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National Provident Fund Final Report [Part 19]

August 31, 2015 Leave a comment

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.

CONCLUDING COMMENTS

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

INTRODUCTION

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.

Findings

(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.

Findings

(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.

Findings

(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

O’Neill’s illegal logging: 798 days and counting…

August 31, 2015 Leave a comment

count

Peter O'Neill: Theft of forest resources: Guilty

sabl cartoon

National Provident Fund Final Report [Part 18]

August 28, 2015 1 comment

Below is the eighteenth 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 2002/03.

NPF Final Report

This is the 18th 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.

LOAN AGREEMENT SIGNED BY MANAGEMENT WITHOUT BOARD AUTHORITY

Mr Wright handled the loan negotiations and reached agreement with PNGBC as to its terms in June 1997.

The loan establishment fee was K375,000 which was debited to NPF’s interest income account. Messrs Kaul and Frank attested the Board of Trustees’ seal to the agreement on 17th June 1997, entirely without the authority of the NPF Board.

These decisions were never ratified1 by the NPF Board resolution so the loan agreement between NPF and PNGBC remained illegal because, firstly, NPF lacked the power to enter into an agreement to borrow and, secondly, because the agreement which was actually signed, lacked NPF Board approval. PNGBC’s lack of due diligence was surprising.

Findings

(a) Mr Kaul’s request to Minister Konga for NPF to borrow K50 million from PNGBC had not been considered or resolved by the NPF Board. This amounted to improper conduct by Mr. Kaul and a breach of his fiduciary duty to the members of the Fund.
(b) Minister Konga was also guilty of improper conduct in approving Mr. Kaul’s request without sighting an NPF Board resolution and without seeking advice from the DoF.
(c) Mr Wright’s application to PNGBC for the loan facility had no authority from the NPF Board.
(d) PNGBC was negligent in not requesting a copy of the NPF Board approval and the Minister’s approval before approving the loan facility of K50 million. PNGBC also failed to perform due diligence in relation to NPF’s power to borrow.
(e) PNGBC’s analysis of the loan application was flawed.
(f) Mr. Wright’s conduct in accepting the loan facility on behalf of the NPF Board and authorising payment of the K375,000 establishment fee without consulting the Board, was improper.
(g) The conduct of Messrs Kaul and Frank in applying the NPF seal and executing the loan facility agreement without the authority of the NPF Board, was improper.
(h) The improper conduct and breach of duty by Messrs Kaul and Wright leave them open to personal liability for loss suffered by members of NPF and, in the circumstances, it is unlikely they could defend themselves against an action by claiming to have “acted in good faith”.

MANAGEMENT FAILS TO FULLY INFORM NPF BOARD

At the 4th July NPF Board meeting, the Board was given the barest details of the loan agreement and was not asked to consider the tenders. Also it was not told that Gadens Lawyers had established The Tower Pty Ltd and transferred title to it and would act for NPF on the construction contract despite the fact that Gadens also acted for PNGBC on the loan facility agreement.

Findings

(a) Management was grossly negligent in allowing The Tower project to proceed with:-

-Inadequate planning (no financial planning)
-No financial evaluation
-No commitment for equity participation
-No commitment for leasing
-Insufficient due diligence

This amounts to a breach of common law duty by Mr. Wright and of fiduciary duty by Mr. Kaul.

(b) Messrs Kaul and Wright failed in their duty to keep the NPF Board fully informed of the progress of The Tower development.

(c) The Trustees in office at the time were in breach of their fiduciary duty to the members by failing to insist on a full report and full disclosure from management and for failing to inquire into and inform themselves on these issues. Their failure in these respects amounted to improper conduct.

CONTRACTUAL AND LOAN ARRANGEMENTS APPROVED WITH MINIMAL THOUGHT AND DISCUSSION

Paragraph 7 of Schedule 2B, describes how the NPF Board simply “rubber stamped” management’s recommendations on:-

(a) awarding the K45.447 million building contract to Kumagai;
(b) entering into the K50 million loan facility with PNGBC and
(c) appointing Century 21 with exclusive marketing rights.

Management did not point out to the Board that the loan agreement was based on a fluctuating Indicator Lending Rate (“ILR”) + 0.5 percent interest over 10 years which could leave NPF exposed to a massive increase in its debt burden if interest rates rose (which in fact happened when the ILR rose from 8.5 percent in mid 1997 to 21 percent in 1998). This was gross dereliction of duty by management.

The Commission notes that the Rider Hunt feasibility study of September 1996 assumed a flat interest rate of 9 percent to be set off against projected rental income when calculating net annual income from The Tower. It seems the Trustees were happy to proceed on the basis of gross rental figures.

Findings

(a) The management and Trustees in office at the time, were in gross breach of their duty and fiduciary duty respectively by:-

(i) giving so little consideration to:-
– the Kumagai K45,447,338 building contract
– the K50 million PNGBC loan agreementand failing to obtain adequate expert advice.
(ii) engaging a photographer without calling for tenders.
(iii) appointing Century 21 without going to tender.

(b) The management and Trustees failed to perceive the dangers of agreeing to pay fluctuating interest at ILR over 10 years and failed to consider the effect of sudden changes in ILR on their financial calculations. This was a major cause of the financial loss NPF suffered on The Tower project.

(c) These breaches of duty by management and of fiduciary duty by the Trustees, exposes them to personal liability for the losses incurred by the members as a result of these breaches of duty. It is unlikely that they could avoid liability by claiming to have “acted in good faith”.

DISCUSSIONS ON SECURITY AND LEGAL DOCUMENTATION

The fine-tuning of the documentation between PNGBC, Gadens and Mr Leahy continued through August and September as described in paragraph 7.1.7. It was still assumed that the borrower would be The Tower Pty Ltd.

MINISTERIAL APPROVAL OF K50 MILLION LOAN

On 8th September 1997 after the 1997 National Elections, Mr Kaul requested Ministerial approval of the PNGBC K50 million facility giving brief details, but providing no critical analysis and with no mention of the rate of repayment or the security to be offered.

Acting Minister Hon. Roy Yaki sought DoF advice. After almost one month of consideration at various levels, DoF finally provided advice, which merely summarised Mr Kaul’s brief. It presented no financial analysis, cash flow projections or assessment of NPF’s capacity to service the debt. The loan was then approved by the then new minister for Finance and Treasury, Hon. Iairo Lasaro.

This was a devastating failure of proper process. Neither NPF nor the PNGBC had addressed issues which were critical to the financial viability of the project and this failure was not picked up and addressed by anyone involved in the departmental and Ministerial approval process.

Findings

(a) Mr. Kaul’s brief to Minister Hon. Roy Yaki requesting approval of the K50 million PNGBC loan was totally inadequate, leaving out vital information that was required totally inadequate, leaving out vital information that was required.
(b) The DoF failed to critically analyse NPF’s proposal and failed to request that further information be supplied to enable a proper assessment to be made. The DoF failed its duty in recommending Ministerialapproval in these circumstances.

COSTLY EXTRA WORK REQUIRED ON THE BELOW GROUND FOUNDATIONS

After work commenced, there were immediate problems regarding the foundations, which required pilings at an estimated additional cost of K2 million and a 50 day delay (later extended to 86 days). This was reported to the October NPF meeting (see Schedule 6 where this matter is investigated).

The final cost of strengthening the foundations was K2,725,236 plus redesign work costing K212,496.

This, plus the fact that BSP had refused to purchase equity in The Tower, strained the financial viability of The Tower project. Gaps in legal documentation were still preventing NPF from drawing down on the facility.

ACCELERATION PAYMENT

To get the project back on track, NPF agreed to an acceleration payment of K1,400,000 and the adjusted contract price as at 15th April 1998 was K47 million. NPF was, by then, meeting progress claims by PAC the project manager at the rate of K3 million per month.

SUBSTITUTION OF NPF AS THE BORROWER

In paragraph 7.1.11, Schedule 2B describes how PNGBC agreed to Mr Leahy’s request to substitute NPF for The Tower Pty Ltd as the borrower in the contract documents because of last minute tax advice. The change was agreed without any thought about whether NPF had the power to borrow.

LEGAL DOCUMENTATION

By June 1998, the following legal documents were in place, preparatory to NPF drawing down on the facility:-

1. Floating Kina Loan Agreement between PNGBC and the NPF Board of Trustees drawn by Gadens Lawyers – attested by Mr Henry Fabila and Mr Herman Leahy (This document is dated the 4th of May,the day before the instrument of Mr Fabila’s appointment was signed and gazetted on 5th May 1998).

2. Fixed and Floating Charge between The Tower Pty Limited (Mortgagor), NPF Board of Trustees (Debtor) and PNGBC – attested by Mr Robert Kaul and Mr Herman Leahy.

