An Australian Mega-Scandal: The 10 Red Flags at Manus

Last week the Australian Financial Review (AFR) published a series of hard-hitting investigative reports into the award of $423 million in security contracts for the Manus Island detention centre – a controversial mechanism used by the Australian government to offshore its widely criticised refugee policy.

The contracts went to Paladin Solutions PNG Ltd, whose principals include Ian Duncan Stewart, and former Australian soldier, come private security contractor, Craig Thrupp.

It is common in the anti-corruption community when studying contracts to look for red flags, which point to heightened risks that a transaction may have been affected by improper or illegal dealings. The more red flags, the higher the risk, and the greater the need for a formal investigation.

And with an especially high priced transaction such as this, in an area of strategic importance for the Australian government (and in particular the Liberal Party, which holds onto government by a thin margin), it must and should come under close scrutiny. There are a whole range of scenarios to be on the watch for.

The most malevolent of which is that the Australian government knowingly awards an inflated contract to a company which it is aware will launder the money and solicit bribes to senior PNG politicians, who in turn will green light this deeply unpopular offshore method for processing asylum seekers. PNGi has no evidence to suggest this was the case here, but the red flags described below certainly show that this scenario cannot be ruled out at this stage

Then there is the possibility that while the Australian government may not explicitly set out to bribe its PNG counterparts using a third party company, it consciously employs a highly opaque and high risk contracting process in the knowledge it will likely pump-prime bribes to PNG decision makers, getting Australia the all important green light (i.e. the see no evil, hear no evil, approach). Again PNGi has no evidence to support this proposition, but the red flags are of such a substantive nature, it is a factual scenario that must be within the purview of the investigative authority appointed to scrutinise this scandal.

At the most benign level, there is the risk that in a bid to keep a lid on a highly sensitive policy mechanism at a time of electoral vulnerability, the Australian government pushed through an opaque and poorly run procurement process, in a bid to secure a contractor, especially one that is more immune to public pressure in Australia.

Given these different potential risks, it is critical contracts such as those awarded to Paladin Solutions are carefully examined for red flags – the more red flags, of a serious nature, the greater the likelihood something nefarious may have occurred.

How does the Paladin Solutions contract stack up?

⚑ Red Flag 1 – Extravagant price 

It is reported that Paladin Solutions PNG Ltd has been paid A$423 million for 22 months work. Although this amount is at first glance obscene, the real red flag lies in the estimated rate of profit.

The AFR estimates that Paladin Solutions’ monthly costs amount to A$3 million. Under the most recent contract they are receiving A$20 million per month from Australia. The industry standard is a 40% profit rate, would indicate A$4.5 million would be the broad market price paid for similar services.

Why is an exorbitant contract price a red flag?

It can denote ‘hidden expenses’ associated with a bidding process, that are paid off the book i.e. bribes.

For example, in the Somare bribery scandal, an American national Philip Doerhman was successfully prosecuted in Singapore for his role in soliciting bribes to the Somare family. Doerhman told police: ‘[T]here were PNG government officials who would demand monies from us before they would do their jobs and hence we need to set aside such contingency funds for such demands for monies from government officials and presently demanding for more and more as we are near sign off, in particular one request for up to USD 5 million by Ambassador Dominic Diya which was reduced to USD 1 million’.

Against this backdrop exceptionally large contract prices can signal that a contractor has built in costs for such ‘contingency funds’. And when contracts are fixed illegally, there is no motivation to submit a competitive bid, so firms paying the bribes are incentivised to inflate their own rate of return. This is a particularly notorious problem in the country’s national health procurement system.

In the case of Paladin Solutions, we have no idea if any illegal payments were made. If a formal investigation is launched, Australian Federal Police will almost certainly be seeking access to the company’s offshore bank records to detect whether anything improper took place.

⚑ Red Flag 2 – Flawed Tender Process

Astonishingly the AFR reports that Paladin was exempted from complying with Commonwealth procurement rules: ‘The [Australian] federal government chose not to run an open tender process for contracts worth $423 million to provide security for refugees on Manus Island, raising more questions about how the thinly capitalised and inexperienced Paladin group was chosen. Government procurement documents show the Home Affairs Department ran a “limited tender” for both contracts won by Paladin, which typically means it was the only party invited to bid’.

