Fabricated letters and the ‘lone wolf’ who CTM says overcharged UK government $240m

Australia’s Contiki tourists gearing up for another summer of European debauchery will have a tough time keeping up with the alleged antics of our big tourism operators.

In February, Web Travel Group plummeted to an 11-year low after announcing that its Spanish arm had been raided by local tax authorities.

Weeks ago, Katrina Barry, the boss of Web Travel’s former consumer arm Webjet, announced her departure amid a tanking share price and an unfair dismissal lawsuit from its former top lawyer, Meaghan Simpson, who alleges she was bullied.

But they both pale into insignificance against the scandal unfolding in the UK with another ASX-listed travel group, Corporate Travel Management.

The announcement to the market this week that it had overcharged various arms of the British government by as much as £128 million ($240 million) – a significant upgrade from a previous estimate of £78 million ($160 million) – was a sideshow to other shocking revelations about its UK business, which was already a magnet for controversy.

The overpayments relate to a multitude of projects, and almost certainly include Corporate Travel’s £1.6 billion contract to accommodate UK asylum seekers on barges. The deal was designed to cut hotel use that had been costing British taxpayers millions of pounds a day.

One of the barges, the Bibby Stockholm, became a high-profile, deeply divisive symbol of the UK conservative government’s hardline approach to asylum seekers, and triggered clashes between police and protesters.

But it was difficult for analysts and investors to know where to look this week when Corporate Travel chairman Ewen Crouch fronted a conference call and admitted that overpayments were still occurring last year and the group would now have to restate its financial accounts for every year going back to 2019.

The most shocking revelation was that Corporate Travel’s board first became aware of overpayment issues in 2022, when the discrepancy had already reached £54.6 million ($103 million).

Keep in mind: this is a business that generated revenue totalling $388 million and a $3.1 million profit the year prior.

If founder Jamie Pherous had not retired as chief executive and board member in February, he would have faced many a curly question this week.

Pherous was on the board when it chose not to disclose its first knowledge of payments in 2022, but the story behind its justification is entertaining, to say the least.

According to Corporate Travel’s lengthy explanation to the ASX, it all came down to its “former UK CEO” – an executive who, coincidentally, was awarded an OBE (Officer of the Most Excellent Order of the British Empire) for his work on one of the UK government contracts under scrutiny.

This former executive, who it chose not to name, is the reason why CTM did not notice that British customers had been charged up to $240 million for services that were not provided.

According to the announcement, part of the problem was that most of CTM’s UK business falls outside the traditional travel and accommodation services that it provides to businesses and government agencies here.

One example cited was the break-neck speed with which it needed to find flights and accommodation in 2021 for a UK government that was repatriating 38,000 British travellers from 58 overseas countries as the COVID pandemic closed down global borders. In that rapidly changing environment, many of these services were provided on verbal approval.

The UK asylum seeker deal was another novel contract that bore no resemblance to the mundane business of finding flights and hotels for travelling executives and bureaucrats.

This explanation sounds reasonable until you consider the fact that the overpayments date back as far as 2019 – and that Corporate Travel had the chance to remedy this issue in 2022.

So what happened in 2022 when the board, and Corporate Travel’s auditor PwC, were alerted to significant payment anomalies?

In the June half of 2023, the group – aided by its auditors – relied on information from this “former UK CEO” to get to grips with the matter, the market announcement said.

By July 2023, “following the completion of the exercise”, the board appeared confident that it was on top of things. The company prepared letters of agreements with these UK customers, which led to refunds totalling £28 million.

“The former UK CEO provided CTM with copies of the signed letter agreements,” it told the ASX.

It must have been a relief for the board and its auditor. Revenues were recognised in both the 2023 and 2024 accounts based on the agreements that allowed the group to “retain any amounts not satisfied by the further services”.

But it looks like none of it was true.

To use Corporate Travel’s own words from its ASX confessional: Corporate Travel “became aware that the letter agreements may not, in fact, be authentic”.

By November last year, the company had come to realise there was no independent corroboration that these agreements were signed by the respective customers, who subsequently informed Corporate Travel that they had no record of the letter agreements.

As one analyst put it, the signed letters “may have been fabricated”.

Michael Healy OBE was stood down as head of its UK and European operations.

A week before Christmas, he was sacked.

This week, Crouch, who has been on the board since 2019, did not explain one crucial issue: How on earth did the board and its auditor PwC rely on one person to explain, and rectify with customers, a $100 million cash pile from overcharging these clients without any independent verification?

Corporate Travel has assured investors that it will not have to pay back all of this $240 million as it has already made repayments and will be able to claim back tax, but it still potentially faces significant penalties and interest payment issues, and we don’t know how it will fund any of these outflows.

PwC’s audit work will also come under scrutiny as law firms mull potential class action lawsuits.

RBC Capital analyst Wei-Weng Chen said one of the more troubling disclosures is the July 2023 deal to settle the payment discrepancies with customers without market disclosure.

At prevailing exchange rates, this represented 35 per cent of its closing cash balance for the 2023 financial year, “which in our view should meet most materiality thresholds for disclosure”.

As for our former UK chief executive, it will be interesting to see if Corporate Travel’s “notifications to relevant authorities” lead anywhere.

The only certainty is that this Corporate Travel saga has a captive audience with its 20,000 or so investors – including some of our biggest professional investors, such as AustralianSuper – unable to sell their shares since August, when the company went into a trading halt.

Crouch is promising the accounts will be lodged by June 30 and that shares will be trading again. But this assumes Corporate Travel has finally got it right, in its sixth ASX update since shares last traded.

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