• Housing ministry incurred $2.75m ‘unauthorised obligations’
• Forensic probe says loans arrangements ‘alarming’ for public
• Identifies $1.12m in ‘improper payments’, mostly to contractors
By NEIL HARTNELL
Tribune Business Editor
The National Insurance Board (NIB) “lost control” of its $10.8m loan to the Government’s housing scheme, a forensic audit probe found, leading to $2.753m in “unauthorised obligations” being incurred.
The BDO accounting firm’s investigation, tabled in the House of Assembly yesterday, exposed another episode where the Bahamian people’s monies were improperly managed due to multiple breaches and control violations by those entrusted with their care.
In particular, the BDO investigators said it was “alarming” that NIB’s Memorandum of Understanding (MoU) with the Ministry of Housing and the Environment, and accompanying documents for the loan, “lacked some basic and usual information that is expected of a typical facility agreement”. It described the funding’s structure as “unusual” and featuring “irregularities”.
These flaws, the report concluded, resulted in “inappropriate payments” of $1.119m from funds that belonged to the Bahamian people. Of this sum, BDO said $300,693 concerned “unauthorised mobilisation prepayments” for contractors, while a further $417,249 was paid out for work building government homes that was never performed.
Of that latter figure, some $269,690 in such “improper payments” went to contractors in Abaco, while the $147,559 balance related to Grand Bahama. The report also identified $118,025 worth of “duplicate payments” made to contractors, while $283,264 was defrauded by an employee at the HLB Galanis & Co accounting firm, which acted as the loan’s administrator.
BDO also disclosed that, given the Ministry of Housing and the Environment entered into housing commitments worth $12.576m when the budget under the MoU with NIB was $9.823m, some $2.753m in “unauthorised contractual obligations” were incurred in “violation” of the agreement between the two sides.
NIB was found to have committed “a dereliction of oversight responsibilities” by waiting almost 18 months to contact HLB Galanis for more timely updates on the project’s progress, resulting in housing commitments exceeding the agreed budget by almost 25 percent come March 2016.
“Thus by March 2016 the NIB had lost control of the programme, effectively ceding it to the Ministry of Housing and the Environment,” BDO concluded. “The NIB did not conduct best practices with respect to its oversight duties and obligations.
“It appears that NIB personnel released the funds based solely on the requests for the funds. The terms of the MoU were not followed, and signatories on the NIB accounts followed instructions to process these payments.”
While the Opposition yesterday made no secret of their belief that the BDO report’s release was timed to distract public and media attention from Lanisha Rolle’s departure as minister of youth, sports and culture, especially given that it was completed 13 months ago in January 2020, its contents illustrate a disturbing failure to safeguard the public’s social security funds held in trust for their benefit.
In particular, the BDO report suggested that the $10.8m loan was structured to evade parliamentary scrutiny and also remove the need for its approval by the then-minister of finance, who was prime minister Perry Christie.
Discussions on raising the loan were initiated in September 2012 four months after the Christie administration was elected to office by Simon Wilson, the Ministry of Finance’s financial secretary, who it is understood still holds the title and remains on full pay despite the current government’s attempt to remove him.
With the debt-laden Bahamas Mortgage Corporation cash-strapped, and unable to finance the Government’s housing initiative, Mr Wilson turned to NIB and Phaedra Mackey-Knowles, its deputy director of investments, as an alternative option.
The initial proposal for a $60m “bridge loan” from NIB, together with a $5m revolving credit facility, was reduced to $10m after Ms Mackey-Knowles “raised concerns about the amount of the loan to the Mortgage Corporation and availability of funds considering the limitations of the NIB cash flow. She also raised concerns about the interest rate and highlighted.... the lack of a [government] guarantee”.
However, the Attorney General’s Office subsequently pointed out that the Mortgage Corporation Act required all borrowings over $1m to be approved by the minister of finance, while a House of Assembly resolution was required for the government guarantee.
To overcome this problem, a September 5, 2013, meeting at NIB headquarters agreed to “simplify the draft MoU” so that the money could be provided as a direct loan to then-minister of housing, Kenred Dorsett, as “a corporation sole” - a move that gave him the status of a legal entity.
“We found that a degree of care was followed during the early and initial discussions about most aspects of the credit facility, its purposes and plan for the use of the funds and subsequent repayment. Interest rates, in particular, were reviewed and scrutinised in great detail,” BDO said.
“Following two months of discussions, the Mortgage Corporation Board approved a bridge loan from the NIB and the parties started work on the MoU. While the same high-level qualified persons carried out the task, including a complete review by NIB general counsel, Heather Maynard, it is alarming that the final MoU document and the accompanying facility letter lacked some basic and usual information that is expected of a facility agreement.”
The report added some NIB directors had voiced concerns about the loan, and changes to the MoU allowing funds to be paid directly to the Ministry of Housing, asking if NIB “will get its money back”, but the Board went on to approve these terms. “It appears that the revision of the loan counterparties was devised to circumvent the need for the Government’s guarantee,” it said.
BDO said the MoU made no mention of the interest rate payable on the loan, while both it and the loan documents failed to set out a repayment schedule. This, the accounting firm added, made NIB’s enforcement of its rights difficult should the ministry of housing default, while there were no “consequences” for the latter if it did fail to pay.
The forensic investigation added that no loan security was provided, increasing NIB’s risk making it potentially “unsafe” and breaching the social security system’s own investment policy and guidelines. “The MoU and facility letter are legally binding documents, and omission of critical and material details is alarming,” BDO said.
It added that the proposed interest rate attached to the loan, of “91-day Treasury Bills plus a spread of 2 percent”, also breached NIB’s requirement that the benchmark yield of its investment portfolio be set at Bahamian Prime “at least”. Liquidity, given that the loan proceeds were to be invested in constructing housing assets that take time to monetise if needed, was another concern.
“BDO identified lax oversight in following policies and procedures in that the MoU and facility letter covenants were not followed,” the report said. “While the loan origination process appeared sound and diligent, the loan granting procedure - including the approval of an inadequate MoU and facility letter - lacked the level of scrutiny and judgment required for all NIB investments.
“Due to the unusual nature of the loan and other irregularities, and given the loan’s illiquid nature, best practice at a minimum would dictate that consultation should have occurred between the minister of finance [Perry Christie] and minister of labour and national insurance [Shane Gibson]. BDO has seen no evidence that Mr Gibson consulted with the minister of finance.”