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National Provident Fund Final Report [Part 80]

November 23, 2015 Leave a comment

Below is the eightieth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

NPF Final Report

This is the 80th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 9 Continued

1999

Outsourced legal fees for 1999 are reported in paragraph 6.4.7.

The state of the NPF records makes it difficult to separate fees for general work from investment related legal work so they are considered together.

The total comes to K442,648.12 plus $A871.90 paid to 11 different firms.

The massive amount of K202,023.46 went to Carter Newell (and an extra K17,602.58 described at paragraph 6.4.8).

Maladinas Lawyers was paid K17,653.50 for work which should have been handled “in-house”, including K5000 for fees relating to the Employers Federation challenge to Mr Maladina’s appointment, which should not have been paid by NPF at all.

Both large and small matters were briefed to Carter Newell in 1999.

Findings

(a) Substantial fees were again paid to offshore legal firms in relation to the $A bond (Allen Allen & Helmsley) and the Cue Energy Resources situation (Freehill Hollingdale & Page) on the basis of their complexity and the need for specialised legal expertise;

(b) Fees paid domestically for board restructure advice (from Allens Arthur Robinson) and some of the work referred to Maladinas, Fiocco Posman & Kua and Carter Newell, were properly outsourced because of the complexity and the need for specialised legal expertise;

(c) There is insufficient detailed evidence to enable the commission to comment on matters referred to other firms;

(d) There is a discernable trend whereby more work was referred out to external lawyers, which should have been capably handled by NPF’s “in-house” lawyers; and

(e) The level of fees suggests that matters of lesser significance were also referred to Pattersons, Henaos and Young & Williams.

The commission summarises the evolving situation regarding outsourcing legal frees at paragraph 6.5.

Summary

In the period under consideration, external legal fees paid by NPF for work outsourced grew in the period under review as follows:

npf 80 a

To a very large extent, the massive increases in 1998 and 1999 reflected the need to obtain expert and specialised advice in relation to legal transactions in which NPF became involved.

It is equally apparent that there was an increasing trend to brief out to external lawyers matters, which should have been within the competence of NPF’s “in-house” legal staff. This was reflected in the legal fees paid in 1998 and 1999.

The clear major beneficiary of that trend was Carter Newell Lawyers and, to a lesser extent, Fiocco Posman & Kua and an even lesser extent, Maladinas.

At paragraph 6.4.8.12, we said there may have been further legal fees paid to Blake Dawson Waldron and Carter Newell after August 31, 1999 and that this might explain the difference of about K21,000 in fees referred to on that page.

Additional payments

From NPF’s cheque payment records, the commission further extracted the following payments, which were made after August 31, 1999, and not included in earlier material.

Gadens Lawyers  (Adding to paragraph 6.4.8.1 and Transcript p.7589)

A payment of a further K2342.95 was made on December 21, 1999 for advice for Ambusa on its copra oil purchase and sales agreement and operations management contract.

Blake Dawson Waldron (Adding to paragraph 6.4.8.6 & Transcript p.7592)

Two further payments were made:

(a) on November 8, 1999, for K9995.56 for advice as to a dispute with Boroko Motors; Pacific Finance Superannuation Fund; debt restructure and a review of Garry Jewiss’ contract with Crocodile Catering;

(b) on December 6, 1999, for K26,743.77 payable to Blake Dawson Waldron Melbourne Australia office, for advice on the sale of shares in Cue Energy Resources.

Carter Newell (Adding to paragraph 6.4.8.7 and Transcript p. 7595)

Three further payments were made:

(a) on November 8, 1999, for K6048.04 for advice as to exemptions under Part VII of the NPF Act and for Mr Mitchel’s employment contract;

(b) on December 2, 1999, for K4087.79 for advice on NPF’s Investment Portfolio involving Deutsche Morgan Grenfell; and

(c) on December 21, 1999, for K7466.75 for advice and work done on the sale of shares to NPF in Kundu Catering; general matters on NPF Tower leasing and a claim by Cue Energy Resources.

The supporting vouchers and invoices are Part M of CD1226. The aggregate of these further payments was K56,648.56 and results in the difference of K21,000 becoming an excess of K25,000.

The commission’s accounting advisors have stated that this difference is probably explained by the manner in which NPF has treated the VAT component in the payments made.

Investigations

In late 1999, the finance inspectors and then the NPF board itself, carried out inquiries into irregularities concerning Mr Maladina and Mr Leahy which included questions about their conflict of interest in briefing legal work to Carter Newell, in which firm Mr Maladina was a partner and Mr Leahy’s wife, Angelina Sariman, was employed.

Although their clear conflict of interest was raised with them, Mr Maladina and Mr Leahy vigorously denied any conflict. Failure to put legal outsourcing out to tender was not, however, raised by the inspectors.

As reported in paragraph 6.6.3, NPF started to brief Carter Newell only after Ms Sariman commenced work with that firm. She was recorded as the work author for 46 of the first 50 new files Carter Newell opened for NPF.

A calling for tenders for legal work was belatedly raised in October 1999 by Mr Giregire and an advertisement was placed in the newspapers.

Findings

(a) Mr Leahy’s conflict of interest regarding outsourcing legal services to Carter Newell is clear. When Mr Leahy briefed out work to this firm where his wife was employed as a lawyer. This amounted to nepotism.

(b) When Mr Maladina became chairman of the NPF Board of Trustees, a further conflict of interest clearly arose, as he was also a partner in Carter Newell;

(c) When Mr Leahy referred legal work to Carter Newell, of which the chairman, Mr Maladina, was a managing partner, it was clearly nepotism. This was also improper conduct by Mr Leahy and a breach of his common law duty to the NPF board;

(d) Mr Maladina never declared his conflict of interest to the board of trustees. This amounted to improper conduct and a breach of his fiduciary duties to the members of the fund;

(e) Mr Maladina, as an equity partner in Carter Newell, benefited from legal work being referred by Mr Leahy to Carter Newell;

(f) Mr Leahy benefited by having his wife employed and continuing to be employed for reward by that firm;

(g) Paying overseas law firms through NPF’s account with Wilson HTM Brisbane, breached the BPNG Foreign Currency Exchange Act and was therefore illegal; and

(h) Management breached normal government tender procedures by not going out to public tender for the provision of legal services.

Procurement Of Security Services Pre-1995

The commission’s terms of reference requires it to examine the procurement of security services for the period commencing January 1, 1995 until December 31, 1999. To understand the situation at the beginning of 1995, however, it is necessary to look briefly at earlier events.

Awarding and terminating NPF’s contract with Kress Securities

On October 7, 1993, Mr Kaviagu, the NPF financial controller, awarded a contract to Kress Security Services beyond the scope of his delegated authority and without following proper tender procedures and evaluation. On December 8, 1993, Mr Kaul issued a memorandum directing that tenders for security services must be submitted to him, with recommendations, for his approval.

