Posts Tagged ‘Herman Leahy’

Jimmy Maladina acquitted??? Spare a thought for his partner in crime 

April 21, 2016 1 comment

jimmy maladina

The Supreme Court it appears has quashed Jimmy Maladina’s conviction for misappropriation, which emerged out of  the National Provident Fund inquiry. We are told Maladina is away on business, but will hold a press conference shortly. 

No doubt Mr Maladina will claim full vindication, and protest his innocence. But don’t get the tissues out just yet for Jimmy. In fact spare a thought for one of his conspirators, who does not appear to have the same luck as Jimmy Maladina when it comes to the courts. 

Iori Veraga was found guilty of misappropriation and conspiracy in 2005, for his part in the fraud Maladina is alleged to have masterminded. According to the National Court Mr Veraga was a registered valuer, who was recruited by Jimmy Maladina to provide services to the National Provident Fund at a grossly inflated price. The proceeds of the scam were then shared between the two.

The court accepted:

‘the State evidence, once again confirmed by the accused’s own evidence that 50% of the proceeds of each of these cheques went to Maladina as his share of the fees as agreed between them’.

The National Court also claimed it was:

‘satisfied beyond reasonable doubt that before Maladina’s meeting with the accused, there had been an agreement with … [NPF executives] Herman Leahy and Henry Fabila about this criminal enterprise. These two officers were to be the conduits for the successful prosecution of the conspiratorial agreement. The events which took place throughout the entire affair did not, in my opinion, take place by accident. There was here the hallmark of preconcert. These events occurred pursuant to a pre-existing, antecedent, agreement’.

‘The conspiracy also depended on the accused performing his part by over-pricing or exaggerating the values of the two properties and charging excessive fees to be shared with Jimmy Maladina. The fees had to be large enough to be worth sharing. Messrs Leahy and Fabila were important elements, conduits, in the conspiracy. They were in the position to ensure secrecy, non-compliance with tendering requirements, keep the [NPF] Board in the dark, and ensure further that the fees quoted were accepted, thus committing the Fund to paying them, and paying them quickly.’

The National Court, therefore, concluded:

‘the funds [misappropriated by Veraga and Maladina] were the funds of the NPF. They remained the property of the Fund because neither the accused nor Jimmy Maladina had any legitimate claim over them. Thus, the sharing of the fees between the accused and Jimmy Maladina constituted the dishonest application to his own use and to the use of another person, property belonging to another as defined [by the Criminal Code].’

Veraga was sentenced to six years hard labour. Curiously Maladina – the alleged mastermind – was never successfully prosecuted for this crime. 

Instead his recently quashed conviction related to yet another act of misappropriation against the National Provident Fund.

So when you hear Jimmy Maladina waltz around the media claiming he is the true victim in all this, spare a thought for his partner in crime, Mr Veraga, who spent six years inside for a crime Mr Maladina was allegedly the primary author of.

National Provident Fund Final Report [Part 83]

November 26, 2015 1 comment

Below is the eighty-third 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 83rd 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

Ken Yapane & Associates

Ken Yapane & Associates were employed to refurbish an office on the ground floor of NPF’s Head Office. This work was not tendered and Ken Yapane was paid an exorbitant K40,000 contract sum in advance without any work being done on the office refurbishment. He paid half this amount back to Mr Maladina.

This same Ken Yapane was also involved in the NPF Tower fraud when Mr Maladina utilised Mr Yapane as a notional contractor and laundered money through his bank account to transfer money from Kumagai Gumi to Carter Newell’s office. 

Mr Maladina paid Mr Yapane a generous commission for his service. The similarities between Mr Yapane’s role in the Tower fraud and this office refurbishment contract are compelling. In both cases, the payment from Mr Yapane to Mr Maladina was laundered through the Carter Newell John Losuia account then paid to Mr Maladinas company, Kuntila No. 35 Pty Ltd.

The commission has found that the advance payment to Mr Yapane of K40,000 for work he did not do was improper, that Mr Leahy was knowingly involved and that the ultimate beneficiary was Mr Maladina.


At paragraphs 9.3.5 and 9.6.1, the commission has found that:

(a) The advance payment to Mr Yapane & Associates was improper. Management, and more specifically, Mr Leahy should be held responsible as he was the one responsible for authorising this payment;

(b) Mr Leahy was responsible for fabricating the minutes of a fictitious NPF board resolution increasing his financial delegation to K50,000 in order to enable him to authorise the payment of K40,000 to Mr Yapane;

(c) Mr Leahy should be held accountable for improperly paying K40,000 to Mr Yapane because no work had been or was done;

(d) Management failed in their fiduciary duties to properly tender this job and obtain board approval for this expenditure;

(e) The fact that Mr Maladina demanded and received at least K20,000 of the fees paid to Mr Yapane is grossly improper;

(f) The evidence of criminal interest and association coupled with the evidence of similar conduct in the NPF Tower fraud involving the same persons strongly suggests that there was a criminal conspiracy to cheat and defraud the NPF involving Mr Maladina, Mr Leahy and Mr Yapane which was successfully implemented; and

(g) MR Maladina, Mr Leahy and Mr Yapane should be referred to the Commissioner of Police to consider whether criminal charges should be laid against them.

NEC Secretariat

In September 1996, Hon. Chris Haiveta wrote to Mr Kaul and requested a donation towards the payment of sing-sing groups that were to perform at an NEC meeting in Vanimo.

Mr Haiveta has given evidence (Transcript p. 8477) that he asked NPF management if they could help.

He was not told that NPF was not able to help. He said (Transcript p. 8479) that at the time he requested NPF to help, NPF had previously given donations and sponsored other activities like golfing days.

Mr Kaul responded positively to this request.


At paragraph 9.7.1, the commission has found that:

(a) MR Haiveta’s request for K1600 was improper and he should be referred to the Ombudsman Commission to consider taking action for a breach of the Leadership Code;

(b) THE decision by Mr Kaul and Mr Wright to agree to the payment was a breach of their duty to the members of the fund and amounted also to improper conduct;

(c) AS Mr Kaul was subject to the Leadership Code, he also should be referred to the Ombudsman Commission.

Disposal Of Assets

During the period covered by this enquiry, NPF disposed of some office furniture and equipment through tenders restricted to NPF staff members and by “in-house” raffles to fund Christmas parties and the like. This action by management deprived members of the fund from realising maximum financial benefits from the sale of these assets.


In paragraph 10.3, the commission has found that:

The sale of NPF assets, such as the Kwila table and television and video deck, to staff without determining a reserve price for the items and without open tender, can lead to accusations of nepotism against NPF management. This method of disposal is also contrary to Government procedures on disposal of assets by organisations like NPF.

Procurement Of Computer Hardware And Software

It is relevant to note that the underlying data of members records were held in the Niugini Assets Management (NAM) operated system. At the February 18, 1993 board meeting, it was noted that NPF were in discussion with NAM to purchase NAM’s system. At the July 30, 1993 board meeting, the board resolved for management to explore other alternatives.

At the August 30, 1993 board meeting, the minutes show that management had negotiated a lease arrangement with McIntosh Securities in respect of computer hardware and software. Datec were appointed as advisers to NPF in late 1993, and undertook to review NPF’s software requirements. Datec recommended in their proposal, that following Datec’s development of the new software, NPF would be entitled to a 50 per cent interest in the proprietary rights, and that Datec would market the software to other clients.

At the June 29, 1995 board meeting, the minutes record that NPF had shifted over to the new computer system with effect from May 12, 1995. Datec recommended that NPF utilise an AS400 platform and that Datec would develop software tailored to NPF requirements. The suitability of this recommendation was not challenged by NPF.

Cost of computers

The decision to develop the company’s own software on the AS400 platform, came at a significant cost to NPF. 

As at December 31, 1999, the following computer costs, including consumables, had been expended:

npf 83 c

Software development costs between January 1, 1995 and December 31, 1999 were as follows:

npf 83 d
At no point did NPF management seek board or Ministerial approval for the extra expenditure, other than obtaining original approval to utilise K219,000 for the first phase of this project.

Computer hardware 1995

From the authorised auditors files, NPF had the following computer hardware as at 1st January 1995.

npf 83 a


According to the fixed assets register, NPF only acquired one computer and disposed of two computers in 1996. The disposed computers were fully written down in the books. The commission has been unable to determine what happened to these two computers.


The table below shows the status and value of computers held by NPF in 1997.

npf 83 b

The table below shows computers purchased in 1997.

npf 83 e

At paragraph, the commission has found that:

From the commission’s review of the pattern and manner in which NPF purchased computer equipment, we find that:

(a) The purchase of computer equipment was adhoc and did not comply with annual budgets or a specific IT plan;

(b) There is no evidence that NPF sought to negotiate better than normal prices with any supplier;

(c) From 1998 onwards, NPF purchased predominantly from Tanorama Limited and Datec, with no documented attempts to extract better prices from these suppliers; and

(d) Judging by the payment requisition records, the purchases from Tanorama Limited and Datec were made without reference to any comparison of prices from other suppliers.


There are imperfections in NPF’s accounting records for the 1998 and 1999 financial years because the fixed asset register does not reconcile with the general ledger.

The following computer items “disappeared” from the register without explanation.

  • 1 Compliance Section PC;
  • 3 IBM PC’s from MD’s office; and
  • 1 UPS from operation.

With regard to the acquisition of other computers in 1997, NPF management obtained quotes from various suppliers before making a commitment to purchase the equipment.

There is no documentary evidence found by the commission that would suggest that NPF management or the trustees sought to establish a documented and formal purchase policy in respect of computer equipment.

The purchase of computer equipment, particularly at NPF where IT is a critical function, required careful scrutiny by management and the trustees, both in terms of enforcing an appropriate and proper functioning system, but also because of the high level of cost involved.

Computers purchased in 1998

Chq No 20953, 15-Sep, Datec (PNG) Ltd, K587,837.07(amount), K587,837.07 (capital), AS400 hardware, 9406-620-2175, approved by board, See ref 2, no other quotes attached;
Chq No 0952, 15-Sep, Tanorama Ltd K9301.67 (amount), K4789.50 (capital), two P166 multimedia packs for Ms Dopeke / J Sema, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K2220 (capital), one P166 mmx 15” monitor, approved by Ms Dopeke, within delegation and no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K695 9capital), HP Scan jet Desktop scanner, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K955.75, procurement plus set up, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20252, 27-May, Tanorama Ltd K21,060.86 (amount), 26,450.40 (capital), 12 P166MMX 16Mb RAM 2.5gb, 15”, approved by Mr Wright, see ref 1 below, no other quotes;
Chq No 20253, 28-May, Tanorama Ltd, K9146.40 (capital), four P166MMX 32Mb RAM 2.5gb, 15, no other quotes;
Chq No 20254, 29-May, Tanorama Ltd, K700.40 (capital), software, no other quotes;
Chq No 20255, 30-May-98, Tanorama Ltd, K1814.86 (capital), procurement charges, no other quotes;
Cheq No 20256, 31-May-98, Tanorama Ltd, K3840 (capital), set up costs, no other quotes;
Chq No 20256, 31-May-98, Tanorama Ltd, K169.65 (capital), sales tax, no other quote;
Chq No 19892, 27-Mar-98, Tanorama Ltd, 21,060.86 (amount), items detailed above, approved by Mr Wright, see ref 1 below, no other quotes
Chq No 19665, 26-Feb-98, Datec (PNG) Ltd K8667.56 (amount), K5065.54 (capital), two Datec Millennium internet and monitor, approved by Mr Wright, within delegation, no other quotes;
Chq No 2108, 24-Jun-98, Datec (PNG) Ltd, K64,129.97 (amount), K64,129.97 (capital), 10 per cent deposit on AS400 machine, approved by Mr Wright, see ref 2, no other quotes.
Total: K707,814.54

Purchase of AS400 machine

The purchase of the new AS400 computer hardware seems to have resulted from concerns about the “Year 2000 Bug” and the capacity and efficiency of NPF’s current computer system to cope beyond the year 2000.

