Below is the twenty-third part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 23rd extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 2E Continued
In October 1996, ANZ approved full interchangeability between the two facilities. In reaching this decision, it reviewed NPF’s progress during the last quarter but still did not conduct an in-depth analysis.
The review was expressly based on two unjustified assumptions:-
- that there would be no major changes in the nature of NPF’s proposed investments; and
- income sources would remain stable over the year.
The review did not consider the obvious business risks NPF would face relating to changes in interest rates, exchange rates and market movements.
ANZ’s review of its loan facilities to NPF in September 1996, was superficial and flawed in that it did not consider several obvious risk factors.
Non-disclosure to the NPF Board
Even though ANZ had approved the important variations to the loan agreement on 4th October granting full interchangeability between the Kina and AUD facilities, Mr Wright and the NPF management did not inform the NPF Board about this or the requests Mr Wright had been making to ANZ. These were serious breaches of duty as the transactions between NPF management and ANZ were significant. For instance, on 23rd October 1996, NPF delivered share scrip to ANZ, without the NPF Board’s knowledge or approval.
Equity portfolio is progressively pledged as security for debt
From June to December 1996, as NPF’s loan-funded share acquisitions continued, more and more share scrip was pledged to ANZ as security, as shown.
Equity Portfolio Pledged as security to ANZ Loan – June 1996
Value pledged to ANZ Bank – K36,313,162
Value not pledged to ANZ Bank – K66,195,420
Total Equity Portfolio = K102,508,582
Equity Portfolio Pledged as security to ANZ Loan – September 1996
Value pledged to ANZ Bank – K59,600,940
Value not pledged to ANZ Bank – K48,300,207
Total Equity Portfolio = K107,901,147
Equity Portfolio Pledged as security to ANZ Loan – December 1996
Value pledged to ANZ Bank – K95,518,096
Value not pledged to ANZ Bank – K72,870,007
Total Equity Portfolio = K168,388,103
During this time, the levels of debt rose and fell as maturing IBD’s were used to reduce debt and as further acquisitions were made.
At the 104th NPF Board meeting on 9th December, the various loan agreements for the K40 million and A$20 million were eventually tabled. There was no discussion on the subject even though this was the first time the Board had been notified about the extra K20 million facility.
A$20 million increase in AUD facility
This increase in the AUD facility was resolved by the Board by way of circular resolution as the basis of a short and inaccurate management paper, which provided no reasoned analysis why the increase was required. It enabled management to pursue its aggressive investment strategy without having to seek Board funding approval for each transaction.
(a) In the last quarter of 1996, NPF management continued to drawdown on the ANZ facilities and to pledge securities without Board knowledge or authorisation. ANZ permitted this without sighting all the necessary Board resolutions.
(b) Throughout this period, NPF management failed its duty to inform the NPF Board and obtain the necessary authority for its use of the ANZ facilities.
(c) The Trustees failed in their fiduciary duties to the members by not requiring management to report effectively and by failing to reprimand management when management’s unauthorised actions became known.
(d) ANZ granted further facilities to assist NPF in its endeavour to acquire K32.25 million worth of Orogen shares, despite its growing concerns about NPF’s aggressive investment strategy.
(e) Management provided false and misleading information to the NPF Board by way of circular resolution dated 20th December 1996, in order to obtain approval of an additional A$20 million facility. It failed in its duty to brief the Board with expert objective assessments about the risks of increasing the AUD facility.
(f) The Board of Trustees failed in its fiduciary duty to the NPF members by not maintaining broad control over management and by not directing that management keep the Board informed.
(g) Having obtained full interchangability for the K40 million and A$40 million facilities, NPF management was able to pursue its aggressive risky investment policy, abetted by a compliant Board of Trustees.
USE OF ANZ FACILITIES – 1997
Communications between NPF management and ANZ officers
During 1997, NPF made extensive use of its ANZ facilities to continue with its aggressive investment strategy, all of which was discussed with ANZ officers who were very supportive of NPF but vigilant to protect ANZ’s 150 percent security coverage.
There was constant communications between NPF management and ANZ officers for the release of shares for sale, for pledging additional securities, to execute deeds and for releasing securities. There were discussions about NPF’s strategy to sell off 42.5 million HGL shares and purchase 50 million HPL shares.
These transactions involved the use of the loan facilities and various devices to retain the 150 percent security coverage.
There were also detailed discussions about Mr Wright’s plan to combine with other PNG institutions and sell off their Lihir Gold Limited (“LGL”) shares in order to buy into Vengold with the intention of obtaining a stronger, indirect stake in LGL.
Failure to inform NPF Board
When the Board met on 27th February, there was no mention of these important developments in the use of the ANZ facilities. The Board did, however, approve Messrs Wright and Kaul as signatories to execute drawdown notices. This provided further freedom for management to use the ANZ facilities without obtaining NPF Board approval.
a) Management breached its duty to the Board by failing to provide the Trustees with relevant, timely and adequate information concerning key aspects of the Fund’s borrowings and its financial position.
b) The Trustees breached their fiduciary duty to the members by failing to inquire from management about NPF’s facilities with ANZ. Where information was so clearly deficient, the Trustees should have vigorously sought that information from management.
ANZ’s management of the facility
In order to approve drawdowns or the transfer of one security in exchange for another, ANZ was frequently required to assess the companies concerned and the value and stability of their shares (e.g. Vengold was considered by ANZ to be a risky investment to be marked-to-market on a daily basis and closely monitored (paragraph 6.5)). When NPF sought to hold the proceeds of sales off shore for its own purposes, ANZ was vigilant to ensure BPNG approval was obtained or to find other legal solutions. On occasions, ANZ was required to seek approval from its parent, ANZ Australia, before seeking BPNG approval to lend to NPF in excess of BPNG prudential guidelines. ANZ was also required to ensure that the approvals of the NPF Board and the Minister for Finance had been obtained for transactions as required, before granting approval.
These normal banking activities are described in paragraphs 6.1-6.4 with regard to LGL, HPL and Vengold.
Failure of NPF Board to monitor ANZ Facilities
NPF management was in breach of their duty in not keeping the NPF Board informed of the state of the ANZ facilities, but the Trustees must also be criticised for never inquiring and for failing to criticise, restrain and reprimand management when instances of management exceeding their power, came to light.
At the NPF Board meeting on the 5th May 1997, Mr Wright gave wrong information on the funds available in the facility.
Investment in Cue Energy
ANZ approved a drawdown of K1.75 million to invest in Cue shares and options in May 1997 and ANZ’s records show that it sighted both the NPF Board and the Ministerial approval for this investment. ANZ is unable to produce its file but there is no other evidence that Board approval was obtained.
NPF’s loan-funded investment buying spree during 1996 and the first half of 1997, occurred during favourable economic conditions and without regard to the possibility of an inevitable down turn. This down turn occurred in June / July 1997 when the value of resources stocks began to fall sharply, interest rates began to rise steeply and the value of the Kina increased its rate of decline.
In July 1997, ANZ managers noted the fall in gold prices but felt that ANZ was secured against any adverse effects this may have on NPF. The same month it reviewed NPF’s financial statements for 1996, analysing NPF’s strengths and weaknesses. One of the strengths noted, was that Minister Haiveta was guided by NPF chairman David Copland.
ANZ encourages further AUD Borrowings
In its review ANZ noticed that NPF was under-utilising its K40 million facility as current drawdown was only K8,649,000 whereas the AUD facility was fully drawn. ANZ therefore set in motion the transfer of K20 million to the AUD facility.