3.Unlimited Guarantee between the NPF Board of Trustees and The Tower Pty Limited (Debtor and Guarantor) and PNGBC attested by Mr Robert Kaul and Mr Herman Leahy.

4. Mortgage between The Tower Pty Limited (Mortgagor), the NPF Board of Trustees (Debtor) and the PNGBC over Allotment 16 Section 5 Granville (the consolidated description of The Tower site) attested by Mr Robert Kaul and Mr Herman Leahy.

5. Equitable Charge from NPF Board of Trustees to PNGBC over 4,108,779 shares in Highlands Pacific Limited (“HPL”) attested by Mr Robert Kaul and Mr Herman Leahy.

FALSE DOCUMENT PREPARED BY MR LEAHY

Paragraph 9.4 recounts the detailed evidence how Mr Herman Leahy falsely certified 2 resolutions of the NPF Board allegedly passed at a meeting on 5th May 1998, which purportedly authorised NPF management to negotiate and sign the loan facility agreements with PNGBC. The certificate, dated 22nd May 1998, was clearly false and it was used to entice PNGBC to allow the first draw down on the facility.

Findings

The document certified by Mr. Leahy on 22nd May 1998 was false. He should be referred to the Commissioner for Police to consider whether he should be prosecuted under the Criminal Law.

The first drawdown of K21,598,271 occurred on 17th July 1998.

KUMAGAI’S KINA FLUCTUATION CLAIM AND ATTEMPTS TO SELL EQUITY IN THE TOWER PTY LTD

At this stage, the builders, Kumagai, began making a claim for additional costs and currency fluctuations, which were resisted by NPF.

This matter was raised in the June / July 1998 management report, as was the possibility of a sale of equity in The Tower to the PNGHB.

Mr Leahy falsely referred to a meeting between himself and Mr Greg Emilio, the Managing Director of the PNGHB which Mr Emilio denies ever took place.

At the 115th NPF Board meeting on 1st September 1998, the propriety of the un-tendered contract with Century 21 for management of The Tower (previously signed by Mr Wright) was criticised and it was resolved to obtain legal opinions about the possibility of seeking other quotations on the contract. Mr Wright, whose wife was employed by Century 21, strongly opposed this course.

COMMENCEMENT OF THE WAIGANI LAND FRAUDULENT SCHEME

At the 115th and 116th NPF Board meetings in September and November, the first steps in a fraudulent Waigani Land scheme involving Messrs Leahy and Maladina, were put in place.

PAC ADVISES SETTLEMENT OF KUMAGAI’S KINA FLUCTUATION CLAIM – OPPORTUNITY FOR FRAUD

At the 116th NPF Board meeting held on 22nd December 1998, Kumagai’s currency fluctuation claim was discussed. PAC advised that such a claim was not provided for in the contract but recommended agreeing to a settlement in order to prevent a possible walk away by Kumagai. The Board resolved to accept an increased final price of K50.5 million.

DRAWDOWNS ON FDL FACILITY – HUGE INTEREST RATE INCREASE

The first draw down of K21,598,271 occurred on 17th July 1998. By December 1998, the total draw down was K44,352,334 which required interest payments in December of K712,133, at 21 percent ILR.

As the building neared completion, NPF would be paying off K1 million per month and it still had no committed tenants to generate income.

CONSPIRACY TO DEFRAUD NPF

On 19th January 1999, Prime Minister Skate appointed Mr Jimmy Maladina as Chairman of NPF and the new NPF Board was in place. The Commission finds that at this stage, Messrs Leahy and Maladina were conspiring to defraud the NPF in several ways:-

* Fraudulent sub-contract payments through Kumagai and Ken Yapane and Associates during the construction of The Tower;
* The Waigani Land scam whereby land secretly owned by Mr Maladina was intended to be sold to NPF at an inflated price, and whereby Mr Maladina gained an improper commission from exorbitant land valuation fees );
* An inflated commission payable to Mr Sullivan of PMFNRE on the sale of equity in The Tower to PNGHB and
* Fraudulent payments through Ken Yapane and Associates for fictitious office refurbishment for the benefit of Mr Maladina and his associates.

INFLATED DISPUTE SETTLEMENT PAYMENT

After NPF’s offer to settle the Kina fluctuation claim by increasing the contract price to K50.5 million, Kumagai rejected it but made a counter offer of K51.3 million. Hiding these facts away in a schedule to the Board papers and without referring to them, Mr Leahy recommended to the newly appointed Trustees that they authorise management to settle the claim for between K53-55 million. Upon tha deliberately wrong advice, the Board resolved that management should negotiate settlement at K54 million.

The actual payment is dealt with at paragraph 13.7. The full details of this and other Tower-related frauds upon NPF are described in Schedule 6.

VARIATION TO PNGBC LOAN AGREEMENT TO FINANCE THE CONSTRUCTION OF THE TOWER

On 25th January 1999, Mr Fabila, without the knowledge of the NPF Board, sought and obtained the approval of Minister Lasaro to extend the PNGBC facility by K5 million to K55 million and to extend the overdraft facility by K5 million. DoF provided a positive recommendation to the Minister, which merely parroted NPF’s brief and provided no critical analysis.

Findings

(a) Mr. Fabila was in breach of his fiduciary duty to the members of the NPF in seeking approval from the PNGBC to increase NPF’s loan facility by K5 million and extending its overdraft facility by K5 million without obtaining approval from the NPF Board.
(b) Mr. Fabila was in breach of his fiduciary duty by seeking Ministerial approval for NPF’s varied loan arrangements without obtaining approval from the NPF Board.
(c) Mr. Fabila was in breach of his fiduciary duty in not informing the NPF Board about the contents of the PNGBC letter dated 25th January 1999 regarding the interest cost of The Tower loan.
(d) The DoF was in breach of its duty by failing to critically analyse NPF’s request to the Minister and in merely summarising NPF’s request in its recommendations to the Minister.

When Mr Fabila sought a further increase in the overdraft to K8 million a few days later and to increase the FDL to K59 million, PNGBC requested some hard financial details including a revised cashflow, details of confirmed tenants, a revised profit and loss statement for The Tower and a copy of the PwC Report.

Mr Fabila was not able to provide all the required information. He told PNGBC that the revised construction cost was K54.11 million, including K3.3 million to settle Kumagai’s claim. NPF’s loan relationships with both PNGBC and ANZ were in a fragile state, with PNGBC threatening to dishonour an NPF cheque for K368,071.57 made out to ANZ Bank for line fees. This is a clear indication of how serious the loss of fraudulently obtained payments aggregating some K2.5 million was to NPF at this critical time.

In fact, NPF was relying on an increase in the PNGBC overdraft to remain “financial” and an increase in the FDL facility in order to complete The Tower.

Findings

(a) The only thing stopping NPF’s Tower construction project from financial collapse in early 1999 was continuing support from PNGBC.
(b) NPF’s management of The Tower construction was in such disarray that Mr Fabila was unable to produce even basic details required by PNGBC to enable it to consider extending the loan facility.
(c) There were no committed tenants and no profit and loss statements or financial projections for The Tower.

ATTEMPTED FRAUD IN THE PROPOSED SALE OF EQUITY IN THE TOWER PTY LTD TO PNGHB

Both lender banks, ANZ and PNGBC, were reassuring themselves that NPF’s financial crisis could be
solved by selling The Tower, the proceeds of which would be used to retire debt. They would have gained further reassurance when Mr Leahy reported in his June / July report that the PNGHB was interested in acquiring 50 percent equity in The Tower Pty Ltd and this prospect was kept alive for the next few weeks.

Unfortunately, it was not true.

Schedule 2B devotes some time discussing the pressure being put upon the PNGHB to sign the contract because the possibility of that sale going through led NPF management to ignore proper laws and procedures and led PNGBC to ignore the fact that neither the NPF Board or the Minister had approved the K9 million additional loan. The K40 million expected on the sale to the PNGHB would solve NPF’s calamitous cash crisis, which threatened both NPF and the PNGBC. These matters and the fraudulent conspiracy involved in this proposed sale, are dealt with in more detail in Schedule 6. They are touched upon in this report because of their relevance to the PNGBC loan facilities.

Paragraph 13 of Schedule 2B provides details of a fraudulent scheme worked up by Messrs Maladina, Leahy and the Chairman of the PNGHB, Mr John Orea and Mr Maurice Sullivan of PMFNRE. The scheme involved Mr Orea manipulating the PNGHB to purchase 50 percent equity in The Tower Pty Ltd and for NPF to pay Mr Maurice Sullivan of PMFNRE a 5 percent (K2 million) Commission on the deal.

