5.3.1 Loan Management Processing Controls
The Loan Management process is clearly defined and formalized, understood by staff, and communicated to stakeholders. The FSAGNU and TAG Negotiations West have implemented a number of controls to help ensure that loans are processed in accordance with funding guidelines. In addition, the audit found that controls are in place to help ensure that disbursements are in accordance with the Financial Administration Act (FAA). Audit testing found that these controls over loans processing (timelines, documentation and decisions approval) are functioning effectively. The sections below outline audit observations related to key sections of the negotiation loan management process. Within each section, any key differences in the process for BC versus non-BC loans are outlined.
Once the claim (non BC claims) has been accepted for negotiation by the Minister, loan funding may be available to the claimant on the basis of negotiation priorities and mandates previously established by Cabinet. To obtain loan funding, claimants must first submit a funding proposal. The funding proposal must be supported by a detailed negotiation work plan for the fiscal year which has been approved by both the claimant and the federal negotiator. The work plan provides details as to the number of meetings, duration and location of meetings, the legal work required, studies, consultants/experts to be hired as well as the required communications. Each task is priced based on pre-determined rates. For non-BC loans, the funding proposal is reviewed by a FSAGNU funding officer and is subject to peer review.
In our review of ten loan files processed at HQ, we found that all files included a funding proposal which was supported by an approved work plan. In addition, the audit also noted evidence of review by a funding officer.
For loans related to claims under the BC treaty process, the work plans as well as the funding proposal are reviewed and processed by the BCTC. These documents are not available for review by AANDC. As such, in our review of ten loan files processed in BC, we were unable to access funding proposal documentation.
Non-BC Loans: Once a proposal has been assessed, a loan agreement is drafted and forwarded to the FN for review and approval. The funding agreements are standardized and provide details as to the terms and conditions, eligible expenses as well as the requirements for each advance.
Once the agreement has been approved by representatives of the FN and returned with an approved BCR, the agreement is approved by the DG of FMSS Branch for loans managed in HQ.
BC Loans: For loans in BC, the BCTC will send AANDC (TAG Negotiation West) a package containing the prepared loan agreement, signed by the FN, a Schedule of Payments, the FN banking information and the approved BCR or DR. The loan agreement is reviewed by the Manager of the Negotiation Support Unit, TAG Negotiations West and approved by the DG, TAG Negotiations West. The expectation on the part of the BCTC is that these loan agreements be executed within 48 hours of receipt by AANDC.
In our review of 20 loans processed within the period under scope, we found that each loan was supported by a loan agreement which had been approved by representatives of the FN as well as the proper delegated DG. In addition, all loan agreements reviewed included a BCR.
At HQ, advances are usually provided to the FN on a quarterly basis. As specified in the loan agreement, the FN must submit a promissory note, progress report as well as financial statements prior to the loan advance being disbursed. Once a year, the FN must also provide a copy of its audited financial statements. The information is reviewed by the FSAGNU finance officer to assess whether the funds have been disbursed in accordance with the original funding proposal.
In BC, the loan agreements provided by the BCTC include a schedule of payments, to be distributed on a monthly basis. When the agreement is approved by the DG, TAG Negotiations West, this payment schedule is loaded into the First Nations and Inuit Transfer Payment System (FNITP). The monthly loan disbursements are approved by the DG TAG Negotiations West.
In our review of ten loans managed at HQ we found evidence of review by the FSAGNU finance officer prior to each advance being disbursed. In each case, we noted that the advance had been approved by the proper delegated authority.
In the case of ten loans reviewed in BC it was noted that all disbursements had been approved by the proper delegated authority, and were in line with the disbursement schedule included in the loan agreement.
Non-BC Loans: As noted above, FNs are required to submit a number or reports throughout the year to allow the FSAGNU to monitor the expenditures to help ensure they are in compliance with the funding agreement. Specifically, FNs must submit a progress report as well as financial statements (unaudited) prior to the next advance being issued. In addition, the FNs must submit a copy of their audited financial statements, including a schedule specific to loan funding, on an annual basis.
At the end of the year, FSAGNU performs a more detailed review of negotiation related expenses. In cases where the eligible expenditures are lower that the advanced amount, monies would be retained from the next year's agreed upon funding amount.
In our review of ten loans managed at HQ we have found that all required documentation had been received prior to advances being issued. We also noted, through our review and discussion with staff, evidence of review by the FSAGNU finance officer prior to each advance being disbursed.
