Friday, July 29, 2011

BSP decries fraud guideline


THE largest commercial bank in PNG has decried new regulations imposed on banks by the police fraud squad to stop fraudulent payments, The National reports.
Bank South Pacific yesterday said guidelines from the fraud squad's financial intelligence unit were "actually aimed at abrogating the responsibility and liability of the government in terms of ensuring good governance".
Answering questions from The National, BSP chief executive officer Ian Clyne said the application and enforcement of the guidelines would result in extra cost to banks which would naturally pass on to government. 
He said government development projects around the country would be delayed for unnecessarily long periods while audits were conducted by banks to ensure payments for each of the pro­jects were legitimate. 
"While well-meaning, the guidelines are unlikely to achieve their objective of reducing fraud associated with government contracts and payments, and may well lead to a reduction in development and infrastructure pro­jects," Clyne said.
Clyne said: "Government road, school, health, electricity and water projects will be delayed for months, regularly stopped to await milestone payments or simply not done.
"For banks to 100% comply with these guidelines, they will need to engage or recruit a large number of lawyers, civil engineers and auditors.
"This is simply not the responsibility of commercial banks."
At the same time, he said government officers would have their private bank details examined on a regular basis even if they had acted properly and professionally. 
"The banks would pass on all additional costs to the government and/or the company and could involve many thousands of kina."
He said the guidelines effectively transfer government's oversight and checks and balance responsibilities to commercial banks and the Bank of PNG.
"The lack of public debate on the FIU's assertion that 25-40% of all government payments are defrauded is a concern."
Clyne said it was the responsibility of the auditor-general, attorney-general and all government department secretaries and the Ombudsman Commission to ensure there was transparency and accountability in all government transactions.
Clyne said the new regulations would seriously hinder the go­vernment's ability to effectively undertake and deliver public service projects as banks will now be required to undertake stringent checks before making payments to contractors and suppliers.
Some of the checks included:
  • Validating the tender document and process to ensure all documentation follows all rele­vant government regulations;
  • Checking that no public servant associated with the process has received any financial benefit which will require a check of personal bank accounts;
  • Ensuring the selection of the successful contractor or supplier is done on a transparent and independent basis. That the owners of these entities have not made any strange payments during this period to third parties close to the government again requires checking company and personal bank accounts;
  • Ensuring that the contractor or supplier delivers the project or goods in line with the contract specifications and that requires specialist engineering verifi­cation which will have to be conducted on site all over PNG (this is not a normal banking service);
  • Identify and check the people receiving payments are entitled to such payments in terms of their employment or ownership of the contractor or supplier; 
  • Payments must be made on set milestones and deliverables, which means that this audit process has to be undertaken by a bank several times for each project to validate each indi­vidual milestone payment;
  • Every payment cleared by the bank must be signed by two verifying bank officers; and
  • These officers and the banks are liable on an on-going basis if, at some time in the future, it can be proven that a fraud or overpayment has occurred, even if the bank has made an enormous effort to validate the transaction.
Clyne said: "The conse­quen­ces are obvious and conside­ra­ble. 
"Any company or individuals, who tender for government contracts, will have all milestone or contract payments delayed by several weeks, if not months. 
"Contractors may suffer severe financial cash-flow problems as they must fund the whole project and pay wages, among others, and then wait until the banks have finished their full file compliance review. 
Should banks not be willing to accept the risks and liabilities associated with auditing and processing government cheques and payments of this type, they will simply refuse to negotiate these government payments which would have very serious ramifications for both the government and the banking sector.
The FIU's regulation is initially aimed at all transactions of K2 million and above. 
Clyne claimed the FIU regulations were "not" based on any international "best practice" precedence. 
They are "not" enforced in this way in other democratic countries. 
He also expressed concern that the potentially damaging regulation had been in force since last month but had largely been ignored by the government and businesses.

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