Below is the 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.
NPF Final Report
This is the seventh 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.
Borrowings
All the borrowings were illegal and unsuitable because NPF had no power to borrow. When Noel Wright or the managing director of NPF exceeded their delegated authority to obtain a loan for NPF or to draw down on an existing facility, this amounted to an inappropriate intervention, as these actions were the function of the NPF board.
Examples were:
- The agreements with PNGBC to utilise an overdraft facility (Schedule 2A, paragraph 4.3 and Executive Summary paragraph 4);
- The agreement between NPF management and the ANZ to grant an additional K20 million facility without the knowledge or approval of the NPF board (Schedule 2E, paragraph 4.3 and Executive Summary, paragraph 7.1); and
- Many examples when NPF management exceeded their authority by making drawdowns or transferring securities on the loan facilities without NPF board approvals.
Investments
The schedules dealing with NPF’s equity investments contain many, many examples when NPF management (Mr Wright and Mr Kaul mostly) acquired shares on-market, way beyond their delegated powers. These were inappropriate interventions in the functions of the NPF board.
Examples include:
- STC and CXL – Executive Summary 4D, paragraph 6.1
- Cue – Executive Summary 4C, paragraphs 6 & 7
- Macmin – Executive Summary 4E, paragraph 5 and 6
Sometimes these inappropriate interventions by management to acquire shares were subsequently ratified by specific resolutions of the NPF board. Many times there was no such ratification. For example, Mr Kaul’s unauthorised action in sealing an irrevocable offer to sub-underwrite a Cue share placement to the extent of A$25 million (Executive Summary 4C, paragraph 2.5).
Directions by Ministers Intervention by Prime Minister Bill Skate
The intervention by Prime Minister Bill Skate to direct DoF Secretary Brown Bai, to stand down as chairman of NPF and to appoint Jimmy Maladina in his place (Schedule 1, paragraphs 4.3.6.1 and 4.3.6.2).
The intervention by Prime Minister Skate and Minister Lasaro to arrange for the termination of Robert Kaul’s appointment as managing director and to secure the appointment of Henry Fabila in his place (Schedule 1, paragraphs 4.4.13 and 4.4.1.4).
The intervention by Prime Minister Skate by directing NPF managing director not to travel overseas.
Intervention regarding the purchase of Government stock
It seems that almost annually the NPF was asked to take up government stock or Treasury Bills for the purposes of the national budget by the Minister responsible for NPF.
Such requests are, in the commission’s view, improper and an interference with the investment powers of the NPF board.
Intervention by Jimmy Maladina
Before his appointment as a trustee of the NPF, Jimmy Maladina intervened in December 1998 to force Mr Taniguchi of Kumagai to agree to participate in the NPF Tower fraud, threatening him that he would otherwise deny Kumagai payment of its existing claims when he became chairman of NPF in the near future.
Intervention by Herman Leahy
When preparing to implement the NPF Tower fraud, Mr Leahy intervened in existing contractual arrangements by directing PAC to withdraw from the negotiations process it was conducting with Kumagai on NPF’s behalf. This enabled Mr Leahy to take over the negotiations and arrive at a settlement price which was inflated by K2,505,000.
Intervention by Noel Wright
There were many instances when Mr Wright intervened in the lawful functions of the NPF board by taking actions way beyond his delegated authority.
Examples include:
- Dealing in Lihir options, despite a board resolution to desist from the practise (Schedule 4I, paragraph 4.4.2);
- Directing Wilson HTM to transfer funds to Crocodile in Indonesia (Schedule 4I, paragraph 7.5.7(g);
- Securing an additional K20 million facility from ANZ; and
- Pledging and transferring huge volume of NPF share scrip as security for ANZ loans
Intervention by Henry Fabila
Mr Fabila and Mr Leahy intervened in the lawful tender process for awarding contracts for managing NPF properties, which included awarding the lucrative contract to manage the NPF Tower to PMFNRE (Schedule 9, paragraph 5.6.1(c).
Agreeing to appoint PMFNRE as NPF’s agent to sell 50 per cent of the NPF Tower to the Papua New Guinea Harbours Board (PNGHB) and to pay a 5 per cent commission worth K2 million to Mr Sullivan – without the knowledge or approval of the NPF board (Schedule 6, paragraphs 13 to 13.1.4).
