Select Committee on Public Accounts Eleventh Report



THE CORRUPTION AND OVERPAYMENTS AT FOCUS

How was the corruption uncovered?

5. In November 1995, Mr Richard Clark, Focus's Chief Executive since April 1994, received anonymous allegations that Keith Hinson, who at the time worked in Focus's property services department, had accepted bribes from Darshan Ram, a local property dealer, to purchase houses on behalf of Focus Housing "at a higher rate than is necessary". Mr Clark immediately informed the Housing Corporation and, after a short initial investigation, passed on the allegations to the West Midlands Police in December 1995. Subsequent investigations by the Police and the Serious Fraud Office led to a criminal prosecution and trial at Birmingham Crown Court in early 2000 which resulted in Hinson, his manager John Hartshorn (Deputy Director (Rehabilitation)) and Ram being imprisoned for corruption.[5]

6. Prior to receiving the allegations in November 1995 Focus had received four other indications of possible impropriety, the first in 1992 (Figure 1). These warnings were not always investigated fully, and those received before the current Chief Executive was appointed were not made known to him when he joined the Association.[6]

Figure 1: Allegations and Suspicions received by Focus before November 1995

Between 1992 and 1994 Focus received four indications of impropriety involving either Hartshorn or Hinson:

  (i)  In May 1992, Focus received a complaint that Hinson was favouring particular contractors; a senior manager investigated the complaint but found no evidence of corruption.

  (ii)  In April 1993, Focus's internal auditor questioned the purchase of 30 properties from a property dealer. Focus's senior managers discussed the possibility that Ram was offering financial inducements to Hartshorn and Hinson in return for higher prices but concluded that this was highly unlikely.

  (iii)  In November 1993, a Focus manager was informed that Focus was still purchasing numerous properties from Ram. An investigation was started but not completed. Hartshorn and Hinson were instructed not to acquire any more properties from Ram and his associates without authorisation from senior managers.

  (iv)  In August 1994 Focus's internal auditor raised concerns that the purchase of a property by Hartshorn from another dealer had involved impropriety. An investigation by the Operations Director cleared the purchase, but the new Chief Executive of Focus instructed that no more properties should be purchased from dealers. The Chief Executive, who had taken up post in April 1994, was not told of the earlier allegations. Hartshorn and Hinson continued to buy properties from dealers.


Source: C&AG's Report, Figure 6, paras 1.3-1.4, Q88

7. Focus was formed in 1991 by the merger of three existing housing associations: St Chad's Housing Society, Hestia Housing Association and Copec Housing Association. Hinson was an ex-employee of Copec, while Hartshorn was an ex-employee of Hestia. An investigation by Focus's external auditors, KPMG, had not identified any corruption with regard to purchases by Copec. However, despite extensive searches Focus had not located all of Hestia's records, including Hestia's seal register. As a result, it was not known whether problems similar to those discovered at Focus existed in this association before the merger.[7]

How was the corruption able to occur?

8. Between 1991 and 1996 Focus was the largest recipient in the West Midlands of grants from the Housing Corporation to housing associations, receiving a total of £104 million to help meet the costs of a development programme totalling £206 million. Focus's Chief Executive explained that in the period between 1988 and 1995 the dominant ethos at Focus was one of growth at all costs, and perhaps of the end justifying the means. Speed of development and of acquisition had been valued over internal controls. The relationship between Focus's governing Board of Management and senior staff had also been more arm's length than was healthy and certain activities had been kept away from the Board.[8]

9. Between 1994 and 1997, following his arrival, some 13, mostly senior, staff in Focus's development department were removed, including four dismissals and a series of other disciplinary actions and resignations. Focus introduced new procedures to cover all aspects of its development function, had compliance with these procedures audited, introduced and enforced a Code of Conduct for employees, and made changes to give its Board of Management better control over the organisation.[9]

How much was lost as a result of the corruption?

10. In December 1995, Focus asked its external auditors KPMG to investigate whether Focus had paid too much for the properties bought from Ram and other property dealers. These investigations, based on valuations provided by the District Valuer, revealed a pattern of overpayments by Focus and its subsidiary Focus Two. It is not possible to be precise about the extent of overpayments, but the losses suffered by Focus and Focus Two totalled approximately £1.5 million (Figure 2). Only Ram appears to have made corrupt payments in relation to these purchases.[10]


Figure 2: The overpayments at Focus

Focus bought 142 properties from dealers between 1991 and 1995 and paid £741,200 more than the District Valuer's1 assessment of their value, after allowing a margin for the dealer of 10 per cent. The average overpayment was around £5,200 or 19 per cent per property.