On December 21, 1993, Mr Kaul declared the Kress contract to be null and void and put the contract out for be re-tender. Kress refused to tender but sued NPF for breach of contract instead. This matter was eventually settled out of court, with NPF awarding a 12-month contract to Kress, (plus K4000 damages in March 1994), for all NPF’s investment properties except head office. NPF also paid K4000 to Kress in damages.

1995

Thus, at the commencement of the period under review, on January 1, 1995, there were two security firms contracted to NPF.

  • Moresby Guards — head office; and
  • Kress — all other properties.

The contracts were to expire in March 1995 and tenders were called from a list of firms. The only tender received for the head office was from Moresby Guards. Kress was the lowest of five tenderers for the other properties.

At the NPF board meeting on April 27, 1995, Kress was awarded the contract for all properties, including head office, at a cost per guard of K14,892 per annum.

Findings

(a) The only security contract let in 1995 was to Kress Security for all NPF properties. Tenders were called and Kress Security was the lowest tenderer. Only one tender was received for NPF head office security and no competitive bids were sought, even from Kress Security. There was non-conformity with prescribed tender procedures but it seems clear that the rate offered by Kress Security was the lowest;

(b) The NPF Board of Trustees was clearly informed and involved and itself made the decision to contract Kress Security.

1996

Kress Security was the only security provider for all NPF’s properties throughout 1996, however, Mr Kaul became dissatisfied with Kress’ performance at the head office.

On July 29, 1996, Mr Kaul received a letter from a firm called Metro Security Services Pty Ltd with a proposal to provide security at a cheap rate of K1.70 per hour. Without performing any due diligence, Mr Kaul then recommended to the NPF board that Metro Security replace Kress at head office. At the 103rd board meeting, on October 10, 1996, the Board resolved:

“to replace the current security service with another security service organisation to be decided on by the management”.

This was a full delegation of its role in this matter to management.

On October 25, 1996, Mr Kaul gave Kress three months notice, terminating its head office contract from January 26, 1997. He expressly assured Kress it would continue to provide security for NPF’s other properties.

The commission has examined records of the payments to Kress throughout 1996 and finds that they were in order. The details are set out at paragraphs 7.4.3.1 and 7.8.3.2.

Findings

(a) The amounts paid to Kress Security for head office security services in 1996 was K29,142.80. This compares to the figure shown in the 1995 Income and Expenditure Statement and the same figure for the comparables in the like statement for 1997;

(b) The amount shown by Century 21 statements for rental property security in 1996 was K148,226.41 as against K149,491 shown in the Income and Expenditure statements. Again, the minor differences are probably explained by the fact the commission’s figures are on a cash basis and those in the Income and Expenditure statements were probably made on an accruals basis; and

(c) No new security contract was actually let in 1996, but after being fully informed the NPF board delegated the decision to management.

1997

Contract with Metro

Mr Kaul awarded the head office contract to Metro on November 19, 1996, to commence on January 26, 1997. Mr Frank then wrongly drafted the contract to also include five other NPF properties over which the Kress contract was still in force. This resulted in double security for some weeks until Metro agreed to withdraw from the extra properties on payment by NPF of K4694.75 compensation.

The commission’s research into payments for security in 1997 is set out at paragraphs 7.5.4, 7.5.5, 7.5.6 and 7.5.7. There appear to be no anomalies except two unexplained payments totalling K11,800 to a company named Phantom Security Services Pty Ltd. No invoices exist for this alleged service. The documents show that Mr Leahy was involved in this matter.

Findings

(a) Tender procedures and requirements were totally ignored by NPF management in the letting of security services in 1997;

(b) The amounts paid for head office security in 1997 were K5395.80 to Kress Security and K35,770.95 to Metro Security aggregating K41,166.75. This compares to the figure shown in the 1997 Income and Expenditure statement of K38,593 and the same comparable figure in the like statement for 1998;

(c) The amounts paid for other security services were Kress Security K11,372.40 (for Nine-Mile) and Phantom Security K11,800 for the Kaubebe St property plus the amount shown in the Century 21 statements for rental property security in 1997 of K150,112.80 aggregating in all K169,435.20. This matches the figure shown in the 1997 Income and Expenditure statement of K169,435 and the same comparable figure in the like statement for 1998;

(d) The only changes which took place in the area of continuous security work in 1997 were:

(i) Metro Securities replacing Kress Security as the provider of security at the NPF head office; and

(ii) Kress Security being given additional security work at Nine- Mile housing project.

(e) No tenders were called in 1997 to provide security and there was no competitive bidding obtained for either of the changes in (c) above; and

(f) There was no competitive bidding for the “one-off” job of “Eviction/Demolition” for which Phantom Security was paid.

1998

This was a stable year in security services. Metro continued to provide security services for the head office throughout 1998 for a total fee of K51,246 and the payments disclose no anomalies.

Security services for all other NPF properties were provided by Kress. Kress received the sum of K145,702 through Century 21 for providing this service.

Findings

(a) The amount paid to Metro Security for NPF head office security in 1998 was K31,905.60. This matches the actual figure of K31,906 shown in the 1998 Income and Expenditure statement but not the comparative figure of K33,361 shown in the statement for 1999. The probable reason is that the latter figure for the second half of December 1998 was probably included even though it was paid in 1999; and

(b) The amount paid to Kress Security for all other security services in 1998 was K145,702.

1999

As previously discussed in paragraphs 3.4.1 – 3.4.5, 1999 was the year when NPF property management services were totally restructured with the termination of Century 21’s long standing exclusive management contract.

This was replaced by the awarding of contracts to Gemini and Haka and the lucrative NPF Tower contract to PMFNRE.

This process was marked by Mr Leahy’s interference in the competitive tendering process, which Mr Fabila accepted and facilitated.

1999 was also the year when Mr Maladina was appointed chairman of NPF at the instigation of the then Prime Minister Hon Bill Skate and it was the year when Mr Maladina and Mr Leahy pursued fraudulent schemes against the NPF with the knowledge and acceptance of Mr Fabila.

These same lawless tendencies also characterised the arrangements for security services in 1999.

TO BE CONTINUED

National Provident Fund Final Report [Part 69]

November 10, 2015 Leave a comment

Below is the sixty-ninth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

NPF Final Report

This is the 69th 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. Michael Somare.

Executive Summary: Schedule 6 Continued 

(ii) To the Papua New Guinea Law Society — Mr Leahy and Mr Maladina and Ms Sariman to consider disciplinary measures;

(iii) To the Ombudsman Commission — Mr Maladina and Mr Fabila to consider whether they were in breach of the Leadership Code;

(h) The scam to defraud the NPF over the sale of the NPF Tower amounted to a criminal conspiracy involving Mr Leahy, Mr Maladina, Mr Fabila, Sullivan and Ms Sariman.

