Statement By Health Minister Khaw Boon Wan On KPMG's Report On The National Kidney Foundation (NKF)

21 Dec 2005

The KPMG report has been widely reported. Their assessment and their conclusions are out in the open. I am glad that the KPMG has not pulled any punches. Our priority now is to collectively learn from this episode and to act on it.

Punishing Wrong-doers

First, anyone found in criminal breach will be prosecuted to the full extent of the law. This will be done. Ministry of Manpower (MOM) has completed its investigations. We will be pressing for charges to be made. Commercial Affairs Department (CAD)  and Corrupt Practices Investigation Bureau (CPIB) are still in the midst of their investigations. They will proceed thoroughly as usual. There will be no cover-up of any wrong-doing. As their investigations are still in progress, we should not comment further at this stage.

Cleaning Up NKF

Second, we will clean up the NKF. We have now a strong Board and they are delivering results. Their job is unfinished but they are committed to seeing it through. Mr Gerard Ee and most of his Directors have agreed to stay on for 3 years to complete the transformation of the NKF. The Government appreciates their national service. I am confident that in 3 years' time, NKF will have a standard of corporate governance that is first class.

Strengthening Regulatory Regime

Third, we will strengthen the regulatory regime on Voluntary Welfare Organisations (VWOs). Yesterday's Business Times (BT) commentary by Conrad Raj asked a question: why did no one heed the signs? Let me spend some time on this important question.

To do so, we need to go back to the origins of the NKF. How did it all start? What was its purpose? How did it become a household name?

The Original NKF

The NKF was the brainchild of Prof Khoo Oon Teck. He was the father of dialysis treatment in Singapore, a wonderful man with a charitable heart. As a young doctor, he witnessed first-hand how his brother, the late Rev Khoo Oon Eng, suffered long years of kidney failure and eventually succumbed to it. Prof Khoo was to recount years later that his brother's suffering and premature death provided the impetus for him to devote his whole life and career to caring for renal failure patients.

In 1969, he founded the NKF as a society under the Societies Act. Shortly before that, he had set up the first kidney dialysis unit in an attic above Ward 23 in the old Singapore General Hospital (SGH) Bowyer Block. The Bowyer Block has since been largely demolished, but I retain memories of that attic which I visited as a young officer in MOH.

From that humble beginning, Prof Khoo went on to build up the NKF. He strongly advocated a publicly-funded dialysis treatment programme for patients. He felt that this would better inculcate a spirit of self-help and caring for one another. He was tireless in fund-raising, despite a heavy clinical workload. He was a selfless volunteer and an inspiration to many.

He chaired the NKF until illness forced him to retire in 1995. Over 26 years, the NKF under his leadership contributed tremendously to renal treatment in Singapore. It did very good work and mobilized the entire community, from churches to temples, from hawkers to professionals, from students to housewives.

As we read the KPMG report on the abuses of the NKF in recent years, let us not lose sight of the original NKF and its accomplishments. For a quarter of a century, NKF was a model of success for voluntary organizations. Concerned citizens coming together to initiate and provide much needed care to fellow citizens. People caring for people with a level of compassion and love that for-profit organizations and bureaucrats cannot possibly match. It was the model of the people sector at its best. We had all supported the old NKF whole-heartedly and for many years our trust was not misplaced. Even after Prof Khoo left in 1995, the NKF continued to work to the benefit of many patients.

Losing the Moral Compass

That is probably why no one took serious heed of earlier signs of trouble. I do not know when the NKF began to shift its strategic focus and, along the way, lost its moral compass. It might be in 1999 or thereabouts, when it progressively transitioned from a society to incorporation as a company in 2001.

Around that period, I understand that the regulators did occasionally receive informal but often anonymous feedback on the NKF. Some criticized it for being arrogant, while others complained against its aggressive fund-raising tactics. There were some anonymous allegations of the CEO's lavish lifestyle.

Where appropriate, regulators did follow up on the complaints. Criticisms were set aside after the NKF leadership was able to convince the regulators that they had not done anything improper. The regulators were also reassured by periodic assessments given by the NKF auditors that the financials did not show any unusual transactions.

And when the NKF continued to deliver tangible results - the large number of grateful dialysis patients and the healthy reserves being progressively built up, the regulators assumed that the criticisms were probably due to discomfort at the unconventional means of fund-raising. We now know that we have been misled. Perhaps, we were coloured by our deeply-held and positive view of the original NKF under Prof Khoo Oon Teck.