Term of Reference 3
“Whether in connection with action or failure to act of any trustee, officer or employee of the fund or any other person should be referred to the relevant authorities for investigation with a view to criminal prosecution or other action”
To the Ombudsman Commission
Throughout its investigation, the commission has made many findings about the conduct of trustees and other leaders, which it considers constitutes a breach of the Leadership Code, which has been promulgated pursuant to the Organic Law on the Duties and Responsibilities of Leadership.
In many cases, this has led the commission to recommend to the Prime Minister that those leaders be referred to the Ombudsman Commission. In some cases, the leader is referred to by name for a particular failure by that leader personally. In some cases, the referral has been in respect of all trustees in office at the time because the failure has been a collective failure of such magnitude that it constitutes a breach of the Leadership Code, not merely a breach of fiduciary duties to the members of the fund. Examples of individual referrals to the Ombudsman Commission include:
- Minister Haiveta’s repeated failure to obtain expert independent advice from DoF or elsewhere before granting approvals for transactions having a significant impact on the affairs of NPF.
For example general approval for NPF to invest in companies registered on stock exchanges up to K1 million per transaction (Schedule 1, paragraphs 14.4.3 and 14.4.4.1(a). Approval for NPF to invest in STC and CXL up to K40 million as part of a take over strategy (Schedule 4D, paragraph 4.4.1).
- Trustee Nathaniel Poiya’s acceptance of K150,000 paid to him personally (Schedule 6 paragraph 12) and another payment of K100,000 to the company Mecca No.36 Ltd (Schedule 6 paragraph 12.4.9.2.7(v), which was jointly owned by himself and Peter O’Neill, was from proceeds of the NPF fraud.
Examples of the trustees being referred to the Ombudsman Commission as a group include their repeated failure to supervise, reprimand and control NPF management’s unauthorised activities.
To the professional regulatory bodies
When people have been guilty of professional misconduct as a lawyer, accountant, valuer, etc, the commission has recommended that they be referred to the body responsible for investigating professional misconduct – such as the PNG Law Society and the PNG Institute of Accountants.
To the Commissioner for Police
If the commission finds that there is substantial evidence that a person has committed a crime it has recommended that the Prime Minister refer that person to the Commissioner for Police for investigation and to determine whether the person should be charged with a criminal offence.
Direct referrals
In cases where a person has committed an offence, in effect, against the commission itself – such as fabricating documents, committing perjury and generally interfering with the investigation, contrary to the Commission’s of Inquiry Act or the Criminal Code, the commission itself, through counsel assisting, has referred the matter directly to the Commissioner for Police or other relevant authority.
Method of reporting referrals
Each of the referrals is reported in the schedule, which deals with the topic under investigation. The referrals are therefore listed in the body of the schedule as a “finding”. They are also mentioned in the paragraph at the rear of the schedule, which brings together all findings in the context of the commission’s terms of reference. These referrals are listed in those paragraphs under the heading of Term of Reference 3.
An attempt has been made to list all people who have been referred from the schedules in the following Table of Referrals. Part 1 lists referrals recommended to the Prime Minster by the commission. Part 2 lists referrals made by the commission itself to the relevant authority.
Term of Reference 4
“Whether in connection with any failure to act in good faith, any trustee or officer or employee of the fund or any other person should be held personally responsible for decisions and outcomes”
If a trustee fails in a fiduciary duty or an officer fails a common law duty to the NPF board, that person may face personal liability for any loss caused by that failure of duty depending upon the circumstances. It may be a defence to an action claiming personal liability brought by the NPF board or members of the fund, if the trustee or officer can establish that he or she acted in good faith.
Throughout the schedules, the commission has found many, many instances where management as a whole, individual officers, the trustees as a whole and individual trustees, were in breach of fiduciary or common law duty. The commission has noted that fact.
In instances where the failure of duty has led to loss suffered by the fund and by its members, this is pointed out by the commission in the text and in the findings.
The commission has not, however, proceeded to determine whether or not there is personal liability or whether a defence of “acting in good faith” would succeed. This matter is left for the current NPF board, individual members and the membership as a “class” to consider.
There may be circumstances where it would be appropriate to institute court proceedings but it is not the commission’s role to make findings about personal liability.
Term of Reference 5
“Whether, under the Constitution or any Act, the responsible government agencies, including the Department of Finance and Treasury and the Auditor-General and failed in their regulatory, supervisory or reporting responsibilities, and what was the extent of this failure”
This matter has been fully reported in Schedule 1, paragraph 15 and it is outlined in Executive Summary 1, paragraphs 9 and 15.
