PRESENTATION TO THE SELECT COMMITTEEON LOCAL GOVERNMENT AND ADMINISTRATION

COMPLIANCE WITH THE FINANCIAL DISCLOSURE FRAMEWORK FOR SENIOR MANAGERS

DATE: 6 MARCH 2008

VENUE: ROOM M.46, MARKS BUILDING, PARLIAMENT

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OUTLINE OF PRESENTATION

Background Submission of Financial Disclosure Forms Scrutiny of Financial Disclosures for potential Conflicts of

Interest Challenges Recommendations Conclusion

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BACKGROUND A key mandate of the Public Service Commission (OPSC) is the promotion

of professional ethics. A key aspect to be addressed in professional ethics is the management of

potential conflict that exists between the private interests of senior managers and their public responsibilities.

To address this situation the PSC developed the Financial Disclosure Framework (FDF) for senior managers.

The objective of the Framework is to manage potential conflicts of interest by requiring senior managers to disclose their financial interests. By managing potential conflicts of interest the FDF ensures that honest public servants remain honest.

The FDF was introduced in March 2000 for Heads of Department and senior managers on salary level 15 and in May 2001 the Framework was extended to all members of the Senior Management Service (SMS).

The Asset Register (FDF) is regulated in terms of the Public Service Regulations (PSR) and the responsibility of managing the Asset Register for Senior Managers is vested in the PSC.

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BACKGROUND – (continued)

In terms of the PSR all senior managers must submit their financial disclosures to their Executing Authorities by April of each year. Executing Authorities in turn must submit the disclosures to the PSC by May of each year.

The following types of interests are registrable interests and must be disclosed by a SMS member:

• Shares and other financial interests in private or public companies and other corporate entities recognized by law;

• directorships and partnerships;• remunerated work outside the public service;• consultancies and retainerships;• sponsorships;• gifts and hospitality from a source other than a family member; and• ownership and other interests in land and property, whether inside or outside the

Republic of South Africa. The PSC is responsible for scrutinizing financial disclosures to identify

potential conflicts of interest and advising executing authorities accordingly. The role of the PSC in identifying potential conflicts of interest can only be

performed effectively if all disclosure forms are received as prescribed by the Regulations.

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BACKGROUND (continued)

The rate of compliance with the FDF has consistently been monitored by the PSC.

It has conducted an investigation into the management of conflicts of interest through the FDF covering the period 1999/2000 to 2004/2005. The report that emanated from this investigation focused on compliance with the FDF during this period and identified potential conflicts of interest through an analysis of a sample of financial disclosures for the financial years 2002/2003 to 2004/2005 and the 1581 exception reports in respect of senior managers identified by the Auditor-General in 2005.

The PSC further compiled a fact sheet on compliance with the FDF for 2006/2007 which was submitted to all executing authorities. The fact sheet highlighted concerns regarding the late submission of financial disclosures.

Since the inception of the FDF the rate of compliance by national and provincial departments through the submission of financial disclosure forms has not been satisfactory. The fact that not all financial disclosures are received by the PSC impacts negatively on its ability to identify potential conflicts of interest.

The presentation to the Select Committee reflects the PSC’s findings on the extent of compliance with the FDF drawing from its monitoring thereof.

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SUBMISSION OF FINANCIAL DISCLOSURE FORMS

Given that the submission of financial disclosure forms is a regulatory requirement, only a 100% rate of compliance is acceptable to the PSC.

It is therefore disconcerting that through the eight (8) financial years since the establishment of the FDF, this has not been achieved.

For the financial year 1999/2000, 229 SMS members had to declare their financial interests. However, only 142 (62%) financial disclosures were received by the PSC.

The level of compliance improved over the next two financial years 2000/2001 (66%) and 2001/2002 (82%).

During the financial years 2002/2003, 2003/2004 and 2004/2005 the average submission of all financial disclosure forms was 66%, 72% and 77% respectively. A 80% compliance rate for 2005/2006 and 2006/2007 (as at 20 February 2008) has been achieved.

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SUBMISSION OF FINANCIAL DISCLOSURE FORMS – (continued)

1999/2000

2000/2001

2001/2002

2002/2003

2003/2004

2004/2005

2005/2006 2006/2007

National Departments

60% 39% 87% 81% 81% 79% 74% 75%

Eastern Cape 46% 55% 41% 37% 26% 68% 65% 72%

Free State 50% 48% 44% 71% 61% 49% 47% 94%

Gauteng 50% 60% 85% 88% 53% 94% 90% 88%

Kwazulu Natal 75% 52% 79% 45% 27% 65% 91% 69%

Mpumalanga 71% 37% 70% 91% 93% 78% 98% 91%

Northern Cape 33% 33% 78% 17% 88% 61% 81% 81%

Limpopo 93% 91% 74% 84% 89% 62% 94% 92%

North West 100% 53% 89% 69% 92% 95% 100% 100%

Western Cape 100% 97% 99% 91% 89% 90% 99% 94%

The extent to which national and provincial departments complied by submitting financial disclosures for the financial years from 1999/2000 to 2006/2007 is as follows:

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SUBMISSION OF FINANCIAL DISCLOSURE FORMS – (continued)

Since the implementation of the FDF, the PSC forwarded numerous reminders to Executing Authorities not only requesting the financial disclosure forms but reminding them that senior managers that do not comply are guilty of misconduct in terms of Chapter 3, Section H of the Public Service Regulations.

