An internal audit of the contract between the Home Office and Wackenhut (UK) Ltd for the operation of industrial functions of HM Prison Coldingley in South East England, has discovered mismanagement, inappropriate accounting, and unauthorised loans and payments to the company (see PPRI # 23, 25 and 26).

    The report was finalised in December 1998. It has been circulated within the Prison Service but it has not been made public.  The report, with the pages marked ‘Restricted - Audit’ has been seen by PPRI. It lists more than 50 points for further action and/or investigation.

    The Director General of the Prison Service has launched an inquiry into whether disciplinary and/or criminal proceedings should be taken against any Prison Service senior management.

    Although the auditors have recommended pursuing Wackenhut for the recovery of hundreds of thousands of pounds, it is not clear whether  the company has been penalised for breaching the terms of the contract.

The concession agreement

   Under the contract - referred to as the concession agreement - Wackenhut was to provide work for 155 prisoners each week and to pay all the costs associated with running the concession plus various management charges to be made by the Prison Service. The company was also required to share profits with the Prison Service and make good any losses at the end of each  financial year to 31 March.

What the auditors found:

1. Concerns about management

                The auditors were not satisfied with the level of management control exercised over the concession agreement and, based on their findings, they considered that “an overall control risk assurance rating of deficient is warranted in terms of compliance with procedures laid down  in the Concession Agreement and general Prison Service and Government Accounting (PSGA) principles.”

                They stated that “there are sufficient concerns highlighted by the findings on the management of the concession agreement to require a review of the adequacy of the initial contract letting procedures.”

                Noting that certain aspects of the mismanagement of the concession agreement “appear to be due to the lack of required expertise” the auditors also stated that [Coldingley] management showed a “total disregard for many of the fundamental tenets of government accounting and Prison Service financial policy.”

                They said that there was “sufficient evidence to warrant consideration of disciplinary action” with regard to performance of duties and general misconduct.

n As Wackenhut (UK) Ltd (WUK) experienced cash flow problems, a credit note was issued in May 1998 for £105,000 against utilities invoices - effectively writing off the debt to the Prison Service. “We can only conclude that the action taken was a deliberate attempt to circumvent control systems. The credit note was raised to alleviate WUK’s responsibility to make payment.”

n A loan of £105,000 was paid to the company on 21 April 1998 for the purchase of ‘materials’.  The auditors found that two repayments totalling £52,500 had been made and that the balance of £52,500 was not shown as a debtor on the internal accounting system. “Payment of the £52,500 is requested immediately ... the amount of interest not charged on the loan to be calculated ... WUK should then be invoiced for the interest due or write off action taken if appropriate.”

nThe auditors also found “ ... no clause in the concession agreement requiring/allowing the payment of loans.”

nHM Prison Coldingley’s records showed a debtor figure of £302,700 for WUK. “We estimate the true figure was £472,200 as at 30 September 1998.” This included charges to 30 September 1998 and the outstanding loan of £52,500.

n Wackenhut had been undercharged £14,000 for utilities and oil. The company is to be invoiced for these costs.

n Charges levied by HM Prison Coldingley had not increased in line with the Retail Price Index (RPI)  as stated in the concession agreement. WUK should be invoiced for £1,700 to account for the increase.

n At the beginning of the contract, stocks valued at £452,600 were transferred to WUK at nil cost. The auditors stated that “if a decision is made to terminate the concession agreement then the need to reclaim the amount of £452,600 plus RPI increase ... must be followed up.”

2. Wackenhut’s accounts

                The concession agreement required WUK to complete audited financial statements and monthly statements in a prescribed format.  The auditors revealed that “these have never been completed by WUK. The only accounts available are the monthly management accounts which ... detail a loss of £338,700 for the ten month period ending 31 August 1998.”

                On reviewing the company’s monthly management accounts, the auditors raised the following concerns:

nAn item of £45,200 for depreciation was “not borne out by the number of assets our review found to have been acquired by WUK since the commencement of the agreement. WUK provided a hand written breakdown of the depreciation charge which includes £40,200 for the amortisation of linen. The inclusion of these charges is not detailed in the concession agreement and there is no documentary evidence of prior agreement of the charges with the [prison] Governor.”

n An item for ‘Establishment Overhead’ of £188,000 represented “ ... a  re-charge of WUK headquarters allocated costs. This includes £10,900 bank charges, £90,000 salaries and £39,000 for temporary/contract staff. There is no documentary evidence of prior agreement of these charges with the Governor.”

n Of the £379,200 to be charged by HM Prison Coldingley, “this is the amount accrued for in the WUK management accounts although only £80,600 of the charges have been paid.”

n “The allocation and amount of these charges have not been formally agreed. We are therefore unable to verify their reasonableness. Before the inclusion of these items the concession shows a net profit of £273,800.”

