January 23, 2022

Cayman Islands: CarePay audit report finds no corruption by public service

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HON-FRANZ-MANDERSONFrom The Office of the Deputy Governor of the Cayman Islands

Internal auditors looking into the CarePay procurement process have found no evidence of corruption by civil or public servants their report says.

Earlier this year jurors in a corruption trial found former Health Services Authority (HSA) Board Chairman Canover Watson guilty on five criminal charges including breach of trust and fraud in relation to the CarePay project. CarePay was the outcome of a search to find an online solution to the difficulties faced by HSA in verifying patients’ eligibility for health insurance and managing the resulting claims process.

Screen Shot 2016-07-19 at 3.49.40 PMAt the conclusion of the criminal case, the Deputy Governor and Head of the Civil Service Franz Manderson, commissioned an investigation by the Internal Audit Unit into the procurement of the CarePay system.

In regards to auditors’ findings Mr Manderson made the following statement:

“While I am pleased that auditors found no evidence of corruption by civil servants or public servants, I am concerned that our internal controls and governance arrangements were not robust enough to prevent the serious abuse of public funds.

I have noted the remarks of Justice Michael Mettyear during the sentencing of the former Chairman in which he stated to Mr. Watson: “You are a certified accountant. Yet you behaved shamelessly, falsifying presentations, letters, emails, contracts and signatures.”

It seems to me that Mr. Watson’s conduct, as described by the Justice, together with his high standing in the community, contributed to his ability to perpetrate this fraud. However, I agree with the Internal Auditors, that civil servants did not display the expected standard of care and professional skepticism that I expect, and that the public deserves. This could have prevented or reduced Mr. Watson’s success.

There are many lessons to be learned from this entire episode and I wish to assure the public that action will be taken to avoid a recurrence of such an event.

I would also add that many persons complain of Government bureaucracy and red tape, and encourage the civil service to “just get on with it”. Yet this case highlights the need for civil servants to be diligent and deliberate in carrying out their duties, to develop sound business cases and to introduce strict internal controls.

The good news is that much has changed in the civil service since the CarePay contract was awarded in 2010 some six years ago. Business case planning is the norm and legislation, such as the Framework for Fiscal Responsibility, has strengthened our internal controls. So has recurring training in procurement good practice.

Meanwhile imminent legislative changes are underway, such as the Procurement Bill and the Public Authorities Bill, both of which emphasise role clarity in governance arrangements. Going forward these will strengthen our procurement processes and prevent a reoccurrence of an incident similar to CarePay. Both of these draft bills are in the final stages of development.”

Additionally, in order to strengthen the system of checks and balances between the government and the statutory authority, a Cabinet Paper will be presented imminently to Cabinet to add representatives from the Ministries of Finance and Health to the HSA Board.

The Deputy Governor will circulate the report among senior civil servants in the various ministries and portfolios to assess the vulnerability of their own relationships with statutory authorities and government companies.

Notes:

1 Future developments which will further tighten procurement controls include two pieces of draft legislation which emphasise role clarity in governance arrangements and are in the final stages of the development process. These are:
a. The draft Procurement Bill:
i. This legislation details the establishment of committees to oversee the procurement process, and specifies that membership may not extend to persons whose financial or other interests might affect how they carry out their duties.
ii. In addition Chief Officers, Chief Executive Officers, as well as board members of statutory authorities or government companies, are ineligible for membership of these procurement committees. (This is an important development as Mr. Watson, although Chairman of the Board, was allowed to serve on the procurement committee, which contributed to the successful fraud.)
iii. The Bill also empowers the newly appointed Director of Procurement to monitor the compliance of all public procurement processes.
b. the Public Authorities Bill
i. This legislation speaks to the importance of avoiding conflicts of interest, and promotes full disclosure, in the appointment of board members.
ii. It further specifies that only the CEO of a Public Authority, rather than its board, is responsible for procurement. It adds that any such procurement must be in line with the policy framework established by the board, and also with Government’s procurement legislation and policies.

2. An electronic copy of the Internal Audit Special Investigation Report into the
CarePay Procurement Process is available in the publications section of the Portfolio of the Civil Service website www.pocs.gov.ky. It is part of the collection entitled internal audit reports.
3. HSA and the Cayman Islands National Insurance Company (CINICO) implemented the CarePay system on 2 May 2012.

