Cipro collapse?

As well publicised and openly discussed the problems surrounding the Companies and Intellectual Properties Registration Office (Cipro) may be, even more seems to be unknown, either obscured by politicking, incompetence or lack of will to get to the root of the problem. Whatever the forces at play, the one clear loser is the South African economy, which faces potentially dire consequences if this key government agency is allowed to flounder.

It is difficult to ascertain the exact economic impact the functional collapse of Cipro would have, but the initial cracks are already showing. For starters, the dysfunctional registration system is making life impossible for small business owners, who are finding their businesses - without warning - being deregistered from the Cipro database. With this come the complications of frozen bank accounts and the resultant inability to trade as a business.

In March, the South African Institute of Chartered Accountants issued a warning that Cipro`s "paralysis threatens the economy on several fronts, most notably in the inability of companies and close corporations (CCs) to continue operating within the confines of corporate legislation". The institute pointed out that "not only are new companies and CCs unable to obtain the registrations required to commence trading, existing businesses are unable to comply with the laws that require them to register certain corporate events with Cipro."

These problems first surfaced in October last year and Cipro assured businesses that a fix was in the pipeline. The problem, it said, was its outdated IT system, which was in the process of being updated. Few would have guessed then that "fix" - a R153 million contract to install a new end-to-end enterprise content management (ECM) system at the agency - would, in fact, prove to be the proverbial final nail in the coffin of Cipro.

CONTENTIOUS FROM THE START

What happened next is well documented. The ECM contract was awarded in February 2009 to a little-known company called Valor IT, a decision that was immediately challenged by BEE company Mantra Consulting, which called on Cipro to suspend the contract. Mantra alleged that it had worked on the bid with Valor IT and the latter had failed to meet its contractual obligations, which would result in court action. Cipro responded by refusing to pull the plug on the contract, saying the Valor IT-Mantra issue was a mere contractual dispute between the two that would not influence the Cipro ECM implementation.

However, Valor IT`s snub of Mantra, which later emerged to have been to the tune of some R10 million in "consultation fees", was a fateful decision that blew the lid off the festering cesspool that was bubbling under Cipro. The subsequent flow of information about fraudulent activities, irregular dealings and tender-rigging, purportedly emanating from the Mantra Consulting camp, eventually raised several high up red flags, prompting the Department of Trade and Industry (DTI), under whose auspices Cipro falls, to take a closer look.

Trade and industry minister Rob Davies, with pressure from official opposition the Democratic Alliance (DA), called in independent forensic investigators Specialised Services Group (SSG) to conduct an investigation and compile a report on the way the ECM tender was handled. It was at this point that Davies was hailed as the man of the moment; finally, a minister who was serious about stamping out corruption and who could be counted on to clean up the mess at Cipro.

The SSG probe promptly resulted in the suspension of Cipro CEO Keith Sendwe and CIO Michael Twum-Darko in connection tender irregularities, more specifically for rigging the R153 million ECM tender that was awarded to Valor IT. But it emerged that the SSG investigation was not without its own challenges, with several sources, including the DA, publicly citing high-level interference from within the DTI. This interference was said to have extended to ministerial level, with Davies purportedly being pressured to end the investigation and bury any subsequent findings.

While SSG was allowed to finish its investigation, Davies sought legal opinion on keeping a firm lid on the report that was handed to him in May this year, and announced that it would not be released publicly. Even though the full findings of the report may not ever see the light of day, results of an Auditor-General`s report into the tender - concluded at the beginning of the year - did indicate that Valor IT had been paid R56 million in February last year, 10 days after having been awarded the entire contract, when it had dropped off a box of CDs and an invoice at Cipro`s offices. The CDs were meant to have contained software that was needed to develop the ECM system.

In May, Davies commented that this on its own should have raised a red flag. He said steps had been taken to ensure any monies paid would remain in the country. "This was a system that was going to deal with white-collar crime. Its integrity is absolutely fundamental."

The findings of the forensic investigation also prompted Davies to cancel the contract last month, eliciting an immediate legal challenge from Valor IT. Furthermore, Davies announced that Sendwe and Twum-Darko would not only face internal disciplinary action, but possibly also criminal charges.

BUT WHAT ABOUT BUSINESS?