That commission would subsequently be laundered through the accounts of PMFNRE and Carter Newell lawyers and then divided between the conspirators and Mr Peter O’Neill (see Schedule 6). Mr Fabila, who placed his signature on some of the crucial documents, claims to have been duped by Mr Leahy but the Commission has found that he had some knowledge of serious improprieties occurring which he chose not to question or expose, probably in order to safeguard his job.

Findings

Messrs Maladina, Leahy, Orea, Sullivan and Fabila should be referred to the Commissioner for Police to consider whether charges of criminal conspiracy, attempted fraud or other offences should be brought against them.

The details of the fraudulent scam are further outlined in paragraphs 13.2, 13.3 & 13.4, showing how NPF Board approval was obtained to sell 50 percent of the equity in The Tower Pty Ltd for K40 million and how no mention was ever made to the Board of the K2 million commission for Mr Sullivan.

With the fraudulent scam in place it merely required the sale to the PNGHB to be completed. Here the conspirators struck trouble because the managing director of the PNGHB, Mr Robbie Kaivepa, and its legal officer, Mr Erastus Kambur, were men of integrity who realised it would be against the best interest of the PNGHB.

As part of the scam, Mr Orea (who stood to benefit personally) had already agreed to the purchase as Chairman of the Harbours Board, though he had no authority to do so. Mr Kaivepa rejected this as invalid and obtained legal advice that the PNGHB lacked the legal power to make the purchase. Three (3) Ministers wrote letters dated 22nd and 23rd March 1999, in identical terms, approving the sale (Ministers Lasaro, Pok and Auali).

These letters were intended to demonstrate that there was strong political support for the transaction. As PNGHB management remained firmly opposed to the deal, Mr Leahy wrote a letter on 10th June 1999 vaguely threatening future legal consequences.

The sale and the scam came to naught when at its meeting on 17th July 1999, the PNGHB accepted its
management’s firm and honestly reasoned recommendation to reject the proposition to acquire 50 percent of The Tower equity.

PNGBC APPROVES FDL INCREASE TO K59 MILLION AND EXTENDS THE OVERDRAFT FACILITY TO K9 MILLION

The bank approval for these variations was subject to proof of NPF Board approval and also of NPF’s power to borrow. This constituted a problem, firstly, because the NPF Board had not approved the variations, as Messrs Leahy and Fabila had acted without authority in accepting the increase in the facility and, secondly, because NPF did not possess the power to borrow.

Findings

The Commission’s findings clearly show the irregularities which had occurred in relation to this facility:

(a) The approval to sell a 50 percent equity in the NPF Tower, signed by Minister Lasaro dated 22nd March 1999, which was faxed by Carter Newell Lawyers to NPF on 1st April 1999, was drawn up by Carter Newell and backdated to 22nd March 1999.
(b) The approvals by Ministers Lasaro, Pok and Auali to sell to PNGHB, all dated 22nd March 1999,
were also drawn up by Carter Newell, for the purpose of applying pressure on the management and
members of the PNGHB to approve the purchase of 50 percent of the NPF Tower.
(c) Mr Leahy acted unprofessionally in drawing up a certificate recording a circular resolution of the NPF Board dated 26th March 1999 without indicating that it had not been ratified by the Board at a properly constituted meeting and that it was therefore not a valid Board resolution.
(d) Mr Fabila failed his fiduciary duty as a Trustee and his duty to the NPF Board by seeking an increase of K9 million in the PNGBC Tower FDL facility in excess of the amount approved by the NPF Board.
(e) The payment to Kumagai authorised by Mr Fabila on 31st March 1999, was part of a scam involving Messrs Leahy and Maladina to fraudulently obtain K2,505,000 for Mr Maladina’s benefit. On the face of the documents, Mr Fabila was also involved (See Schedule 6). Those involved should be referred to the Commissioner for Police to consider prosecution.
(f) The procedure of obtaining approval for multi million Kina transactions concerning The Tower and other matters by way of circular resolution to be ratified later at the 118th NPF Board meeting in April 1999, was an abuse of process for which management and the Trustees must bear responsibility.
(g) The responsibility for the scam involving the 5 percent (K2 million) commission to Mr Sullivan of PMFNRE lies with Messrs, Leahy, Maladina and Sullivan. On the face of the documents, Mr Fabila was also involved.
(h) Mr Fabila as managing director and Mr Maladina as chairman, knowingly withheld from the NPF Board that Mr Fabila had signed an agreement to pay Mr Sullivan of PMFNRE a 5 percent commission on the sale of the 50 percent interest in The Tower. This was a breach of fiduciary duty by Messrs Fabila and Maladina.
(i) The scam to defraud the NPF over the sale of the NPF Tower amounted to a criminal conspiracy and Messrs Leahy, Maladina, Fabila, Sullivan and Ms A. Sariman should be referred to the Commissioner of Police to consider bringing criminal charges.
(j) Messrs Leahy and Maladina and Ms Sariman should also be referred to the Law Society of PNG to consider disciplinary measures.
(k) The PNGBC was remiss in failing to follow up its inquiry in April 1999 about NPF’s power to borrow, especially as it had knowledge of a previous legal opinion that NPF had no such power.
(l) The NPF Board was in breach of S.61(2) of the PF(M) Act when management (Messrs Fabila and
Leahy) accepted the increase in the PNGBC (Tower) FDL without obtaining prior approval from the NPF Board and the Minister.

SPECIAL NPF BOARD MEETING – 30TH APRIL 1999

This was the first meeting at which the Board was given full details about the loan facility and the
PNGBC conditions attached to it. It showed also that the NPF management was still holding out hope that the sale of the 50 percent equity in The Tower to PNGHB would succeed. The minutes show that the Board had considered Kumagai’s proposal to extend the completion date to 30th June 1999 but had firmly rejected it. It instead insisted on completion by the agreed date being 30th May 1999 or it would seek liquidated damages for any overrun.

PNGBC AND NPF CONFER AND AGREE ON NPF’S DEBT REDUCTION STRATEGY – MAY 1999

At meetings in May 1999, between PNGBC and NPF it was agreed that Mr Mitchell would continue negotiations with Mr Hersey of PNGBC. Negotiations seem to have gone well between May and October 1999.

PNGHB RESISTS FURTHER PRESSURE AND REJECTS A PROPOSAL TO BUY EQUITY IN NPF TOWER

Despite pressure from Mr Leahy on 10th June 1999, threatening legal consequences if the PNGHB withdrew from the transaction and despite a similar letter from Fiocco Posman Kua Lawyers, the PNGHB met on 17th July 1999 and finally and firmly rejected the proposal. This brought to a close Mr Maladina’s fraudulent scam to obtain the K2 million commission through Mr Sullivan of PMFNRE.

This outrageously excessive commission agreement had never been disclosed to the NPF Board. By contrast, when there was a later offer by another potential buyer to purchase The Tower for K69 million, the commission, which was to be only K775,000, was immediately disclosed to the NPF Board.

NPF MANAGEMENT PROVIDES EFFECTIVE SERVICE TO THE BOARD AND ADVISES OF FINANCE PACIFIC OFFER

Prior to June 1999, management, under Mr Rod Mitchell, had begun providing fully informative briefings to the Board in monthly papers. As at 30th June 1999, the Board received a performance analysis on The Tower including debt servicing cost, valuation, current leasing and expected income, schedule of overheads and return on book value. Mr Mitchell recommended selling The Tower.

The brief included documentation of an offer from Finance Pacific to purchase NPF’s BSP shares and assume NPF’s debt to PNGBC for K60 million which was exactly equal to NPF’s debt to PNGBC on The Tower FDL. By 5th August 1999, NPF had accepted the offer as The Tower was then costing NPF K1 million per month and its sale was crucial to NPF’s debt reduction strategy.

In August and September, NPF pursued the Government to revalidate its guarantee for the Roadstock to enable it to be assigned to PNGBC and asked PNGBC to capitalise the K900,000 per month interest debt in the meantime.

INVESTIGATIONS AND RECRIMINATIONS

At the 29th September NPF Board meeting, many serious complaints were aired about NPF affairs,
including matters related to the Waigani Land and NPF Tower frauds. These were followed up at the
October special Board meeting. Accusations were made against Mr Maladina and Mr Leahy.

INTERNAL FINANCIAL CONTROL RE-ESTABLISHED AT NPF

By mid June 1999, although NPF was still in very difficult financial circumstances, with the unsold Tower still draining off interest payments at K1 million per month, the new management team, under Mr Mitchell, advised by Mr Paul Marshall of PwC, had brought financial procedures under control and were progressively reducing the burden of debt by a concerted effort to sell off assets. These strategies had been formulated and implemented in consultation with Mr Hersey of PNGBC.