Failure to seek analysis by an Independent expert

Quite glaringly, NPF did not seek independent advice about the AS400 machine. However, it is apparent that NPF relied on Datec’s recommendation. There is no evidence that NPF sought a second opinion on its proposal to purchase this AS400 machine from an independent computer consultant.


National Provident Fund Final Report [Part 82]

November 25, 2015 1 comment

Below is the eighty-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 82nd 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

Fees Paid to accountants in 1996 1997 and 1998

npf 82 a

npf 82 b

npf 82 c

npf 82 d

The situation in 1998 remained basically the same as the previous three years. However, as far as outsourcing of accounting work was concerned, a significant part of the costs at the end of 1998 was charged to 1999 accounting cost.

When Noel Wright (a qualified chartered accountant) left in January 1999, the responsibility for the accounting positionmoved to Salome Dopeke.

The commission finds that Ms Dopeke was not suitably qualified and experienced and lacked appropriate skills to take on this role. A draft section 8 letter prepared by the authorised auditors for the year ended December 31, 1998, included items that deal with weaknesses in the accounting area and requested NPF to address these weaknesses.

NPF therefore sought out accounting firms to assist them in having their accounts brought up to date.

Appointment Of Ram Business Consultants (Ram) 

Jimmy Maladina engaged this firm as auditors and investigators for Crocodile Catering. The engagement was made without reference to the Crocodile board or the shareholders, (the NPF board). This appointment was made contrary to proper tender procedures. This firm was also most expensive. This commission considers the fees charged by Ram were excessive for the actual time they worked for NPF.

Appointment Of Pricewaterhouse Coopers (PwC)

Fees paid to PwC were related to several distinct engagements. This commission found that work performed by PwC was agreed to in advance between NPF and the firm, and was confirmed by a letter of engagement. It is noted that NPF sought quotes before engaging PwC.

Fees paid to Accountants in 2000 relating to 1998 and 1999 financial statements

npf 82 e

In 1998 and 1999, KPMG billed additional audit fees direct to NPF for additional work in assisting NPF in the preparation of their annual financial statements in a format compatible with International Accounting Standards.

Tender Procedures Adopted In November 1999. 

From 1995 to 1999, NPF management used its discretion to appoint key advisors and professional service providers. Then in early 1999, chairman Mr Maladina made the appointments without reference to the NPF board. This is contrary to normal procedures used by NPF in the procurement of professional services, including accountants.


At paragraph 8.9.6, the commission has found that:

(a) During the period January 1, 1995 to December 31, 1999, NPF engaged the services of the following accounting firms for various accounting and tax related services:

  • Ernst & Young in the period 1995 to 1998 as tax agents and tax advisers;
  • Deloitte Touche Tohmatsu in 1999 as tax agents and tax advisers and to do sundry accounting services with regard to the Ambusa Copra Oil Mill Project;
  • PwC in 1999 as business advisers including inter alia a review of the fund’s investment portfolio and a review of the financial position at December 1999;
  • Ram in 1999 for accounting assistance (and in particular the completion of bank reconciliations for 1998);
  • Auditor-General — for the 1995 to 1997 financial years authorised auditor was Deloitte Touche and for 1998 to 1999, the authorised auditor was KPMG;

(b) Almost without exception, NPF did not seek to tender the fund’s tax and accounting related work and as such NPF management failed to ensure the fund received the most cost effective service during the period 1995 to 1999;

(c) Following the departure of Mr Wright in January 1999, the weaknesses in the fund’s accounting systems and resources resulted in the need for the fund to out source accounting and business advice from the abovementioned professional accounting firms;

(d) These weaknesses in the accounting function also resulted in the significantly high level of additional audit costs levied by the authorised auditors, KPMG. In relation to the 1998 and 1999 financial statements, KPMG billed NPF direct contrary to normal procedures where audit fees are usually billed by the Auditor-General;

(e) With the exception of Ram, there is no evidence that favouritism or nepotism existed in the appointment of any of the professional firms. However, the lack of transparency and tender procedures in the appointment of these professional firms leaves a general suspicion that favouritism may have existed in relation to non-audit services, particularly with regard to Ram;

(f) There is considerable evidence connecting Rex Paki of Ram and Mr Maladina during the time that Mr Maladina and Mr Leahy were actively conspiring to defraud the NPF. Mr Paki also received benefits in the form of cash and airfares from the proceeds of those frauds;

(g) Examining the process of appointing Ram to provide services for NPF, the commission finds that it was similar to Mr Maladina’s improper appointment of Ram as financial consultant for Crocodile (see Schedule 3A);

(h) On all the evidence, the commission finds that the appointment of Ram by the NPF board, which was not properly briefed, was strongly influenced by Mr Maladina. Mr Maladina’s co-conspirator in the criminal conspiracy to defraud NPF, Herman Leahy, then proceeded to approve the payment of Ram’s excessive fees without seeking the required NPF board approvals.

(i) The commission finds that the appointment of Ram and the payment of their excessive fees on the approval of Mr Leahy constituted nepotism within the meaning of the commission’s terms of reference;

(j) There also exists a significant level of concern as to the probity or otherwise of fees charged by Ram. The limited documentary evidence in the form of the working papers, fees and correspondence files, produced under summons to this commission by Ram, to support the fees paid by NPF, indicates that the fees charged by Ram were excessive.

(k) Management acted in excess of their delegated financial authority by approving Ram’s fees without referring them to the board.

Other Professional Services 

During the period covered by this review (1995 to 1999), NPF hired other firms to carry out specific work requirements. These firms are:

  1. Hay Group of Companies;
  2. Ken Yapane and Associates
  3. Freehill Hollingworth and Page;
  4. E&S Groups;
  5. Minao Surveys; and
  6. Sogu Works.

The finance inspectors closely scrutinised the arrangements between NPF and the above firms and concluded they were in order, with the exception of Ken Yapane and Associates. The commission accepts and agrees with those findings.

National Provident Fund Final Report [Part 81]

November 24, 2015 1 comment

Below is the eighty-first 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 81st 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

Mt Tapi Brothers

Mt Tapi Brothers Ltd (MTB) had associations with Mr Skate as it provided security services for the Prime Minister’s residence and family and for some of his Ministers. The telephone contact number MTB provided NPF was one of Mr Skate’s official numbers. Also at a later date, Mr Skate actively intervened on behalf of MTB (see below).

Mt Tapi Brothers Forceful Initial Approach

On February 23, 1999, MTB offered to provide security for all of NPF’s properties. In its initial letter it pointed out its close connections with the Prime Minister and enclosed a draft contract. Mr Fabila received the letter on February 24, 1999 and immediately granted a contract to MTB, in the full knowledge that NPF was contractually bound to Metro and Kress.

On February 26, Mr Fabila wrote to Kress and Metro arbitrarily terminating their contracts as from February 28, enclosing cheques for payments due to that date.

Mr Fabila also wrote to MTB granting a 12-month contract, with a three-month probationary period. He then wrote to Century 21, which was still managing NPF properties, directing them to terminate any current security contracts for the investment properties and to make way for the new security guards to commence work from 1st March 1999.

Metro accepted the termination of its head office contract without a fight.

Kress on the other hand demanded K199,844.80 for wrongful termination of its contract. Kress received K8283.60 from NPF for the Nine-Mile properties for January and February and K22,754.40 for its other contracted properties prior to its contract being terminated. Its claim for breach of contract was eventually settled out of court for K40,684.80 (being three months payment in lieu of notice plus costs).

MTB Contract

Mr Leahy prepared a contract on March 29, 1999 granting the security services for all NPF properties to MTB. The contract followed the draft presented by MTB with a few very minor amendments.

The first invoice for the period March 3, 1999 to April 7, 1999 was a phenomenally high K45,792, yet reports were being received that the service was very poor. When Mr Fabila complained about the exorbitant cost, the number of guards was cut from 52 down to 17. From March to August 1999 the complaints about the MTB security guards were pouring in.

NPF records show that the following payments were made to MTB in 1999: (See table)

npf 81 aIn October 1999, the NPF board resolved to terminate the services of MTB for the properties being sold off by NPF and the purchasers were advised that they could contact MTB if they wished to reemploy that firm. This resulted in MTB instituting court proceedings claiming K200,000 from NPF, which had been rejected by the NPF board.

On June 21, 2000, Shirley Marjen noted on an NPF file:

“File Note — Tapi Bros Security Service Bill Skate phone me at home on 20/06/00 at about 8.00pm asking me if I could assist with Mr Tapi Bros claim of about K200,000.00 I told Mr Skate that it would not be possible as NPF had objected to the claim and that Mr Tapi Bros can proceed to sue NPF if it wished to.

“I also told Mr Skate that if the matter went as far as the National Court, NPF would defend the matter vigorously.” (Exhibit N401)

In evidence to the commission on December 12, 2001 (Transcript pp. 9897-9902), Mr Skate admitted that the head of MTB Mr Okil, was employed on his Prime Ministerial staff and that MTB provided security services for himself and his family. He denied holding any interest in MTB or putting pressure on NPF to employ MTB. He said that if MTB played upon its close association with the Prime Minister, it was without his knowledge or authority.


(a) Both Mr Fabila and Mr Leahy failed in their duty to NPF in the way they handled the security services arrangements. As a result of these failures, NPF:

(i) suffered a K41,684.80 loss, paid to Kress Security, plus the related legal costs paid to Maladinas Lawyers;
(ii) may well be at risk of a similar claim or suit by Metro Security;
(iii) paid the very large security bill for the period March 3 to April 7, 1999 (K45,792) which, as later costs show, was for services vastly in excess of NPF’s reasonable security service needs; and
(iv) faces possible further risk in the pending litigation with MTB.

(b) Mr Fabila and Mr Leahy face personal liability to NPF in relation to their failures outlined above which led to NPF’s loss. They would have great difficulties pleading a defence of “acting in good faith”;

(c) Mr Fabila and Mr Leahy disregarded the proper tendering process when engaging MTB;

(d) The commission finds that nepotism and political interference were operating in the actions of Mr Fabila and Mr Leahy in their handling and engagement of security firm MTB; and

(e) The action by Prime Minister Skate in telephoning Mrs Marjen on behalf of MTB was improper conduct. The commission recommends that the constituting authority refer this matter to the Ombudsman Commission to investigate Mr Skate’s conduct and his possible links to MTB to consider possible breaches of the Leadership Code by Mr Skate.

As MTB’s legal proceedings in the National Court against the NPF are still pending, the commission refrains from further comment about the roles of the various persons involved.

