The Office of the Public Auditor (OPA) conducted an audit of government deposits held in banks and financial institutions as of April 30, 2002, and conducted a followup review of deposits as of April 30, 2004. The audit revealed a number of concerns about the security of government funds.

OPA’s audit included those funds held by the CNMI Treasury and those funds under the control of autonomous agencies and public corporations. In total, the Act, as of April 30, 2002, only applied to $22.9 million in Treasury funds. Government deposits not under the purview of the Act amounted to about $81.5 million, comprised mainly of deposits of various autonomous agencies and public corporations.

OPA’s evaluation revealed a number of concerns, the urgency of which was so great that on April 3, 2002, OPA issued to the Governor, Senate President, Speaker of the House, and Secretary of Finance the results of its preliminary survey. OPA concluded that, “existing laws do not prohibit most CNMI government agencies from depositing their funds in non-FDIC banks,” and although these banks have pledged security to the agencies there is no guarantee that the securities are adequate.

Shortly thereafter, a local bank was placed in receivership by the Superior Court. This action ultimately exposed that $15.7 million in funds were inadequately collateralized. While the ultimate outcome of this event is unknown, the documented effect was to restrict government agencies from access to the majority of their funds for a period approaching three years.

The Legislative amendments to the Act in both 1994 and 2001 substantially weakened the security of government deposits. This is most notable in the exclusion of various agencies and public corporations from the provisions of the Act. OPA found in its audit that none of the major agencies or corporations had adequate regulations in place to insure the security of their deposits. Further, no regulations have ever been adopted for those CNMI Treasury funds covered under the Act.

The Commonwealth Banking Code (Code) governs all banks within the CNMI. The Code provides that regulations relating to the enforcement of the Code are the responsibility of the Department of Commerce. The Act stipulates that the development of regulations for government deposits rests with the Secretary of Finance. The lack of appropriate regulations by either agency results in a failure to define or implement needed monitoring mechanisms to insure compliance with the laws. Further, critical definitions are lacking, particularly in the meaning of “obligations and securities backed by the CNMI Government.” Additionally, there seems to be no formal agreement between the government and banks to clarify the responsibilities of the bank, or what constitutes a deposited balance.

OPA urges the Legislature to review the Act and all other laws covering government deposits with the view towards uniform coverage and compliance, not just for the Treasury funds, but all CNMI Government agencies/corporations.

Specifically, to address the issues of the CNMI Treasury funds, OPA recommends that the Secretary of Finance adopt regulations to interpret, execute and enforce the provisions of the Act.

OPA also recommends that all government agencies and public corporations currently excluded from the Act prepare regulations to address the issue of the security of public funds. Particular detail should be given to create an environment of transparency and avoidance of the perception of any conflict of interest.

Lastly, OPA recommends that the Department of Commerce implement a system to monitor all securities pledged by banks as collateral for all CNMI Government deposits, or seek legislative amendment to designate or transfer such responsibility to another capable government office or agency.

View/download a copy of the audit report.