Redacted Joint Review to Quantify Ineligible Expenditures for the Seven Districts and Headquarters of the Arid Lands Resource Management Program Phase II for FY07 and FY08 : INT Redacted Report

Redacted Joint Review to Quantify Ineligible Expenditures for the Seven Districts and Headquarters of the Arid Lands Resource Management Program Phase II (ALRMP II) for FY07 & FY08 1 18 November 2011 Joint Report issued by the Integrity Vice Presidency of The World Bank (INT) & Internal Audit Department – Treasury, Government of Kenya (IAD) 1 This Joint Report was redacted at the request of the Kenyan Authorities to allow, inter alia, “due process of justice to take place in instances where fraud is suspected to have occurred.” Acronyms and Abbreviations ALRMP Arid Lands Resource Management Project ALRMP II Arid Lands Resource Management Project – Phase II CDC Community Development Committee CDD Community Driven Development DMO Drought Management Officer DSG District Steering Group F&C Fraud and Corruption FMR Financial Management Report FY06/07 Financial year – 1 July 2006 to 30 June 2007 FY07/08 Financial year – 1 July 2007 to 30 June 2008 GOK/GoK Government of Kenya IAD Kenyan Treasury – Internal Audit Department IDA International Development Association INT World Bank’s Integrity Vice Presidency KACC Kenyan Anti-Corruption Commission KCB Kenya Commercial Bank KESSP Kenya Education Sector Support Program KRA Kenyan Revenue Authority KSH/ksh Kenyan Shillings SFE Suspected Fraudulent Expenditure TOR Terms of Reference VAT Value Added Tax WKCDD Western Kenya Community Driven Development and Flood Mitigation Project Joint Report issued by the Integrity Vice Presidency of The World Bank (INT) and Internal Audit Department (IAD) – Treasury, Government of Kenya(GOK) Background INT and IAD have collaborated on a number of forensic audits, workshops and communication tools since May 2008 when INT provided technical assistance to IAD for its forensic audits. INT and IAD have also published a brochure on common Fraud & Corruption risks and their red flags in the public sector in Kenya. INT and IAD recognize that it is important that the issues highlighted through the forensic audit work are owned by GOK and both parties are committed to working to ensure that IAD develop a good base of people with the right technical capabilities to undertake this forensic work. IAD has been grateful for the technical support and training INT has provided and this has improved IAD’s capacity to undertake forensic audit work. The objective of the Joint Review was to finalize the quantification of ineligible expenditures due to be reimbursed to the World Bank for ALRMP II for FY06/07 and FY07/08 arising from INT’s forensic audit of a portion of the said project (seven districts and headquarters). The audit report has been shared with GOK on April 15, 2011 and published by INT on July15, 2011 and IAD’s review and draft report, dated August 15, 2011. The Joint Review took place between October 19, 2011 and November 15, 2011. Limitation of Scope Due to time constraints for the Joint Review, only transactions with a value of more than Ksh100,000 were reviewed. This meant that 1,874 transactions worth Ksh47.6m were not reviewed, which represented 58.8% of all transactions by number and 10.9% of all transactions by value. Guidelines for Determination of Ineligibility The World Bank defines ineligible expenditures to mean amounts withdrawn that have been used to finance expenditures that are not eligible for financing pursuant to the provisions of the financing or credit agreement. Ineligible expenditures may arise from questionable expenditures that are subsequently confirmed to be ineligible for financing following a more detailed examination. The Bank may question expenditure because of: (i) an alleged violation of the terms of the financing agreement; (ii) a finding that, at the time of the review or audit, the expenditure is not supported by adequate documentation; (iii) the expenditure is supported by documents that are inconsistent with the underlying transaction; or (iv) the existence of supporting documents that are suspected to be fictitious/fraudulent. In determining ineligibility, the following guidelines applied when carrying out the Joint Review: • Expenditures must comply with the Government of Kenya (GOK) Financial Regulations and Guidelines and Treasury Circulars, unless acceptable justification is provided. In certain cases, the GOK Financial Regulations and Guidelines and Treasury Circulars will determine the types of documentation that would apply in a given transaction. In determining ineligibility based on GOK Financial Regulations and Guidelines, consideration was made of the substance of the breach rather than the form. • Where only a portion of a transaction was identified as being ineligible, then only that portion would be considered ineligible and not the entire value of the transaction. • Sufficient audit evidence must be available to confirm that the underlying transaction took place. While the exact type of supporting documentation could not be determined upfront for all situations, the following guidelines applied: i. Evidence obtained from an independent source was generally more reliable than evidence obtained internally; ii. Evidence obtained directly by the auditor was more reliable than evidence obtained indirectly e.g. from the DMO; and iii. Evidence provided by original documents was more reliable than evidence provided by photocopies or facsimiles. 