National Provident Fund Final Report [Part 14]
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!
NPF Final Report
This is the fourteenth 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
Fiduciary duty of Trustees
The commission reports on the legal position of trustees resulting from the breaches of the 1993 Investments guidelines (paragraphs 220.127.116.11; 18.104.22.168; 22.214.171.124). In paragraph 126.96.36.199, the liability of management is considered.
The extent of the variations from part (a) of the guidelines, regarding the required balance in the equity portfolio is demonstrated in the following table:
The commission has reported on the variance for each of the five years.
(a) By Section 26(1) of the NPF Act, NPF was obliged to invest its funds in accordance with investment guidelines determined by the Minister. Investing outside the guidelines is a breach of fiduciary duty by the trustees.
(b) The 1993 investment guidelines were intended to specify broad categories of investment and securities and the percentage of the investment funds, which could be invested in each category, namely, Government securities 30-40 per cent, IBD 10-20 per cent, equities 20-35 per cent, properties 20-30 per cent and long-term development loans 10-25 per cent.
(c) The spread of investments within each broad category was to be controlled by a variety of devices including the need to take account of government’s economic policies — Part (b) use of only approved institutions for cash and IBD investments, strict requirements to submit plans and reports to the Minister, the requirement to obtain Minister’s approval beyond limits imposed by the Minister; and limits on the value of overseas investments.
(d)The NPF board and management disregarded the requirement to maintain the balance between the broad categories of investment required by Guideline Part (a).
There was gross imbalance in each of the five years under review, the most damaging being the huge over-investment in equities and the massive build up in overseas equities within that category.
(e) The fact that the guidelines were being breached was known to senior management and trustees and was discussed at board level. Rather than bringing the investments into line with the guideline categories, the board resolved to try and get the guidelines changed.
(f) This was a serious breach of fiduciary duty by all trustees in office during 1996, 1997 and 1998 during which period the imbalance developed (exponentially) and was allowed to remain.
(g) The trustees face being found liable at the suit of a class action by the members for losses suffered by the members because of this breach of duty. It is unlikely that a defence of “acting in good faith” would succeed, but this would need to be determined in relation to each individual Trustee by the Court.
(h) Sir Julius Chan’s intention to establish an effective monitoring system was frustrated by the fact that the NPF management and board knowingly disregarded the need to maintain an annually updated rolling five year plan and to report on investments and the investment policy and strategy on a quarterly and annual basis. This failure was a breach of duty by management and a breach of fiduciary duty by all trustees within the period under review except John Jeffery.
(j) The approval given by Minister Haiveta in 1995, which allowed the NPF to make repeated investment transactions in shares listed overseas up to K1 million at any one time, was utilised by NPF to widen the existing breach in the (K1 million maximum) control over overseas investments guidelines, so that it became a flood of overseas investments — rising from an already excessive K25,497,921 in December 1995 to K141,507 by December 1997, plus a further K55,038 overseas investments in STC and CXL.
(k) The NPF board and management also exploited the gap created by not applying sections 57(5) of the PF(M) Act to the NPF as a “public body”. The prohibition against investing more than 3 per cent of its assets in a single investment or purchasing more than 10 per cent of the assets of a single company did not apply to NPF. This enabled NPF to concentrate large-scale investments in particular companies in order to obtain positions on the controlling Boards of Directors.
ACCOUNTS AND AUDIT OBLIGATIONS
The commission reports how NPF is obliged to keep proper accounts and records to be audited by the Auditor-General.
The legislative provisions were complicated by amendments in 1995 to the Audit Act and the PF(M) Act which were inserted to replace previous provisions in the NPF Act. Section 63 PF(M) Act is intended to subsume Section 30 NPF Act and rules and Section 8 Audit Act.
Gaps in the legislative scheme
In this process of legislative reform, the Auditor-General’s previous obligation under section 30(2)(c) of the NPF Act to report on NPF’s compliance with the NPF Act has been omitted. The requirement in section 29(3) of the NPF Act for the Auditor-General to report to the Minister the result of his audit may have been omitted also.
Obligation to maintain proper accounts
NPF’s obligation to maintain proper books of account derives from Section 28 of the NPF Act. From the commission’s own experience and from auditors reports, NPF management failed dismally in this task.
Section 63 of the PF(M) Act. Obliges NPF to submit annual reports and financial statements to the Minister, with a copy to the Auditor -General for auditing so the Minister can table an audited report in Parliament.
The NPF failed to fulfil this obligation from 1997 onwards and DoF failed to follow up to enforce compliance.
Consequently, the Auditor-General was unable to audit NPF’s books after 1997. The system of annual report and auditing broke down completely.
The NPF was also obliged by section 63(2)(a) of the PF(M) Act to submit a performance management report on its operations to the Minister before June 30 of each year. Sub-section 63(5) requires the Minister to table this report in Parliament once audited by the Auditor-General. This system also broke down due to NPF’s non-compliance .
DoF fails to monitor and enforce compliance
There is a gap in the legislative system because DoF has no inherent obligation to supervise compliance with these requirements unless specifically directed by the Minister to do so. No such direction was given by the Minister.