At the time of promoting this further incentive for NPF to borrow course, ANZ had already identified the economic trends which would make further borrowing for investment by NPF foolhardy.
The transfer of K20 million to the AUD facility was approved by BPNG on 25th November 1997. ANZ facilities available to NPF were then K20 million and A$40 million.
ANZ fails to assess the risks of investing in HPL
In 1997, NPF sold its HGL shares in order to finance a K50 million investment in HPL. ANZ, which held the HGL shares as security, allowed their release, and accepted the newly purchased HPL shares as security. ANZ then approved a drawdown of A$15.75 million for the purchase by NPF of the balance of the HPL shares which were then also pledged to ANZ as security for the loan.
The value of HPL shares never took off. The fall in value was so steep and so continuous that less than one year later, ANZ was refusing to accept HPL stock as security, relegating it “junk” status.
Release from Negative Pledge
By this time, in October 1997, ANZ also released NPF from its “negative pledge” to allow it to borrow K50 million from PNGBC to finance the construction of the NPF Tower. ANZ’s decision enabled NPF to seriously over-commit itself as a borrower and dramatically reduced its ability to service its ANZ loan facilities.
Use of the extra A$20 million facility
As soon as BPNG approved the increase of the AUD facility to A$60 million, NPF immediately gave drawdown notices for the following investments:-
Orogen & STC- shares – A$ 658,000
STC – A$ 44,403
HPL – A$ 573,895
Orogen – A$ 358,303
Vengold – A$ 511,289
CXL – A$ 11,033
(a) Throughout 1996 and 1997, ANZ allowed NPF to make drawdowns on the Kina and AUD facilities to purchase high-risk PNG resource stock. Although it was uneasy about the situation, it continued to encourage NPF to increase its borrowing (paragraph 9.1). ANZ protected its own position by ensuring the security provided by NPF, in the form of share scrip, was “marked-to-market” on a daily basis, to ensure the debt / security ratio did not inadvertently fall below 150 per cent.
(b) ANZ’s decision to release NPF from its negative pledge to enable it to borrow from PNGBC for the construction of the NPF Tower, endangered ANZ’s own security position, as it encouraged NPF to grossly over-commit itself as a borrower.
(c) Throughout 1996 and 1997, NPF management completely failed to keep the NPF Board involved in how the ANZ facilities were being managed; what drawdowns were being made and for what investment; and what scrip was pledged against what loans. There was no practice of reporting on the state of the ANZ facility. This was a gross breach of duty by Messrs Wright and Kaul who frequently exceeded their authority in the agreements they reached with ANZ.
(d) The Trustees failed to insist that management keep them informed about the use and state of the ANZ facility and this was a serious breach of the Trustees fiduciary duty.
(e) During a period when interest rates rose sharply, the value of the Kina fell and the value of NPF’s share portfolio plummeted, management did not provide and the Trustees did not seek, a professional assessment of NPF’s investment. No one calculated the huge unrealised losses, which were occurring.
TO BE CONTINUED NEXT WEEK
Below is the twenty-second part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 22nd extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Continued from yesterday
(f) It was improper for management to seek Ministerial approval to accept the ANZ facility before the NPF Board had even been consulted. (g) DoF failed its responsibility to brief the Minister before he approved NPF obtaining the ANZ loan facility.
(h) Minister Haiveta should not have approved such a significant request as borrowing K20 million and A$20 million, without taking expert advice from DoF or some other independent expert source.
(i) Mr Herman Leahy failed in his duty as NPF’s legal counsel by not proactively advising the Board about the statutory constraints on NPF’s powers, that it had no power to borrow and that the Minister’s approval (which Mr Leahy seems to have drafted) was invalid.
The fees due on the facilities were:-
ADDITIONAL K20 MILLION FACILITY
On 22nd March 1996, without notifying the NPF Board and without its approval, NPF management then sought Minister Haiveta’s approval for an increase of the Kina facility to K40 million, which he granted on the same day (paragraph 4.2). DoF was not consulted. It seems that the sudden need for the extra K20 million was related to an opportunity to acquire CXL and STC shares for A$39.7 million which was payable to POSF and DFRBF by 10th June 1996.
ANZ made a detailed review of NPF’s situation at this stage but did not conduct an in depth analysis of the various risks NPF faced by financing such investments on borrowed funds, without considering factors such as the impact of an adverse macro economic environment. ANZ approved the K20 million increase on the strength of the Ministers approval, without sighting an approval from the NPF Board.
(a) ANZ’s assessment of NPF’s request for an additional K20 million in its loan facility was shallow.
(b) Minister Haiveta approved the increase in the ANZ facilities without sighting any resolution from the NPF Board and without advice from the DoF. This was improper conduct by Mr Haiveta and poor banking practice by ANZ.
(c) Management failed its duty to seek NPF Board approval for an increase of K20 million in the loan facility.
USE OF ANZ FACILITIES – 1996 Purchase of CXL and STC shares
On 31st May 1996, the NPF Board resolved to partly fund the purchase of CXL and STC shares from the ANZ facilities and Mr. Wright sought a A$6.6 million drawdown on the facility for this purpose. There was difficulty getting Bank of Papua New Guinea (“BPNG”) foreign exchange approval as Mr. Popoitai wanted time to consider it. He was however, over ruled by the Governor of the BPNG, Mr. Tarata, at the request of ANZ.
Purchase of Highlands Gold Limited shares
NPF management also received notice from brokers Wilson HTM on 6th June 1996 that NPF would be expected to find A$6,085,650 by 11th June to honour its sub- underwriting agreement to cover the shortfall in a Highlands Gold Limited (“HGL”) share placement. There was no NPF Board approval for the purchase of these HGL shares but ANZ allowed the drawdown after sighting only the Minister’s approval, which was dated after the date of the contract.
On the 14th June 1996, representatives of NPF, ANZ and BPNG met to sort out drawdown procedures. As of 14th June 1996, NPF’s pledged assets for the FCL were:-
The assets pledged represented 159.7 percent security coverage.
During those NPF Board discussions concerning the ANZ facility, management did not mention to the Board that the Kina facility had been increased by K20 million.
Purchase of Macmins shares
On 26th June 1996, Mr. Wright organised a A$2.4 million drawdown to buy 10 million shares and 5 million options in Macmin. Once again, there was no NPF Board approval of the proposed purchase. ANZ diary notes indicate that Ministerial approval had been sighted (but the relevant ANZ file is lost).
Once again, NPF management did not account to the Board for this drawdown or the 1.35 million Niugini Mining Limited (“NML”) shares that had been pledged as security. After NPF had drawn down to pay for its CXL and STC purchases on 13th June 1996, NPF’s approved drawdown in respect of the K40 million facility then stood at K35,800,000 against which it had pledged the following IBD’s:-
Poreporena Freeway loan – Transfer from AUD to Kina facility
On 26th June 1996, Mr Wright wished to drawdown K5 million to on-lend to the National Government to help finance the Poreporena Freeway project.
As there was only K4.2 million available in this facility, ANZ agreed to the temporary transfer of K1 million from the AUD facility and for the security to be share scrip maintaining a 150 percent coverage. Until then, the Kina facility had been secured by cash (IBD) in accordance with the loan agreement.
Pledging shares to the Kina facility was a variation of the loan agreement and 5.99 million STC shares were so pledged.
Mr Wright authorised these security transactions without reference to the NPF Board and beyond his authority.