2 • For vehicle repairs expenditure, there was a requirement to show 3 quotes for work undertaken and show that the vehicle had both, pre and post inspection certificates, to confirm that work was required and subsequently completed for material repairs. • There needed to be full compliance with procurement requirements. • Where the IAD has obtained Bank statements for the various CDCs which record the receipt of funds from the DMOs, in considering the authenticity of the transaction, the disbursements from the account needed to be consistent with the underlying CDC project documentation. For example, a series of cash withdrawals over a period of time from the CDC bank account which do not correlate with the purported purchase and payment of livestock on a particular day would not be consistent with the purchase having taken place. • Each CDC project was required to be approved by the DSG and recorded in the minutes and in the Annual Plan. The DSG minutes needed to be available for inspection. • All payments or advances using the imprest system needed to fully comply with the imprest system requirements. This included the requirement for mission authorization forms and comprehensive evidence that payments had been made in accordance with the imprest warrant. The imprest was required to be surrendered in the time frame stipulated within the imprest. • Proforma invoices and quotes were not acceptable as a request for payment by the supplier. • The Joint Review did not review the amounts relating to Government of Kenya funded transactions and the VAT expenditures (or portions thereof) and focused only on amounts funded by IDA. • The 156 ‘Unclassified/not reviewed’ transactions amounting to Ksh43.8 million were considered eligible for the purposes of the Joint Review due to time limitations and expediency. • The Joint Review did not consider Ksh2.863 million relating to payroll expenditures and the issues with FMR reconciliations relating to Ksh100.9 million, which were identified in the INT audit. 3 Outcome of the Joint Review The Joint Review established that a total of Ksh340 million was ineligible expenditure. This compares to: the earlier INT figure of Ksh 514 million in questionable expenditures; and the earlier IAD figure of Ksh159 million (refer Appendix 1). Observations from the district analysis undertaken during the Joint Review The reconciliation between INT’s report, IAD’s draft report and the Joint Review required reconciliations of the methodologies applied in the earlier work. The approach in INT’s forensic audit was not designed to identify ineligible expenditures but rather questionable and SFE expenditures. The questionable and SFE expenditures were considered by IAD when assessing expenditure eligibility (or part thereof) during their review. The following reasons have been identified to have contributed to the differences in INT, IAD and Joint Review figures: • INT considered all transactions including GOK counterpart and VAT transactions under the Project, while the final figures in this Joint Review, which focused on amounts due to be reimbursed to IDA, identified the ineligible IDA amount only. • IAD could only review the transactions for which it received transaction vouchers and only requested vouchers relating to those identified by INT as either questionable or SFE. • IAD auditors only addressed the specific INT comments and did not have time to review the transaction as a whole. • Subsequent guidelines for assessing eligibility agreed between INT and IAD as part of this Joint Review were not applied at the time of the IAD review. • All transactions with value of less than Ksh100,000 which were not subjected to Joint Review due to time constraints have been treated as ineligible and included in the Joint Review figure. • Some expenditures have been treated as ineligible during the Joint Review due to technical reasons e.g. imprests accounted for after the required period, notwithstanding that funds may have been applied for project purposes, fuel paid for on the strength of proforma invoices, delayed or missing confirmation from Kenya Revenue Authority (KRA) on 4  VAT refunds or exemptions, lack of evaluation reports by project management. • Differences in the timing of production of some supporting documents produced for IAD which were not made available to INT during its forensic audit. • The inter linkages between government offices and other public agencies at the District level, where some documents although not available at the project