REFERRALS

IN relation to the commission’s inquiries into the six matters investigated in Schedule 6, the commission recommends that the Prime Minister makes the following referrals:

SECTION A:

Referrals recommended by the commission to the constituting authority:

Jimmy Maladina

To the Commissioner for Police:

(a) Demanding money (K150,000) from Kumagai with threats to stop work on the Tower and reject payment claims if the demand was not met (Criminal Code Act, Section 389);

(b) Conspiring with Mr Taniguchi and Mr Kobayashi and probably with Herman Leahy to defraud the National Provident Fund Board of Trustees of K2.505 million ((Criminal Code Act, Section 407);

(c) Forging or causing to be forged a writing (being the signature of Ken Yapane & Associates) on the subcontract (Criminal Code Act, Section 462(1));

(d) Knowingly and fraudulently uttering a false writing (being the signature of Ken Yapane & Associates on the subcontract) to Kumagai (Criminal Code Act, Section 463(2));

(e) Fabricating evidence with intent to mislead a tribunal in judicial proceedings (the two false retyped letters produced to this commission by Mr Yapane) (Criminal Code Act, Section 122);

(f) Attempting to induce a person called as a witness in judicial proceedings (Mr Yapane as called before this commission) to give false testimony or withhold true testimony (Criminal Code Act, Section 123); and

(g) Possibly attempting in his telephone conversation with Mr Taniguchi (Transcript p.2977) to induce a person to be called as a witness in judicial proceedings (Mr Taniguchi before this commission) to withhold true testimony (Criminal Code Act, Section 123).

Ombudsman Commission:

To consider breaches of the Leadership Code in relation to his activities concerning the fraud against the NPF and related activities.

PNG Law Society:

Professional misconduct.

Henry Fabila

Commissioner for Police

(Transcript pp. 3280-3332) Mr Fabila: for being party to all or some of the above mentioned offences and/or of criminal conspiracy with Mr Maladina in relation to any or all of such offences.

Ombudsman Commission

To consider breaches of the Leadership Code in relation to his activities concerning the fraud against the NPF and related activities.

Herman Leahy

Commissioner for Police

For being party to all or some of the above mentioned offences and/ or of criminal conspiracy with Mr Maladina in relation to any or all of such offences.

PNG Law Society Professional misconduct.

Mr Taniguchi

Commissioner for Police

For being party to all or some of the above mentioned offences and/ or of criminal conspiracy with Mr Maladina in relation to any or all of such offences.

Kazu Kobayashi

Commissioner for Police

For being party to all or some of the above mentioned offences and/ or of criminal conspiracy with Mr Maladina in relation to any or all of such offences.

Ken Yapane

Commissioner for Police

(a) FOR being party to all or some of the above mentioned offences and/ or of criminal conspiracy with Mr Maladina in relation to any or all of such offences; and

(b) Fabricating documents.

Rex PAKI

Commissioner for Police

Aiding the office of fraud or receiving.

PNG Institute of Accountants

Professional misconduct

Ango Wangatau

Commissioner for Police

Aiding the office of fraud

PNG Institute of Accountants

Professional misconduct

David Lightfoot

Commissioner for Police

To consider whether there is criminal culpability in relation to the fraud against the NPF such as to warrant charging him with an offence against the Criminal Code.

PNG Law Society

Professional misconduct

Barbara Perks

Commissioner for Police

To consider whether there is criminal culpability in relation to the fraud against the NPF such as to warrant charging her with an offence against the Criminal Code.

Peter O’Neill

Ombudsman Commission

(a) The concealment of his interest in Bluehaven No.67 which purchased RIFL from ICPNG;

(b) The receipt of K100,000 fraud money by his company Mecca No.36; and

(c) The concealment of his interest in Nama Coffee Exports Pty Ltd.

Kenneth Barker

Commissioner For Police

(a) To be referred for perjury if he returns to PNG; and

(b) Aiding the offence of fraud.

Maurice Sullivan

Commissioner for Police

Aiding the office of fraud.

The commission has already directed that the following persons be referred to the Commissioner for Police.

SECTION B:

Direct referrals by the commission

Peter O’Neill

Commissioner for Police

Possible perjury regarding source of funds to purchase Manamatana apartments.

Concluding Comments

Result of the investigation

After thorough and painstaking investigations, the commission has concluded that no further action is required regarding:

  • The inground works variation costs of K3,006,270.26 as the costs were justifiable and there were no irregularities;
  • Builders other works variations because sound professional opinion establishes there were no irregularities;
  • The first acceleration fee of K1.4 million because the decision to pay the fee was justifiable and the cost was within reasonable bounds; and
  • The professional fees, because there is a genuine dispute caused by ambiguity in the contract documents and there are no irregularities.

However, the commission’s investigations uncovered criminal malpractice requiring the following matters and referrals to the Commissioner for Police and other authorities have been recommended:

The Kina devaluation claim of K3.3 million:

This payment was agreed upon by Mr Maladina so he could receive the fraudulent payment of K2,505,000 from Kumagai. That was part of the “deal” with Mr Taniguchi. NPF may be entitled to recover the refund of this K3.3 million;

THE second acceleration claim of K2,505,000:

This claim was spurious and was agreed upon between Mr Maladina and Kumagai Gumi managers (under pressure from Mr Maladina) to enable the money to be channelled through Kumagai Gumi and on paid for the benefit of Mr Maladina, with shares for Mr Leahy and Mr O’Neill (through the account of Carter Newell and PMFNRE).

NPF is entitled to recover this K2.505 million.

Tribute to Finance Inspectors

The commission once again commends the finance inspectors who were directed by DoF Secretary Brown Bai under Section 64 of the PF(M) Act to inquire into aspects of the NPF Tower financing and construction.

In every respect their inquiries and findings had validity and it amply demonstrates what a powerful tool Section 64 is if the inquiry into a public body is carried out by professional Finance Inspectors acting with perseverance and integrity.

SCHEDULE 7A

Niugini Insurance Corporation K2 Million Loan

The commission has carefully considered counsel’s opening submissions and all statements, evidence and submissions given in reply.

For ease of reference this report is presented generally in the same sequence as opened by counsel. The commission’s findings are set out at appropriate places within the text and also in the schedule of findings at the rear of the report as answers to the terms of reference given to the commission.

Addresses by counsel and evidence in relation to this topic can be found in the transcript of proceedings as follows:-

Background

The initial decision by the National Provident Fund of Papua New Guinea (NPF) to loan funds to Niugini Insurance Corporation (NIC) derived from the 93rd NPF board meeting on February 9, 1995.

At that meeting, finance and investment manager Noel Wright informed the board of NIC’s request for a loan to complete its Lakosi Place development.

A paper was also circulated to the board members in which the managing director Robert Kaul recommended board approval of a debt facility of K2 million at a fixed interest rate of 13 per cent for a term of 10 years.

The board, however, resolved not to approve the loan on the terms recommended by the managing director but instead resolved that the managing director offer the loan to NIC under the following terms:

Debt facility — K2 million;
Interest rate — PNGBC Indicator lending rate plus 4 per cent;
Term — 10 years; and
Security — first registerable mortgage over Lakosi place property. (Exhibit N1)

Although we were unable to locate a copy of the board paper that was circulated at the 93rd board meeting, it seemed that Mr Kaul brokered the deal with NIC as evidenced at the 94th board meeting on April 24, 1995.

