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.
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.
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.
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
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.
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.
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.
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
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.
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
ibid, para 2.7 and Figures 5 and 6, Evidence, Qs 10, 88 Back
ibid, paras 1.2 and 1.5, Evidence, Qs 61-65 Back
Qs 8-9 Back
Qs 13-15, C&AG's Report, para 2.13 Back
paras 1 and 1.4 and Figure 3 Back
para 1.6 and Figure 3 Back
Report, para 1.6, Evidence, Qs 11-12, 26-29, 37-38 Back
Qs 41-42 Back