    The auditors recommended that audited financial statements be completed for the concession for the period to 31 March 1998. Also “... in view of the lack of payment by WUK for debts due to the Prison Service, the financial health of the parent company should also be checked.”

n The annual amount payable under the plant and equipment maintenance agreement was reduced from £60,000 to £25,000 per annum from 17 August 1998 due to WUK employing their own engineer in the laundry. “The basis of the new charge has not been quantified and the concession agreement has not been amended.”

n “Losses for the year ended 31 March 1998 should have been made good by WUK but have been carried forward in the management accounts and no payment has been made ... to make good these losses.” The auditors recommended that the losses should be made good.

n The company was supposed to provide training for the prisoners: this was in fact provided jointly by HMP Coldingley’s Education Department and the company. An invoice for £4,500 was paid by HMP Coldingley in March 1998 for materials for NVQ training but the Prison Service has not been reimbursed for the training costs associated  with the concession. The auditors recommended that “recovery of £4,500 expended on NVQ materials for inmate training is sought from WUK.”

3. Prisoners’ earnings

    Despite an agreed structure for prisoners’ weekly earnings, the auditors recommended that “the structure of the bonus scheme ... is analysed in the light of the high level of bonuses payable against the background of the current loss making position of the concession.”

4. Staff pensions

     WUK was required to provide a pension scheme for staff who transferred from the Prison Service. It was to be “broadly comparable” to their former scheme.

n The auditors noted monthly payments to a pension provider but stated that “a copy of the actual pension trust deed was requested from WUK but has not been provided so we are unable to give 100 per cent assurance that the scheme has been set up.” They recommended that “a copy of the actual pension trust deed is obtained from WUK.”

5. Other issues

      Other concerns raised included improper payments to WUK, unauthorised amendments to the concession agreement and weaknesses in internal market sales invoicing.

n Two examples of improper payments by the Prison Service were £5,400 for a locker refurbishment to meet health and safety requirements and £5,500 for purchasing capital equipment. Both of these costs should have been borne by the company. The auditors recommended seeking reimbursement of £10,900 from WUK but  “if the amounts cannot be recovered then write-off action should be taken.”

n The auditors became aware that a loan and prepayments were viewed as amendments to the contract. But they “ ... found no formal clauses in the concession agreement for these variations. It is our opinion that none of these items are bona fide amendments ...”

n Background to the audit

Why contracting out?

    The original argument for privatising the industrial functions - laundry services, sign making and engineering - at HM Prison Coldingley was that this was supposedly the only financially viable strategy to secure future operations. The audit report referred to Prison Service correspondence which stated that, if kept in-house, the industries at Coldingley were expected to make losses of £250,000 per annum.

    In July 1997, in a letter to the Prison Reform Trust, Mr John Smith the [then] Governor of the prison explained that contracting out was necessary due to the: lack of capital to improve equipment; lack of working capital to fund expansion of activity; lack of finance to support marketing and sales activity and lack of finance for design and product development.

    Mr Smith noted that “ ... in some part, the rigidity of public sector rules on finance and personnel undermined the establishment of a commercial culture which was necessary if Coldingley industries are to be successful, both in business and regime training terms.”

      He also stated that: “In view of the long term inability of the public sector to resolve these problems the inevitable and probably the only solution is for much closer involvement of the commercial sector ... if we want prisoners to be given the opportunity to work then we need somehow to finance it.”

Concession awarded without competition

    Following lengthy negotiations between the prison’s Governor, the Prison Service and Wackenhut, a concession was granted to the company. The contract was unusual in that it was awarded without a tendering process.

    Trade unions representing the staff working at Coldingley were consulted about the proposal but the financial details of the contract were kept secret. The unions failed to convince the Prison Service and the Government that the scheme was deeply flawed and contravened an International Labour Organisation (ILO) convention on prison labour.

    Wackenhut’s contract commenced on 1 November 1997 for an initial period of five years with a further possible extension for a maximum of four years.

    In April 1998, the unions published A Future for Prison Service Regimes and Activities, an alternative plan for the future of prison industries. It concluded: “A successful implementation of the ideas contained in this paper negates the need for the Coldingley privatisation. We would therefore expect that the Coldingley/Wackenhut contract be revisited, and the industries and the staff returned in full to the Prison Service.”

    Eight months after Wackenhut started, a researcher commissioned by the Home Office to evaluate the project  had her contract terminated after the preliminary findings of her report - which raised concerns about possible irregularities - were leaked to the press.

    The internal audit was carried out between 20 October and 17 November 1998.

Fraudster in the wings

      In its zeal to hand over entire prison wings to an American based religious community called Kairos-APAC Trust, the Prison Service has placed its faith in the organisation’s UK co-ordinator, who has more than 70  criminal convictions for fraud and deception since 1973.

   Mr Ken Jones has served prison sentences in Britain, Canada and the US, where government officials regarded him as a “danger to society”. He is barred from living in the US. 

    Kairos is “an intense course in leadership in Christian values and teachings” and claims to have had a significant impact on reoffending rates in the US (see PPRI #5).

    Kairos runs wings at HM Prison Coldingley (see above) and HM Prison The Verne, in southern England. Mr Jones has recently been negotiating with the Prison Service for Kairos to expand into other prisons.

    Police in South Wales told the Independent recently that “there is documentation throughout Jones’ criminal history of him being involved in church affairs and complaints being made over the administration of accounts connected with these religious groups.”  Mr Jones claims that his days as a fraudster are over.