The Provision of Bank Guarantees given in the Sum of US$100,000,000, in breach of the Leadership Code and Section 14(f) of the Ombudsman Act and related matters thereto - July 3, 1996 - Emalus Campus



The Provision of Bank Guarantees given in the Sum of US$100,000,000, in breach of the Leadership Code and Section 14(f) of the Ombudsman Act and related matters thereto - July 3, 1996

96-01

As a result of negotiations entered into with Peter Swanson, a recently discharged Australian bankrupt, the Prime Minister, Maxime C. Korman, the Minister of Finance, Barak Sope, the Governor of the Reserve Bank of Vanuatu Samson Ngwele and the First Secretary of Finance, George Borugu signed 10 International Bank Guarantees on behalf of the Reserve Bank and the Republic of Vanuatu. Each guarantee was in the sum of US$10,000,000.  The guarantees were dated April 1, 1996 and were to mature on April 1, 1998. The total amount of the guarantees significantly exceeded the total foreign reserves of Vanuatu.  The guarantees were joint and several and could be freely negotiated or transferred by the bearer.  Their release onto the open financial market represented a grave risk to the financial solvency of Vanuatu.

The guarantee certificates were delivered to Peter Swanson along with a diplomatic passport and a power of attorney to Act on behalf of the Republic of Vanuatu.  Swanson was also provided with details of all the foreign reserves held by Vanuatu.  In the course of dealings, Swanson was paid AUD$50,000 from an unauthorized loan account opened at the National Bank of Vanuatu by the Minister of Finance.

No proper inquiries were make into the background of Swanson or New Resources Group (Vanuatu) Ltd the “company” that was part of the deal.  In fact, the company was not incorporated at the time of the execution of the guarantees.

In the negotiations leading up to the issuance of the guarantees, documents and letters were produced by Swanson which purported to explain how the guarantees could be used in “bank credit instrument trading”. Nothing in the Ombudsman’s investigation revealed any consideration flowing to the Government of Vanuatu as a result of the issuance of the guarantees.  It appears however that the guarantees were signed in the expectation that profits in the order of US$250,000,000 could be realized in 2 years.  The documents uncovered in the investigation supported a conclusion that the guarantee scheme was a scam from the beginning.  The Governor of the Reserve Bank, after signing the guarantees, agreed with this assessment and, after the issuance of the guarantees, tried to remedy the situation.

In addition to engaging with alarming naivete in ill considered investment plan, ostensibly on behalf of the people of Vanuatu, the report concluded that the actions of the Prime Minister, Minister of Finance, the Governor of the Reserve Bank and the First Secretary of Finance constituted misconduct.

The Minister of Finance, the Honourable Barak Sope committed a breach of section 3(3)(b) of the Government Borrowing and Guarantee Act Cap.149 in that did not obtain prior approval of the Council of Ministers before the execution of the Guarantees.

 
A breach of Section 13 of the Public Finance Act Cap.117 occurred when the Guarantees were executed by the Prime Minister, the Honourable Maxime Carlot Korman, the Minister of Finance, the Honourable Barak Sope, the Governor of the Reserve Bank, Mr Samson Ngwele and Mr George Borugu, First Secretary to the Minister of Finance, without having first obtained a resolution of Parliament.

 
The Governor of the Reserve Bank, Mr Samson Ngwele breached section 23 of the Reserve Bank Act which places him under a duty to ensure that the value of external assets of the Bank does not reduce to more than 50 percent of the total demand liabilities of the bank.

The Governor of the Reserve Bank did not have the approval of the Board of Directors of the Reserve Bank and he thus acted beyond the scope of his authority by executing the Guarantees and accompanying Non-Circumvention Agreement.

Section 38 of the Reserve Bank Act (which prohibits the Reserve Bank from making advances to the Government except in circumstances specified in Sections 27, 36 and 37) was breached.

 

Funds were committed by the Minister of Finance in Breach of Section 3(3)(b) of the Government Borrowings and Guarantee Act without approval of the Council of Ministers.

Further, it was concluded that the Leadership Code was breached in the following respects:

The Prime Minister, the Minister of Finance, the Governor of the Reserve Bank and the First Secretary of Finance:

    (a)    Demeaned their offices or positions

    (b)   Allowed their integrity to be brought into question; and

    (c)    Endangered or diminished respect for and confidence in the integrity of the Government of the Republic of Vanuatu.

·        Recommendations

    ·        That the Minister of Finance be dismissed from his leadership position.

    ·        That the Prime Minister be reprimanded by the President.

    ·        That the Governor of the Reserve Bank be dismissed from office.

    ·        That the First Secretary of Finance be dismissed from office.

    ·        That the Council of Ministers should meet urgently to discuss the matter.

    ·        That the Government have nothing further to do with Peter Swanson or New Resources (Vanuatu) Ltd.

    ·        That the diplomatic passport issued to Peter Swanson be cancelled.

    ·        That the power of attorney given to Peter Swanson be cancelled.

(see also reports of October 22, 1996 and November 28 1996)

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Written by Edward R. Hill
UNDP Governance and Accountability Project
January, 2001
Van/97/001
© Ombudsman of Vanuatu
Published here by University of the South Pacific, School of Law Web Site - www.vanuatu.usp.ac.fj






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