The finance inspector’s report, which examined and detailed irregularities in the security contracts, is summarised in paragraph 7.8.1. The finance inspectors focused on the failure to call tenders; failure to verify invoiced charges; advance payments; overpayments; extra legal amendments and failure to obtain the authority of the NPF Board of Trustees. The schedules to the finance inspectors report contain details of persons who authorised all the payments referred to and detailed calculations of the overpayments made to Kress Securities of K7632 (Schedules 3.1 and 3.2) and overpayments to MTB of K16,896 (Schedule 3.5). No attempt has been made by NPF management or the board to recover these amounts.

The commission records its agreement with the finance inspectors findings on these matters.

120th NPF Board Meeting

At the NPF board meeting on September 29, 1999, Trustee Jeffery and Mr Mitchell asked detailed questions about the failure to tender security contracts; the termination of Kress and the appointment of MTB without competitive tenders. Mr Fabila’s answers were very unsatisfactory and it was resolved that:

“It was resolved that all security contracts adhere to proper tender procedures. It was further resolved:
(i) THAT the vendor for each property sold be advised in writing after contracts of sale be exchanged and that security on the property then becomes the purchasers responsibility;
(ii) THAT MT Tapi Brother be advised that their services are no longer required for each property when sold, however, allowing for the appropriate time for vendors to engage new security services;
(iii) THAT NPF put out tenders for the Tower and remaining properties;
(iv) THAT at the end of the property rationalisation that MT Tapi Brothers be given three months notice of termination.” (Exhibits N423-4)

The now active NPF board held a special meeting on October 8, 1999 to consider a special report by Mr Jeffrey and Mr Mitchell. Mr Leahy was given time to answer searching questions. His reply, when it came, was evasive.

The changing of security arrangements in 1999 entailed breaches of contract and unnecessary cost to NPF. As corporate secretary, legal counsel and operations manager Mr Leahy had a duty to give proactive advice to Mr Fabila and the NPF board on these matters. He failed in that duty.


At paragraph 7.8.4, the commission has found:

(a) NPF paid Metro Security K6830.20, Kress Security K8283.60 and MTB K199,560 for security services in 1999, aggregating K214,673.80. In addition, the payment of damages and legal costs made to Kress Security of K41,684.80, increased this total to K256,358.60 (It is necessary to deal with a single total, as the payments to MTB have not been split, in the commission’s calculations, between head office and other properties);

(b) The actual security costs included in the 1999 Income and Expenditure Account are; K223,223 for “Rental Property Expenses” and K54,542 for “Head Office Expenses”, aggregating K277,765. The difference of more than K21,000 cannot be explained by adopting a cash against accruals basis of calculation and the commission is not able to explain a difference of this magnitude;

(c) The decision by Mr Fabila to terminate the less costly services of Metro and Kress and to appoint the more expensive MTB was made in two days, without competitive bidding or advice. It cost NPF dearly in terms of:

(i) A payout to Kress of K41,684.80 for breach of contract;
(ii) AN enormous initial bill of K45,792 from MTB for the first month for services, which were massively in excess of NPF’s actual needs;
(iii) THE legal risk to NPF of a like wrongful termination suit from the second terminated contract; and
(iv) litigation now pending before the National Court by MTB whose services, under a legally deficient contract, were also subsequently terminated.

(d) MR Leahy was remiss in his duty in not proactively advising Mr Fabila against the foolhardy course on which he was embarking; (e) The contract awarded, without contest, by Mr Fabila to MTB Ltd was politically influenced by the close association with that company of Mr Fabila’s political appointer, the former Prime Minister Hon. Bill Skate and constitutes an example of nepotism in the award of that contract.

Concluding comments

The commission concluded that:

“As with other topics in this report, it does seem that in 1994-5, both the NPF board and senior management appreciated the need to tender and obtain competitive bids for the provision of security services for the NPF Head Office and for the NPF properties rented to third parties.

Even then, when tenders were obtained and considered in March/ April 1995, there were competitive tenders for the rental properties only, but not for the head office. The board of trustees made the decision to contract in this instance.

Thereafter and until the end of 1999, all NPF security service contracts were let without tender and without any competitive bidding process and contrary to Government procedures for the procurement of services.

The board of trustees was only consulted once during this period — in October 1996 — over the change of security provider at NPF’s head office. On that occasion the board delegated the decision to management.

Otherwise, all other decisions about security services were made at management level.

The situation reached absurd proportions in February/March 1999 when Mr Fabila made a hasty decision to terminate the services of the two contracted security providers in favour of a single more expensive alternative — Mt Tapi Brothers Limited.

He did this without seeking advice or making inquiries and did so without referral to the NPF board”.

Procurement Of Accounting Services Background

In house accounting capabilities during the period under review were as follows.

Noel Wright, a qualified Chartered Accountant who was originally employed as compliance manager, later became finance and investment manager and deputy managing director. He resigned from NPF in January 1999. He was replaced by Rod Mitchell who is not a qualified accountant. This was the time when NPF struggled to come to “grips” with its financial crisis.

Salome Dopeke was the chief accountant — she was a graduate accountant but had not passed all her PNGIA examinations and as such was not a formally qualified accountant.

It is therefore important to note that the accounting capabilities of NPF were weak and lacked professional efficiency and effectiveness. There were other specialised accounting requirements, which were outsourced to local accounting firms in Port Moresby.

Fees Paid To Accountants — 1995

Other than the above fees and audit related fees there were no external accounting fees incurred in 1995 and it is inferred all other accounting needs were satisfactorily handled in-house.

NPF utilised the services of the accounting firm Ernst & Young as tax agent from 1995 to 1998. There is no evidence of favouritism or nepotism in the appointment and continued engagement of Ernst & Young.

npf 81 b

The audit of the financial statement of NPF is the responsibility of the Auditor-General’s office (AGO). In the case of NPF, the AGO subcontracted Deloitte Touche Tohmatsu to audit NPF’s accounts until the year ended December 31, 1997. There was scope for nepotism by NPF in this arrangement.


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


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.


(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.


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, 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 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 & 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 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.


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.


(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.


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.


(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.


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 and


(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.


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.


(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.


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.


(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.


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.


National Provident Fund Final Report [Part 79]

November 20, 2015 1 comment

Below is the seventy-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 79th 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

Property mentioned at the 99th NPF Board meeting

The property was mentioned at item 5.10 of the minutes of the 99th NPF Board meeting on 23rd February 1996 but not in relation to the proposed sale to Mr Paska, which was consequently not discussed at Board level.

Mr Paska contracts to buy

Mr Leahy prepared a contract of sale and forwarded it to Mr Paska who signed the contract and returned it to the NPF Managing Director, Mr Kaul, on 6th December 1996, saying he had rented the property to tenants and that all rent collected would be remitted to NPF. He said that he was anticipating final settlement 2 weeks from the date of his letter.

Mr Paska makes part payment and seeks Ombudsman Commission approval

There was some delay while Mr Paska sought to obtain a bank loan but, meanwhile, he paid K24,000 to NPF on 10th July 1997 as a deposit on the purchase.

On the same day, he wrote to the Ombudsman Commission seeking approval to buy the property. He stated that the NPF Board had “approved consideration of my interest in acquiring the property”. He also said he had obtained legal advice that there was no conflict of interest. Mr Paska did not advise the Ombudsman Commission that he had already signed the contract of sale and been receiving rent on the property since December 1996 and that he had paid K24,000 towards the purchase price.

Mr Leahy communicates with Ombudsman Commission

On 11th July 1997, Mr Leahy wrote to the Ombudsman Commission in support of Mr Paska, saying that following his expression of interest, Mr Paska had been asked to make an offer to the Board and that he had offered K96,000. Mr Leahy falsely said that this offer had been approved by the Board in Mr Paska’s absence. At this stage, the Board had not considered Mr Paska’s offer.

During early August, the Ombudsman Commission sought details from Mr Leahy of the Board resolution approving the sale to Mr Paska (These inquiries were followed up by a formal letter on 22nd August 1997). As there had not yet been such a resolution, Mr Leahy proceeded to manipulate the NPF Board in order to bring such a resolution into existence.

Mr Leahy manipulates NPF Board to retrospectively create a resolution approving the sale to Mr Paska

The NPF Board held its 108th meeting in Kavieng on 22nd August 1997, and it seems as though a late item was introduced, orally, as there was no mention of it in the pre-prepared management papers. The item sought to amend the minutes of the 99th Board meeting held some 18 months earlier on 23rd February 1996. This meant that Item 5.10 of the earlier minutes was replaced with a new item 5.10 that purported to describe how Century 21 had been listing the property for K110,000, that there were interested buyers but “the sale price appeared to be beyond market valuation”, that an offer of K96,000 to purchase from Mr Paska was tabled and discussed by the Trustees to ensure it was fair market value and that it was resolved to accept Mr Paska’s offer (Century 21 later refused to confirm its alleged role as stated in the amended minute).

It is recorded that the Board resolved at the 108th meeting to approve the amendment to item 5.10 of the minutes of the 99th meeting and that Mr Paska was not present during the 108th meeting.

Mr Leahy provides misleading statement to the Ombudsman Commission

In answer to the Ombudsman’s letter of 22nd August 1997, Mr Leahy replied on 23rd September 1997, enclosing a signed extract of item 5.10 of the minutes of the 99th NPF Board meeting held on 23rd February 1996. The extract was certified by Mr Leahy on 23rd September 1997, as if it were an item recorded at the 99th meeting on 23rd February 1996.

The item so certified, was the amended item, which had been resolved on the 27th August 1997, at the 108th Board meeting.

Quite clearly, this was a false representation deliberately designed by Mr Leahy to deceive the Ombudsman Commission. Mr Leahy’s conduct was unprofessional. This Commission has recommended that he be referred to the President of the Papua New Guinea Law Society and the Ombudsman Commission for further investigation.

Mr Paska withdraws offer to purchase and PNGTUC becomes the purchaser

Despite these false representations designed to encourage the Ombudsman to approve the sale to Mr Paska, the Ombudsman Commission still delayed its ruling. Mr Paska then withdrew his offer to purchase the property at the 110th meeting on 11th December 1997. He requested that the sale be made to the PNGTUC instead for K96,000. Mr Paska, who is the General Secretary of the PNGTUC, was present at that meeting and did not declare his conflict of interest.

Delay in executing contract

PNGTUC paid a deposit of K9,600 in February 1998 and remained in possession of the property receiving rent for it. Despite considerable correspondence between NPF and PNGTUC and exchange of documents, the contract was not finally executed until 6th November 1998. This was an extraordinary long delay, considering that the PNGTUC had already been allowed to take possession (which was highly irregular) and was receiving rent for the property.

The settlement of this transaction was continually postponed as the PNGTUC experienced difficulty securing the required financing. Meanwhile, however, the rent received accumulated and they enjoyed the benefit of it.

On 18th September 2000, NPF’s new legal counsel, Mr Kamburi, issued a “Notice to Complete Settlement” to PNGTUC. On 11th October 2000, PNGTUC responded that K61,950 had been collected in rent, that K4,000 had been spent on improvements and K52,000 was held in trust. PNGTUC (unsuccessfully) sought a rent sharing agreement with NPF.

The sale was finally settled on 20th October 2000 and PNGTUC paid the full balance of the K96,000 purchase price. There had been no independent valuation of the property and the 1995 proposed purchase price of K96,000 had not been reassessed during the 5 years to the settlement date.