The board meeting resolved to ratify the NPF management’s decision to loan up to K2 million to NIC on the following terms and conditions:

Borrower: Niugini Insurance Corporation Limited;
Amount : Up to K2 million;
Term: 10 years;
Interest Rate: PNGBC Indicator Lending Rate (ILR) plus 4 per cent payable monthly;
Grace Period: Eight months from date of signing agreement;
Drawdown Period: First drawdown after five days from date of signature of the loan agreement to and including up to 10 months from such date;
Commitment charges: No commitment charges within six months of the date of signature and 0.5 per cent of undrawn balance for the remaining drawdown period for each day undrawn;
Prepayment penalty: Provided no prepayment is made within three years, otherwise the charge equal to the default rate will apply on the prepaid amount before the expiration of the said period;
Default penalty: 2 per cent charge on unpaid amount remaining un-remedied within five working days;
Repayment: Repayments of the principal amount shall be made monthly equal installments, the first monthly repayment commencing on the eighth month after the signing of the loan agreement and the final repayment being on the 112 month after the signing of the loan agreement;
Management Fee: 1 per cent flat of the total facility in advance for the first K1 million drawn and for the balance of the drawdown in arrears; and
Security: First mortgage over the property. (Exhibits N2 and N3)

Although the minutes do not make reference to it, the managing director’s report for the 94th board meeting reads:

“v) NIC Loan

After NIC consented to the 4 per cent margin, Ministerial approval has been received and documentation is now proceeding smoothly. First drawdown is expected this month”. (Exhibit N4)

Mr Kaul failed to attach a copy of the Ministerial approval in his board report and it seemed his report might have been misleading.

Ministerial Approval

We have not sighted any Ministerial approval for this loan even though the finance report for the period ending March 1995 advised of the Ministerial approval as being received (Exhibit N5).

The NPF Files on “Letters to the Minister” (Commission Document 55) and “Letters from the Minister” (Commission Document 54) do not contain any letter granting Ministerial approval.

The documents produced by the Department of Finance and Treasury (DoF) in respect of Ministerial approval granted in 1995 (Commission Document 5A) contain no documents indicating Ministerial approval was either sought or given.

Consequently, there is no primary evidence of approval either being sought or given, only third party reports from Mr Kaul and Mr Wright.

Loan Documentation

The legal counsel/corporate secretary’s report for the months of April/ May 1995, reads: “Niugini Insurance Corporation Limited— Long Term Loan — K2 million Allotment 9 Section 62 Granville. I table the following loan and security agreements.

(i) Loan Agreement dated 28 April 1995

(ii) Memorandum of Mortgage dated 28 April 1995

The Memorandum of Mortgage was registered on the certificate of title to allotment 9 section 62 Granville on 17 May 1995. The certificate of title has now been lodged in the NPF safe”. (Exhibit N6)

The above report was for the 95th board meeting held on June 2, 1995. The minutes of that meeting record the corporate secretary tabling both documents (Exhibit N7).

The 95th board meeting was the last board meeting during which the NIC Loan was actually considered.

As was the case with the Ministerial approval letter, the commission was unable to locate copies of the signed loan documents.

Drawdown

In the managing director’s report for the 96th board meeting held on August 2, 1995, (Exhibit N8), Mr Kaul discussed NPF’s investment in the Bank South Pacific (BSP). Mr Kaul advised the board of NPF’s large deposit of K28 million with BSP and stated that although NPF is receiving healthy returns from this investment, the deposit will be reduced considerably in the next 12 months due to the withdrawal of funds to meet NPF’s loan commitments to, among others NIC.

With the K2 million already being committed the finance reports for the months of September and October 1995 attached the 1996 budget. The projection of interest from, the NIC loan was as follows: The interest projection was based on the assumption that the Indicator Lending Rate (ILR) averaged 13 per cent in 1996 (Exhibits N9-N12).

Repayment

By the end of 1995, NPF’s projection of interest income from the loan for the year 1996 was K281,419.

npf 69

The first mention of the NIC loan in 1996 was at the 101st board meeting on June 28, 1996.

The finance manager informed the board that NIC was willing to repay its K2 million loan.

The board resolved to accept early repayment subject to the terms and conditions governing the loan.

However, by the 103rd board meeting held on October 18, 1996, the board noted that NIC had decided against early retirement of the loan (Exhibits N13-N15).

In commission document 1144 is a schedule of loan repayments for the years 1996 to 1999 detailing monthly payments of K14,583.33 beginning January 1996 till December 1999. This standard payment of K14,583.33 was to retire the principal amount.

Therefore, a total of K699,999.84 had been received by NPF to retire the principal amount (i.e. K174,999.16 per year from 1996-1999) (Exhibit N16).

NPF could not locate documents evidencing payment of interest on the loan and it seemed that such payments were not forwarded to NPF.

Findings

(a) The NPF management failed to seek Ministerial approval for the loan to NIC;

(b) THE board reports by Mr Kaul and Mr Wright were misleading as no ministerial approval was sought or granted;

(c) NPF management and Board of Trustees failed to ensure that Ministerial approval had been received before allowing NIC to commence drawdown of the loan funds; and before allowing NIC to commence drawdown of the loan funds; and

(d) THE NPF management failed to ascertain and ensure that interest payments were made by NIC.

TO BE CONTINUED

National Provident Fund Final Report [Part 68]

November 9, 2015 Leave a comment

Below is the sixty-eigth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

This conclusively showed that Mr O’Neill had definitely benefitted from the proceeds of the NPF Tower fraud.

NPF Final Report

This is the 68th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary: Schedule 6 Continued 

(b) The K250,000 paid to Bank of Hawaii was for the benefit of South Super Stores Limited and both Peter O’Neill and Nathaniel Poiya received a direct benefit as this payment reduced their direct personal liability under their respective guarantees given to Imak International Limited;

(c) The K60,000 came from Carter Newell and was credited to this Ledger 18. The evidence of Mr Barker regarding that money was false and knowingly false. It is recommended that if Mr Barker ever returns to PNG he should be referred to the Commissioner for Police with a view to his being charged with perjury under the Commissions of Inquiry Act;

(d) The K60,000 paid into Ledger 18 from Carter Newell was part of the proceeds of the Waigani Land fraud. It was later combined with other moneys to enable Mr O’Neill’s children’s company LBJ Investments (see paragraph 12.4.20.9) to buy Remington Ltd from Baradeen Holdings.

Mr O’Neill’s rental income 

In attempting to explain the expenditure of apparently excessive sums for his personal benefit Mr O’Neill claimed they were funded from rental income on his properties, which had been paid into PMFNRE on his behalf. At paragraph 12.4.25, the commission reported upon the procedures whereby PMFNRE accounted by monthly rental statements to Mr O’Neill for rental receipts.

Accordingly, payments were not made out of rentals unless they are detailed in the monthly rental statements.

Free rent for Minister Zemming 

While investigating the rental payments, the commission discovered that rent was not charged for unit 105 Pacific View Apartments, which was occupied by Hon Mao Zemming, a Minister in the National Government. Mr O’Neill said Unit 403 was occupied by Mr Zemming’s first secretary Sam Basil and that Mr Basil’s company paid the rent for both apartments by one cheque.