Failure to notify NPF Board
At the 101st Board meeting on 28th June 1996, Mr Leahy tabled various documents relating to the K10 million and A$20 million facilities. However, he still did not disclose the existence of the additional K20 million facility nor mention the “rapid fire” drawdowns during June, nor the securities pledged.
Both management and the Trustees were negligent in not providing and demanding (respectively) an update as to the use of the facilities. By 2nd July 1996, the facilities were almost fully utilised as follows:-
The shares pledged as security were 14,351,000 HGL shares, at the market value of A$8.8 million and 9,000,000 LGL shares with a market value of A$18.2 million (Exhibits B1275-B1276).
The same diary note records that NPF repaid K1.5 million of the Kina facility, which enabled ANZ to reallocate the temporary transfer from the AUD facility to the Kina facility.
In July 1996, NPF paid two K500,000 cheques as well as K4.1 million from its BSP IBD towards the facilities.
(a) Management’s failure to notify the Trustees at the 30th May 1996 meeting that the Minister had approved an additional K20 million to be added to the ANZ loan facility, was deceptive and disrespectful to the Trustees as well as being a breach of their duty to the Board members.
(b) The Minister’s approval for the A$6 million drawdown to purchase HGL shares was granted without Board approval and amounted to improper conduct by Minister Haiveta.
(c) ANZ breached its own internal policy by not sighting the NPF Board resolution before allowing the drawdown of A$6 million requested by NPF in order to purchase HGL shares.
(d) Mr Noel Wright acted without NPF Board authority when he asked ANZ to allocate K1 million to the AUD facility and when he pledged STC and CXL shares as security for a K5 million drawdown in June 1996. This was improper conduct and a breach of his duty to the NPF Board.
(e) NPF management failed in their duty to advise the Board of the transactions to which the drawdowns related – particularly the pledging and transferring of assets as security for the drawn down loan.
(f) The NPF Trustees failed their fiduciary duty by not directing management to keep them regularly informed with regard to drawdowns, the pledging of assets and the state of the loan facilities account with ANZ.
ANZ reviews NPF facility
On 31st July 1996, ANZ reviewed NPF’s financial performance for the previous quarter and found it satisfactory (paragraph 5.12). The Senior Credit Inspections manager expressed caution that he “would not like to see hard core borrowing emerge from the Fund gearing up, particularly against security of a small number of largely mining shares”.
His warning seems to have gone unheeded.
In August 1996, NPF repaid K500,000 on the Kina facility and prepared to transfer the proceeds of K4 million maturing IBD’s to ANZ to reduce debt. Further, CXL and STC shares were also pledged to secure the debt.
Relaxation of Kina borrowing against Kina security rule
When NPF sought to drawdown K15 million to on-lend to the Government to fund the Poreporena freeway construction, it did not have sufficient Kina security, as required under the loan agreement. ANZ obliged by relaxing the rule and accepting Government inscribed stock as security for the K15 million drawdown. ANZ was now considering whether to allow full interchangeability between the Kina and AUD facilities.
Meanwhile, Mr Wright approached ANZ to discuss borrowing A$150 million to fund the purchase of 50.4 percent of NML to be then resold for profit by means of a structured selldown. Although ANZ diary notes record the high-risk of this strategy, ANZ managers participated in discussions with Mr Wright aimed at progressing the strategy.
On 10th September 1996, in approving Mr Wright’s request to drawdown K5 million to on-lend for the Freeway construction, ANZ accepted Australian registered scrip as security for part of the loan as follows-
The pledging of these shares was in order to maintain the 150 percent security to loan ratio though it actually amounted to a ratio of 550 percent.
There were frequent discussions between Mr Wright and ANZ Bank officers on the question of maintaining the ratio, as the levels of drawdowns and the value of the securities altered.
One way to maintain the 150 percent security level was to reduce the level of debt. With this in mind, the following debt repayments were made by NPF in September 1996:-
During discussions, Mr Wright committed NPF to use K9.9 million of maturing IBD’s to retire debt and promised another K10.5 million from a maturing loan to Ramu Sugar.
This is an example of how involved ANZ’s managers had become involved in NPF management’s decisions regarding the loan facilities. In some ways ANZ was more involved than the NPF Board, as the NPF management did not inform its Board about the arrangements for drawdowns and transferof securities it had made
(a) One of the rationales for following the path of borrowing was that NPF would be able to retain its high yielding IBD’s and finance investments by obtaining cheap loans from ANZ. Instead, however, as early as September 1996, NPF began retiring its IBD’s when they matured, in order to clear outstanding debt.
(b) In their place, NPF invested in equity stocks, which included investing in companies such as CXL, STC, Macmin, NML and HGL. All of these are reviewed in separate schedules to the Commission’s Report.
(c) It is obvious that NPF’s investment decisions were driven by Messrs Wright and Copland. Mr. Robert Kaul had minimal input. It is also clear that NPF management and the chairman of the Board, had a close working relationship with the Minister for Finance, Mr Haiveta, who regularly used an office in the NPF building and who was consulted early about proposed investments.
(d) DoF’s role was minimal as it was not asked by either the NPF or the Minister to advise on the use of the ANZ facilities to acquire these investments.
(e) NPF management did not report to, consult or seek the authority of the Board regarding the management of the ANZ loan facilities throughout 1996.
(f) ANZ’s willingness to lend many millions of dollars to NPF for high risk investments, sometimes without sighting an NPF Board approval, was a breach of its duty to its client. To ANZ’s knowledge, NPF was a provident fund controlled by Trustees who had an onerous fiduciary duty to the Fund’s members.
Wrong advice about NPF’s power to borrow
In September 1996, Carter Newell lawyers incorrectly advised ANZ that NPF had power to borrow. ANZ was remiss in not seeking advice from senior counsel on this important matter.
(a) Although ANZ obtained legal opinion from Carter Newell regarding NPF’s power to borrow, there was a lack of clarity on the face of the opinion. In view of the magnitude of the sums involved, ANZ should have obtained a second opinion.
(b) Carter Newell’s legal advice to NPF was wrong in circumstances that could amount to professional negligence. The wrong advice led to very serious consequences, particularly for NPF. As the advice was not prepared for NPF however, (and Carter Newell was not at that time advising NPF on other matters) it is probably not actionable at the suit of NPF.
TO BE CONTINUED
Below is the twenty-first part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 21st extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 2c Continued
The commission recommends that all trustees be referred to the Ombudsman Commission to investigate whether breaches of the Leadership Code have occurred.
With regard to the “Government” loans and Treasury Bill investments, both the Minister and DoF staff had very serious conflicts of interest. The DoF and the Minister were responsible for controlling the State’s finances but were also obliged to take account of the best interests of NPF and its members.
This conflict may have contributed to the failure of DoF to warn NPF about the mismatch between NPF’s borrowing and on-lending arrangements. The conflict was again exposed when the financially ailing and debt-burdened NPF was directed to use its BSP loan facilities to drawdown K15 million to purchase Treasury Bills to aid the Government’s urgent cash flow crisis.
Executive Summary Schedule 2d
See the report on NPF Proposed Borrowing from Leveraged Equities for on-lending to Cue Energy Resources N.L. (Schedule 2D) for the full details and findings regarding this investment.
The short report at Schedule 2D describes a situation in March 1996 when Cue Energy Resources N.L. was apparently in urgent need of short-term funding of $A1 million and Mr Copland (the NPF chairman and Cue Board member), Mr Kaul (the NPF managing director) and Mr Wright (the NPF investment advisor/deputy managing director) agreed that NPF would borrow the money in order to on-lend to Cue.
