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National Provident Fund Final Report [Part 74]

November 16, 2015 1 comment

Below is the seventy-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 74th 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

Transfer of members of Corporatised State Entities and their entitlements from POSF to NPF

This is a summary of the commission’s report which deals with the transfer of employee and State contributions from POSF to NPF, following corporatisation of Post and Telecommunication (PTC) and the National Airlines Commission (NAC).

Unless otherwise stated, paragraph numbers referred to in this summary are references to paragraphs in Schedule 8.

Background

On April 17, 1996, the National Executive Council (NEC) approved the corporatisation of PTC and NAC under the Companies Act. This NEC decision resulted in the transfer of all assets, rights and liabilities from PTC to two separate entities namely Post PNG Limited and Telikom PNG Limited. The transfer from NAC was to Air Niugini Ltd.

This move also required the transfer of both the employees’ and employers’ (State’s) contributions from POSF to NPF.

The State, however, had not been paying its share of contributions to POSF on an annual basis. It had merely been paying its share on an individual basis when an employee became entitled on retirement or death, so a large accumulated amount was owing by the State to POSF as the State contribution under the POSF Act.

At the date of corporatisation on December 31, 1996/January 1, 1997, the State was unable to meets its share of contributions. Subsequently, the State entered into an agreement with NPF and POSF acknowledging its debt to NPF. The total of the State’s contribution was acknowledged as K23,531,053, a sum understated by some K944,023. The actual total should have been K24,475,075.

NPF Considers The Transfer

The board, at its 102nd board meeting on August 27, 1996, was briefed by managing director Mr Kaul on the progress of the awareness campaign by NPF for Telikom, Post PNG and Air Niugini employees. Mr Kaul also requested the board to consider providing a loan to the State to cover the transfer of the State’s share of contributions.

Delay In Transferring Of Funds From POSF To NPF

The NPF board was advised during their 103rd board meeting on October 18, 1996, of the progress of the transfers, which included some administrative problems at POSF. The delays in transferring contributors funds from POSF to NPF was attributed also to the POSF’s poor record keeping and the fact that the Post and Telecommunication (Corporatisation) Act 1996 (PT(C) Act) had not been passed.

The NPF board was advised at its 104th board meeting on December 9, 1996, that the registration of Air Niugini employees was progressing well. The minutes of this meeting also reported that the PTC Workers Union was demanding a payout of their POSF contributions rather than having the contributions transferred to NPF.

Findings

(a) The NPF board of trustees resolved to offer a loan to the State to cover the amounts owed by the State as employer of the PTC and NAC employees, as a consequence of their transfer from POSF to NPF.

This loan offer was made without seeking independent investment advice or performance of due diligence.

The NPF board of trustees acted as “banker of last resort” to facilitate the transfer of the PTC and NAC employees funds to NPF and to assist the State to extricate itself from a politically and economically difficult position.

The commission finds that the board’s conduct was improper and the trustees failed to fulfil their fiduciary duties to the NPF members; and

(b) Trustees Vele Iamo and Abel Koivi were in a conflict of interest position regarding this issue, Mr Iamo as the State’s representative and Mr Koivi as personnel manager with Air Niugini.

There is no record that the board excluded these trustees from discussions, or that the board took this fact into account. In fact, both trustees played active roles in board deliberations and active roles in their positions with DoF and Air Niugini, respectively.

Mr Iamo and Mr Koivi also did not remove themselves from this conflict of interest position.

Status Of Transfer Of Funds From POSF

On December 31, 1996, PTC and NAC ceased to operate and on January 1, 1997, the newly incorporated bodies, Telikom PNG, Post PNG and Air Niugini came into effect.

This also means that the employees of these organisations were to commence their contributions to NPF on January 1, 1997.

The arrangement to transfer funds from POSF to NPF was not clear-cut and the State was not able to pay its share of unpaid contributions owed to POSF.

105TH Board Of Trustees Meeting

At the 105th NPF board meeting held on February 27, 1997, the board was advised that the contributions due from POSF to NPF with respect to the employees of Post PNG, Telikom and Air Niugini had not been effected.

The PTC(C) Act became effective on January 21, 1997.

Contributions From Employees Of newly Incorporated Entities Commence

At the 106th board meeting on May 5, 1997, the board was advised that the transfer of funds from POSF was still outstanding but employee contributions to NPF from the three organisations had commenced.

The board also discussed and resolved to suggest to POSF that POSF should offer a commercial loan to the State to cover the State’s share of contributions.

Unions Become Agitated Over Slow Transfer Of funds

Due to the slow progress in the transfer of member’s funds from POSF, the Papua New Guinea Communications Workers Union (PNGCWU) and the National Airlines Employees Association (NAEA) wrote separately on June 13, 1997, to POSF demanding action on the transfer of the contributions within 30 days.

Ereman Ragi managing director of POSF responded to the letters explaining the reasons for the delays.

He said that it was a legal requirement for the Minister for Finance to approve the transfer amount before the transfer is effected; and that the audit of the 1996 accounts was only recently completed. This had resulted in a final interest of 15 per cent to the members being declared by the POSF board. The employees would have missed out on this 15 per cent interest if their funds were transferred before the completion of this audit. He explained that the delay was not deliberate.

NPF Board Advised Of Difficulties With The Transfer

At the 107th board meeting on July 4, 1997, the NPF board was advised of the difficulties faced in the transfer and also that POSF board will not cover the State’s share of contributions.

The board also resolved at this 107th meeting to discuss the difficulties faced in the transfer of funds to NPF with the organisations and POSF, and if that failed, then the managing director was authorised to examine the possibility of NPF itself providing a commercial loan to the State to cover the State’s share of contributions.

The NPF board was also advised that contributions from the employees of the three new entities were continuing.

NPF Assumes State Liability

At the 108th board meeting on August 22, 1997, Mr Kaul advised the board in his report that the only serious option available to address the unpaid State share of contributions to POSF was for NPF to provide a loan to the State.

He also requested the trustees to set the terms and conditions for this loan.

Noel Wright then requested, through a circular resolution dated October 23, 1997, that the board assume the State’s debt.

This was approved and subsequently ratified by the board at its 109th board meeting on October 28, 1997. Mr Wright wrote to Minister Lasaro on October 24, 1997, requesting Ministerial approval for the loan to the State.

On the same day, the Commercial Investments Division of the DoF (CID) briefed the Secretary recommending that the State enter into a deed of acknowledgement of debt with NPF acknowledging the amount owed by the State to POSF as the unpaid State share of contributions.

Ministerial Determination Under POSF Act 1993

Minister Lasaro, in a notice in the National Gazette (G87) dated October 1997, directed the transfer of funds to be effected within 21 days.

The board also ratified Mr Wright’s circular resolution on October 23, 1997.

Findings

(a) The NPF board, through a circular resolution, approved the assumption of the State’s liability. Although subsequently ratified by the board, this was an unsatisfactory manner in which to make such an important decision.

The commission finds that the board of trustees failed in their fiduciary duty to NPF members because the decision to lend funds to the State was made by trustees via circular resolution and without the benefit of appropriate investment advice;

(b) The proposed interest rate for the loan was 3 per cent less than other loans NPF had provided to the State;

(c) Trustee Isikeli Taureka opposed the loan as minuted. The board of trustees failed to properly take cognisance of his views, which the commission finds were correct;

(d) Trustee Copland’s reported comment that “whilst the risks as outlined by trustee Taureka should be considered, they need to be weighed up against the cash benefit the NPF was receiving now” was slightly misleading. There was no direct linkage between the granting of a loan to the State (to fund the State’s obligations as employer for the payment of contributions due to members leaving the POSF) and the receipt of cash from POSF, because the payment from POSF was the employees contributions (excluding the State’s contributions due) which would be paid by POSF in any event.

(e) Despite a clear conflict of interest, the State’s representative Trustee Vele Iamo was permitted to and did participate in the NPF board’s decision regarding the loan funding to the State. This practice is inconsistent with good corporate governance, which would require those in a conflict of interest position to abstain from participating in any decision-making process. The trustees failed in their fiduciary duty to exclude those in a conflict of interest position from participating in any decision-making process. Similar conflict of interest existed for Mr Koivi;

(f) Trustee Taureka’s objections were valid and seem to have been dismissed by the remaining board members. A proper consideration of the loan would have led a prudent and rational investor to consider the State’s ability to meet the financial commitments and to fully assess the risks of the investment against its returns; and

(g) Mr Wright’s brief was woefully inadequate and failed to critically and objectively inform the trustees. In particular, it failed to highlight the risk of a concentrated association with this investment as NPF was already heavily exposed to the State through its loans to Curtain Burns for the Poreporena Freeway.

Mr Wright’s comment that “we believe the yield of 12.67 per cent with sovereign risk is a good return given that no funds have been committed by NPF to achieve the yield”, was misleading in that NPF was obliged to meet any liabilities as they fell due.

The question was whether this investment (the loan to the State) was providing NPF sufficient returns for the risks of tying up these funds. NPF would be obliged to meet all liabilities associated with the acknowledgement of this debt (including the possibility of paying the employers share);

(h) It is important to note that the commission is not saying that this was an inappropriate investment, but rather that the board failed to properly assess the investment. The approval that was performed was not objective and most importantly, no professional advice was sought.

Transfer Of The PTC And NAC Employee Contributions Completed

Ereman Ragi, the managing director of POSF, wrote on November 7, 1997, to the Secretary for Finance advising him that the transfer of funds to NPF was now complete and enclosed details of the funds transferred and their calculations.

At the 110th board meeting, the NPF board was advised by management that funds had been received from POSF.

Deed Of Acknowledgment Of Debt

By the time the transfer of funds from POSFB had been finalised, the deed was not yet executed. On November 10, 1997, DoF forwarded a draft of the deed to NPF. Mr Leahy responded, on November 14, 1997 to DoF, informing Mete Kahona of NPF’s suggested changes to the deed. At the NPF board meeting on December 11, 1997, it was noted that NPF had assumed the State’s debt to POSF of K23,785,056.23 and that funds had been received from POSF for the employee’s contributions.

However, despite the fact that there was no signed deed of acknowledgement of debt, the NPF board went ahead and approved the payout of the State’s share of contributions to the employees. There was no legal basis for this resolution, which appears to have been ignored between the months of March and August 1998 during which NPF management and the board strongly resisted demands by the communications unions for a payout of the State’s share.

Findings

(a) NPF management failed in their duty by not performing a critical analysis and not providing the board with a detailed brief that would facilitate a critical assessment by the board of the investment decision where:

  • THERE was doubt as to whether the State could service the debt and meet capital repayments;
  • the security available was contingent on the successful completion of privatising State entities, something beyond the control of NPF;
  • the investment risk profile of the fund increased as this additional investment in the State brought NPF’s total exposure to the State to K83.4 million as at December 31, 1997.
  • THREE was no proper evaluation of the returns achieved compared to the risks involved. NPF management should have sought independent investment advice where these skills were not available in- house;

(b) The NPF management and the trustees failed in their duties because the transfer was not adequately planned and important issues were not settled prior to the transfer being effected;

(c) The trustees failed in their fiduciary duties to the members by failing to:;

  • perform a critical analysis and assessment of the additional loans to the State;
  • exclude Mr Iamo and Mr Koivi from discussing and participating at the board meeting despite their clear conflicts of interest;
  • have the initial approval of the loan through a proper board meeting rather than by way of a circular resolution;
  • properly plan the transfer by ensuring that all issues were settled and sorted out between the POSF, the State and the members, prior to the transfer.

(d) Trustees Mr Iamo and Mr Koivi failed in their fiduciary duty to the members by failing to disclose their conflict of interest to the NPF board and failing to abstain from discussions and involvement at the NPF board meeting, when the loan to the State was discussed;

(e) The DoF failed to perform its function responsibly because:

  • no objective and critical appraisal of the proposed loan from NPF’s perspective was performed.
  • even though it was clearly in a conflict of interest position, it failed to provide an independent review of the NPF loan proposal and proceeded to recommend to the Minister that S61 approval be granted; and.

(f) The resolution to payout the State’s share of contributions to all the transferred employees was contrary to the NPF Act and without any legal foundation.

NPF’s Accounting Of The Funds Transferred As At December 31, 1997

NPF’s end of the year trial balance showed that the full amount of employee contribution including the State’s unpaid share had been taken up in their books.

However, because the deed had not been signed, NPF was not liable to payout the State’s share to employees, even though NPF had assumed the State’s liability for their unpaid share of contributions.

TO BE CONTINUED

National Provident Fund Final Report [Part 72]

November 12, 2015 Leave a comment

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

NPF Final Report

This is the 72nd 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 7b Continued 

Findings

(e) NPF management, specifically Mr Mitchell and Mr Mekere, were in breach of their common law duty to the NPF board in failing to obtain and provide this expert opinion;

(f) The NPF trustees were in breach of their fiduciary duties to the members of the Fund in failing to obtain this advice.

(g) The NPF management were remiss in not providing the Minister and the DoF with the contrary advice given by PwC and FPK that NPF would be better off continuing with the BoH assignment agreement;

(h) The DoF review and assessment was detailed but it followed NPF’s own line of reasoning closely and failed to address whether it might be best for NPF to retain the BoH agreement and (possibly) to sell the BSP shares separately;

(i) The Secretary of the DoF was in a conflict of interest situation as adviser to the State on the one hand, which would benefit if Finance Pacific gained from the deal. On the other hand, the Secretary also had a duty to ensure that the best interests of NPF and its members were safeguarded. The Secretary and his senior officers were remiss in not ensuring that independent advice, focusing entirely on NPF’s best interests, was obtained;

(j) The Minister, Sir Mekere Morauta, was also in a similar conflict of interest situation as he was required to consider the best interests of both the State (through Finance Pacific) and NPF. He was not advised that PwC and FPK had advised NPF against unwinding the BoH assignment transaction; and

(k) Sir Mekere acted in accordance with the NPF request, after considering a detailed brief from DoF in support of it. His approval was properly granted, in the circumstances.

Possible ulterior motives behind the Finance Pacific offer

At the time the Finance Pacific offer was being considered, the executive chairman of Finance Pacific was Peter O’Neill. The chairman of the NPF was Jimmy Maladina and the NPF corporate secretary/legal counsel was Herman Leahy.

The commission’s investigations into the NPF Tower fraud, which are reported upon in detail at Schedule 2, have disclosed a criminal conspiracy to defraud NPF to which these three persons were linked.

The conspiracy, in fact, succeeded in illegally obtaining K2.5 million from NPF and it was contemporaneous with this proposed purchase of Roadstock and BSP shares by Finance Pacific. The deal came to nothing because Mr O’Neill was terminated from Finance Pacific before it was completely in place.

In the light of the other evidence linking Mr O’Neill, Mr Maladina and Mr Leahy, the commission is very suspicious of the bona fides of this proposed purchase and of Mr Leahy’s role in ignoring the PwC and FPK reports and of his role in strongly advocating that NPF approve unwinding the BoH transaction sale, despite the negative expert advice.

As the sale did not eventuate, the commission did not pursue these inquiries any further.

Payment Of Interest And Management Fees To NPF Interest 

On the commission’s calculations, the State has honoured its obligations under the Freeway loans, in fact there has been a small over payment of interest of approximately K25,000.

