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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.

Findings

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.

Findings

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.

Findings

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

1996

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.

1997

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
Findings

At paragraph 12.4.1.1, 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.

1998

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.

TO BE CONTINUED

National Provident Fund Final Report [Part 80]

November 23, 2015 Leave a comment

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

NPF Final Report

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

Executive Summary Schedule 9 Continued

1999

Outsourced legal fees for 1999 are reported in paragraph 6.4.7.

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

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

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

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

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

Findings

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

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

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

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

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

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

Summary

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

npf 80 a

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

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

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

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

Additional payments

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

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

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

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

Two further payments were made:

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

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

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

Three further payments were made:

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

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

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

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

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

Investigations

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

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

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

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

Findings

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

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

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

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

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

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

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

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

Procurement Of Security Services Pre-1995

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

Awarding and terminating NPF’s contract with Kress Securities

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

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

1995

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

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

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

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

Findings

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

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

1996

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

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

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

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

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

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

Findings

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

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

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

1997

Contract with Metro

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

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

Findings

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

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

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

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

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

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

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

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

1998

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

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

Findings

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

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

1999

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

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

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

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

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

TO BE CONTINUED

National Provident Fund Final Report [Part 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”.

Findings

(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.

PROCUREMENT OF LEGAL SERVICES

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.

1997

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

Findings

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 6.4.4.4, 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.

Findings

(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.

1998

The general fees for 1998 are reported in paragraph 6.4.5.1 through to 6.4.5.3. 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.

Findings

(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 6.4.6.8, 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.

Findings

(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.

TO BE CONTINUED

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).

Findings

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.

Findings

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.

Findings

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.

TO BE CONTINUED

National Provident Fund Final Report [Part 70]

November 11, 2015 Leave a comment

Below is the seventieth 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 70th 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.

SCHEDULE 7B  Poreporena Freeway Loan 

Introduction 

After a troubled history leading to a Supreme Court order against the Independent State of Papua New Guinea (the State), a contract was executed between the State and Curtain Bros (QLD) Pty Ltd (Curtain Bros) to construct the Burns Peak and Waigani Drive project on March 3, 1995.

The contract was made conditional upon funding. It was originally intended that the State would borrow money offshore to fund the project but the Government was advised that this would contravene World Bank guidelines.

On July 13, 1995, the contract was declared unconditional and the Government proposed to contribute equity of K12.7 million with the balance of K48 million to come from commercial loan funding from PNG banks and superannuation funds.

When Curtain Bros refused to receive the loans directly, a special entity, Curtain Burns Peak Pty Ltd (Curtain Burns Peak) (jointly owned by the State and Curtain Bros.) was incorporated to receive the borrowed funds.

Having trouble raising the money from the commercial banks, the State turned to the PNG superannuation funds. On legal advice, the other funds refused to participate and it was left for NPF to become, in effect, the lender of last resort.

In all, NPF provided loans totalling K62 million to Curtain Burns Peak. This loan funding is referred to here as the Poreporena Freeway loan.

Loans

The loans were as follows:

npf 70

K9 Million Loan — September 7, 1998: 

This loan was made using contributor’s funds and was made directly to the State.

The details and conditions of the K9 million loan appear to have been worked out and agreed to in discussions between Mr Kaul and the First Assistant Secretary (FAS) of the Commercial Investment Division (CID) of the Department of Finance (DoF) Vele Iamo.

Mr Iamo was also a Public Service representative trustee on the NPF board.

The NPF board approved the loan on June 29, 1995 and Mr Iamo briefed the Secretary for Finance Gerea Aopi and the Minister for Finance on July 18, 1995, recommending approval and saying that the DoF had been fully involved in the decision-making process.

The brief was forwarded to Minister Haiveta on July 17, 1995, and he approved the K9 million loan that same day on the recommended terms. He also gave approval for NPF to provide “additional funding of K10 million in 1996 and or 1997 under the same terms and conditions as above”.

Conflict of interest 

Mr Aopi and Mr Iamo were Secretary for Finance and FAS (CID) of the DoF respectively, with the responsibility of protecting the State’s financial interests. They were also chairman and trustee, respectively, of the NPF Board of Trustees, with strict fiduciary duties to look after the interests of members of the fund.

Their conflict of interest was, therefore, acute.

K10 Million Loan — June 27, 1996: 

Approval for the additional K10 million had not been resolved by the NPF board or requested from the Minister. Mr Haiveta’s premature approval was, therefore, irregular. It perhaps indicates his keenness to secure the funds that the Government required to fulfil its contractual obligation to Curtain Bros.

The additional K10 million loan was required by the State because the Public Officers Superannuation Fund (POSF) and Motor Vehicles Insurance Trust (MVIT) had withdrawn from their intention to make loans.

The proposal was subsequently approved by the NPF trustees, initially by circular resolution and later ratified at a board meeting on August 29, 1995.

Failure to disclose conflict of interest and to abstain from voting 

At that meeting, three employee representative trustees voted against the proposal. Chairman Aopi and Trustee Iamo voted in favour, despite their undisclosed conflict of interest, mentioned above.

Had they refrained from participating in the vote, the motion to advance the K10 million would not have been approved.

Findings 

At paragraph 4.10 of the report, the commission has found:

a) NPF’s investment appraisal and decision-making process, concerning this loan, was inadequate;

(b) To be able to make a prudential assessment of the investment, this matter warranted a full board discussion and a formal documentation of that appraisal. The decision to advance such large sums of money to the State should have been based on a critical appraisal of risk and return.

The clear existence of conflicts of interest with regard to the State representative trustees, should have led the board to seek independent advice as to the merits and appropriateness of this investment.

Judging by what was recorded in the minutes (Exhibit G3 and G10 and the board papers (Exhibit P2)), NPF did not carry out any critical appraisal on this investment proposal and its management did not obtain or offer the trustees any independent advice;

(c) The trustees and management failed respectively in their fiduciary and common law duties by using a circular resolution to approve a transaction that involved substantial amounts of members’ funds;

(d) The commission notes that Trustees Gerea Aopi (who was the chairman of the NPF board at that time) and Vele Iamo were, at that time, Secretary and FAS CID, respectively, of the DoF.

Minutes of the National Executive Council (NEC) meetings found in the DoF files (commission documents 5A), record that the DoF was charged with the responsibility of procuring funds for the Poreporena Freeway project. Both Mr Aopi and Mr Iamo were also members of the Poreporena Freeway Project Management Group, which was responsible for providing advice to and liaison with the NEC in respect of this project.

Mr Aopi and Mr Iamo were clearly in a position of conflict of interest and therefore should have withdrawn from participating at the NPF board meeting when the board considered the Freeway project funding request.

Mr Aopi and Mr Iamo did not declare their obvious conflict of interest position to the NPF board nor did the board consider the implication of this conflict. The NPF Board of Trustees failed in their fiduciary duty in this respect;

(e) The NPF management (particularly Mr Kaul, Mr Wright and Mr Leahy) failed to properly brief the board on this issue;

(f) NPF’s use of borrowed funds to on-lend in this way was not sanctioned by the NPF Act or any other law. It was, therefore, illegal as well as being thoroughly inappropriate for a provident fund;

(g) In light of this clear conflict of interest within the DoF, an independent review of the NPF loan proposal was required. DoF did not attempt to isolate its review process through the use of “Chinese Walls” or similar methods to ensure that an independent review of the investment, from NPF’s perspective, rather than from the State’s perspective was achieved. This shortcoming, in a structural sense, persists; and

(h) Trustees Paska, Gwaibo and Leonard voted against making the additional K10 million loan. Had Mr Aopi and Mr Iamo refrained from voting because of their conflict of interest, the motion to approve the additional K10 million loan would, on the numbers, not have been passed;

(i) The loans provided by NPF were long-term loans and long-term loans are approved investments, under NPF’s investment guidelines.