A number of departments and provinces have, however, consistently performed poorly in complying with the regulatory requirement of submitting financial disclosures. The submission rate in the Eastern and Northern Cape as well as the Free State was below 50% in a number of financial years.

The North West was the only Province to achieve a 100% compliance rate during 2005/2006 and 2006/2007.

The National Department of Health only submitted disclosure forms of their senior managers on one occasion since the implementation of the FDF and the Department of Housing only twice.

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SUBMISSION OF FINANCIAL DISCLOSURE FORMS – (continued)

The national departments from which 100% financial disclosure forms were received since the implementation of the FDF are the following: • Independent Complaints Directorate• Office of the Public Service Commission• Department of Transport

Apart from the last two financial years a 100% compliance rate was also achieved by:• Government Communication and Information System• National Treasury• Safety and Security• South African Management and Development Institute• Statistics South Africa

Whilst the overall rate of compliance with the submission of financial disclosures for 2006/2007 as at 20 February 2008 is 80%, this figure should be considered against the fact that financial disclosures in terms of the PSR must be submitted to the PSC by 31 May of each year. The extent of compliance by 31 May is far lower than 80%.

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SUBMISSION OF FINANCIAL DISCLOSURES – (continued)

Very few departments succeed in meeting the prescribed date of submission to the PSC of 31 May as illustrated below:

NATIONAL DEPARTMENT / PROVINCE

SMS MEMBERS FORMS RECEIVED NO. OF FORMS OUTSTANDING PERCENTAGE RECEIVED

National Departments 3738 325 3413 9 %

Eastern Cape 483 52 431 11 %

Free State 343 3 340 0.8 %

Gauteng 753 41 712 5 %

Kwazulu-Natal 645 0 645 0 %

Limpopo 410 101 309 25%

Mpumalanga 240 36 204 15%

Northern Cape 157 27 130 17%

North West 294 151 143 51 %

Western Cape 369 0 369 0 %

PROVINCIAL SUBMISSION 3694 411 3283 11 %

COUNTRY AVERAGE 7432 736 6696 10 %

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SUBMISSION OF FINANCIAL DISCLOSURES FOR 2006/2007 – (continued)

The fact that only 10% of all financial disclosures were received by the PSC as at 31 May 2007, illustrates the extent of non-compliance with the regulatory requirements by Executing Authorities and senior managers.

It has been noted that many designated officials submit their financial disclosure forms on or before the due date but Executing Authorities delay submitting the forms to the PSC. On the forms submitted by some departments there is a significant lapse of time from when a designated official has signed and the date on which the form is signed by the Executing Authority. The obligation to submit the disclosure forms to the PSC rests with the Executing Authority.

This deficiency impacts negatively on the PSC’s ability to perform its functions as prescribed by the Regulations. The PSC is not in a position to advise executing authorities timeously of potential conflicts of interest which may result in actual conflicts of interest occurring.

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SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST

In scrutinising financial disclosures the PSC applies three principles to identify potential conflicts of interest :• The relationship or compatibility of the company with which an official is

involved in relation to the work the department is doing is assessed as such relationship could lead to potential conflicts of interest.

• It is presupposed that an official involved in a large number of companies could experience conflicts of interest. This is based on the fact that in terms of the Public Service Act, “every employee shall place the whole of his or her time at the disposal of the State”.

• In some instances two or more officials from the same department are involved in the same company or companies. This is seen as a potential conflict of interest as such officials could make decisions that favour one or the other.

The PSC applied these three principles in its scrutiny of a sample of 300 financial disclosures per financial year for the period 2002/2003 to 2004/2005 as well as the 1581 exception reports of the Auditor-General.

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SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST – (continued)

NUMBER OF SENIOR MANAGERS WHO DECLARED SHARES AND DIRECTORSHIPS

CASES WITH POTENTIAL CONFLICTS OF INTEREST

CASES WITH NO POTENTIAL CONFLICTS OF INTEREST

PERCENTAGE POTENTIAL CONFLICTS OF INTEREST

1999 – 2000 39 28 11 72%

2000 – 2001 44 28 16 64%

2001 – 2002 38 17 21 45%

2002 – 2003 53 26 27 49%

2003 – 2004 47 31 16 66%

2004 – 2005 57 26 31 46%

The assessment of the sample of financial disclosures found no potential conflicts of interest in respect of work outside of the Public Service, sponsorships, gifts and hospitality, consultancies and retainerships and land and property. In terms of shares and directorships however, potential conflicts of interest were identified as indicated below.