Arrangements to source the loan from the ANZ Bank were going to be too slow to satisfy Cue’s immediate need.
They reached agreement with Cue as to the terms of the on-lending and claim to have reached agreement with Leveraged Equities for NPF to obtain a loan at exceptionally favourable terms which would enable NPF to on-lend to Cue very profitably.
They then put these arrangements up for board approval by way of circular resolution and sought Ministerial approval before obtaining a valid board resolution.
In any event, the contractual relationship with Cue had already been entered into without being made subject to obtaining the required approvals.
Minister Haiveta was pressured into giving his approval without seeking Department of Finance advice and the terms of the NPF board resolution presented to Minister Haiveta, had been altered by corporate secretary Herman Leahy before certification. The Minister was then hurried into granting approval before seeking DoF advice. After approval had been granted, DoF then gave advice to the Minister recommending approval without making any critical appraisal of NPF’s submission.
The whole process was rushed and did not follow the proper sequence of procedures.
It resulted in breaches of the Public Finances (Management) Act 1995 and breaches of duty by management and Mr Copland.
Whether or not the alleged agreement with Leverage Equities was ever genuine is not known as very little documentation pertaining to this transaction has been found. In any event, the transaction did not proceed.
In order to provide Cue with urgently required funds, NPF management simply by-passed all procedures and arranged the funding by illegally using off-shore funds held by NPF in its trading account with its brokers Wilson HTM.
Instructions were given to Wilson HTM to transfer $A500,000 to Cue from this account.
The commission is unable to say who actually gave the direction, though it was normally Mr Wright who gave directions to Wilson HTM. The commission has found that Mr Copland, Mr Kaul and Mr Wright were fully aware and approved of this illegal transaction.
(a) Due to the dearth of available documents the commission is unable to ascertain what, if any, direct contact NPF had with Leveraged Equities. There is no documentary evidence that NPF carried out any due diligence in relation to Leveraged Equities;
(b) NPF managing director Robert Kaul, exceeded his authority in writing the letter dated March 19, 1996, to Cue without making the loan offer conditional on both the approval of the NPF board and the Minister. Both of these approvals were required and subject to the approval of the Bank of Papua New Guinea under the Banking (Foreign Exchange) Regulation;
(c) Each of David Copland, Robert Kaul and Noel Wright were remiss in not ascertaining and advising the NPF Board of Trustees that NPF was not authorised by the Ministerial investment guidelines to make short-term loans of the nature sought by Cue – only long-term development loans are permitted under such guidelines. Herman Leahy was likewise remiss in not so advising Mr Kaul and Mr Wright and the board when he prepared the documentation for the circular resolutions on March 25, 1996;
(d) NPF management in the persons of Mr Kaul, Mr Wright and in particular Mr Leahy as corporate secretary, were remiss in their duty in not advising the NPF board that the only method of board decision making prescribed by the NPF Act is a resolution passed in a properly convened board meeting; that the circular resolution process was extra legal and that such process as used:
(i) Risked pressuring trustees into making decisions in isolation based on minimal and inadequate information;
(ii) Deprived trustees of the benefit of face-to-face discussion and dialogue with all fellow trustees before decisions were made which would be acted upon by management;
(iii) Was of no legal effect unless the opinions expressed in response to “circular resolutions” were confirmed and the subject matter of the same ratified by formal resolution in the prescribed decision making forum.
(e) Mr Leahy was remiss in his duty as corporate secretary in preparing an extract of the “circular resolution” regarding the borrowing from Leveraged Equities and signing a document which differed materially from the terms of the “circular resolution” agreed to by the seven responding trustees.
(f) Mr Kaul acted improperly in meeting with Minister Haiveta on March 27, 1996, and prevailing on the Minister to approve the loan arrangements in respect of Cue without the Minister having the benefit of advice from his line department;
(g) Hon Chris Haiveta acted improperly in:
(i) Meeting with Mr Kaul on March 27, 1997, and approving the loan arrangements in respect of Cue without the benefit of advice from his line department
(ii) Not informing his department of such approval and thereby occasioning wasted time and effort in the consideration of Mr Kaul’s letter preparation and processing of a brief and preparation consideration and execution by his Vice Minister of a second letter of approval all after such matters had been rendered futile by the Minister earlier signing an approval letter on March 27, 1996.
(h) NPF management acted in excess of its delegated financial and other delegated authority in authorising payments of $A400,000 and $A100,000 to Cue from funds held in NPF’s share trading account with Wilson HTM in Australia:
(i) Without approval of the NPF board.
(ii) Without approval of the Minister (who only approved a borrowing and on lending).
(iii) Without the requisite approvals of the BPNG.
(i) On the evidence, the commission is satisfied that Mr Kaul, Mr Wright and Mr Copland were fully aware of the arrangements made to obtain funds from Wilsons HTM, which by-passed the legally required approvals.
Executive Summary Schedule 2E
This is a summary of the report on ANZ Banking Group Ltd (Schedule 2E) which is set out in Schedule 2E of the commission’s report.
The NPF Fund’s new and aggressive investment policy was introduced in late 1995.
It involved putting more emphasis on equity holdings. The aim was to obtain significant holdings in PNG resource stocks with a view to obtaining representation on the companies boards of directors and consequently a measure of control over their policies and activities.
It also involved obtaining a controlling interest in Steamships Trading Company Limited (STC) and Collins and Leahy Holdings Limited (CXL) with the intention of merging and managing the two companies.
The new policy envisaged NPF becoming a player on the Australian Stock Exchange, buying and selling as favourable opportunities arose and involving itself in “corporate plays”, particularly as sub-underwriter of share placements and in corporate takeover strategies.
The aim of the new strategy was to manage the NPF portfolio in a way that would return more profit on the investments for the benefit of the fund’s members.
There seems also to have been a belief that it would be beneficial to Papua New Guinea for NPF to own significant interests in companies that held major interests in PNG’s mineral resources.
How this would directly benefit NPF members was never spelt out.
As far as STC and CXL were concerned, it was thought that NPF members would benefit if the fund owned a controlling interest in those companies as they employed a large number of the members and also contributed significantly to employers contributions to the fund.
Again, how these factors related to the best interests of NPF were never spelt out.
Decision to Fund Share Purchase with Borrowed Funds
To fund this investment strategy, chairman David Copland, investment manager Noel Wright and managing director Robert Kaul decided to approach the ANZ Banking Group Ltd (ANZ) to establish kina and Australian dollar loan facilities.
Without prior discussion with the NPF board, Mr Kaul entered into detailed discussions with the ANZ to establish loan facilities.
This initiative was followed up by Mr Wright who carried on the negotiations with ANZ, briefed the Department of Finance and the Minister and presented the pre-arranged package to the NPF board.
ANZ responded enthusiastically as NPF seemed potentially to be an excellent client and within days, the details of a K20 million and an $A20 million facility were presented to Mr Wright by ANZ (paragraph 3.2).
The interest rate was to be variable at the indicator lending rate (then 15 per cent) and security was to be full cash cover for the kina facility and Australian listed scrip for the Foreign Currency Loan (FCL), ensuring 150 per cent security cover at all times.
NPF was to sign a negative pledge (with an obligation not to borrow from another institution without ANZ’s approval).
There were other covenants to protect ANZ’s interest, but at that stage all were negotiable. During discussions, Mr Wright outlined how NPF intended to take “a more pro-active approach to managing its security portfolio through trading of securities rather than the current more passive approach of the Buy and hold strategy”.
