Declassified forensic audit report suggests RM890m loss from LCS project to Boustead Heavy Industries

KUALA LUMPUR, Aug 23 — Boustead Heavy Industries Corp Bhd (BHIC) could face potential losses of RM890 million due to double claims, dummy payments and overlapping Letters of Award (LOAs), according to a forensic audit report on the littoral combat ship (LCS) project declassified last night.

Now available online, the forensic audit report estimated that BHIC had already lost RM23.37 million due to alleged dummy payments made to three companies for non-existing technical services related to second generation patrol vessels (SGPV) from 2011 to 2012.

It said the companies had provided false addresses on their invoices and the payment was diverted elsewhere.

The declassified forensic audit report named the companies as Setaria Holding Ltd, Sousmarin Armada Ltd, and JSD Corporation Pte Ltd, which has a Singapore address.

The forensic audit report said 10 separate payments amounting to RM13.74 million were made to Setaria Holding while four payments totalling RM8.26 million were made to Sousmarin Armada Ltd and two payments totalling RM1.36 million were made to JSD.

The forensic audit report also noted that that there is a company in Malaysia that shares a similar name to the second company, called Sousmarin Armada Sdn Bhd, but that it was dissolved in 2012.

The director of Sousmarin Armada Sdn Bhd is one Zainab Mohd Salleh, who is involved with Alizes Marine Ltd and its offshore companies in Malta and Labuan.

“One of such companies belonged to the same person who was also involved in Alizes Marine (Ltd). The entire money released for Alizes Marine was suspected to be received by a company registered in Labuan.”

The forensic audit report further said that overlapping LOAs were issued in favour of Contraves Electrodynamics Sdn Bhd (CED) in April 2012 for Boustead Integrated Technology Centre (BIT), which amounted to RM305 million.

The forensic report report noted that the cost of this BIT was already incorporated in the original RM898 million LOA issued by Boustead Naval Shipyard Sdn Bhd (BNS) for the combat management system to Contraves Advanced Devices Sdn Bhd (CAD).

The RM898 million LOA, together with another RM287 million, which was also for a combat management system, was reassigned from CAD to CED and endorsed by BHIC managing director Tan Sri Ahmad Ramli Mohd Noor on behalf of BNS on April 9, 2012.

BHIC also incurred an estimated loss of RM537 million due to double claims for the same services with different nomenclature related to services costs and combat system integration, which was confirmed by the company’s new chief executive officer Azhar Jumaat.

“During our review and discussion with Azhar, we noted that RM1.185 billion for combat management system, several components amounting to RM537 million approximately appeared as a duplicate with different nomenclatures for the same component. One should note that the management of BNS agreed and issued LOAs, which directly impacted the whole LCS programme,” the forensic audit report said.

The forensic audit report also said BHIC could face another potential loss of RM4.58 million due to additional variation orders issued in favour of IHC Metalix BV for Mill Certificate during 2017, despite its cost being part of the original request for quotation.

There is also a potential loss of RM13.49 million due to change in currency from ringgit to Euros for LOAs issued in favour of CAD for main surveillance radar and towed array sonar in 2013.

The currency of the LOAs was changed without any written request from CAD or any discussion in the board meeting of BNS, the forensic audit report said.

It also suggested another possible loss of RM6.78 million to Boustead Penang Shipyard due to the reorder of 23 non-delivered items by Alizes Marine.

Both CAD and CED are 51 per cent-controlled by BHIC, with the other 49 per cent held by German outfit Rheinmetall Air Defence AG.

BNS had appointed both CAD and CED to buy equipment from the original equipment manufacturer, which caused acquisition costs to swell several times.

As of 2018, BNS' debt to the original equipment manufacturer stood at RM801 million, while it owed RM956 million to financial institutions.

The report also found that CAD and CED had charged a mark-up of approximately RM180 million for 10 LOAs.

In the 10 LOAs that were marked up, BNS issued two LOAs to CAD as an intermediary for RM1.185 billion, which made up of RM898 million and RM287 million respectively.

The LOAs reflects approximately a three-fold increase against the value of the LOA issued by CEO to DCNS Naval group at RM397 million.

The declassified forensic news report said that in a review of CAD meeting minutes dated October 14, 2014, it was found that the management of CAD was disappointed with DCNS on the progress of the combat management systems (CMS), as auditors believed the system was underdeveloped.

“The non-performance of DCNS and an apparent unwillingness to meet its contractual obligations posed a significant risk to the LCS programme,” the forensic audit report read.

Another meeting by BHIC’s group core committee was subsequently held on Oct 15, 2014, which highlighted serious shortcomings in the execution of the CMS LOA by DCNS.

“However, we did not find any corrective actions taken by the management of BHIC till 2014.” The forensic audit report also found a common anomaly among all the LOAs issued to CAD and CED and several original equipment manufacturers — most of the LOAs were issued before BNS and the Defence Ministry had even signed any contract.

“It appeared abnormal, as several variables pertaining to the contracts had not materialised since negotiations and discussions on technical issues were ongoing during this period.

“The signing of LOA without being certain about the exact requirement proved expensive and fatal to monitor progress milestones,” the forensic audit report read.

At the same time, several weaknesses were found in the preparations of LOAs because they were not vetted by the BNS group legal department before it was issued to suppliers.

“During our review of the BHIC board meeting dated May 14, 2014, Tan Sri Ahmad Ramli Mohd Nor stated that all the LCS contracts were reviewed by competent external lawyers.

“However, we did not find any report/document to confirm that external lawyers were engaged by the management of BNS.

“It was unusual to note that despite having an internal legal department, Ahmad Ramli chose to engage external lawyers to review the contracts,” the forensic audit report said.