Coincidence or conflict of interest?

Research reveals Borders council auditors' links to offshore trusts registered at same British Virgin Islands address as managing shareholder of council's failed waste management investment fund.

SPECIAL REPORT by DOUG COLLIE and EWAN LAMB

The global accountancy firm KPMG which checked the books of Scottish Borders Council for five successive financial years, and gave the local authority 'a clean bill of health' following the New Earth Solutions waste management scandal, audits the accounts of more than a dozen offshore trusts registered in the British Virgin Islands (BVI).

Thousands of files made public following the "leak" known as the Paradise Papers contain information showing those trusts - audited by KPMG Glasgow - are based in the offices of Panamanian lawyers Mossack Fonseca at  24 De Castro Street, Wickham’s Cay, Road Town, Tortola, British Virgin Islands.

Not Just Sheep & Rugby has previously revealed that Premier Group Distribution Inc (PGDI), the managing shareholder of New Earth Solutions and New Earth Recycling & Renewables [Infrastructure] Inc (NERR) is also registered at 24 De Castro Street, Wickham’s Cay, Road Town, Tortola, British Virgin Islands.

So was this "coincidence" or potential conflict of interest declared when KPMG signed off SBC's accounts for 2014/15, including the loss of £2.4 million of taxpayers' money after NERR could not come up with the £23 million needed to provide a waste management solution for SBC? And how deeply did KPMG delve into the conduct of NERR and its controllers and promoters Premier Group Isle of Man?

The NERR fund, as we reported last week, continues to be the subject of detailed investigations by liquidators Deloitte who have managed to assemble 200,000 documents linked to the failed investment fund. How many of those papers were inspected by SBC's external auditors?

Unfortunately not a single politician has been prepared to raise the issue despite compelling evidence of council incompetence throughout the four-year contract with New Earth Solutions Group (NESG). Instead they have been content to accept KPMG's assurances that everything was handled properly while the accountancy firm acted on behalf of Audit Scotland between 2011 and 2016.

The auditing of public authority accounts in Scotland provides highly lucrative contracts for KPMG and other accountancy businesses as a result of out-sourcing by Audit Scotland, the country's public expenditure "watchdog".

.On June 27^th 2011 Audit Scotland published a contract award notice which revealed that 38% of the audit work for Scottish public bodies, including councils, government departments and further education colleges had been placed with various accountancy firms including KPMG, Ernst & Young, Deloitte’s and several others. The total value of these lucrative contracts came to £31.889 million, covering the financial years 2011/12 to 2015/16.

KPMG was successful in securing 28 separate accounting appointments across the three sectors after tenders were submitted by their Edinburgh office. The value of their share of the work was: Local authorities £4.204 million; Central government bodies £1.511 million; FE Colleges £500,000; a combined total of £6.215 million.

The tendering exercise was repeated in 2016. In March of that year Audit Scotland again published a contract award notice covering the financial years 2016/17 to 2020/21. This time the notice did not provide amounts won by individual firms from a pot worth £23.295 million representing 36% of Scotland’s public audit work. KPMG’s Glasgow office was among the successful bidders.

The external auditors’ report on the abandoned Borders/New Earth Solutions debacle dated September 2015 stated:

Termination of waste management contract In 2014-15, £2.2 million was written off as a result of the termination of a waste management contract. We have reviewed the Council’s decision making process in relation to the termination of the contract. Key points include:

■ These costs do not include any early termination fees or additional costs claimed by NES, as a “no fault” termination provision formed part of the contract;

■ The decision was considered and made by the Council in February 2015:

■ Information was provided by an internal project team, supported by appropriate external professional advisors; and

■ Appropriate options were considered and due diligence processes are evidenced as being followed. We are satisfied that the Council has followed appropriate procedures in relation to this decision. We have reviewed the business case relating to this decision, which was presented in February 2015 and set out the options available to the Council. 

The disclosure concerning PGDI's BVI connection came in April 2016 courtesy of another set of files known as the Panama Papers.

This aspect of the Scottish Borders project was not mentioned in any audit reports, and SBC has confirmed in a Freedom Of Information response they were unaware of these complex offshore “arrangements” even though the details were available in successive NERR annual reports from 2011.

In the Paradise Papers KPMG Glasgow,which houses the firm's "UK Tax Centre of Excellence", is identified as auditor for 15 offshore entities, most beginning with the name Windsor, and registered in Jersey and British Virgin Islands.

So KPMG Glasgow appears to work closely with Mossack Fonseca, registered intermediary for at least 14 of the offshore trusts, and who also happen to be the agent for PGDI, the managing shareholders of New Earth Solutions/NERR Fund.

 PGDI beneficiaries and shareholders included David Whitaker, a director of numerous NES Group companies, including (from April 2011 to November 2015) New Earth Solutions (Scottish Borders) Ltd, the special vehicle set up to deliver the £23 million waste management project at Easter Langlee, Galashiels.

 The so-called "Panama Papers”had come from Mossack Fonseca’s offices and revealed the law firm’s involvement in activities which brought allegations of corruption and money laundering. The contents of the leaked documents have been reported in media and newspapers around the world.

Mossack Fonseca’s BVI ‘branch’ where PGDI and those entities audited by KPMG are registered was hit with a $440,000 financial penalty in November 2016 by the British Virgin Islands Financial Services Commission for eight breaches of BVI’s anti-money laundering and terrorist financing codes. The penalty was the largest ever imposed by the BVI FSC. But anti-corruption activists claimed it was “too little, too late”.

It is perhaps somewhat surprising that none of the above factual information gleaned from detailed research requires neither an investigation nor a public explanation.