The approval given for the K10 million loan had the State as the borrower.

Borrower becomes Curtains Burns Peak 

The new arrangement, to lend through Curtain Burns Peak as intermediary, was put to the NPF board on April 26, 1996. No independent or expert advice was given or sought about the effect on NPF’s security of this “off balance sheet” transaction. The Minister approved this new arrangement on the same day.

Management allows early drawdown

The NPF board approval was that the K10 million could be drawn down in two tranches of K5 million each in 1996 and 1997. The K10 million loan was signed on June 27, 1996. Management allowed both tranches to be drawn down in 1996. This was because the State had applied pressure on NPF to advance the second drawdown date because POSF and the Defence Force Retirement Benefits Fund (DFRBF) had sought legal advice about the validity of the changed arrangements and would not commit their funds to the Poreporena freeway funding. This left a shortfall, which NPF was asked to fill.

The source of funds for this on-lending was NPF’s loan facility with the Australia & New Zealand Banking Group (PNG) Limited (“ANZ Bank”).

Findings

At paragraph 6.4, the commission has found:

(a) Management was in breach of its common law duty to the board in not obtaining independent expert advice regarding the State’s revised “off balance sheet” loan arrangements, using Curtain Burns Peak as an intermediary to receive the funds;

(b) THE trustees were in breach of their fiduciary duties to the members of the fund by failing to insist on obtaining independent expert advice about the loan agreement as well as an assessment of NPF’s security for the loan;

(c) NPF management acted beyond their authority by allowing Curtain Burns Peak to drawdown the entire K10 million loan in 1996, contrary to the loan agreement. This was a failure by Mr Kaul of his fiduciary duty as a trustee. He and Mr Wright also failed their common law duties to the NPF board;

(d) THE trustees failed in their fiduciary duty to the members by not noticing and questioning this obvious departure from the terms of the loan agreement;

(e) Minister Haiveta’s approval of the loan agreement between NPF and Curtain Burns Peak, without seeking advice from DoF, was a failure of his duty as a Minister.

In view of the conflict of interest situation that he and senior officers of the DoF were in, it was impossible for them to properly advise and consider the best interest of both the State and NPF. In these circumstances, the Minister should have sought independent advice from outside the DoF. His apparent failure to seek and take any advice at all was improper conduct; and

(f) NPF’s use of borrowed funds to on-lend in this way, was not sanctioned by the NPF Act or any other law. It was, therefore, illegal, as well as being thoroughly inappropriate, for a provident fund.

K15 Million Loan — November 14, 1996 

Management fails to disclose constitutional problems to NPF board 

During August and September 1996, Mr Wright was negotiating a drawdown on the ANZ loan facility to enable NPF to on-lend a further K15 million for the project. Bank approval was given in principle, subject to the ANZ obtaining legal advice that a charge over the inscribed stock would be effective.

The Government’s need to obtain the further K15 million from NPF at this stage was because POSF and DFRBF were holding back from their lending commitment while seeking legal advice, from Blake Dawson Waldron, as to the constitutionality of the new “off balance sheet” loan to Curtain Burns Peak and of the State’s proposed guarantee.

Even though Mr Wright and the NPF management were on notice that this legal question had been raised, they proceeded to recommend the K15 million loan to the NPF board, without advising the trustees that such a loan could be illegal and unenforceable.

Failure to obtain independent expert advice

Once again, the NPF board approved this proposal without any formal expert briefing from management and without any independent expert advice. On September 26, 1996, Minister Haiveta gave his approval.

Despite the clear conflict of interest affecting the DoF senior advisers and the Minister, no attempt was made to ensure that expert independent advice was made available to NPF.

Before the K15 million loan agreement was signed by NPF, POSF and DFRBF received their legal opinion from Blake Dawson Waldron dated October 10, 1996. The opinion stated that the proposed method of funding, by Curtain Burns Peak borrowing from PNG institutions and the State issuing a guarantee, violated Section 209(1) of the Constitution as it would constitute a loan raised by the State, without the authority of an Act of Parliament. Only at this late stage did NPF management see fit to obtain its own legal opinion. That opinion, provided by John Batch SC, was contrary to that of Blake Dawson Waldron.

Opposing legal opinion 

Mr Batch felt that the arrangement did not contravene Section 209 (1), though he conceded that if there was a contravention, the loan may not be recoverable against Curtain Burns Peak and that NPF would not be able to enforce the State guarantee in the Courts. Mr Batch’s opinion was dated November 7, 1996 and the K15 million loan agreement between NPF and Curtain Burns Peak was signed on November 14, 1996.

The K15 million loan agreement was executed on November 14, 1996, between Curtain Burns Peak and NPF. Again, it was fully drawn down ahead of the agreed dates. The management and facility fees totalling K85,000, were paid to NPF.

Findings 

At paragraph 6.8, the commission has found:

The Board of Trustees did not critically appraise the provision of further loans to the State and thereby failed in their fiduciary duties, in that:

(a) No consideration was given to the impact this further loan would make on NPF’s investment portfolio balance;

(b) The impact on NPF’s debt management and cash flow planning was not considered and documented;

(c) No assessment was made of the ability of the Government and Curtain Burn Peak to fulfil their obligations;

(d) No assessment was made of how the World Bank would view the State’s use of NPF funding for the State’s infrastructure projects, as political influence had clearly been brought to bear;

(e) NO consideration was given to the risks and returns or to other possible investment opportunities;

(f) There was a mismatch in the arrangements because the borrowed funds advanced to the State to finance the project, were repayable by NPF to ANZ “on demand”, whereas NPF’s loan to the State was not repayable for 10 years;

 (g) THE trustees did not seek independent investment advice concerning this additional loan, nor was a critical investment appraisal of the additional loan to the State made;

(h) THERE was no documented input from NPF’s investment division.

Of the K48 million which the State had expected to raise in order to fund the original Freeway contract between 1995 and 1997, NPF provided K42 million. This was K23 million more than had been planned in 1995.

Second K15 Million Loan — March 13, 1997 

Board and Minister approve further loan without any expert advice

As a result of the Blake Dawson Waldron advice, POSF and DFRBF resolved not to participate in the Poreporena Freeway loan and pressure was put on NPF to make good the funding shortfall.

NPF management eagerly accepted this challenge. Chairman Copland sought the board’s view at the 104th Board meeting, on December 9, 1996, about advancing another K15 million for the Freeway project. On the strength of a mere verbal proposal, without any attempt at appraising the investment, the board gave its immediate approval.

Minister Haiveta approved the proposal on January 28, 1997, without seeking advice from DoF.

THE NEXT EXTRACT, No.71 IS MISSING. WE WILL CONTINUE WITH PART 72 TOMORROW

National Provident Fund Final Report [Part 69]

November 10, 2015 Leave a comment

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

NPF Final Report

This is the 69th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare. Michael Somare.

Executive Summary: Schedule 6 Continued 

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

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

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

REFERRALS

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

SECTION A:

Referrals recommended by the commission to the constituting authority:

Jimmy Maladina

To the Commissioner for Police:

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

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

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

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

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

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

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

Ombudsman Commission:

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

PNG Law Society:

Professional misconduct.

Henry Fabila

Commissioner for Police

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

Ombudsman Commission

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

Herman Leahy

Commissioner for Police

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

PNG Law Society Professional misconduct.

Mr Taniguchi

Commissioner for Police

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

Kazu Kobayashi

Commissioner for Police

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

Ken Yapane

Commissioner for Police

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

(b) Fabricating documents.

Rex PAKI

Commissioner for Police

Aiding the office of fraud or receiving.

PNG Institute of Accountants

Professional misconduct

Ango Wangatau

Commissioner for Police

Aiding the office of fraud

PNG Institute of Accountants

Professional misconduct

David Lightfoot

Commissioner for Police

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

PNG Law Society

Professional misconduct

Barbara Perks

Commissioner for Police

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

Peter O’Neill

Ombudsman Commission

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

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

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

Kenneth Barker

Commissioner For Police

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

(b) Aiding the offence of fraud.