Reluctant payment of rent by PNGTUC

On 10th January 2001, after NPF had instituted legal proceedings, PNGTUC paid NPF K50,000 of the rentals they had previously collected. The letter enclosing the bank cheque for that partial rent payment concluded:-

“the balance will most probably be in the vicinity of K10,000 – K15,000 … Hopefully this amount will be settled sooner rather than later”.


(a) The disposal of Allotment 13 Section 73 Korobosea failed to comply with Government tender procedures. The Board and management staff may be held responsible by members of the Fund for any loss incurred in the sale of this property.

(b) No valuation of the property was made to determine the commercial value of the property.

(c) The sale of this property to PNGTUC and the conduct of NPF management in their handling of this sale in the face of Mr Paska’s conflict of interest was nepotistic and improper.

(d) Although Mr Paska had previously declared his conflict of interest as a Trustee and contracted purchaser, he was also General Secretary of the PNGTUC but did not abstain from discussing on the sale of this property to PNGTUC and was therefore in a conflict of interest situation.

(e) The long delay in completing the conveyancing enabled PNGTUC to rent the premises and receive K61,000. NPF instituted legal proceedings against PNGTUC. In January 2001, PNGTUC still owed between K10,000 – K15,000 to NPF.

(f) Mr Leahy engineered the approval by a new Board resolution on 22nd August 1997, which created a substitute minute of the meeting of 23rd February 1996 intending to mislead the Ombudsman Commission. He should be referred to the PNG Law Society to consider whether disciplinary measures should be imposed upon him.

(g) The Ombudsman Commission should be notified about the events leading up to the amended Board minute, which was created specifically to mislead the Ombudsman Commission. They should be asked to consider whether an offence has been committed and / or whether there is a gap in the legislation, which may require legislative amendment.

Concluding comments

Mr Paska’s initial expression of interest to purchase the property was done openly and he disclosed his conflict of interest in a frank and refreshing manner. Based on his own evidence to the Commission and on the evidence of contemporaneous documents produced, he was acting honestly and transparently, though he was clearly not aware of the law of Trusts.

At that stage, Mr Leahy should have pointed out that it would be inappropriate for Mr Paska as a Trustee to buy any portion of the Trust property and it would amount to a breach of fiduciary duty by Mr Paska and a breach of duty by management to sell it to him.

In any event, it would have been particularly necessary, in these circumstances, to get an independent valuation and to advertise for tenders. Instead, Mr Leahy struck a purchase price based on the land and construction costs and prepared contract documents, without doing either and without referring the matter to the Board. Mr Paska was allowed into possession before executing the contract documents, well before settlement took place. He then rented out the property taking the benefit of the rent for himself. It would have been a simple and inexpensive procedure to have placed an advertisement calling for tenders at that time, but that was not done.

Mr Paska’s disclosure to the Ombudsman was not complete and Mr Leahy’s manipulation of the NPF Board to be able to provide the Ombudsman Commission with a “manufactured” resolution apparently approved 18 months earlier in February 1996, was improper.

When Mr Paska withdrew from the purchase in December 1997 and “handed it on” to the PNGTUC as purchaser, he ignored the fact that he remained in a position of conflict as a Trustee of NPF (the vendor) and general secretary of the PNGTUC (the new purchaser).

The fact that the NPF management and Trustees allowed the completion of the settlement to drag on until 20th October 2000, with rent of K61,000 accumulating in PNGTUC’s hands, was a very serious beach of common law and fiduciary duty to the members of the Fund. That this neglect of duty was occurring in favour of Trustee Paska, initially as purchaser and then as secretary general of the substituted purchaser, was nepotistic and improper conduct.


The Commission makes a detailed analysis of NPF’s “in-house” legal service capacity from January 1995 through to December 1999, noting that there were always two full time “in-house” lawyers and sometimes three. Having studied the individual experience and capabilities of the “in-house” lawyers employed during the period, the Commission concludes that throughout this entire period, NPF had the capacity to carry out all routine PNG domestic legal work, “in-house”. There was, however, always the need to brief out work of more complexity or involving specialist skills or international connections.

NPF had no system or practice of monitoring the legal work briefed out to external lawyers or of calling for tenders. It was simply left to Mr Leahy’s discretion.

Outsourced legal services during 1995 & 1996

The study each matter outsourced to each firm, year by year.

For 1995 and 1996, outsourcing was modest and justifiable, considering the nature of the matters outsourced.


Analyses outsourcing of general matters and investment related matters. Outsourcing of general matters was very modest and mostly, appropriate.


The Commission has found:-

(a) The general pattern for legal fees in 1997 was to outsource complex matters or those matters requiring specialised legal expertise.

(b) Goroka matters were briefed out to Pryke & Co.

(c) Fees paid to Warner Shand and for a ‘lost certificate’ to Carter Newell, should have been handled “in house”.

Investment related matters in 1997 are reported upon in paragraphs 6.4.4 to, which analyse the fees paid to each firm involved. By far, the greatest fees were paid to Carter Newell. However further study showed that K38,376.12 of these fees were for services provided by Carter Newell for the ANZ Bank regarding loans to NPF. The Bank billed these fees to NPF in the normal course of banking business.

It is notable, however, that the first record of NPF itself briefing Carter Newell, occurs soon after Mr Leahy’s wife commenced working for Carter Newell, after their return from Mr Leahy’s study leave in July 1997.


(a) The general pattern regarding investment related fees in 1997, was to outsource complex matters or those requiring specialized legal expertise, coupled with the “briefing out” of the conveyancing settlement in Lae.

(b) The Bomana conveyancing matter, the Gordons lease and the insurance policy documentation could have been done in-house.

(c) The Commi-ssion cannot explain why the accounts show an expenditure on outsourced legal services of only K61,483 when the voucher evidence clearly shows that an expenditure of K68,646 actually occurred.


The general fees for 1998 are reported in paragraph through to After commenting upon figures which had been wrongly recorded, the only matter of significance is the sizeable sum of K27,389.84 paid to Carter Newell for which NPF was not able to supply vouchers.


(a) After deducting disbursement and similar fees NPF’s total expenditure on outsourced general legal fees in 1998 was K29,705.34.

(b) By far, the greatest fees were paid to Carter Newell (K27,389.84) for a mixture of specified and unspecified matters. As the vouchers were not available, the Commission is unable to determine whether the fees paid to Carter Newell were for complex matters or matters requiring specialized legal skills. Evidence from other sources indicates that at least some of these matters should have been done by NPF’s in-house lawyers.

(c) The outsourcing to Fiocco Posman and Kua and to Pryke & Co. were in order.

The investment related outsourced legal fees for 1998 are reported in paragraphs 6.4.6 to, firm by firm. After wrongly recorded items were deducted, they still totalled a massive K244,780 plus a further A$33,541.65 and US$24,183.39.

On a firm-by-firm basis, the aborted AUD Bond issue accounted for over K72,000 of the Kina fees and another heavy expenditure concerned Crocodile Catering (Some of this was sourced from funds held offshore with Wilson HTM).

A large part of the K27,389.84 briefed out to Carter Newell was capable of being handled “in-house”. Once again, NPF was unable to produce vouchers for matters briefed out to Carter Newell.


(a) A substantial part of these 1998 investment related legal fees paid both onshore (to Gadens Ridgeway and Allens Arthur Robinson) and offshore (to Clifford Chance, Corrs Chambers Westgarth and Troy & Gould) were related to the AUD Bond.

Some part of the fees paid onshore (to Carter Newell) and offshore (to Deacon Graham James) were related to the Maluk Bay venture.

(b) These referrals were clearly made on the basis that the matters were complex and required specialized legal expertise.

(c) There are also some instances of domestic referrals where, in our view, the work should have been able to be performed by NPF’s in house legal staff and should not have required reference to external lawyers.


National Provident Fund Final Report [Part 78]

November 19, 2015 1 comment

Below is the seventy-eighth* 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 78th* 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

Their failure to ensure this was a breach of their fiduciary duty to the members of the fund. The successive managing directors, as trustees and as managers, were in breach of the same duty in allowing such lax and inappropriate procedures to be followed.

Procurement And Disposal Of Property And Property Management Services Property disposal

Many of NPF’s “lesser” properties were sold during 1998 and 1999 as part of NPF’s asset disposal strategy.

The sales have been examined by the commission and found to be in order, with the one exception of Allotment 13 Section 73 Pipigari S Korobosea, which was sold to the Papua New Guinea Trade Union Congress (PNGTUC). The further investigation into this matter is dealt with at paragraph 3.6 below.

Property management services

Many irregularities have been discovered in management services contracts where proper tender procedures have not been followed and nepotism has clearly been occurring.

Long standing relationship with Century 21 Siule Real Estate (Century 21)

Since well prior to 1993, Century 21 was NPF’s sole agent, managing and marketing NPF’s various properties.

It is not known how this relationship developed, however, the commission is aware that Century 21 employed Noel Wright’s wife, Helen Copland.

In late 1997, as the NPF Tower neared completion, the question of marketing and managing it came up for consideration and this was clearly to be lucrative business for the chosen agent.

In August 1997, the exclusive marketing rights for the NPF Tower were granted to Century 21 as a matter of course, without following any form of competitive tender procedures. At the 114th NPF board meeting on September 1, 1998, Mr Fabila, supported by Mr Leahy, challenged that arrangement. Mr Wright’s failure to disclose his interest in Century 21, through the fact that his wife was employed there, formed part of the discussion.

In August/ September 1998, after obtaining legal opinion about the power to do so, Mr Fabila cancelled Century 21’s exclusive marketing rights over the Tower and called for competitive quotes from Graeme Dunnage and Associates, The Professionals, Port Moresby First National Real Estate (PMFNRE), L J Hooker and Century 21.

Mr Fabila also notified Century 21, in October 1998, of NPF’s intention to terminate Century 21’s contract for the exclusive management of all NPF’s properties and to call for tenders. This matter was not put before the NPF board and seems to have been an initiative of Mr Fabila and Mr Leahy.

Century 21 seems to have accepted the termination of its exclusive marketing and management contract, which took effect on 22nd December 1998 and then participated in the tendering process in January 1999 for a new contract.

The tenders

Advertisements, calling for tenders to manage all NPF’s properties as one contract, were published on January 15, 1999 with January 31, 1999 set as the closing date.

Tenders were called for the management of the following properties:

  • The four blocks of units at Allotment 7 section 142, Tokarara;
  • The NPF Head office Allotment 7 Section 58 Boroko;
  • One house at Allotment 18 Section 34 Lawes Rd;
  • One house at Allotment 26 Section 34 Ela Makana;
  • Eight units at Allotment 26 Section 34 Ela Makana;
  • Three units at Allotment 83 Section 51 Davetari Drive; and
  • The warehouse at Allotment 16 Section 62 Gordons.

Tenders were received from Gemini Holdings Ltd, Haka Holdings Ltd and Century 21 within time.

Possible collusion between Mr Leahy and PMFNRE

A proposal from PMFNRE was also considered although initially neither NPF nor PMFNRE was able to produce under summons a formal tender document from PMFNRE.

In April 2001, PMFNRE later produced some correspondence between Mr Leahy and Mr Sullivan of PMFNRE, which indicates that Mr Leahy was providing information to assist Mr Sullivan to prepare a tender in January 1999.

One of the documents he provided to Mr Sullivan was a list of NPF’s property portfolio, as follows:

78 a

The papers included a document purporting to be a tender which contained promotional material about PMFNRE and a one page sheet listing the quoted fees as “6 per cent of the total monies paid”.