FINANCE PACIFIC MOVES TO TAKE CONTROL OF NPF’S ASSETS

It therefore came as a shock when Mr Rimbink Pato, the Executive Chairman of Finance Pacific, move to appoint an “Informal Administrator” to take control of NPF in order to protect the interests of PNGBC (a member of the Finance Pacific Group). The Finance Pacific Group was NPF’s major creditor with claims against most of NPF’s assets as security for The Tower FDL.

As part of a Skate Government restructuring of financial institutions, the PNGBC, MVIT, Agricultural Bank, National Investment Corporation and the Resources and Investment Finance Ltd were brought under the control of a newly created body, Finance Pacific Investments Ltd under the Executive Chairmanship of Mr Rimbink Pato.

Paragraph 17.1 describes how Mr Pato undermined the job tenure of the Finance Pacific Group General Manager, Mr Ken Bromley, in October 1999 and then appointed him as “Informal Administrator” of the NPF, claiming to be entitled to do so in order to protect the assets of NPF pledged as security for the K60 million owing to PNGBC on The Tower FDL facility.

Mr Pato clearly expected Mr Bromley to accept his directions to take control of NPF’s major assets on behalf of Finance Pacific, which controlled PNGBC. As an inducement (or possibly a veiled threat) it was pointed out to Mr Bromley that this appointment gave him an opportunity to demonstrate his higher managerial skills.

The report details the hard line adopted by Mr Pato and the pressure put on Mr Bromley to dismiss Mr Mitchell and oppose the appointment of PwC to “ensure an independent assessment of NPF’s viability over the coming six to twelve months” (paragraph 17.11). Early relationships between Mr Bromley and senior NPF management were strained and objection was taken to his presence at Board meetings. NPF quickly got legal advice, which confirmed that Mr Pato lacked the power to appoint Mr Bromley as Informal Administrator. However, largely because of the patient and understanding approach taken by Mr Bromley, NPF agreed to cooperate.

Luckily for NPF and its members, Mr Bromley was a man of integrity who formed a beneficial relationship with Messrs Mitchell and Marshall and adopted a patient “hands off” approach, as he saw that NPF was applying open, transparent procedures and following the rules of good corporate governance. It had also formulated and was conscientiously performing appropriate financial strategies, which were rapidly bringing NPF under proper financial control and reducing its burden of debt. Mr Bromley saw that those policies and strategies were working for the interests of both PNGBC and NPF’s members.

The fact that Mr Pato and his deputy Mr Hersey were not happy with this turn of events but wished to apply non-legal pressure on NPF management and NPF’s assets, indicated that they had a different and improper agenda.

Mr Bromley wrote four (4) reports to Mr Pato on the progress of NPF’s financial restructuring, the soundness of PNGBC’s security situation and the progress towards retiring the NPF debt to PNGBC.

They were all positive reports, which virtually precluded any possible attempt by Finance Pacific or PNGBC to deal with NPF’s assets.

Paragraph 17.18 of Schedule 2B, quotes an unused “draft” paragraph written by Mr Bromley that exposes the pressure, which was brought to bear on him by Finance Pacific and hints at hidden agendas.

Findings

(a) A concerted attempt by Finance Pacific to destabilise NPF by arranging for the dismissal of Mr Rod Mitchell was thwarted by the fact that Finance Pacific’s “Informal Administrator”, Mr Ken Bromley, was a man of integrity who realised that with appropriate encouragement and guidance, NPF’s new management and Board would bring NPF’s finances under control.
(b) NPF management under Mr Mitchell, assisted by Mr Paul Marshall of PwC, formulated sound financial strategies and obtained sound legal advice regarding the limit of Finance Pacific’s powers to take control of NPF’s assets.
(c) When Messrs Bromley, Mitchell and Marshall of PwC combined to ensure NPF was allowed time to implement its strategies, it was in the best legitimate interests of Finance Pacific as a concerned creditor and of NPF and its members. This combination of three men of integrity, armed with sound legal advice, brought Finance Pacific’s plans to a halt.
(d) The attempt by Mr Rimbink Pato of Finance Pacific to gain control over NPF’s assets, exceeded the legal powers of Finance Pacific and amounted to improper interference with the management of NPF. As Mr Pato was subject to the Leadership Code, his conduct should be referred to the Ombudsman Commission to consider his liability for breaches of the Leadership Code.

POWER TO BORROW

Finally, the report concludes by detailing the failure of PNGBC to follow up on knowledge it had (corporately) obtained by at least 14th August 1998, that there was competent legal opinion that NPF had no power to borrow, pledge assets or give guarantees.

TO BE CONTINUED

National Provident Fund Final Report [Part 17]

August 27, 2015 Leave a comment

Below is the seventeenth 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.

NPF Final Report

This is the 17th 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. 

Mr WRIGHT ADVISES NPF BOARD OF EXISTENCE OF A K4 MILLION OVERDRAFT

In May 1998, PNGBC incorporated the various assets over which it had obtained security for the overdraft facility into the security it held for the PNGBC Tower loan.

It was not until June 1998 that Mr Wright provided any information to the NPF board about the long-standing overdraft. At this time it stood at K4 million. The information provided to the board, however, was very guarded and misrepresented the true facts.

Findings

(a) Disclosure of the overdraft facility by management (Mr Wright and Ms Dopeke) to the NPF board at the 113th board meeting on July 2, 1998, was inadequate and misleading as it implied that the overdraft was a new event and failed to mention it had been in place a long time; and
(b) Minister Lasaro was in breach of his duty as a Minister in not seeking DoF or other expert advice before approving the K4.5 million overdraft on August 19, 1998.

FURTHER OVERDRAFT ASSISTANCE FOR NPF BOARD

From August 1998, NPF required temporary overdraft assistance from PNGBC of K5 million to help meet its cash flow crisis. NPF management made minimal explanation to the board and the trustees failed to notice that management was exceeding its authority.

Findings

(a) PNGBC was remiss in August 1998 in not insisting that it sight board and ministerial approval before granting the K5 million temporary overdraft facility at 22.75 per cent interest;
(b) NPF management and Mr Wright in particular was in breach of duty in not keeping the NPF board fully informed and seeking approval for the K5 million overdraft facility;
(c) Mr Wright and NPF management failed to obtain approval from either the NPF board or the Minister for the K5 million overdraft facility;
(d) As the NPF 1998 Annual Report showed overdraft at December 31, 1998 of K6,770,000, both PNGBC and NPF trustees were negligent in not perceiving that this was in excess of the K4.5 million approved by the Minister of Finance.

NPF ADVISED OF LACK OF POWER TO BORROW FUNDS

When in August 1998, Gadens advised PNGBC that NPF lacked the power to borrow, PNGBC continued to lend to NPF, thus creating a very real possibility that the loan may not be recoverable and exposing the bank to a possible class action brought on behalf of NPF members in the future.

Findings

(a) Management’s reporting to NPF board in the last half of 1998 was scant and misleading as the overdraft balance was netted off against credit balance. This concealed the fact that NPF’s account with PNGBC was overdrawn by K6 million;
(b) The NPF board was remiss in accepting and not questioning such scant information and in simply approving confirmation of the overdraft facility at a level in excess of that earlier approved by the board and the Minister.

NEGLIGENCE OF NPF AND PNGBC

By December 31, 1998, NPF’s overdraft with PNGBC was K6,770,000 and it was having difficulty meeting its commitments to reduce it.

Findings

As the NPF 1998 Annual Report showed an overdraft at December 31, 1998, of K6,770,000, both PNGBC and NPF trustees were negligent in ignoring the known fact that this overdraft figure was in excess of the K4.5 million approved by the Minister of Finance.

FURTHER INCREASE IN FACILITY

PNGBC then acceded to NPF’s improper request to increase the overdraft facility even further by increasing it to K7 million subject to board and Minister’s approval.

The Department of Finance (DoF) recommended that the Minister give his approval without performing any analysis of the situation.

Findings

The Department of Finance was clearly remiss in not obtaining advice and not pointing out to the Minister – as it should have earlier:-

(a) Section 56 does not apply to the NPF Board of Trustees as it is not “a public body to which this Act applies”; and
(b) the NPF Board of Trustees has no power to borrow at all;
(c) the Minister should accordingly not grant approval under Section 61 of the borrowing as a contract because it was ultra vires the NPF board’s powers; and
(d) Those involved in giving advice to the Minister were clearly remiss in their duties.

REQUEST TO INCREASE OVERDRAFT FACILITY

The NPF board was notified of the overdraft extension to K7 million and a request for a further K2 million as well as a K9 million addition to the NPF Tower loan after the event.