By legislation, the NPF was obliged to invest only in accordance with the investment guidelines and had strict obligations to make quarterly and annual reports and to maintain and work to a five-year plan updated annually.
It failed to perform on all these obligations throughout the five-year period under review.
The fact that these failures persisted unrectified for five years enabled the NPF to pursue its reckless investment policies to the brink of financial ruin and somewhat over the brink, in that it suffered losses in excess of K150 million.
No agency of Government accepted the clear responsibility to supervise, report on and enforce NPF’s compliance with its planning, investing and reporting obligations.
Department of Finance
Under the PF(M) Act, the DoF was not obliged to perform this role in relation to the NPF (because it was not a “public body” for the purpose) unless so directed by the Minister, and no such direction was given.
The DoF did, however, have an obligation to make recommendations to the Minister when required by the Minister to do so. This included the duty to give the Minister sound, analytical, expert advice on applications for approval by NPF. In most cases, it conspicuously failed its duty in this regard.
Mostly, its advice to the Minister consisted of parrot-like summaries of NPF’s submissions, lacking any critical analysis.
Evidence from senior DoF officers showed that DoF lacked the professional expertise to provide expert advice on investments and it failed to brief this role out to independent expert consultants.
Under Section 64 of the PF(M) Act, the Secretary of the DoF was empowered to oblige the NPF (and other public bodies) to report to him on the state of their finances. Under Section 64, the Secretary could instigate an investigation into its affairs.
Brown Bai utilised this section with great effect in 1999, by commissioning the Finance Inspectors’ inquiry and report. Prior to this, however, this effective tool, which could have been the salvation of NPF, was left unused.
The Minister
The Minister for Finance was the Minister responsible for NPF and under the PF(M) Act, was Minister responsible for monitoring all public bodies which for some (but not all) purposes, included the NPF. The Minister was also empowered to issue guidelines on investments and to give broad policy directions.
Sir Julius Chan promulgated carefully considered and appropriate guidelines in 1993.
After that, the power was unused except for one hasty and ill-advised variation by Minister Haiveta in 1996, which allowed NPF to acquire equities in companies listed on registered stock exchanges up to K1 million per transaction, without the need to seek his approval.
This opened the door to a massive increase in investments in equities in a series of less than K1 million transactions.
Mr Haiveta sought no expert advice before making this decision (Schedule 1, paragraphs 22.3.9.1, 22.3.10.1, Executive Summary, paragraph 15.12).
Accounts and audit obligations
The obligations and the breakdown in their performance are briefly described in Executive Summary 1 at paragraph 1 and fully reported in Schedule 1 paragraph 15.
Because NPF failed to present its annual reports from 1997 onwards, the Auditor-General was unable to perform the annual audit for presentation to the Minister and tabling in the National Parliament. This was a complete systemic breakdown from 1997 onwards.
The commission’s finding at Schedule 1, paragraph 15.4.3 are repeated in Executive Summary paragraph 9.8.
Term of Reference 6 – Structural Reforms
“Whether the present reporting, monitoring and supervisory regime is adequate and whether any, and if so what, structural reforms should be implemented”
The commission was asked to report upon the adequacy of NPF’s reporting, monitoring and supervisory regime under the NPF Act and has done so at paragraphs 21 and 22 of Schedule 1, which are summarised at Executive Summary 1, paragraph 15.
After the completion of the commission’s inquiries and public hearings into structural matters were completed, the Superannuation Act 2000, was brought into force.
The NPF has registered under the new Act as Nasfund and the NPF Act has been repealed.
The commission has nevertheless published its report about structural weaknesses and problems under the NPF Act and its recommendations for reform, which had been worked up prior to the coming into force of the new Act. This approach has validity, partly because some of the previous weaknesses and problems may still persist and our findings may therefore have direct relevance.
Also, in many ways, the NPF’s problems were not caused by weaknesses in the formal structure established under the legislation and directions made under it.
The problems were mainly caused by the way the NPF was able to ignore and disobey the clear structural requirements – regarding such things as its investment policies and reporting obligations and there was no agency to monitor its non-compliance.
The effectiveness of the Superannuation Act 2000, will to a large extent depend upon whether an effective monitoring and enforcement agency is put in place.