Management fees 

For each loan agreement, an annual management fee of K10,000 was payable to NPF.

The State failed to pay and the NPF failed to collect these fees. At March 5, 2001, the NPF took action to recover the sum of K283,932.35 from the State.

Findings 

At paragraph 11.3, the commission found:

The failure by NPF management to seek payment of management fees, payable on each of the Freeway loan agreements, was a serious failure of duty.

Concluding Comments

The investment in the Poreporena Freeway loans turned out to be one of NPF’s more profitable investments as it returned a comfortable dividend of 14.67 per cent per annum plus management and line fees.

There have, however, been some very worrying features.

Firstly, there was the failure of NPF management and trustees to seek independent expert advice about:

(a) the structure of the loans which resulted in the mismatch between the interest rate and maturing conditions of NPF’s loan facilities with the banks from which it borrowed compared with the interest rate and maturing conditions of the on-lending to Curtain Burns Peak.

The mismatch left NPF in a losing situation during the period when the ILR interest it was paying to the lender bank, exceeded the fixed interest rate it was receiving from the borrower. As the period of the loan to Curtain Burns Peak was a fixed 10-year term. NPF was persuaded to assign the loans to the Bank of Hawaii at a considerable discount in order to extricate itself from this unfavourable situation;

(b) the “off balance sheet” revised funding arrangements whereby Curtain Burns Peak (instead of the State) became the borrower. Before seeking advice on this legally controversial arrangement, NPF had already lent K10 million’

(c) The Bank of Hawaii transaction proposal;

(d) The proposed sale of the Freeway (and other State loans) together with NPF’s BSP shares to Finance Pacific.

Secondly, the conflict of interest situation facing DoF senior officers who had “State” responsibilities to obtain funding for the Freeway Project and who also “put together” the loan arrangements with NPF and applied pressure on NPF to borrow the money to on-lend to the State (directly and through Curtain Burns Peak). The same officers were also involved in making recommendations to the Minister to approve NPF’s loan arrangements.

The conflict was particularly severe for officers like Vele Iamo who was also an NFP trustee with a fiduciary duty to act only in the best interests of the members of the NPF, yet he was also a member of the State committee responsible for keeping up the supply of necessary funds so the State would not be in breach of its project agreement with Curtain Bros.

The failure of these public service representative trustees to declare their conflict of interest and refrain from voting on the Freeway loan resolutions at NPF board meetings was also a breach of fiduciary duty.

Thirdly, management on some occasions failed to consult the board and acted without board authority. This included Mr Wright’s unauthorised activities in August 1997 to redeem deposits and alter security arrangements. Mr Wright also acted improperly by applying incorrect accounting principles to book K18.5 profit in 1997 on the BoH transaction, which resulted in an incorrect bonus being paid to senior management.

Finally, Minister Haiveta who failed on several occasions to seek advice of the DoF before granting approvals under Section 61 of the PF(M) Act, was possibly guilty of improper conduct under the Leadership Code.

Executive Summary Schedule 7c

NCD Water and Sewerage Ltd/Eda Ranu Loan Funding

Forward

This is a summary of the commission’s report Schedule 7C which deals with NPF’s loans to the National Capital District Water & Sewerage Ltd (NCD W&S). Unless otherwise stated, paragraph numbers referred to in this summary are references to paragraphs in Schedule 7C.

Background

Following a Cabinet submission from the then Minister for Finance Chris Haiveta, the NCD W&S Ltd was set up under NEC decision No. 85/96 of May 31, 1996. Its purpose was to take over responsibilities for water supply and sewerage from the National Capital District Commission (NCDC). The trading name of this new organisation is Eda Ranu.

The same NEC decision also directed the Department of Finance (DoF) to review various options for the funding of this newly created entity.

Department Of Finance Submission

The Department of Finance policy submission to the Minister in support of the Minister’s Cabinet paper details the background to the loan as follows:

  • ON September 3, 1996 (SIC) (NPF Board approved K5 million loan to Eda Ranu on August 27, 1996, at meeting No.102) the board and management of NPF agreed to provide a commercial loan of K5 million to NCD Water and Sewerage Pty Ltd under the same terms and condition as the Poreporena Freeway loans.
  • It was advised that the option to convert the loan to equity could be considered at a later date but at that stage the NPF board had no interest in being part owner of the water supply company;
  • IT was said that the terms and conditions were “quite favourable” to Eda Ranu and the State.

The wording of this policy submission brought out clearly the latent conflict of interest facing the DoF and the Minister, as DoF and the Minister also had a duty to take into consideration the interest of NPF. In this case, they did not do that sufficiently.

NPF’s Decision To Lend Funds To NCD Water & Sewerage Ltd

NPF board approved a K5 million loan to Eda Ranu in their meeting held on August 27, 1996. The terms of this loan were similar to the loan NPF had given to the Poreporena Freeway project.

NPF’s Funding Of The K5 Million Loan

NPF’s original intention was to fund this loan through its current loan facility with the ANZ bank.

However, NPF eventually sourced funds to meet this loan commitment of K5 million through its BSP loan facility of K30 million. The K30 million facility is dealt with in Schedule 2C “Borrowings”.

NPF Seeks Legal Advice About Reliance On State Guarantee

The State guarantee for the K5 million loan to Eda Ranu was dated October 31, 1996. NPF sought legal advice from Gadens Lawyers about its reliance solely on the State guarantee, given the State’s current cash restrictions in meeting its ordinary budgetary expenses. The legal advice they received stated that it was dangerous for NPF to rely solely on the State guarantee and NPF was advised to ask Eda Ranu to grant a fixed and floating charge over the borrower’s assets in addition to the State guarantee. Establishment Of A Debt Sinking Fund

In order to address NPF’s concern about the Government guarantee, Eda Ranu was to establish a debt sinking fund by way of a trust account with a commercial bank. NPF was advised of this move in a letter dated October 11, 1996, from Salamo Elema of the DoF. This same letter also advised that the first drawdown was required by November 4 to enable Eda Ranu to meet is payroll commitments.

Findings

(a) The pace at which the preconditions to the initial drawdown were being addressed shows clearly the apparent failure by the Department of Finance to critically analyse this loan funding, due to it’s attitude of serving the State’s interest first, even though they have a responsibility to protect the interest of NPF as well;

(b) The execution of the loan agreement was done without the inclusion by NPF lawyers of provisions for the establishment of a trust account and the Finance Minister’s approval for Eda Ranu to borrow from NPF as a precondition;

(c) The execution of the loan agreement was also done contrary to the PF(M) Act, which covered the NCD Water and Sewerage Pty Ltd and therefore required the prior approval of the Minister for Finance for Eda Ranu to borrow the funds.

Concerns Raised About Proposed Trust Account

Following conversations between NPF and Gadens Lawyers, NPF instructed Gadens on November 8, 1996, to write to Eda Ranu and DoF about its concerns regarding the trust account. Stephen Lewin of Gadens wrote to Young and Williams pointing out NPF’s concerns regarding the Trust Instrument on November 8, 1996.

These concerns include:

(a) Part Ill of the Public Finances (Management) Act 1995 (PF(M) Act) is not intended to be used for trust accounts of the type proposed;

(b) Notice by Minister for Finance arguably purports to amend and/or does not comply with the provisions of Part Ill of the PF(M) Act;

(c) Incorrect reference to section 10 (should be section 15);

(d) Poorly drafted notice;

(e) As lawyers for NPF, Gadens Ridgeway have not sighted any executed documents;

(f) Amend the Governor-General’s approval to specifically refer to section 37 of the PF(M) Act; and

(g) Declaration by existing shareholders of NCD W&S Pty Ltd that they hold shares in trust for the Independent State of Papua New Guinea.

Eda Ranu and DoF addressed the above concerns in a letter to NPF dated November 8, 1996. In this letter, Eda Ranu gave an undertaking that:

“1. IF the trust account established pursuant to a deed of trust executed by the Minister for Finance is declared invalid for any reason or the operation of it causes any difficulties, it will execute a new trust instrument with you in relation to the account upon request;

2. THAT it will use its best endeavours to obtain an amended executed approval from the Governor- General within 30 days after drawdown whereby the GG will approve the purpose of the loan pursuant to section 37 of the Public Finances (Management) Act, the loan being clearly stated to be made to NCD W&S Pty Limited.

3. THAT it will obtain a declaration by the existing shareholders of the company that they hold the shares in NCD W&S Pty Limited in trust for the Independent State of Papua New Guinea and will forward executed copies of those declarations of trust to your lawyers and that it will within 30 days satisfy you that 100 per cent of the issued share capital in the company is held legally and beneficially by the Independent State of Papua New Guinea or officers of the State on behalf of the State”. (Exhibit E74)

Lack Of Due Diligence

Right up until the day before the K3 million was advanced by NPF, there were still serious concerns about the legal validity of NPF lending money to NCD W&S Pty Ltd as a means of avoiding restrictions on direct state borrowing from NPF. Right up until the last day, NPF did not have details of the shareholders in the borrower company and whether they were acting as trustees for the Sate pursuant to valid declarations of Trust.

NPF, however, released K3 million of the K5 million to Eda Ranu without confirming who Eda Ranu shareholders were.

Findings

At paragraph 12.1, the commission has found that:

(a) NPF lent money to Eda Ranu without the benefit of knowing who the directors and/or shareholders of the company were and before legal due diligence had been completed; and

(b) The speed at which this loan was being arranged, under pressure from DoF and Eda Ranu, resulted in NPF entering into commitments prior to completion of basic aspects of due diligence and despite expressed concerns about the legality of the arrangements and the effect of hastily prepared trust arrangements designed to avoid doubts about the State’s power to borrow without an Act of Parliament. Drawdowns

The drawing notice from Eda Ranu to NPF predated the loan agreement and guarantee. It was dated October 22, 1996.

In an attempt to correct the drawing notice, Kenneth Frank wrote to Salamo Elema on December 4, 1996, enclosing a substitute drawing notice signed by Eda Ranu dated November 18, 996 (sic) for Mr Elema’s signature.

This action by Mr Frank was improper and risky as it may have legal implications in the sense that Eda Ranu could choose not to pay the interest and principal because the drawing notice predates the loan agreement.

In a letter dated November 8, 1996 to Chris McKeown of BSP, Mr Wright of NPF requested a draw down of K3 million. BSP released K3 million the same day to Eda Ranu.

The second K2 million was presented to Eda Ranu on November 20, 1996. This was sourced from a maturing IBD although Mr Wright made out that it was sourced from the BSP K30 million facility.

Findings

At paragraph 14.1, the commission has found that:

(a) The drawing notice predated the loan agreement and guarantee. While this matter was corrected by Mr Frank in his letter to Mr Elema on December 4, 1996, such action was not proper and it may have legal repercussions in the sense that Eda Ranu could choose not to pay the interest and principal because the initial drawing notice predated the loan agreement.

TO BE CONTINUED

* PART 71 is missing and has not been published in this series

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 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 50]

October 14, 2015 1 comment

Below is the fiftieth 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 50th 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 4N Continued 

Preparation Of ACOM contract Involves Protracted Negotiations 

In his capacity as executive director of ACOM, Haro Mekere was in regular contact with Odata, which was calling for the release of “mobilisation costs” from ACOM even before there was a signed contract between ACOM and Odata.

Mr Mekere had been promised a trip to India paid by Odata to visit the company that would manufacture the mill. Mr Mekere put pressure on Herman Leahy, the NPF legal counsel, to draw up a simple turn key contract between ACOM and Odata but Mr Leahy insisted on briefing this out to Carter Newell lawyers to draw up a far more sophisticated and all encompassing document.

Mr Mekere then put forward a draft contract, which had been prepared by Odata for consideration. At Mr Copland’s insistence, Mr Mekere obtained a breakdown of Odata’s mobilisation costs in the form of an invoice.

Payments To Odata Through NPF’s Off-shore Account With WILSONS HTM In Breach Of Foreign Exchange Regulations 

The first payment of $A40,282.65 was paid on June 1, 1998 by using NPF’s account with its share brokers Wilson HTM to avoid the requirement for foreign exchange approval by BPNG. Mr Copland apparently authorised the payment, which was beyond his authority and Mr Wright gave instructions to Wilson HTM for payment from that account. Mr Wright and Mr Copland and also Wilson HTM should be referred to the Controller of Foreign Exchange to consider action against them for breach of BPNG foreign exchange regulations.

Mr Leahy refused to be rushed into the preparation of the contract and insisted that NPF’s initial equity contribution should be made subject to approval by the Minister for Finance, as it was now in excess of K500,000.

The commission finds that failure to seek and obtain Ministerial approval for the initial equity contributions was a breach by the board of trustees of section 61(2) of the PF(M) Act.

Misrepresenation To NPF Board Lead To Signing Of Contract Between ACOM And Odata Committing ACOM To Pay K1,500,000 To Odata 

Mr Wright also misled the board in November 1998, by setting a target date of early 1999 for pouring the first copra oil. At that time, there was no contract with Odata, no sub-contract for manufacturing the mill and no agreed funding in place.

By the beginning of November 1998, the contract was still not finalised (and negotiations were still continuing) and ACOM had not yet succeeded in obtaining a license from the CMB to export copra oil. On November 12, 1998, Mr Mekere advised the ACOM board that he held a completed contract document executed by Odata and sought approval for the chairman or a delegate to sign on behalf of ACOM.

Mr Mekere pointed out that the export licence had still not been obtained and that the contract should be made conditional upon the grant of that licence.

He also pointed out that ACOM had not yet obtained a bank loan to enable it to fund the project and meet the proposed commitments to Odata. He failed to recommend that the contract also be made subject to ACOM obtaining finance.

When the contract was signed by Mr Fabila on behalf of ACOM on about November 23, 1998, ACOM thereby became liable to pay Odata $US25,000 immediately and to find $US1,525,000 in the longer term. NPF met the first payment by cheque for K48,623.02 payable to Odata on November 25, 1998.

Breach Of Fiduciary Duty By Trustees And Mr Fabila and Mr Mekere 

It is likely that Mr Fabila and Mr Mekere, who witnessed the contract, are personally liable for losses suffered by NPF under this contract as it is doubtful they could claim “good faith” as they were clearly aware of the financial obligations being undertaken and of the lack of funds to meet it.

Likewise, all trustees in office at the time were in breach of their fiduciary duty by authorising management to execute this contract.

The trustees also face personal liability for all losses incurred by NPF as a direct result of entering into this contract.

Further Payments By NPF On Behalf Of ACOM To Odata Without NPF Board Approval 

On December 10, 1998, Mr Wright authorised the payment of a further K302,393 to Odata with no NPF board approval and well in excess of his financial delegation.

Mr Wright was in breach of his duty to the NPF board and could be personally liable for this amount. It brought NPF’s payments to Odata to K417,500 at that time. The NPF trustees may also be personally liable for not having controlled this unauthorised expenditure by Mr Wright.

On January 18, 1999, Odata claimed a further $US290,000, saying “we have already started implementing the project ahead of schedule”.

This amount was paid without question and with no project engineer in place to verify the work done.

There was no authority from the NPF board to advance this sum as “bridging finance” pending ACOM obtaining bank financing. NPF management and Mr Fabila and Mr Mekere were in breach of their duty and may be personally liable.