From INTERNAL AUDIT SPECIAL INVESTIGATION REPORT Of The CAREPAY PROCUREMENT PROCESS

EXECUTIVE SUMMARY

At the request of the Deputy Governor the Internal Audit Unit recently concluded a Special Investigation into the procurement of the CarePay System that was implemented by the Health Services Authority (HSA) and CINICO on May 2, 2012.

The purpose of the review generally was to evaluate the administrative processes that were carried out in the procurement of the CarePay System in order to identify the root causes of the failure in the procurement process such that the former Board Chairman was convicted for offences under the Anti-Corruption Law.

Our review has determined the following in regards to the CarePay procurement process:

 The HSA had a need for a solution to the difficulties being faced in its patient eligibility verification and claims management processing.

 A solution was brought to the attention of the Ministry of Health and the vendor was invited to make a presentation on the System.

 As a portion of the HSA’s patient population held private sector insurance policies, the long term plan for effective resolution of the problem, called for an expansion of the System to the private sector health care providers.

 A Technical Committee was formed to explore the possibility of implementing this

System.

 The former Chairman of the HSA Board was appointed by the Ministry of Health to be the Chairman of the Technical Committee, separate from his role as Chairman of the Board of the HSA.

 In September 2010 the Chief Officer in the Ministry of Health wrote to the members of the Technical Committee to request that the RFP clarifies that Government did not intend to convey to potential bidders, the potential for any future contracts that would include private insurance/private healthcare providers as a result of a successful bid.

 The Technical Committee issued an RFP and evaluated 3 bids in response to the RFP.

 In December 2010, the CTC awarded the tender to AIS for CI$11,149,540 (US$13,597,000) inclusive of setup costs and transaction fees projected over a 5-year period.

 A contract was signed effective December 21, 2010 between the HSA, CINICO and

Advanced Integrated Systems (Cayman) Ltd for the provision of claims administration services for the HSA and CINICO, but did not include the national roll-out to the private sector.

 After experiencing numerous setbacks, including a rescheduling of the initial implementation date of July 2011, the System was fully implemented (‘go-live’) in May 2012.

 Payments totaling US$1,372,000 were made during the period December 2010 to May 2012, for the System setup.

 Additional payments totaling US$1,800,000 were also made to AIS Cayman for the national roll-out of the System to the private sector, although there was not an approved tender award by the CTC for this aspect of the project.

 The US$1,800,000 was funded by an equity injection for the HSA, which was included the Ministry of Health’s 2011/12 budget.

 Due to the late amendment to the 2011/12 budget, the Ownership Agreement from the HSA did not include this request for the equity injection, and a letter from the former Board Chairman to the Minister of Health, in May 2011, appears to be the only basis for the inclusion of this equity injection in the budget.

 The Ministry of Health withdrew US$1,800,000 from the Treasury Department on the basis of AIS Cayman invoices that were billed to the Ministry of Health; letters from the former Board Chairman of the HSA (written on the HSA’s letterhead); a copy of the CTC approval for the tender award, and a copy of the contract (which was subsequently determined to be fraudulent).

 The Ministry of Health then paid over the funding for the equity injection to the HSA.

 The HSA receipted the funds and then paid over cheques in the same amount to AIS Cayman, despite the fact that the invoices were billed to the Ministry of Health, as the customer.

 The Carepay System did not yield its anticipated benefits and was denying claims for valid services; incorrectly identifying them as duplicate claims.

 In December 2014 the CarePay System was terminated by AIS.

Our review has identified instances of non-compliance with the established procurement policies and procedures of the Cayman Islands Government which are summarized below:

 A documented business case was not developed to assess value for money prior to embarking on the procurement of the Carepay System;

 An approved capital appropriation was not made in the 2011/12 budget for the procurement of the CarePay System, although we recognize that the 2011/12 budget was approved prior to the identification of this solution.

 There was non-compliance with the CTC tender process requirement to give consideration to extending the tender deadline where valid queries are raised in regards to the Request for Proposal

We have however determined that the key deficiencies that resulted in the systemic failure of this procurement were as follows:

 There was an ineffective governance arrangement between the Ministry of Health and the HSA such that the Ministry of Health’s Chief Officer, the HSA’s CEO and finance officers within both entities did not have complete information on the administration of the CarePay procurement and in particular the full plans in place for the national roll-out to the private sector. Additionally, the absence of a Ministry of Health’s representative on the HSA Board is a missing component of the governance framework that would facilitate certainty in the HSA’s implementation of policy directives issued by the Ministry and Cabinet.

