Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 4]

National Provident Fund Final Report [Part 4]

This week 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.

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!

This is the fourth 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.

These two investments demonstrated all the flaws detailed above. However, as the investments were less massive, the losses as at December 31, 1999, were smaller:

  • in Macmin NPF invested $A4,370,349 and made a realised and unrealised loss of $A3,469,977
  • In Cue, NPF invested $A11.7 million and made a net realised loss of $A7.4 million (Executive Summary 4C, paragraph 2.5). 

PROFITABLE PASSIVE EQUITY INVESTMENTS

In contrast to the above loss-making, high-risk, aggressively active equity investments in companies listed on registered stock exchanges, NPF also held passive investments in large income earning companies, which were reasonably profitable. They would have been appropriate investments for a superannuation fund if they had formed part of a balanced portfolio.

These included Oil Search Limited (OSL), Schedule 4G, Niugini Mining Limited (NML) Schedule 4F and Orogen Minerals Limited (Orogen) Schedule 4H.

NPF sold off its OSL shares at a modest profit to finance the purchase of shares in NML, which were in turn sold off at a modest profit so that NPF could invest more aggressively in LGL and Vengold. NPF’s K29.5 million investment in Orogen resulted in a realised capital gain of K9.9 million when it was sold off between April and June 1999. Dividends of K2.5 million were also received.

INVESTMENT IN UNLISTED ENTITIES

During the period under review, NPF also invested in some unlisted entities. Some of these were passive investments in well run companies such as the Bank South Pacific (Schedule 4J), Westpac bank PNG Ltd, SP Holdings and Toyota Tsusho PNG (Schedule 4K) and Amalgamated Packaging / Amalpak (Schedule 4M).

These were all safe, profitable and appropriate investments for a superannuation fund.

There were also investments in four plantation companies described in Schedule 4O. These had been acquired well before 1995 and for reasons beyond NPF’s control, were now non-productive loss-making investments. NPF disposed of them in the best way possible in the circumstances.

There were also two foolish investments undertaken and mishandled during the period under review. The first was Crocodile Catering PNG Pty Ltd (Crocodile), which is the subject of separate findings pursuant to Terms of Reference 1(l) and 1(m). The second was Ambusa Copra Oil Mill Ltd – see paragraph 3.5.4 at page 11 above and Schedule 4L and its Executive Summary.

Ambusa was an investment where, prompted by newly appointed investment advisor Haro Mekere and without due diligence NPF entered a joint venture with Ambusa Pty Ltd to operate a Copra Oil Mill to be constructed by a Canadian Company Odata Pty Ltd. NPF lost K1.1 million which had largely been transferred to the project in an unplanned way. Despite NPF’s financial crises in 1999, it guaranteed a K3,150,000 loan from BSP — Executive Summary 4L, paragraph 13. Mr Mekere’s motive for supporting this inappropriate investment with such fervour may have been influenced by the fact that his wife had been appointed to the Board of Odata (PNG) Ltd, and this fact had not been disclosed (Executive Summary 4L, paragraph 12).

REPORT ON THE COMMISSION’S  SPECIFIC TERMS OF REFERENCE

Term of Reference 1

“Whether in connection with the management of the fund, there has been any illegal or improper conduct by any person, business, company, legal entity or agency between 1995 and 1999”

The commission has interpreted “illegal conduct” to mean conduct which is prescribed or forbidden according to a law in force in PNG, which includes the NPF Act, the PF(M) Act, the Criminal Code, the Organic Law on the Duties and Responsibilities of Leadership (the Leadership Code) and the Trustee Act and the Common Law as adopted at independence.

“Improper conduct” includes any conduct forbidden by law (criminal conduct) but also conduct, which is a breach of a person’s fiduciary or common law duty or a leader’s failure to conduct himself in accordance with the requirements of the Organic Law on the Duties and Responsibilities of Leadership. Thus, a Trustees breach of fiduciary duty (as governed by the Common Law or the Trustee Act) may also amount to improper conduct.