They must have known that the requisite NPF approval had not been given and they would not succeed in a “good faith” defence.

Similarly, the trustees failed in their fiduciary duty to the members of the fund to exercise control over management and this may expose each trustee to personal liability for this loss.

It is important to note that in January 1999, Mr Wright was forced to resign from the NPF and ACOM, amidst mounting criticism of his conduct as finance and investment manager for NPF. His position was filled temporarily by the unqualified and inexperienced Haro Mekere.

In his report to the ACOM board dated January 18, 1999, Mr Mekere understated the amount which had been paid to Odata (K417,000) by claiming only K380,000 had been paid.

On January 29, 1999, there was a further request from Odata, this time for K60,000 to be paid into the personal account of Odata director, Krishna Prasaad.

The amount was paid, without question, into Mr Prasaad’s personal account.

External funding: Bank Loan 

From February 1999, Mr Mekere sought the assistance of Deloittes to obtain a loan facility for ACOM, preferably from the Bank South Pacific (BSP).

Without any authority from the NPF board, he discussed a guarantee and the possibility of NPF providing security for the proposed facility.

Bridging Finance From NPF 

In April 1999, Odata demanded a further drawdown and threatened legal action.

In his April report to the NPF board, Mr Mekere sought board approval to advance between $US50,000 to $US100,000 by way of bridging finance for Odata to proceed with site preparation.

Request To PNGBC 

On April 15, Mr Fabila sought approval from PNGBC to advance K2.750 million to ACOM at ILR +2 per cent.

This was a time of extreme financial crisis for NPF itself, which was unable to meet its own massive borrower’s commitments to ANZ and PNGBC.

Mr Fabila’s uncritical support for this proposal was a gross breach of his fiduciary duties to the members of the fund.

Suspicions About Mr Mekere’s Motives In Supporting Odata

Mr Mekere’s continued active involvement to obtain funding for Odata is also highly questionable. At this time, it was not known that his own wife had been appointed to the board of the recently incorporated Odata (PNG) Ltd. The explanations given for this appointment are most unsatisfactory and Mr Mekere’s failure to disclose her appointment to either ACOM or NPF was improper conduct.

At this stage, Mr Mekere had become aware that Deloittes had revised cash flow projections for ACOM, which showed a clear cash deficit in the first two years and an overall cash deficit after six years. Mr Mekere’s failure to advise the NPF board of these unfavourable projections was another gross failure of his duty to give professional objective advice to the board. It again raises serious questions about Mr Mekere’s motivation.

NPF Board Guarantees BSP Loan Facility Of K3,150,000 T0 ACOM

On April 30, 1999, at a special meeting, the NPF board, without the benefit of any independent expert advice or professional analysis of the viability of ACOM and the copra oil process, resolved to guarantee a loan facility of K3,150,000 to be provided by BSP.

By passing this resolution at a time when NPF was in financial crisis, the board of trustees were in serious breach of their fiduciary duty to the members of the NPF.

At this time, the trustees had been well briefed about NPF’s acute cash flow problem and financial crisis.

The trustees were aware of the endeavours being made to sell off NPF’s investments to enable the repayment of the ANZ debt and of the attempts to reduce the burden of its crippling PNGBC loan facility.

The trustees must be severely criticised for following with such docility, the unsupported and fiscally irresponsible recommendation from Mr Fabila and Mr Mekere, to guarantee this BSP facility to ACOM, without seeking any independent investment advice.

The NPF sought Ministerial approval for this guarantee but it was “put on hold” by Secretary Tarata of the Department of Treasury.

Meanwhile, NPF paid an additional K157,977 to Odata on June 14, 1999, on the authority of Mr Fabila, without any board approval. Again, Mr Fabila faces personal liability for this breach of his fiduciary duty to safeguard the member’s funds. This brought the amount paid by NPF to Odata to K647,000.

Continuing Negotiations For BSP Loan Facility Without NPF Board Authority 

Throughout June and July 1999, Mr Mekere was involved in negotiations with BSP regarding the security that NPF would provide for the ACOM loan facility.

These discussions had no board authority whatsoever and were at odds with the endeavours of Rod Mitchell and PwC to stabilise NPF’s haemorrhaging debt problems.

The conditions imposed by the NPF board, as a prerequisite for providing bridging finance to ACOM pending finalisation of its proposed BSP loan facility, had not been met but Odata was continuing to ask for on-going funding.

Further Payments By NPF To Odata To Fund Construction Of The Mill 

At the NPF board meeting of July 29, 1999, the board approved payment of $US78,000 for Odata and the K31,500 loan processing fee for BSP. These amounts totalling K214,303, were paid by cheque to Odata on August 3, 1999.

ACOM Binds Itself In A Management Contract With Odata 

While the scramble to fund construction continued, with no project engineer to give independent verification of the funds being claimed by Odata, ACOM proceeded to bind itself into contractual arrangements with Odata for management of the project and marketing of the product.

At a special NPF board meeting on August 15, 1999, the ACOM management was authorised to “negotiate and finalise the contracts” for circulation to the board before signing.

This resolution was passed despite discussion among the trustees, which recognised the lack of expertise in either NPF or ACOM, to ensure the best price would be obtained.

This was another serious failure of the NPF trustee’s fiduciary duty to members of the fund and indicates their lack of awareness about the fiduciary duties they owed to the members.

By August 10, 1999, Mr Mitchell was expressing concerns about the project and successfully arranged for BSP to apply a strict deadline of August 31, 1999, for ACOM to satisfy the required conditions for granting the facility. The deadline was not met, although Mr Mekere attempted to obtain the loan facility, offering further securities to be provided by NPF, without board authorisation.

The documents in evidence indicate an increasing sense of urgency amounting almost to desperation, characterising Mr Mekere’s conduct.

BSP Loan Facility Negotiations Discontinued 

On October 28, 1999 Mr Mekere gave in, and on instructions, notified BSP that ACOM was not able to proceed with the loan facility.

NPF Withdraws Construction And Odata Sues ACOM 

On November 3, 1999, Mr Mekere formally advised the directors of ACOM that the NPF board “withdrew its commitment to construct the proposed 30 tonne per day copra processing facility . . .”. The letter also alleged that Odata was in breach of its contractual obligations to ACOM and that if this was redressed “NPF may revisit this investment in six months time”.

Odata subsequently claimed $US612,000 from ACOM for costs incurred under the contract. This was not paid and court proceedings have been instituted.

Findings In Accordance With Terms Of Reference 

The commissions findings are set out in the text of the report on Ambusa and at Paragraph 11 of that report. In summary:

(a) Mr Wright, Mr Mekere and Mr Fabila were in breach of their duty to the NPF board by putting forward a recommendation for the board to invest as a joint venture partner with Ambusa Pty Ltd, without carrying out any due diligence on Ambusa or Odata or the personalities involved and without instigating an independent expert analysis of the business proposal put forward by Ambusa, Odata and Mr Valu, Mr Ryan and Mr Gavuli;
(b) The NPF trustees failed their fiduciary duty by approving this investment in principle in December 1997 and then approving its implementation and investment of K400,000 in February 1998; and
(c) Both the management and the trustees continued to breach their duty to the NPF members throughout 1998 and 1999 by continuing to meet progress claims by Odata prior to finalising the turnkey construction contract and without appointing a project engineer to verify the claim for payment.

On several occasions, management authorised these payment to Odata without NPF board approval, knowledge or authority.

The NPF board of trustees accepted management’s recommendation that ACOM should execute the contract with Odata knowing that it would obligate ACOM to pay $US25,000 immediately and to provide long term funding of more than K3 million, with no protective “subject to finance” clause in the contract.

As a result of this foolish and poorly managed investment, NPF suffered actual loss in terms of payments to Odata, board fees and expenses and legal fees of more than K1.1 million.

NPF also faces potential liability to Odata in the outstanding court proceedings.

The trustees in office during this period were Brown Bai, Henry Fabila, Michael Gwaibo, John Paska, Abel Koivi, Vele Iamo and Tau Nana, all of whom were in breach of their fiduciary duty to the members of the fund.

All face potential personal liability for the losses incurred by NPF because of their serious failure to seek even basic expert advice and their failure to reprimand or control management for making repeated unauthorised payments.

The officers involved were Mr Fabila, who, as managing director, had both a common law duty to the board and a fiduciary duty to the members.

The other officers involved were Mr Wright and Mr Mekere.

These officers face personal liability for losses suffered by NPF generally by entering into the investment on the basis of their woefully inadequate investment advice and for the various payments made to Odata on their unauthorised direction. It is unlikely they would succeed in a defence of “acting in good faith”.

Executive Summary Schedule 4O Plantations and Agriculture Investments 

Introduction 

This introduction covers NPF’s investments in New Guinea Plantation Holdings Limited (NGPHL), New Guinea Plantations Limited (NGPL) Walmetke Ltd (Walmetke) and New Guinea Islands Produce Ltd (NGIPL).

These investments were made well before the period covered by this commission of inquiry. Very few records are easily available about the initial investments, which is outside the time frame of the commission’s terms of references.

The early history of this investment has been put together on the basis of available documents and from evidence given by Mr Robert Bolling (Transcript pp.5763-8) who was previously the finance manager of the company Kina Gilbanks.

TO BE CONTINUED

National Provident Fund Final Report [Part 34]

September 22, 2015 1 comment

Below is the thirty-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 34th 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 4B Continued 

In October 1997, Mr Wright wrote in his investment report: “The board needs to give some consideration to how much we want to spend to push the price up at the end of the year”.

The commission recommends that this matter be reported to the Australian Stock Exchange for consideration as possible illegal share ramping (paragraph 6.9).

During October 1997, NPF management again purchased shares for $A2,959,967 also without board authority:

npf 34 a

During this period, Mr Copland and Mr Kaul purchased HPL shares without disclosing this to the NPF board. As they continued to participate in NPF discussion and decision-making on the HPL investment, they were both in a conflict of interest situation and of improper conduct.

Findings

(a) Mr Copland failed to disclose to the NPF Board of Trustees, that he owned 273,000 shares and 125,000 options in HPL. This was improper conduct;
(b) The proposal by Mr Wright for the board to buy shares at year end 1997 and the subsequent purchases of seven parcels of shares in October totalling 3,718,361 shares for $A2,959,967, a strategy designed expressly to increase end of year profits, constituted improper conduct and may amount to illegal share ramping;
(c) When Mr Copland and Mr Kaul participated in the decision to “buy into” HPL shares for that purpose on the October 28, 1997, that decision would also increase the value of their shareholding in HPL. Their failure to disclose to the NPF board their own shareholdings and options in HPL and their participation in the vote, was improper and a breach of their fiduciary duty to members.

On December 11, 1997, the NPF almost formalised the incipient take-over of board functions by management when it resolved: “To approve management’s discretionary buying of shares in HPL between December 11, 1997 and December 31, 1997”. (Exhibit H60)

The resolution did not impose any limit as to quantity or price and really amounted to a licence to buy until the end of the year.

Management took full advantage of this virtually unfettered discretion, to buy up HPL shares by purchasing 4,330,635 HPL shares over 15 days to December 31, 1997, at a cost of $A3,540,036. By increasing NPF’s end of year profits in this way, management increased the size of the senior management onus under the staff bonus scheme.

Investment in HPL – 1998 

Between February and June 1998, NPF management continued to purchase HPL shares without board authority, long after the end of year licensed buying spree had ended.

By this stage, NPF held approximately 70 million HPL shares representing an investment of approximately $A60 million.

npf 34 b

The price had dropped from $A1 in June 1997 to 61 cents in June 1998, yet Mr Wright was still presenting a rosy future to the trustees. Because of the huge size of the HPL investment, the fall in share value represented an unrealised loss of over $A20 million on the HPL investment. This loss was compounded by the facts that the investment had been purchased largely with borrowed funds and that interest rates on the loan were steadily rising.

Both management and the trustees were seriously failing in their duty and fiduciary duties by not calling for any independent expert opinion on how to handle this situation.

Findings 

(a) Mr Wright continued to give one- sided overly optimistic reports to the NPF board about HPL’s immediate and mid-term prospects and failed to initiate a revaluation of the huge investment in light of falling share prices.
(b) Mr Wright and NPF management repeatedly acquired shares for NPF with no reference to or approval of the Board of Trustees. This constituted breaches of duty by management as well as a failure by the trustees to supervise and control management;
(c) NPF trustees failed in their fiduciary duty to contributors by not directing management to report on the changing values of NPF’s major investments or seeking independent advice; and
(d) Both Mr Wright and the then trustees may be personally liable for losses incurred by NPF because of these breaches of duty. It is unlikely that a defence of “acting in good faith” would succeed.

Appointment of Mr Fabila – May 5, 1998 

Mr Fabila replaced Mr Kaul as managing director on May 5, 1998. He obtained a report on NPF’s investment portfolio from Deutsche Securities, which pointed out the extreme bias towards PNG resource stock and PNG businesses. Mr Fabila chose to ignore this report and not disclose it to the NPF board.

This was a serious failure of Mr Fabila’s fiduciary duty to the members of the fund as it deprived the board of its last chance to minimise the losses, which were soon to become realised.

Termination of Appointment of Mr Copland and Mr Aopi 

On August 1, 1998, Mr Copland’s appointment as a trustee was terminated and shortly afterwards Mr Aopi resigned from the NPF board.

Both continued, however, as “independent” directors of HPL and a struggle to have them replaced by NPF representatives, ensued. Both had been receiving K50,000 per annum in directors fees which were payable to NPF if they represented NPF on the HPL board. Legal proceedings are occurring regarding this aspect.

In October 1998, Herman Leahy finally spoke out, critically examining the value of this loss-making, non-dividend producing investment to NPF.

Both Mr Copland and Mr Aopi had also been allocated options by HPL. The directors fees and options issued to them were as follows:

Directors Fees  Findings

With regard to the benefits received by Mr Copland and Mr Aopi, the commission has found at paragraph 7.9:

npf 34 c

The commission finds that the names of Mr Aopi and Mr Copland were submitted by NPF to HPL for appointment on the HPL board of directors. The understating between NPF and Mr Aopi and Mr Copland was that they would act as NPF’s representatives on the board. As such, they were obliged to pay any remuneration or benefits received to the account of NPF. Their failure to account to NPF for benefits received as directors of HPL, was illegal and improper.

Appointment Of Mr Fabila And Mr Maladina to HPL Board 

After Mr Maladina was appointed as chairman of the NPF board on January 27, 1999, he and Mr Fabila were appointed as NPF’s representative directors to the board of HPL in May 1999.

Wilson HTM Assessment Of NPF Portfolios

In February 1999, Ben Semos of Wilson HTM, at the request of Mr Fabila, reported on NPF’s portfolio. With regard to HPL, he noted:

Holding: 72,877,733
$A Average Net Entry Price: 0.9393
$A Current Price: 0.22 – 0.23 $A
Total cost: 69,402,748
$A Market Value: 16,033,101
$A Net Loss: 53,369,647

It showed an unrealised loss on HPL of $A53.3 million.

Mr Semos recommended against selling because of the size of the loss which would be realised and in the hope that Ramu and Frieda River would produce results, saying that they: “Present incredible long term upside and phenomenal benefits to PNG’s future growth.” (Exhibit 96)

He also said that a sell-off would provoke a corporate takeover, which “would not be in the interest of PNG”.

