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UBS Australia failed to see red flags in PNG loan

Angus Grigg
Angus GriggNational affairs correspondent

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The Australian arm of UBS was paid “excessive” fees to arrange a $1.2 billion loan for the government of Papua New Guinea according to the watchdog in Port Moresby, which labelled the investment bank’s appointment “wrong and improper”.

In a report Prime Minister Peter O’Neill has spent five years seeking to quash, the Ombudsman Commission of PNG was highly critical of how the government engaged with UBS.

The 332-page report suggests UBS either ignored or failed to ask sufficient questions around the legality of the controversial transaction, which saw the Pacific Island nation lose an estimated $400 million in less than three years.

PNG Prime Minister Peter O'Neill is facing a vote of no confidence in his leadership. Bloomberg

The leaking of the Ombudsman’s report, which says 15 PNG laws may have been breached in agreeing to the loan, comes at an awkward time for Mr O’Neill.

He is set to face a no confidence motion on the floor of parliament this month in what analysts see as the biggest test of his prime ministership.

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The Prime Minister slammed the leaked report as “clearly political” and said opposition MPs were playing a “dirty game”.

PNG used the UBS loan to purchase a 10 per cent stake in the ASX-listed Oil Search, shares it was forced to sell when the stock price fell sharply. UBS declined to comment.

The report says Guy Fowler, who announced his resignation from UBS last month after 25 years with the bank, was the main contact with PNG authorities. It does not make any adverse findings against Mr Fowler, but is scathing about a process in which UBS was the sole financial adviser.

UBS banker Guy Fowler will leave UBS by year's end. Nic Walker

It highlights a series of red flags, which should have raised compliance concerns within the Australian arm of the Swiss bank.

Insufficient time

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The report notes the State Solicitor, Daniel Rolpagarea, was given 28 volumes of documents at midnight on the eve of a special cabinet meeting convened to approve the loan.

This was insufficient time to “give legal clearance” it found, although on the substantive point of parliamentary approval Mr Rolpagarea said it was required under section 209 of the Constitution. This was never sought, which has thrown into question the legality of the loan.

The Ombudsman found the State Solicitor’s advice was not given to cabinet by the acting Treasury Secretary, Dairi Vele.

It notes 14 of cabinet’s 33 members were also not present to approve the loan. The Treasurer Don Polye resigned before the meeting.

In addition the report finds the PNG central bank was “conveniently used” to “legitimise” the appointment of UBS. Loi Bakani, the Bank of PNG governor, said he had recommended the hiring of UBS to refinance an exchangeable bond with the United Arab Emirates. But he had not approved UBS’ appointment as the sole financial adviser for the purchase of the stake in Oil Search.

The ombudsman said UBS was “improperly engaged” as its appointment should have been conducted through a public tender, while the fees it and professional service firms Ashurst, Norton Rose Fulbright and KPMG charged were “excessive”.

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The firms split $14.6 million in fees for advising on the transaction.

UBS is estimated to have made a total of $120 million in fees, interest income and trading revenue from the deal, in what is believed to be one of its most lucrative transactions.

The Swiss regulator is investigating if UBS had broken any laws in providing the loan.

Angus Grigg is an investigative reporter based in Sydney. He has worked as a foreign correpondent in China and Indonesia, and has won two Walkley Awards. Connect with Angus on Twitter. Email Angus at agrigg@afr.com

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