Allegations of elected ministers and board members fiddling with the appointment of employees and the award of bank loans were reported Tuesday by the Cayman Islands auditor general’s office.
As part of a larger review of perceived problems within public sector statutory authorities and government-owned companies, Auditor General Alastair Swarbrick identified a number of instances where politically-appointed boards of directors overstepped their bounds or government ministers engaged in questionable activities.
“We found examples where the boards are getting involved in the day-to-day operations of the entities, rather than letting the executive management run the business for which they are remunerated,” Mr. Swarbrick stated in the report. “I also have significant concerns about how boards are appointed and members are chosen for various roles that they are required to perform.”
Some “significant issues” were listed in the auditor general’s report for specific public sector organisations.
The board of the Cayman Islands Development Bank, a government-supported financial institution that assists small businesses and homeowners in need with loans, apparently was the subject of political interference in its operations during the 2010/11 government budget year.
According to the AG’s report: “A customer that did not meet CIDB’s credit criteria was granted a loan in the amount of $232,500 as a result of requests made by several members of the Legislative Assembly and the chairman of the board that ‘the loan be favourably considered’.”
Development bank general manager Tracy Ebanks noted that transaction occurred prior to the current board chairman’s tenure, but also said the loan designate’s account was up to date and that the bank needed to maintain some flexibility in its credit policies, just like any commercial institution.
Another loan was given out totalling $131,000 that was not supported by the general manager because the customer had a “poor payment history”. In the 2010/11 year, that loan was “converted” to a business loan and increased to $329,000 to “facilitate a payout to other financial institutions”, according to the auditor general. The previous loan was five months behind |was it was “converted”.
In a third case, a $136,000 charge was approved on a property only worth $132,000 – typically, the CIDB does not green-light more than 90 per cent of the maximum property value for a loan. The loan was 183 days behind as of May 2012.
“The bank’s credit policies, approved by the board of directors, are designed to ensure that loans are only disbursed to customers who are credit worthy,” Mr. Swarbrick wrote. “When a breach occurs this exposes CIDB to increased risk of losses due to delinquency.”
Ms Ebanks pointed out that the problems identified in the report had been “mitigated against” and that a review of the government’s 2011/12 fiscal year found no similar issues at the development bank.
In some cases, auditors found that the Cayman Islands Airports Authority board overstepped its bounds with regard to management of authority employees.
Mr. Swarbrick said board members often sat on recruitment interview panels that hired mid-level employees, that board members participated in procurement committees for airport projects and approved applications for businesses to operate at Cayman Islands airports.
“The actions … provide a significant opportunity for corrupt practices to exist,” Mr. Swarbrick wrote in his evaluation.
In general, there was a noted lack of procedures in dealing with the appointment of authority board members, including certain steps to ensure conflicts of interest with regard to board members’ ownership of companies affiliated with the airport would not occur, auditors found.
The CIAA has been “operating outside the realm of acceptable governance practices”, the report noted.
Former authority board chairman Richard Arch, who resigned from that position earlier this month, denied any conflicts of interest relating to his ownership of Air Agencies ground handling firm and insisted he had always acted properly and within the law.
“There was no contravention of the law and I always withdrew prior any discussions that might be considered as conflicting,” Mr. Arch said.
The potential for ‘fraud and error’ was revealed by auditors looking into Cayman Airways Ltd. financials.
What Mr. Swarbrick’s office revealed that what auditors termed “significant control weaknesses” were found across nearly all of the national airline’s financial systems.
“[These included] reconciliations, including basic bank reconciliations, not being performed on a regular or timely basis,” the audit report stated, adding that auditors had to perform these functions in some cases rather than airline staff preparing such records on a regular basis for management.
The review also noted financial control weaknesses in the processing of expenses or certain aspects of the airline’s payroll process. There was a “general lack of evidence” of monitoring and review by senior management of the organisation’s internal controls.
“The totality of these individual weaknesses equates to a material weakness in the processing of financial transactions,” Mr. Swarbrick wrote. “In addition to the risks of losses due to fraud and error, there is also the risk that management reports used for decision-making by senior management, the board and legislators may contain erroneous information and that inappropriate decisions are taken.”