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SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST – (continued)

. Critical information on job content is not provided in financial

disclosures and as such the PSC had to make certain assumptions based on the principles as outlined. This may have resulted in more potential conflicts of interest being identified than would have been the case had more information on job contents been available.

However, a high percentage of the designated officials identified through the sample (ranging from 45% in 2001/2002 to 72% in 1999/2000) that had shares and directorships could have had potential conflicts of interest.

A possible reason why top management is involved in directorships/shares/partnerships could be that they are looking at ways to improve their financial security. However, the risk is that the more they become involved in these activities, the more they potentially open themselves to being influenced by sources outside of their work environment, thereby putting their departments at risk.

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The Auditor-General provided the PSC with 1581 exception reports. These reports provided an indication of the total number of SMS members who are directors or members in companies and close corporations. The financial disclosure forms of the relevant senior managers for 2003/2004 (the period applicable for the Auditor-General’s report) were assessed to determine if they had disclosed the directorships or partnerships.

The same principles as applied for the assessment of the sample of financial disclosures were used to determine whether potential conflicts of interest existed between the private interests SMS members, identified by the Auditor-General, and their duties as public servants. Based on the analysis, it was found that a total of 835 SMS members are involved in companies which could pose a potential conflict of interest to the State as Employer. This represents 53% of the total number of cases that were analyzed.

SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST – (continued)

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SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST – (continued)NATIONAL DEPARTMENT/PROVINCE

NUMBER OF CASES

POTENTIAL CONFLICTS OF INTEREST

NO POTENTIAL CONFLICTS OF INTEREST

PERCENTAGE POTENTIAL CONFLICTS OF INTEREST

National Departments 840 446 394 53%

Eastern Cape 103 64 39 62%

Free State 49 25 24 51%

Gauteng 186 102 84 55%

Kwazulu-Natal 117 51 66 44%

Limpopo 127 68 59 54%

Mpumalanga 66 22 44 33%

Northern Cape 28 15 13 54%

North West 0 0 0 0

Western Cape 65 42 23 65%

NATIONAL AVERAGE 1581 835 746 53%

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SCRUTINY OF FINANCIAL DISCLOSURES FOR POTENTIAL CONFLICTS OF INTEREST – (continued)

A number of cases were found where the PSC could not come to a conclusion on whether a potential conflict of interest exists. This was due to the fact that not enough information was available on the financial disclosure forms of certain senior managers as well as the fact that not enough information concerning the company was available from the CIPRO database.

The national departments whose officials identified by the Auditor-General had the lowest potential conflicts of interest is the Office of the Public Service Commission (OPSC) with 18%. This is followed by the Department of Home Affairs (25%) and the Department of Foreign Affairs (41%).

Statistics South Africa, with 92%, the Department of Communications with 90% and the Department of Minerals and Energy with 71%, were the departments whose designated officials had the highest percentage potential conflicts of interest.

After assessing the potential conflicts of interest of designated officials identified by the Auditor-General it was found that those officials who have directorships in private companies and close corporations and whose job functions are closely aligned with financial management, safety and security and education pose the highest potential conflicts of interest.

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CHALLENGES The most significant challenge faced by the PSC is that financial disclosures

are not submitted timeously to the PSC. Financial disclosures are predominantly received after the cut-off date of

May of each year impacting negatively on the PSC’s ability to identify conflicts of interest.

Critical information on job content is not provided in financial disclosures and as such the PSC had to make certain assumptions based on the principles as outlined. This may have resulted in more potential conflicts of interest being identified than would have been the case had more information on job contents been available.

The number of designated officials (SMS members) have consistently increased over the period under review from 229 in 1999/2000 to 6434 in 2004/2005.

The growth rate of SMS members together with the higher levels of compliance is creating a challenge for the PSC in that the PSC must increase its human resource capacity geared towards the Financial Disclosure Framework to fulfill its mandate in terms of assessing and identifying potential conflicts of interest.

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RECOMMENDATIONS

Based on its own analysis of the problems faced with the FDF the PSC proposed the following in its report of 2007:• That Heads of Department play a more active role in the management

of the financial disclosures and the identification of potential conflicts of interest;

• That penalties and or fines be imposed for non-compliance with the Framework;

• That an electronic Financial Disclosure Framework be introduced;• That Ethics Officers be appointed in all national and provincial

departments; • That compliance with the Financial Disclosure Framework is linked to

the Performance Agreements of designated officials; and• That the financial disclosure form be amended to ensure that adequate

information is provided for the identification of potential conflicts of interest.

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CONCLUSION

Managing the conflicts of interest of public servants effectively is an important stepping stone to achieving high levels of integrity in the Public Service. Through the management of conflicts of interest, honest public servants are kept honest and the opportunity for corruption to occur is reduced.

The PSCintends to sharpen its role in managing conflicts of interest through the Financial Disclosure Framework for senior managers.

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THANK YOU!