BC Loans: In BC the monitoring and the review of loan funding reporting requirements is managed by the BCTC. AANDC is not provided with copies of the FNs audited financial statements that include a detailed loan expenditure schedule. The BCTC will provide AANDC with a Summary of Auditors' Opinions which are updates in the form of letters, on the number of audits that haven't been received by the due date. AANDC is not provided with details of the contents of audits, or provided with the names of the FNs that are past due. Subsequently and only when there is a continuing failure to file an acceptable audit, will the BCTC indicate to AANDC which FN is not satisfying the reporting obligations.
Audited Financial Statements: First Nations recipients must provide their audited financial statements to AANDC as part of the reporting requirements of other program funding (e.g. Band Support Funding, Education). In addition, as per the requirements of Bill C-27 the First Nations Financial Transparency Act 2013, First Nations are required to publically disclose their audited consolidated financial statements (including online publishing). The availability, however, of these financial statements would not assist in the monitoring of the loan expenditures, as these documents would only include the total loan funding received in a given year, but would not include the detailed schedule statement of how the loan funding was expended.
Loans are repayable by the FN when the loan agreement comes due or once a treaty comes into effect. The repayment term and payment schedule are detailed in an annex included in the final treaty agreement. The repayment is recoverable as a first charge against the claim. This is usually done by a deduction of the repayment amount against the capital transfer payments.
In our review of two loan files for claims that had been settled, we found that the repayment amounts had been completed in accordance with the agreed upon repayment schedule. In both cases, the loan repayment was deducted from the capital transfer amounts.
Interest on loans is incurred from the date the loan is incurred until it is fully repaid. For non-BC negotiations, Interest on loans taken after an agreement in principal (AIP) has been agreed upon is charged to the FN. In BC interest on these loans is not incurred until the treaty comes into effect.
In our review of two loan files for claims that had been settled, we found that interest on loans taken post AIP had been calculated and charged to the FN. We also noted that interest was deducted from the capital transfer payment to the FN.
In cases where there is little prospect for settlement, the Minister may formally discontinue the negotiations with the FN. In these cases, the loan funding ceases. The Department may then opt to write-off the outstanding debt.
AANDC has established a formal process to write-off debts where they are determined to be uncollectable. For debt write-off greater than $25,000 the write-off must be submitted to the Departmental write-off Review Committee. In cases where outstanding debt is greater than $100,000, Ministers approval is required based on the Committees recommendation. All write-offs must then be submitted to Treasury Board for approval.
Debt written off must be repaid by AANDC to the Consolidated Revenue Fund through the Claims Envelope. As such prior to submitting the request to Treasury Board, funds availability must be confirmed.
It has been noted that there can be substantial delays between the approval of the write-off by the Committee and the submission to Treasury Board. In some cases the delays where in excess of seven years.
As funds may no longer be available by the time the submission is proposed to Treasury Board, Management should consider establishing a deadline after which the committee approval becomes stale dated and no longer valid. At that point a fresh Committee approval should be sought.
5.3.2 Transition of Finance function in BC
As part of the Deficit Reduction Action Plan, AANDC is streamlining the provision of corporate services by creating regional hubs to deliver these services to regional offices. A regional Accounting hub is being created in the Winnipeg Regional Office, and will be servicing western regions, including BC Regional Office. This means that the accounting operations in the BC office will be eliminated. Currently, TAG Negotiations West relies on BC's accounting operations to process the release of loan advancements (executing Sec. 33 of the FAA). According to management, after the transition, this function will likely be taken over by the Regional Accounting Hub in Winnipeg.
Management has expressed concerns about the impact this transition will have on their ability to meet the legal obligation of reviewing and approving a loan agreement in 48 hours. The time difference physical distance, and the potential lack of loans experience of financial staff could cause delays in approving the loan and the initial disbursement within the expected timeframe.
While this transition is taking place, there may be an opportunity to look at centralizing the accounting process for comprehensive claim negotiation loans within HQ Chief Financial Officer Sector, to the same HQ unit that authorizes the release of non-BC loan disbursements. This may allow for centralized processing, tracking, and reporting of loan advances, interest, and recoveries. By leveraging the pre-existing capacity in this unit, there is opportunity to streamline and create efficiencies within this component of the process. The feasibility of centralizing the accounting function of all negotiation loans should be considered within the context of the operational requirements of the TAG Negotiations West office.
4. The Senior Assistant Deputy Minister of the Treaties and Aboriginal Government Sector, and the Chief Financial Officer should monitor the adequacy of regional accounting support and consider the feasibility of centralizing the accounting function in the management of comprehensive claim negotiation loans to AANDC Headquarters.