Maurice Sullivan

Commissioner for Police

Aiding the office of fraud.

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

SECTION B:

Direct referrals by the commission

Peter O’Neill

Commissioner for Police

Possible perjury regarding source of funds to purchase Manamatana apartments.

Concluding Comments

Result of the investigation

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

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

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

The Kina devaluation claim of K3.3 million:

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

THE second acceleration claim of K2,505,000:

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

NPF is entitled to recover this K2.505 million.

Tribute to Finance Inspectors

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

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

SCHEDULE 7A

Niugini Insurance Corporation K2 Million Loan

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

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

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

Background

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

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

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

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

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

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

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

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

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

“v) NIC Loan

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

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

Ministerial Approval

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

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

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

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

Loan Documentation

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

(i) Loan Agreement dated 28 April 1995

(ii) Memorandum of Mortgage dated 28 April 1995

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

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

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

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

Drawdown

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

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

Repayment

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

npf 69

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

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

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

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

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

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

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

Findings

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

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

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

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

TO BE CONTINUED

National provident Fund Final Report [Part 54]

October 20, 2015 1 comment

Below is the fifty-fourth 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 54th 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.

Some Concluding Comments

Although the planned scope of the Waigani land fraud was very serious, the actual loss suffered by NPF and its members was reduced to the loss on the valuation fees and legal costs because at the last moment, NPF withdrew from the purchase agreement. Members have mainly journalist Ruth Waram (Editor’s Note: Ms Waram was the business editor of the Post-Courier at that time) and the national press to thank for this partial reprieve.

This report demonstrates the amoral greed of the conspirators who preyed upon the NPF when its finances were in a desperately weak state and the depths of official corruption which existed in the Lands Ministry and the Land Board.

Some positive aspects which emerged from the inquiry were:

(a) THE benefit of a free and courageous press;
(b) THE effectiveness of the finance inspector’s inquiry;
(c) THE energetic and effective inquiry carried out by the NPF board of trustees after August 1999, which led to the termination of Herman Leahy and Jimmy Maladina from the NPF.

One matter of great public concern was the attempt by professional people to interfere with and undermine this commission of inquiry in order to protect Mr Maladina and his fellow conspirators. It is particularly disturbing that some of those people were lawyers, whose profession imposes upon them a duty to serve the court as their primary responsibility.

Executive Summary Schedule 6 NPF Tower Investigation Introduction 

The commission’s inquiries into the financing and construction of the NPF Tower, reported upon in Schedule 2B to the commission’s report, disclosed several matters which required further detailed investigation.

Those investigations are reported upon in Schedule 6, of which this is an executive summary.

The matters requiring further investigation, which are reported upon in Schedule 6, are:

  • THE in-ground works variation of K3,006,270.26;
  • THE resultant acceleration claim of K1.4 million;
  • THE currency fluctuation claim of K3.3 million;
  • THE second acceleration claim of K2.505 million;
  • THE professional fees of K3,568,298.84; * WHERE the K2.65 million from the arrangements made by Mr Maladina with Kumagai Gumi Company Ltd (Kumagai) went; and
  • THE proposed sale to PNG Harbours Board (PNGHB).

Overview 

In 1999, the Secretary for the Department of Finance (DoF) directed that there be an investigation by finance inspectors under Section 64 of the Public Finances (Management) Act 1995 (PF(M) Act). Among other matters, the inspectors were to investigate and report upon the NPF Tower construction.

Schedule 6 quotes the finance inspector’s report in full by way of an overview (paragraph 3.1). The lack of planning and critical financial analysis by NPF management and the board is criticised by the inspectors who blame chairman David Copland, general manager Robert Kaul and deputy managing director Noel Wright as being primarily responsible for this.

They were also primarily responsible for the failure to properly obtain the approval of the NPF board for the full amount of the preliminary expenditure that cost K1.93 million which Mr Kaul asked the Minister to approve. The trustees had approved a lesser expenditure of K1.50 million as professional fees for the feasibility studies conducted during the pre-tender stage.

The finance inspectors criticised the trustees for authorising the expenditure of such a large sum before basic calculations regarding the likely construction costs, sources and costs of funding as well as the availability of joint venture partners and estimated rental returns had been put before the board and considered. The inspectors also criticised the role of the DoF, particularly its senior officers serving as NPF trustees, for not providing a professional critical analysis of NPF’s proposals for initial expenditure, and for meekly supporting those proposals and recommending Ministerial approval. The commission fully endorses all these criticisms.

By the time the project was presented to the NPF board again in October 1996, K3 million had already been spent on pre-tender documentation (double the amount the board had approved). Management recommended that the board authorise the commencement of the project on the strength of a preliminary feasibility study by Rider Hunt and Partners (Rider Hunt). The board gave its approval on the basis that:

  • The total cost would be under K50 million;
  • The expected rate of return would be 10 per cent;
  • THE proposed residential floors would be converted into rentable office space; and
  • Funding would be partly by cash and partly from borrowings, repayable in approximately eight years.

The commission fully agrees with the inspector’s comments that an expected return of only 10 per cent on such a high-risk venture was far too low; funding partly by borrowing was unwise because of the significant cost of borrowing over eight years (The commission adds the overriding criticism that, legally, NPF lacked the power to borrow); NPF had dropped its previous requirement that joint venture partners must be found and this significantly increased NPF’s exposure to risks and cost blow-outs.

The inspectors were very critical of DoF Deputy Secretary (and NPF trustee) Vele Iamo and First Assistant Secretary, Commercial Investments Division Salamo Elema, for not recommending against this proposal.

On their recommendation, the Minister approved the construction of the Tower, at a cost not exceeding K40 million.

The accepted tender by Kumagai was for a construction cost of K45,447,388 and this required further Ministerial approval for a revised cost of K50 million on May 27, 1997. A contract was entered into with Kumagai for a construction cost of K45,447,388 which Mr Kaul signed on behalf of NPF on June 2, 1997.

This was signed prior to NPF board approval for this amount being obtained, which was not given until August 22, 1997.

The inspectors go on to describe how the concept of partial funding through members’ contributions was set aside as management negotiated a K50 million fully drawn down loan facility (FDL) with PNGBC which was later increased to K59 million.

Findings 

The irregularities in obtaining board and Ministerial approval for this facility and for the subsequent variations are described in Schedule 2B at paragraphs 4.3 and 4.8-4.10, where the commission has found that:

(a) Mr Kaul’s request to Minister Konga for NPF to borrow K50 million from PNGBC had not been considered or resolved upon by the NPF board. This amounted to improper conduct by Mr Kaul and a breach of his fiduciary duty to the members of the fund;
(b) Minister Konga was also guilty of improper conduct in approving Mr Kaul’s request without sighting an NPF board resolution and without seeking advice from the DoF.
(c) Mr Wright’s application to PNGBC for loan facility had no authority from the NPF board;
(d) PNGBC was negligent in not requesting a copy of the NPF board approval and the Minister’s approval before approving the loan facility of K50 million. PNGBC also failed to perform due diligence in relation to NPF’s power to borrow;
(e) PNGBC’s analysis of the loan application was flawed;
(f) Mr Wright’s conduct in accepting the loan facility on behalf of the NPF board and authorising payment of the K375,000 establishment fee without consulting the board, was improper;
(g) The conduct of Mr Kaul and Mr Frank in applying the NPF seal to and executing the loan facility agreement without the authority of the NPF board, was improper conduct;
(h) The improper conduct and breach of duty by Mr Kaul and Mr Wright leave them open to personal liability for loss suffered by members of NPF and, in the circumstances, it is unlikely they could defend themselves against an action by claiming to have “acted in good faith”.