office at the time of INT forensic audit, were secured by IAD from other interlinked offices e.g. District Treasuries, and interrogated them. • Accountability challenges associated with CDD projects, where documentation was not up to the Bank’s required standard but had been initially accepted by IAD. NB: The differences in the INT and IAD and Joint Review treatment of ineligible expenditures are illustrated herewith in Appendix 3. Way forward (i) IDA will assist in the development of a TOR and the implementation of the extended audit by IAD to cover the remaining 21 Districts during an agreed time period of the project. (ii) Further original documentation relating to the expenditures with indicators of fraud and corruption that have been identified during the Joint Review will be isolated and shared with the appropriate investigation agencies of GOK as further work will be required to substantiate the potential F&C red flags for some expenditures, which was not within the scope of this Joint Review. Such documentation will supplement the referral made by INT to GOK authorities (KACC) on August 31, 2011 relating to Ksh361 million of SFE expenditure identified in the INT forensic audit. 5 Appendices Appendix 1 Summary table and notes Appendix 2 District reconciliation table Appendix 3 The differences in the INT and IAD and Joint Review treatment of ineligible expenditures 6 Appendix 1 Summary table and notes RESULTS OF THE JOINT REVIEW OF INELIGIBLE EXPENDITURES FY07 FY08 Total KSH 000s # Amount # Amount # Amount INT Report (Q + SFE) 1717 255,134 1540 256,494 3257 511,628 less GOK & VAT portion 22 35,012 49 40,718 71 75,730 INT Report - IDA only 1739 220,122 1589 215,777 3328 435,899 Unclassified/not reviewed 92 24,851 64 18,967 156 43,818 Agreed eligible 64 29,183 58 22,272 123 51,455 Less eligible 156 54,035 122 41,239 279 95,274 Transactions <Ksh100k 1006 25,642 868 21,951 1874 47,593 Ineligible - GOK review 208 44,651 194 41,375 402 86,026 Ineligible - Joint Review 324 95,795 307 111,213 631 207,007 Total Ineligible (IDA only) 1539 166,088 1369 174,538 2907 340,626 * Excludes payroll amount of Ksh2,863,000 in INT Report. Note: (i) In summary the total ineligible amount of IDA expenditures confirmed by the Joint Review was Ksh340 million, this compares with the total SFE and Questionable expenditures identified in INT’s report of Ksh514 million (Ksh152.8m Q & Ksh361.7m SFE) and the total SFE and Questionable expenditures previously confirmed in IAD’s revised report of Ksh159.1 million (Ksh111.3m Q & Ksh47.8m SFE). (ii) Differences arose due, in part, to the guidelines applied during the Joint Review exercise that included focusing on ineligible IDA-funded expenditures only and to exclude (a) Ksh75.73 million relating to GOK portion of expenditures and VAT; (b) unclassified expenditures (totaling Ksh43.82 million); and (c) Ksh2.863 million relating to Headquarter expenditures identified as questionable by INT. (iii) INT’s Report (refer Appendix 1 - Table 4, page 6) set out 3,257 questionable and SFE transactions amounting to Ksh514 million, which after deducting the payroll amount of Ksh2,863,000, leaving Ksh511.6 million in transactions to be considered by the Joint Review. (iv) Included within INT’s reported questionable and SFE were transactions relating to counterpart obligations (GOK and VAT) amounting to Ksh75.7 million. (v) Since the objective of the Joint Review exercise was to quantify ineligible expenditure relating to the IDA portion of the project funding, the expenditures relating to GOK and VAT were excluded from the definition of ineligible expenditures as those amounts were not financed by The World Bank. . (vi) The Joint Review only considered transactions set out in INT’s report greater than Ksh100,000. Those 1,874 transactions less than Ksh100,000 were not considered for eligibility. INT and IAD agreed to their exclusion from the Joint Review work due primarily to the time constraints of the Joint Review. As a result, they are de facto “deemed” ineligible for the purposes of the Joint Review. (vii) Further transactions described as ‘unclassified/not reviewed’ represented 156 transactions, amounting to Ksh43.8 million, which may have been duplicated or for which no voucher could be produced for Joint Review purposes. These transactions were classified as “not reviewed” and therefore deemed eligible for the purposes of this Joint Review. (viii) Total ineligible expenditures was made up of 2,907 transactions amounting to Ksh340 million. IAD’s own review identified 402 transactions amounting to Ksh86 million and the Joint Review identified 631 further transactions amounting to Ksh207 million. 