 The former Board Chairman was appointed by the Minister of Health as the Chairman of the procurement and implementation committee for the project, even though he was still in his appointed role of Chairman of the HSA Board. This facilitated the former Board Chairman’s involvement in a number of conflicting roles, including roles that should be undertaken by executive management, whilst also operating in the role of Chairman of the HSA Board of Directors.

 As a multi-agency procurement the governance arrangement that was established for the procurement of the System was inadequate to ensure the effective procurement and implementation of the System, including ensuring all parties performed their assigned roles as agreed.

 A lack of an expected standard of care and professional skepticism in the payment of invoices in totaling CI$1,507,500 by the Health Services Authority. The Ministry of Health funded the HSA for an equity injection on the basis of a request from the former Board Chairman however the HSA finance officers advised that they had no knowledge of this equity funding. The HSA officials, at the instructions of the former Board Chairman paid out the funds to AIS Cayman, without an approved contract of service and despite the fact that the invoices were addressed to the Ministry of Health and not to the HSA.

The following key recommendations have therefore been made to prevent such negative outcomes in the future:

 Establish formal communication mechanisms between the Ministry of Health and the HSA, outside of the annual budget and reporting processes. Such communications should set out clear expectations for policy directions and should facilitate effective identification of high-risk issues and notification to the Chief Officer and the Minister on key issues within a timely manner. Communication of pertinent information that affects the management of the HSA should involve the Board as well as the CEO of the HSA.

 The Board Policy that is in place at the HSA, addresses the separation of the role of the Chairman of the Board and board members, from the role of the CEO and executive management. This Board Policy should be complied with at all times.

All procurements should be conducted in accordance with the CIG’s procurement policies and regulations. In the case of multi-agency procurements, the procurement approach and structure should be designed so as to be relevant and appropriate to the nature of the particular procurement being undertaken.

 The HSA and the Ministry of Health should establish documented agreements to govern transactions being undertaken that are outside of the usual purchase and ownership agreements/arrangements so as to ensure that all parties are agreed as to the terms of the arrangements being entered into. Appropriate invoices should then be raised as necessary to support any requests for funds in accordance with the terms of the agreements.

As the key controllers of the entities financial resources, Chief Financial Officers within entities should be fully aware of key policy decisions that will require financial support. The financial officers were kept out of the loop in this procurement, yet they were the same personnel who were called on to decide how to administer the entities funds. It is therefore vital that these officers are provided with sufficient information so as to assist them to make appropriate decisions in the management of the entities finances.

Subsequent to this procurement, in November 2012, the Framework for Fiscal Responsibility (FFR) was brought into effect as a part of the Public Management & Finance Law. This Framework is based on the following key principles:

 Effective medium-term planning, to ensure that the full impact of fiscal decisions is understood;

 Putting value for money considerations at the heart of the decision making process;

 Effective management of risk; and

 Delivering improved accountability in all public sector operations.

On the key principle of delivering value for money, Section 12 of the Framework states as follows:-

The Cayman Islands Government recognizes that achieving value for money is central to the appropriate use of public funds. Central government and other public sector bodies will therefore ensure that effective processes are in place to provide confidence and ensure suitability, effectiveness, prudence, quality, good value and avoidance of error and other waste.

To assure value for money is achieved, the CIG commits to undertaking five key stages as part of the implementation of new projects, namely appraisal and business case; procurement; contract management; delivery; and evaluation.”

We therefore recommend that all procurements are to be undertaken in accordance with the principles outlined in this framework

 

CONCLUSION

This audit report is being submitted to the Deputy Governor in accordance with the agreed Terms of Reference.

As a result of our audit work, and the information which came to our attention, we did not find any evidence of misconduct or corruption on the part of public servants within the entities reviewed.

We did however identify instances of non-compliance with the PM&FL and established operating procedures, as well as internal control deficiencies. We also determined that there was an absence of the expected standard of care and professional skepticism in the actions of public servants in the processing of payments related to the procurement of the CarePay System.