Findings

(a) NPF management was remiss in the way it sought board approvals for extensions of the PNGBC overdraft facility to the extent that a valid approval was not obtained before management entered a binding commitment;
(b) The NPF board was remiss in not questioning management’s actions and not censuring management for acting in excess of its lawful authority.

ASSETS SALE TO REDUCE OVERDRAFT

By March 1999, Mr Marshall of PwC was helping NPF reduce its burden of debt by selling off assets.

The proceeds were used to reduce the PNGBC overdraft, which had been almost eliminated by January 2000. A similar overdraft for Crocodile was to be eliminated soon afterwards.

CONCLUDING COMMENTS

In addition to the major point that NPF had no power to borrow at all by way of overdraft or any other form of loan, the major discovery which the study of the PNGBC overdraft facility disclosed was that it had been arranged by NPF management secretly and that, mostly, PNGBC had gone along with management’s failure to obtain board (and sometimes ministerial) approval.

Entering into and using an overdraft facility is a contract requiring Ministerial approval in accordance with the sum involved. Deceptive accounting had initially hidden the existence of the overdraft and even after it had been disclosed to the board, the management provided misleading information. These matters were not properly regularised until Mr Mitchell had been appointed in 1999.

Executive Summary Schedule 2B

This is a summary of Schedule 2B which deals with the financing and construction of the NPF Tower.

See Schedule 6 also for details of special investigations into certain matters relating to the NPF Tower.

References in this summary to paragraph numbers in the report (unless otherwise stated) refer to the report on the NPF Tower loan set out in Schedule 2B.

deloitte-tower

INTRODUCTION

This report focuses on the loan funding obtained from the PNGBC to construct the NPF Tower.

It also outlines relevant aspects of the construction of the tower in order to provide background context for the loan funding. It overlaps to some extent with Schedule 6, which reports on several matters mentioned in this report that required detailed investigations.

RELATIONSHIP OF THIS REPORT TO SCHEDULE 6 – THE REPORT ON NPF TOWER 
INVESTIGATIONS

Schedule 2B reports on the decision to construct the NPF Tower, the incorporation of a company, The Tower Pty Ltd, to be the legal entity for the project; the tenders procedures and building contracts which resulted in the appointment of Pacific Architects Consortium (PAC) as the architects and Kumagai Gumi Company Ltd as the builders; the financing of the project and the performance of NPF management and the board in obtaining and servicing the loan from PNGBC; difficulties and claims during construction and machinations to sell a share in the tower to the PNG Harbours Board (PNGHB).

Schedule 2B also describes the history of the construction, with initial delays and increasing costs of K2 million caused by unexpected problems with the foundations.

It describes increased costs due to architect approved variations and an increase in costs of K1 million because of a genuine acceleration claim and of K2.5 million resulting from a fraudulently inflated settlement of a currency devaluation claim and a fraudulent second acceleration claim.

Further investigation of this fraud and other suspicious activities are reported upon in Schedule 6 which also relates the full history of the frauds perpetrated by Jimmy Maladina, Herman Leahy and Angelina Sariman in early 1999 whereby they illegally obtained K2.5 million from NPF and attempted to benefit from a K2 million commission to Port Moresby First National Real Estate (PMFNRE). It also reports upon the involvement of Peter O’Neill, Maurice Sullivan and Ken Barker.

Schedule 6 presents the results of the commission’s investigation into the money trail, which traced the “dirty money”, as far as possible to its eventual recipients.

The trail leads through the bank accounts of Carter Newell Lawyers and PMFNRE to the intended beneficiaries who include Mr Maladina, Mr Leahy and Ms Sariman as well as the directors of PMFNRE

Ken Barker and Maurice Sullivan and Peter O’Neill, executive chairman of the PNGBC and Finance Pacific and the secret “owner” of PMFNRE.

In this Schedule 2B those criminal matters are merely outlined, in order to provide background content for the loan funding for the construction of The Tower, which is the major focus of this Schedule.

EARLY DISCUSSIONS

The tower project was first discussed at NPF board meetings in December 1994 when K1.5 million was approved for preparing documentation to the pre-tender stage. Ministerial approval for K1.93 was requested and obtained by management, which was in excess of the board’s resolution. Throughout 1995, the board proceeded with caution and sought details of the financial viability of the project, refusing to be pressured by Mr Wright into premature approval.

Findings

(a) In 1995, the board authorised expenditure of up to K1.5 million to get the proposed NPF Tower development to pre-tender stage and made it clear that NPF by itself should not be exposed to a venture of this magnitude. The board emphasised the need for joint venture partners;
(b) Although the NPF board approved feasibility costs of only K1.5 million to pre-tender stage, Mr Wright exceeded his authority by seeking and obtaining Ministerial approval for such costs to K1.93 million;
(c) The Minister was not told that the board had only approved K1.5 million;
(d) The board was not told the Minister had approved K1.93 million;
(e) The cost estimate for the construction of the NPF Tower was K39.285 million;
(f) There were no projected rental calculations from Mr Wright as requested by the board; and
(g) No information on possible joint venture partners was forthcoming from Mr Kaul.

The project was temporarily shelved while management unsuccessfully sought joint venture partners.

When the project was revived by Mr Copland, Mr Kaul and Mr Wright in mid 1996, they discussed partial loan funding and the ANZ Bank, which was NPF’s major financier, was keen to provide a loan facility but under BPNG guidelines, it was unable to do so because ANZ was already over exposed to NPF.

APPROACH TO PNGBC FOR A LOAN FACILITY

By August 1996, the project was being pushed along by NPF chairman Copland as interest rates were low and he felt the time was ripe (paragraph 2.7.2).

With Mr Kau’s support, the project was approved in principle by the NPF board on August 27, 1996.

This approval was premature and based on little detailed information.

Findings

(a) The trustees failed in their fiduciary duty to the members by approving the development of the NPF Tower despite obvious deficiencies in the information provided to them on key matters such as thorough marketing evaluation, rental calculations and the availability of a joint venture partner.
(b) The trustees failed to inquire into the unexpected doubling of the approved K1.5 million initial investigation costs to K3 million.

Mr Wright approached Mr Holmes of PNGBC in October of 1996 (paragraph 3.1). He welcomed the possible business but wisely expressed precautions about the lack of research into the financial viability of the project and noted that the loan should be limited to K25 million which was about 50 per cent of the projected cost of the project. He felt that 100 per cent loan financing would lead to a prohibitively high interest rate burden. Unfortunately, this wisely cautious approach was later abandoned by PNGBC.

MINISTER HAIVETA APPROVES THE CONSTRUCTION OF THE NPF TOWER AT A COST OF K40 MILLION

NPF’s headlong rush into this risky and expensive venture continued and no brakes were applied by the supervisory bodies. Mr Kaul’s submission for Minister Haiveta’s approval provided no detailed financial analysis. The Minister granted approval without waiting for Department of Finance advice.

The DoF advice, when it came, provided no critical analysis of the economics of the proposal.

Findings

(a) Mr Kaul failed to provide a properly researched brief to the Minister to support his request for approval of the NPF Tower project;
(b) Senior officers in the DoF failed their duty to provide the Minister with an objective critical analysis of the proposal;
(c) Minister Haiveta failed in his duty to act on independent expert advice and granted approval without any expert advice other than the preliminary feasibility studies submitted by NPF. In granting premature approval to a half thought out project in these circumstances, Minister Haiveta was guilty of improper conduct;
(d) The approval was given even though there had been no market research to determine possible occupancy and achievable rental rates. There were no plans formulated to finance the total cost of the project or to service the debt over a stated time frame. The only due diligence and documented material available to the Minister and his advisors was the feasibility assessment by Rider Hunt;
(e) The hasty process by which Ministerial approval was given and recorded may have resulted in conditions imposed by the Minister being not recorded in writing.
(f) As both the Minister and the senior officers of the DoF failed in the discharge of their duties – this resulted in premature Ministerial approval of a poorly thought out, unresearched, unplanned and extremely speculative expenditure of up to K40 million of members funds.

MR WRIGHT APPLIES TO PNGBC FOR K50 MILLION LOAN FACILITY

Without NPF board authority, Mr Wright began negotiating the loan arrangements with Mr McAnally of PNGBC, seeking a K50 million facility on security of the tower, Highlands Pacific shares and an NPF guarantee. The Tower Pty Ltd was shown as the borrower.

While PNGBC were considering the loan application, the NPF board continued to make ill-considered decisions in February and May 1997 towards implementing the project, including the un-tendered appointment of Century 21 Siule Real Estate to market the leasing of the tower (paragraph 4.6) and the appointment, after considering tenders, of Kumagai as builder. The board was not informed of the proposals to borrow K50 million from PNGBC.