Misleading Many

But we were not alone in missing those early signs. I asked for a scan of media reports on NKF around that period. There were many, and the strong support and praise of the NKF were palpable. Even as late as this year, during the trial on the Singapore Press Holdings' (SPH) defamation case, many still came forward to defend Mr T.T. Durai. In particular, the NKF staff was sure that he had been victimized. Now that the KPMG report has been published, Straits Times (ST) today reported that many now feel betrayed.

Even Prof Khoo who has the greatest interest in the NKF was misled. In July, he described Mr Durai as "hardworking, loyal and honest man who volunteered his time for the NKF at the expense of his own family". He was not wrong to say that Mr Durai worked hard for the NKF. But the way Mr Durai captured the Board and ran the organization was fundamentally flawed.

Mr Durai obviously had strong views on how the NKF ought to be run. If the NKF were his privately-owned company, he could perhaps be excused for running it as he pleased. But the NKF was not his little empire. It was a public organization supported by public funds. No matter how good you believe your ideas are, you still have to subject them to continuing and open debate with your Board of Directors and your fellow colleagues. This did not seem to be the case.

Board Has Failed

As a lawyer, he would understand the need for sound corporate governance. Indeed, the old NKF publicly declared that it was a pioneer amongst charities in introducing strong corporate governance practices. But it was merely a structure in form. Mr Durai's actions could not absolve the former NKF Board, whose fundamental failing was in not fulfilling their duties as Directors. Regrettably, they delegated practically all their powers to the CEO. As a result, they did no more than endorse his decisions with little or no challenge. Consciously or otherwise, they constituted a facade of good corporate governance, but without much substance to back it. This allowed serious problems such as mishandling of contracts and conflicts of interest to happen. They have badly let down the donating public which trusted them, just as much as the former CEO has.

Bizarre HR Policies

Mr Durai's HR administration was also highly unacceptable. For his part, Mr Durai was obviously embarrassed by the high salary that he took from the NKF. So he chose to suppress transparency and consciously stayed out of Board membership. His exchange of letters with his Chairman, rejecting the latter's repeated offers to raise his salary, but only to get paid more than what was formally offered, was bizarre, to say the least.

Mr Durai's handling of his own staff's remuneration was equally questionable. All CEOs value good employees and would rightly strive to attract, reward and retain them. But to reward certain employees with ad-hoc salary increments, exit bonuses, back-dated salary adjustments is strange for any entity that has grown far beyond the size of a small family-run company.

Auditors Found Wanting

Over the years, the NKF had been audited by certified public accountants, both as per routine corporate reporting requirements and in response to specific requests by the regulators. However, the weaknesses in NKF's corporate governance went unnoticed. Different groups of auditors have been commissioned to peep into the NKF. Even last year, when my Ministry got KPMG to conduct an ad-hoc review on the NKF's tax-deductible receipts, that review had not uncovered any large-scale weaknesses. It certainly did not suggest the pervasiveness of poor governance and mismanagement.

That the current KPMG audit could now reveal so much is the result of deploying enormous auditing resources and under exceptional circumstances. With the former NKF Board and CEO having resigned, the KPMG auditors were able to go through every file and read every email, without people looking over their shoulders or obstructing their way. I appreciate the challenge of auditing an organization which we now know was completely dominated by its CEO. If he deliberately set out to mislead, it would take some efforts to uncover the truth. But it is not impossible and hence my disappointment with the former NKF auditors.

Regulators Could Have Done Better

On Government's part, we accept KPMG's sharp comments on the regulators. There were many agencies involved, each with its specific roles and responsibilities. This created a lack of clarity in the regulatory structure, which became vulnerable to exploitation. We will fix this within 3 months. This may require legislative changes.

We have learnt a sharp lesson from this episode. We will tighten the co-ordination across agencies and close the gaps in our current system. We will provide clarity on the roles and responsibilities of each agency. We will clarify the 30% rule on expense ratios and make it unambiguous. An inter-agency committee has started working on this. And as a regulatory philosophy, we cannot be overly-trusting that others will behave honourably, nor be swayed by the apparent success of the parties we regulate. If regulators are suspicious, it is their responsibility to follow through robustly even if it causes unpleasantness and unhappiness.

Within my Ministry, I have restructured the unit supervising healthcare Institutions of Public Character (IPCs) and beefed it up with more staff, including additional accountants.

Conclusion

But at the end of the day, let us remember that we are dealing with an NGO, a non-government organisation. The NKF is not a government department. Like all other charities, the primary responsibility for the proper running of the NKF lies with its Board of Directors.