Break down of monitoring by National Parliament
It is apparent that the concept of Parliamentary monitoring broke down because the last audited report on NPF tabled in Parliament related to the year 1994.
(a) The former requirement under Section 30(2)(c) of the NPF Act for the Auditor-General to report on NPF’s compliance with the NPF Act regarding the receipt, expenditure and investment of moneys, was accidentally omitted during 1995 legislative amendments. This left a serious gap in the provisions for monitoring NPF investment activities.
(b) Between 1996 and 1999, NPF failed to make the required annual reports and there were no remedial or rectifying actions by DoF or Auditor-General.
(c) NPF management and Board of Trustees are responsible for this failure, which was a breach of fiduciary duty by the Trustees.
(d) The PF(M) Act did not give DoF clear responsibility for monitoring or enforcing NPF’s reporting obligations and there was no Ministerial direction for DoF to carry out this role.
(e) Monitoring and rectifying NPF’s performance was left to the National Parliament, but no report has been tabled since the 1994 report.
(f) The Auditor-General did notify the Minister each time NPF failed to produce to him its annual report for auditing, though under no obligation to do so. There was no follow up by the Minister or DoF to this notification.
(g) Theoretically, the structural reporting and monitoring procedures governing NPF in relation to its investment activities, seemed adequate except for the lack of provisions for monitoring NPF’s compliance with its reporting obligations and the lack of sanctions for non-compliance.
Pursuant to section 63(2)(b) of the PF(M) Act (which replaced Section 30 of the NPF Act) the NPF, (and other public bodies) was obliged to prepare and submit to the Minister:-
(a) a quarterly report on all investment decisions;
(b) by February 28 each year a detailed report on investment performance for the previous year ending December 31;
(c) a five-year investment plan (updated each year) setting out investment policies, strategies and administrative systems to be pursued and providing forecasts of investment flows and returns.
The commission reports how NPF failed to comply with each of these requirements.
In June 1996, Mr Kaul advised the NPF board that equities were an over weighted 43 per cent of the portfolio and sought guidance from the board (This was just as Minister Haiveta gave dispensation from the need to seek approval for equity transactions of up to K1 million which resulted in an orgy of further equity investments in defiance of the guidelines). Had NPF made a genuine attempt to comply with these mandatory statutory provisions, it would have been obliged to focus on policies and strategies, to reign in its wild investment activities and to account for deviations from the guidelines. Trustees and management would also have been faced with the cold reality of audit reports from the Auditor-General. The inadequacy of DoF’s reports to the Minister and its failure to monitor NPF’s compliance with its reporting obligations are discussed at paragraphs 16.1.1, 16.1.2, 16.1.3. The Secretary of the DoF’s conflict of interest is discussed at paragraph 16.2.2.
PERFORMANCE AND MANAGEMENT PLANS
Under Section 50(2) and (3), the Secretary of the DoF was empowered to require the NPF managing director to submit performance and management plans. Section 50(4) enables the Secretary to carry out a performance review. The Secretary completely failed to use this powerful tool. It seems the reason for this was a failure to realise it was available in respect of NPF.
Section 50 of the PF(M) Act provided a powerful tool which could have been used by the Secretary of the DoF to submit a performance and management plan and to conduct a performance review. The section was not utilised, possibly through failure to understand the scope of its potential operation.
TENDERS PROCUREMENT AND DISPOSAL OF ASSETS PROCEDURES
Paragraph 18 describes how NPF was not bound by section 59 of the PF(M) Act which prescribes tenders procedures for most other public bodies but that NPF was bound to follow Ministerial directions on tenders procedures (of which there were few). Despite the lack of clear legislative guidance, the trustees were required to ensure an orderly system was followed as part of their fiduciary duty to ensure fair and financially responsible management procedures.
As it happens, management (wrongly) considered that NPF was bound by Section 59 of the PF(M) Act but mostly failed to comply.
In 1989, a Supply and Tenders Committee was established but it seems to have ceased functioning by 1993.
Full details of the acquisition of goods and services and disposal of assets between January 1, 1995 and December 31, 1999, including the spasmodic operation of tenders procedures, are reported in Schedule 9 – “Tenders Procedures and Nepotism”.
(a) The legislative provisions establishing an effective tenders system for NPF was weak as it did not fall within the definition of a “public body” to which the PF(M) Act applied for this purpose.
(b) The NPF board nevertheless, had a fiduciary duty to ensure that an effective tenders procedure was in place and being followed by management.
(c) The NPF Board of Trustees’ failure to ensure an effective tenders procedure was in operation was a breach of fiduciary duty by the trustees in office throughout the period under review.
As it happens, NPF management (wrongly) considered that NPF was bound by Section 59 of the PF(M) Act but mostly failed to comply.
(c) The NPF Board of Trustees’ failure to ensure an effective tenders procedure was in operation was a breach of fiduciary duty by the Trustees in office throughout the period under review.