The provision of private security services is a pretty standard product these days, even for ‘remote’ locations. Additionally, the Australian civil service is an experienced hand at running open and public tenders in an efficient manner. There is on the face of it no compelling reason why the Australian government would use an opaque method for running a tender of such high value, in a very sensitive policy area.

This is a red flag that the tender has potentially been fixed in an improper or illegal manner.

Our own national courts are replete with evidence how ‘certificates of inexpediency’, which allow government to avoid competitive tenders in emergency situations, have been abused for illegal ends. Hence when we observe governments avoid open, competitive tenders without any compelling reason, the risk of misdealing is amplified.

Once married to the fact that the tender price was well above the industry average, this red flag is screaming high risk to the Australian taxpayer.

⚑ Red Flag 3 – Allegations of Fraud

A former employee of Paladin, retired Major Craig Coleman, is suing Paladin in Australia.

It is reported that Mr Coleman claims that Paladin ‘submitted tender documents that were “fundamentally misleading, inaccurate, incorrect or wrong”. He said address, organisation and company information given to the government was wrong, as was the description of the relationship between the various Paladin entities’.

It is also noted: ‘The statement of claim [submitted by Coleman] also said Paladin had broken PNG immigration law by deploying employees to PNG under “false and deceptive circumstances”. In other documents, it emerged Mr Coleman alleged the company’s PNG arm had made “ex-gratia payments”‘.

While Paladin will argue this is a disgruntled employee making false allegations, whenever an insider source discloses information such as this it is a red flag. How red depends on their credibility and motivation.

From an examination of his digital footprint, Coleman appears to be a much more reputable member of the private security and risk community than say, Thrupp. However, further due diligence would be required to confirm his bona fides as a premium value source.

⚑ Red Flag 4 – Lack of Transparency

The Australian government has refused to disclose essential information about the contracts with Paladin Solutions, claiming it would impact on the bilateral relationship with PNG. A concerned citizen may ask, why would a contract  for a legitimate service, if properly awarded impact on Australia’s relationship with PNG?

Even attempts by Australia’s parliament to acquire the details have been denied.

The AFR reports: ‘The federal government has refused an order from the Senate to release documents on the health, construction and security services for refugees on Manus Island, saying it would “cause damage to Australia’s international relations with Papua New Guinea” for the details of the offshore immigration regime to be made public’.

Australia’s Home Affairs Minister, Peter Dutton, observes: ‘I believe the disclosure of the requested material would, or could reasonably be expected to, cause damage to international relations: specifically, Australia’s relations with Papua New Guinea’.

In PNG the problems that go with a lack of transparency are well known. Despite the legal requirement in PNG for government authorities to publish tender results in the official gazette, they rarely do. This ensures contracts awarded under dubious conditions are never spotted by prying eyes of the anti-corruption community.

That Australia has gone to such extensive efforts to deny information to the public and parliament, is a clear red flag that these contracts potentially contain information, that would reflect poorly on those involved.

⚑ Red Flag 5 – Track Record of the Contractor

Whenever studying a contract awarded under dubious conditions, the first thing an investigator asks is – who are the principals behind the business? What is their track record?

If they have a track record of transparent business dealings, and happy customers, its a good sign. On the other hand, if they are running from failed deals, angry creditors, and litigation, this is a very bad sign.

In the case of Paladin Solutions the key actor is Craig Thrupp. He is a former Australian soldier, who has attempted to monetise his military experience by entering the world of private security.

The AFR observes: ‘The key beneficiary [Craig Thrupp] of a $423 million government contract to provide security for refugees on Manus Island left a string of bad debts and failed contracts across Asia, raising further questions about how the Paladin group won such a lucrative tender’.

This is a really serious red flag.

Then when we turn to Paladin Solutions’ local Director, Kisokau Powaseu, we discover ‘Powaseu Kisokau has been charged with 106 counts of misappropriation and one count of money laundering by the National Fraud And Anti-Corruption Directorate’. The charges relate to $US370,000 taken ‘from the Defence Force Commercial Support Program Trust Account’.

