Investigate losses in the CSE, T-Bond issues from 2008-14: Presidential Commission

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By 2018-01-22

By Paneetha Ameresekere

The report of the Presidential Commission which inquired into the alleged multibillion Treasury (T) Bond scandals that took place between 1 February, 2015 to 31 March, 2016; covering the greater part of the tenure of former Central Bank of Sri Lanka (CBSL) Governor Arjuna Mahendran, one of the key culprits in this scandal, was released recently.

Those findings exemplify what Dr. Supachai Panitchpakdi, a former UN Conference for Trade & Development (UNCTAD) Secretary General and former Thai Deputy Premier had to say in Colombo recently about bond dealers among others becoming rich overnight, whereas the rest of society suffers in want.

He said, '...Rising income disparities are more worrying to the UN than 'climate change,'... the effect of this was that those who invest in real estate, bonds and equities, find their income levels rising faster... ('Ceylon Today' of 14 September, 2017).
Ranil

The report also faulted Premier Ranil Wickremesinghe, for trusting Mahendran, in particular of the latter's assurance that his son-in-law Arjun Aloysius, whose family firm, Perpetual Treasuries, a primary dealer, which is in the centre of this scandal, had nothing to do with the Company, was allegedly false.
The report has also booked two retired CBSL Deputy Governors, B.D.W.A. Silva and P. Samarasiri for negligence, while also accusing the latter of misleading Premier Wickremesinghe vis-à-vis the T Bond auction of 27 February, 2015, where the original call was for the issuance of Rs one billion worth of T Bonds, but which was increased 10 fold to Rs 10 billion on the day of the auction, among others, took place.

In this connection, the incumbent CBSL Governor Dr Indrajit Coomaraswamy recently told reporters that in the case of Treasury auctions, which also includes T Bond auctions, that CBSL, heretofore will stick to the original amount to be offered at the auction and not beyond. And if in the case the yields quoted were too high, CBSL will issue a lesser amount of Treasuries to the market.
Issuing of treasuries is one of the principal measures that a Government resorts to raise funds to meet its monetary needs. CBSL is the steward of Government of Sri Lanka's debt.
Meanwhile, the Presidential Commission report had also faulted one of the sitting CBSL Deputy Governors, Dr, Nandalal Weerasinghe, also of negligence, in the light of the aforesaid T Bond scandals.
The report also faulted the Monetary Law Act for not laying down stringent conditions that have to be followed in respect of the appointment of CBSL Governor.
In this connection the report said, '...The Monetary Law Act does not set out the criteria which should be applied when selecting and appointing a Governor of the CBSL. The only requirement specified in the Monetary Law Act is that, a Governor shall devote his full professional time to the business of the CBSL....'

Considering the present Monetary Law Act, Coomaraswamy also told reporters that this Act will be revamped.
In respect of the appointment of the CBSL Governor, it may be moot to reproduce excerpts of the editorial published on this newspaper on its issue of 7 January, 2018 vis-à-vis the current T Bond scandal where it said, '...... It was a case of misplaced trust in an official (former CBSL Governor Arjuna Mahendran). This is where there needs to be a system of screening, before appointing men and women to high office in the public sector, in particular to appointments such as CBSL Governor, so that misfits may be weeded out. The system of appointments to such high office needs to be streamlined. Such appointments should not be based purely on the recommendations of the Premier and/or the President alone. Those recommended to high office, in particular to the post of CBSL Governor, should also be vetted, before such appointments are confirmed.

First, have the proper systems in place, in the event those are not already in place, before such appointments are made...'
John Exter
Giving meat to this argument, the Presidential Commission report further said, '...It is appropriate to refer to the observations made by John Exter, who is the architect of the Monetary Law Act and the Founder Governor of the CBSL, ... the Exter Report,...said, ' 􀂳Although the ultimate authority rests in the Monetary Board, the draft law nevertheless recognizes need for a strong chief executive for the Central Bank.

