Detectives have now launched an investigation into the controversial $700,000 fee paid by Government to the general contractor of the new secondary school project.

The Royal Gazettehas learned that members of Central CID are carrying out a probe into whether or not contractor Pro-Active Management Systems Ltd. actually paid the $700,000 needed to get a performance bond for the job put in place, which was then reimbursed for by the Ministry of Works and Engineering.

Auditor General Larry Dennis raised serious concerns about the bond (financial guarantee) last year and repeatedly requested that the Ministry provide him with evidence that Pro-Active had paid out the cash before being reimbursed for it. However, he received no receipt and was given little comfort in the authenticity of the bond, so passed the file on to Police in January this year.

Yesterday, Police refused to confirm or deny that the investigation had begun, but a number of sources said the inquiry recently got underway after a delay of several months.

Mr. Dennis, a year ago, raised a number of concerns in his special report on the new $68 million school development, which has run into a number of problems and is expected to open a year behind schedule.

But at the top of the auditor's fears was the performance bond that was required to be put in place by the general contractor who was awarded the job. The bond was to act as a form of insurance cover amounting to ten percent of the overall cost of the project, should it fall drastically behind schedule, go massively over budget, or come to a standstill. The bond was there to safeguard Government against extra costs if the project went awry.

Pro-Active initially had trouble finding a company or bank to put up the bond for the project, as the company was little known and had little experience, particularly on major contracts.

In the end, the Bermuda Industrial Union (BIU), headed by Government MP Derrick Burgess, specifically set up an insurance company, named Union Asset Holdings Ltd., to provide the bond, which if called, could be required to meet demands up to $6.8 million.

Mr. Dennis said Pro-Active was expected to pay the $700,000 premium to UAH to get the bond in place, which the Ministry would then reimburse once it had proof the premium had been paid and the bond was secured.

However, in carrying out his audit on the site, Mr. Dennis revealed the Ministry had never received any proof that the cash had been paid in the first place, but had freely handed over the $700,000.

He said even officers in the Ministry of Works and Engineering had raised concerns about the issue. Mr. Dennis also raised questions about the authenticity of the bond and the ability of UAH to meet demands up to $6.8 million.

And despite several requests, Mr. Dennis also never received a copy of an assessment of UAH, which was supposedly carried out by the Attorney General's Chambers to ascertain that it could meet the demands of the bond, and he also never received the original copy of the bond agreement.

In his report last year on the bond issue, Mr. Dennis said: “My concerns are grave enough that I do not think I should be coy.

“If the $700,000 surety fee has not been paid, Pro-Active has received a $700,000 interest-free injection of public funds for which Government has received no value. Most charitably, I might describe it for now as an interest-free cash advance to help with cash flow problems that was received under false pretences.”

Mr. Dennis said it was common knowledge in the Ministry that evidence of the payment from Pro-Active to the surety was needed before Government reimbursed it. He added: “If the $700,000 surety has not been paid, the premium has not been received by the insurer and the bond is not in effect. This could suggest that the bond was never expected to be called, a suggestion that needs to be dispelled immediately.”

But Premier Alex Scott, who was Works Minister at the time, said there were “absolutely no irregularities” in the payment and said his department had conducted itself entirely appropriately after three different lawyers told The Royal Gazettethat a fraud investigation could ensue if proof of the payment could not be found.

Mr. Scott said: “There is absolutely no irregularity involved. We have conducted ourselves properly, We are quite satisfied with the way we have managed it.”

At the height of the controversy, Mr. Burgess wrote to Mr. Dennis confirming that the premium had been paid by Pro-Active and that the union had assets well in excess of $6.8 million to meet its obligations. But Mr. Dennis said that letter did not provide him with the assurance he required.

Yesterday, Mr. Dennis' audit report for the financial year 2001 to 2002 was released to the House of Assembly, and in it he summarised his findings from the specific audit, particularly with reference to the bond. He said if the BIU's assets were pledged and would be available to meet the bond if required, then his concern over UAH would be mitigated. But he said he was still not satisfied.

He said in his recent report: “In normal circumstances, I might accept the president's assurance as persuasive audit evidence that the fee was paid and the bond is good. However, in view of the events since the issue of the Berkeley report, the president's connections to Government, and legal advice obtained that the bond is not enforceable unless certain conditions have been met, circumstances are far from normal.”

He said satisfactory evidence that the premium had been paid would be a bank statement or proof that a cheque had been issued.

And he said: “Finally, because the audit environment has been so poisoned, I would feel professionally obligated to see up-to-date audited financial statements of the union.”

The last set of annual accounts that the BIU filed with the Registrar General were for 1999.