Findings 

At paragraph 12.4.25.1, the commission has found:

(a) Mr O’Neill’s statement that the payments out for his benefit are balanced by rental receipts from his rental properties managed by PMFNRE is not true; and

(b) Mr Zemming was occupying Unit 105 owned by Mr O’Neill rent free.

Money from Niugini Aviation Consultants and links to Chelsea Ltd 

At paragraph 12.4.27 (12.4.21(f)), the commission revisited the Waigani land matters concerning money allegedly paid into Carter Newell Trust Account Niugini Aviation Consultants in Hong Kong. After the deposit was made large cheques were paid to PMFNRE, Biga Holdings and also a cheque for K333,200.00 for Chelsea Ltd.

A search of Chelsea Ltd shows probable links to Mr O’Neill (represented again by Jack Awela and other significant links).

Findings 

At paragraph 12.4.26.1, the commission has found:

(a) There are clear links between the money from Hong Kong and each of PMFNRE and Mr O’Neill; the company Chelsea Security Limited and M Basil and Wandi Yamuna and the company Biga Holdings Limited owned by Ms Iaraga Asi (Mr Pok’s current partner);

(b) There are also rental arrangement links between Mr O’Neill, Chelsea Security and Mr Sam Basil and Hon. Mao Zemming and the commission so finds.

The relationship between Mr O’Neill and PMFNRE

At paragraph 12.5.2, the commission lists the many links between Mr O’Neill and PMFNRE, the many benefits he received from that company and the controls he exercised over the accounts and funds held by PMFNRE. The commission points out at paragraph 12.5.2.3 that:

(a) Mr O’Neill used PMFNRE as his banker with massive numbers of transactions treated as “Adjustments” and many entries on numbered sales ledgers attributable to Mr O’Neill and persons and companies associated with him and the commission so finds;

(b) Mr O’Neill also received funds for his personal benefit from sales “commissions” said to be earned by PMFNRE on property sales and which there were efforts to conceal;

(c) Mr O’Neill also borrowed large sums of money from PMFNRE, which were treated as “Adjustments” and many of which were not reimbursed even as late as 31st May 2001; and

(d) Mr O’Neill made, requested or gave directions to PMFNRE on multiple occasions concerned not only with his own funds but with funds derived from the NPF Tower fraud (credited to PMFNRE Ledgers 8, 9 and 18) and with transactions derived from those funds – one sees so often “REF P.ON” or “REF PO” or similar expressions that it is perfectly plain Mr O’Neill had dominion over these funds and gave directions in relation to them.

At paragraph 12.5.2.4 the commission describes how Mr O’Neill gave detailed directions to PMFNRE’s accountants on accounting matters. At paragraph 12.5.2.5, the commission reports on Companies Office records which show Mr Awela as owning 90 per cent of the shares in PMFNRE. Granted the commission’s previous findings that Mr Awela is a nominee for Mr O’Neill in Mecca No.36 Ltd, and Nama Coffee Exports Ltd, it is quite clear that Mr O’Neill himself owns the 90 per cent of shares in PMFNRE attributed to Mr Awela.

There are many reasons why Mr O’Neill would want to conceal his interests in PMFNRE including:

1. First, it would avoid the need for disclosure to the Ombudsman Commission during the time Mr O’Neill was executive chairman of Finance Pacific Group and subject to the Leadership Code;

2. Second, it would avoid the need for disclosure during the same period to PNGBC, which was a lender to each of these companies;

3. Third, it would conceal the fact that Mr O’Neill would receive benefits from the work that was directed to PMFNRE from the various Commercial Statutory Authorities; and

4. Fourth, it would mask Mr O’Neill’s connection with moneys that were being laundered through PMFNRE and used for purposes such as the acquisition of RIFL and the purchase by Bethgold Pty Limited of the Kanimbla property from Mr and Mrs Reynolds.

Findings

At paragraph 12.5.2.6, the commission has found that the:

(a) evidence is overwhelming that the true owner of PMFNRE is and was Mr O’Neill and that Maurice Sullivan and Mr Barker acted in accordance with his instructions.

(b) The commission recommends that the Prime Minister refer Mr O’Neill to the Ombudsman Commission to consider whether Mr O’Neill’s concealment of his interests in Nama Coffee Exports Pty Ltd and Port Moresby First National Real Estate Pty Ltd constitutes a breach of his duty under the Leadership Code and the need to submit full and honest Leadership Returns.

Concluding comments on the second acceleration claim 

The investigation into the spurious second acceleration payment has clearly demonstrated that it involved a carefully planned fraud on the NPF, instigated and carried out by Jimmy Maladina, with the active involvement and support of Herman Leahy. Mr Leahy’s wife Ms Angelina Sariman played a supporting role as a principal offender.

Ken Yapane was also involved, at least as an accessory and receiver of fraudulently obtained money. The two managers of Kumagai Gumi were reluctant participants and are also principal offenders. Mr Fabila had knowledge of what was occurring. He failed to stop it and signed documents which helped to perpetrate the fraud.

The tracing of the NPF money, paid as six progress payments by Kumagai Gumi, plus the K150,000 personal commission for Mr Maladina shows quite clearly who the beneficiaries of most of the Tower fraud moneys were.

These included Mr Maladina and his wife and companies, Mr Leahy and his wife and companies and Mr Yapane.

Substantial amounts were paid into PMFNRE accounts and substantial parts of these moneys were paid for the benefit of Mr O’Neill.

This finding was vigorously denied by Mr O’Neill, who argued that although it appears on paper that payments for his benefit came from ledgers containing NPF Tower fraud money, he in fact had other moneys of his own in other PMFNRE accounts, which were the true and “innocent” source of moneys paid out to himself, his companies and his family company.

To assess Mr O’Neill’s claim, the commission made a thorough study of PMFNRE’s accounts and traced all moneys paid in and out on account of Mr O’Neill.

This conclusively showed that Mr O’Neill had definitely benefitted from the proceeds of the NPF Tower fraud. It also showed that, despite his denial’s, Mr O’Neill is the beneficial owner of PMFNRE and that Mr Sullivan and Mr Awela are his nominee shareholders.

It is quite clear that there is a relationship between Mr Maladina and Mr O’Neill whereby they have benefitted jointly from the NPF Tower fraud.

The Proposed Sale Of 50 Per Cent Of NPF Tower To PNG Harbours Board 

1. In paragraph 13 of Schedule 6, the commission describes the failed attempt by NPF to sell a 50 per cent ownership in NPF Tower to the Papua New Guinea Harbours Board (PNGHB) for K40 million.

The idea of selling off an interest in the uncompleted NPF Tower was a good one because it would enable NPF to pay off some of its K59 million debt to the PNGBC, the interest on which was a crippling burden to NPF.