ANZ’s Due Diligence
ANZ management must have been aware that it was unusual for a provident fund to fund an investment program by borrowing. Perhaps for this reason, ANZ obtained a legal opinion from Carter Newell Lawyers to confirm whether NPF had power to borrow.
Carter Newell advised that the National Provident Fund Act Chapter 377 (NPF Act) was silent on the subject but that the power to borrow could be inferred from the Public Finances (Management) Act 1995 (PF(M) Act). This was incorrect advice, which even on its face indicated a degree of doubt. ANZ should have sought a second opinion from senior counsel on such an important matter.
NPF Board Resolution April 26, 1996
ANZ sent its detailed offer to Mr Wright on April 19, 1996 and Mr Wright briefed Minister Haiveta in writing on April 25, 1996, copying his letter to the Secretary for Finance.
At the NPF board meeting of April 26, 1996, Mr Wright provided the board with a short brief regarding the tax advantages of borrowing and tabled ANZ’s detailed offer of K20 million and $A20 million facilities.
Mr Haiveta was in attendance when the board resolved to accept the ANZ facilities offer, subject to Ministerial approval. There was no information or discussion about the way the facility was to be used or of the risks involved.
Ministerial Approval of K20 Million and K20 Million Facility
Minister Haiveta did not seek or receive DoF advice but approved the facilities on May 10, 1996, invoking the wrong section of the PF(M) Act in the process.
$A1 Million Drawdown as Investment Loan For Cue Energy
During negotiations with ANZ regarding the facilities, Mr Wright, without the authority of the NPF board, agreed with ANZ that $A1 million would be drawn down on the FCL facility for NPF to on-lend to Cue Energy Resources NL (Cue). Mr Wright wrongly signed off on this.
(a) The paper from Mr Wright on borrowing for tax purposes and the presentation to the board by chairman Copland at the 100th NPF Board meeting on April 26, 1996, regarding the proposed ANZ Facility, contained only a limited, simplistic and one-sided analysis. Although borrowing may, at that time, have been a cheaper source of finance, it exposed the fund to serious risks which should have been mentioned;
(b) the NPF had no power under the NPF Act or the PF(M) Act to borrow (See report on Structure – Schedule 1). Ministerial approval was given under the wrong section of the PF(M) Act;
(c) Management made no attempt to negotiate better terms with ANZ despite there being some room for negotiation;
(d) Mr Kaul and Mr Wright should have sought board approval before holding in-depth discussions with ANZ that led to ANZ’s letter of offer;
(e) ANZ should have taken more care to “know its client”, given the fact that NPF was a superannuationfund whose trustees owed a fiduciary duty to the contributors to manage the fund prudentially and withinGovernment investment guidelines. ANZ was aware that NPF intended to use the money lent to finance an aggressive and inappropriate investment program.
The Office of the Auditor General has a vital role to play in combatting the corruption that plagues our public finances. The AG’s primary function is to inspect, audit and report at least once every year on the public accounts of Papua New Guinea and the use of all public moneys and property.
But how well is the AG doing its job?
Now is your chance to have your say: Auditor General DISCUSSION PAPER August 2015 [pdf file – 2.3MB]
“Auditing for impact” is a compelling statement encompassing the directive goal and vision assurance of the Auditor-General to the People of Papua New Guinea. The output of the audits of Auditor-General is more than a validation of financial statements or the effectiveness of internal controls. It extends beyond that. It is a formidable measure for the People, to ensure that Parliament can hold and call managers of the people’s resources to account for their stewardship and effective, efficient and economic management of these resources. The People of Papua New Guinea deserve the very best.
“Auditing for impact” ensures the constitutional guarantee conferred on the Auditor- General to perform the audit tasks for People is secured and the obligation on the government to be accountable to the People is imposed. “Auditing for impact” allows the Auditor-General to contribute to fostering greater public trust and confidence in all levels and institutions of government. The lives of the People will improve for the better and accountability and good governance realistically measured. You are entitled to know that the government can be held to account for the public resources entrusted to them on your behalf. The Auditor-General is that critical link in the chain of accountability. It is a key pillar of a healthy nation. Today, the focus is on achieving beneficial change. That change is now.
That being the vision, the Office of the Auditor-General mission is “to provide independent and quality assurance over the financial management of government and public entities through our audit activities.
A robust, strong and properly resourced Office of the Auditor-General is needed, in order to be credible and independent. Your participation and responses to the Discussion Paper will assist in the process of our legislative review which is aimed at strengthening the audit mandate of the Auditor-General by having in place proper structures and resources necessary to ensure that appropriate and necessary audit toolkit is in place.
Ways You Can Participate In Our Discussion Forums
In order to achieve the above objectives, the Office of the Auditor-General intends to consult broadly and widely within and external to the National Government. The nation has been notified through selected national mediums of the Consultation Timelines and forums happening in selected regions.
Given funding constraints, the Auditor-General and the Office of the Auditor-General are unable to cover all Districts and Local Level Governments (Urban and Rural). However, the invitation is open and extended to those of you there to join the discussions at the selected locations.
In responding, you may wish to highlight other potential reforms, not identified in the Paper which could improve public audit by the Auditor-General and enable the Office of the Auditor-General to perform effectively and efficiently in discharging functions, duties and powers conferred on him.
How to Participate and Have Your Say: Comments and Submissions
This Discussion Paper officially commences the Consultation process. The period begins on the 24 August, 2015 and ends on 23 November, 2015.
You are invited to make comments and submissions and provide any other relevant information in response to this Discussion Paper. Where appropriate, please provide evidence to support comments.
The closing date for providing comments on this discussion paper is 24 November, 2015.
All feedback to the issues highlighted for discussion, will form part of the Auditor-General’s evaluation in his submission to the relevant authorities.
Below is the twentieth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 20th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary 2c Continued
(a) Management, particularly Mr Kaul and Mr Wright, were in serious breach of their duty to the NPF board and NPF members by failing to disclose and seek board approval for the negotiations with BSP, the substitution of security arrangements and the acceptance of a K30 million loan facility;
(b) The NPF board minutes for 1997, up to the 109th board meeting on October 28, 1997, record:
(i) The brief mention of the Poreporena Freeway loan at the 105th meeting held on February 27, 1997 (Exhibit B1011)
(ii) The brief mention of the Poreporena Freeway, NCD Water and Sewerage and Eda Ranu loans – but not the source of funds for them – at the 106th meeting held on May 5, 1997;
(iii) a resolution to loan a further K1 million to NCD Water and Sewerage – but not the source of funds for it – at the 107th meeting held on July 4, 1997.
(iv) a brief mention that BPNG approval for BSP to loan K30 million to NPF had not been obtained by the time of the 108th meeting held on August 22, 1999 (Exhibit B1036) and at the same meeting, the Eda Ranu loan was mentioned but not the source of funds.
There is, otherwise, not a single mention in the board minutes of all the events earlier catalogued in this report.
There were no board approvals sought or given for the drawdowns on the BSP facility, the altered security arrangements with BSP or acceptance of the new BSP facility arrangements contained in the facility letter of October 10, 1997;
(c) The drawdowns on the BSP facility, the altered security arrangements (which involved pledging NPF assets) and the entry into the new facility arrangements in October 1997, were all matters beyond any financial or other delegated authority of any member of the NPF management team and all required board approval.
The 109th NPF board meeting held on October 28, 1997, afforded a clear opportunity for management to brief the board and to obtain board ratification of what had been done and board approval of the BSP facility letter of October 10, 1997 but this was not done;
(d) Mr Kaul, as managing director, was clearly in breach of his duties in not curbing these management excesses and requiring that the requisite board approvals be obtained.
