A review of the allocation of grants to voluntary sector organisations in the east London borough of Tower Hamlets has found that elected members intervened to ensure that funds were given to groups that did not meet the minimum eligibility criteria.
Eric Pickles, the communities secretary, asked the professional services firm PwC to carry out a review of procedures at Tower Hamlets Council after the BBC Panorama programme broadcast allegations that Lutfur Rahman, the elected mayor of Tower Hamlets, had doubled the grants awarded to Bengali-run charities in return for electoral support.
In the programme, which was shown in March, opposition councillors claimed that Rahman, who has executive power over the allocation of some grants made by the local authority, awarded £3.6m to Bengali and Somali groups, despite recommendations by council officers that they should receive £1.5m.
Police subsequently said there was "no credible evidence of criminality" to substantiate the allegations. Rahman has strongly denied any wrongdoing.
Pickles told parliament this afternoon after the report was published that he had appointed commissioners to take over financial control of Tower Hamlets Council in various areas, including the making of grants.
The PwC review, the report of which has been published today, does not directly address the issue of electoral support but focuses on the council's relevant procedures.
It says that about 11 per cent of grants given under the council’s £8m mainstream grants programme for the period 2012 to 2015 were awarded to organisations that were either ineligible or did not meet the required evaluation score when assessed by officers applying the agreed applications evaluation methodology.
It says that there was a lack of transparency over the rationale for decisions to grant awards and there were gaps in the performance monitoring processes for organisations that have received grants.
The report says that the council is "failing to comply with its best value duty" on grant-making.
"Overall, we do not see an effective system in place to ascertain whether or not the allocation of grant monies awarded is such as to obtain best value," it says.
The report says that a Corporate Grants Programme Board was set up to provide recommendations to the mayor.
This committee consisted of two elected members, five council officers, a council legal representative and Khadiru Mahdi, chief executive of Tower Hamlets Council for Voluntary Service.
The report says that councillors Miah and Choudhury, the elected members on the panel, disagreed with recommendations from officers about the awarding of grants to some organisations.
"Whilst officers made recommendations that four organisations that scored less than the minimum quality score of 40 received funding totalling £67,712, members, by making changes to officer recommendations, increased this to 34 applications totalling £637,700," the report says. "We were informed during interviews that no re-scoring of applications took place following input from members."
The report says that Mahdi abstained from voting on grant award proposals at a meeting in September 2012 because he considered that insufficient information had been provided and there was not enough time to review the proposals.
He also wrote a note on the same day that was forwarded to the council setting out his concerns about the grant-making process, including meetings being cancelled at short notice because of a review of the recommended awards, papers not being released in advance or being released late and no explanation of "how the published criteria were used to arrive at different recommendations".
Mahdi’s note said he believed he was "an observer rather than an effective contributor to the panel", the report says.
Rahman said in a statement: "In April 2014, Eric Pickles announced that he was concerned about potential fraud and the London Evening Standard ran these claims on its front page. These allegations have been rejected by PwC.
"The report highlights flaws in processes. These are regrettable. We will learn from this report and strengthen our procedures accordingly. I was always confident wild claims about fraud would not be substantiated. Both my officers and I want to get on with our jobs serving all residents in Tower Hamlets."
A council spokesman said: "While the PwC report identifies some process and governance issues that needed to be improved, the council notes that no evidence of criminality or fraud has been identified by the government-appointed forensic auditors.
"In our view, there is no evidence that these flaws of process are regular or endemic, meaning that there is no failure to comply with our best value duty.
"We await the government’s reaction to the report but we urge the Secretary of State to act proportionately and to acknowledge the steps we have already taken to tighten up processes as well as the high performing nature of the council’s services."