The audit was ordered by the department after a series of articles in The Australian Financial Review raised questions about how the thinly capitalised Paladin, which was previously registered to a beach shack on Kangaroo Island off South Australia and had little experience in handling big contracts, was awarded the work without an open tender.

The Auditor-General is also investigating the contracts as part of a broader review into the procurement practices surrounding Australia's offshore processing centres.

The EY audit report found the department's process for awarding the contracts lacked transparency, did not properly account for fraud risk and was done without a robust financial strength assessment.

It said "the decision-making trail and information which led to the identification of Paladin was not clearly documented and was difficult to determine."

At the same time, EY said there was a risk of "collusion, bribery and deliberate misinformation" given it was such a high value contract and that the department had no mechanism to identify this.

The documents from the department suggested the PNG government had identified Paladin as a "preferred provider" of security services and that is thought to have influenced the decision to award it the initial contract.

Home Affairs Secretary Mike Pezzullo told Senate Estimates in February, his preference was to run an open tender process for the Manus contract. But he said there was not sufficient time for this after a plan to have PNG manage the contact was abandoned by Port Moresby.


He said the government was forced to act quickly and invited Paladin to be its sole tenderer.

Among the papers released to the Senate, a series of emails suggests there were simmering tensions between Paladin and Home Affairs staff and that fines, known as "abatements", could have totalled $11 million, if not for monthly penalty limits.

Over the twelve months to April 2019, Home Affairs asked Paladin to refund a total of $5.6 million in fees for failing to meet performance standards.

These fines ranged from $1200 for taking more than 24 hours to induct a new refugee to $30,000 for failing to comply with directions from Home Affairs to fix a service problem. The fines began in September 2018 following a year-long grace period for Paladin.

In December 2018, Paladin should have been fined $8 million, but the contract stipulated any penalties could not exceed 15 per cent of its total monthly service fee. As a result it was fined $2.6 million that month.

The documents show Paladin was chronically under staffed for the first six months of operations due to visa problems.

In November 2017, the first month of its contract, Paladin had just one of the required 86 "qualified staff" on Manus Island. By January 2018, it still only had 28 per cent of the staff required and in May was back to having just a single "qualified" staff member. In June it had recovered to 76 per cent of the required number.

In March 2019, Paladin was also forced to respond to a notice from Home Affairs after one of its inspectors fell through a rotting floor at the Manus facility.


“Based on the information reported, Paladin was aware of the flooring issue and did not take appropriate steps to ensure the safety of the site,” the department said.

Paladin said the incident was “regrettable and preventable” and said the “decaying flooring” was due to be replaced.

The previous year in May 2018, Paladin asked for any performance fines to be waived, blaming delayed visas for its staff as the underlying cause of hundreds of failures.

The Manus Island refugee centres are due to close in November. Andrew Meares

These included 231 failures to have staff on Manus with the appropriate training and qualifications, 30 failures to carry out planned maintenance tasks quickly, 50 failures to carry out "reactive" maintenance tasks quickly and 151 failures to clean facilities.

Paladin also reported an "unknown" number of failures to provide "timely delivery of transport services".

Home Affairs initially defended its appointment of Paladin after the Financial Review raised multiple issues about the security company, before admitting in March it had asked EY to investigate the contracts and the tendering process.

In its audit report, EY made a series of recommendations suggesting in future "there may be value in appointing a risk and assurance officer with specific skills and experience in procurement risks, including fraud and corruption risks."


It also said it would be better practice to have "predetermined criteria" against which to judge value-for-money assessments, while there was too much reliance on Paladin self-reporting for its performance assessments.

The refugee centres on Manus Island are due to shut at the end of November, ending a controversial six-year period.

The remaining 120 men will be transferred to Port Moresby and integrated into the community.

The closure of Manus will end Paladin’s 27-month contract with the federal government for which it was paid $1600 a day for each refugee and asylum seeker, to provide security, transport, logistics and maintenance on the island. Food and medical care were delivered by other service providers.

Former prime minister Julia Gillard agreed to restart processing asylum seekers in PNG under an agreement with her then counterpart Peter O'Neill in September 2012.

While the Manus facility provided some local employment, the centres were always unpopular with local governor Charlie Benjamin, who told the ABC in June he wanted the refugees removed immediately.

Explore the Financial Review's investigation of The Paladin Affair.