The commission reports how a small group of conspirators plotted and manipulated events hoping to ensure that:

  • Maurice Sullivan of PMFNRE would be appointed NPF’s agent to arrange the sale but this was without the knowledge and approval of the NPF board;
  • NPF management would agree to pay 2.5 per cent commission to Mr Sullivan, which was then raised to 5 per cent, (K2 million) without the knowledge or approval of the NPF board;
  • Mr Sullivan would take advantage of the inexperience of the PNGHB chairman John Orea to obtain his signature to a contract of sale;
  • The board of the PNGHB would then approve the purchase of 50 per cent of the NPF Tower for K40 million with the responsibility to pay the K2 million commission to PMFNRE being shared between NPF and the PNGHB;

2. Fortunately, the management of the PNGHB, under managing director Bobby Kaivepa, resisted the political pressure and prepared an excellent brief to the members of the PNGHB pointing out that:

(a) PNGHB had no legal power to enter the agreement;

(b) the proposal was not financially viable; and

(c) PNGHB lacked the required funds and had no power to borrow for this purpose.

3. The sale to PNGHB was then dropped by NPF. Throughout the negotiations Mr Leahy and Mr Fabila had deliberately refrained from mentioning the unauthorised agency agreement entered into with PMFNRE and the 5 per cent commission, which had already been agreed by Mr Fabila and Mr Sullivan.

On the evidence, it is clear that this idea was being promoted in NPF mostly by Mr Maladina and Mr Leahy, with Mr Fabila’s support.

Mr Sullivan was obviously a principal in the conspiracy.

In relation to the attempted sale to the PNGHB, at the paragraphs in Schedule 6 referred to below, the commission has found that:

At paragraph 13.1.3: 

(a) Mr Leahy was not in direct discussion with Mr Emilio;

(b) Mr Leahy, without any authority from the NPF board or Mr Fabila, engaged PMFNRE as NPF’s agent to sell equity in The Tower Pty Limited;

(c) Mr Leahy suppressed the fact that he had engaged PMFNRE from Mr Fabila and the NPF board.

(d) Mr Leahy provided false information to the NPF board that he was holding direct discussions with Mr Emilio and in failing to disclose his engagement of PMFNRE;

Paragraph 13.1.5: 

(a) Mr Leahy exceeded his authority in entering arrangements with PMFNRE in August 1998 without the approval of the NPF board or Mr Fabila;

(b) Mr Leahy was the recipient of Mr Sullivan’s letter of March 5, 1999, and the author of Mr Fabila’s letter of March 10, 1999. Mr Leahy exceeded his authority in entering into these altered arrangements with PMFNRE in March 1999 without NPF board and Ministerial approval. Mr Leahy was remiss in his duty to fully and properly inform Mr Fabila of the content and legal effect of the letter of March 10, 1999, which he arranged for Mr Fabila to sign;

(c) Mr Fabila was remiss in his duty as managing director of NPF in signing the letter of March 10, 1999, without properly reading and understanding it and without apprehending that the letter constituted a contract beyond his approved financial delegation, which required both NPF board and Ministerial approval;

(d) February/ March 1999 was a time of financial crisis at NPF and concurrently with this arrangement, Mr Leahy was heavily involved in the Waigani Land proposal and the NPF Tower claims with Kumagai. In those contexts, Mr Leahy also wrote and arranged for Mr Fabila to sign other letters in respect of which Mr Leahy also did not fully and frankly brief Mr Fabila; and

(e) MR Leahy, Mr Sullivan and Mr Fabila should be referred to the Commissioner of Police to consider whether charges of criminal conspiracy, attempted fraud or other offences should be brought against them.

Paragraph 13.4.1: 

Both Mr Fabila and Mr Leahy failed in their duties in not fully and frankly informing the board of this contractua* obligation they had entered into to pay 5 per cent commission to Mr Sullivan and by not openly seeking board ratification of their action despite the clear opportunity to do so.

Paragraph 13.5.5.1: 

The commission finds, on the balance of probabilities, that it is likely that this approval was prepared in Carter Newell’s office after March 25, but backdated to March 22.

There are at least two possible explanations for the sense of urgency about obtaining the Minister’s approval for the sale of 50 per cent of the Tower to the PNGHB. Firstly, NPF desperately needed the money. Secondly, the conspirators were greedily awaiting payment of the 5 per cent commission.

The three identical approvals by Ministers Lasaro, Pok and Auali, which were sent to the PNGHB were also dated 22nd March 1999, but were worded differently from the approval faxed from Carter Newell on 1st August 1999.

Paragraph 13.15: 

(a) THE approval for the sale of 50 per cent equity in the NPF Tower signed by Minister Lasaro dated March 22, 1999, which was faxed by Carter Newell Lawyers to NPF on April 1, 1999, was drawn up by Carter Newell and backdated to March 22, 1999;

(b) The approvals to sell to the PNGHB which were given by Ministers Lasaro, Pok and Auali, dated March 22 and 24, 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 per cent of the NPF Tower;

(c) Mr Leahy acted unprofessionally in drawing up a certificate recording a circular resolution of the NPF board dated March 26, 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) THE payment to Kumagai authorised by Mr Fabila on March 31, 1999, was part of a fraudulent scam involving Mr Leahy and Mr Maladina to fraudulently obtain K2,505,000 for the benefit of Mr Maladina. On the face of the documents Mr Fabila was also involved;

(e) The responsibility for the scam involving the 5 per cent (K2 million) commission to Mr Sullivan of PMFNRE lies with Mr Leahy, Mr Maladina and Mr Sullivan. On the face of the documents, Mr Fabila was also involved;

(f) MR Fabila as managing director and Mr Maladina as chairman, knowingly withheld from the NPF board the fact that Mr Fabila had signed an agreement to pay Mr Sullivan of PMFNRE a 5 per cent commission on the sale of the 50 per cent interest in The Tower. This was a breach of fiduciary duty by Mr Fabila and Mr Maladina.

(g) In relation to the attempted sale to PNGHB, it is recommended that the Prime Minister should refer the following people to the authorities named:

(i) TO the commissioner for Police – Herman Leahy, Jimmy Maladina, Henry Fabila, Maurice Sullivan, and Angelina Sariman to consider criminal charges;

(ii) TO the Papua New Guinea Law Society – Mr Leahy and Mr Maladina and Ms Sariman to consider disciplinary measures.

TO BE CONTINUED

National Provident Fund Final Report [Part 52]

October 16, 2015 1 comment

Below is the fifty-second part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

NPF Final Report

This is the 52nd extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 5 Continued 

(f) MARIANO Lakae and Iori Veraga charged fees at approximately double rate to give grossly inflated valuations for the NPF Tower and the Waigani land;
(g) Authorisation for payment was given by general manager Henry Fabila, well in excess of his financial delegation and without consultation with or authority from the NPF board;
(h) The two valuers each paid Mr Maladina K30,000 commission on the fees paid to them by the NPF for valuation of the Waigani land. They each paid a commission of K87,500 to Mr Maladina from the fees received for valuing the NPF Tower.
(i) There was a conspiracy between Mr Leahy, Mr Maladina, Mr Lakae and Mr Veraga and possibly including Mr Fabila to obtain inflated valuation fees from NPF;
(j) Mr Maladina, Mr Leahy, Mr Veraga, Mr Lakae and Mr Fabila should each be referred to the Commissioner of Police to consider criminal charges, including conspiracy in relation to the valuations and valuation fees (See paragraph 19.9.2 for referral).
(k) Mr Fabila was in breach of his fiduciary duties as an NPF trustee and should be referred to the Ombudsman Commission in relation to this matter to consider possible breach of the Leadership Code.