When therefore the NPF board borrowed money from a bank the commission has found that was ultra vires the NPF Act. That is an example of illegal conduct by an entity, the NPF. The trustees who resolved to approve the borrowing and pledge NPF’s assets, without seeking expert advice on, or even thinking about, NPF’s power to borrow are in breach of their fiduciary duty to members of the fund. Repeated, reckless breaches of fiduciary duty is considered as improper conduct to be referred to the Ombudsman Commission as a breach of the Leadership Code. In the commission’s view, the banks which repeatedly lent money to the NPF to enable it to fund its share acquisitions, without obtaining competent legal advice about whether NPF had the power to borrow, and knowing that NPF was a superannuation fund, are guilty of improper conduct and may in fact have civil liability to NPF members for losses the members have suffered from the bank’s negligent failure to carry out due diligence in this respect.

Other examples of illegal or improper conduct include the criminal offences described in Schedules 5 and 6; making false claims and misrepresentations to the NPF board or the Minister; falsifying minutes of proceedings; creating false invoices; the appointment by Mr [Jimmy] Maladina of Mr Petroulas and Mr Barredo to Crocodile (Schedule 4L, paragraph 11.1.8) and transferring funds illegally through the Wilson HTM account.

At the end of each schedule, the commission provides a final paragraph headed “Findings in Context of the Terms of Reference”. This paragraph has a separate sub-paragraph for each term of reference, which groups together all findings in the body of the report regarding the relevant term of reference. Sub-paragraph 1 deals with illegal and improper conduct and major instances of such conduct are referred to.

Sub paragraph 2 deals with breaches of fiduciary duty and there is some overlap between sub paragraphs 1 and 2. Instances when the commission has recommenced referral to another authority are listed in the subparagraph dealing with Term of Reference 3. Instances of personal liability for loss are listed under Term of Reference 4 and so on.

The Terms of Reference then list specific conduct, activities or situations where such illegal or improper conduct may have occurred and into which the commission is directed to inquire, such as (a) the failure of the trustees and management to carry out the expected fiduciary duties of trustees and management under the NPF Act. These are listed as 1(a) to 1(o). Specific findings on these matters are also listed in “Findings in Context of the Terms of Reference” paragraph at the rear of each schedule. Terms of Reference 2, 3, 4, 5 and 6 are reported upon in the same way in the schedules.

Term of Reference 1(a)

“The failure to carry out the expected fiduciary duties of trustees and management under the National Provident Fund Act”.

A fiduciary duty is a duty owed by a trustee to the beneficiary of a trust. In this context, the trustees of the NPF Board of Trustees owed a fiduciary duty to the members of the fund. At law, it is a very onerous duty governed by the Trustees Act and the Common Law. The officers of the NPF are not trustees (except the managing director who is a trustee by virtue of being a member of the board). Officers owed a Common Law duty to the NPF board by virtue of their contract of employment.

Each schedule is liberally sprinkled with findings on breaches of fiduciary duties to members of the fund by trustees and of common law breaches of duty to the NPF board by officers of the NPF (often referred to generically as “management”).

When the breach is specific to an individual trustee or officer the person is usually named. It would not be meaningful to name each specific breach here in the main report, outside the context in which the breach occurred, so this section deals with such breaches in general and the general consequences of the breaches as a whole. Each individual breach of duty is, however, dealt with in its context in the schedules to this report by way of findings paragraph by paragraph. In the paragraph “Findings in Context of the Terms of Reference”, at the end of each topic schedule, these breaches of duty pursuant to Term of Reference 1(a) are listed with reference to the relevant paragraph where the breach is described and the finding is made.

Frequently, breaches by “management” or individual officers are described first – such as acting in excess of delegated authority (such as unauthorised transactions; failing to obtain required ministerial approval; failing to keep the NPF board informed, failing to perform due diligence; failing to obtain expert advice . . . etc).

These findings will often be followed by related findings against the trustees for the same failures or for failing to reprimand and control management, failing to insist that management obtain independent expert advice . . . etc.

Some findings are made against individual trustees for their personal conduct while other findings are made against all trustees in office at a particular time or all trustees who supported a particular resolution.

