Three men have been arrested over an alleged fraud that cost the publically-funded Bermuda Hospitals Board (BHB) almost $1 million.

The news emerged yesterday when the BHB's 2007-2008 annual report was published. This newspaper understands the men, who were doing work for the BHB, were arrested on Tuesday.

A press release from the BHB said: "The delay in publishing this annual report was due to an extensive investigation of an extraordinary item about a capital project renovation at MWI (the Mid-Atlantic Wellness Institute) which relates to a significant renovation of Fairview Court. This project was initiated at the end of 2007.

"Following concerns regarding the management of the project in 2008, BHB undertook its own internal investigations and an independent review by a quantity surveyor, and a staff member was terminated. Details were immediately forwarded to the Auditor General for a full financial investigation and to the Police for potential fraud.

"A charge of $950,000 has been recorded against income as an extraordinary loss for the year ended 31 March 2008, that represents the difference between the estimated fair value of the assets and the amounts capitalised by BHB. A Police investigation has led to three arrests, although the case has yet to go before the courts so BHB is unable to comment further. However, once legal proceedings are complete, BHB will seek financial restitution."

A hospital spokeswoman later explained: "The statement is how much over fair value was paid, and the staff member was involved in the management of the project."

She declined to give any further information.

A Police spokesman said: "Three individuals, a 55-year-old Paget man, a 43-year-old Paget man and a 39-year-old Pembroke man, have been arrested in relation to a complaint made by the Bermuda Hospitals Board.

"All three individuals have now been released on Police bail. The BHB's complaint is the subject of an ongoing investigation and therefore no further information will be released at this time."

Fairview Court is a building on the MWI campus comprising of three wards for people with learning disabilities. It was shut down in December 2007 because it needed renovation, and the project began in 2008.

BHB's chief executive officer, David Hill, said: "We have many examples of well-run projects that have been run on-budget and on-time, such as the Lamb Foggo Urgent Care Centre which opened last year, the new Child and Adolescent Services Facility at MWI that opened in 2008 and the Intensive Care Unit in KEMH.

"We were therefore obviously very disappointed by the management of the Fairview Court project in the initial phase of the project. We expect the highest level of due diligence with our projects and internal controls have increased even further since this case came to light. We will not shy away from full investigations, full disclosure and have zero tolerance where there is a proven violation of policy."

He added that there was a delay in the Fairview Court renovation while investigations took place, but it's expected to be completed later this summer. The project has involved roof repairs, mould remediation, as well as the replacement of heating, ventilation, air conditioning, electrical and fire suppression systems.

According to Mr. Hill, the cost of the project to date is about $6 million, $4 million of which was paid by Government grant. The Bermuda Hospitals Board, which is a publically-funded body, is covering the balance.

The Annual Report is a complete review of the 2007-8 year, along with fully audited financials. A surplus of just over $6 million was recorded, and there was an additional actuarial adjustment of $9.2 million relating to future employee benefits, mostly health insurance. There was a final operating loss of $4.1 million.

According to the press statement, while the 2008-9 financials are still awaiting audit sign off, they indicate a return to surplus.