automated biometric information system, which was critical to consolidate citizens’ data and enable further digitalisation of DHA processes, said EOH CEO Stephen van Coller.

The total value of the DHA Abis contract was about R410-million, but the contract bid was placed at R200-million below the other competitors in order to secure the contract, allegedly based on leaked inside information.

This contract formed part of the initial problematic legacy contracts as identified in the ENSafrica forensic investigation initiated by the EOH board in February 2019. At the time of discovery, the new EOH management team reported its concerns regarding the awarding of the contract to the Hawks and the Financial Intelligence Centre.

EOH has only received about R282-million, including value-added tax, in payment for services rendered for the DHA Abis contract. To date, EOH has successfully delivered 51 of the 60 contracted milestones for Phase 1 of the project, which have been signed off and accepted by the DHA.

EOH has further procured and built two data centres as contracted. In addition all contracted interfaces have been built and unit testing has been completed.

As acknowledged in the Nexia SAB&T forensic report, EOH fully cooperated with the investigation on information available to EOH at the time and, importantly, EOH further initiated action to recover losses caused by the perpetrators of wrongdoing.

The remaining milestones in Phase 2 were ceded to a subcontractor by EOH on April 1, this year, following a proposal submitted by EOH to the DHA in March 2020. This has the required legislated approvals.

As part of EOH’s commitment to deal with the past appropriately, EOH ensured the cession remains within the original budgeted expense and that the handover is managed appropriately. This has been at EOH’s own cost.

The project was delayed for several reasons and, to resolve the disputed issues, this now forms part of an ongoing arbitration process, the company said.

As previously reported, EOH has made significant progress and reported its first positive operating profit for the first half the 2021 financial year since the new board and management took over. In addition, the process to create a permanent capital structure for EOH is well advanced and should be completed in the next 12 months.

“The independent forensic investigation is behind the group, and we have reported suspected fraud and corruption to the authorities and instituted legal proceedings where appropriate. We have also engaged relevant law enforcement agencies to ensure that anyone found guilty of wrongdoing will ultimately be held accountable for their actions.

“We remain encouraged by the ongoing support and feedback we have received from all our stakeholders including our clients, our suppliers and our investors. I am especially appreciative of our 6 200 hardworking and honest people who were not part of these legacy issues and who have remained committed to staying the course and building the EOH of the future,” said Van Coller.