For some matters, the failure by the trustees to address an issue over a long period – for instance the trustees’ continuing failure to address management repeatedly acting in excess of its authority – is found by the commission to amount to improper conduct by the trustees. When management’s serious breaches of duty have been repeatedly brought to the trustees’ attention and they have repeatedly not addressed the matter, the commission has found that it is not only improper conduct but it should be referred to the Ombudsman as a breach of the Leadership Code (to which all NPF trustees were subject (For example see Schedule 4B, paragraphs 5.12(e); 5.14.2(e); 6.3 & 6.7(b); Schedule 1 paragraph 14.4.4.5) – where the trustees deliberately chose to acquire shares outside the investment guidelines it was not only a breach of fiduciary duty to the members but was illegal and improper conduct amounting to a breach of the Leadership Code for which the commission recommended that they be referred to the Ombudsman Commission). In these instances, the conduct is listed as a breach of fiduciary duty and also under the subparagraph dealing with Term of Reference 3 – referral to other authority (Schedule 1 paragraph 14.4.4.2).

Similarly, the trustees’ longstanding failure to notice and rectify management’s failure to follow appropriate tender procedures has been referred to the Ombudsman Commission as a possible breach of the Leadership Code (Schedule 9, paragraph 14).

Some terms of reference encompass conduct which is relevant to more than one term of reference, thus, the same action might be a breach of duty, a failure to disclose a conflict of interest and benefiting from the trust property. It could also be an offence or breach of statutory duty (Schedule 1, paragraph 14 provides a full report on breach of duty and leadership offences regarding repeated, blatant and deliberate breaches of investment guidelines).

Term of Reference 1(b)

“Breaches of the Act and National Provident Fund Rules relating to borrowings and placement of charges over members’ asset”

It is quite clear that the NPF had no power to borrow or pledge members’ assets, as these powers are not granted to it under the NPF Act or any other law. As NPF was created by statute it possesses only those powers expressly given to it. The legal opinion of Allen Arthur Robinson, with which the commission is in full agreement, is set out at Appendix 6 to Schedule 2E (The erroneous opinion of Herman Leahy, which concluded there was a power to borrow, is reported at Schedule 2E paragraphs 3.9 and 3.10(i)). Carter Newell’s inadequate and incorrect opinion is at Schedule 2E, paragraph 3.4.

There being no power to borrow or pledge assets, the following breaches of the NPF Act with regard to borrowing occurred:

  • Overdraft with the PNGBC which peaked at K6 million (Schedule 2A);
  • The ANZ loan facilities which peaked at $A20 million and K40 million fully drawn (Schedule 2E); and
  • The BSP loan facility of K30 million fully drawn (Schedule 2C).

As a condition to these loans, NPF was obliged to pledge its assets in the form of share scrip and to maintain an agreed security to loan ratio. As the value of the scrip fell over the years, more and more assets had to be pledged in order to maintain the security to loan ratio.

All these loans and pledges were in breach of the NPF Act and were therefore ultra vires.

The commission believes that the banks were in serious dereliction of their duty by not performing due diligence before entering into the loan agreements to assure themselves that NPF had the power to borrow, especially as the banks were well aware that NPF was a superannuation fund and that it was therefore inherently likely that it would not have power to borrow. The banks were also aware of the purposes for which NPF intended to draw upon the loan funds. The ANZ, for instance, was fully aware of NPF’s intention to use the borrowed funds to finance its massive investments in volatile, risky, non-income producing PNG resource stocks. When it finally obtained competent legal opinion from Allens that NPF lacked the power to borrow it kept that information from NPF and aggressively called in the debt, forcing NPF to sell off assets at a loss (Schedule 2E, paragraph 13).

NPF members suffered losses in excess of K100,000,000 as a result of those investments. In addition to the losses on the investments, NPF members suffered the loss of many millions of kina in interest and bank fees and charges. For instance, interest and bank fees on the ANZ loan facilities alone amounted to K14,102,276.09 (Schedule 2E, paragraph 12).

NPF members may have rights to recover some of these losses in a class action brought against the NPF board and against individual trustees who were in breach of their fiduciary duties to the members by entering into these loan agreements. The members may have similar rights against the banks concerned (These possibilities are discussed in Schedule 2E paragraph 17 and Executive Summary paragraph 13).

Term of Reference 1(c)

“Provision of false or misleading information provided by or to trustees and management, including over the financial state of the funds in relation to the provision of the year end performance bonuses”

Misleading silence

The investigations disclosed many instances when particular officers, or management generally, provided false or misleading information to the NPF board on a variety of topics. Equally importantly, perhaps, was management’s misleading silence with regard to things that should have been disclosed.