The inspector’s report goes on to describe how the cost of the project increased because of a successful kina fluctuation claim by Kumagai and how Mr Fabila, the new general manager of NPF, used this to justify an increase in the FDL.

They point out that Ministerial approval was for an increase to K55 million but that NPF exceeded this limit by obtaining from PNGBC, an increase to K59 million of which K58,122,757 had been drawn down by November 30, 1999.

The inspector’s report shows that when construction was completed in October 1999, the total costs incurred by NPF to develop and build the Tower amounted to K72,890,199.73 broken up as follows:

npf 54 image c

The inspectors comments on this table were:

“It will be noted that since the inception of the project in 1994 and up to September 1999, the expected overall cost of the development of the NPF Tower had increased tremendously, by as much as 2.43 times – from K30.0 million in August 1994; to K39.30 million in December 1995; to K48.14 million in September 1996; to K54.80 million in September 1997; to K58.03 million in January 1998; to K59.68 million in March 1998; and to K72.89 million (see Table 1 above) as at October 1999. This investigation notes that while the maximum development costs approved by the Minister was K50 million, actual development cost incurred amounted to almost K60 million. These exorbitant costs incurred in the project with no definite sign of profitability reflect the financial mismanagement and inefficiency by the involved NPF management and board.”

TO BE CONTINUED

National Provident Fund Final Report [Part 49]

October 13, 2015 1 comment

Below is the forty-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 49th 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 4L Continued 

The Crocodile board allowed Mr Jewiss to hire staff and enter into construction and other contracts without being presented with a satisfactory business plan, detailed costing, management structure or an agreed source of funding.

Even worse, Crocodile had not secured the required registration, which would have enabled it to open a bank account and carry on business in Indonesia; nor had it obtained secure title to the land on which the hotel would be constructed.

Mr Jewiss and his key expatriate staff had not acquired the appropriate visas to permit them to work in Indonesia.

This failure required them to fly out of Indonesia and return every 60 days at great cost. As Crocodile had not obtained its PMA status, Mr Jewiss, assisted by Mr Wright, used a number of methods to transfer funds to Indonesia including:

  1. Carrying foreign currency travellers cheques to Indonesia (Exhibit CC354, CC358 Transcript p. 6155);
  2. Personal credit cards and bank accounts (Exhibit CC307, CC309, CC310 Transcript pp. 6270);
  3. Mr Goodfellow’s bank account (Exhibit CC367, CC338, CC345, CC 360-362, CC367 – Transcript p. 6150);
  4. DGJ trust account (Exhibit CC270-278, Transcript pp. 6145-6147);
  5. NPF’s Wilson HTM trading account (Exhibit CC322); and
  6. PT Cipta Boga Baya (Exhibit CC383A) Crocodile entered an agreement to use this company’s bank account and work under its (legal) umbrella.

These devices were not legal, secure or transparent. The use of NPF’s offshore account with Wilson HTM as a vehicle to send funds to Indonesia was particularly contentious. Approximately $US600,000 was sent this way in breach of PNG foreign currency regulations and without the knowledge of the NPF board.

The Crocodile board made several attempts to impose cost controls on Mr Jewiss and to persuade him to provide proper financial reporting. These attempts failed.

With Mr Copland as chairman of the Crocodile board and with trustees Tau Nana and Henry Leonard and Mr Wright and Mr Kaul as directors, there should have been ample feed-back to the NPF board regarding the Maluk Bay affairs but this was not the case.

The willingness of NPF trustees to support Mr Jewiss’s wild and ill thought out proposals without insisting upon a professional feasibility study, was a failure of the trustees’ fiduciary duty to the NPF members.

Concluding Comments On Crocodile

During the period under review, from January 1997 to December 1999, NPF expended approximately K7.4 million by way of loan and equity investments in support of Crocodile for no return.

The commission has not pursued this matter after December 1999 but has been informed by the current NPF management that Crocodile has redirected its business operations to PNG, that management is vastly improved and that proper cost controls and reporting procedures are in place.

The commission has been told that there are signs of profitability and that once this trend is firmly established the intention is to sell off Crocodile.

Executive Summary Schedule 4M Amalpak Limited

Forward

This is a summary of the report on Amalpak Limited (Schedule 4M) which is set out in Schedule 4M of the commissions report. Unless stated otherwise, paragraph numbers referred to in this report are references to paragraphs in Schedule 4M.

Original Investment in Amalpak Ltd

NPF’s first invested in Amalpak Ltd, then named Amalgamated Packaging Pty Ltd, by purchasing 30 per cent of its shares in August 1990, for a price of K2,268,000.

The purchase agreement contained a performance warranty, which was not honoured by the company.

The shortfall was quantified at K1.033 million which was repaid to NPF meaning NPF’s net purchase price was K1.235 million.

Other Shareholders 

The other shareholders were the Investment Corporation of PNG (30 per cent) and VisyBoard, the active foreign manager (60 per cent).

In October 1997, the company’s name was changed to Amalpak Limited (Amalpak).

Despite problems caused mainly by significant devaluation of the kina, which affected the cost of its raw materials, and other economic circumstances, the company remained moderately profitable for NPF, paying a total of K4000 per annum as directors’ fees for NPF’s two directors and reasonable dividends throughout the period under review.

Amalpak’s managing director reported monthly and it held directors meetings four times a year. Although NPF had two directors on the board, NPF management’s reports to NPF were limited to summaries of Amalpak management reports and the Amalpak, annual report. No discussions by NPF trustees were recorded in board minutes.

Value Of NPF’s Equity 

NPF’s equity in Amalpak was valued as follows:

npf 49 b

Findings 

NPF’s investment in Amalpak is an illustration of a prudent passive investment in a sound well-managed commercial enterprise. The company has regularly reported and regularly paid high dividends with no problems. Although overall profits were reduced owing to the devaluation of the kina, it has remained a moderately profitable company paying an average return of 16 per cent on the total cost of investment.

During the five-year period under review by the commission, the returns on NPF’s investment were:

npf 49 c

The history of this investment is in pleasing contrast to NPF’s loss making investments in high risk PNG resource stock and the other investments in which NPF aggressively sought to pursue a much more active role. No borrowed funds were used in the Amalpak investment.

In view of the uncontroversial nature of this investment from quarter to quarter, the quality of NPF management’s reporting to the NPF board was adequate, though it merely summarised the regular reports coming from Amalpak itself. In latter times the timeliness of NPF management’s reporting became a little bit confused.

Executive Summary Schedule 4N 

Investment in Ambusa Copra Oil Mill Ltd – Proposal On Behalf Of Ambusa Pty Ltd For NPF To Fund Ambusa Copra Oil Mill 

During the second half of 1996, Jai Ryan and Stanis Valu who were connected with Ulamona Sawmill in West New Britain Province, approached Mr Wright with a business proposal to establish a copra oil mill at Ambusa, WNBP.

Mr Valu claimed to represent a landowner group, which had been incorporated as Ambusa Pty Ltd. They had already been introduced by Mr Ryan to Odata Ltd of Canada, to supply a Copra Oil Mill through contacts in India, to construct the mill and then to manage it and market the product.

The group had unsuccessfully sought funding elsewhere and wished to apply to NPF to join with it as a joint venture investment. They provided Mr Wright with a detailed proposal/business plan which had been drawn up with the help of Odata.

Mr Mekere Prepares Proposal Utilising Odata’s Business Plan Without Any Due Diligence 

Mr Wright asked his junior, Haro Mekere, to examine the proposal and to work with Mr Valu and Mr Ryan to develop it into a draft proposal in a format suitable to place before the NPF board.

Mr Mekere told the commission that he summarised the 40-page business plan into a few pages accepting the claims and assumptions at face value.

The only due diligence performed was to talk with unspecified officers in the Copra Marketing Board (CMB), the Bank of Papua New Guinea (BPNG) and the Bureau of Statistics. In essence, a new joint venture company would be incorporated consisting of NPF and Ambusa Pty Ltd who would each hold 50 per cent of the shares.