Findings

Wilson HTM and Mr Semos in particular, failed in its duty to “know its customer” and carry out a reasonable investigation upon which to base its recommendations regarding NPF’s massive investments in HPL. It should have advised that the investment strategy regarding HPL was completely inappropriate for NPF.

On the advice of PwC, NPF then sold off its entire holding of HPL shares. As at December 31, 1999, with the sell-down still proceeding, NPF had realised a loss of $A27,332,554 on sale and an as yet unrealised loss of $A1,8974,100 for a total loss of $A46,296,654 million on its HPL investment.

npf 34 d

Conclusions

The evidence shows that NPF’s nationalistic, so called “gutsy” play to lead the other PNG institutions to block Placer Dome’s take-over bid for HGL and turn it to the advantage of NPF and the other PNG institutions, was master minded and controlled by Mr Copland and Mr Wright, with the support of Mr Aopi and Mr Kaul and the enthusiastic support of Minister Haiveta.

The NPF trustees allowed NPF to be led into this huge, high-risk and speculative investment, without question or protest. With the exception of Mr Taureka, when provided with a circular resolution committing NPF to a $A50 million investment, they simply signed on without seeking expert advice, relying on their faith in Mr Copland and Mr Wright.

Thereafter, the trustees stood by silently while NPF management acquired more and more HPL share to peak at 72.9 million shares at a cost of $A69,402,748. These acquisitions were usually in parcels worth less than K1 million to avoid the need for Ministerial approval (and DoF scrutiny).

As these unauthorised acquisitions became known, the trustees, including the DoF representative public service trustees, failed to question or criticise management for acting in excess of their authority.

As the HPL share price continued to fall from $A1 to 30 cents a share and below, both management and trustees seemed paralysed, doing absolutely nothing to try and save the members of the fund from the financial catastrophe, which was clearly approaching.

During this period, NPF suffered from a lack of responsible leadership.

Until August 1998, its chairman was Mr Copland who masterminded and continued to support the investment until the termination of his appointment in August 1998.

He was followed by the well qualified and efficient Brown Bai whose honest attempts to restructure NPF’s investments stopped after a few months when he stood down at then Prime Minister Skate’s direction.

His successor Jimmy Maladina has been found by the commission to have been dishonest, fraudulent and not acting in the interests of the members of the fund.

When Mr Bai stood aside as chairman and acting on the direction of the Prime Minister nominated Mr Maladina as his successor, Mr Bai remained as a trustee. However, in dereliction of his fiduciary duty to the members, he simply absented himself from attending meetings while the fortunes of NPF plummeted.

The board’s other DoF trustee, Vele Iamo, also continued his long-standing practice of not usually attending NPF board meetings. This was a serious failure of Mr Iamo’s fiduciary duty to the members.

On the management side, for most of this period the manager was Mr Kaul who gave evidence that he was unable to control Mr Wright and had difficulty communicating with Mr Copland.

In full knowledge of what was happening with this and other investments, Mr Kaul went along with the initiatives of Mr Copland and Mr Wright. He was party to and supported Mr Wright’s repeated purchases of HPL shares without board approval.

This was a breach of fiduciary duty by Mr Kaul.

TO BE CONTINUED

National Provident Fund Final Report [Part 27]

September 10, 2015 1 comment

Below is the twenty-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 27th 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 2F continued 

Henry Fabila And Herman Leahy Oppose Noel Wright And David Copland Over Bonds

As NPF’s Financial Position Worsens ANZ Nominees agreed to hold the securities in a custodian capacity for a single client, which was significantly different from the security trustee, which had been recommended by Clifford Chance.

By April-May 1998, NPF’s financial situation was deteriorating rapidly and Mr Wright was staving off action by NPF’s bankers by promising the imminent signing of the bond agreement, which would provide immediate cash, which could be deposited with the banks to rectify breaches in the loan covenants. NPF and Warrington signed an agreement but as Warrington failed to affix its seal, the first payments were delayed.

In June 1998, ANZ Nominees became alarmed at Warrington’s notification that it was assigning the bond securities, which NPF had lodged with ANZ, to the RH Foundation of Anacirema. ANZ felt this would endanger NPF’s securities and it withdrew from further involvement.

Mr Leahy and Mr Fabila attempted to persuade the board to terminate the Warrington agreement but Mr Copland and Mr Wright successfully opposed this move. Mr Leahy made belated attempts to check out the financial bona fides of Warrington and wrote a strong memorandum recommending immediate termination of the agreement with Warrington.

Findings 

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

The commission finds that Mr Leahy’s assessment of NPF’s perilous predicament at this advanced stage of negotiations was well grounded.

NPF Board Approves Appointments of Wilson HTM As Security Trustee – Mr Wright Transfers Shares Without NPF Authority 

At this stage in 1998, Wilson HTM agreed to be the security trustee. Desperate to finalise the agreement, Mr Wright (and Haro Mekere) signed an assignment of share scrip from ANZ Nominees to Wilson HTM.

This was done without the approval of the NPF board. At the 113th NPF board meeting, despite open conflict between Mr Leahy and Mr Wright, the board approved the appointment of Wilson HTM as security trustee and resolved that the sale of the bond to Warrington should continue.

Findings 

(a) Mr Wright and Mr Mekere authorised transfers of shares from ANZ Nominees to Wilson HTM without NPF board authority. This was a breach of their common law duty to the NPF Board of Trustees.
(b) The decision by the board to continue with the bond purchase and sale agreement, in full knowledge of these circumstances, was reckless and a breach of the trustees’ fiduciary duty to the member’s of the fund.

Gadens Lawyers Advises That NPF Has No Power To Borrow – Mr Leahy and Mr Wright Negligently withholds the Advice 

PNGBC was requested to seek an alternative buyer in Australia. As part of normal due diligence, potential buyers sought assurance that the NPF had the power to borrow money and issue bonds. Geoffrey Applegate of Gadens Lawyers advised, correctly, that NPF had no power to borrow. Mr Wright was advised of this oral opinion, as was Mr Leahy, but they ignored the advice which would have virtually demolished NPF’s entire loan financed investment strategy.

Findings

(a) It is absolutely clear from the documentary evidence that Mr Wright was aware of Mr Applegate’s advice that NPF lacked power to borrow. PNGBC noted that Mr Wright had referred the issue for advice but the commission finds no direct evidence of this.
(b) In failing to seek independent legal advice and failing to notify the board on this issue, Mr Wright was guilty of gross dereliction of duty. NPF’s power to borrow not only was material to this failed attempt to issue a bond, but it struck at the very heart of many of NPF’s investments and of its whole investment strategy which by then was based on borrowed funds. If Mr Leahy and/or Mr Kaul had notice of Mr Applegate’s advice and just ignored it, they bear the same responsibility.
(c) As evidenced in transcript page 1688, Ms Israel ceased her employment with PNGBC towards the end of 1998, leaving the file with a Mr Hersey.

Mr Cop;and Persuades BPNG Governor to Require Mr Popoitai to Grant Further Extensions 

Meanwhile, Mr Popoitai made another attempt to stall the execution of the bond by refusing to extend foreign exchange approval beyond the July expiry date. On July 17, 1998, after intervention by the new Governor of the BPNG Mr Vulupindi, Mr Popoitai granted a series of further extensions until October 31, 1998. Mr Vulupindi’s intervention followed upon further pressure being exerted by Mr Copland.

Findings

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

Desperate Mr Wright Makes False Statements And Acts Without Board Authority In Attempts To Save Bond Deal

Without seeking NPF board approval, Mr Wright purported to grant power of attorney to Allen Allen and Helmsly to appoint Commonwealth Custodian Services Ltd (CCSL) as security trustee. CCSL created a problem by seeking an assurance form NPF that all securities it would be holding would be unencumbered.

Such an assurance could not honestly be given because Mr Wright had been secretly pledging STC shares (which were intended as bond security) to ANZ Nominees to remedy breaches in NPF’s loan covenant to maintain a 150 per cent ratio between securities and borrowings. The assurances, which Mr Wright, nevertheless gave, was therefore untrue.

In September 1998, there was desperation in Mr Wright’s last efforts to finalise the agreement with Warrington. The hold up remained the appointment of a satisfactory security trustee. On September 1, 1998, without board authority to do so, Mr Wright transferred 6.4 million STC shares from Rubicon Nominees (a Wilson HTM company) to ANZ Nominees for transfer to CCSL. When this arrangement fell through there were last minute attempts to involve ANZ, Midland Bank and HKBA Nominees. Mr Wright repeatedly made false statements that the shares provided as security were unencumbered.

Findings 

(a) Mr Wright transferred 6.4 million STC shares on September 1 without the approval of either the NPF board or the Minister. This was a breach of his duty to the board as well as a breach of Section 61 of the PF(M) Act;
(b) Mr Wright misrepresented to HKBA (and probably also to Warrington) that shares in CXL, Orogen and STC were unencumbered;
(c) Again, Mr Wright failed to advise Mr Cooper, the NPF board or his own legal advisers that the STC shares were already transferred to ANZ nominees, as previously mentioned (Transcript p.1327).

Last Minute Proposal To Appoint Union Bank of California as Security Trustee But Brown Bai Leads NPF Board To Reject Bond Deal 

When all attempts to find a legitimate security trustee to hold unencumbered securities had failed, Jai
led, Jai Ryan proposed the unknown Union Bank of California (UBC) as security trustee. Documents were produced which Allens pointed out were dangerously flawed and would put NPF seriously at risk.

While Allens proceeded to deliver 30 crucial questions to Warrington on unanswered matters, Mr Wright was pressing to have the agreement executed before the expiry of the latest BPNG deadline of August 31, 1998. He failed to advise Mr Cooper, the NPF board or NPF’s lawyers that the STC shares nominated as securities had already been transferred to ANZ Nominees as security for NPF’s loan facilities.

The final showdown occurred at the 115th NPF board meeting on November 6, 1998, just as all arrangements were ready for an agreement to be signed in Australia. Under the firm chairmanship of Brown Bai, the board resolved to terminate the agreement with Warrington. This almost certainly saved NPF from a multi-million dollar disaster as the suspicions about Warrington’s bona fides were subsequently confirmed.

Financial Costs 

The financial cost to NPF of the attempt to issue the bond was K244,762 in addition to a vast amount of management time and energy.

Concluding Comments 

This attempted bond issue has been detailed at length. This is because, even though it finally came to nothing, it illustrates how the board chairman Mr Copland and Mr Wright, supported initially by former managing director Mr Kaul and corporate secretary Mr Leahy, took the NPF perilously close to a $A54 million commitment with Warrington to be serviced at 14.67 per cent interest over nine years. Neither Warrington nor Mr Cooper had an established reputation or reputable referee and were shrouded in suspicion (Exhibits AB634-635).

Mr Wright repeatedly exceeded his authority and kept the NPF board ignorant while he transferred and pledged NPF assets. He was also guilty of serious misrepresentation on several occasions. When Mr Leahy finally realised the dangers and turned against the project, Mr Wright and Mr Copland ignored his sound advice.

Similar advice and warnings from other experts in the DoF and BPNG and the NPF’s own consultants were also ignored by management and kept from the board. NPF management lacked expertise in these matters and dealt with investors, financiers and international bankers without adequate due diligence or references, putting NPF’s assets at risk.

Throughout this entire affair, the NPF Board of Trustees demonstrated an amazing lack of care and lack of inquiry, as they blindly and compliantly voted in favour of unsubstantiated motions and resolutions, taking NPF to the very edge of a financial precipice.

It is not even that there was a well-conceived plan for using the bond monies sought. Four possible projects were belatedly mentioned to justify the efforts, pledges and misrepresentations that were occurring and to complete the bond issue:

  • Government infrastructural programs;
  • Ramu Nickel project development;
  • construction of supermarkets for STC; and
  • other opportunities arising all the time (Exhibit AB129)

None of these projects were firm “in place” commitments and none were likely to bring in the income required to offset NPF’s interest commitment and make the bond issue profitable. In the later stages, there were plans to use the bond money to bail out NPF’s disastrous investment in Crocodile Catering and then merely to invest a substantial portion in ANZ deposits to secure NPF’s existing debts.

Information received from ICC – Commercial Crime Bureau (obtained by Benny Popoitai) indicated that the suspicions about Warrington and Mr Cooper were well founded.

Also, the so-called (and misspelt) “Banque de Fonds Prives E. Fiduciare de S.A.” in Antigua, which had acted as referee for Warrington, shared the same registered address as Warrington. It is not listed in the Bankers Almanac and is not an entity licensed and authorised by the Bank of England to conduct banking business or to even be a depository institution in the United Kingdom.

Allocation of responsibility

The commission has commented on the degree of responsibility of the main participants in this fiasco: Mr Wright, Mr Copland, Mr Leahy, Mr Kaul, Mr Iamo and all the trustees then in office must share the blame. The DoF also failed its duty by forwarding a bland, positive recommendation for Ministerial approval of the bond, despite excellent research by its technical officers who recommended strongly against recommending Ministerial approval. Similarly, the BPNG is criticised for giving and then extending foreign exchange approval for the issue of the bond despite the proper advice of its Foreign Exchange Controller and technical officers that issuing the bond would probably damage PNG and the NPF.

Executive Summary Schedule 3B 

Donations 

Introduction 

By the same process of reasoning and analysis, which led to the conclusion that NPF had no legal power to borrow funds, similarly, NPF had no power to make donations. There is no power under the NPF Act to give donations to charitable, sporting or religious organisations and to other individuals.

During Mr Kaul’s period as managing director of NPF, there was awareness that NPF had no specific power to make donations. This was Mr Kaul’s evidence, and it is supported by documentary evidence. However, during Mr Fabila’s period as managing director of NPF, there was a substantial increase in the use of members’ funds for donations.

Findings

NPF had no legal power to pledge or make donations.

Yearly record of donations – 1995 to 1999

The commission has examined the detailed income and expenditure statement as at December 31 of each year and the following is noted

1995 

NPF’s records examined by this commission showed that there were no donations made.

1996 

NPF’s records examined by this commission showed that NPF made no donation during this year. However, as is reported in Schedule 9 (Tenders, Procedures and Nepotism report), Minister Haiveta requested and NPF donated K1600 towards remuneration for sing-sing groups who performed during a scheduled NEC meeting at Vanimo.

Findings 

(a) Minister Haiveta’s request for K1600 to pay the sing-sing groups amounted to improper conduct and he should be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(b) Mr Kaul acted in excess of his authority in granting the request and in breach of his fiduciary duty to the members as he knew it was wrong. He would not be able to claim he was “acting in good faith” so he would be personally liable to repay this money. He should also be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(c) The payment of K1600 was beyond the powers of NPF;
(d) If Mr Copland advised Mr Kaul to pay the donation towards sing-sing groups in Vanimo, his advice was improper and also a breach of his fiduciary duty for which he may be personally liable.

1997 

NPF’s records examined by this commission showed that there were no donations made during this year.

1998 

The income and expenditure statement under “general expenses”, shows that NPF gave a total of K104,182 in donations during 1998. The major portions of the total donation were made to the Bougainville Children’s Fund and the Aitape Tsunami Disaster Fund.

The vouchers extracted from this and other sources totalled K113,500 and there could possibly be others the commission did not locate (Exhibit B814).

