Health authorities in Western Australia heard allegations of abuse at the Esther Foundation in 2018 – well before the Morrison government awarded the foundation a $4m grant.

The grant to the religious rehabilitation centre, which has been accused of exorcisms and gay conversion practices, was part of the $2bn Community Health and Hospitals Program (CHHP). The national audit office this week accused the former government of deliberately breaching the CHHP guidelines, giving out grants likely to be unlawful, and falling short of “ethical requirements”.

The health minister, Mark Butler, described the Australian National Audit Office (ANAO) review as “a scathing report describing the full extent of the Morrison government’s waste, rorts and captain’s picks in a billion-dollar health slush fund”.

The then prime minister, Scott Morrison, announced the Esther Foundation’s grant on a visit to the Perth-based organisation in March 2019.

The foundation, which claimed to help young women with health, mental health, and drug and alcohol issues, ultimately only got half the grant amount after a WA parliamentary inquiry heard allegations of “extreme religious practices”.

“Some of the prevalent and consistent themes that emerged from the complaints and allegations included emotional and psychological abuse, coercive and extreme religious practices, LGBTQA+ suppression and conversion practices, culturally harmful practices, medical complaints, family alienation, physical restraints and assaults, and sexual assault,” the inquiry’s report said.

There is no evidence that any politicians or federal health department officials knew about the allegations when the grant was awarded. The federal health department told Guardian Australia it was first told of allegations in early 2020.

In a statement, a spokesperson said no allegations about abuse were made to the department, but that on 5 February 2020, it was advised that allegations had been made against a senior person formerly connected with the foundation and “was made aware of the actions taken at that time by the new board to implement a number of cultural and organisational changes”.

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The WA health department and Mental Health Commission (MHC) heard allegations against the foundation in November 2018, they told a 2022 WA parliamentary inquiry.

But the inquiry heard the department was powerless to investigate because the foundation was always unlicensed and the chairperson signed a statutory declaration saying it did not meet the criteria that would mean it needed a licence.

The report from that inquiry says the Esther Foundation board became aware of complaints in “early 2019”. Morrison announced the grant on 8 March 2019, and the agreement was signed on 18 June. The ANAO report found the then health minister, Greg Hunt, had approved the grant pending legal advice.

The agreement was signed on the same day the legal advice came back indicating that the grant would “likely be without legal authority” because the department had not done due diligence and the foundation planned to spend the money in areas outside the grant guidelines.

A former Esther Foundation resident contacted the MHC on 2 November 2018. When she was 15, her parents had sent her to the foundation to be treated for anxiety and suicidal ideation, and she said the Esther Foundation told her they were her legal guardians.

She said she had witnessed “disturbing and distressing treatment” at the foundation, according to the MHC’s evidence to the WA inquiry, and believed some of it was criminal. The MHC contacted the Department of Health’s licensing and accreditation regulatory unit (LARU), asking for the matter to be investigated.

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LARU then wrote to the Esther Foundation, asked it to consider whether it fell under the definition of a private psychiatric hostel, in which case it needed to be licensed.

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Vanessa MacDonald, from the WA Department of Health, told the WA inquiry that the department contacts facilities that may fall under the definition of a private psychiatric facility and asks them to self-assess to see if they should be licensed.

“We did actually do that with the Esther Foundation and they replied that they did not meet the definition, particularly relating to the area of the definition that refers to socially dependent people,” she said.

On 29 November, LARU received a “quite angry” email from the foundation’s administrator, saying no residents were “socially dependent”, which is one of the prerequisites for licensing. LARU said it would need a formal notification.

On 3 December, LARU received a statutory declaration from the foundation’s chair, who said it did not provide services for people who are “socially dependent”.

Health department officials told the WA inquiry that “socially dependent” was hard to define but meant people who need support in their everyday life due to mental illness.

The MHC deputy commissioner of operations, Lindsay Hale, said there was a “serious gap” in the system where LARU does not have oversight. He said there was a problem of services “essentially self-describing the nature of their service”.

There were people potentially “blurring the lines” of what services they offer, he said.

Hale said the Esther Foundation was an example “where it appears that the nature of services, and the definition of services, was unclear and probably blurred”, and relied on “self-definition”.

Butler has directed the health department to “run the ruler” over the remaining CHHP projects.

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