Findings

(a) The management and trustees were in breach of their duty in appointing Century 21 to market the tower leases without calling for tenders;
(b) Mr Wright acted improperly in not disclosing to the board that his wife was employed by Century 21.

PNGBC APPROVES K50m FACILITY

With the PNGBC Lending Committee about to meet, Mr Kaul quickly obtained approval from acting Minister Konga to increase the cost of the project by K10 million to K45 million.

In recommending approval of the loan facility, the PNGBC Lending Committee gained reassurance from the fact that it was a fixed price contract which it felt removed the possibility of subsequent costly kina fluctuation claims and that NPF would itself be able to finance any cost over K50 million.

Both these sources of assurance proved to be unwarranted as later there was a successful kina depreciation claim and NPF was not able to meet costs more than K50 million from its general revenue.

TO BE CONTINUED TOMORROW

Court Rulings confirm SABLs null and void

August 27, 2015 1 comment

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Special Agriculture Business Leases (SABL) have been used to secure the mass alienation of over 5 million hectares of customary land for periods of up to 99 years.While the debate over cancellation of the leases rages on between civil society groups, affected landowners and the State, it is interesting to examine what the Courts have said about these land deals.

Since 2007 there have been five reported legal cases in which the validity of an SABL has been challenged through the Courts. In all five cases the courts have found the SABL was not granted in accordance with the law and proper process and the breaches by Department of Lands Physical Planning (DLPP) were so serious that the lease was declared null and void.

These findings add weight to those of the SABL Commission of Inquiry which also found serious breaches of the law and proper process and recommended all but four of the 42 leases reported on be revoked.

Here is a brief summary of the Court cases:

Ramu Nickel Ltd v Temu [2007]

This case involved a SABL granted over land described as portion 19C, Milinch Sepu, Fourmil Ramu, Madang Province in August 2003. The Court, granted an order quashing the decision of the Minister for Lands granting the lease and the registration of the lease by the Registrar of Titles. The court also ordered the Registrar of Titles to de-register or cancel the registration of the lease.

Musa Valley Management Company Ltd v Kimas [2010]

A SABL over 211,600ha of land at Portion 16C, Milinch Gona, Fourmil Tufi was granted to Muida Holdings Limited in December 2008. In finding the lease null and void the Court declared that:

“The procedures for acquisition of the land by the State under Sections 10 and 11 and for granting of the lease under Section 102 were not complied with as the customary landowners or at least a substantial majority of them did not agree to either process…The errors of law were significant. The acquisition by the State of customary land, by lease, under Sections 10 and 11 of the Land Act and the subsequent granting of a lease by the State to a lessee can only proceed lawfully if a substantial majority of customary landowners agree. There was a lack of agreement in this case at both stages of the process…The Secretary’s decisions to grant the lease were seriously flawed and therefore his decisions were quashed and the leases declared null and void.”

Mahuru v Dekena [2013]

This case also involved a SABL granted over an 8.51 hectare block of land at Taurama Valley in the National Capital District in June 2010. The Court found that the procedures in the Land Act were not followed and the Minister erred in law by:

  • not meeting with the plaintiffs and agreeing on the terms and conditions on which the land would be acquired by the State, contrary to Section 10(2)
  • not inquiring into and being satisfied of the use of the land, contrary to Section 10(3)
  • not ensuring that an instrument of lease in the approved form was executed by or on behalf of the customary landowners, contrary to Section 11(2)
  • granting the lease to the fifth defendants, who had not been appointed by the plaintiffs or their clan members, contrary to Section 102(2)

The errors of law were so numerous and serious as to amount to constructive fraud. The Court’ quashed the lease and the lease was declared null and void.

Justice Cannings stated:

“To lawfully grant a Special Agricultural and Business Lease over customary land the Minister must comply with all of the requirements of Sections 10, 11 and 102”.

“The elaborate procedures in Sections 10, 11 and 102 of the Land Act have been inserted for a reason: to ensure that leases over customary land are granted only after a thorough identification and investigation of the land and the customary landowners and their agreement to what is proposed. In PNG land is a critical natural resource required by National Goal Number 4 to be conserved and used for the benefit of the present generation and for the benefit of future generations”

“Decisions about the transfer of interests in customary land must be made carefully and thoughtfully and in strict accordance with procedures prescribed by law.”

Maniwa v Malijiwi [2014]

This case involved a SABL over Portion 144C, East Sepik Province, granted to Sepik Oil Palm Plantation Limited in September 2008. The judge reiterated that in order to lawfully grant a Special Agricultural and Business Lease over customary land, the Minister must comply with all the requirements of Section 10, 11, and 102 of the Land Act.

In this case the Minister had failed to comply with those Sections.

The court also found the SABL was issued in breach of S.53 of the Constitution, in that the landowners were unlawfully deprived of their customary land.

For these reasons, the SABL was declared null and void and “Any other related actions or projects undertaken or done either pursuant to or in relation to the SABL, such as logging agreements and or planting of oil palm in the SABL area are also declared illegal and null and void”.

Isu v Ofoi OS [2014]

This case involved two SABLs. First, the SABL over Portion 113C Milinch Murua Fourmil Tufi, Oro Province granted to Sibo Management Limited in July 2012 was declared null and void and was quashed.

Secondly, the SABL over Portion 143C Milinch Kupari Fourmil Tufi, Oro Province granted to Wanigela Agro Industrial Limited in July 2012 was also declared null and void and was quashed.

The court ordered the original owner copies of the title deeds be surrendered to the Registrar of Titles for cancellation and the Registrar to make all necessary amendments and deletions to the Register of State Leases to give effect to the Order.

Conclusions

These five cases have made it to the Courts because of the determination and drive on the part of landholder groups to organize, fundraise and seek justice from the Court. But what about the numerous others cases stalled in the judicial process or which are unable to even be registered because landholder groups do not have the means to engage in a court battle? When is the State going to intervene on behalf of its people and ensure the rule of law is upheld? What happens when the State fails to protect its own citizens where they suffer as a result of negligence on the part of State agents and employees?

While we wait to find the answer to these questions, the National Elections approaches!

National Provident Fund Final Report [Part 16]

August 26, 2015 Leave a comment

Below is the sixteenth 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.

NPF Final Report

This is the sixteenth 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.

The IRC has lists of group employers and their employees for the purposes of ensuring that all employers contribute the PAYE tax deductions for all their employees and recording PAYE tax deducted in respect of each employee annually in the form of a group certificate.

There would appear to be merit in information exchanges between NPF and IRC so each can detect defaulters.

There appears to be no legislative impediment to IRC obtaining information from NPF.

Section 9 of the Income Tax Act, however, precludes IRC providing information on a tax payer to NPF. Consideration should be given to removing that impediment and allowing limited access to NPF.

Pressure to invest in Government Bonds and Roadstock

(a) This conflict of interest situation would be resolved if the Government was not represented upon the NPF board and if the Minister’s powers to direct NPF to take account of the Government’s economic priorities were removed.
(b) While the Government continues in this role, at the very least DoF should ensure that NPF is given independent advice when the Government’s interests are so clearly at stake. Naturally, public service representative trustees should declare their conflict of interest and refrain from voting. These principles should be enshrined in the legislation.

Corporatisation exercise

(a) The Government should honour its obligations under the law and not use its powers to force NPF into possibly unfavourable arrangements. In this and future corporatisation exercises, the Government should pay out the employers contributions to NPF when the former public employees are transferred over as NPF members.
(b) This will occur again as additional public enterprises are corporatised. If the required amounts cannot for some reason be set aside from the price received on sale of the enterprise, then the Government should borrow in order to pay its employers’ contribution to NPF or issue marketable securities which are readily saleable.

False accounting

Directions to indulge in false accounting should cease.

Non-compliance with requirement to make quarterly and annual reports

(a) The central bank regulator should be empowered and directed to monitor NPF’s compliance with its reporting obligations;
(b) Criminal sanctions should be prescribed for wilful failure to report as required and the regulator should be given the power to appoint an inspector or administrator to inquire into the state of the fund.

The regulator should be empowered to remove trustees and officers, to direct the fund to appoint replacements and to administer the fund pending the appointment of new trustees and officers.

Failure of the Secretary to exercise powers under Section 50 of the PF(M) Act to seek performance and management plans and to carry out a performance review

Either the PF(M) Act needs to be simplified and made more specific or other steps need to be taken administratively to ensure DoF officers understand the legislation which they administer. Under the system now recommended by the commission, these powers should be vested in the BPNG regulator.

All powers presently existing for the Minister and the Secretary should be given to the BPNG regulator.