1. June 23, 1998: Bougainville Children’s Fund – K1500;
2. July 13, 1998: Bougainville Children’s Fund – K5000;
3. July 23, 1998: Aitape Disaster Relief – K100,000;
4. August 19, 1998: PNG Sports Federation- K2000;
5. October 9, 1998: Bougainville Children’s Fund – K5000

These donations were made towards worthwhile causes. However, what this commission is concerned with is that no-one at NPF checked to make certain that NPF had the legal power to make donations out of members’ funds, as this money donated was in a direct sense coming out of member’s pockets.

Request by Dr Fabian Pok – Aitape Disaster Relief 

Dr Fabian Pok called a meeting at the Telikom Rumana office where he sought financial assistance from statutory bodies. Mr Fabila approved a donation of K100,000 after this meeting.

TO BE CONTINUED

National Provident Fund Final Report [Part 26]

September 9, 2015 1 comment

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

NPF Final Report

This is the 26th 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 2E Continued 

11. The trustee’s breached their fiduciary duties by failing to:

  • inquire from management the status of the ANZ facilities;
  • properly understand the risks inherent in NPF’s investment, as it was funded by debt;
  • consider whether NPF management was appropriately qualified and competent in the field of investment and provident fund management;
  • react appropriately to the clear warning signals in late 1997 and early 1998 when interest rates, exchange rates and share market prices all adversely impacted on the fund.

The roles of NPF management, the trustees, the Minister for Finance and of the ANZ managers have been examined in detail in this report because the approval of the ANZ facility and the way it was used to fund NPF’s disastrous investment strategies were very significant factors in the financial downfall of the NPF.

Executive Summary Schedule 2F Attempts to issue $A Bond 

Introduction: 

The possibility that the National Provident Fund (NPF) might issue an Australian dollar bond ($A bond) was first discussed in April-May 1994 when NPF’s finance and investment manager Noel Wright raised the matter with Dr Jacob Weiss, a World Bank advisor to the PNG Government.

At that stage Mr Wright floated the idea of offering the opportunity for NPF’s employer companies to buy transferable NPF bonds, earning tax-exempt interest. He felt this may be a cheaper way for NPF to raise funds to finance investment opportunities which may be attractive to NPF’s employer companies.

It was an ill-considered concept, which Dr Weiss did not encourage.

The concept surfaced again in 1997 with the apparent support of trustees Mr Copland and Mr Aopi. Mr Wright placed the matter before the NPF board on October 28, 1997. The proposal was to issue a $A54 million bond with a 14.67 per cent coupon rate (interest) maturing in 9 years. It was linked to a proposal to make a loan of K54 million to the State at 14.67 per cent interest for constructing the Poreporena Freeway.

The management paper which recommended that such a bond issue would be profitable for NPF was simplistically argued and was prepared without expert advice. It ignored some significant risk factors, particularly the risk that profitability could be eroded by unfavourable movements in the kina/$A exchange rate.

Without insisting on obtaining expert advice, the Board resolved to approve the issue of the bond subject to the approval of the Bank of Papua New Guinea (“BPNG”) and the Department of Finance (“DoF”). Making such a poorly advised decision constituted a breach of duty by management and the Trustees. NPF sought the views of the BPNG Controller of Foreign Exchange, Mr Benny Popoitai (paragraph 4.1). Mr Popoitai expressed strong concerns that the proposal could expose NPF to heavy loss if the value of the Kina fell in relation to the Australian dollar, as NPF would be paying interest in Australian dollars.

It is possible to “hedge” against such a risk by holding substantial Australian dollar assets, which would be appreciating in value if the exchange rate moved against the Kina and this was argued by Mr Wright. Mr Popoitai and other experts pointed out, however, that NPF’s Australian dollar assets were concentrated heavily in PNG resource stock, which are subject to dramatic fluctuations in value. If the value of these assets plummeted, which they did during late 1997 and 1998, the exchange rate hedge would be ineffective and NPF would be in serious financial difficulties if the value of the Kina fell against the Australian dollar. Mr Popotai’s warning was disregarded by NPF management and not put before the NPF Board.

Findings 

Mr Popoitai’s concerns about the exchange rate risks were valid and Mr Wright’s explanation was over simplistic and failed to recognise other risks that would negate the effectiveness of the “natural” hedge, which impacted on the exchange rate movement.

ANZ BANK VIEW 

Australia & New Zealand Banking Group Ltd (“ANZ”) diary notes of 1st December 1997 show that ANZ was approached by Mr Wright to help market the bond but decided not to get involved because it felt the bond issue would be commercially impractical.

No reputable investor would purchase a bond issued by an unknown institution like NPF unless performance of the bond conditions was guaranteed by a reputable government or financial institution.

ANZ was also concerned that this would be the first such bond issue in PNG and that NPF management lacked any experience or expertise in this area.

NARA INVESTMENTS (J. RYAN) AND WARRINGTON INTERNATIONAL 

Making no progress in finding a reputable investor to buy the bond, Mr Wright turned to Mr Jai Ryan a Canadian living in Port Moresby associated with Ambusa Copra Mill, who quickly identified Warrington International as a potential buyer for the bond.

Mr Wright, without consulting the NPF Board, offered Mr Ryan a commission of .05 percent which would net him a sum of $270,000 or $385,000 depending on how the ambiguous “informal” commission agreement was interpreted. Mr Wright authorised an advance of $15,425 to Mr Ryan, also without NPF Board authority and in contravention of the agreement, which specified payment only on successful completion.

Warrington was incorporated in Antigua and its representative was another Canadian, Mr Rudi Cooper. The terms of the agreement for Warrington to purchase the bond were quickly prepared. Without performing due diligence on the unknown and dubious Warrington and still with no expert professional advice, the NPF Board agreed to issue an AUD54 million bond with a 9 year maturity date and a coupon rate of 14.6 percent to be purchased by Warrington International.

Mr Wright and NPF management had withheld the critical comments of Mr Popoitai and the ANZ Bank from the NPF Board. The Trustees accepted management’s positive but shallow recommendations and did not insist that management perform due diligence on Warrington or obtain expert advice.

Findings 

(a) The failure of Mr Wright and Mr Kaul to brief the Board on these matters was a breach of their common law duties to the NPF. For Mr Kaul it was also a breach of his fiduciary duty as a Trustee.
(b) On the other hand the Board of Trustees’ failure to inquire about these matters and/or to insist that management undertake due diligence on Warrington was a breach of their fiduciary duty to the members of NPF.

FALSIFICATION OF DOCUMENTS AND WITHHOLDING INFORMATION FROM NPF BOARD 

In certifying the Board resolution, Mr Leahy, the corporate secretary and senior legal counsel, falsely included additional provisions authorising management to approve and execute all necessary documents which had not formed part of the resolution.

NPF prepared a very optimistic application for Ministerial approval. Two briefs for the Minister were prepared in DoF. One simply recommended approval. Another, prepared by Mr Tim Curtain, a World Bank consultant employed within the DoF, was a detailed and expert critique, which set out the commercial impracticality of the proposal and the serious risk of financial loss to NPF.

Mr Curtain’s brief was never put before the NPF Board. Mr Vele Iamo, the Deputy Secretary, DoF and a Trustee on the NPF Board, was aware of the critical brief but failed to ensure it was placed before the Trustees.

Findings

(a) Mr Vele Iamo’s failure to advise the NPF Board of Mr Curtain’s severely critical expert assessment of the proposed bond issue was a serious breach of Mr Iamo’s fiduciary duty to the NPF members.
b) The Commission finds that it is unlikely that he could successfully claim he was “acting in good faith” as a defence and accordingly he may be personally liable for any provable losses incurred because of his breach of fiduciary duty.

Mr WRIGHT WITHHOLDS CAUTIONARY EXPERT ADVICE FROM THE NPF BOARD AND MAKES COMMITMENTS WITHOUT BOARD’S AUTHORITY 

The similar concerns of the BPNG were also not put before the NPF Board.

NPF briefed Clifford Chance, lawyers in Paris, France, to advise on the terms of the agreement. As it was to be a bearer bond, Clifford Chance recommended it would be necessary to appoint an independent Security Trustee to hold NPF’s securities for the bond on behalf of NPF, with authority to release them to Warrington if NPF defaulted on the bond conditions.

In February 1998, there were wrangles between Warrington and NPF over the securities to be provided by NPF as cover for the bond. Mr Wright offered $A72 million in share scrip, without any authority from the NPF Board, in an endeavour to expedite settlement.

When Warrington sought evidence that interest it received on the bond would be tax free, Mr Wright was sensibly advised to obtain a ruling from the Tax Office. Instead, he recklessly guaranteed on NPF’s behalf to meet any taxes that might be levied. This potentially costly guarantee was without Board knowledge or authority.

Findings 

(a) Mr Wright’s guarantee that NPF would cover tax charges in PNG did not have the Board’s approval. Had the bond come into existence, this representation potentially exposed NPF to a heavy PNG taxation liability because PNG tax could be payable on the income earned from the bond. This was a serious breach of Mr Wright’s duty to the NPF.
(b) The Commission finds that Mr Wright had no relevant experience in corporate finance, especially in securing finance through bond issues. It is worthy of note that as far as we are aware, no bond has ever been issued in PNG.
(c) The Commission of Inquiry finds that Mr Wright and the NPF management team were unqualified to handle such a transaction and should have taken note of the professional and specialist assistance provided by the DoF, the BPNG, the ANZ Bank and Clifford Chance, instead of potentially exposing NPF to great risks.
(d) Mr Wright acted beyond his authority in exposing NPF to grave risks. Mr Kaul’s supervision of Mr Wright was inadequate.
(e) The Trustees also failed in their fiduciary duty to ensure that proper advice was obtained where it was obvious to the Board (or should have been) that NPF management did not have the appropriate in-house capabilities.

Foreign Exchange Controller Popoitai commissioned his own inquiries into Warrington and became increasingly concerned that it was not a reputable and financially secure company and that it may be connected with money laundering operations. He delayed foreign exchange approval while seeking further information and guarantees.

Clifford Chance also advised caution because of Warrington’s method of negotiating and about the security conditions being sought by Warrington.

MINISTERIAL APPROVAL 

Minister Lasaro was given only the DoF favourable recommendations and the NPF optimistic request for approval. He was not shown the critical report prepared by Mr Tim Curtain, which also queried NPF’s power to issue such a bond in foreign currency. Consequently, the DoF failed its duty to provide proper advice to the Minister and he gave his approval as recommended by DoF.

Findings 

(a) The Commission finds that the NPF had no power under any law to borrow money by way of bond issue or otherwise. This topic is dealt with in detail in the separate report on Borrowings.
(b) The Commission finds that DoF failed in their role to properly scrutinise NPF’s submission seeking approval under Section 61 of the PF(M) Act. The DoF failed to properly advise the Minister of Finance.

Mr POPOITAI’S SUSPICIONS ABOUT WARRINGTON INCREASE AND Mr WRIGHT MAKES FURTHER UNAUTHORISED OFFERS ON BEHALF OF NPF 

In January 1998, Papua New Guinea Banking Corporation (“PNGBC”) was prepared to provide a $A77 million bank guarantee to Warrington (covering principle and interest) but required specific details from Warrington to establish its credentials (Warrington failed to provide this information). PNGBC also required a 150 percent security cover from NPF for its guarantee.

A 150 percent security cover was beyond NPF’s capability as Mr Wright had already pledged huge volumes of scrip to ANZ as security for NPF’s loan facilities with ANZ. Instead, Mr Wright offered Warrington share scrip to the value of $A77 million as security (paragraphs 11.2 and 11.3). He had no NPF Board authority to make this offer and was therefore acting beyond his authority.

By March it was apparent that Warrington was suspiciously reluctant to provide details of its credentials and of its financier (NationsBank).

When Mr Wright finally provided Mr Popoitai with a company profile of Warrington it raised more concerns as it portrayed Warrington as a secretive organisation registered in Antigua, providing cheap loans to third world countries, using innovative funding methods. The profile did not allay fears that Warrington could be involved in money laundering activities for its anonymous owners and no reputable banker was listed as a referee.

Mr Popoitai expressed concerns about the lack of tender procedures in the appointment of Mr J. Ryan as agent and the selection of Warrington as the purchaser of the bond. He sought details of the specific purposes for which the proceeds of the bond would be used. Mr Popoitai also expressed concerns about the commercial practicality of the bond proposal and called for the coupon rate to be significantly reduced. Mr Wright’s replies misrepresented the facts and were deceitful.

Findings 

(a) The terms of the purchase agreement with Warrington and the surrounding circumstances strongly suggest it was not a normal commercial transaction.
(b) Mr Wright’s explanations about the purpose to which the hoped for bond funds would be put were unsubstantiated late inventions, of which the Board had not been advised and which it had not approved.
(c) Mr Wright gave misleading information to Mr Popoitai in order to gain BPNG approval to issue the bond.
(d) The NPF Board approved the issue of the bond on the basis of clearly inadequate information and advice, in breach of the Trustee’s fiduciary duty to the members.
(e) In failing to direct management to provide essential details of the bond and any risk to the Fund, the Trustees were in breach of their fiduciary duties to the NPF members.

The Commission finds that the views and conduct of the BPNG Foreign Exchange Controller were proper as he correctly expressed concerns regarding fundamental issues, which had not been addressed by NPF management, or the Board of Trustees.

In reviewing the correspondence referred to above, the Commission finds that Mr Wright misrepresented to Mr Popoitai the advice from Clifford Chance regarding security arrangements as Clifford Chance was still far from satisfied and was sending warning signals to NPF. He was also deceitful about the Board’s view in relation to reducing the coupon rate of the bond. The Board did not discuss the issue.

Mr COPLAND PERSUADES BPNG GOVERNOR TO INTERVENE AGAINST Mr POPOITAI 

Mr Popoitai continued to withhold Foreign Exchange approval until BPNG Board member and NPF Acting chairman, Mr Copland, exerted extreme pressure on the Governor of the BPNG, Mr Koiari Tarata.

Responding to this pressure, the Governor bypassed Mr Popoitai and personally signed the approval for NPF to issue the bond to Warrington. Mr Popoitai then gave approval for NPF to transfer the shares required as security from the PNG Register to the Australian register.

TO BE CONTINUED

National Provident Fund Final Report [Part 9]

August 17, 2015 1 comment

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

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

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

NPF Final Report

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

Continued from Friday

Three Employee Representative Trustees
Position: Trustee
Name: Henry Leonard
Period: May 18, 1995 to May 17, 1998 and January 1, 1999 to December 21, 1999

Irregularity
The only irregularity is that after his first term expired on May 17, 1998, a period of seven months was allowed to elapse before his reappointment. During that period, there were only two employee representative trustees.

Three Employer Representative Trustees
Position: Trustee
Name: Graham Hogg
Period: February 12, 1993 to February 11, 1996

Irregularity
No irregularities

Position: Trustee
Name: Isikeli Taureka
Period: February 12, 1993 to December 1997

Irregularity
Mr Taureka apparently resigned in about December 1997. It was not gazetted as required by the NPF Act. The vacancy was not filled for over 12 months.