In regards to the extent of the failure of the procurement process such that it resulted in a criminal conviction, we have determined that this was heavily related to the lack of information between the Ministry of Health and the Health Services Authority regarding the procurement that was being undertaken. For the procurement of the CarePay System; which was so integral to the HSA’s strategic objectives, and required such large outlay of government funds, the CEO should have been included to a large extent in the communications between the Minister and the Board Chairman. Additionally, the Chief Officer as the principal source of advice to the Minister should have been privy to all communications on the CarePay procurement as they relate to significant policy decisions to be undertaken under the remit of the Ministry of Health.

During the time of the procurement, the former Board Chairman in addition to operating in the role of Chairman of the Health Services Authority, was also appointed as the Chairman of the procurement committee for the CarePay System. Both the Ministry of Health’s and the HSA’s personnel, placed a significant level of confidence and trust in the former Chairman of the Board and as such, literally handed the management of the procurement off to him, without scrutiny or oversight. He was therefore relied on heavily, for decisions in regards to the project.

This level of authority together with him also operating as the main liaison/advisor to the Minister of Health as it relates to the CarePay procurement in addition to being the Chairman of the HSA Board, was not in keeping with the principle of segregation of duties, and entrusted a level of influence to the former Board Chairman, which was abused. This not only served to blur the lines of accountability but as a result the only person who fully understood the true circumstances of the project at any point in time, was the former Board Chairman.   The Ministry of Health did not have a complete picture of the situation and assumed that the HSA did, whilst the HSA also did not have a complete picture but also thought that the Ministry did.

Based on our assessment it is evident that, the former Board Chairman also operated in the role of advisor to the Minister of Health on the implementation of the RTA/EVS System and its potential for improving the financial circumstances of the HSA. This role was undertaken separately from his capacity as the Board Chairman of the HSA, and the Chairman of the procurement committee.   To make matters worse, and to confuse staff even further, the former Board Chairman utilized the letterheads of the Health Services Authority in his written communications, signing as Chairman of the Board even when these correspondences did not relate to his role of Board Chairman.

It is therefore our overall conclusion that the following are the major factors that contributed to the breakdown in the procurement process:

 lack of an effective governance framework between the Ministry of Health and the Health Services Authority that would facilitate the CEO’s full awareness of all Ministerial directives that impact the HSA;

 the involvement of the Board Chairman in conflicting roles including the operational duties of the Health Services Authority;

the view held by the HSA’s finance officers regarding prior financial arrangements between the Ministry of Health and the HSA;

 the general absence of information provided to the financial officers within the Ministry of Health and the HSA; and

the inappropriate administrative structure that was in place for the multi-agency procurement.

The recommendations for improvement have been accepted and as indicated in the management comments, management have committed to improving the deficiencies, in some instances over and above the recommendations that have been raised in this report.

I would also like to thank the public servants who assisted during this review. Their assistance have made it possible for us to put together a coherent report, given all the facets and complexity of this procurement. This audit process has also conveyed the considerable distress that the entire situation has caused for some public servants. And although our report has identified administrative deficiencies with the procurement process that was undertaken, and which public servants have committed to rectifying going forward, it is our overall assessment that the impact of the administrative deficiencies was aggravated by a clear intent to deceive.

(Signed)

Deloris E. Gordon                                                                                           June 6, 2016

 

HSA’s Response Regarding CarePay Audit Findings

The HSA Board welcomes the review of the CarePay procurement process and the findings of the Internal Auditor that there is no evidence of corruption by civil or public servants.

As indicated in the Internal Auditor’s report, the “lack of an effective governance arrangement for the procurement project contributed to” and facilitated the Chairman’s involvement in a number of conflicting roles that allowed him to successfully defraud the government. The HSA and Ministry of Health recognize that the governance structure is critical to a clear separation of roles and we are already working together to strengthen internal controls in an effort to mitigate against such activities in the future.

(ENDS)

Ministry of Health’s Response to CarePay Audit Findings

The Ministry of Health welcomes the review of the CarePay procurement process and the findings of the Internal Audit Unit that there is no evidence of corruption by civil or public servants.

Furthermore, the Ministry fully supports the Ministry of Finance’s efforts to improve the procurement process and the Ministry is also taking steps to improve the communication structure between the H.S.A.’s Board and the Ministry.

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