Ambusa Pty Ltd would contribute the former Ambusa Copra plantations, said to have been valued recently at K400,000, as its contribution to the joint venture. NPF would match this by contributing K400,000 which would be used for start up costs.

The new company, Ambusa Copra Oil Mill Ltd (ACOM) would enter a “turnkey contract” with Odata to build and manage the mill and to market the product. It would seek and obtain external funding for this purpose by way of bank loan.

NPF Board Accepts Proposal Involving Turnkey Contract Between Ambusa Copra Oil Mill Ltd And Odata 

With virtually no due diligence, this proposal was put to and accepted in principle by the NPF board at the 110th meeting on December 11, 1997.

Management’s failure to perform due diligence and to carry out a professional analysis of the business plan, meant that the trustees did not have an adequate basis upon which to make a decision as to whether or not to invest in the project.

This was a failure by Mr Wright and Mr Mekere to perform their duty to provide professional investment advice to the board.

The trustees’ acceptance of management’s recommendation without insisting upon expert independent advice was a failure of their fiduciary duty to the members of the Fund.

Defects In NPF’s Due Diligence 

In evidence, Mr Mekere stated:

(a) The idea for the ACOM originated with Stanis Valu, and Clebus Gavuli, local landowners and owners of Ulamona Sawmill Pty Ltd and Jay Ryan, the manager of Ulamona Sawmill. Mr Ryan secured the participation of Odata Ltd (Canada) as project manager and they developed a business proposal for the purpose of obtaining funding;

(b) After seeking funding from various sources, they approached Mr Wright of NPF who delegated to Mr Mekere the task of preparing the project in a form suitable as a proposal for the NPF board;

(c) Mr Mekere said that his due diligence consisted of having some discussions with Jay Ryan, Stanis Valu, Clebus Gavuli and officers of the CMB and the BPNG. Otherwise, he merely summarised the business proposal, which had been presented to him. He then gave the proposal, in the NPF board format, to Mr Wright who placed it before the board;

(d) Mr Mekere admitted the following defects in the due diligence process:

  • No independent evaluation of the business proposal was done;
  • No analysis was done of the (doubtful) assumption that it would have tax exemption for five years as it was a pioneer industry;
  • No consideration was given as to whether NPF had the power to grant bridging finance;
  • He was not aware of the existence of investment guidelines so gave them no consideration;
  • He did not follow up on perceived factual errors in the proposal;
  • He accepted the claim that it was a simple process but had never visited a copra mill;
  • He did not check on the bona fides or the experience of Odata;
  • He had no idea of the techniques used to load copra oil and did not inquire;
  • He did not check on availability of monthly shipments;
  • He did not consider bulk storage facilities to store oil between shipments;
  • He claimed he intended to do a more thorough evaluation after the board had approved the project – but did not do so;
  • He did not verify the (false) claim that licensing requirements had already been approved;
  • No verification was done of the claim that K550,000 had already been spent on feasibility studies and initial costs;
  • He did not complete any engineering evaluation of equipment proposed to be purchased;
  • No check was done on Odata’s marketing experience or on the buyer allegedly under contract to Odata; and
  • No verification was done of the (false) statement that the plantation to be contributed by Ambusa as its 50 per cent equity in the joint venture had really been valued at K400,000.

(e) The due diligence by Mr Wright and Mr Mekere was woefully deficient. Because of his immaturity, the cause of this in Mr Mekere’s case may be attributable to inexperience and naivety. The commission takes a harsher view of Mr Wright, who was a qualified accountant and who was in charge of supervising Mr Mekere. The commission finds that his failure to ensure that even basic and simple checks were made to verify the claims in Ambusa’s business proposal, should be attributed to reckless indifference about his duty to the NPF;

(f) Because of their breach of duty to the NPF board, Mr Wright and Mr Mekere may be personally liable for any loss incurred by NPF resulting from their failure to exercise reasonable care. It is unlikely that they could rely on a defence of “acting in good faith”, particularly not Mr Wright; and

(g) The trustees who attended the 110th NPF board meeting and who voted in favour of approving the project in principle, failed in their fiduciary duty to the members of the fund by not insisting that proper due diligence was carried out, including an independent professional evaluation of the proposal before approving it in principle.

After the NPF board approved the project in principle in December 1997, Mr Mekere conducted a site visit.

Having no expertise in the copra oil industry, he made a woefully inadequate assessment of the plantation.

NPF Board Resolves To Participate In ACOM

At the 111th NPF board meeting on February 20, 1998, the board resolved to invest in the project as recommended.

Mr Mekere then arranged for a shelf company to be purchased which was registered as “Ambusa Copra Oil Mill Ltd” with David Copland as chairman, Robert Kaul as director, Haro Mekere as executive director and two nominees from Ambusa.

Mr Mekere then became the main driving force pushing the project along.

TO BE CONTINUED

National Provident Fund Final Report [Part 48]

October 12, 2015 1 comment

Below we continue the re-publication of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.

The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime! 

NPF Final Report

This is the 48th 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 4L Continued 

4. APPROVALS had to be in place for the construction;
5. CROCODILE would accept a five per cent share in the project if MBI also injected capital into the project;
6. CROCODILE would provide loan finance provided it was given preferential repayment from the profits of the project.

These conditions were never fulfilled and by December 1997 they were completely overlooked by management and the boards of both NPF and Crocodile.

At the December 10, 1997, Crocodile Board meeting, the directors accepted a woefully inadequate feasibility study presented by Mr Jewiss and failed to have it reviewed professionally.

Then, without observing that the conditions previously imposed had not been met, the Crocodile Board approved participation in the project subject only to “satisfactory financial arrangements”.

At the NPF Board meeting on December 11, the board endorsed the decision of the Crocodile Board to proceed with the project, giving no thought to the financial arrangements.

In March 1998, with no source of funding in place, with no title to the land where the hotel was to be built and without any authority to carry on business in Indonesia, Crocodile signed a joint venture agreement with MBI. Mr Jewiss accepted the help of Nicolo Lolong, a former Indonesian Government official, to help guide Crocodile through the legal and bureaucratic requirements.

The arrangements with Mr Lolong were never properly finalised and this led to serious legal complications as Mr Lolong later refused to hand over land titles to Crocodile until his claim was paid.

South East Asian Financial Crisis

At this stage, in March 1998, the catastrophic impact of the South East Asian financial crisis on the Indonesian economy, currency and inflation was daily headline news. Neither Mr Jewiss, the Crocodile Board, the NPF management nor the NPF Trustees paused to critically assess the effect this crisis would have on the Maluk Bay investment. All parties were in gross breach of duty by this failure.

The Joint Venture 

The joint venture agreement was between Crocodile, MBI and MSP (a local company which would hold the land once it was acquired). A joint venture company was to be established as a foreign investment company under the laws of Indonesia. The partners investment in the company would be $US1.6 million consisting of $US1.12 million loan finance and $US480,000 in share capital to be contributed as follows:-

Crocodile – $US240,000
MBI – $US230,000
MSP – $US9,000.

The joint venture agreement also provided that Crocodile would provide a loan for working capital but did not specify how much (paragraph 7.5.4).

Crocodile immediately employed Mr Wilson and Mr Goodfellow (shareholders in MBI) to manage the construction of the hotel “in-house”, remunerated at $US12,000 per month. The Crocodile Board was not consulted about these critical decisions.