(d) Senior management failed in their common law duties in this regard — particularly Mr Kaul, Mr Fabila, Mr Wright and Mr Leahy.
(e) The failures by the management and board led to nepotism, criminal offences and significant financial loss to the NPF (as detailed in Schedule 9).
MINISTERIAL APPROVAL OF MAJOR CONTRACTS
Section 61(2) of the PF(M) Act, requires that NPF obtains Ministerial approval before entering into a contract of 300,000 or more (K500,000 after October, 19, 1995) (paragraph 19.1).
This applied to all such contracts except those subject to the general dispensation from seeking approval for equity transactions up to K1 million granted by Minister Haiveta in June 1996 (paragraph 19.2). NPF preferred to apply for approval directly to the Minister, bypassing DoF’s procedures for considering such application and recommending to the Minister (paragraph 19.3).
DoF and successive ministers accepted this departure from orderly procedures, which reduced the quality of expert advice being considered by ministers before making decisions. On many occasions NPF failed to obtain required approvals from the ministers.
NPF management and the board frequently by-passed the need to obtain ministerial approval for contracts above specified levels. This existing tendency was encouraged by Mr Haiveta’s general approval in April 1996 for NPF to be permitted to enter transactions in equities up to K1 million per transaction without the need to obtain approval.
POWERS OF INSPECTION
Paragraph 20 of Schedule 1 points out how successive Ministers and secretaries of the DoF failed to exercise the powers given to them by Section 64 of the PF(M) Act to order an investigation into NPF’s failure to implement a management plan under Section 50(2) or into any other breach by NPF of the PF(M) Act.
When Mr Bai utilised this section in 1999 and directed the Finance inspectors to investigate specified aspects of NPF’s operations, it led to rapid disclosure of the irregularities reported upon in Schedule 1 and the financial crisis threatening NPF. That, in turn, led to the establishment of this commission of inquiry.
THE NEED FOR STRUCTURAL REFORM
Structural weaknesses existing under the NPF Act
The commission’s inquiries identified many structural weaknesses which contributed to the massive losses suffered by the NPF and many recommendations were made for remedying those weaknesses. Some of the recommendations were for amendments to legislation and others were of an ongoing administrative nature. The major recommendations were essentially to:
1. Remove the NPF from the control of the Minister and the DoF;
2. Reduce the degree of external control over the management of NPF’s affairs and investments;
3. Vest the control in a better qualified Board of Trustees;
4. Establish the BPNG as the external Regulator of NPF;
5. For matters still requiring imposition of external controls or guidelines the necessary powers to monitor and control should be transferred from the Minister and DoF to the Regulator.
6. In order to ensure better qualified trustees: (a) Remove all political interference from the selection and appointments process and vest power of appointment in specified organisations of employers and employees with all appointments to the board and senior management to be approved as fit and proper persons by the Regulator.
(b) Take active measures to help trustees understand and perform their roles and to understand the nature of their fiduciary duty to members of the fund.
7. Strengthen the accounting and reporting requirements and require the regulator to accept responsibility to monitor and enforce compliance;
8. Provide for prudential investment guidelines to be promulgated and enforced by the regulator;
9. Enable NPF to appoint professional fund managers onto the board of NPF or, preferably, to brief investment management to a firm of professional fund managers, which would be obliged to act within the prudential guidelines promulgated by the regulator and within policy directions of the board.
The commission’s detailed recommendations are listed at paragraph 15.4 below.
The Superannuation Act 2000
During the closing stages of the commission, there was considerable interaction between the commissioners and staff and the task force on superannuation and there was an interchange of ideas.
The task force has presented its report and the Superannuation Act 2000 was certified on May 30, 2002.
The main features of the new Act are:
1. The Act provides for licensing and regulation of the superannuation industry;
2. BPNG is the Regulator to: Authorise existing fund to continue to operate; License trustees, investments managers and fund administrators; Determine prudential standards; supervise compliance with the Superannuation Act and prudential standards; Promote, encourage and enforce proper standards of conduct;
3. It obliges authorised funds to have a licensed trustee, a licensed investment manager and a licensed fund administrator.
4. The BPNG will inquire whether applicants for licences and their officers are fit and proper persons and will apply a “fit and proper person test” before granting a licence. It may issue binding directions to licence holders and other persons engaged in the superannuation industry;
5. The Superannuation Act provides for contributions to be paid to the fund by employees and employers and for transfers of member entitlements;
6. The Act provides for mandatory and voluntary codes of conduct and penalties for breach;
7. The BPNG is empowered to prosecute and commence civil actions;
8. The Act provides for the amendment and repeal of the NPF Act, the POSF Act, the DFRBF Act and for the replacement of existing trustees and the transfer of employees.
The final structure and the preparation of prudential guidelines and control and monitoring mechanisms are still evolving.
Evolving policy development under Superannuation Act 2000
It is not within the commission’s terms of reference to participate in or contribute to that general process of policy development other than to publish findings and recommendations on structure as applicable to the NPF within the framework of the NPF Act and the reporting and monitoring scheme applicable in the period under review by the commission.