Political direction to refrain from new investments

(a) The commission recommends that NPF should not be subject to such directions from the Prime Minister. The NPF board should be in control of such matters.
(b) If the power to make directions regarding NPF’s investment is to be retained in some form, it should be given to the BPNG regulator to exercise.

Political interference in NPF’s overseas travel

NPF should be freed from such political controls. Management’s travelling should be under the control of the NPF board. However, there should be a specific obligation on the board to report annually to the members and the regulator on overseas travel expenses of trustees and management, together with the reasons for the travel.

Salaries and Conditions Monitoring Act

(a) A policy decision needs to be made whether this Act has application to the remuneration payable to officers and employees of a private employees superannuation fund. The resulting policy (either yes, no or sometimes) should be written into the NPF Act;
(b) It is desirable that some restraints be imposed upon excessive remuneration for managers but this should be achieved by requiring that all such employment contracts be submitted to the regulator for approval.
(The regulator should also be required to vet the appointment by applying the “fit and proper person” test to the senior officer being appointed).

Tenders procedures for procurement and disposal of assets and services

The appropriate clauses governing tenders procedures should be written into the NPF Act.

The Senior Management Bonus Scheme

(a) The NPF board should not approve such schemes;
(b) Management contracts and other forms of remuneration should be submitted to the regulator for approval.

Subsidiary corporations

(a) NPF should be obliged by legislation to limit the powers of a 100 per cent owned subsidiary to the four corners of the NPF’s own powers;
(b) A discrete accounting system for each corporation needs to be established, distinct from NPF’s accounts;
(c) Reporting obligations of wholly owned corporations should not be merely to the board of the corporation but also to the NPF board. Thus, Crocodile management reports should be tabled at the NPF board meetings not just at the Crocodile board meetings.

The Auditor- General’s Report

(a) The NPF board should be responsible for ensuring that its financial statements are properly audited and that the financial statements and the audited report is presented to the regulator by the due date;
(b) The obligation to monitor compliance with this requirement should be vested in the regulator and there should be sanctions applicable against the managing director and the trustees for significant non-compliance.

Serious weaknesses in accounting

Though many of these matters have been addressed by NPF and many of the weaknesses will probably be solved by the Audit and Remuneration Committee which NPF has since created and the outsourcing of the administration function, it is imperative that the accounting standards which NPF must achieve be enshrined in legislation or prudential guidelines; that a periodic external review mechanism be put in place and that the monitor is empowered to require NPF to address and promptly remedy weaknesses detected by such periodic reviews.

Executive Summary

SCHEDULE 2A: INTRODUCTION TO BORROWINGS – PNGBC OVERDRAFT FACILITY

This is a summary of the commission’s report on introduction to borrowing – PNGBC Overdraft Facility Schedule 2A.

BACKGROUND TO BORROWINGS

This schedule examines the background to borrowings by the NPF and how the borrowings were supported by a negligently wrong legal opinion given by NPF legal counsel Herman Leahy that NPF had the power to borrow.

Findings

Mr Leahy’s legal opinion that NPF had the power to borrow was incompetent and wrong. It amounts to professional negligence.

BORROWINGS FROM JANUARY 1, 1995 TO DECEMBER 31, 1999

In paragraph 3, the schedule surveys NPF’s borrowings between January 1995 to December 31, 1999, which commenced with a covert overdraft with PNGBC, and lists facilities with BSP (K30m) and (K40 million and $A40 million) and PNGBC (K50 million) together with a failed attempt to issue an Australian dollar bond. Most of these facilities have been reported separately: ANZ – Schedule 2E, BSP – Schedule 2C, PNGBC K50 million – Schedule 2B, Australian dollar bond – Schedule 2F. This schedule reports in detail on the excessively secret PNGBC overdraft facility and NPF management’s irresponsible failure to inform and obtain approval from the NPF board or from the Minister regarding the overdraft facility.

Findings

Although there was an overdraft borrowing in existence from at least 1993 to December 31, 1995, that borrowing was not approved by the NPF board or the Minister. Approval was necessary as the borrowing was a contract for a value of more than K300,000.

MANAGEMENT CONCEALS BORROWINGS FROM BOARD

Not only did NPF management not keep the board informed about the continued use and increasing size of the overdraft facility but it adopted wrong accounting methods, which concealed the existence of it.

This was achieved by netting the overdraft debits against cash credits in other accounts. Both NPF management and PNGBC officers were negligent in not seeking competent legal opinion about NPF’s power to borrow.

Findings

(a) During 1995, Noel Wright was in breach of duty for not clearly and fully disclosing to the board of trustees the fact and extent of borrowing from PNGBC by way of overdraft and by not reporting correctly on these borrowings in NPF’s financial statements;
(b) Neither the NPF Board of Trustees nor the Minister approved these borrowings, which were hidden from them by the offset treatment in the 1994 accounts;
(c) After 1995, the existence of the overdraft facility was disclosed in the financial statements and the trustees were negligent in not questioning management about it;
(d) NPF management, particularly legal counsel Herman Leahy, were in breach of duty for not seeking competent legal opinion on NPF’s power to borrow;
(e) PNGBC was negligent in not seeking independent expert opinion about NPF’s power to borrow before entering into any loan agreement with NPF;
(f) NPF management and trustees were in breach of duty by not seeking expert financial advice about the financial rationale for using an overdraft facility.

SECRET OVERDRAFT FOR CROCODILE

NPF management deceived the board by obtaining a K1.5 million overdraft in May 1997 for Crocodile. PNGBC cooperated with NPF management.

Findings

(a) NPF management was in breach of duty to the board in applying for a temporary excess facility of K1.5 million for seven days without board or ministerial approval;
(b) PNGBC was negligent in granting the excess without sighting the approvals from the board and Minister and in not carrying out due diligence.

TO BE CONTINUED TOMORROW

National Provident Fund Final Report [Part 15]

August 25, 2015 Leave a comment

Below is the fifteenth 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.

NPF Final Report

This is the fifteenth 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.

Some of the commission’s recommendations regarding the NPF cover the same topics dealt with in the Superannuation Act. The commission hopes that its recommendations, which are specific to the NPF and the NPF Act will be considered as part of the general policy development, which is now occurring.

List of the Commission’s recommendations on the structure of NPF between 1995 and 1999

At the paragraphs in Schedule 1 listed below the commission has made the following recommendations:

Selections, qualifications and quality of Trustees

(a) The Minister’s powers of appointment and termination of appointment of trustees should be removed;
(b) There should be no public service representative trustees on the board of NPF;
(c) The ex officio appointment of the Secretary of DoF as chairman of the NPF Board of Trustees should be removed;
(d) The chairman should be appointed by the board;
(e) New employer representative trustees should be selected and appointed by organisations representing employers (They need not themselves be an employer);
(f) New employee representatives should be selected and appointed by organisations representing employees (They need not themselves be an employee);
(g) The organisations entitled to take part in the selection and appointment of Trustees should be specified in or under the legislation;
(h) Prior to appointment, all selected trustee designates should be vetted by the regulator and satisfy the regulator that they are fit and proper persons to be appointed as trustees;

(i) The process of applying the “fit and proper person test” should be an administrative rather than a judicial or quasi-judicial process; it must be fair but not subject to review by the courts;
(ii) The onus of establishing a person as fit and proper should be upon the applicant or organisation that has selected the applicant;
(iii) The decision should be made by a committee which could be comprised of the Chief Ombudsman Commissioner, the chairperson of Amnesty International and the president of the Law Society;
(iv) The committee should be empowered to request a police clearance and be entitled to seek the opinion of the Ombudsman Commission;
(v) There should be a right of review from the committee to the Governor of the BPNG whose decision should be final and not reviewable by the courts;

(i) The concept of fiduciary duty of trustees should be expressly stated in the NPF Act. It should also be stated whether the more stringent duties imposed by the Trustee Act apply to NPF Trustees. The commission recommends that they should
(j) The sanctions against criminal, negligent and improper conduct by trustees should be strengthened; and
(k) The concept of appointing the managing director, as a member of the board should be reconsidered. The board’s role is to appoint, direct and supervise the managing directors. The managing director’s role is to carry out the board’s policies and directions and report to the board. It is inappropriate that he/she be a member of the board and it leads to role confusion.

The appointment and termination of appointment of Trustees

(a) Remove ministers and politicians from the process for selecting and appointing trustees;
(b) There should be an express statement in the legislation that the board has the responsibility to advise the appointing authorities of pending vacancies. It should empower and oblige the board to fill casual vacancies on the board (after vetting by the regulator) until a new trustee is duly appointed by the appointing authority;
(c) Draw up a clear statement of duty for the corporate secretary to monitor the approaching expiry of appointment dates and the constitution of the NPF board generally. It should be the corporate secretary’s duty to advise the board;
(d) Sanctions to be applied at each level (management and board) for failing to maintain the required number of representative trustees on the board.