Findings 

(a) MR Jewiss failed to clarify Mr Lolong’s role and to enter into clear formal contractual relations with him;
(b) MR Jewiss failed to properly advise the Crocodile Board about the implications of the spreading Indonesian financial crisis and the Board of Crocodile was remiss in not seeking advice about the matter;
(c) THE joint venture agreement between Crocodile, MSP and MBI failed to specify the amount of the loan to be supplied by Crocodile;
(d) THE engagement of Mr Goodfellow and Mr Wilson to manage constructions at Maluk Bay in March 1998 was premature, as approval of the project was still subject to finance. The appointment was also made without Crocodile Board approval. As both men were friends of Mr Jewiss and shareholders in MBI, their appointment raises concerns of nepotism and impropriety;
(e) MR Jewiss and Mr Wright acted improperly in arranging finance for the Maluk Bay project through NPF without obtaining the formal approval of either the Crocodile or NPF Boards;
(f) THE methods of providing finance for Crocodile adopted by Mr Jewiss and Wright were unconventional, improper and secretive. This resulted in the NPF and the Crocodile boards losing control over Crocodile’s operations;
(g) THE use of NPF’s trust account with Wilson HTM was in breach of PNG foreign exchange regulations for which Mr Wright, Mr Jewiss and Mr Wilson HTM are personally liable;
(h) MR Jewiss’ denial of having knowledge of this arrangement at transcript p. 5566 was false and he should be referred to the Police Commissioner for prosecution.

In May 1998, Mr Fabila replaced Mr Kaul as general manager of NPF and he became a director on the Crocodile Board. Unfortunately, this did not strengthen the control over the management of Crocodile.

In June 1998, Mr Wilson, who was supervising the very early stages of the construction of the hotel, prematurely appointed a Ken Williams as general manager of the hotel, ostensibly to run a three month staff training program before the commencement of hotel operations (paragraph 7.6.5).

To satisfy the growing need for funds, Mr Jewiss and Mr Kaul increased the use of the Wilson HTM account, through which approximately $US600,000 of NPF funds was channelled to Indonesia, without the NPF Board’s knowledge or authority. This of course was illegal.

There was also at least one attempt to transfer funds by way of a false invoice prepared by Patrick Goodfellow at Mr Wright’s request – see paragraph 7.6.3 of the report (This invoice was apparently not used and the commission does not know if there were others).

With no financing plan in place, Crocodile management kept up the expenditure in the belief that NPF would foot the bills and that Noel Wright would find ways to achieve this. This process led directly to the loss of $US160,000 that was paid as a deposit on kitchen equipment when there were no funds to pay the balance owing (see paragraph 7.7.2).

Findings 

(a) MR Wright’s extensive use of NPF’s Wilson HTM’s money market account to transfer approximately $US600,000 to the PT Cipta Boga Baya bank account at Mataram, was illegal and completely without the NPF Board’s authority. It resulted in the boards of both the NPF and Crocodile being by-passed and indicates that both boards had lost financial control of their respective management teams;
(b) IT is clear that Mr Jewiss was party to this method of funding Crocodile;
(c) IN view of Mr Copland’s close connections with Mr Wright, as he was chairman of both boards, and as the evidence is that he kept himself informed of major management issues, the commission finds that Mr Copland must also have been aware that finance was being provided to Crocodile by this extra legal means, without board approval;
(d) CROCODILE suffered significant loss when large deposits were paid to purchase equipment when there were no funds to pay the balance of purchase moneys;
(e) NPF’s system of financial control was weak in that it enabled Mr Wright to misuse NPF’s account with Wilson HTM undiscovered, as there were no checks or balances in place.

Not surprisingly, these weak financial controls and unorthodox and secretive methods of providing funds, led to a budget blow out from the approved $US1.6 million to $US4.178 million.

At Mr Copland’s direction, Mr Wright visited Maluk Bay and performed an audit. His audit report was seriously inadequate and failed to highlight the following critical issues to the board, including:-

  • AN assessment of the local economy and the impact of the economic crisis;
  • DETAILS of the contractual arrangements;
  • THERE was no audit of the financial records;
  • THERE was no analysis of the project costs to date, including actual versus budget figures;
  • THERE was no management performance assessment;
  • THERE was no assessment of the business risks and
  • THERE was no update on the land title issue. (Paragraph 7.7.3)

In 1999, the NPF management and Trustees finally began tackling NPF’s financial crisis and enlisted the help of PwC. This exposed the fact that NPF management had been funding the Maluk Bay project by various means without the board’s knowledge.

Mr Jewiss was called before the NPF special board meeting on February 8, 1999. It was resolved to cease funding the Maluk Bay project and to review critical matters like land title, the joint venture agreements, using the Wilson HTM account to pay invoices and to require evidence of the $US50,000 equity contribution from the joint venture partners.

Unfortunately, the shut down of funding was so complete that a care and maintenance budget to protect NPF’s physical assets (including the partially completed hotel), was not provided. This resulted in damage and further loss.

Mr Maladina 

By this time, Mr Maladina was chairman of both the NPF and Crocodile Boards and his dubious influence quickly began to manifest.

In April, Mr Maladina unilaterally appointed a friend, Peter Petroulas, (of “Precise Strategies”) to review the Maluk Bay project.

During the review, Mr Petroulas began setting a scene to make continued NPF funding contingent on buying MBI out of the joint venture by buying 60 per cent of MBI shares for the low sum of $US1,000, claiming to be acting for “a powerful lobby group” close to the NPF.

Also in April, Mr Maladina, unilaterally and without the authority of the Crocodile Board, negotiated a new contract appointing his friend, Mr Barredo, as managing director of Crocodile on very favourable terms, including a grant of 150,000 Crocodile shares each year. The contract was approved by the NPF board but, to be valid, it required a resolution from the Crocodile Board. Mr Maladina, however, signed the contract himself, as chairman of Crocodile and illegally affixed the company seal to it.

Meanwhile, MBI’s interests were being looked after by its prominent shareholder and Crocodile employee, Keith Wilson. Completely without legal authority (but purporting to use a lapsed invalid power of attorney which had been granted for another purpose), Mr Wilson signed, on behalf of Crocodile, a variation to the joint venture agreement, which purported to commit Crocodile to provide all funding in the form of a loan.

The variation, which was very favourable to MBI, also provided that Crocodile would reimburse all shareholders for contributions to the purchase of land. This purported variation to the agreement is invalid (details in paragraph 7.9.3).

Findings 

(a) WHEN rejecting requests for further funding for Maluk Bay, the NPF Board was remiss in not providing even a care and maintenance budget to protect its investment;
(b) MR Maladina’s unilateral decision to appoint his friend, Peter Petroulas, to review the Maluk Bay project was improper, beyond his authority and amounted to nepotism;
(c) MR Jewiss falsely informed Mr MacKenzie of MBI that Crocodile intended to fund the entire project knowing that this was contrary to the agreement and that the Crocodile Board had not resolved to do so;
(d) MR Wilson improperly purported to sign an amendment to the joint venture agreement, favouring MBI, at the expense of Crocodile. As Mr Wilson had an interest in MBI, was not authorised by Crocodile to amend the agreement and had such a clear conflict of interest, his action was improper as well as being legally ineffective.

After ceasing as managing director in April 1999, Mr Jewiss was directed to try and finalise the land title issue at Maluk Bay. No one seemed to have “on the ground” overall responsibility for the Indonesian operations and, with no funding, things came to a standstill.

The private management agreement between Crocodile and Gary Jewiss Ltd was eventually terminated in August 1999.

Financial Controls And Funding Of Crocodile’s Activities In Indonesia 

Because of poor and incomplete records, some of which have not yet been returned to PNG, the commission has not been able to fully account for all funds expended on the Maluk Bay project.

The management and directors of Crocodile were in breach of their duties under the Companies Act 1997 in this regard. As NPF was the sole shareholder of Crocodile, the management and Trustees of NPF must also be held responsible for not ensuring that the Crocodile Board (comprised entirely of NPF Trustees and officers) exercised proper control over the Crocodile management and maintained ultimate financial control.