It acknowledged that tenders for the Tower were not then being called for but expressed an interest in tendering for that contract when it came up. The PMFNRE unsigned and undated document entitled “Tender for NPF Property Management” cannot be seriously treated as a formal tender but it seems that it was accepted by NPF as such.

Mr Leahy intervenes in the tender process

After the tenders from Gemini, Haka and Century 21 were received and, possibly, the PMFNRE “tender” also, Mr Fabila left PNG for a short period. While he was away, and before any formal decision had been made to accept the best tender, Mr Leahy communicated with Haka, Gemini and PMFNRE. He advised Haka and Gemini that each had been accepted to manage a few of the properties for which they had tendered and asked them to again list the services they would supply and to, again, quote their fees.

As a result each restated the services and quoted substantially higher fees than previously (perhaps because the property portfolio to be managed was smaller). Haka complained bitterly at the limited portfolio it had been granted, and this was subsequently increased.

Mr Leahy grants management of the Tower to PMFNRE

On February 11, Mr Leahy also wrote to PMFNRE advising that it had been awarded:

  • Section 34: Allotment 26 Granville — 8 units;
  • Section 62: Allotment 16 Gordons — 1 x Archives shed; and
  • Section 5: Allotment 11 Granville — (The Tower)

The letter requested PMFNRE to provide a description of the scope of the service as well as a quotation of their fees.

Mr Leahy’s intervention in the competitive tender process changed it to that of non-competitive negotiated contracts with the three successful applicants.

Mr Fabila negotiates with the successful tenderers

On February 26, 1999, Mr Fabila formally notified Gemini of the list of properties it had been awarded at the higher fee, though he negotiated the fee down slightly. On the same date, Haka was similarly notified, but because of its complaints that the portfolio awarded by Mr Leahy on February 11 was too small, it was also awarded the management of the Ela Makana units (which were taken back from PMFNRE).

Also on the same day, Mr Fabila also confirmed the good news to PMFNRE that it had won the management contract for the NPF Tower, which had not even been on the list of properties for which tenders were called.

Finally, on February 26, 1999, Mr Fabila also notified Century 21 that its tender bid had been unsuccessful. Because of the way NPF handled this matter, the handover arrangements from Century 21 to the successful tenderers, were messy and unprofessional.

There is no evidence that the various tenders were ever comparatively analysed to choose the best tender.

On the face of the documents, it seems that Century 21’s tender was probably the best, considering its experience, prior successful service and fees quoted.


(a) The termination of Century 21’s exclusive property management agreement with NPF was a management decision Mr Fabila made without the authority of the NPF board;

(b) The exclusive property management contract for all NPF properties (other than the NPF Tower) was put out to tender. The lowest and best tender was that of Century 21;

(c) Mr Leahy acted improperly by contacting each of the three companies (Gemini, Haka and PMFNRE) while the tender procedure was in progress, asking them to specify a job profile and to quote a price to manage a portion of the properties originally put out to tender. This resulted in NPF paying a higher price than the tenders initially received;

(d) The Century 21 tender was rejected by management without proper analysis of the competing tenders;

(e) The appointment of Gemini, Haka and PMFNRE as management agents for NPF properties (shared between them) was not arranged under any proper or approved tenders procedures, but was the result of non-competitive contract negotiation;

(f) The awarding of property management contracts to Haka, Gemini and PMFNRE was a management decision made without board authority or approval; and

(g) Mr Fabila negotiated directly with each of the tenderers to agree upon a lower price than quoted.

Management agreement for the NPF Tower

The agreement was between PMFNRE as agent and the Tower Ltd as owner. The directors of the Tower Ltd, appointed by the NPF board on February 8, 1999, were Henry Fabila (chairman), Jimmy Maladina and and Herman Leahy (also secretary) although NPF was sole shareholder, its approval was not legally required for the terms of the management agreement, which was signed by Mr Leahy and Mr Fabila.

As these three persons were all involved in schemes to defraud the NPF at the time, it is not surprising that the terms of the management agreement were very generous to PMFNRE at the expense, of course, of the members of the fund. This generosity was built in by:

(a) Providing a 5 per cent commission, not only on rent paid, but also on rent plus the tenants outgoings paid;

(b) Providing for a minimum commission in the early days, when the occupancy rate would still be low, of K199,999.92 or 5 per cent of gross rentals, whichever was the greater; and

(c) The termination clause provided that PMFNRE would be entitled to its full commission for the whole of the three-year term unless the agent had breached a fundamental term of the agreement.

False report to the NPF Board

In his report to the NPF board at its meeting on April 20, 1999, Mr Leahy pointed out the important details of the contract as:

“(i) Three-year term; and;

(ii) Fee = 5 per cent of the gross monies collected from tenants; and

(iii) Subject to board approval”.

Mr Leahy failed to point out that:

(a) In the early years when the rental income would be low because the building would be only partly tenanted, the commission would be a guaranteed minimum of K199,999.92 per annum.

(b) In the event of wrongful termination, the agent would be entitled, not just to damages, but to the whole of the management fees for the rest of the term; and

(c) As the contract had already been executed on March 23, 1999, it was too late to make it subject to NPF board approval.

Sub paragraph (a) and (b) above amounted to a misrepresentation to the board. Sub paragraph (c) was simply false.

The commission views all these arrangements with suspicion because of its findings in relation to the NPF Tower fraud and the Waigani Land deal in which the same characters were involved in either the fraud itself or the subsequent laundering of the money — Mr Maladina, Mr Leahy, Mr Fabila, Mr Barker, Mr Sullivan and PMFNRE.


(a) The management contract between the Tower Pty Ltd and PMFNRE was negotiated directly by Mr Fabila, Mr Maladina and Mr Leahy as directors of the Tower Ltd and the management of PMFNRE;

(b) The awarding of contracts in this way justifies the commission’s suspicion of nepotism, because:

  • MR Maladina and Mr O’Neill have direct interests in PMFNRE and used PMFNRE as a vehicle to defraud the NPF regarding the NPF Tower and Waigani Land, NPF Tower Investigations and, Waigani Land);
  • THE property management contract between PMFNRE and the Tower Ltd (signed for the Tower Ltd by Mr Maladina and Mr Leahy), was excessively favourable to PMFNRE.
  • MR Leahy provided false information to the NPF board regarding the property management contract, which understated the benefits payable to PMFNRE under the contract.

Sale Of The Non-Core Properties Using Multiple Agents

In July 1999, NPF resolved to sell off all non-core properties and part of the NPF Tower. This was in accordance with the PwC report on NPF’s losses. It was decided to use multiple agents and the existing exclusive managing agents accepted this.

NPF Board Challenges Management Over Tender Procedures

In October 1999, the NPF board, led by trustee Jeffery and acting managing director Rod Mitchell, challenged Mr Maladina and Mr Leahy over a number of issues, including failure to follow tender procedures and nepotism. This led to the termination of Mr Maladina and Mr Leahy.


(a) The decision to enter into one-year and (for the Tower) three- year management contract for the properties in early 1999, when NPF was considering selling those properties was inappropriate and could have resulted in NPF facing a claim for damages in breach of contract.

(b) The questions posed by Mr Jeffery and Mr Mitchell regarding the failure to follow proper tender procedure when awarding property management contracts were valid questions which required answering.; and

(c) Mr Leahy’s responses to the questions were false and evasive.

Sale of NPF Property to PNGTUC

Expression Of interest by Mr Paska

NPF built a three-bedroom house on its land at Allotment 13 Section 73 Pipigari St, Boroko. As construction of the house was nearing completion in September 1995, it was recorded that trustee John Paska was interested in purchasing the property. Mr Paska was the general secretary of the PNGTUC and was one of three people appointed to the NPF board as a representative for employees on the NPF board.

Under the law of Trusts, it would be a serious breach of trust for a trustee to buy Trust property but this did not occur to anyone, not even the fund’s corporate secretary and legal counsel Herman Leahy, who should have advised Mr Paska and the NPF against this proposed purchase. In fact, Mr Leahy took very improper action to facilitate the sale to Mr Paska, as described below.

Mr Paska wrote to Mr Leahy in September 1995 expressing his interest to buy the property and advising that he had received legal advice that his conflict of interest would not be an impediment to the sale. His offer of K96,000 had been worked out in conjunction with Mr Leahy based on the cost of land and of constructing the house thereon. He wrote again in November saying he was prepared to pay the (higher) valuation placed on the property by the bank, which was financing him and would seek Ombudsman Commission approval.


* PART 77 is missing and has not been published in this series

National Provident Fund Final Report [Part 76]

November 18, 2015 Leave a comment

Below is the seventy-sixth 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 76th 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 8 Continued

This was primarily a failure of duty by Mr. Wright and his successors regarding this duty, Mr Mekere, Mr Mitchell and Mr Gire. It was also a failure of fiduciary duty by the trustees who allowed this situation to continue for some 14 months.

Failure To Properly Implement The Deed Of Acknowledgement Of Debt

After the deed was signed on October 29, 1998, NPF failed to:

  • adjust prior billings to reflect the terms of the deed;
  • request the 1997 interest or obtain acknowledgement of its capitalisation;
  • BASE subsequent calculations on the higher principal sum and an interest rate of 14.67 per cent or 15.67per cent as appropriate; and
  • exercise its rights under the deed resulting from the State’s default in payment of interest. Auditor-General’s Intervention

The Auditor-General notified NPF of the understated interest in September 1999 and Mr Mitchell subsequently advised DoF that the cumulative underpayment for the period to December 31, 1999 was K4,000,510.91. This related only to the interest differential between 12.67 per cent and 14.67 per cent.

The commission finds that this figure must be increased to take account of:

(a) The applicable interest rate under the deed should often have been 15.67 per cent — with a discount rate of 14.67 per cent.
(b) The use of the incorrect principal sum in the calculations; and
(c) Penalties for late payment of interest.

The commission has given careful and detailed consideration to the underpayment of interest as set out in paragraph 8 of the report. It finds that the underpayment of interest (not including penalty interest) amounts to K4,288,674.


(a) The NPF management particularly Mr Wright, Mr Mekere, Mr Mitchell and Mr Gire failed in their duties when:

  • they failed to apply the correct interest rate and principal amount resulting in the interest being under- billed;
  • when DoF defaulted on numerous instances, NPF management failed to exercise its rights granted by the deed; and
  • their administration of the deed was careless resulting in loss of income to NPF;

(b) The trustees failed in their fiduciary duties to the members where:

  • they have failed to apply the correct interest rate and principal amounts, resulting in the interest amount being under-billed;
  • when DoF defaulted on numerous instances, NPF failed to exercise its rights granted by the deed; and
  • they failed to detect and correct management’s mishandling of this matter. Concluding Comments

The transfer of members and members’ entitlements from POSF to NPF consequent upon corporatisation of NAC and PTC was badly mishandled by NPF and also by the State and POSF. The transfer was characterised by a failure to anticipate and provide for the problems which would be encountered, with the result that basic policy decisions and administrative arrangements were not in place before the date of corporatisation and the implementation of the transfer of membership from POSF to NPF on 1st January 1997.

This unnecessarily caused great and understandable concern among the transferring members and led their unions to adopt a hardline and unreasonable stance. Faced with strong inappropriate demands for the payout of employee contributions to members who transferred to Air Niugini, NPF decided to honour an extra legal agreement between employees and Air Niugini management, despite the fact that it was in breach of the NPF Act.