On the face of the Carter Newell records, the 50 per cent of the valuation money was received by Carter Newell as legal fees for division in accordance with the partner’s profit sharing arrangement. As it was grossly excessive considering the minimal service provided by Mr Maladina that amount of remuneration was improper.

However, the commission made further investigations to see what actually happened to those valuation fees after they were received into the Carter Newell Trust account. It found the fraudulently obtained valuation fees were laundered through Carter Newell trust account and general account and paid largely for the benefit of Mr Maladina and Mr Leahy and their corporate entities. Angelina Sariman, Mr Leahy’s wife, was clearly involved and cashed and reinvested several of the cheques.

The commission traced the payments of these moneys to their end destinations as far as possible and these transactions are depicted diagrammatically in chart 1 attached as an appendix to this report (It deals with both the Waigani land and the NPF Tower valuations) (see paragraphs 17 and 19).

Findings 

(a) There is strong evidence that the arrangements between Mr Lakae, Mr Veraga, Maladina and Mr Leahy and Ms Sariman involved a conspiracy to cheat and defraud the NPF and that the conduct of these people was criminal in nature;
(b) Cheating is an offence under Section 406 of the Criminal Code Act as is conspiracy to defraud under Section 407. Misappropriation is an offence under Section 383A of the same Act and knowing receipt of property obtained by means of an indictable offence is an offence under Section 410 of the same Act;
(c) The commission recommends to the constituting authority that:
(i) each of Mr Maladina, Mr Leahy, Ms Sariman, Mr Veraga and Mr Lakae should be referred to the Commissioner of Police for investigation with a view to criminal prosecution; and
(ii) each of Mr Maladina, Mr Leahy and Ms Sariman, as lawyers, should be referred to the Papua New Guinea Law Society for investigation with a view to examining whether their respective conduct was unprofessional;
(iii) each of Mr Veraga and Mr Lakae should be referred to the Papua New Guinea Valuers Registration Board and the Papua New Guinea Institute of Valuers for investigation with a view to examining whether their respective conduct was unprofessional; and
(iv) Mr Maladina should be referred to the Ombudsman Commission for investigation whether he has committee offences in breach of the Leadership Code.

Attempts by Mr Maladina and Mr Leahy to persuade the NPF board to resolve to acquire a 100 per cent interest in the Waigani land were firmly rejected by the NPF board at its meeting on December 22, 1998, despite the preparation of false and misleading briefing papers for the Board (See paragraphs 13, 15 & 18).

Findings

(a) Attempts were being made, simultaneously, to sell off all or part of the Waigani land through the sale of shares in Waim No. 92 / WCC Ltd to POSF, MVIT, DFRBF and NPF;
(b) Pacific Capital was retained to prepare investment memoranda for the proposed sale to POSF and DFRBF. False information was included in the memoranda, which had been provided by the client, notably that the Valuer General had valued the land at K15 million whereas the actual Valuer General’s valuation had been K2.866 million;
(c) Mr Maladina was heavily and directly involved in briefing Pacific Capital in the preparation of the two memoranda of information;
(d) Mr Maladina was also directly involved in proposing to the NPF board that NPF should purchase 100 per cent of the shares in Waim No. 92, known as Waigani City Centre Ltd (WCC Ltd) for K10 million;
(e) Mr Maladina had an interest in WCC Ltd, which he was deliberately concealing;
(f) Mr Leahy was conspiring with Mr Maladina to sell off the interest in Waigani land to NPF and the other institutions; and
(g) These activities were serious breaches of Mr Maladina’s fiduciary duty as a trustee and of Mr Leahy’s contractual duties to NPF.

When Prime Minister Skate succeeded in obtaining the appointment of Mr Maladina as chairman of NPF in January 1999, Mr Maladina directed that the Waigani land deal be put back onto the agenda for the NPF board meeting scheduled for February 1999. Mr Leahy “doctored” the minutes of the December board meeting to create the impression that the board had left open the possibility of acquiring the land.

Prime Minister Skate appointed new trustees to replace those whose terms were expiring. By postponing the February meeting by a few days, Mr Leahy, supported by Mr Fabila (who was himself one of Mr Skate’s appointees) manipulated things so that Mr Paska, Mr Koivi and Mr Nana had no current appointment as trustees, so they were barred from attending the February meeting. With virtually a new board, Mr Fabila and Mr Leahy provided false information to the new trustees who then resolved to acquire 100 per cent of the shares in WCC Ltd (see paragraphs 20 & 21).

Findings 

(a) There were clear and obvious manipulations of the minutes of the 117th NPF board meeting, to reduce the role of Mr Maladina in the NPF Tower discussions and to hide the fact that he arranged, with Mr Leahy’s help, that negotiations to settle a claim by Kumagai Gumi be taken over by NPF management so as to achieve the increased ceiling of K54 million (See Schedule 6);
(b) There are also clear and obvious manipulations of the minutes regarding the Waigani land item to attribute to Mr Fabila, remarks which were actually made by Mr Maladina; to add in a fabricated recommendation attributed to Mr Fabila and to add additional resolutions which had not actually been passed;
(c) The additions to the evolving drafts of the minutes purported to empower an acting managing director to execute documents. This was intended to empower Mr Leahy to sign the contract and other documents during Mr Fabila’s absence from PNG when he attended a Cue Energy board meeting; and
(d) Further additions made after the meeting purported to expand the financial delegations of the corporate secretary and managing director to K50,000, falsely referring to the distribution of a paper which was not distributed at the meeting.

Using Patterson Lawyers as solicitors for WCC Ltd (to hide the involvement of Mr Maladina and Carter Newell), a contract was prepared and signed on behalf of NPF by either Mr Fabila or Mr Leahy and a cheque for K80,012 was drawn for stamp duty (see paragraph 22).

Mr Leahy and Mr Fabila provided false and deceitful information to obtain Ministerial approval.

Findings 

(a) The submission to the Minister seeking approval for NPF to purchase shares in WCC Ltd was knowingly deceitful and dishonest on Mr Leahy’s part because he drafted and asked Mr Fabila to sign the submission;
(b) If Mr Fabila read the submission before signing it, he, too, was knowingly deceitful, dishonest. If Mr Fabila failed to read the submission, as he claims, he was merely negligent; and
(c) Mr Fabila was in breach of his fiduciary duty as a trustee.

On the eve of the final settlement in April 1999, the press broke the news of the proposed Waigani land acquisition by NPF and the participation of other PNG institutions.

It was clear the press had very detailed and authentic evidence.

Mr Skate directed that NPF and other institutions must withdraw from acquiring the Waigani land (see paragraph 24).