(e) Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board approvals; (f) Herman Leahy was remiss in his duties in:
(i) Signing the false board minutes of October 9, 1997. For this it is recommended that Mr Leahy be referred to the PNG Law Society to consider whether to impose disciplinary measures and
(ii) Not advising of the need to obtain board approvals.
(g) The NPF Board of Trustees were in breach of their fiduciary duty in not questioning NPF management about where the money for substantial investments was coming from, what the borrowed funds were being expended on and what security NPF was giving BSP for this substantial facility.
(h) The DoF (Mete Kahona, in particular) had a serious conflict of interest as it represented the State’s interest in urgently securing funding for the freeway as well as having the function of making recommendations regarding NPF’s requests for approval. It failed to address the danger of NPF borrowing at a variable (ILR) interest rate and then on-lending to Curtain Burns Peak at a fixed rate.
Drawdown paid through NPF’s PNGBC account: BSP co-operates with NPF management regarding unauthorised transactions
BSP paid the K3 million balance of the K8 million loan approved by the Minister to NPF’s Papua New Guinea Banking Corporation account before it was on-loaned to Curtain Burns Peak on November 20, 1997.
Payment through another account, in this way, has made it difficult to trace the source of the freeway project loan funding.
In January 1998, NPF’s drawdown balance was K20,092 and the accrued interest totalled K19,926.
In February 1998, Mr Kaul agreed with BSP about rearranging NPF securities and also drew down K1.8 million for payments on the NPF Tower. The board was not informed of these transactions.
At the same time Mr Kaul asked BSP to act as security custodian for NPF’s proposed $A54 million bond issue while Mr Wright sought the release of Orogen shares to bolster NPF’s security requirements elsewhere.
These moves were necessary as NPF’s finances were being seriously affected by the fall in the value of its shares and the rise in interest rates.
Again, management kept the NPF board in the dark in relation to these activities.
BSP TIGHTENS ITS CREDIT ARRANGEMENTS, 1998
In March 1998, BSP did release seven million Orogen shares but ensured it maintained a 4.5 per cent differential between the rate it paid on borrowed funds and the rate it charged.
In order to protect its own profitability, BSP notified NPF that it was tightening its credit arrangements with NPF. BSP also refused to accept the assignment by NPF of IBD’s held at other banks as security and effectively began putting pressure on NPF to find more acceptable security or begin retiring its debt to BSP .
In April 1998, BSP did release K1 million in term deposits to NPF but retained its 4.5 per cent differential and kept the NPF within its K22 million limit. It was keeping a vigilant eye on NPF.
NPF was obliged to accept commercial terms or apply maturing IBD’s to retire the BSP debt. Mr Wright agreed to retire the debt.
In June 1998, BSP conferred with ANZ about NPF’s credit rating and both banks agreed to tighten up their credit arrangements with NPF.
In July, Mr Wright was obliged to apply maturing IBD’s with PNGBC and the Bank of Hawaii (BoH) to retire the BSP debt.
GOVERNMENT PRESSURES NPF TO DRAWDOWN AND ON-LEND TO BUY TREASURY BILLS
In December 1998, the Government put pressure on the financially ailing and debt-burdened NPF to seek a further K15 million drawdown on its BSP facility in order to purchase Treasury Bills to assist the Government cope with an urgent cash flow crisis.
NPF complied and BSP agreed to the drawdown on the condition that it took a lien over the Treasury Bills.
DoF and Minister’s conflict of interest
In applying this pressure and then recommending Ministerial approval for the drawdown, the DoF was acting contrary to NPF’s interest and its senior officers were in an impossible conflict of interest situation, as was the Minister for Finance when he gave that approval.
In relation to all these negotiations and transactions entered into by NPF management, the commission has found at paragraph 4.3.13 that:
(a) Yet again, the NPF board minutes for 1998 do not record any information being given or noted by the board in relation to transactions concerning this BSP facility. No board approvals were sought or given in relation to any drawdown of funds on this facility; the request to fund a payment to Kumagai Gumi for the NPF Tower construction; the release of Orogen shares from BSP to be used as security for another loan; the numerous alterations in the security offered to and held by BSP; the realisation of NPF’s IBD assets to retire debt; the purchase of K15 million in Treasury Bills; the drawdown on the BSP facility to finance that purchase or the pledging of the Treasury Bills as security to BSP;
(b) Yet again the transactions listed in (a) above were beyond any financial or other delegated authority of the NPF management team and all transactions required board approval;
(c) Yet again, both Mr Kaul and Henry Fabila, as successive managing directors of NPF, were each clearly remiss in their duties in not curbing these excesses and requiring that the requisite board approvals be obtained and that for transactions over K500,000, the requisite Ministerial approval be obtained;
(d) Again, Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board and Ministerial approvals and in pledging NPF assets without those approvals;
(e) The NPF Board of Trustees also failed their fiduciary duty by not questioning management’s conduct and not making inquiries about the source of the funds for NPF’s investments and the expenditure or application of the funds, which they clearly knew NPF was borrowing;
(f) In relation to the drawdowns for the freeway loans and the drawdown for the K15 million to buy Treasury Bills, each of the Minister for Finance and the DoF officers (and in particular Mete Kahona) were placed in an impossible position as the interests of the State, which they were obliged to advance, were in conflict with the interests of NPF, which they were obliged to protect (when advising the Minister whether to grant approval under section 61(2) of the PF(M) Act).
RETIREMENT OF BSP DEBT – 1999
By February 1999, NPF had consulted and been advised by PwC about the massive 1998 losses and the urgent need to reduce assets and retire debt. The maturing K15 million Treasury Bills were accordingly used to retire debt in February 1999.
This was done without board or Minister’s approval or knowledge.
Finally, K8 million of maturing IBD’s were used in April to fully pay off the BSP loan, despite a last minute attempt by the NPF board to “hawk” it around to find an investment at a higher interest rate.
During 1999, although management put more effort into working under the controlling authority of the NPF board, the commission has found at paragraph 4.4.9, that there were shortfalls.
(a) Mr Fabila exceeded his delegated authority in applying the K15 million in Treasury Bills to retire debt without board or Ministerial approval and failed to inform the board of his action;
(b) Haro Mekere, inadvertently, provided false information to the board meeting of April 30, 1999 as to the purpose of the BSP loan facility and did not explicitly advise the board whether NPF was free to deal with the maturing K8 million IBD.
He did, however, get the board, rather than management, to make a decision as to what to do with that IBD;
(c) Someone in NPF management exceeded his delegated authority in paying off the approximate K8 million balance of the BSP facility in April/May 1999, without specific board or Ministerial approval and failed to inform the board of his actions. That “someone” is not identified on the evidence before the commission;
(d) Rod Mitchell inadvertently provided false information to the board meeting of May 21, 1999, as to the existence of and need to address the BSP facility when that facility had, unknown to Mr Mitchell, in fact been paid out in full, prior to that date.
The commission’s investigations into NPF’s BSP loan arrangements have revealed that management operated almost totally outside of the control of the NPF board.
For the most part the board was not informed or consulted.
Management sometimes entered into loan agreements entirely without the board’s knowledge and drew down funds without board authority, frequently paying the funds into accounts at other banks rather than spending them directly on BSP approved purposes.
On at least one occasion, when evidence of (a non-existent) board approval was required by BSP, Mr Leahy simply presented a falsified approval resolution.