This includes silence about unauthorised overdrafts (Schedule 2A), drawdowns, (Schedule 2E, paragraph 13.3) acquisitions, (Executive Summary 4D, paragraph 4.1) agreements and commitments (Executive Summary 2E, paragraph 7.7.1).

False and misleading information generally

Specific instances of giving false and misleading information can be examined by consulting the “Findings in the context of the Terms of Reference” at the rear of each schedule under Term of Reference 1(c). Examples include:-

  • false information about obtaining SCMC approval (Schedule 1 paragraph 5.4.4.5);
  • Mr Leahy lied to the NPF board about Mrs Andoiye’s departure from NPF (Schedule 1 paragraph 20.1);
  • Concealing from the NPF board the existence of an unauthorised PNGBC overdraft by adopting misleading accounting procedures and netting the overdraft against credits in other accounts (Schedule 2A paragraph 4.3);
  • Mr Wright falsely told both the BSP and the Minister that the proceeds of a K30 million drawdown were to be used for local infrastructure projects. He did not disclose the intention to use the loan money to purchase Orogen shares (Schedule 2C paragraphs 4.1.4 and 4.1.5(c));
  • Mr [Robert] Kaul falsely advised the NPF board that the board had previously approved a K30 million ANZ facility whereas the approval had really been for K20 million (Schedule 2E paragraphs 5.23 & 5.24);
  • Misleading information given by Mr Wright to the NPF board about the profits to be expected from issuing the Australian dollar bond (Schedule 2F paragraphs 5.1; 7; 7.1 & 7.2);
  • False information given by Mr Wright to the BPNG about by NPF board’s approved use for the Australian dollar bond money (Schedule 2F paragraphs 11.10; 11.12(b) and (c)); Management provided overly optimistic briefings on Vengold without referring to the risks involved (Schedule 4A paragraph 10.4);
  • Mr Kaul misled the NPF board and the Minister about the date he signed the HPL sub-underwriting agreement (Schedule 4B paragraphs 5.3 and 5.4(b));
  • Mr Kaul gave false information to the NPF board understating the number of unauthorised HPL shares that had been acquired (Schedule 4B paragraphs 4.2 and 4.3(d));
  • Mr Leahy falsely advised the newly appointed NPF board members that the proposal to purchase the Waigani Land had been raised at the previous board meeting but not resolved – whereas the proposal had been rejected (Schedule 5 paragraph 21.2.7);
  • Management provided false information to the NPF board about the purchase of a motor vehicle for the managing director (Schedule 9 paragraphs 4.4.3; 4.4.4(a) and 4.4.4(d));
  • Mr Leahy requested the board to approve the Tower management contract with PMFNRE without disclosing the contract had already been agreed by management (Schedule 9 paragraphs 5.8 and 5.10(i));

False information specifically about the financial state of the Fund and end of year performance bonuses

The two main examples of this type of false information were:-

  • Bank of Hawaii transaction.
    The accounts drawn up by Mr Wright for the 1997 year included the whole of the K18.5 million received from the Bank of Hawaii transaction as profit in 1997 instead of spreading it over the lifetime of the loan. This false reporting resulted in senior management receiving an undeserved end of year bonus based on a falsely reported profit (Schedule 1 Appendix 20 – paragraph 20.7.2.1 – end of year bonus);
  • K10 million “reserve” provision:
    Management set aside a K10 million reserve in 1996, contrary to International Accounting Standard AS26. This reserve was utilised in 1997 thereby showing a false profit with the result that an undeserved end of year bonus was paid to senior management (Schedule 1 Appendix 20 – paragraph 20.7.2.2);

Concealing relevant information on the state of the Fund

The commission’s inquiries have disclosed many instances when NPF management concealed relevant information on investments. This regularly occurred when management had made unauthorised acquisitions or sales of shares and then failed to specifically mention this at subsequent board meetings. For most meetings, however, management-briefing papers would be distributed in advance to trustees, which would usually include a schedule of investments.

This was a list of NPF’s investments so a really conscientious trustee who took the time, should have been able to work out recent transactions by comparing the amount in the schedule of investments with the previous schedule.

Evidence from the trustees indicates that few, if any, trustees checked out the investment schedules, so management succeeded in concealing information about these investments (Often, the schedules were several months out of date anyway).