Position: Trustee
Name: David Copland
Period: September 1, 1998

Irregularity
Mr Copland was allowed to continue as an employer representative trustee long after he ceased to be an employer – in contravention of the Act. The stated ground for termination was not a prescribed ground under the Act.

Position: Trustee
Name: Tau Nana
Period: February 8, 1996 to February 7, 1999 and April 20, 1999 to December 31, 1999

Irregularity
Once again, there was a gap between the end of Mr Nana’s first term and his reappointment. For a period Mr Nana was the only employer representative trustee. Mr Nana’s second appointment was invalid as there was no vacant employer trustee position available.

Position: Trustee
Name: Nathaniel Poiya
Period: January 19, 1999 to December 31, 1999

Irregularity
No irregularity

Position: Trustee
Name: Jimmy Maladina
Period: January 19, 1999 to December 31, 1999

Irregularity
This controversial appointment was opposed by the employers federation on the ground that his name had not been put forward by an organisation representing employers. Court action was settled on the basis that Mr Maladina would resign as trustee. He did not do so.

Position: Trustee
Name: Wayne Golding
Period: February 18, 1999 to March 13, 1999

Irregularity
Mr Golding was appointed by Minister Lasaro as an employer’s representative trustee. The appointment was invalid as there was no vacancy for an employer’s representative trustee and because his name had not been put forward by an organisation representing employers. When the employers federation threatened court action, his appointment was terminated.

Position: Managing Director
Name: Robert Kaul
Period: July 5, 1993 to May 5, 1998

Irregularity
His initial appointment was in accordance with the NPF Act but his conditions of employment were agreed by way of a personal contract of employment, with generous early termination clause. This was contrary to the provisions of Section 15 of the NPF Act, which required a Ministerial determination after prior consultation with the NPF board.

Revocation of his appointment by Minister Lasaro was improper and ineffective. It coincided with conflict between Mr Kaul and Mr Lasaro over claim for exemption by Masurina Group of Companies.

Position: Managing Director
Name: Henry Fabila
Period: ?

Irregularity
His initial appointment was invalid as Mr Kaul had not vacated the position. The signing of personal contract of employment was contrary to the NPF Act.

Findings regarding the  appointment of chairmen to the NPF Board

Appointment of Evoa Lalatute

Minister Haiveta’s precipitate conduct in purporting to appoint Mr Lalatute, as chairman of the NPF board was improper and ineffective. The proper way to make the appointment was for the Secretary of the DoF Rupa Mulina to nominate him as chairman and for the Minister to then approve the nomination. Mr Mulina’s attempt to regularise the appointment by way of a backdated nomination may be ineffective.

Findings

(a) Minister Haiveta had no legal power to appoint a chairman to the NPF board. His appointment of Mr Lalatute as chairman on December 13, 1995 was therefore illegal and improper.
(b) It is not appropriate for NPF management to be involved in giving advice to the Minister and DoF on the appointment of a trustee and to draft the required legal documents.
(c) The improper appointment resulted from Mr Haiveta’s enthusiasm for achieving results by exercising power and because DoF and Mr Mulina did not insist on asserting DoF’s primary role as Ministerial advisor and implementer of Minister’s decisions. There was nothing sinister in the replacement of Mr Mulina by Mr Lalatute, however.
(d) In an attempt to regularise Mr Lalatute’s appointment, Mr Mulina nominated Mr Lalatute to replace himself as chairman on January 19, 1996 pursuant to Section 6(1)(b) of the NPF Act. The instrument of nomination was however, backdated to December 1, 1996, in order to give the appearance that the initial appointment of Mr Lalatute had been done in accordance with the Act.

The validity of Mr Lalatute’s appointment is questionable.

Revocation of Mr Lalatute’s appointment as Chairman

The proper way to revoke this appointment was for Mr Lalatute to resign or else for the Secretary of the DoF Mr Mulina, to withdraw his nomination. Instead, Minister Haiveta purported to rescind the appointment and published a notice in the Gazette approving the revocation of Mr Lalatute’s appointment as chairman.

Mr Mulina did not withdraw Mr Lalatute’s nomination as chairman and there is no documentary evidence that Mr Lalatute ever resigned in writing given to the Minister, as required by the Act. No termination of Mr Lalatute’s appointment was ever gazetted. Nor is there evidence that Mr Lalatute’s appointment as a trustee was ever properly terminated.

The uncertainty about Mr Lalatute’s termination as a public service representative trustee and as chairman throws up doubts about the legality of the appointments of his successors as chairman and trustee.

Findings

(a) Mr Lalatute’s appointment as chairman of the NPF board on the nomination of the previous chairman Rupa Mulina was never properly revoked or otherwise terminated prior to the appointment of his replacement as chairman – David Copland.
(b) The appointment of Mr Copland as chairman of the NPF board was not valid as the position was not vacant.
(c) The appointment of Mr Lalatute as a trustee representing the public service was not validly terminated.
(d) The appointment of Gerea Aopi to replace Mr Lalatute as a public service representative trustee was not valid as there was no vacancy in that category of trustee position at that time.
(e) The managing director of NPF had no power to recommend trustees to the Minister and DoF to be appointed to the NPF board.
(f) DoF failed to assert itself as the prime authority to advise and support the Minister in these matters. This left a bureaucratic vacuum, which NPF management attempted to fill.
(g) In consequence there is serious doubt about the legality of Mr Lalatute’s vacating the office of chairman and consequently there is also doubt about the validity of Mr Copland’s appointment as chairman.

Role of Morea Vele

The new Secretary of the DoF assumed the role of chairman by revoking Mr Copland’s nomination but then failed to attend meetings.

Findings

(a) Mr Vele’s failure for a period of almost six months (February 15 to August 4, 1998) to attend to his duties as NPF chairman or, alternatively, to nominate a person to occupy the position of chairman at and between meetings was a breach of his fiduciary duty to the members of the fund.
(b) There is no evidence that Mr Vele was under any political or other external pressure to not perform his role as chairman.

David Copland – termination of appointment as a Trustee 

In the absence of Mr Vele from meetings, Mr Copland was repeatedly appointed acting chairman, even after he ceased to be an employer. When he was finally terminated as a trustee no valid ground was stated. The correct grounds for terminating Mr Copland should have been under Section 10(1)(h) of the Act (ceasing to be an employer).

Findings

(a) After Mr Copland ceased to be a representative employer in PNG he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act.
(b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds.

Brown Bai

After Mr Bai became Secretary of the DoF on September 1, 1998, he performed actively as chairman of the NPF board. He stood down reluctantly and nominated Jimmy Maladina as chairman under pressure from Minister Lasaro and Prime Minister Bill Skate, who exerted strong and improper pressure to have Mr Maladina appointed as a trustee and as chairman.

Findings

(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1)(e) of the NPF Act.
(b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator, Mr Maladina.
(c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion.
(d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper.
(e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board.
(f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Minister Lasaro and Prime Minister Skate.
(g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees.
(h) Mr Bai’s failure to attend meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund.
(i) Mr Maladina’s failure to formally resign his position of employer representative trustee, as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment, as there was no vacancy for him to fill.

Findings regarding appointments of Trustees to the NPF Board

Vele Iamo

Mr Iamo’s repeated absences from NPF board meetings deprived the board of the benefit of his expertise. Even though it was caused by pressure of other important work it was a breach of his fiduciary duty to the members of the fund. After absenting himself without permission of the chairman for more than three consecutive meetings, it was obligatory for the Minister to terminate Mr Vele’s appointment. This did not happen for several years.

The belated termination of Mr Iamo’s office of trustee was irregular.

Findings

(a) Mr Iamo failed in his fiduciary duty to NPF when he failed to regularly attend board meetings.
(b) Mr Frank and Mr Leahy failed in their fiduciary duties by not advising the board about the legal position concerning Mr Iamo’s continuous absences from board meetings.
(c) Minister Lasaro failed to make a clear-cut and publicly gazetted termination of Mr Iamo’s appointment, before advertising for applications to fill the non-existing vacancy in his position.
(d) Mr Iamo’s frequent absences from NPF board meetings were because of his extremely busy schedule as a senior officer of the DoF, which obliged him to attend a great many board and other meetings. Expecting senior officers to hold responsible positions on so many boards amounted to a structural weakness in the NPF Act.
(e) There were many instances where Mr Iamo’s role as a senior officer of DoF was in direct conflict with his role as a trustee of NPF, especially when he was promoting the Government’s interests while advising/requesting NPF to assist the State by, for instance, purchasing Government bonds or road stock.

Evoa Lalatute

There was confusion about Mr Lalatute’s position as a trustee after he ceased to be chairman because proper procedures were not followed.

Findings

As Mr Lalatute never resigned as a trustee and as his appointment was never formally terminated, it throws legal doubt about the subsequent appointment of Gerea Aopi as a public service representative trustee, as there was no vacancy in that category of trustee at the time of his purported appointment.
Gerea Aopi

Mr Aopi’s appointment as a public service trustee occurred before there was a vacancy, as Mr Lalatute was still a public service trustee. There were, therefore, too many public service trustees for over 21/2 years, from February 8, 1996 until August 28, 1998.

Findings

(a) The failure to follow the prescribed procedures in the NPF Act regarding appointment and termination of trustees continued to undermine the constitutional validity of the NPF Board of Trustees up until Mr Aopi’s resignation on August 28, 1998.
(b) Primary responsibility for this situation is the failure of DoF to accept responsibility for managing these changes to the NPF board and Mr Leahy’s failure to proactively provide timely and professional advice as legal counsel and corporate secretary.
(c) It seems there was more than the maximum allowed number of public service representative trustees for more than 21/2 years throwing doubt on the legality of the NPF board and all its decisions in that period.

Abel Koivi

Mr Koivi was appointed as a public service representative trustee because he held a position with Air Niugini when it was Government owned. The appointment was invalid because there was no vacancy for a public service representative trustee at that time.

When Air Niugini was privatised, Mr Koivi was no longer a public servant and therefore he was not qualified to hold this position.

Mr Leahy attempted to “qualify” him by arranging for his job with Air Niugini to be declared an office in the public service.

Findings

(a) Mr Koivi was initially appointed to the NPF board on April 1, 1996, when there was no vacancy for a public service representative trustee and without following prescribed procedures. His appointment was therefore invalid.
(b) This irregularity became known to Mr Leahy who on August 5, 1997, advised managing director Kaul of the fact and the legal consequences, but did not pursue the matter to rectification.
(c) When an attempt was made to regularise Mr Koivi’s appointment as a public service representative trustee he was no longer in the public service.
(d) Following Mr Leahy’s advice, NPF management sought to overcome this impediment by declaring the position to be a public service office by declaration under Section 3(5) of the Interpretation Act. This was done surreptitiously, without notifying DoF or the Minister about the reasons for this deft legal manoeuvre. It is not certain whether or not this finally regularised Mr Koivi’s appointment, two years and five months after it had been made.
(e) When it was decided to terminate Mr Koivi’s appointment, he was given no notice and it was done by Prime Minister and Acting Minister Skate, irregularly and not upon any grounds specified under Section 10 of the NPF Act, as required. The effectiveness of the formal termination of appointment is therefore in doubt.

Brown Bai

When appointed a trustee after he stood down as chairman, Mr Bai continuously failed to attend meetings. His appointment was not terminated as required by Section 10(1)(d) of the NPF Act.

Findings

(a) Because of slackness in the way appointments and terminations of office of trustees were handled, the NPF board of trustees was improperly constituted for almost two years and five months from early 1996 until August 28, 1998.
(b) This situation was known by Mr Vele, Mr Kaul, Mr Fabila and mr Leahy.
(c) It raises doubts about the legality of NPF board decisions and contracts during a period when there were very significant transactions involving many millions of kina.
(d) Mr Leahy failed in his duties by not taking immediate and appropriate action to ensure the board was properly constituted as far as public service trustees are concerned.
(e) The DoF failed in its duties by not ensuring that the matter of the constitution of the NPF board under Section 6(1)(c) of the NPF Act was properly managed.
(f) The commission recommends that the monitoring of the constitutional integrity of statutory corporations should be the responsibility of a single agency and that the statutory instruments should always be prepared in the office of the First Legislative Counsel.

Findings regarding the appointments of three employee representative Trustees

There were no substantial irregularities in the appointment and terminations of appointment of the employee representative trustees — Mr Paska, Mr Gwaibo and Mr Leonard. The only serious irregularity was that for substantial periods, there were only two employee representative trustees instead of the prescribed three.

Findings regarding the  appointments of three employer representative

Trustees Graham Hogg
There were no irregularities.

Isikeli Taureka

Mr Taureka resigned for personal reasons about December 1997. There is an air of uncertainty, as his resignation was not gazetted as required under Section 10(3) of the NPF Act. The vacancy caused by his departure was allowed to remain vacant for 12 months.

David Copland

After being illegally allowed to continue as an employer representative trustee, after ceasing to be an employer, Mr Copland’s appointment was terminated on a ground, which was not prescribed in Section 10 of the NPF Act.

Findings

(a) After Mr Copland ceased to be a representative employer in PNG, he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act.
(b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds.

Mr Copland’s vacancy was not filled immediately and for a period, Mr Nana was the only employer representative trustee on the board.

Tau Nana

There were no irregularities except the two-month delay in reappointing him. For a period, Mr Nana was the only employer representative trustee.

Jimmy Maladina

There was considerable controversy surrounding Mr Maladina’s appointment as employer representative trustee as for a long while no valid organisation representative of employers was willing to nominate him for consideration by the Minister. It involved much political pressure and contrived nominations.

In evidence before the commission, Mr Skate and Mr Lasaro each blamed the other for the appointment of Mr Maladina.

Findings

(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1) (e) of the NPF Act.
(b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator Mr Maladina.
(c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion.
(d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper.
(e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board.
(f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Mr Lasaro and Prime Minister Skate.
(g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees.
(h) Mr Bai’s failure to attend any meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund.
(i) Mr Maladina’s failure to formally resign his position of employer representative trustee as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill.

The employers federation strongly resisted the appointment of Mr Maladina as an employer representative trustee on the nomination of Waghi Mek Plantations, saying this was not an organisation of employers representing employers and a Writ was issued. It was settled on the basis that Mr Maladina would resign as an employer representative trustee, allowing for the appointment of Mr Jeffery in his place, with Mr Maladina to remain with NPF solely in his capacity as chairman. When Mr Maladina failed to carry out the formalities required in order to validly resign, it threw doubt on the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill.

Wayne Golding

Mr Golding’s appointment by Minister Lasaro was invalid from the start. He was not nominated by an organisation of employers representing employers, nor was there a position for him. Nevertheless, he assumed duties and voted at meetings before his appointment was terminated in the face of threatened court action by the employers federation.

Findings

(a) The appointment of Mr Golding as an employer’s representative trustee by Mr Skate as Acting Minister for Finance, without a nomination by an organisation of employers representing employers, was improper and invalid, being contrary to the requirements of Section 6 of the NPF Act.
(b) It was inappropriate that Mr Fabila and Mr Leahy were dealing directly with the Minister in organising the appointment of Mr Golding, by-passing the DoF.
(c) The DoF failed to assert itself by insisting on advising the Acting Minister on this appointment. This is understandable considering that Mr Skate had already indicated he would act despite DoF’s contrary advice.
(d) The procedures adopted by Mr Lasaro and Mr Fabila to terminate the (invalid) appointment of Mr Golding were not in accordance with the NPF Act and were very confusing.
(e) It seems that Mr Golding participated in NPF decision-making, despite his initial appointment being invalid and after steps had been taken to terminate the appointment.