When NPF management sought approvals for the K30 million BSP facility, BSP, BPNG and the Minister approved the facility be used to fund local “Government” projects – i.e.: Freeway, NCD Water and Sewerage and Eda Ranu. Mr Wright, however, also had an additional purpose to use the facility to fund the purchase of Orogen shares and he disclosed this only to the NPF board. When the Ministerial and BSP approvals did not include this purpose, Mr Wright simply paid the drawdown into another bank account and then used it to buy Orogen shares, despite the lack of Ministerial and BSP approval.
The NPF board was kept in the dark about the fact that various “investments” were financed out of the BSP facility and the purposes for which drawdowns on the BSP facility were applied. Each decision involving over K100,000, required board approval and each decision over K500,000 required Ministerial approval, as there was no delegation of powers.
Mr Wright seems to have thought he had the power to do what he liked and no one in NPF curbed him.
The only partially effective curb was BSP’s insistence on Ministerial approvals to cover the stated purpose of each drawdown.
Many drawdowns were not directed to their approved purpose but were paid to NPF’s ANZ or PNGBC accounts where they were mixed with other funds. This confused the position as it is hard to say what the actual source of funds for a given investment was. This is important in relation to the source of funds for the freeway loans and probably “masked” the payment of K9.6 million for Orogen shares.
Neither the NPF board nor the Minister were adequately briefed as to the risk of borrowing funds at a variable interest rate (ILR) and on-lending at a fixed interest rate. The concessional interest rate on the freeway and NDCW&S loans was 11 per cent after tax (14.67 per cent gross).
The on-loans were profitable only when the ILR was below 11 per cent, when NPF was paying tax or 14.67 per cent when not paying tax. From October 1996, the ILR remained below 14.5 per cent only until April 1998.
Thereafter, it ranged from 17.5 per cent to a high of 23 per cent then back to 19.75 per cent when the loan was repaid in May 1999.
After 1998, NPF was clearly making a loss on the money on-lent for the Poreporena Freeway project.
Not only did management act beyond the control of the board regarding entering loan agreements and making drawdowns, it was equally beyond control in the way it pledged assets for security and redeemed and substituted securities with no reference to the NPF board whatsoever.
Throughout the period of the BSP loan facilities, from January 1996 until early 1999, there is no evidence that the Board of Trustees ever questioned management about what was occurring. All trustees appointed at the time were therefore in breach of their fiduciary duty to the members of the fund.
TO BE CONTINUED
Below we continue the re-publication of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.
The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime!
NPF Final Report
This is the 19th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Continued from Friday
The Commission has found that NPF certainly lacked power to borrow, pledge and guarantee.
It is possible that PNGBC is vulnerable should a class action be mounted on behalf of NPF members against the NPF Board and PNGBC for losses incurred as a result the various ultra vires loan arrangements entered into between NPF and PNGBC.
The decision to invest in the construction of the NPF Tower involved very major expenditure of borrowed funds.
It was driven by Messrs Copland and Wright and was riddled by gross failures of judgement by management, which failed to take basic steps to ensure the financial viability of the project and to address the inherent dangers in the loan agreement NPF entered into with PNGBC. Throughout the construction period, management repeatedly acted without Board approval to seek, enter and sign loan agreements and extensions.
The DoF failed to critically analyse proposals and make professionally competent recommendations to the Minister and the PNGBC failed to carry out competent due diligence about NPF’s power to borrow or to check that loan applications from NPF management had received NPF Board approval.
In the midst of this serial incompetency, the NPF Trustees completely failed to ensure that they received adequate briefs from management, based on independent professional advice.
Within the scope of its Terms of Reference, the Commission has accordingly found that the Trustees were in breach of their fiduciary duty to the members by not controlling management’s excessive zeal and in not seeking independent professional advice and that management was in breach of its duty to the Board, particularly Messrs Kaul and (later) Fabila, Mr Wright and Mr Leahy.
Worse still, by early 1999, a criminal conspiracy had evolved involving Chairman Maladina, Mr Leahy, Ms Sariman, Messrs Veraga and Lakae, Kumagai Gumi, Mr Ken Yapane, Messrs Barker, Sullivan and O’Neill and probably Mr Henry Fabila to cheat and defraud the NPF by means of excessive land valuations, a spurious acceleration claim, an inflated sale of 50 percent of the Tower to the PNGHB and inflated real estate commissions. These criminal matters are merely introduced in outline in this report, but are dealt with in detail in Schedule 6.
This report concludes with a description of what seems to have been a failed attempt by Pacific Finance to obtain access to NPF’s assets.
At the 108th NPF Board meeting on 27th August 1997, the Board “noted” that a K50 million loan would be secured
The National Provident Fund (“NPF”) borrowings from Bank of South Pacific Limited (“BSP”) commenced entirely as a management initiative without any Board involvement.
Throughout the period between January 1995 and December 1999, there was a continuing tendency for management, particularly Mr Wright, to act without the Board’s knowledge and authority. BSP seems to have condoned this by not insisting on evidence of Board approval before approving loan agreements and allowing drawdowns.
On the other hand, BSP was very insistent on sighting evidence of Ministerial approvals. This requirement became troublesome for Mr Wright when the Ministerial approvals were too narrow to encompass Mr Wright’s desired purposes. On some occasions, he solved this problem by framing the drawdown requests within the narrow terms of the Minister’s approval and then requesting BSP to pay the drawdowns into an NPF account with another bank. This enabled Mr Wright to withdraw the money for non-approved purposes.
The history of the borrowings from BSP, discloses misleading conduct by Mr Wright and false certification of Board minutes by Mr Leahy.
In 1998, as NPF descended into financial difficulties, BSP conferred with ANZ and both Banks began tightening up their credit arrangements with NPF. This led to BSP insisting that NPF repay its loan.
In paying off the outstanding balance in 1999, NPF management again acted outside the authority of the NPF Board.
SHORT TERM K7 MILLION LOAN
NPF first borrowed from the BSP in December 1995 by accepting a loan of K7 million. The loan was sought, agreed, executed, received and repaid entirely by management, specifically Messrs Kaul and Wright, without the knowledge or approval of the NPF Board.
The funds were almost certainly used to purchase Government Inscribed Stocks and were repaid in less than one week. The cost in interest (22 percent) and stamp duty aggregated K24,806.13, far exceeding the coupon rate on the stock, of 11.625 percent.
(a) BSP did not undertake any due diligence to ascertain whether NPF had the power to borrow or to pledge assets, and it did not determine whether this loan was NPF Board approved or whether Ministerial approval was granted.
(b) Mr. Noel Wright and Ms. Salome Dopeke acted beyond their authority in accepting the terms of the borrowing from the BSP.
(c) Mr. Wright and Ms. Dopeke failed to provide any adequate information to the Board and the Board and managing director failed to question the loan arrangements.
(d) Mr. Wright and Ms. Dopeke failed to seek Ministerial approval and without the Board’s authority or the Ministers approval, both of which were required, entered into these loan arrangements with BSP.
(e) Mr. Wright and Ms. Dopeke failed to seek or obtain the Board’s and the Minister’s approval to pledge NPF assets as security for this loan.
(f) Mr. Wright and Ms. Dopeke are personally liable for any loss suffered by NPF as a consequence of this loan venture and neither would, in the Commission’s view, have the “good faith” defence available to them.