While Powaseu was formally appointed Director in May 2018, as early as 2015 a ‘Melynda Powaseu’ was part of the Paladin Solutions network, serving briefly as Company Secretary in one of its subsidiary. Melynda Powaseu has been the authority appointed by Paladin Solutions to submit documents on its behalf to the IPA. The relationship between Melynda and Kisokau is not clear, but the shared surname denotes a kinship affiliation.

There is circumstantial evidence therefore that at the time Paladin Solutions fortunes took off, following a string of failed deals by its principal, they had formed a relationship with  Powaseu, a prominent former defence force official, currently being investigated for misappropriation and money laundering. This red flag requires clear investigation to determine whether Mr Powaseu engaged in inappropriate political fixing on Paladin’s behalf.

It is sadly not uncommon for failed expatriate businessmen fleeing creditors and the law, to arrive in PNG and make it big.

For example, the Icelandic-Australian businessman, Gudmundur Fridriksson, whose companies have clocked up an astonishing number of rebukes from the Auditor General, Public Accounts Committee and a Commission of Inquiry in PNG, came to the country under a cloud of litigation and investigation that stretched from Hong Kong, to his native Iceland.

Accordingly, when we see a businessmen with Thrupp’s track record, team up with a local executive under investigation for misappropriation, it is a definite red flag, that increases the need for a thorough investigation.

⚑ Red Flag 6 – Corporate Compliance

When evaluating a bid for a lucrative contract, due diligence is the name of the game. We cant just take the bidder’s word for it they are a professional and buoyant outfit, independent inquiries must be made.

The first port of call is the corporate disclosure documents issued by the company to the regulators, in this case the Investment Promotion Authority.

Despite being incorporated in 2010, the first thing that can be observed is that the Paladin Solutions failed to submit annual returns for the first six years of its life, in violation of the Companies Act 1997. Then on 15 June 2017, it submitted a slew of backdated annual returns.

Not only that, the Annual Returns are incomplete and unsigned. This from a company that is winning nearly half a billion in contracts with the Australian government!

No Annual Return has been submitted for 2017.

So far the company has failed to procure an Auditor, now that it is the recipient of hundreds of millions of dollars, it will be incumbent on the company to submit audited annual returns.

Then if we turn to Sunam Security Services Limited, which is a subsidiary of Paladin Solutions things become even more concerning. Rather than submit a backdated Annual Return, even an incomplete and unsigned one, the company instead submitted this one page statement which is in notably garbled english.

When dealing with a dubious outfit such as this, it always pays to confer with the legislation they cite, rather than taking their word that it allows the course of conduct the resolution points to.

We can see this section only permits a change in the form of annual reporting, within certain prescribed limits, nothing more.

The failure of Paladin Solutions to comply with the Companies Act 1997, is a serious red flag. We know in PNG, there is a close correlation between Companies Act violations, and more serious forms of criminality.

We don’t know if that is the case here, but it certainly deserves to be awarded a serious red flag.

⚑ Red Flag 7 – Parent Companies in Opaque Offshore Locations

Paladin Solutions is ultimately owned by an offshore parent company. Initially its parent company was based in Hong Kong, more recently it has moved to Singapore. The parent companies were not only incorporated in these jurisdictions, but were also conducting their banking in these jurisdictions.

Both jurisdictions have been flagged as being highly opaque by the Financial Secrecy Index, collated by the Tax Justice Network. In 2018 Hong Kong and Singapore were designated the 4th and 5th worst jurisdictions respectively, when it comes to corporate and financial transparency.

In Papua New Guinea, Singapore and Hong Kong have been used for a range of nefarious reasons. They are jurisdictions used to channel bribes, and to conduct other illegal activity, such as transfer pricing, where companies artificially shift profits from their PNG operations to outside jurisdictions with lower tax rates.

We don’t know in this instance why an Australian firm, chose Singapore and Hong Kong over Australia. There may be legitimate reasons, but in light of the research and history, it constitutes a red flag for further inquiry.

⚑ Red Flag 8 – Links to Power

Where a company has close links to politically powerful actors this heightens the risk that political power may be used inappropriately for the private benefit of these actors.