No independent monitor of statutory compliance

Many of the irregularities which occurred regarding the appointment and termination of trustees arose from the fact that no agency of government assumed responsibility for ensuring that the NPF board was properly constituted at all times.

It was left to the NPF corporate secretary/legal counsel to monitor the completion of terms of appointment, to ensure nominations for appointment and reappointment occurred in compliance with the Act and to prepare instruments of appointment for signature by Prime Minster or Minister and to organise gazettal as appropriate. Similarly, it was left to Mr Leahy and NPF management to ensure that all categories of trustee position were filled, with the prescribed number of trustees of that category.

This system clearly broke down.

As neither DoF nor the First Legislative Counsel had clear responsibility in these matters, the gross constitutional defects which occurred in the composition of the NPF board throughout the period under review were not noted and corrected.

Findings

(a) The failure of DoF or any other government agency to advise the Minister and manage appointments and termination of trustees continued to undermine the constitutional validity of the NPF board when the resignation of Mr Maladina as an employers representative trustee did not proceed as agreed.
(b) The appointment of Mr Nana and Mr Jeffrey on June 3, 1999, resulted in there being four trustees in that category and consequently the board was invalidly constituted from June 3, 1999, until the end of the period under review on December 31, 1999.
(c) The fact that there was no validly appointed NPF board of trustees casts legal doubt upon the validity of the major board decisions made after June 3, 1999, which included the transfer of NPF assets. There is no validating clause in the NPF Act to protect decisions made by an unconstitutional board containing too many members in any one category of trustee (Section 11 only validates decisions of a board which has two few trustees in a particular category).
(d) The primary responsibility for ensuring that the trustees are validly appointed to the NPF board and that the composition of the board is in accordance with the requirements of the Act lies with the corporate secretary and principle legal officer Herman Leahy. Mr Leahy was in serious and repeated breach of that duty.
(e) The DoF did not accept responsibility to oversee and monitor the process of appointments to the board.
(f) Mr Lasaro and his advisors within the NPF, Mr Fabila and Mr Leahy as well as the DoF, which failed its responsibility to advise and manage this process, are all responsible for the serious legal confusion.
(g) The commission recommends that all instruments of appointment or termination of appointment should be prepared by the office of the First Legislative Counsel.

Appointment of  Managing Director

Legislation

Section 15 provides that the appointment of the managing director is by the Minister after prior consultation with the NPF board. Under Section 16, termination is by the board. Terms and conditions are as determined by the Minister after prior consultation with the NPF board.
Robert Kaul

Mr Kaul’s initial employment in 1993 was regular but his terms and conditions were agreed to by a contract of employment with NPF rather than by Ministerial determination as required by Section 15(2) of the NPF Act. This was repeated on his reappointment on July 4, 1996, with generous payout terms for early termination.

His early termination in 1998 was a result of improper political direction from Minister Lasaro and Prime Minister Skate, which resulted in a significant payout of his unexpired contract. Proper procedures were not followed. The termination was the result of a political scheme involving Mr Skate and Mr Lasaro, assisted by Mr Leahy, to appoint Henry Fabila to the office of managing director.

The irregular termination of Mr Kaul’s appointment was legally ineffective, which in turn invalidated Mr Fabila’s appointment, as the position of managing director had not yet become vacant.

Findings

(a) Gerea Aopi and the NPF management and board ignored the provisions of Section 15 of the NPF Act regarding appointments and the conditions of a managing director and inappropriately appointed Mr Kaul in 1993 pursuant to a personal contract of employment, containing generous payout provisions for early termination.
(b) After the formation of the “Skate” government in 1997, Prime Minister Skate and Minister Iairo Lasaro wished to replace Robert Kaul with Henry Fabila as managing director NPF.
(c) Prime Minister Skate had strong personal links with Mr Fabila and Minister Lasaro had strong personal reasons for replacing Mr Kaul, who was strongly resisting the Minister’s improper pressure to grant an exemption to the Masurina Group of Companies.
(d) Minister Lasaro gave an improper direction to the chairman of the NPF board/Secretary DoF Mr Vele to terminate the appointment of Mr Kaul without any prescribed grounds, which was beyond his power as this power lay with the board.
(e) Minister Lasaro’s direction to NPF to submit a list of names, including the name of Mr Fabila for his consideration, in circumstances where he had already made up his mind to appoint Mr Fabila and had issued a press release to that effect, did not constitute prior consultation with the NPF board as required by Section 15(1)(a) of the NPF Act.
(f) It was not possible to appoint Mr Fabila until Mr Kaul’s appointment had been terminated. This early termination required a payout to Mr Kaul of K141,983.51 for early termination according to his contract of employment.
(g) The DoF gave inadequate and incorrect advice to the Minister on the termination of Mr Kaul and appointment of Mr Fabila.
(h) Mr Leahy failed his duty as legal counsel and corporate secretary to advise the NPF board as to its rights and duties and that the Minister was exceeding his power in directing the termination of Mr Kaul’s appointment.
This was a serious breach of duty for which Mr Leahy, as a qualified and practising lawyer, was professionally liable. He may be personally liable for damages at the suit of the NPF board, including liability for loss suffered by NPF members caused by the excessive payout to Mr Kaul.
(i) The decision to terminate Mr Kaul and appoint Mr Fabila amounted to improper interference with the management of the NPF for which both Minister Lasaro and Prime Minister Skate were responsible.
(j) The commission recommends that the constituting authority refer William Skate and Iairo Lasaro to the Ombudsman Commission to investigate whether there have been breaches of the Leadership Code in relation to the termination of Mr Kaul’s appointment and the appointment of Mr Fabila as managing director of the NPF.
(k) The action of Acting Minister Sir Mekere Morauta in signing the instrument of appointment of Mr Fabila to the position of managing director of the NPF was not improper, as he acted in good faith, on the advice of the DoF, that the appointment was appropriate and in order.
(l) The statutory instrument of appointment of Mr Fabila was not prepared by the office of the First Legislative Counsel. It was probably prepared by Mr Leahy at the NPF. The instrument fails to recite the words of section 15(1)(a) “after prior consultation with the board” and there had been no such prior consultation — merely directions given by the Minister.
(m) The commission recommends that the office of First Legislative Counsel be given clear authority to prepare all instruments of revocation and appointment.
(n) Carter Newell were remiss in their professional duty for simply producing a contract for Mr Fabila’s terms and conditions, without proper research and without taking account of statutory provisions including Sections 16 and 17 of the Act, which set out grounds for termination.

continued tomorrow

National Provident Fund Final Report [Part 8]

August 14, 2015 Leave a comment

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

NPF Final Report

This is the eighth 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.

INTRODUCTION AND OVERVIEW

Schedule 1 reports upon the legislative and policy framework within which it was intended that the National Provident Fund (NPF) should operate.

It records how NPF management and trustees frequently operated outside of that structure and how, by 1999, that structure had, to a significant extent, broken down in key areas, such as the constitutional integrity of the NPF board, internal governance, accounting, compliance by contributors, investment strategies, reporting obligations and external monitoring and controls. Specific matters, which received detailed investigation, are reported upon in Appendices 1 to 21 that are attached to Schedule 1.

On August 11 and 15, 2000, the commission conducted a seminar in the form of a public hearing to seek the views of 78 participants about the effectiveness of the legislative and administrative structure for the NPF. The proceedings were recorded at transcript pp. 1-121. The report on the seminar is included as Appendix 23 to Schedule 1.

Just prior to presenting this report, the new Superannuation Act 2000 was brought into force and NPF restructured itself and was licensed under the new Act under the name of Nasfund. The NPF Act was then repealed in its entirety and Nasfund now operates under the provisions of the Superannuation Act 2000.

In this schedule, the commission presents its findings and recommendations regarding the legislative structure which applied to the NPF in the years January 1, 1995 to December 31, 1999. Despite the fact that the Act has been repealed, the schedule continues to talk about the NPF and the NPF Act in the present tense, as if the NPF Act and the NPF still exist.

This is partly to ensure that the commission’s report is faithful to its terms of reference and partly because it will be of current benefit to understand how the previous structure was largely by-passed by the former trustees and management with impunity and to consider whether the new structure put in place under the Superannuation Act 2000 successfully overcomes the previous weaknesses.

NPF Act and Rules

NPF is given corporate status and its powers and functions are strictly defined under the NPF Act.

Expenditure of funds is limited to NPF’s objectives and powers as defined in the NPF Act, or other legislation. It is, for instance and importantly, not given the power to borrow or pledge its assets.

It was naturally assumed that NPF’s governing board of trustees would be properly constituted in accordance with the provisions of the Act so that its decisions would be legally valid.

The Act established the NPF as an accumulated benefits superannuation fund for private sector employees. All private employment establishments employing 25 or more employees are required to join the fund, with employers and employees all contributing a percentage of the employee’s wages to be received by the fund and credited to the member’s account. NPF’s funds must be properly accounted for and deposited into a certified bank and invested in accordance with guidelines promulgated by the Minister.

The Act provides that the Minister with responsibility for financial matters, have portfolio responsibility for NPF, with powers regarding appointments to the managing board and some powers regarding termination of appointments.

Under the Public Finances (Management) Act 1995 (PF(M) Act 1995), the Minister was given powers to approve major transactions and investments. Under Section 26 of the NPF Act, the Minister is empowered to promulgate guidelines for NPF’s investments.

It was envisaged that the Minister would receive reports and financial statements on the progress and health of the fund and that these reports and statements would be audited by the Auditor-General and tabled in Parliament.

The Act established that the governing body of the NPF would be a board of trustees consisting of a mix of trustees from the public service (two), from private enterprise (three) and representing employees (three). The managing director would also serve on the board as a trustee.

The legislation

The major pieces of relevant legislation are:-

  1. The PF(M) Act;
  2. The Audit Act and
  3. The Salaries and Conditions Monitoring Act.

The NPF Act 1995 establishes the NPF as an accumulated benefits fund for all workers employed in private enterprise employment establishments employing 25 or more employees unless an exemption has been granted under Section 3(6) or 42, of the Act. Participation is compulsory (The amendment repealing subsection 3(6) was not brought into force).

The NPF falls within the portfolio of the Minister responsible for PNG financial affairs (the Minister) and it is governed by a board of trustees (the NPF board), consisting of two representatives of the public service, three representatives of employers and three representatives of employees. The NPF board is chaired by the Secretary for the department responsible for managing the country’s financial affairs, referred to here as the Department of Finance (DoF).

The Managing Director

The management of NPF is headed by a managing director appointed by the Minister after prior consultation with the board (Section 15), who is also a member of the board of trustees and is therefore himself a trustee pursuant to Section 6(1)(d).

Officers

The managing director has control of the officers appointed by the NPF board on the recommendation of the managing director (Section 19).

Employees

Beneath the officers are the employees of the fund, appointed by the managing director with the approval of the board (Section 21).

Contributions and compliance

Part V of the NPF Act provides for employers to contribute an amount equal to 7 per cent and employees to contribute 5 per cent of each employee’s monthly wage actually drawn. Section 35 obliges the NPF to credit to each member all amounts paid on his behalf.

Section 37 enables the managing director to charge a penalty interest to employers on overdue contributions. Failure to comply is also an offence (Section 36).

Withdrawals and payments from the Fund

Section 49 provides a mechanism whereby the managing director may approve a withdrawal to purchase a dwelling house or site or materials for a dwelling to a maximum limit of 24 times the member’s monthly pay.

Section 52 provides for withdrawal of the full amount standing to the credit of the member’s account on retirement after attaining 55 years, on attaining 55 years after previous retirement, on retirement due to total and permanent incapacity; or immediately prior to permanent emigration from PNG.

Reporting and external supervision

Although the NPF is designed to be independent of government control and interference, the legislation provides for a framework of external monitoring and supervision and for broad policy guidelines and directives on investment policies to be issued by the Minister (Section 26(2)) within which the NPF board and management is obliged to operate.

The NPF Act specifies rules for banking and investing the funds and the Minister is empowered to issue policy guidelines on investments (Section 26 of the NPF Act). Section 30 (now subsumed by Section 63 of the PF(M) Act) requires NPF to submit an annual report to the Minister and to also submit the report to the Auditor-General who, pursuant to Section 29, shall report the result of his audit to be Minister, who, in turn, is obliged to submit the audited report to Parliament each year.

Section 63(2)(b) of the PF(M) Act requires NPF to report quarterly to the Minister on all investment decisions and to provide an annual report on investment performance and an updated five year rolling plan on investment strategies and administrative systems. How this structure, which requires NPF to have in place and to report upon investment strategies and plans, was ignored, is set out in paragraph 16 of Schedule 1.

The formal legislative and administrative structure in place for NPF between 1995 and 1999 is shown in Table 1 below.

Trustees

Schedule 1 reports how the members of the NPF board failed to appreciate and to perform their fiduciary duty as trustees and how this leaves them open to personal liability for loss suffered by the fund and its members, arising from their breach of fiduciary duty. It reports in detail how the repeated irregularities in the appointment and termination of trustees seriously compromised the legal validity of the NPF board. It clearly demonstrates that no single agency was responsible for ensuring that the board was validly established at all times and that appointments and terminations were constitutional.

Problems regarding the determination of trustees’ expenses and allowances are studied in detail, as are the failures to properly administer and account for payments of these allowances to trustees. These are reported at paragraph five and in Appendix 16.

Managing Director

Similar problems with the appointment, termination of appointment and determination of terms and conditions of employment of the managing director are reported in paragraphs 5.4 and 5.4.5 of Schedule 1 which shows how the provisions of Section 15(2) of the NPF Act, requiring a determination by the Minister acting with the advice of the board were ignored in favour of signing a contract of employment with very favourable terms for early termination in defiance of the statutory provisions.

Officers

The appointment, termination and conditions of employment of the other officers are reported upon in paragraph 6 of the Schedule and how the necessity to obtain the approval of the Salaries and Conditions Monitoring Committee (SCMC) was ignored, which had the effect of making the contracts void.

The senior officers were given additional remuneration in the form of a senior officers bonus scheme, which was inappropriate and led to irregular accounting techniques in order to artificially boost the profit-based bonus payments.

In reporting upon the nature and defects of the bonus scheme the commission has made a detailed study of the ineffectiveness of NPF management and financial planning which is reported in detail as specific matter number 20 in Appendix 20.

As with the trustees, the commission has found that there were serious irregularities regarding the determination and administration of expenses and allowances for officers. These are reported at paragraph 8.6.

Employees

The fairly favourable conditions of employment of employees and their access to a home ownership scheme and staff performance benefits are reported in paragraph 9 of Schedule 1.

After the departure of experienced and well trained staff prior to January 1995, NPF suffered from a serious lack of experienced and well trained work force and this is clearly reflected in the lack of efficiency reported upon by the Auditor-General, Pricewaterhouse Coopers (PwC) and KPMG.

There were attempts to restructure all staff positions at NPF. This resulted, however, only in a restructure and salary increase for senior officers.