Further concealment of relevant information consisted in the endemic failure by management to keep the Board of Trustees informed of the state of the various loan accounts with the NPF’s lender banks. This non-disclosure constituted a failure of management’s common law duty to make open disclosure to the board. The main offenders would be the managing director, who had ultimate responsibility for management’s performance and Noel Wright who was in charge of finance and investments.

Term of Reference 1(d) This Term of Reference was repealed.

Term of Reference 1(e) “The failure to adhere to prescribed Investment Guidelines”

After NPF adopted its new aggressive investment strategy in 1995 with firm guidance from Mr [David] Copland and his protégé Mr Wright, NPF departed further and further from the investment guidelines proclaimed by Sir Julius Chan in 1993. The story is told in Schedule 1, paragraphs 14.1 to 14.5.1 and Executive Summary 1, paragraphs 8 to 8.4.1. The departure from the guidelines was pointed out by Mr Kaul in 1996 but the trustees and management determined to proceed with the strategy of acquiring the high-risk PNG resource stock, using borrowed funds to do so (Schedule 1, paragraph 14.5.1(e)).

When the board became aware that NPF was seriously in breach of the guidelines, particularly in having its portfolio weighted heavily in favour of the high-risk equities, the Board of Trustees resolved to try and get the guidelines changed, but to continue with their foolhardy strategy in any event (Schedule 1, paragraph 14.5.1(e)).

The result was that the expenditure of NPF’s funds in this way was illegal and the trustees who permitted this to occur were all in breach of their fiduciary duty to the NPF members. Given their awareness of what they were doing and their conscious decision to continue, it is likely that the trustees would be personally liable for the huge losses suffered by the members from the trustees’ breach of fiduciary duty. It is very unlikely they could succeed in a defence of “acting in good faith”. (Executive Summary, paragraph 8.5 and Schedule 1, paragraphs 14.4.4.1 to 14.4.4.5).

It was NPF’s failure to adhere to the investment guidelines and its strategy of borrowing funds to finance these high-risk investments, which accounted for by far the greatest proportion of the K150 million losses suffered by NPF.

Term of Reference 1(f)

“The failure to adhere to prescribed foreign exchange regulations under the Central Banking Act, particularly with respect to the investment in Maluk Bay Resort in Indonesia”

The NPF management found it convenient at times to utilise unorthodox methods of making payments overseas.

The prime example of this was providing funds to support the activities of Crocodile in Indonesia, particularly the construction of the resort at Maluk Bay. Crocodile was not properly registered to carry on business in Indonesia and was therefore unable to operate an Indonesian bank account. Also, the NPF board had never considered a comprehensive strategy for funding Crocodile and that process was occurring on an ad hoc basis, often behind the back of the NPF and Crocodile boards.

Mr Wright utilised the fact that NPF’s sharebroker, Wilson HTM, held money in its accounts for NPF from proceeds of share sales and dividend payments. Rather than account for the money in PNG, as he should have, Mr Wright arranged for Wilson HTM to make payments from this account directly to Crocodile’s overseas contractors and creditors. Approximately $US891,773 was transferred in this way (Executive Summary 4L, paragraph 12, Schedule 4L, paragraphs 7.5.5, 7.5.6, 7.5.7 and 7.7.4).

NPF management also made payment of $A40,282 to Odata for construction of the Ambusa Copra Oil Mill through its account with Wilson HTM (Executive Summary 4N, paragraph 7, Schedule 4N, paragraphs 5.6 and 5.7).

Using the Wilson HTM account to make overseas payments in this way had two advantages for Mr Wright.

Firstly, it enabled him to avoid the time-consuming inconvenience of seeking approval from BPNG’s controller of Foreign Exchange (In the $A54 million bond affair, the Controller Mr Popoitai delayed granting foreign exchange approval because of his well-founded concerns about the proposed purchaser of the bond, Warrington International. Mr Copland brought pressure on the Governor of the BPNG to obtain foreign exchange approval (Schedule 2F, paragraphs 13.2, 13.3 and Executive Summary, paragraph 8).

Secondly, it enabled Mr Wright to make overseas payments “behind the back” of the NPF board more easily.

It is likely that NPF management made other overseas transactions through Wilson HTM in breach of foreign exchange regulations and this should be checked by the BPNG.

Continued tomorrow

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