7 Appendix 2 District Reconciliation Table RESULTS OF THE JOINT REVIEW OF INELIGIBLE EXPENDITURES KSH 000s Samburu Headquarters Wajir Tana River Nyeri Kajiado Isiolo Garissa TOTAL # Amount # Amount # Amount # Amount # Amount # Amount # Amount # Amount # Amount FY07 INT Report (Q + SFE) 271 42,882 110 36,969 421 50,578 96 16,435 82 8,411 126 18,729 340 49,200 271 31,930 1717 255,134 less GOK & VAT portion 1,830 6,607 8,039 2,643 1,885 0 2,062 3 7,409 19 4,536 22 35,012 INT Report - IDA only 271 41,052 110 30,362 421 42,539 96 13,792 82 6,526 126 16,667 337 41,791 252 27,394 1695 220,122 Unclassified/not reviewed 41 11,852 23 6,225 2 504 26 6,270 92 24,851 Agreed eligible 13 6,517 21 9,791 1 238 1 121 3 917 6 4,712 17 6,092 3 796 64 29,183 Less eligible or not reviewed 54 18,369 21 9,791 1 238 24 6,346 3 917 8 5,216 43 12,362 3 796 156 54,035 Transactions <Ksh100k 167 3,274 43 1,277 277 6,575 49 1,045 66 1,286 90 3,064 129 3,839 185 5,282 1006 25,642 Ineligible - GOK review 6 2,288 10 3,956 48 16,122 8 2,114 2 245 15 3,266 116 15,916 3 744 208 44,651 Ineligible - Joint Review 44 17,121 36 15,337 95 19,604 15 4,287 11 4,078 13 5,120 49 9,674 61 20,573 324 95,795 Total Ineligible (IDA only) 217 22,683 89 20,571 420 42,301 72 7,446 79 5,609 118 11,450 294 29,429 249 26,599 1539 166,088 FY08 INT Report (Q + SFE) * 194 26,741 103 33,212 310 68,796 110 21,099 99 15,745 81 7,236 193 38,814 450 44,852 1540 256,494 less GOK/VAT portion 0 734 0 8,686 0 13,993 0 2,612 0 3,076 0 1,129 4 4,926 45 5,561 49 40,718 INT Report - IDA only 194 26,006 103 24,526 310 54,803 110 18,487 99 12,669 81 6,107 189 33,888 405 39,291 1491 215,777 Unclassified/not reviewed 13 3,994 23 5,693 28 9,280 64 18,967 Agreed eligible 10 3,474 17 7,414 7 1,890 2 648 6 1,727 1 1,759 5 2,211 11 3,150 58 22,272 Less eligible or not reviewed 23 7,468 17 7,414 7 1,890 25 6,341 6 1,727 1 1,759 33 11,491 11 3,150 122 41,239 Transactions <Ksh100k 128 3,589 44 1,014 180 4,270 53 1,631 60 1,508 71 1,550 38 1,225 294 7,165 868 21,951 Ineligible - GOK review 3 805 24 6,144 45 12,760 13 3,620 4 2,155 2 423 96 13,706 7 1,762 194 41,375 Ineligible - Joint Review 40 14,145 18 9,955 78 35,883 19 6,895 29 7,278 7 2,376 22 7,466 93 27,214 307 111,213 Total Ineligible (IDA only) 171 18,538 86 17,112 303 52,914 85 12,146 93 10,941 80 4,348 156 22,397 394 36,141 1369 174,538 FY07 +FY08 Ineligible 389 41,222 175 37,683 723 95,214 157 19,592 172 16,550 198 15,799 450 51,827 643 62,740 2907 340,626 * Excludes payroll amount of Ksh2,863,000 in INT Report. 8 Appendix 3 – The differences in the INT and IAD and Joint Review treatment of ineligible expenditures CDC payments There were various issues that led to the Joint Review classifying CDC transactions as ineligible. Amongst such issues were cases were DSG minutes were not available or suspicious; incomplete lists of community beneficiaries; irregularities in the procurement processes (despite having been trained on procurement management); and insufficient record keeping to prove receipt and the consistent use of funds allocated to the CDCs in accordance with the MOUs, financing agreements and the receipt of the funds. Below are a few examples of such transactions: • [In one of the districts audited], a review of a voucher for Ksh500,000 in FY08 relating to a CDC for a restocking project. It was noted that goats were supplied to the CDC at a different price than that quoted and approved by the CDC officials. It was also noted that the cash sale receipts did not appear authentic and the list of beneficiaries provided had only names and no other details i.e. number of goats received, signatures and ID numbers. • [In one of the districts audited], a review of a voucher for Ksh465,206 for FY08 relating to a CDC, noted the following: (1) The MOU between the CDC and ALRMP was not signed and dated; (2) The CDC’s proposal was not dated, hence it was not clear which period it related to, particularly given the activity being funded was in the DSG minutes for the previous financial period; (3) The winning quote for the supply of goats was from an individual who was purportedly paid Ksh431,200 for 196 animals. The balance of IDA funds of Ksh34,006 was not accounted for; and (4) The LPO to the vendor was not authorized/signed by the CDC officials. Issues relating to fuel and tyres There were various issues that lead to the Joint Review classifying fuel and tyre transactions as ineligible. There were various instances where the fuel purchased for certain activities could not be linked to the activities undertaken. Further, volumes of fuel consumed could not be traced in the fuel ledgers and the work tickets. No till receipts were availed which normally record the precise number of litres pumped, as well as the cost (per litre and in total). Other factors that made it difficult to track fuel 9 consumption are non-functioning of vehicle odometers hence it was difficult to estimate fuel consumed per km and unavailed or uncompleted log-books. Amongst such issues were cases where there were significant alterations on fuel supporting documents (i.e. delivery notes and detail orders), fueling of non-project vehicles, irregularities in the fuel procurement procedures, sole- sourcing from specific suppliers, payment of fuel using proforma invoices and a lack of proof regarding the use of fuel for particular stated activities. Tyres were