Commission staff have pieced together the financial history of Maluk Bay and the results of this task are detailed in paragraph 8 of the report. It sets out details of amounts transferred through the Wilson HTM account ($US991,773), through D&J Consultants ($US145,000), through Patrick Goodfellow ($US41,000), the Bank Negara Account of PT Cipta Boga Baya (the “umbrella” company utilised by Crocodile) ($US783,573), Garry Jewiss-rent ($US22,200), direct funding from NPF ($US81,357), funding from Crocodile in PNG (K1,851,958) and funding from the Cikobas catering contract ($US80,550).

Funds Expended On The Maluk Bay Project 

The various records show an investment of approximately K4.3 million in the Maluk Bay project, which has been written down to nil in the Crocodile books. See table below. (Transcript p. 6277)

npf 48 a

A funding statement to PT Cipta Boga Baya was obtained. Commission staff have traced the known transfer of funds from the various sources mentioned above. Our Staff also obtained credit notes to confirm that these funds were received by the specified banks. The commission finds that there was no “leakage” of funds prior to their receipt into Crocodile’s bank accounts in Indonesia.

TO BE CONTINUED

National Provident Fund Final Report [Part 47]

October 9, 2015 1 comment

Below is the forty-seventh 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 47th 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 4L Continued 

(c) The NPF trustees failed in their fiduciary duty to the members of the fund by not insisting upon performance of due diligence, a business risk appraisal and independent expert advice;
(d) NPF trustees and the management were remiss in not critically assessing the competency and integrity of the Crocodile management team;
(e) NPF trustees and the management failed their duty to the members in not assessing Crocodile’s need for further funding and where the funds would come from.

Maluk Bay Project 

When NPF acquired the business in January 1997, Crocodile’s company office, all its contracts and activities and all its prospects were in PNG. It was pursuing catering opportunities in Highlands Pacific Ltd (HPL), camps at Ramu and Freida River, Lihir Gold, OK Tedi Mining, Misima Mines and Trans Island Highlands.

Mr Jewiss, however, immediately after his appointment, developed plans to expand Crocodile into ventures in Indonesia. By February 1997, he had secured qualified approval from the Crocodile board to embark upon a project to construct a hotel at Maluk Bay, Sumbawa Island.

By April, he relocated himself and family to Bali, Indonesia where he was seeking various investment opportunities, particularly the purchase of land at Maluk Bay to build the hotel complex.

Mr Jewiss remained “located” in Bali and was focussing on various Indonesian ventures (particularly Maluk Bay), recruiting staff, sorting out land rights and other legal problems under Indonesian law and dealing with Indonesian bureaucracy and local authorities.

Neither he nor his key staff had visas allowing them to work in Indonesia so this meant they had to fly out and return every month. All this was most disruptive. It constituted a serious flaw in the overall management of Crocodile and its ‘mainstream’ PNG ventures suffered. It was also very costly.

Unauthorised Loans 

Between July and September 1997, NPF advanced K850,000 and then a further K250,000 to Crocodile as capital loans with no formal approval from the NPF board. This was authorised by Mr Wright (acting way beyond his authority). The requisite Ministerial approval was not sought and no loan documents were in place (Mr Leahy was asked to draw these up after the event).

Quite clearly, Mr Copland who as the active chairman of both boards must have known of these loans and Mr Wright and Mr Kaul were in gross breach of duty to the NPF board and members. When the NPF simply ratified these loans after the event, without taking steps to rationalise and control financial relationships between NPF and Crocodile, all the trustees involved were failing their fiduciary duties to the members of NPF.

This was not an equity investment requiring professional expertise that the trustees lacked. This was a matter of business loans and contracts of which several trustees had experience and their silence about what was happening is inexcusable.

Attempts By Crocodile Board To Impose Controls 

The Crocodile board was not entirely inactive however, it resolved not to continue with the loss making Kundu Catering division because of irregularities and it directed Crocodile management to impose cost controls in July 1997 (paragraphs 4.2 & 4.3). Crocodile management made no attempt to comply with these board directions.

On the request of Mr Copland, Mr Jewiss provided the Crocodile board with a proposed revised management structure. Although it was clearly inappropriate it was accepted by the Crocodile board and by NPF, Crocodile’s only shareholder.

Findings 

(a) Mr Wright and Mr Kaul acted improperly and in excess of their delegated authority by advancing “capital loans” of K850,000 and K250,000 to Crocodile without prior NPF board authority;
(b) When ratifying these loan payments NPF trustees failed to reprimand or openly address the serious breach of duty by Mr Wright and Mr Kaul;
(c) NPF failed to obtain Ministerial approval as was required by the PF(M) Act for the K850,000 loan;
(d) Mr Wright and Mr Kaul and possibly also the NPF trustees in office at the time who failed to inquire about Ministerial approval, may be personally liable to repay the amount of the loan to NPF;
(e) Crocodile management failed to implement cost controls as directed by the Crocodile board and the board failed to address this failure by management; and
(f) The Crocodile board failed to ensure an appropriate management structure was put in place to handle both domestic and international operations before commencing the Indonesian operations. The structure that was determined was inadequate.

At the Crocodile board meeting on October 27, 1997, there was concern about the cash flow problem. The minutes show that “it was noted that the managing director is not required on a full time basis in Indonesia. . .” and it was resolved that management focus its attention on the PNG operations (Mr Jewiss continued to reside in Bali, however).

At the NPF board meeting the next day, Mr Kaul advised that Crocodile was defaulting on interest payments to NPF. It was resolved to convert the loans to Crocodile into share capital. This was done without the requisite Ministerial approval (paragraph 4.4.10).

Crocodile management was not performing well and Crocodile was running at a loss. It is of concern therefore that Mr Jewiss provided the senior managers with a computer notebook each as a bonus.

Findings 

(a) Mr Jewiss failed his duty to the Crocodile board by not relocating and focusing his attention in PNG;
(b) The Crocodile board directors failed their duty under the Companies Act by not following up on their direction to Mr Jewiss and ensuring compliance;
(c) Crocodile management and the board failed to deal with Crocodile’s chronic cash flow problems (other than by turning to NPF);
(d) NPF management, particularly Mr Kaul and Mr Wright and the NPF trustees on the Crocodile board failed to fully advise the NPF board about Crocodile’s cash flow problem; and
(e) Mr Jewiss’s decision to grant a bonus to senior management was not justified by their (or Crocodile’s) performance.

Continuing Cash Flow Problems 

After Mr Fabila replaced Mr Kaul at NPF and on the Crocodile board in May 1998, the Crocodile cash flow problems continued, largely because of the financial drain caused by the Maluk Bay project. Crocodile was facing legal proceedings for a debt of $A356,524 it owed to one of its suppliers. In June 1998, PNGBC formally approved a loan of K2.9 million to Crocodile and part of the security was an unlimited guarantee from NPF. In this way, NPF’s exposure to the troubles of Crocodile was steadily increasing.

In late 1998, despite Mr Jewiss’s confident forecasts, the Crocodile board was concerned about poor performance, which Mr Jewiss blamed on delays in completing the Paiam warehouse. Mr Copland was expressing dissatisfaction with Mr Jewiss.

With the PNGBC K2.9 million loan not yet in place, NPF management extended bridging finance to enable Crocodile to meet payments due on the Paiam warehouse. This was arranged entirely without the knowledge or approval of the NPF board (paragraph 4.7.2).

To enable Crocodile to drawdown on the PNGBC K2.9 million facility, NPF gave a limited guarantee to PNGBC on September 4, 1998, (paragraph 4.7.3). Again, this was carried out without the approval of the NPF board through formal resolution, as required.

On September 14, 1998, Crocodile drew down K2.9 million on the PNGBC facility, using the funds to repay K2 million borrowed from NPF and retaining K900,000.

Although Crocodile continued to rely on NPF finance, its board still failed to critically review the business in order to rationalise its operations and reduce costs.