Throughout the schedules to this report, the commission has pointed to weaknesses caused by the power of the Minister over some of NPF’s affairs and occasional inappropriate intervention. Other weaknesses described include the inadequacies of the NPF Board of Trustees and the lack of an effective supervision and monitoring body.
The commission’s recommendations are discussed and recorded fully in paragraphs 21 and 22 of Schedule 1. In Executive Summary 1, paragraphs 15.5 to 15.34 is a full list of the commission’s recommendations for structural reform.
In general terms, the major recommendations are, in essence, to:
(a) Remove the NPF from the detailed control and influence of the Minister and the DoF, as it is a private superannuation fund;
(b) Reduce the degree of external control over the management of NPF’s affairs and investments but increase the capacity of management;
(c) Vest the control in a better-qualified board of trustees;
(d) Establish the BPNG as the external regulator of NPF and give it the staff and powers to regulate effectively;
(e) For matters still requiring imposition of external controls or guidelines the necessary powers to monitor and control should be transferred from the Minister and DoF to the Regulator (the BPNG).
(f) In order to ensure better qualified Trustees:
(i) remove all political interference from the selection and appointments process and vest power of appointment in specified organisations of employers and employees with all appointments to the board and senior management to be approved as fit and proper persons by the regulator.
(ii) Take active measures to help trustees understand and perform their roles and to understand the nature of their fiduciary duty to members of the fund. These measures should include detailed orientation or new appointees, a hand book or manual and seminars on essential aspects of trustees’ functions.
(g) Strengthen the accounting and reporting requirements and require the regulator to accept responsibility to monitor and enforce compliance.
Trustees need such help in order to understand such things as the principles of investment, the relationship between trustees and management, the nature of fiduciary duty, personal liability, the structure of NPF, benefits for members.
(h) Provide for prudential investment guidelines to be promulgated and enforced by the regulator.
(i) Enable NPF to appoint professional fund managers onto the board of NPF or, preferably, to brief investment management to a firm of professional fund managers, which would be obliged to act within the prudential guidelines promulgated by the regulator and within policy directions of the board.
(j) Strengthen and facilitate two-way communication between members and management so that an active and informed membership can find ways to monitor the conduct and performance of management and to monitor the fund’s investment policies and strategies.
CONCLUDING COMMENTS
To a very large extent, the crisis which befell the NPF was caused by a dramatic departure from the normal prudential guidelines applicable to superannuation funds, which had been spelled out explicitly in the 1993 Investment Guidelines. The reasons why this occurred lay in the personalities of the fund’s chairmen, trustees and managers in 1996 to 1999, the reckless high-risk investment strategy they pursued and the fact that they financed the investments with borrowed funds.
When the inevitable down turn in economic conditions occurred in 1997-1998, NPF was trapped.
The rapid fall in the value of its equities meant more and more scrip needed to be pledged to the banks as security for the loans.
As interest rates rose and the value of the kina fell NPF’s interest rate burden, of more than K1 million per month became unbearable. Inevitably, NPF began to default on its loan agreements with the banks and the banks then required the loans to be reduced.
This in turn required NPF’s equity assets to be sold off at a time when they had very little value – leading to massive realised losses in the members’ assets.
More than K150 million of NPF’s funds were lost in this way.
This recipe for financial disaster continued un-remedied for so long because NPF management totally failed to meet its reporting obligations and the board of trustees failed their fiduciary duties to monitor and control management.
On top of this, when NPF was at its lowest point, those charged with its management, namely its chairman Jimmy Maladina its corporate secretary/ legal officer Herman Leahy and to a lesser extent its managing director the late Henry Fabila, were involved in a criminal conspiracy and other criminal conduct. They succeeded in defrauding the NPF of millions of kina by means of excessive valuation fees, a fraudulent second acceleration claim on the NPF Tower, payment of a currency fluctuation claim on the NPF Tower, which was not legally payable and Mr Maladina’s retention of the proceeds of sale of shares in Vengold.
DoF Secretary Brown Bai started the investigation and clean-up process in early 1999 and the new manager Rod Mitchell started to impose appropriate financial and managerial controls by mid-year.
NPF then quickly began to address its problems. With good advice from PwC and KPMG, a rescue package was worked out.
This involved government assistance and increased employer contributions. It also involved members foregoing entitlements.
NPF then commenced the climb back to profitability, which it appears now to have been achieved as “Nasfund” under the regime created by the Superannuation Act 2000.
CONTINUED TOMORROW