often purchased using proforma invoices, without pre or post inspection certificate and in some cases without reference to the vehicle(s) for which they were purchased. In addition, often there were no supporting documents to show that the ‘worn’ tyres were returned to stores and the subsequent boarding of those used tyres. Below are a few examples of such transactions. • [In one of the districts audited], a review of a voucher for Ksh86,000 for FY07 relating to the purchase of fuel from ______ [entity] noted the following: (1) there was use of detail orders from other government departments to support ALRMP fuel purchases; and (2) there were cases of fueling personal and non-project vehicles. • [In one of the districts audited], a review of a voucher for Ksh637,205 for FY08 relating to the purchase of fuel from the ______ [entity], noted Fueling of non-project vehicles (license plate no. _______, ______, ______). Issues relating to procurement There were various issues that led to classifying procurement transactions as ineligible. There were cases where a vendor may have been pre-approved to provide specific goods, however, additional goods may have been acquired from that same supplier, that were not listed within the agreed pricing schedule. In some instances these additional goods could amount to up to 90% of the total goods supplied and procurement rules would have still applied, requiring the project to obtain three quotations for the goods not listed within the agreed pricing schedule. The fact that a supplier is prequalified does not guarantee single sourcing. The GOK regulations require three quotes to be obtained unless the purchase is within the threshold for single sourcing (Ksh50,000). Amongst such issues were cases where GOK procurement policies and procedures were not applied, bid rigging, possible collusion between various suppliers and the management of ALRMP, and falsified supporting documents for services and goods were supplied to ALRMP. Below are a few examples of such transactions. 10 • [In one of the districts audited], a review of a voucher supporting a cheque for Ksh108,587 for FY07, relating to repairs of motor vehicle by ______ [entity], showed: (1) there was no tendering, no quotations were sought from different suppliers; (2) the LPO was dated 31 October 2006, whereas the invoice for the same transaction was dated 28 September 2006, hence the invoice was issued before the LPO; (3) Pre and Post maintenance inspection reports were not attached and thus it was not clear whether the repairs were satisfactorily undertaken; and (4) A copy of both the VAT cheque and a cheque to______ [entity] were not availed by the ____[bank] to verify the payee for this transaction. • [In one of the districts audited], a review of a voucher supporting a cheque for Ksh180,000 for FY08 relating to repairs of a motor vehicle by ______ [entity], noted the following: (1) there was no pre and post inspection reports for the vehicle repairs; (2) on reviewing the cleared cheque, it was noted that the cheque had the payee ______ [entity] and not _____ [entity]; (3) a copy of the VAT cheque from ______ [bank] was not available to verify the payee of this transaction; (4) the invoice for this transaction was issued before goods were supplied and accepted; and (5) there was no VAT payment voucher. Other issues There were instances where the date of the purchase order was after the date of the invoice, and accordingly, this would indicate that either the invoice might not be genuine or the goods or services had been supplied without appropriate authorization. There were a number of cases were the proper authorizations required on the Payment Voucher were not obtained or dated and this was evidence that goods or services may have been paid for without proper authorization. This was also a red flag indicator that the underlying service or goods may have never been received. Although these payment vouchers were declared ineligible for deficiencies on the face of the voucher itself, many of these transactions warrant referral to the appropriate enforcement agency as the red flag may in fact indicate that the expenditure was fraudulent. Documentation supporting certain payment vouchers were suspected as being fictitious. For example, vehicle running sheets attached to two separate vouchers were identified as relating to the same vehicle, for the same period, but with different operating histories. 11 There were instances where individuals had multiple imprests outstanding, contrary to GOK regulations. There were also instances where imprest warrants were not surrendered within the stipulated or required timeframes which rendered them ineligible. The Joint Review also noted other deficiencies with such documents which represent red flags and warranted referral to the appropriate enforcement agency, such as insufficient or inconsistent receipts to account for the imprest advanced, or no evidence that the balance of the imprest was actually surrendered to the cashier. 12