However, in the frenzied spate of legal action surrounding the Cipro debacle - Mantra Consulting earlier this year successfully sued Valor IT for at least some of the outstanding "consultation" fees, and Valor IT frantically applied for urgent interdicts to stop being barred from Cipro`s premises - the core functions of Cipro and the interests of the business community it is meant to serve seem to have fallen by the wayside.

It has now become glaringly obvious that Cipro`s readiness to implement the new Companies Act, to come into effect in October, is a physical impossibility. Work on the new ECM system has stopped and is unlikely to commence before the current Valor IT legal challenge against the minister`s decision is finalised - and this could take months. Should the court uphold the DTI`s decision to pull the plug on the contract - enough prima facia evidence exists to show that this will be the most likely outcome - Cipro will have to go back to the drawing board and put the contract out to tender. Confounding the matter is that Faritec, a strong contender for the original ECM contract, with a bid of R90 million lower than the winning tender from Valor IT, recently liquidated its biggest operating entity. It is thus unlikely that Faritec would be in a position to step in and rescue the situation.

Again, the South African business community is the clear loser. If Cipro fails to meet this deadline, it will not be able to cater for the functions of the new Companies Act, which requires the agency to amend company registration forms that will simplify the process. In addition, the new Act makes provision for changes to electronic processes in terms of name reservations, registration of companies and the compliance regarding accounting officers. A failure to get the systems up and running in time could have disastrous consequences for the economy. New companies may not be able to register, and existing ones could find themselves unable to implement empowerment deals as they cannot change company details. Moreover, investors could decide not to invest in SA, because they may see the company registration process as too cumbersome, unreliable and open to abuse.

Alarmingly, it seems that there is no contingency plan. Last month, Elsab  Conradie, Cipro`s head of communication, marketing and stakeholder relations, confirmed that development of the new IT system has stopped. She said the office is looking at a few options and, once it has decided on a way forward, the DTI would have to sanction its solution. "The sooner we find the best solution, the better."

Cipro is moving into a completely electronic environment, which is a requirement of the new Act, and needs to be ready for when the law comes into being. "We are working very hard to get everything ready," she said. "Cipro`s current systems are legacy systems and, although they have been upgraded, they do not have the capability or integration capacity to cater for the new functions [of the Companies Act]," she conceded.

But it gets even more worrying. The SSG investigation uncovered a link between international terrorism and the fraudulent activities at Cipro. It is understood that various South African security agencies are investigating the possibility that Pakistani terrorists have cashed in on the corruption at Cipro, stealing millions of rands from government to fund international terrorist activities. Minister of police Nathi Mthethwa confirmed that police are looking into the evidence, working closely with the National Intelligence Agency, the South African Secret Service, as well as the US embassy.

The investigation is focused on tax fraud, money laundering, racketeering, organised crime, fraud and financing of international terrorism. A Pakistani national, in custody in Gauteng, is alleged to be involved in the "cloning" of legitimate companies, including the well-documented case of Sun Microsystems, in a scam to divert R144 million in tax refunds from the South African Revenue Service. Five Cipro officials were suspended last year in connection with the case, but that was before the terrorism link was exposed. Investigations are ongoing, but the DTI has thus far been very tight-lipped about this particular probe. This can only have severely negative consequences for the economy, investor confidence and the health of South Africa`s business landscape.

WHERE IS THE MINISTER?

Three months after the SSG forensic probe blew the lid off shenanigans at Cipro, government`s intervention seems to have stalled under the burden of red tape, purported political interference and legal action.

Conspicuously silent is Davies, who was initially hailed by industry observers and political commentators as one of the few ministers in government who could make a difference. However, his credibility has subsequently suffered, as his tough stance on Cipro seems to have garnered little real rewards bar the suspension of the agency`s CEO and CIO. It has been weeks since Davies has made any mention of Cipro whatsoever and this has done little to reassure business.

Sendwe and Twum-Darko were meant to find out what charges they faced at the end of May. However, the DTI now says the legal team has not even finalised the charges, nor could it say when these would be filed, despite the minister announcing to Parliament almost three months ago that the two could be criminally charged.

Despite Davies` earlier assurances, Cipro lies in tatters and the public is still none the wiser as to what steps he has taken, or will take, to clean up the agency. At this point, it would appear that there is no plan, and South African business is skating on dangerously thin ice. A total collapse of Cipro, which now seems imminent, could severely damage the ability to do business in South Africa, with potentially devastating consequences for the economy.