Agenda item

Statutory Report under Sections 114 and 114a

 

The Chief Finance Officer of the Council, appointed under S.151 of the Local Government Act 1972, issued a formal report to members of the Council on 23 May 2022. Legislation requires the County Council formally to consider the report within 21 days of it being sent to members. For a Council to receive such a report is very unusual and plainly a matter of great significance.

Statutory Report under Sections 114 and 114a

 

The Chief Finance Officer of the Council, appointed under S.151 of the Local Government Act 1972, issued a formal report to members of the Council on 23 May 2022. Legislation required the County Council formally to consider the report within 21 days of it being sent to members. For a Council to receive such a report was very unusual and plainly a matter of great significance.

 

The purpose of the report was to formally place the Chief Finance Officer’s report before the Council and to invite the Council to accept its contents and recommendations. The statutory report was attached at Appendix 1. A number of additional appendices had been circulated to members as follows:-

 

·       Report to Cabinet meeting of 7 June 2022 (App D)

·       Draft resolutions of Cabinet dated 7 June 2022 (App E)

·       Letter from Chief Executive to all members dated 6 June 2022 (App F)

·       Email from S151 Officer to External Auditors dated 8 November 2021 (App F)

·       Letter from Chief Executive to S151 Officer dated 13 May 2022 (App F)

·       Supplemental advice from Nick Giffin QC dated 7 June 2022 (App G)

 

Councillor Wearmouth made a brief statement about the matter. The serious failures in governance had to be addressed and any appropriate remedial action taken. He welcomed the report and thanked Mrs Willis and her team for their hard work and meeting the challenges the situation had presented. He was determined that the issues were addressed and steps taken to ensure it was never repeated. He also reported back on the outcome of Cabinet’s deliberations the previous day on the matter.

 

The S151 Officer detailed the key points of the report for members. She advised members that a further letter had been recently circulated to all members from the Chief Executive where she made a number of additional points. Nothing in this changed her view regarding the legal position. The limit of her responsibility was to inform members that in her opinion the Council had incurred unlawful expenditure. Members had been provided with a copy of the Chief Executive’s letter and supplementary advice from Nigel Giffin QC. In his view, there was nothing in the Chief Executive’s letter of 6 June which altered his view .

 

The S151 Officer responded to questions which had been raised with her regarding the Nick Grubeck advice and why she had changed her view on the legal position opinion. She was very clear to members that she had not in fact done this as he not provided a formal written opinion. He had been asked during a conference call if there were any other powers the Council could rely on to undertake this activity. He had outlined a potential argument which she had shared with the external auditor, who did not feel that it would pass muster. Therefore a full legal opinion had been commissioned from Nigel Giffin.

 

Regarding questions about how much money the international company had made, this was very difficult due to incomplete records, but the best guess she could make based on partial records was in the region of £800,000-£900,000.

 

A number of members raised questions as follows:-

 

·       Councillor Dickinson sought confirmation that members of the EAC could take part. He also asked with regard to recommendation 6 how this could relate to a member, and how extensive the investigation was likely to be and who would be involved. How much would the investigation cost bearing in mind that no money had been lost and money had been made.

·       Councillor Kennedy asked if it was £200,000 in international allowance which had been paid, what the QC advice had cost and which councillors had failed in their responsibilities.

·       Councillor Reid asked if the issue had been lack of paperwork or had it been deliberate.

 

The Monitoring Officer confirmed that the EAC did not have a remit regarding member conduct however she had suggested that it be looked at in total by a group of members looking at all the facts. Part of the investigation’s terms of reference would be to consider whether there had been a breach of the code of conduct. If there had, it would need to be considered by the Standards Committee.

 

The S151 Officer advised that she had suggested that there be an investigation into the international trading under the auspices of the Audit Committee. The Deputy Chief Executive would draw up the terms of reference for the Audit Committee to agree. It was important that the investigation was independent and that the facts were established even if the issue was now a historic one. She did not know what the QC advice had cost but would get the figure for Councillor Dickinson.

 

Pension contributions had been paid on the £200,000 figure by both the Chief Executive and NCC. The QCs advice was that if it was unlawful then it cannot have been pensionable and work would have to be done to unpick all of that. It would affect her pension entitlement as well as any strain that would fall on the Council in any negotiated settlement. This work was already in hand with Tyne and Wear Pension Fund and she would report back on it.

 

Regarding the paperwork, this was difficult to comment on but there were some lax processes and controls and some were totally absent. If there was any more to it than that, she could not say.

 

·       Councillor Dale asked if Audit Committee could look at this.

·       Councillor Bawn sought confirmation that legal privilege had been waived in respect of Appendix G and asked whether the Council would be pursuing recovery of costs/payments. Reassurances were needed that the EAC process would be properly followed.