Subsequently, when faced with strike action by communication workers unions for payout of the State’s contributions, NPF again capitulated. This was illegal and unfair to other NPF members as it allowed this group of transferred members to avoid the effects of the eventual write down of NPF member’s entitlements. It is clear that NPF’s decision to make the extra legal payment of the State share to former PTC employees was influenced by political pressure to settle the strike action.

Faced with the failure by POSF and the Sate to resolve the problems caused by the State’s longstanding failure to pay POSF the State’s contribution to the fund, NPF initiated a loan to the State to fund the transfer without seeking investment advice or performing due diligence on the State’s ability to meet its commitments. This was of great concern because NPF was already massively exposed to the State through the freeway loans.

Having entered into the loan to finance the transfer of the State’s contribution, NPF management and trustees demonstrated negligence and ineptitude in administering the loan. They under-charged the interest rate and applied it to an understated principal sum, resulting in a loss of more than K4 million to NPF members. This was gross mismanagement of the trust fund and a serious breach of fiduciary duties.

SCHEDULE 9 – Tender Procedures and Nepotism


Terms of Reference and Finance Inspectors Report

The commission’s term of reference Number 1(0) requires the commission to investigate and report on:

“The failure to comply with prescribed tendering processes, and whether such failure benefited any person and if so who, and the role of any trustee or manager of the funds or of any other person or entity”.

The finance inspectors provided an excellent report on these topics, on December 15, 1999, exposing irregularities in the National Provident Fund’s (NPF) financial management.

This was one of the big issues, which led to the setting up of this commission of inquiry. The finance inspectors drew attention to the deficiencies in the procedures used by NPF in the procurement of goods and services and the disposal of assets.

Commission’s inquiries

The commission chose not to make a full and detailed investigation into every possible irregularity, as the task would be massively beyond this commission’s resources. Instead the commission examined the following topics in detail for the whole period under review, January 1995 to December 1999:

(a) Procurement and disposal of motor vehicles;
(b) Procurement of property management;
(c) Procurement of legal services;
(d) Procurement of security services;
(e) Procurement of accounting services;
(f) Procurement of computer and computer services;
(g) Procurement of other professional services; and
(h) Procurement of stationery and office supplies.

The results of the commission’s own investigation into these matters are presented in the main report (Schedule 9). That report shows a worrying lack of formal tendering procedures and many serious financial irregularities. The corrupt practices of NPF staff and instances of nepotism are also noted in the main report.

The law applicable to tender procedures

The commission has found, in paragraph 3, that Section 59 of the Public Finances Management Act (PF(M) Act) does not apply to the NPF but that the NPF must nevertheless follow financial instructions issued from time to time. In addition, all NPF trustees were under a fiduciary duty to ensure proper management of the fund’s assets and this would include the need to follow suitable tender procedures for the acquisition and disposal of assets, goods and services.

On the evidence, it is clear that management (wrongly) assumed that NPF was bound by Section 59 of the PF(M) Act and that, in 1989, a Supply and Tenders Committee had been established.

Mr Wright, Mr Leahy and Mr Tarutia were members of the committee, which ceased to operate before January 1995 (the commencing date set by the Commission’s terms of reference).

In March 1989, a NPF board resolution established a Supply and Tenders Committee and procedures and financial delegations for tenders. Although this resolution remains in force, it fell into disuse before January 1, 1995.

The commission has found that there were no clear procedures being followed between January 1995 to December 1999 and that this was a failure of duty of both management and the trustees.

We will now report upon each of the selected topics in turn.

Procurement And Disposal Of Motor Vehicles

Policy on use of motor vehicle

The procedure for acquiring and disposing of motor vehicles followed no clear policy. There was a formal policy adopted on October 27, 1994 regarding the use of motor vehicles which allowed vehicles supplied as part of an officer’s contract entitlement (“employment contract vehicles”) to be used on a 24-hour basis by the managers to whom they were allocated and to be replaced every four years. All other vehicles were to be used for official duty only and to be replaced every four years or “on reaching 150,000 kilometres whichever is the earlier”.

The policy did not deal with acquisition and disposal procedures.

The commission found that the standard of NPF’s documentation, regarding acquisition and disposal of motor vehicles, was extremely poor.


A study of the Fixed Assets Schedule provides evidence of what vehicles were held at the beginning of 1995, how many of those were still held at the end of 1995 (or had been disposed of during the year) and how many new vehicles were acquired and became part of the NPF fleet during 1995. That evidence discloses that:

(a) NPF owned the following vehicles throughout the whole of 1995:

76 b

(b) NPF also owned the following other vehicles in 1995, but disposed of them during the year:

76 c

(c) NPF also purchased the following vehicles in 1995, which showed up on the capital asset schedule as at December 1995:

76 d

In addition to the outline of evidence provided by the Fixed Assets Schedule, the commission sought other evidence located in NPF’s poor record system in order to flesh out the outline.

The Fixed Assets Schedule indicates that during 1995 NPF disposed of four Suzuki Vitara’s used by divisional offices and a Nissan Pathfinder used by the managing director. Three of these were traded in — three Mitsubishi L200 4×4 single cabin utilities.

It seems that competitive quotes were obtained from Boroko Motors, Toba Motors, PNG Motors and Ela Motors. The Toba Motors quote was accepted. Toba is a subsidiary of STC and Mr Copland, who was managing director of STC at the time, declared his interest

Toba’s quote for supplying the three L200’s was K74,514 less K19,000 on the three traded Suzuki’s. The fixed asset schedule shows that NPF allowed K83,314 (K20,000 higher).

Although the Mt Hagen Suzuki was dropped off the fixed asset schedule by December 1995, it was not actually disposed of in that year. It seems that it was involved in a fatal accident and sold by internal tender among Mt Hagen NPF staff in 1996, though it was not carried forward onto the fixed asset schedule for that year.

Some documentary detective work shows that the managing director’s Nissan Pathfinder was stolen during 1995 and K29,500 was put towards the purchase price of K41,499 on a Mitsubishi Verada from Toba Motors.

No competitive quotes were obtained for similar vehicles from other firms this time and Mr Copland did not record his conflict of interest nor is he recorded as abstaining from discussions.


(a) NPF’s records on procurement and disposal of motor vehicles were fragmented and inadequate and it is necessary to use inference and deduction in order to make findings;

(b) Three area office Suzuki Vitara’s were traded in on the purchase of three Mitsubishi L200 4X2 single cabin utilities.

  • Competitive quotes were obtained;
  • Mr Copland declared his interest and abstained from discussions; and
  • THE fixed asset schedule records the purchase price paid as K20,000 higher than the quote. This could not be followed up, as NPF could not produce the vouchers;

(c) A fourth Suzuki Vitara was damaged at Mt. Hagen. It dropped off the Fixed Asset Schedule as at December 1995, but was not carried forward onto the 1996 Assets Schedule, though it was still owned by NPF (It was sold during 1996 by internal staff tender). This procedure was improper and amounted to nepotism;

(d) The Nissan Pathfinder allocated to the managing director was stolen and replaced by a Mitsubishi Verada from Toba Motors;

  • No competitive quotes were obtained; and
  • Mr Copland did not declare his interest or abstain from discussions;

This was improper procedure and nepotistic. Mr Copland’s conduct was improper.


Again, based on the evidence of the Fixed Asset Schedule:

(a) NPF owned the following vehicles throughout the whole of 1996: (See Table 1 below)

76 e

(b) NPF also owned the following (Head Office) vehicles in 1996, but disposed of them during the year:

(c) NPF also purchased the following (Head Office) Vehicles in 1996, which were recorded on the Fixed Asset Schedule at the end of 1996: (See Table 2 below)

76 f

Changes in motor vehicle policy

The board amended the Motor Vehicle Policy regarding the change over of vehicles during their 101st board meeting on June 28, 1996, and resolved to reduce the mileage limit for change over of vehicle from 80,000km to 50,000km.

The reason given to justify this change in policy was the current condition of roads.

The resolution was based on a false premise, as the previous mileage limit was 150,000km, not 80,000km. The resolution also removed the four-year rule, leaving the 50,000km mileage limit as the only criteria for replacement.

The Fixed Asset Schedule for 1996 records that NPF disposed of two Suzuki Vitara, a Mazda 626 and a Mazda Bus and purchased two Mitsubishi Double cabs, a Mitsubishi bus and 4 Mitsubishi Lancers, all from Toba Motors.


National Provident Fund Final Report [Part 75]

November 17, 2015 1 comment

Below is the seventy-fifth 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 75th 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 8 Continued

Air Niugini Employees Demand Payout Of Their Employee Contributions/Communication Unions Demand Payouts of State’s Contributions

The PTC(C) Act provided the employers of the old PTC with an option of a payout of their own component of the benefits from POSFB.

No such option was provided for the Air Niugini employees, but there were numerous requests from Air Niugini employees for payout of their own share of contributions. This was related to the fact that Air Niugini management, including trustee Koivi, had reached an extra legal agreement with the union that NAC employees who continued in employment with Air Niugini would be offered the payout of their contributions previously made to POSF.

Mr Kaul advised the NPF board during their 111th board meeting on February 20, 1998 that it was anticipated Air Niugini employees would demand payout of their own contributions following the transfer of funds from POSF. The board resolved to offer Air Niugini employees payout of their own contributions during this meeting. This was contrary to the NPF Act and not sanctioned by any other legislation.

On February 24, 1998, Mr Kaul informed Air Niugini that the NPF board had resolved in their 111th board meeting on February 20, 1998, to payout the employee contributions to the employees. On the same date, the NAEA was also advised of the NPF board’s decision.

The NAEA acknowledged Mr Kaul’s letter and responded with requests for clarification on other issues raised by Mr Kaul in his letter of January 24, 1998.

PNGCWU Queries Timing Of The Payout Of The State’s Share And Drafting Of The Deed

On March 3, 1998, Mr Kaul responded to PNGCWU queries regarding the payout to former PTC employees of the State’s share of contributions.

Mr Kaul explained to the PNGCWU that there was no provision in the PTC(C) Act 1996 for the payout of the employers (State) component of the contributions.

In any event without receipt of funds from the state, NPF could not and would not payout the State’s share of contribution in the manner being requested by the unions. NPF’s current legal obligations were limited to withdrawals, which were permitted under the NPF Act (i.e. on retirement, death or retrenchment).

Mr Kaul directed Mr Leahy on March 25, 1998, to immediately finalise the amendments to the deed.

The draft deed records that the State’s total unpaid contribution amounted to K23,785,056.23.

POSFB wrote to NPF on April 16, 1998 confirming the total funds being transferred to NPF as:

“The total fund share of the transfer is K17,625,057.02 and this has already been paid to NPF. The State share component is K24,475,074.65, which has increased from the previous amount of K23,785,056.23 as advised per our letter of 7 November 1997. The increase has come about as a result of another lot of transfers effected on 21/04/98 for a few employees of the above authorities whose balances were never transferred in the previous transfers. This is a matter, which the NPF management will deal directly with the National Government through your department.

Please refer enclosure.” (Exhibit T2)

npf 75 a

Unions Heighten Demands For The State To Pay Its Share of Contributions

The PNGCWU wrongly believed that the execution of the deed would enable NPF to payout the State’s share of contributions to its members. When they realised that this was not to happen, they threatened industrial action in mid 1998.