Managing Director

(a) The managing director/CEO should to be chosen and appointed by the board, after advertising the position on the open market. The terms and conditions of the position are to be determined by the board (including specified grounds for termination);
(b) The appointment should be by contract after the appointee has been vetted by the regulator and passed the “fit and proper person” test;
(c) The board should be obliged by legislation to prepare a detailed duty statement for the managing director to be incorporated into his contract of service;
(d) The board should be obliged to consider whether conditions of service should be left to negotiation or whether an upper limit is to be imposed. Submitting the contract to the regulator for approval should be considered.
(e) The bard should be obliged to prepare a code of conduct covering the managing director and all senior staff;
(f) There should be an annual performance review for the managing director; and
(g) There are arguments for and against the managing director being also a member of the board of trustees. As stated previously, the commission recommends that the managing director not be a member of the board.

Corporate Secretary

(a) The corporate secretary should be chosen and appointed by the board.
(b) The minimum duties of the corporate secretary should be prescribed in legislation to include the duty to record and monitor the dates of appointment and expiry of the terms of trustees and to notify the managing director and chairman of all matters affecting or likely to affect the constitutional validity of the composition of the board; and
(c) The secretary (if also the legal officer) should be proactive in giving legal advice. If secretary is not a lawyer, the legal officer should have that proactive advising role at board meetings. The corporate secretary should be responsible for advising the board of all its obligations, including reporting obligations. The corporate secretary should also advise the board on its compliance.

Management of investments – weaknesses

(a) Require NPF, by legislation, to have an expressed investment policy which has been approved by the regulator;
(b) Provide for investments to be managed by a professional funds manager, which is obliged to follow prudential investment guidelines.
If this is not possible, or alternatively, make provisions for independent professional trustees to join the board, with suitable provisions for their remuneration or to oblige the board to obtain professional advice at the cost of the fund;
(c) The regulator should be given the duty and power to monitor NPF’s compliance with all its reporting obligations and the trustees should be exposed to sanctions for non-compliance;
(d) The regulator should be given the responsibility to review investment performance and the power to give directions in relation to investments and trustees to be subject to sanctions for non-compliance;
(e) The board must be obliged to report to the members (employers and employees) at least annually and members should be given access to a Complaints Tribunal. Members should also be empowered and facilitated to complain to the regulator about the performance of trustees and management and to seek the removal of trustees and officers for misconduct or non-performance;
(f) Methods of reporting to members could include the NPF’s periodical magazine, press advertisements and by communicating to relevant employer and employee organisations and placement on the website (Cost effective methods should be chosen);
(g) BPNG should be appointed the regulator of superannuation funds (including the NPF) (This has been set in place under the Superannuation Act 2000);
(h) For this system to work, BPNG will have to establish a strong regulator section and become very proactive in monitoring NPF’s compliance with investment guidelines, internal management and planning requirements and with its reporting obligations. This is not a traditional banking responsibility but it will need to be embraced wholeheartedly by BPNG so that the existing vacuum in the field of supervision and monitoring is well, truly and effectively filled.

Powers and obligations of the NPF Board of Trustees

Where possible the powers and obligations of the board of trustees should be included in the legislation by way of clear and definite statements — such as no power to borrow or no power to borrow for investments.

Such clear statements in the legislation should be supplemented by commentary in NPF’s manuals for trustees and senior officers.

Investment guidelines and directions

While the Minister retains powers over the NPF this question about the Minister’s power to issue directions to NPF needs to be resolved by appropriate legislation.

The commission, however, recommends removing the Minister’s powers to issue directions to the NPF from the NPF Act.

The Minister’s powers over NPF should not exceed his powers over other private organisations.
Investment Guideline Part (e) approval delegations

This raises the question of whether there should be any external control over NPF’s investment or whether it should be left entirely to the control of the board, in conjunction with its investment manager company.

(a) The commission recommends that there should be some device to ensure that NPF’s investments will be in accordance with prudential principles suitable for a superannuation fund;
(b) The responsibility for monitoring and approving that NPF’s investments are within prudential limits should be given to the BPNG regulator.
(c) While NPF remains subject to ministerial control its prudential limits need to be clearly specified in the legislation.

Minister Haiveta’s K1 million approval to trade in equities

(a) If it is intended to constrain the fund’s ability to acquire equities registered on overseas stock exchanges then this general approval up to K1 million per transaction needs to be reconsidered;
(b) The general approval should be worded to enable the fund to invest up to a given percent of its total assets offshore.

Minister’s approval given without seeking or obtaining DoF advice

It is recommended that a Minister’s duty to act on advice should be treated as one of the duties of leadership. It is recommended that this problem, which extends beyond the situation of the NPF, be referred to the Ombudsman Commission to consider whether to issue appropriate directions on this aspect of the duties of leadership.

Failure by DoF to provide expert advice to the Minister

The commission has recommended that the NPF should be freed from the need to obtain ministerial and DoF approvals. However, the recruitment of highly qualified professional officers into DoF still needs to be addressed to enable it to carry out its other functions. In the meanwhile, DoF should seek the advice of external consultants on significant matters, which are beyond the expertise of its own staff (at the cost of the applicant — DoF pays consultant and applicant reimburses). If the approval function resides in the BPNG regulator, the expertise must be built up within the regulatory body, which could also use expert consultants at applicant’s expense if necessary.

With regard to ministers making decisions without acting upon required departmental or appropriate independent expert advice, the Minister should be advised by the Ombudsman Commission of his duty to make decisions after receiving advice from relevant experts.

Approvals under Section 61 of the PF(M) Act

Such political approval is no longer appropriate but the commission considers that approval from an independent authority for large investments is still desirable.

Approval should be sought from the regulator who can nominate an independent expert to give an opinion. The regulator will then approve or not approve.

Approval should be sought prior to entering into the transaction or it could be contracted subject to regulator’s approval. There should be an express provision about the validity or invalidity of non-approved transactions.

Applying the PF(M) Act

The applicability of Part viii of the PF(M) Act to the NPF, which is a private employees superannuation fund needs to be reconsidered. If there are provisions which could benefit NPF, they should then probably be written into the NPF Act.

Deliberate failure by Board and management to comply with legislation

(a) There should be clear civil sanctions written into the Act making Trustees and officers personally liable for loss caused by such breaches of duty (A re-examination of the”good faith” concept to make the risk of incurring personal liability very clear);
(b) There should be criminal sanctions for deliberately disregarding the provisions of the legislation; and
(c) Such deliberate or seriously negligent failure to obey statutory duties should be specifically referred to in the legislation as breaches of the Leadership Code, subject to the Ombudsman.

Management exceeding delegated powers

(a) Clear delegations to be made by the board to management and recorded on a delegations file for reference by management and the trustees; and
(b) There should be an audit trail for delegated decisions by way of written memorandums showing reasons given and approvals obtained (and where appropriate, competitive quotations).

Circular resolutions

(a) If it is decided to allow board decision-making by circular resolution then clear provisions regarding the matter need to be specified in the NPF Act, such as:

(i) the circumstances justifying decision-making by circular resolution;
(ii) provisions for administering circular resolutions;
(iii) the subsequent ratification of circular resolutions.

(b) The commission recommends that the provisions in the Companies Act be considered as a model for adaptation.

Unauthorised expenditure of Trust funds outside the investment guidelines

(a) Departure from prescribed investment guidelines should be specified as a breach of fiduciary duty;
(b) Where Section 61 or equivalent approvals are sought, one condition of approval should be that the transaction will not result in a breach of the investment guidelines.

Validation provisions

(a) Insert appropriate validating provisions in the Act to validate bona fide decisions despite unintended flaw in the appointment process. The provisions could be similar to those in the Company Act;
(b) Define by legislation the excusatory test. The “good faith” test is less stringent than the Common Law test which requires the conduct to be validated to have been:

* Reasonable;
* as would be done by a prudent man; and
* in good faith.

Compliance

(a) The policy regarding exemptions needs to be worked up by means of a process of rational policy development involving all interested parties and then considered by government and Parliament.
It is a very complex matter beyond the scope of this commission;
(b) The commission recommends that sanctions and strong incentives be built into the legislation to encourage employers to comply with their obligation to contribute to the NPF in a timely manner;
(c) This should include automatic penalty interest for significantly overdue contributions; tax concessions on contributions paid to be made dependent on timely payment and an attractive discount for timely payment;
(d) Access to the Internal Revenue Commission database. The NPF has lists of employers and their employees for the purposes of ensuring that all relevant employer bodies contribute to NPF for all their employers and recording those contributions in respect of each employee on their memberships files.

To be continued