‘Some govt funds at risk’

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Posted on Mar 03 2005
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Previous amendments to the Government Deposit Safety Act substantially weakened the measure in such a way that banks may pledge the same securities simultaneously to different government agencies without detection, the Office of the Public Auditor said.

In an audit report on the security of CNMI government deposits in banks and financial institutions released yesterday, OPA said it actually found that a bank “had pledged the same securities to three government agencies/corporations—Commonwealth Development Authority, Marianas Public Lands Authority, and the NMI Retirement Fund.”

The Government Deposit Safety Act requires banks to provide security—or collateral—for certain government deposits but the OPA report found out weaknesses in this system that could place the government’s deposits in jeopardy.

OPA said it found that “none of the major agencies or corporations had adequate regulations in place to ensure the security of their deposits.”

OPA pointed out that CDA’s enabling law imposes only a general prudent management requirement applicable to all its assets, “but there appear to be no guidelines for operating and liquidity funds.”

The Commonwealth Ports Authority does not require security for all funds, it said. While its enabling law states that deposits shall be secured “in the manner provided in the resolution authorizing the issuance of the bonds to which the funds relate, there is no guidance…as to the criteria to be set in the resolutions. Further there is no mention of security for other funds, such as operations.”

For its part, the Commonwealth Utilities Corp. does not specify what is acceptable insurance or collateral, or how collateral is to be handled.

MPLA, OPA said, provides no guidance regarding the security of its funds, while the Marianas Visitors Authority “is unclear and does not mention security for its deposits.”

The same is true with the NMI Retirement Fund, whose board has full power to manage investments it deems most appropriate. Although the board is authorized to appoint custodians of its assets or evidences of assets, it is unclear what funds in the Fund are to be under the control of such custodians, said OPA.

Except as to specific investment options, it is unclear as to where funds are to be held and how they are to be secured, and whether or not they should be collaterized, said OPA.

The Public School System’s funds are maintained by OPA but PSS legislation does not provide security for the remainder of its funds, OPA said.

“Inquiry on our part showed that government agencies/corporations have no written policies or procedures addressing the handling of government funds,” OPA said.

Meantime, OPA said that the use of the same collateral for different deposits happened because the government has no monitoring mechanism to ensure compliance with the Government Deposit Safety Act.

For one, the Department of Commerce admitted not conducting bank audits, OPA said.

“OPA believes that monitoring compliance with the Act could have prevented this from occurring if monitoring included the tracing of all securities pledged by banks to their respective government deposits,” OPA said.

The Act, enacted in 1985, initially required all government deposits, both Treasury and CNMI government agency/corporation, be collateralized 110 percent by a federally insured bank.

In 1994, the Act was amended to allow the depositing of Treasury funds in non-federally insured banks. The 1994 amendment also excluded from the Act funds held by CNMI autonomous agencies. In 2001, the law was amended again, reducing the collateral requirement to 100 percent.

The two amendments, OPA said, resulted in a loss of uniformity over protection of government deposits, and potentially placed $17.3 million of government funds deposited in a non-federally insured banks and financial institutions at risk.

The latest amendment allows a bank to use as collateral “obligations and securities backed by the CNMI government.” OPA said, though, that this phrase is not defined.

“If obligations or securities are not specifically identified, it is unlikely that any monitoring will be effective,” said OPA.

The legislative amendments in 2001 and 1994, OPA said, “substantially weakened the security of government deposits.”

OPA called on the Legislature to review the Act and all other laws covering government deposits to ensure uniform coverage “not just for the Treasury funds, but all CNMI government agencies/corporations.”

OPA also recommended that the Secretary of Finance adopt regulations to interpret, execute, and enforce the provisions of the law.

The Commerce Secretary should implement a system to monitor all securities pledged by banks as collateral for all CNMI government deposits, or seek legislative action to designate such responsibility to another capable office or agency.

As for government agencies and corporations currently excluded from the law, they should ensure transparency and avoid perception of any conflict of interest in handling public funds, the OPA said.

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