National Provident Fund Final Report [Part 16]
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.
(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.
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.
(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.
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.
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.
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.
(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.
(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