In this respect, the AFR has notes that Paladin recently purchased Black Swan, ‘ a company repeatedly forced to deny rumours it has links to the family of Prime Minister Peter O’Neill’. This link at present is pretty weak unless further evidence comes to light.

It also appears that Paladin has partnered with individuals who have strong local influence in Manus Province. For example, a minority shareholder in the Paladin subsidiary, Sunam Security Services, Porou Papu, has been a business partner of Jacob Jumogot, who is the former Governor of Manus.

While a minority shareholder in another Paladin subsidiary, Rodney Pokapin, comes from an influential local family, with previous business links to the current Manus Governor Charlie Benjamin.

Perhaps of most concern is the AFR’s report published today, revealing that Paladin Solutions ‘entered into an agreement with Peren Investment, a company controlled by the brothers of PNG’s parliamentary speaker, Job Pomat. Mr Pomat is the local member for Manus, a key ally of Prime Minister Peter O’Neill and deputy leader of the ruling People’s National Congress’.

To this it may be added, Job Pomat is a business partner in Too Ltd, a company he owns with Polonhou Pokawin. Rodney Pokapin is a minority shareholder in the Pomwan Paladin. If Polonhou and Rodney are related this is another close connection between Job Pomat and Paladin.

While this evidence does not prove any inappropriate dealings between members of the Paladin organisation and political power brokers on Manus. Nevertheless, they are red flags any investigation would want to explore further.

Indeed, in the aforementioned Somare bribery scandal, the Chinese contractor soliciting the bribes awarded a lucrative subcontract to a firm part owned by Sir Michael’s son – a timely reminder of why this is a red flag.

⚑ Red Flag 9 – No Proper Corporate Headquarter

According to the AFR, one Paladin corporate entity is ‘registered to a beach shack on Kangaroo Island and another to a post box in Singapore’.

One would expect that any company winning half a billion in security contracts would have a corporate headquarters, with the usual trimmings – a front office, human resources, public relations, etc.

When The Australian newspaper attempted to visit their office  in the town of Lorengau back in late 2017 it was observed: ‘The business that recently scored a hefty deal to protect the asylum-seekers boasts no signage at its tiny two-room nondescript wooden hut on a small muddy plot of land just off the main road into the town of Lorengau. And the only indication the hut is associated with security is a photocopied piece of paper stuck crookedly on the mouldy front door saying: “Pre-entry test for static guards and drivers are now closed”‘.

Why is this a red flag? We have seen in PNG that fraudulent and corrupt contracts often involve companies set up overnight, with no assets or resources of note. A prominent examples was Eremas Wartoto’s Travel Air, which was illegally awarded contracts before it was even incorporated.

That Paladin did not have the corporate assets we would expect is not in itself evidence of wrongdoing. But given they were awarded a massive contract, through an opaque, limited tender process, it certainly raises the risk level observed here.

⚑ Red Flag 10 – A Counterintuitive Sequence of Events

Although  the Australian civil service is not without criticism, it does have a seemingly well evidenced record of professionalism and skill.

It is, therefore, very difficult to understand how a procurement process and subsequent contracts, with so many red flags were not identified at an early stage in the process and remedied.

The fact it wasn’t remedied, indicates a higher risk of political interference at a Ministerial level, which prevented concerns raised by the civil service from being actioned.

Conclusion

So to summarise we have a company set up by a principal with a record of ‘bad debts and failed contracts’, using offshore holding vehicles in secrecy havens, led by a local executive currently being investigated for misappropriation.

The contracts were awarded under opaque conditions, without competitive tender. The price paid are well above the sector average. The contracts were awarded despite the company’s failure to adhere to local companies law, and despite the fact there was no appropriate headquarters for the organisation. A seemingly credible ex-employee alleges the company used fraud and made ex-gratia payments. While most recently links have been identified between Paladin and senior political power brokers in Manus Province.

Since the awards were made the Australian government have used all their powers to avoid supplying parliament or the public with details on the contract.

Given this involves half a billion in Australian taxpayer money, nothing short of a full and open inquiry is needed, in tandem with a thorough Australian Federal Police investigation.