The Government has a duty and it is to ensure that there is no criminal misconduct, and that the basic rules, such as the 30% expense ratio cap, are complied with. However, in the case of a large entity like the NKF, because of its scale of fundraising, and the patronage that Government leaders lent to the NKF, the Government had a heavier responsibility to satisfy ourselves that the organization was properly run. We failed in not doing so earlier.

Now that NKF has a new Board and is making a fresh start, we will work with it to institute tighter checks and balances on the NKF to prevent any future recurrence. However, we must not because of the NKF, tighten up on the rest of the charities with a heavy hand, or we will stifle their initiative, their public spirit and their community-building instincts. The Government must strike a balance between regulatory rigidity and operational flexibility.

We have a basic choice to make. Either we get the Government to be more involved and shrink the role of volunteers and civic society. Or within the framework of privately-led VWOs, we strengthen checks and balances to ensure better accountability.

We think the right way is not to have the Government take over. That will change the character of the organization altogether, and choke off the volunteer spirit and the motivation for the public to donate to worthy causes. Instead we should prevent the Board from being captured by a dominant and charismatic CEO, mainly by putting reliable and dedicated people and ensuring proper succession. There is no 100% solution to this problem. But we will do everything practical to reduce the chances of the problem recurring.

In closing, let me again thank Mr Gerard Ee, his Board and the interim CEO for the excellent work they have done while under the most difficult of circumstances. I also thank the NKF nurses and other staff who have bravely and steadfastly cared for their patients through these difficult months. Indeed, they have been badly let down and misled by their former bosses. They deserve our sympathy, not our anger. The NKF has lost its way in recent years. Let us all help the new NKF team to bring the NKF back on track.

Annex A: Fixing Regulatory Gaps

The Government will tighten the co-ordination across agencies, close the gaps in our current system, and provide clarity on the roles and responsibilities of each agency.

In May 2005, Ministry of Finance (MOF) accepted the recommendations made by the Council on Governance of Institutions of a Public Character (IPCs), with some moderation in view of IPCs' concerns on compliance costs and implementation time.

However, KPMG has pointed out weaknesses which are not adequately addressed by the Council's recommendations. For example, there are no implementation guidelines for the application of the 30/70 Rule on fundraising expenses, or the determination of the number of years for an IPC's reserves to last.

The Government will review this, in particular to tighten rules and raise standards in areas of public concern and for larger charities. Ministry of Finance (MOF) will announce the revised rules in due course.

KPMG also observed that the regulators rely largely on auditors' reports and formal complaints to identify non-compliance by charitable organizations, and that there could be more active follow-up on instances of non-compliance.

The Inter-Ministerial Committee (IMC) on Regulation of Charities and IPCs is reviewing the regulatory framework to rationalize the existing regulations, as well as the roles and powers of the various agencies. Preliminary recommendations are expected by Feb 2006. It will consider KPMG's suggestion that regulators conduct compliance inspections. This may require expanded legal powers and resources.

In line with the work of the Council on Governance of IPC, NCSS (National Council of Social Services) plans to make some parts of the NCSS Code mandatory.

Since Nov 2005, MOH has increased manpower and resources for a new Division dedicated to the regulation of IPCs under MOH. MOH will formulate strategies to promote sound financial management and accounting best practices among VWOs under its purview.

Annex B: Central Fund Administrator for the National Kidney Foundation (NKF)

KPMG's report stated that NCSS earlier had some concerns about NKF's accounts, and described it as a "wasted opportunity" that the issue was not addressed 4 years ago.

NCSS had been the Central Fund Administrator for the NKF in the 1990s. By 2000, NCSS found it difficult to assess the use of NKF funds because the NKF's programmes were predominantly medical and health-related. For that reason, a more logical Central Fund Administrator to oversee the NKF was MOH. NCSS also had concerns on the NKF's use of tax-exempt donations and its fund-raising expenses.

NCSS informed the Commissioner for Charities and MOH in 2000 of its concerns over the NKF. The regulators collectively assessed and found nothing which would lead to the conclusion that the NKF's financial track record and fund management track record were less than satisfactory, and would justify the removal of its Institution of Public Character (IPC) status. The NKF had provided reasonable responses to queries on its financial statements, which were accepted by the regulators. In addition, the NKF's auditors then, PwC, expressed the professional opinion that NKF's financial statements were in order.

Taking into account the above factors, MOH granted the NKF its IPC status from 2002-2004. MOH subsequently commissioned KPMG to do a one-time review of the NKF's FY03 tax-deductible receipts. KPMG at the conclusion of its review surfaced a number of observations, which the NKF addressed.