·       Councillor Hill asked if the S151 Officer had been aware that in 2020-21 the external auditor had said this needed to be regularised and put into a limited company. Would the investigation look at why there had been resistance from the Cabinet at the time to implement that arrangement? She also asked if the unlawful set up meant that all expenditure was unlawful including member expenses.

 

The S151 Officer responded that the recommendation to the EAC was not in her report but she accepted the point regarding the need to arrive at a balanced judgement taking into account value for money and the wider public interest. Further legal advice had been commissioned regarding the recovery of the allowance. There were a range of options open and lots of factors to take into account in making that decision. It would be for the Audit Committee to agree the terms of reference and any specific issues to be included.

 

The unlawful set up did not mean that all expenditure was unlawful. The Council should have taken a proper decision, a decision had not been delegated and it didn’t comply with the pay policy statement.

 

·       Councillor Cessford asked whether any more S114 reports were likely.

·       Councillor Bridgett hoped that if the EAC did make recommendations then the substantial backlog of complaints for Standards Committee would be dealt with first. He also asked if the full amount paid by the Chinese and other partners had been put on the risk register because if it had been illegal there could be potential for them to ask for their money back. He also asked for further information regarding the detail of para 7.7 of the report.

·       Councillor J. Watson asked why proper records had not been kept and whose responsibility had it been to ensure that they were.

 

The S151 Officer replied that she did not know if further S114 reports would be issued as she was still looking at other matters including two exit payments paid to senior officers. There were recommendations in the report asking members to note that she was still looking at issues and actions she had put in train. She had asked officers to look at all payments over £100,000 for the last two years but would go back as far as she needed to. Nigel Giffin was of the view that any claim to recover payments made would be highly unlikely to succeed. The records issue would be a matter for the investigation but there had been a failure in process. It was primarily the responsibility of officers to ensure that process was followed properly.

The Monitoring Officer added that the EAC would decide what it did and what it looked at in terms of its investigation. Regarding any standards or code of conduct matters, it was for Standards Committee to adhere to the locally agreed protocols.

 

·       Councillor Jackson asked if the S151 Officer had the records of the questions from Cabinet members to officers on this and on the whistleblowing allegations from himself and two Cabinet members about the potential illegal activity.

·       Councillor Ball asked whether the poor record keeping could be repeated elsewhere.

·       Councillor Oliver commented that the former Deputy Chief Executive had advised him that if former officers had been found guilty of gross misconduct then the Council had a duty to report it to their new employer. He asked if this would be done if it had been found to be correct.

 

The S151 Officer advised that she was aware of the whistleblowing issues which were relevant to her considerations. The record keeping failures were those of the Council, not the company.

 

The Monitoring Officer added that it would not be possible to take disciplinary action against a former member of staff but in certain circumstances, matters could be referred to their professional regulator, the Police or their employer.

 

·       Councillor Robinson sought confirmation that there was still £700,000 sitting in an inert company.

·       Councillor Riddle asked if the best estimate of profit took into account officer time and travel/subsistence costs.

·       Councillor Murphy asked what the role of the Council’s own legal team had been before external support had been brought in which had allowed this to happen. Was there a need to expand the legal team?

 

The S151 Officer responded that £300,000 from the estimated profit had been used as start up capital for NIC last year. £800,000 was the best guess up to 31 March 2021 and it did include travel and subsistence costs but it had not included the fuller picture on officer time spent. Regarding the role of the legal team, the practice had developed of bypassing the legal team and the MO so there was no oversight of what was being done. This wasn’t a satisfactory position.

 

·       Councillor Ferguson asked if the failure in process was due to no policies being in place, or poor policies, or polices not being followed.

·       Councillor Wearmouth commented that there had been a number of warning flags raised during the process and lots about unlawful activity. He asked if there had been earlier instances where concerns had been raised by the MO or S151 Officer.

·       Councillor Kennedy asked if the tax authorities had been alerted about the failures in record keeping.

 

The S151 Officer responded that regarding the process, it was not just about the policies though some were in place and some were wrong. It was also about how decisions had been taken and recorded. There had been no formal decision or advice which was why she could not respond to Councillor Wearmouth’s question either. She did not believe there was any tax liability as the activity had not been carried out by a company and the Council was not liable for corporation tax. The Council may want to consider making a voluntary payment in the amount which would have been due. She would confirm the position with HMRC.

 

Councillor Wearmouth moved the report’s recommendations which was seconded by the Leader.

 

Councillor Reid felt there was a need to learn lessons from this as it should never have happened. The priority should be to get out completely and concentrate on Northumberland doing business. He asked what the Chief Executive had done to earn the allowance and what work had been involved.