Focus' subsidiary association, Focus Two, also overpaid property dealers £344,850 for 81 properties, representing an average 18 per cent over the District Valuer's valuation.

Focus bought 96 properties which had been certified by an architect employed by Focus as 'satisfactory dwellings' but which were in such poor condition that an average of £5,000 needed to be spent on each (£467,000 in total) before they could be let. Proper approval for the expenditure was not obtained. Focus believed that this was done, in part, to favour Ram but also to provide work for favoured contractors.


Note 1:District Valuers are employed by the Valuation Office Agency, an executive agency of the Inland Revenue, to provide property valuation services to both the public and private sectors.

Source: C&AG's Report, Figure 3

11. Each purchase had been supported by a property valuation provided by an independent valuer. Around half, including the worst cases of overvaluation, had been provided by one valuer, and most of the remainder by two others. In addition, the 96 properties requiring repairs had been certified as being in a satisfactory condition by an architect engaged by Focus.[11]

12. Mr Clark explained that the architect was no longer in practice. He had no knowledge of the current activities of the main valuer, but thought it unlikely that the valuer was working for another association. Focus did not proceed with legal action against the main valuer, primarily because he was bankrupt, or against the architect on the grounds that he was no longer practising. More generally, the Association had assessed whether it was worth suing its advisors but had concluded that its solicitors were the only major party where legal action was merited. This action had not been successful partly because of the solicitors' plea that the management culture at Focus constituted contributory negligence.[12]

13. Although Focus recovered £250,000 from its insurers, the Chief Executive acknowledged that the losses had reduced its operating surplus, impacting on services to tenants, who ultimately bore the loss.[13]

Conclusions

14. The corruption at Focus, which came to light in 1995, led to losses of some £1.5 million. Although Focus has recovered £250,000 from its insurers, most of these losses have been borne by tenants. These losses might have been lower, or avoided altogether, had Focus management responded more thoroughly to indications of impropriety raised with Focus on four earlier occasions in the period 1992-94, and if the current Chief Executive had been made aware of these earlier incidents on his appointment in 1994. All housing associations should ensure that allegations of impropriety are properly investigated, and the outcome reported promptly to the Housing Corporation.

15. The corruption was made possible by weak internal controls at Focus, poor supervision of Focus's officers by its Management Committee, a general disregard in parts of Focus for proper standards of conduct and control, and an ethos which emphasised speed and expansion over the need for sound internal controls. Thus during a period in which Focus received grants from the Housing Corporation totalling £104 million, basic standards of corporate governance were not in place at the Association.

16. It was not possible to establish whether corruption had occurred at a predecessor association of which Hartshorn had been an employee, because key property records could not be located. Housing associations should keep records and documents in safe custody at all times, and the Housing Corporation should confirm that they are doing so, particularly when associations are being wound up or merged.

17. Weaknesses in the internal control framework at Focus contributed to the failure of Focus's legal action against its solicitors, thus further emphasising the importance of housing associations operating sound internal control systems. The Association did not pursue legal action against its other advisors such as valuers and architects on the basis that it was unlikely to recover any monies. Whilst recognising the need to assess the costs of legal action against the likely recompense, recipients of public money should seek recovery from negligent contractors wherever there is a reasonable prospect of success.


5   C&AG's Report, para 1.3, Figure 1 Back

6   ibid, para 2.7 and Figures 5 and 6, Evidence, Qs 10, 88 Back

7   ibid, paras 1.2 and 1.5, Evidence, Qs 61-65 Back

8  Evidence, Qs 8-9 Back

9  Evidence, Qs 13-15, C&AG's Report, para 2.13 Back

10  ibid, paras 1 and 1.4 and Figure 3 Back

11  ibid, para 1.6 and Figure 3 Back

12  C&AG's Report, para 1.6, Evidence, Qs 11-12, 26-29, 37-38 Back

13  Evidence, Qs 41-42 Back


 
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