Overview of officers and employees

Paragraph 10 of Schedule 1 provides a detailed overview of NPF’s management problems and deficiencies as reported by the Auditor-General, PwC and KPMG, which the commission adopts as part of its own findings.

Board forum and decision-making

The structure created for NPF envisioned that decisions would be made by the NPF board in properly constituted board meetings, unless delegated to management.

In paragraph 11, the commission reports on ultra vires decision-making by management; failure by management to properly brief and inform the board prior to seeking a board resolution; decision-making by “circular resolutions” and the board’s frequent failure to obtain the required approval by the Minister for decisions involving transactions over K300,000 (later increased to K500,000).

The problem caused by the participation in board meetings of invalidly “appointed” Trustees is also discussed.

The relationship between structural problems and losses suffered by NPF

NPF failed to develop investment policies and strategies and to report upon them quarterly as required.

Instead, it embarked upon a wholly inappropriate series of high-risk investments in PNG resource and other shares.

It ignored the structural requirement to confine its activities within the boundaries of its statute-given powers. Most notably it borrowed the funds to make these investments, which was beyond its powers.

The NPF board was required to confine its investments within the guidelines set by Sir Julius Chan in November 1993. Its failure to do so was a breach of fiduciary duty by each trustee in office during the period in which these investments were made and retained. Most of

NPF’s huge losses resulted from stepping outside the set structure governing its activities in this way.

The reason these activities and the mounting losses continued for so long is that NPF also ignored the obligatory structural requirement that it report quarterly and annually to the Minister. DoF must have been aware of this but felt no obligation to monitor and rectify the situation.

This was a serious gap in the structure of reporting. With NPF’s reporting to the Minister having broken down, it meant that the Auditor-General’s audit and reporting system also failed to operate, as it required the receipt from NPF of its report to the Minister to set the audit procedures in motion.

Weak governance within NPF was a significant contributing factor to the losses, which NPF suffered.

For most of the time, trustees were badly informed by management and seemed content to passively attend meetings, draw their allowances, sign circular resolutions and not inquire what management was doing.

The managing directors and investment managers rarely sought expert advice, relying on their own ego-driven and extreme views of what were suitable investments and activities for a provident fund.

The trustees almost never questioned or criticised management and never insisted on being given independent expert advice. In this manner, the trustees meekly went along with management’s recommendations to borrow funds for high-risk equity transactions, to invest millions of kina in Crocodile Catering and its foolish Indonesian adventures, to attempt to issue a $A54 million bond and to construct the NPF Tower.

Having embarked upon those ventures, the trustees did not insist upon strict accounting and reports by management as to their progress and NPF’s financial situation.

Criminal conspiracies

In 1999, while NPF’s financial lifeblood was haemorrhaging and it was facing bankruptcy and the complete loss of its member’s funds, its chairman Jimmy Maladina and its legal counsel/board secretary Herman Leahy, with the complicity of its managing director Henry Fabila, in defiance of all legal constraints, set about defrauding the NPF by means of the Waigani land deal and the NPF Tower construction fraud. These criminal conspiracies caused a further loss of just under K3 million to the Fund.

This executive summary will now present the major findings made by the commission in Schedule 1 with a brief summary of the relevant context. References to the relevant paragraphs in Schedule 1 and to the relevant appendix are given.

IRREGULARITIES IN APPOINTMENTS, TERMINATIONS AND CONDITIONS OF TRUSTEES AND OFFICERS

The structural framework for appointing, removing and remunerating trustees and officers, was carefully specified in the NPF Act. The administration of the process was so poor, however, that it undermined the constitutional legality of the board and the integrity and efficiency of the officers.

Schedule 1 examines these processes in great detail in paragraphs 4, 5 and 6.

This executive summary first postulates the formal structure as intended by the Act and then tabulates the period of incumbency of successive trustees, chairmen, managing directors and officer holders, pointing out any irregularities in tabular form.

Finally, this section of the summary sets out the commission’s findings on appointments, terminations and remunerations with brief contextual comments.

The structural framework for appointments, removals and the remuneration of office holders 

The Board of Trustees

The tripartite structure of the board is designed to give representation to the public service (two trustees), the employers (three trustees) and the employees (three trustees).

Appointment of Trustees

The public service representative trustees are appointed by the Minister to ensure that the board contains their professional expertise and to allow for an informal avenue of co-ordination and communication between the NPF and the public service and government (the intention was frustrated because the senior public service representative Iamo Vele rarely attended board meetings. On several significant matters his role as a trustee was in direct conflict with his role as a senior DoF officer).

The employer representative trustees are to be appointed by the Minister from a panel of names submitted by organisations representing employers. This is designed to ensure that this category of trustee is made up of trustees acceptable to the contributing employer establishments (The appointment of Mr Maladina as a trustee was in breach of this requirement).

The employee representative trustees are to be appointed by the Minister from a panel of names submitted by an organisation representing employees (traditionally the PNG Federation of Trade Unions).

Termination of appointment of Trustees

The employer and employee representative trustees are appointed for fixed three year terms subject to terminations upon grounds set out in the Act, and not otherwise.

Section 10 provides mandatory grounds upon which the Minister shall terminate a trustee’s appointment if (relevantly), the trustee:

(c) resigns his office by writing under his hand addressed to the Minister;

(d) absents himself from three consecutive meetings without the written consent of the chairman;

(e) . . .

(f) . . .

(g) being a person appointed under Section 6(1)(e), ceases to be an employee;

(h) being a person appointed under Section 6(1)(f) ceases to be an employer.

Section 10(2) allows the Minister to terminate a trustee’s appointment on the clearly stated grounds of:

“. . . inability, inefficiency, incapacity or misbehaviour”.

These are the only legitimate grounds for termination, yet there were many purported terminations on other grounds.

Where the Minister terminates an appointment, Sub-section 10(3) provides that the Minister shall, by notice in the Gazette, declare the office vacant and sub-section 10(4) provides it shall then be filled in accordance with Section 6.

Schedule 1 traces the history of the appointment and termination of appointment of trustees in detail.

As there were so many irregularities and so little care taken to follow the provisions of the Act, that the board was improperly constituted for long periods of time, which throws the legality of major board decisions into doubt. These irregularities are set out in Table 1 of this executive summary and the commission’s findings on this aspect are set out at paragraph 3 of this Executive Summary.

The chairman

Section (6)(1)(a) provides that the chairman shall be the Secretary of the DoF or his nominee approved by the Minister (An amendment to Section 6 which was enacted by Act No. 40 of 1986, was never brought into force).

Expenses and allowances of Trustees

The Act provides for board expenses and allowances to be determined by the Prime Minister and this power was never delegated.

Schedule 1 shows how the power was illegally exercised by Acting Minister Konga (paragraph 5.3.5) and how the NPF board itself illegally increased its own expenses and allowances (paragraph 5.2.2).

The Finance inspectors’ report has traced serious irregularities in the way board expenses and allowances were administered and calculated and the commission has recommended a full audit and recovery action to be implemented in order to recover the vast increase in expenses and allowances (paragraph 5.3.7.1 and Appendix 16).

There are no provisions for granting additional allowances for the chairman (i.e. the Secretary of the DoF or his nominee).

The managing director

Section 15 of the NPF Act provides that the managing director will be the chief executive of the board and head of the staff.

He is appointed by the Minister by notice in the Gazette after prior consultation with the board.

Sub-section 15(2) provides that the managing director’s salary and conditions shall be determined by the Minister, acting with the advice of the board.

Vacation and termination of office are provided for in Section 16 if the managing director:-

(a) becomes incapable;

(b) resigns;

(c) undertakes outside work without board’s consent;

(d) becomes bankrupt;

(e) is guilty of moral turpitude; the board shall terminate his employment.

Under sub-section 16(2), the board may, with the approval of the Minister, terminate the managing director’s appointment for “inability, inefficiency, incapacity or misbehaviour”.

There is no room for the managing director to be engaged on different terms pursuant to a contract of employment or for his appointment to be terminated on grounds other than those specified in section 16, yet these things happened.

Officers

Section 19 provides that the board may appoint officers of the board on the recommendation of the managing director. Conditions of service of officers may be prescribed in the rules.

Though not stated in the NPF Act, it is clear that the remuneration of officers is subject to the SCMC Act. SCMC approval was, however, rarely sought for officers’ remuneration and conditions, including the benefit of the senior staff bonus scheme.

Other employees

By Section 21 of the NPF Act, the managing director may, with the approval of the board, appoint other employees on terms and conditions determined by the board. Their remuneration is also subject to SCMC approval, which was rarely sought.

Periods of appointment

The periods of office of the successive Minister, secretaries of DoF, chairmen of the NPF board, trustees and managing directors are set out in a graph at Appendix 22 to this executive schedule.

Dates of appointment

The dates of appointment to and vacation of office of the successive Ministers, chairmen of the NPF board, trustees and managing directors and officers of the board are set out in the following table, noting all major irregularities, with references to paragraphs in

Schedule 1 and its appendices.

DATES OF APPOINTMENT AND VACATION OF OFFICE NOTING MAJOR IRREGULARITIES

Position: Minister

Name: Chris Haiveta

Period: January 1, 1995 – August 26, 1997

Irregularity: None

Position: Minister

Name: Iairo Lasaro

Period: September 29, 1997 to August 2, 1999

Irregularity: None

Position: Minister

Name: Sir Mekere Morauta

Period: August 1, 1999 to December 31, 1999

Irregularity: None

Position: Chairman

Name: Gerea Aopi

Period: January 1, 1995 to October 3, 1995

Irregularity: Held position of chairman by virtue of being Secretary of the DoF and vacated the chairmanship on ceasing to be Secretary.

Position: Chairman

Name: Rupa Mulina

Period: October 3, 1995 to January 11, 1996

Irregularity: Mr Mulina became chairman by virtue of his appointment as Secretary of the DoF. He sensed a conflict of interest and willingly complied with Minister Haiveta’s request to nominate Evoa Lalatute in his place. Minister Haiveta proceeded, however, to appoint Mr Lalatute himself, illegally on December 13, 1995. On January 19, 1996, Mr Mulina then signed a nomination of Mr Lalatute which was backdated to December 1995

Position: Chairman

Name: Evoa Lalatute

Period: January 11, 1996 to October 18, 1996

Irregularity: Minister Haiveta’s appointment of Mr Lalatute was beyond power and invalid. This mistake was purportedly corrected when Mr Mulina nominated Mr Lalatute on January 19, 1996 by backdated nomination. Mr Lalatute’s appointment was later wrongly terminated by Minister Haiveta. Only the Secretary of the DoF, Mr Mulina, had the power to terminate Mr Lalatute’s chairmanship which he should have done by revoking his nomination. The termination of Mr Lalatute’s appointment by Minister Haiveta was, therefore, ineffective.

Position: Chairman

Name: David Copland

Period: April 18, 1996 to January 15, 1998

Irregularity: Mr Copland’s initial appointment was tainted by the failure to properly terminate Mr Lalatute’s appointment. Mr Copland’s appointment was probably ineffective. Mr Copland’s subsequent periods as acting chairman was by resolution of board meetings from which Mr Vele was absent. Mr Copland’s appointment was purportedly terminated by Minister Lasaro but no proper ground was stated and it was not gazetted as required by the Act.

Position: Chairman

Name: Morea Vele

Period: January 15, 1998 to August 4, 1998

Irregularity: Mr Vele assumed the role of chairman after his appointment as Secretary of DoF. He then absented himself for nine months without nomination of a successor.

Position: Chairman

Name: Brown Bai

Period: September 1, 1998 to January 27, 1999

Irregularity: Mr Bai actively assumed the role as Secretary of the DoF/chairman when appointed as Secretary DoF. Under pressure from Minister Lasaro and Prime Minister Bill Skate, he stood down and nominated Jimmy Maladina as chairman.

Position: Chairman

Name: Jimmy Maladina

Period: January 27, 1999 to December 31, 1999

Irregularity: Mr Maladina’s appointment was planned by Prime Minister Skate and Minister Lasaro with the assistance of Herman Leahy. Mr Maladina’s appointment as chairman (and as employer representative trustee) was strongly opposed by the Employers Federation who issued a Writ seeking a Court injunction.

Position: Public Service Trustees (Not more than two)

Name: Vele Iamo

Period: February 12, 1993 to january 1, 1999

Irregularity: Mr Iamo was a senior officer in the DoF. He was frequently absent without permission for more than three consecutive board meetings, which should have resulted in obligatory termination of his appointment by the Minister (Section 10 – NPF Act). This did not happen. He was eventually terminated for political reasons by Minister Lasaro for no stated ground and without gazettal as required under the Act. The termination was invalid.

Name: Alphmeledy Joel

Period: January 28, 1994 to February 9, 1995

Irregularity: No irregularities

Name: Evoa Lalatute

Period: May 18, 1995 — no formal termination

Irregularity: Carried on as trustee after his chairmanship was revoked. No resignation, formal termination or gazettal. Uncertainty about cessation of his appointment taints the appointment of his successor with legal uncertainty.

Name: Gerea Aopi

Period: February 8 to August 28, 1998

Irregularity: Mr Aopi was appointed as public service representative trustee prior to completion of Mr Lalatute vacating office as a trustee. As there were still two public service trustees, there was no vacancy for Mr Aopi in this category, so his appointment was invalid.

Name: Abel Koivi

Period: April 1, 1996 to January 19, 1999

Irregularity: Appointment was invalid because there was no vacancy in this category of trustee. Mr Koivi was an officer with Air Niugini when it was privatised at which time he ceased to be a public servant and was no longer qualified to be a public servant representative trustee, but he remained in the position. Two years and five moths later, Herman Leahy attempted to rectify the situation by having Mr Koivi’s Air Niugini position declared to be an office in the public service.

The termination of his office as trustee by Mr Skate as acting Minister was without prescribed ground and was not gazetted as required.

Name: Brown Bai

Period: January 19, 1999 to December 31, 1999

Irregularity:After he stood down as chairman (under pressure) Mr Bai remained Secretary of the DoF and he was also appointed as a public service representative trustee. Whether Mr Bai’s appointment was valid depends upon whether the irregular termination of the appointments of Mr Iamo and Mr Koivi were effective.

After appointment Mr Bai absented himself without permission from many more than three consecutive meetings making himself liable for obligatory termination by the Minister. This did not happen.

Name: Mickey Tamarua

Period: January 19, 1999 to October 29, 1999

Irregularity: The validly of Mr Tamarua’s appointment depends on whether the termination of the appointments of Mr Iamo and Mr Koivi were valid — otherwise there was no vacant public service representative trustee position for him to fill.

Mr Tamarua’s termination as a trustee was sudden, with no grounds given and no gazettal.

Consequently, formal date of his termination and its legality is uncertain.

* Three Employee Representative Trustees

Name: John Paska

Period: February 12, 1993 to February 7, 1999 and February 19, 1999 to December 31, 1999

Irregularity: Mr Paska’s appointment was allowed to expire on February 6, 1999, leaving a gap before his reappointment. Mr Fabila and Mr Leahy exploited this situation to reintroduce the proposal to buy the Waigani land in Mr Paska’s absence

Name: Michael Gwaibo

Period: February 12 1993 to February 7, 1999

Irregularity: No irregularity. His appointment was allowed to expire. For a long period, there was no third employee representative trustee.

CONTINUED ON MONDAY