113th Board Of Trustees Meeting

At the 113th board meeting held on July 22, 1998, Mr Leahy informed the board that NPF had paid out K3,279,952.20 to those Air Niugini employees wanting payouts of their own contributions.

At the same meeting, the minutes record that Noel Wright advised the board of a K4 million overdraft for the purpose of covering the payout of Telikom, Post PNG and Air Niugini employees. Mr Wright’s reason given as explanation for the overdraft facility of K4 million was misleading and incorrect.

Mr Fabila Seeks The Involvement Of DOF To Assist In Negotiations With PNGCWU

Because of the slow progress in the negotiations with the unions, Mr Fabila requested the DoF to assist with the negotiations.

Minster Briefed On The Deed

Ori Avea of DoF provided a brief to Minister Lasaro on July 17, 1998, on the status of the deed and the outstanding issues concerning the finalisation of the deed.

Mr Fabila’s Brief To The Minister

Mr Fabila wrote a brief to Minister Lasaro on August 3, 1998, setting out the background to the dispute and at the same time requesting the Minister to reject the unions claim for full payout of the States share of contributions.

114th Board Of Trustees Meeting

On August 18, 1998, NPF instructed Carter Newell Lawyers to write to the PNGCWU requesting them to clarify and justify their demands for the payout.

At the 114th board meeting on September 1, 1998, Mr Leahy advised the board that NPF had not received any advice about the deed.

Mr Fabila advised the board that there was no legal entitlement for NPF to payout the State’s share of its contributions. The board endorsed Mr Fabila’s stand.

Strike Action By Unions

The union went out on strike during September/ October 1998. Telikom instigated legal action against the union for loss of income associated with the strike.

The deed was finally signed on October 29, 1998.

The Negotiated Settlement Of Strike Action

The board resolved in their 115th board meeting on November 6, 1998 to continue to resist the union’s demand.

The legal action and strike were, however, amicably settled through the signing of two agreements involving the State, the various communications entities POSF, NPF and PNGCWU, which agreed that the State share would be paid to the communication employees in three tranches during December 1998 and 1999.

To enable this to happen, the State paid the required funds to NPF in November 1998, May 1999 and November 1999 and the funds were paid out to the former PTC employees by NPF soon after they were received. (See full details at paragraph 29 below).


At paragraph 4.22.1, the commission has found that:

(a) THE trustees failed in their fiduciary duties to the members by:

  • ALLOWING payments to Air Niugini employees of the employee contributions in breach of the NPF Act. These payments were made preferentially and not equitably to other members; and
  • ENTERING into a memorandum of agreement, which was contrary to the NPF Act;

(b) Despite the board resolution of December 11, 1997, which resolved to payout the State contributions to the transferred employees NPF management and board subsequently maintained a strong and legally correct resistance to PNGCWU’s claims for payout of the State share;

(c) After the Deed of Acknowledgement of Debt was executed, which (technically) meant that NPF began to receive the benefit of the transferred State share of contributions (the benefit being in the form of interest payments on the NPF loan to the Sate) the PNGCWU took strike action to obtain payout by NPF of the State share to former PTC employees who had continued in employment with the new corporate entities;

(d) Under the pressure of the strike action, (and pressure from the Government) NPF capitulated to union demands and agreed to pay out the State share in three tranches to all former PTC members who had transferred to NPF and continued in employment;

(e) The trustees would probably be liable in any future action brought by affected members regarding the preferential treatment accorded to transferred former NAC and PTC employees that effectively enabled them to avoid the write down (if they remained NPF members through to the end of 1998 and 1999); and

(f) Noel Wright provided misleading and false information to the board of trustees when he informed the board that K4 million overdraft was secured in June 1998 for the Post PNG, Telikom PNG and Poreporena Freeway loans.

Deed Of Acknowledgement Of Debt And MOA

The deed was drafted by DoF and reviewed by NPF. It was finally signed on October 29, 1998.

The summary of the deed is as follows:

  • It recognised that on January 1, 1997, all assets, rights, liabilities and obligations of PTC and NAC were transferred to the corporatised entities Post PNG Limited and Telikom PNG Limited and Air Niugini Limited respectively;
  • IT recognised that the superannuation of the corporatised entities came under the NPF Act and therefore these entities were required to register and contribute to NPF;
  • THE State unconditionally acknowledged its liability to NPF effective from January 1, 1997 for its unpaid share of contributions for the employees of the corporatised PTC and NAC. The total debt acknowledged was K23,531,053;
  • IT said that the State would repay the principal sum in full on December 31, 2006, but allowed for repayment prior to that date;
  • THE State agreed to pay interest at a rate of 15.67 per cent. A discount of 1 per cent was allowed if it was paid within three business days of the interest payment falling due date. It stated that interest was payable at the end of each quarter and that the interest for 1997 was due on December 31, 1997;
  • IT stated that interest on the unpaid interest was to be calculated daily and compounded monthly at the rate of 15.67 per cent; and
  • THE State agreed that the security for the principal sum would be a charge over its interest in Post PNG Limited, Telikom PNG Limited and Air Niugini Limited.

It is noted that:

  • POSF advised that the State’s final total unpaid share transferred to NPF on May 1, 1998 was K24,475,074.65 (commission document 1171), however, the deed only acknowledged a debt of K23,531,053 to NPF. This error was carried over by NPF when billing the Sate for interest payable under the loan, which resulted in significant shortfalls in interest being paid. (See paragraph 29 below).

Ministerial Approval

The State’s unpaid share of contributions assumed by NPF was in effect a long-term commercial loan by NPF to the State. Long-term loans are a permitted type of investment for NPF.

There was a request dated October 24, 1997 for Ministerial approval of this loan.

The commission has been unable to ascertain whether Ministerial approval was granted.


In paragraph 5.1.2, the commission has found that:

(a) Management failed in their duties to the members because:

  • THE deed understated the State’s liability to NPF by K944,022;
  • NO attempt has been made to seek repayment of the K944,022 and no interest has been paid by the State on this amount;
  • NO agreement or arrangement was in place for the State to repay the K944,022 and interest thereon; and
  • NO attempt was made to enforce interest payable for 1997 as stipulated by the Deed

(b) MR Leahy failed his duty when he instructed the DoF to capitalise the 1997 interest on the POSF State share loan without board approval. He also failed to ensure that this amount was paid or that it was stipulated in the Deed of Acknowledgement of Debt;

(c) THE board of trustees failed in their fiduciary duties to the members because:

  • THE State’s liability to NPF, as acknowledged in the deed, was understated by K944,022;
  • NO attempt had been made to seek repayment from the State of the K944,022 and the interest payable on this amount;
  • NO agreement or arrangement was in place in respect of the State repaying the K944,022 and interest thereon; and
  • NO attempt was made to enforce payment interest payable for 1997 as stipulated by the deed.

Payout Of State Share To PTC Employees — 1999

Of the total K15,049,421 State’s share due to the employees of Telikom and Post PNG, K6 million was received on November 11, 1998 and was payed out to the former PTC employee members on December 4 and 7, 1998. The balance remaining to be paid by the State was K9,049,421.

The second payout of K6 million from the State was paid into the NPF bank account on May 18, 1999, and was paid out to Telikom and Post PNG employees in June and July 1999.

NPF received the final instalment of K3,049,412 on November 15, 1999.

Two payouts totalling K966,073.05 were made out of this final instalment.

This commission has not been able to determine when the remaining K2,083,338.95 was paid out to the employees.


In paragraph 6.1, the commission has found that:

(a) THE trustees failed in their fiduciary duties to the members because payments of the State share of contributions made to Post PNG and Telikom PNG employees were made in breach of the NPF Act.

(b) THE trustees are open to actions brought by affected members in respect of the preferential treatment accorded to Post PNG and Telikom PNG employees, which effectively enabled these employees to avoid the write-down suffered by other members.

Interest Income

In order to understand the make up of interest income due under the deed, it is important to note:

  • Interest was payable effective from January 1, 1997;
  • 1997 interest accrued was payable December 31, 1997;
  • THE deed was signed on October 29, 1998, which set the interest at a rate of 14.67 per cent if it was paid within three business days of the due date, or 15.67 per cent as set out in Clause 3 of the deed.
  • Between January 1, 1997 and October 29, 1998 (the date the deed was signed), it is apparent from correspondence that there was an expectation by both the NPF and the State that interest was to be charged at 12.67 per cent with a default rate of 14.67 per cent.

Interests Income Due To NPF — Error In Principal Sum

In 1997, the correct principal sum representing the true value of the State’s share of contributions was K24,475,075.

The correct interest rate chargeable was 12.67 per cent as this was the common understanding of both parties.

Instead, NPF calculated the 12.67 per cent on an incorrect principal sum of K23,785,056.

On this principal sum, which was short by K690,019, NPF then billed the State for interest of only K3,013,567.

When the State failed to pay this amount on the due date, Herman Leahy, without NPF board authority to do so, agreed that the interest be capitalised and that this fact be written into the deed.

In fact, the 1997 capitalisation of interest was not recorded in the deed.

This miscalculation of the principal sum in 1997 was carried over into 1998 and 1999 during which period’s interest was charged on a principal sum, which was considerably less than the actual amount of the loan outstanding from time to time.

Error In Interest Rate Charged

The deed signed on October 29, 1998, specified an interest rate of 15.67 per cent with a discounted rate of 14.67 per cent for prompt payment within three business days of the due date.

In fact, Mr Wright and his successors continued to bill the State at the former rate of 12.67 per cent even when payment was made outside the three-day period of grace.

This resulted in very substantial underpayment of interest by the State throughout the period under review.


National Provident Fund Final Report [Part 73]

November 13, 2015 1 comment

Below is the seventy-third 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 73rd 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 7c Continued


(b) NPF’s source of funding for the second tranche of the loan to Eda Ranu was deliberately obscured by Mr Wright who was deceiving the BSP about the purpose of a drawdown intended to finance an unauthorised purchase of Orogen shares.

Decision To Sell Down

NPF’s finance report for the months of May 1997 discussed the option to convert the loans to the Poreporena Freeway project and the K5 million loan to Eda Ranu to bonds. Instead, the loans were eventually assigned to the Bank of Hawaii on December 8, 1997.

Request For A K1 Million Loan

At the 106th board meeting on May 5, 1997, Noel Wright informed the board that Eda Ranu had requested a second loan of K1 million. The board resolved to reject this request. At the 107th NPF board meeting held on July 4, 1997, the K1 million loan request was revisited and the board eventually approved the loan.

NEC, however, had already approved the grant of a Government guarantee to NPF for the K1 million loan at its meeting on April 24, 1997. In this same meeting, NEC advised the Governor-General to approve the purpose of the loan pursuant to Section 37 of the PF(M) Act. This premature decision by the NEC amounted to political interference with the management of the NPF.

The purpose of this second loan was for the payment of termination benefits to former NCDC employees.

A brief by Salamo Elema dated September 18, 1997, to the Minister and acting Secretary explained the facts surrounding the NEC decision and at the same time recommended approval for Eda Ranu to enter into a K1 million loan agreement with NPF. Again there is clearly a conflict of interest where the DoF recommended approval for Eda Ranu to enter into a second K1 million loan agreement with NPF without considering NPF’s interest.

The action of DoF and NEC shows clear political interference with the administration of NPF. The second K1 million was paid to Eda Ranu on June 12, 1998.