 

Councillor Dale urged members to look forward and get on with the work which needed to be done. Breaches of the Data Protection Act needed to be looked at which included the accounts for International. Payments made to officers were included in the Council’s annual accounts and members should take notice of that and highlight if they had any concerns. She thanked Mrs Willis for her work and urged members to work together and keep politics out.

 

Councillor Bridgett commented that when legal advice was sought, then members should know what was being asked in the first place as this was crucial.

 

Councillor Jackson welcomed the fact that details of the Council’s international business were now coming out. In August 2020 he made a formal whistleblowing complaint to the Council’s MO, to the external auditor and to Northumbria Police as he been convinced that the operation was acting unlawfully. Officers had a duty to ensure good governance and that the Council acted lawfully, they were the experts. He felt members had been let down by the Statutory Officers of the time. Council officers had been asked to operate this business in a company both in 2017 and 2018. Officers had promised income of around £2m pa which would have supported services. It was his view that the Council had actually incurred significant losses in the first couple of years and that was why a company couldn’t be created as it would have been insolvent from the start. He felt that the failures of process were deliberate and should be investigated. All members had a right to information and Cabinet members had been denied the information they had asked for by officers acting together. Finally, he did not recognise any of the comments made in the Chief Executive’s letter regarding the allowance and references to a meeting in county hall on 31 October 2017 were incorrect as he had been in London that day.

 

Councillor Riddle commented it was insulting to suggest that members had been asleep at the wheel on this issue. He had evidence that Cabinet members had consistently asked for financial information about the company. Members had been told to destroy the spreadsheet which had been leaked under data protection but the public interest was not being taken into account. He felt that a proper forensic investigation was needed.

 

Councillor Oliver commented that what members had heard already was just the tip of the iceberg. He became a Cabinet member in 2017 when the company was already in existence and for 4 years had struggled to get any information on it. Members and officers had been attacked for trying to get to the truth and the Council’s auditors had had serious concerns about the business and the fact that they had still not signed off the Council’s VFM statements for the 2019-20 and 20-21 accounts was a clear sign that all was not well. Concerns had been consistently raised by senior officers for a number of years and any questions from members about the business had been met with attacks. Members had been deliberately misled and good officers raising concerns about this business had been driven out of the Council and more should have been done to protect them. He hoped the officers who had been involved in the business who had now left would be held to account. Cabinet had been given presentations on the business but with no meaningful financial information and he was very sceptical that any money had actually been made. What was clear was that there had been substantial travel costs as these were in the Council’s accounts. The £40,000 pa allowance was unlawful because it had not been properly authorised and the story to justify it kept changing. This represented a 40% uplift on an already large salary. There were three basic questions to be answered – if there had been unlawful activity would people be held to account and would there be proper disciplinary action? If money had been paid unlawfully, would the Council take action to recover it and if there had been illegal activity then would referrals be made to the Police, and would the Council consider civil action for activity that did not meet the criminal threshold?

 

Councillor Dickinson remarked on the number of prepared statements from members and the accusations being levelled against officers without investigation. Members were being asked to approve an investigation so the facts could be established. He welcomed the report’s recommendations and was dismayed that members had already disregarded Mr Caller’s recommendations regarding standards of behaviour and treating people with respect by throwing out allegations when officers were not present to defend themselves.

 

The Leader commented that when he had asked for the governance review he had known that he was taking a risk in terms of what it would say and the reaction from members. The report had shown many positives for the Authority and he called on all members to work together to tackle the issues at hand.

 

RESOLVED that:-

 

(a)      the Statutory Report of the Chief Finance Officer made under S114 of the Local Government Finance Act 1988 dated 23rd May 2022 be received;

 

(b)      Council agree the contents of the Statutory Report addressed to the Council under S.114 (in relation to the non-executive functions of the Council);

 

(c)      Council note the resolutions of the Cabinet at its meeting on 7 June 2022 in relation to those matters subject to a Statutory Report under S.114A of the Local Government Finance Act 1988;

 

(d)      the recommendations to the County Council set out paragraph 6.2 of the Statutory Report dated the 23^rd May 2022 be agreed;

 

(e)      a meeting of the Staff and Appointments Committee be convened to take place within 14 days, to consider the contents of the Statutory Report in relation to the payment of the International Allowance and the matters referred to it in the recommendations of the Chief Finance Officer; and

 

(f)       a meeting of the Employment (Appeals) Committee (EAC) be convened to take place within 14 days, to commence consideration of who knew what, when and whether any grounds exist to take disciplinary, capability or other action in relation to any officer or former officer of the Council, or whether there are circumstances relating to Elected Members to be referred for consideration under the Council’s Code of Conduct for Members arising from the circumstances set out in the Statutory Report.