Mr Maladina Mr and Fabila publicly and falsely denied NPF had signed a contract or expended any funds, despite the valuation fees of K235,000 and the stamp duty cheque for K80,012 (paragraph 26).

After the scandal broke in the press in April 1999, Brown Bai, Secretary for Finance established an inquiry by the finance inspectors in June. By October 1999, the NPF board itself was actively inquiring into the Waigani land deal and other matters (paragraph 29). Mr Leahy and Mr Fabila were unco- operative and obstructive to the finance inspectors, which amounted to deliberate interference with their investigations. These inquiries led to the termination of Mr Maladina and Mr Leahy from NPF.

Findings 

(a) The commission, in the light of all the evidence available to it, fully supports the findings of interference listed in the finance inspectors report;
(b) The interference by Mr Leahy and Mr Fabila is evidence that they feared exposure of improper conduct; and
(c) If Mr Fabila is, as he claims, innocent of any wrongdoing except that he was tricked and misled by Mr Leahy and Mr Maladina, he should have welcomed and fully co-operated with the Inquiry.

In evidence given on January 31, 2001, transcript pp. 5113-4, Mr Fabila explained his earlier obstruction was caused by his ignorance of the legal powers of the finance inspectors pursuant to the PF(M) Act. His resistance continued for three months, however, despite clear warnings and directions from the Secretary DoF.

The commission does not accept his explanation. It is far more likely that this resistance was related to fear of what the inspectors might uncover.

By January 2000, working through Simon Ketan, of Ketan Lawyers, Mr Maladina (with Mr Eludeme as his representative director) negotiated a sale of the Waigani land to Trinco No.6 Pty Ltd (a member of the Rimbunan Hijau Group) for a drastically reduced price of K3.3 million (see paragraph 29). The sale was, however, subject to WCC Ltd arranging for variation of the existing lease condition and other conditions precedent being satisfied.

To satisfy these conditions precedent and enable the sale to Trinco No.6 to proceed, Mr Maladina entered into corrupt agreements with the then Minister for Lands Dr Fabian Pok and chairman of the Lands Board, Ralph Guise.

Pursuant to this corrupt agreement, there was, firstly, a clumsy attempt to falsify the record of an earlier Land board hearing — No. 2006 of March 1999.

The fabricated record made it appear as though an application by Waim No.92 had been dealt with as item 151 and that the Land Board had recommended and the Minister had approved, the grant of a lease which would satisfy all the matters required by Trinco No.6 as conditions precedent to purchasing the Waigani land from WCC Ltd (see paragraph 30).

In pursuit of this clumsy attempt, Mr Guise and Dr Pok were involved in fabricating and gazetting false documents, preparing and signing false Land Board minutes and signing false and fictitious approvals (see detailed findings below). These clumsy attempts to “rig” the false approvals purportedly given at meeting no. 2006 left a documentary trail and when it became clear that it would probably be discovered by the finance inspectors, it was dismantled by a further gazettal notice which admitted that item 151 had never been considered by the Land Board.

Mr Guise then participated in another corrupt activity by arranging for an application by WCC Ltd to be listed for the next Land Board meeting, No. 2017 to be held on November 24, 1999.

Without the formality of a hearing, Mr Guise then simply signed a notice that the desired variations of conditions had been recommended and Dr Pok gave the necessary Ministerial approval.

Mr Guise, Mr Pok and Mr Maladina were all involved in a criminal conspiracy to achieve this result for WCC Ltd. All received corrupt benefits for the part they played (see paragraph 31).

Findings

(a) Relevant files in the Department of Lands have been removed or concealed in order to cover up fraudulent activities carried out by Dr Pok, Mr Guise and possibly by other officers and Ministerial staff;
(b) Mr Guise prepared or directed the fabrication of false minutes of Land Board meeting No.2006 of March 1999, purporting to be pages 10 and 11 dealing with a fictitious item 151 — application by Waim No.92, in which the Land Board recommended granting an urban development lease to Waim No.92 with very favourable conditions;
(c) The then Minister for Lands, Dr Fabian Pok, on September 22, 1999, improperly requested the Government Printer to publish a corrigendum to Land Board meeting 2006, showing Waim No.92 as a successful tenderer in respect of Item 151;
(d) Minister Pok improperly signed notification of alteration of State lease dated September 28, 1999, purporting to grant Waim No.92’s fictitious application purportedly recommended at meeting 2006. Minister Pok was fully aware of the impropriety and illegality of this action and that it was designed to benefit the owners of WCC Ltd; and
(e) Mr Guise improperly caused a corrigendum to be published in Government Gazette G152 dated October 22, 1999, to assist the conspiracy relating to the sale of shares in WCC Ltd;
(f) Mr Guise fraudulently and improperly issued a notice of a Land Board approval, purportedly granted at Land Board hearing no 2017, on November 24, 1999, for Waim No.92, which had in fact not been considered or approved by the Land Board;
(g) Dr Pok received corrupt benefits for his actions in favour of Waim No.92. There is insufficient evidence to make the same finding against Mr Guise although it sees that at least K100,000 was expended from the proceeds of WCC Ltd share sales for “Land Board claims”; and
(h) There is ample evidence that Dr Pok and Mr Guise were party to a criminal conspiracy with Mr Maladina to fabricate false documents designed to favour WCC Ltd in its endeavours to conclude a sale of the shares of WCC Ltd.

Referral

Dr Pok, Mr Guise and Mr Maladina should be referred to the Commissioner of Police to consider whether criminal charges should be laid in respect of their activities in obtaining a lease for Waim No.92 on favourable terms to assist in completing the sale of WCC Ltd shares to Trinco No. 6 (Rimbunan Hijau).

The sale to Trinco No.6 went through and the sale price (after paying out money owed to the Lands Department and for other statutory requirements) was paid to Ketan Lawyers.

Mr Ketan deducted his fees of K40,000 and paid the balance of K1,417,643.69 into the Carter Newell trust account on January 21, 2000, a manual receipt was made out to Philip Eludeme allocating no file number. This receipt was then cancelled (see paragraphs 30.11 & 30.12).

In fact, the money was immediately credited to Carter Newell file no. 200055 (Global Halshaw Consultants — an entity of Mr Maladina’s). It was then paid out through the Carter Newell general account for Mr Maladina’s benefit in various ways or, at his direction, to the benefit of those who had assisted him in organising the Waigani land (or NPF Tower valuation) fraud. The beneficiaries included Mr Eludeme, Mr Mamando, Mr Leahy, trustee Mickey Tamarua, Ram Business Consultants, Viviso Seravo, Dr Pok, Jack Patterson and Mr Maladina’s company, Ferragamo and Dr Pok’s company Biga Holdings.

Peter O’Neill appears to have received a benefit of K60,000 paid on his behalf to Port Moresby First National Real Estate (see Schedule 6 and paragraph 32).

All these transactions are fully described in paragraph 32 of the report and are depicted on Chart No.2.

The tracing of these moneys provides extremely strong evidence in support of the commission’s findings regarding those who perpetrated and benefitted from the Waigani land fraud (and from the NPF valuation fees).

TO BE CONTINUED

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

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