(a) The NPF Board of Trustees and management failed to critically analyse this additional K1 million loan funding when K5 million had already been lent;

(b) The Finance Department treated the NPF as a bank, making frequent requests and supporting of loans for Government initiated projects and entities to be sourced through NPF without due consideration for the effect on members’ funds and the financial position of NPF, especially when it was borrowing the money at commercial interest rates to on-lend to the institutions recommended by the DoF;

(c) There was a conflict of interest situation, within DoF where they supported and recommended NPF to lend funds to Eda Ranu.

Interest Received By NPF

Clause 5 of the Fixed Rate Loan Agreement required the borrower to pay interest to NPF on the amount of each advance outstanding from time to time at the interest rate of 15.67 per cent. However, if payment was made within three days of the due date, interest would be payable at the concessional rate of 14.67 per cent.

These interest payment dates fell due at the end of the month of each quarter in each year.

The theoretical total income receivable by NPF at the end of 1999 from interest payments at the concessional rate of 14.67per cent was K2,522,018.93.

The amount actually received was K2,480,035.39, which shows an underpayment of K36,976.46. This discrepancy occurred because NPF failed to bank the cheque received for the interest paid for the last quarter of 1998. After that was pointed out by this commission and rectified, the full amount of interest receivable at the concessional rate balanced.

There were, however, also instances of interest being paid outside the three-day grace period, when the higher rate of interest should have been 15.67 per cent but it was not applied by NPF. There were also instances when the daily and compound interest on the unpaid interest was not calculated. These instances were not included in the calculation of the total amount of interest theoretically receivable by NPF as stated above.

If the additional interest for late payment and compound interest had been strictly imposed, NPF would have been entitled to a further K45,000 to K46,000 approximately in addition to the theoretical interest receivable figure of K2,522,018.93.


(a) NPF did not enforce Clause 5 of the Fixed Rate Loan Agreement to situations where interest payments were made outside the three-day grace period, which resulted in loss of interest income to NPF of between K45,000 to K46,000;

(b) NPF management’s administration of the loan was careless in that they failed to bill interest when due and they failed to charge higher interest on the default amount when DoF failed to pay by the due date.

Concluding Remarks

The outstanding features of the NPF’s two loans to Eda Ranu were:

(a) the acute conflict of interest faced by DoF senior officers and the Minister for Finance when advising NPF and recommending and approving transactions in matters where significant State interests were involved;

(b) the State’s failure to recognise and deal with these conflicts by ensuring that NPF was given independent and objective advice;

(c) the way the State’s urgent need to find finance for Eda Ranu was allowed to dominate arrangements and negotiations so that proper legal and financial arrangements were rushed and not properly in place before the drawdowns were made;

(d) The behaviour of the NEC and its advisers, which led to NEC approval being given to guarantee a loan which NPF had not yet even considered, amounted to political interference with the management of the fund;

(e) The failure by NPF management and board of trustees to resist these political pressures and insist that due diligence be performed and that due process be followed, with all required approvals and all security arrangements in place;

(f) Even though NPF’s investment in these loans to Eda Ranu turned out to be sound, the way they were handled by management and trustees put NPF at risk and was a breach of duty by management and of fiduciary duty by the trustees; and

(g) There was serious failure by management to keep the NPF board adequately informed.

Executive Summary Schedule 7d Southern Highlands Four Roads Project

In 1998, at a time when NPF was in financial difficulties with the Australian & New Zealand Banking Group (PNG) Limited, (ANZ) the Department of Finance (DoF) was actively promoting a proposal that NPF would agree to lend K17 million to the Southern Highlands Provincial Government (SHPG) for major roadworks.

The proposal was being “worked up” by Mete Kahona working with the State’s Infrastructure Development Group (IDG), which was acting as paid consultants to the SHPG. Clearly, the IDG had the interest of the State and its paying client (the SHPG) primarily in mind — not the interests of NPF.

DoF’s Conflict Of Interest

When NPF was considering these proposals, its chairman Morea Vele was Secretary for Finance and trustee Iamo Vele was a senior officer of the DoF. Both participated in the NPF decision-making process despite their undisclosed conflict of interest.

It was a very bad time for NPF to be lending K17 million as it was itself suffering a severe cash crisis and its lender banks were reducing NPF’s credit facilities. Neither NPF management nor the trustees considered a specific funding plan for this loan. They seemed to rely upon the vague possibility that it could be funded from the $A54 million bond that NPF was fruitlessly trying to issue.

Concern About Security For The Loan

Initially, the NPF board refused to approve the loan because it had major concerns about the security being offered, as the loan was not going to be guaranteed by the State (as the Freeway loans had been). NPF would not accept a guarantee by the SHPG as sufficient security. Mr Kahona and the IDG worked out an alternative security proposal, which included SHPG giving NPF a charge over its share of the conditional grants from the State for infrastructure purposes.

NPF Approves Loan To SHPG

NPF approved the loan in principle “subject to availability of funding” and subject to legal counsel (Mr Leahy) checking the adequacy of the security documents.

Mr Leahy sought advice from Carter Newell lawyers who responded with an alternative proposal, saying the draft charge prepared by the State was worthless. The State rejected Carter Newell’s draft but amended its own draft charge in order to address Carter Newell’s concerns. Mr Leahy and NPF management did not advise the board about these matters.

When the loan agreement was drawn up, the security provided for was the amended version proposed by the State. Mr Leahy failed to ensure that the formal agreement was made conditional upon the availability of finance to enable NPF to fund the loan.

Failure To obtain Independent Investment Advice

Management and the trustees were in serious breach of their duty to the board and members of the fund for not obtaining independent investment advice before entering into this loan, especially as the DoF, which had the duty to consider NPF’s best interests and to give impartial expert advice on the proposed loan to the Minister, was employed by SHPG to look after its interests.


When SHPG sought two drawdowns of K500,000 each, NPF management had great difficulty finding the funds — eventually sourcing the money from its member’s contributions account. Management made payments to SHPG in accordance with drawdown requests, without obtaining board approval.

After the first two drawdowns in August and September 1998, respectively, SHPG proved to be an unreliable borrower and had to be “chased up” for payment of interest and fees.

NPF Terminates The Loan Agreement

This proved to be a boon for NPF as it enabled Mr Fabila to seek out details of the various defaults in SHPG’s performance under the agreement. This enabled NPF to terminate the agreement and institute legal proceedings to recover the principal and outstanding interest.

Outstanding Interest

As at December 1999, the NPF had received K110,728.35 in interest payments from SHPG and was owed K221,057 in outstanding interest. NPF has now commenced action to recover the principal of K1,000,000 and outstanding interest.

Concluding Comments

This investment by NPF in this commercial loan to the SHPG highlighted the severe unaddressed conflict of interest faced by the DoF, which was advising both SHPG and NPF. The conflict was particularly acute for the public service representative trustees Morea Vele and Vele Iamo.

The NPF board demonstrated a rare streak of independence when it initially refused to approve the loan and commissioned legal advice on the security aspects. After this, however, it adopted a more compliant attitude, Mr Leahy failed to ensure NPF’s interest were safeguarded by the loan agreements and management and the trustees failed their duty to seek independent investment advice.


(a) The concept of NPF lending K17 million to SHPG seems to have originated from within the DoF, which called for expressions of interest from ANZ Bank, PNGBC and NPF. DoF actively supported and facilitated the establishment and funding of the project;

(b) The CID of DoF favoured the NPF offer because it was the offer most favourable to SHPG. DoF did not seem to consider whether making the loan would be in the best interests of NPF;

(c) DoF trustees on the NPF board, including the Secretary of DoF were in a conflict of interest situation, pulled between their duty as trustees and their duty to DoF to implement National Government policy;

(d) The NPF board had not expressly resolved to approve the loan to SHPG before Cabinet and SHPG had given approval. DoF had input to the Cabinet submission;

(e) After Cabinet and SHPG approved the project, NPF management sought and received Ministerial approval for NPF to create a loan facility of K17 million for SHPG. Again DoF advised Ministerial approval; (f) NPF board approval was then obtained and it was given subject to legal counsel checking the adequacy of the securities to ensure repayment. The board specifically directed legal counsel to ensure a fixed charge was granted over the conditional grants, which were to secure the loan;

(g) NPF board approval was made “subject to availability of funds”;

(h) The NPF board and management did not seek independent investment advice before approving this loan or have it independently evaluated;

(i) Legal counsel Mr Leahy, prepared a draft charge document and sought external legal advice from Carter Newell who advised the charge in its then form was worthless as an enforceable security. Carter Newell recommended taking a legal assignment of SHPG’s entitlement to royalties from the Kutubu project and prepared appropriate documents;

(j) DoF rejected Carter Newell’s suggestion and Mr Leahy did not advise the NPF board of this situation. Mr Leahy and Mr Wright signed the loan agreement and fixed charge document, the latter amended to accommodate the main criticisms made by Carter Newell;

(k) Mr Leahy should have advised the NPF board of Carter Newell’s concerns that NPF’s securities for this loan may not be adequate. Mr Leahy and Mr Wright may be personally liable for losses incurred by NPF from their signing of the loan agreement and charge, to the extent they were not in accordance with the board’s approval conditions and direction regarding security;

(l) From the outset, NPF had not established its source of funding to provide this loan. Its facilities with PNGBC were insufficient; ANZ was calling in and capping its facilities to NPF. For NPF to rely on the eventual success of the $A54 million bond issue was reliance on fantasy, in view of the difficulties being encountered in bringing the bond issue to fruition;

(m) Even at the time of the first drawdown of K500,000, it was clear that NPF lacked the funds to fulfil its commitment under the loan agreement it had entered into;

(n) The approval by the NPF board was explicitly made “subject to availability of finance”. Mr Leahy as legal counsel failed to ensure that the loan agreement also contained a “subject to finance” clause. This was a failure in his professional duty to NPF;

(o) SHPG defaulted in its interest payments under the agreement. NPF successfully obtained three of the quarterly payments from the State pursuant to the undertaking and charge over the conditional grant money. This satisfied interest payments for the December 1998, and the March and June 1999 quarters, totaling K110,728.35. As at December 1999, there was K221,057 owing and no further payments were received;

(p) From July 2, 1998 until April 1999, NPF management did not adequately advise the NPF board regarding SHPG’s breaches of the loan agreement. This was a failure of management’s duty to the board;

(q) HAD the SHPG not defaulted in its obligations under the loan agreement, which provided NPF with grounds to terminate the agreement, NPF risked being in breach because of its inability to meet drawdown requests due to a lack of funds and because there was no protective “subject to finance” clause in the loan agreement.

(r) NPF board allowed itself to be drawn into this loan agreement without obtaining adequate advice from management about the source of funding, the reliability of the borrower or the adequacy of its securities to protect NPF against possible default by SHPG. This was a breach of fiduciary duty by the trustees.

(s) NPF management, particularly Mr Fabila, Mr Leahy and mr Wright, failed in their duty to provide necessary and timely information and advice to the NPF board;

(t) Mr Leahy, as legal counsel, failed in his duty to ensure the loan documentation was adequate, was subject to NPF having available funds and that adequate security was provided to protect NPF against possible default by SHPG. He failed in his duty to advise the NPF board that he may have been unable to ensure adequate security was in place — despite having received Carter Newell’s detailed professional advice on that subject.