Findings

(a) The provision of bridging finance to Crocodile was made without the knowledge or approval of the NPF board. Mr Wright acted improperly and breached his duty to NPF in this matter. It is highly likely that the NPF managing director Mr Fabila was aware of the transaction. Also, Mr Copland, who was chairman of both boards and taking an active interest in the management of Crocodile must have been aware of the provision of bridging finance;
(b) Providing bridging finance is not a permitted investment under the NPF Act;
(c) NPF’s limited guarantee of the PNGBC K2.9 million loan facility to Crocodile, was not properly approved by NPF board resolution;
(d) Mr Jewiss failed to ensure some of the required essential conditions were included in the catering contract with Tolukuma Gold Mines;
(e) The Crocodile management and board failed to critically review Crocodile’s poor performance in order to reduce costs and rationalise the management of the business.

Falsley Inflated Profits 

Mr Jewiss’s report to the November meetings of the Crocodile and NPF boards used incorrect accounting procedures to show a net profit of K256,612, which was wrongly inflated by K208,333 (paragraph 4.8.1).

He also provided a five-year forecast projecting profits of K31.6 million which was made without any firm foundation.

1999 – Addressing The Problems 

With NPF now recognising its own desperate financial crisis and after the January 1999 departure of Mr Wright, NPF focussed critical attention on Crocodile and its mismanaged, loss-making, finance-draining ventures.

At the February 8, 1999 NPF board meeting, a false profit of K759,733 was reported for the year ending December 1998. Subsequent calculations, using the correct accounting procedures, showed it was really a loss of K600,590.

Mr Fabila, Mr Maladina and Mr Tamarua were installed as directors of Crocodile. At this meeting, management informed the NPF trustees for the first time that NPF had funded payments to the Paiam warehouse builder and, importantly, that secret payments from Wilson HTM’s offshore NPF account had been paid to fund Maluk Bay by Mr Wright, without the NPF board’s knowledge or approval (paragraph 4.9.1).

Appointment Of Ram Business Consultants 

Soon after his appointment to the Crocodile board in February 1999, Mr Maladina, without any authority to do so, unilaterally appointed Ram Business Consultants as investigators and as the independent internal auditor of Crocodile. This was contrary to normal procedures, which required the consent of the Auditor- General as well as approval by the NPF board.

PNGBC now tightened up on its temporary K1.8 million overdraft facility to Crocodile, converting it to a loan.

Findings 

(a) The appointment of Ram Business Consultants was made without the Auditor-General’s consent and was in breach of standard procedures;
(b) In light of evidence linking Mr Maladina with Ram Business Consultants in other matters, the commission finds that this appointment amounted to improper conduct by Mr Maladina and was nepotistic.

By April 1999, attempts to replace Mr Jewiss with Mr Barredo as manager of Crocodile were being hatched by Mr Maladina and Mr Leahy (paragraph 4.10). It resulted in Mr Jewiss being terminated as manager at the end of April 1999, and the complete cancellation of his employment contract in August 1999.

After Mr Jewiss was terminated as manager in late April, Mr Maladina, as chairman of Crocodile, and without any authority to do so, unilaterally signed a contract of employment for Mr Barredo on extremely favourable terms. The terms included a grant of K150,000 of Crocodile shares per annum, which would soon have given Mr Barredo control of the company (On August 24, 1999, Mr Maladina disclosed his unilateral action to the NPF board which resolved that Mr Barredo’s contract should be reviewed by NPF management and then placed before the Crocodile board for approval. This never happened).

As sole shareholder in Crocodile, the NPF trustees could and should have reprimanded Mr Maladina for unilaterally signing the contract.

Findings 

(a) The NPF board’s appointment of Mr Barredo as managing director of Crocodile was not valid, as the Crocodile board did not approve it;
(b) Mr Maladina had no authority to sign the contract of appointment on behalf of the Crocodile board;
(c) Mr Barredo’s contract was vastly overgenerous. The inclusion of a grant of K150,000 worth of Crocodile shares per annum would give him effective control of Crocodile in a short period;
(d) Mr Maladina’s appointment of Mr Barredo was improper and nepotistic;
(e) Mr Maladina’s negotiations with the IPI landowners were conducted without consulting with or obtaining the approval of either the Crocodile or NPF boards;
(f) Crocodile management’s failure to ensure that title to the Paiam warehouse land had been satisfactorily resolved before outlaying substantial expenses was a major failure of duty.

Mr Maladina’s actions regarding Mr Barredo constituted one of the grounds leading to the board’s vote of no confidence in him on October 8, 1999, which led to his suspension as chairman of NPF.

In November 1999, PNGBC showed its concern about Crocodile’s apparent inability to pay its debts when it converted an existing overdraft facility into a loan of K1.8 million, guaranteed by NPF. This was then taken over by NPF and converted to a further equity investment in Crocodile.

Findings 

The fact that NPF was obliged to go further into debt with PNGBC to save Crocodile from financial collapse, at the same time as NPF was selling down the bulk of its equity portfolio at a huge loss to extricate itself from debt to ANZ Bank, emphasises the folly of NPF’s heady involvement in remote catering through its unwise investment in Crocodile.

Maluk Bay Project 

A major factor contributing to Crocodile’s losses was its protracted involvement in the project to build a resort complex at Maluk Bay, Sumbawa Island, Indonesia and this was made a separate term of reference for this inquiry (Term of Reference 1(m)).

The Maluk Bay project is dealt with in detail in Part 2 of the Crocodile Report at Schedule 4L, paragraphs 6 to 9.

Background 

Very soon after NPF acquired Crocodile in January 1997, employing one of the former owners Mr Jewiss as executive manager, Mr Jewiss met up with a former friend and workmate Keith Wilson who was planning to build a small bar and grill at Maluk Bay, Sumbawa Island, Indonesia with a group of his friends.

They had incorporated a company called Maluk Bay Investments Ltd (MBI) for the purpose. Three of the group were employed by Cikoba Konseptama Bangunmutra (Cikoba), which was an Indonesian company operating on Sumbawa Island. Mr Jewiss saw possibilities for a larger hotel complex to serve the needs of nearby mining communities. He saw the possibility of Crocodile participating in the venture and became enthusiastic; believing it would also open the door for catering contracts with the nearby mining companies, whose staff, he believed, would use the hotel for rest and recreation.

After Mr Jewiss and MBI agreed to participate in a joint venture to construct and run the hotel, Mr Jewiss put his proposal to the Crocodile board meeting on February 27, 1997. The board requested more information before making a decision.

Mr Jewiss then falsely informed MBI that Crocodile had agreed to invest $US1 million. Mr Jewiss then took up residence in Bali with his family. The commission assumes that Mr Jewiss enjoyed the life style on Bali, which was also in the vicinity of Sumbawa Island, as there was no valid “business reason” for him to move there.

At the Crocodile board meeting on May 5, 1997, Mr Jewiss reported vaguely about securing four catering contracts in Indonesia but provided no details. Without having received any firm information about the Maluk Bay project, the Crocodile board approved a budget of $US1.3 million, subject to “the numbers, guarantee, costing and other details”. The “numbers, guarantee, costing” never materialised yet Crocodile then proceeded into the project, being “drip-fed” with funds from NPF.

Crocodile seemed to benefit from the relationship with Mr Jewiss’ new friends from Cikoba when that company awarded a catering contract to Crocodile. The contract was never properly formalised, however, and this led to later difficulties and Crocodile lost K200,000 when Cikoba failed to pay its debts.

At the Crocodile board meeting in July 1997, the board approved, in principle, Crocodile’s participation in the Maluk Bay project but subject to the satisfaction of a number of prior conditions:-

  1. Crocodile would not commit to the project until the design, costing and budget had been finalised and provided by the joint venture partner (i.e. MBI);
  2. Any excess over the $US1.3 million guarantee costing would be borne by the joint venture partner;
  3. The joint venture partner would obtain the land title;

TO BE CONTINUED