K30 MILLION LOAN FACILITY
Hidden purpose not disclosed to BSP or the Minister
In October 1996, NPF applied for and obtained a BSP loan facility for K30 million. NPF management advised the BSP, Bank of Papua New Guinea (“BPNG”) and the Minister, that the purpose of the facility was to fund NPF’s on-lending to the State for local projects, such as the Poreporena Freeway project and approvals were granted on that basis. Mr Wright’s additional purpose, stated only to the NPF Board, was to purchase shares in Orogen Minerals Limited (“Orogen”).
After mix-ups over the Ministerial approvals, the facility was put in place and drawdowns were to be utilised to on-lend to Curtain Burns Peak for the Freeway project.
(a) BSP did not carry out any due diligence regarding NPF’s power to borrow or to grant security over the K30 million in term deposits, which were to constitute security for the loan.
(b) NPF management did not give adequate advice to the NPF Board about the danger inherent in entering arrangements where NPF was borrowing funds at a variable interest rate (ILR) to on-lend at a fixed interest rate for the Freeway, NCD Water & Sewerage and Eda Ranu projects.
(c) Clearly, both BSP and the Minister were told by NPF that the proceeds of the K30 million facility were to be used for local infrastructure projects – specifically the Freeway, NCD Water & Sewerage and Eda Ranu. Neither was told, as Mr. Wright told the NPF Board, that it was envisaged that the facility would be used to fund the purchasing of Orogen shares.
(d) The application for Ministerial approval was not made by NPF but by BSP. This was not clearly pointed out to the Minister and the Minister was also not advised of the inherent risk in borrowing at a variable interest rate and on-lending at a fixed rate of interest. The Minister’s letter of approval was sent, however, to NPF.
(e) The letter from BSP to the Minister sought approval under Sections 56 and 61 of the PF(M) Act and the letter from the Minister to NPF granted approval under Sections 55 and 61 of the PF(M) Act. No one appears to have considered and concluded, as is the case, that neither Section 55 or Section 56 apply to NPF as it is not a public body “to which this (PF(M)) Act applies”.
Mr. Wright directs drawdown be paid into NPF’s ANZ account to enable funds to be spent on purpose not approved by BSP
In November 1996, NPF sought to drawdown K3 million for on-lending to NCD Water & Sewerage pursuant to the Ministerial approval of 7th November 1996, which limited the use of funds to local projects. This limited approval was an impediment when NPF management sought to drawdown K11.6 million on 20th November, of which K9.6 million was to be used to purchase Orogen shares. BSP refused the drawdown as it was not in accordance with the Ministerial approval.
Mr. Wright overcame this set back by altering the wording of his draw down request so as to comply with the more limited scope of the Minister’s approval. He then directed BSP to remit K9.6 million of the drawdown to NPF’s ANZ account, which was then used to purchase K9.6 million Orogen shares.
(a) In the process of considering the approval of the BSP K30 million facility for NPF, none of the advisors in the Bank, Department of Finance (“DoF”) or NPF considered NPF’s power to borrow or to pledge assets.
(b) There was considerable confusion surrounding the 20th November 1996 drawdown of K11.6 million, caused by Mr Wright’s attempt to use the drawdown to purchase Orogen shares which was outside the Ministerially approved purposes of the K30 million facility.
(c) Mr. Wright misled the NPF Board in earlier stating the facility could be used to purchase Orogen shares.
(d) Mr. Wright and Mr. Kaul did not advise the Board of the changing circumstances of the drawdown and how the Orogen purchase was actually financed.
(e) Mr. Wright used the K9.6 million drawdown to purchase Orogen shares, outside the terms of the applicable Ministerial approval of 7th November 1996.
Further unauthorised drawdown for Freeway project
On 9th December 1996, NPF resolved to on-lend a further K15 million for the Freeway project as the Public Officers Superannuation Fund (“POSF”) had backed out of its promised support.
K2 million of this was funded from a maturing Interest Bearing Deposit (“IBD”) held by BSP. The remaining K13 million was funded from the ANZ Facility. There seems to have been a further drawing of K3 million for the same purpose, which the NPF Board was not notified about).
By the end of December 1996, the BSP K30 million facility was drawn to K17.678 million.
Further unauthorised K12 million drawdown for Freeway project
In March 1997, Mr. Kaul drew down a further K12 million to finance the Freeway project but this left the facility overdrawn by K88,242.67, with interest therefore accruing at double rate. The Board was not advised of this problem.
BPNG caps BSP’s exposure to NPF at K22 million
In July 1997, Mr. Wright exceeded his authority by negotiating with BSP to redeem K18.8 million worth of IBD’s and substituting Orogen shares as security.
During the negotiations, BPNG imposed a limit on BSP’s exposure to NPF, which resulted in the facility limit being capped at K22 million. None of this was disclosed to the NPF Board.
After BPNG’s imposed prudential guidelines effectively reduced NPF’s BSP facility limit to K18 million, Mr. Wright pledged more Orogen shares, in order to increase the limit.
Again, this was done without consulting the NPF Board or obtaining their approval.
Mr. Leahy certifies false Board resolution
In early October 1997, NPF was under pressure from the State to obtain a further drawdown on its BSP facility for the Freeway project.
Ministerial approval was urgently obtained from Vice Minister for Finance, Mr. Ganarafo (as Finance Minister Lasaro was out of Port Moresby). Mr. Wright applied to drawdown K5 million from the BSP facility but BSP required evidence of a NPF Board resolution approving the loan agreement between NPF and Curtain Burns Peak, as this was a condition of the drawdown under clause 3.1(b) of the agreement.
As there had been no such NPF Board resolution, Mr. Leahy solved the situation by certifying a false resolution (see paragraphs 4.2.12).
This may be short of criminal conduct but it certainly amounted to professional misconduct and improper conduct within the terms of his contract. The Commission recommends to the constituting authority that Mr Leahy’s conduct in this regard be referred to the President of the Law Society of Papua New Guinea.
Unauthorised activities of Mr. Wright and breaches of fiduciary duty by Mr. Kaul and the NPF Board of Trustees
Throughout 1997 there was a great deal of interaction between Mr Wright (and to a lesser extent, Mr Kaul) and the BSP managers in which various transactions and agreements were entered into or discussed.
Very, very little of this was communicated to the NPF Board. From the documents available to the Commission, it appears that Mr Wright was making decisions for NPF as though it was his own personal Fund. These matters are discussed in paragraphs 4.2.1 to 4.2.14 of the report.
BSP was having difficultly reconciling NPF’s drawdown requests with the wording of the Ministerial approvals. BSP’s insistence on strict compliance with Ministerial approvals was impeding Mr Wright’s intentions. This required urgent action in order to obtain amended Ministerial approvals to match up with Mr Wright’s drawdown requests to BSP.
Much of the problem related to Mr Wright’s desire to use the funds approved for other purposes – mainly to acquire Orogen shares. There was much juggling with share scrip to patch up security requirements.
In August 1997, BPNG intervened to limit BSP’s exposure to NPF (paragraph 4.2.7). In fact, BPNG refused to approve BSP’s proposed K30 million line of credit to NPF.
There are records of Mr Wright seeking a K1 million drawdown by telephone to fund a payment to Kumagai Gumi but hanging up the phone when the approval was made subject to compliance with the terms of the Ministerial approval.
There were large transactions involving millions of Kina and large quantities of share scrip, which were all handled by Mr Wright (well beyond his authority) without reference to the NPF Board.
Paragraph 4.2.11 discloses details of the unauthorised pledging of Orogen shares by Mr Wright as security for an K8 million drawdown of the Freeway project. This strategy obliged Mr Wright to obtain urgent approval from Minister Ganarafo on 9th October 1997.
TO BE CONTINUED