Accordingly, the Governor is made the Chairman of the Monetary Board, and is given control of the agenda for its meetings. He is to be responsible for the execution and administration of policies and measures adopted by the Monetary Board, for the direction, supervision and control of the operations of the Central Bank, and for its internal management and administration.
He is to be chief representative of the Bank in its relations with outside persons, including the Government and its agencies, foreign governments and their agencies, and international financial and other institutions. He will be required to devote his full professional time to the business of the Central Bank. Since the other two members of the Monetary Board will be part-time members and because the problems facing central bankers are frequently complex and technical, it is to be expected that the full-time Governor will ordinarily be the most influential member of the Board and will tend to dominate it. Accordingly, the Governor should be a man of recognized and outstanding competence in and understanding of the economic and financial problems of Ceylon, and of unquestioned integrity and responsibility.

In order to attract such a man it is recommended that his salary be set at the highest possible level not inconsistent with remuneration in top-ranking posts elsewhere in the Government and its agencies.

General functions and
duties of Governor
It is important that the Governor should have had actual financial experience. In many countries this point has actually been incorporated in legislation, as the following quotation from De Kock's book on Central Banking shows: ' ... in the case of some central banks it has been laid down by statute that the Governor and Deputy-Governor shall be 'men of proven financial experience', as in Canada, or 'persons possessed of actual banking experience', as in New Zealand, or 'persons of recognised banking and financial experience', as in Argentina, or that the Governor shall be a 'person of tested banking experience', as in the Union of South Africa and Mexico... '

CBSL was established in 1950. To help in its founding, the then Finance Minister of Ceylon, as Sri Lanka was then known, J.R. Jayewardene, invited John Exter, a member of the US Federal Reserve System, i.e., the US Central Bank, to help in this regard.
Meanwhile, the Presidential Commission report further said, '...It is hardly necessary to emphasize that, the Governor of the CBSL is a key official who holds enormous responsibilities and that, he must be a person of the highest integrity and ability and also have the required knowledge and experience to effectively perform his duties in the best interests of the Nation and its people.
At present, the Monetary Law Act does not stipulate any relevant criteria with regard to the selection of the person who is to be appointed the Governor and does not set out a process by which the appointment should be made. In effect, under the Law as it stands now, the appointment of the Governor of the CBSL is at the discretion of the Minister of Finance and the President.
We recommend that, consideration is given to developing relevant criteria and a specified procedure to govern the selection of the person who is to be appointed the Governor...'

The report further said, '... We are also of the view that, the selection of the persons to be appointed members of the Monetary Board, must be done with similar care. In this connection, we note that, following the 19th Amendment to the Constitution, the salutary measure of submitting such appointments for the consideration of the Constitutional Council, has been introduced;

Conflict of interest
In view of the concerns with regard to conflict of interest and other matters which have been referred to earlier, we recommend that, the CBSL and the relevant ministry consider whether it is appropriate to introduce a 'code of conduct' for members of the Monetary Board...'

The Presidential Commission report further said, '... there is adequate evidence before us to form the view that, there is a likelihood that some irregularities have taken place in the acceptance of 'Direct Placements' prior to 2015.
Therefore, we recommend that, an appropriate investigation be carried out to ascertain whether there were significant irregularities in the acceptance of Direct Placements by the Public Debt Department during the period 2008 to 2014 and, if so, to identify the officers of the Public Debt Department and the superior officers of the CBSL, the Primary Dealers and any other persons who were responsible for such irregularities.

Such an investigation should also seek to compute the losses, if any, which may have been incurred by the Government as a result of any such irregularities. A Forensic Audit may be appropriate; of the Public Debt Department and the Tender Board....'

Rich, overnight
In this connection, a banker told me that as far as he could remember, irregularities in respect of T Bond issuances took place as early as 1999, making many a primary dealer, not just Perpetual Treasuries alone, rich, virtually overnight!
In this context it may be moot to note that in the period 1999 to 2014, i.e., before Mahendran's appointment, CBSL had three other Governors. They were: A. S. Jayawardena, Sunil Mendis and Ajith Nivard Cabraal, respectively.

Meanwhile, the report further said, '...CBSL should ensure that, the officers of the Public Debt Department and the Tender Board are required to furnish Assets Declarations and furnish details of the Accounts these officers and the members of their immediate families maintain with Banks, Finance Companies and the Central Depository System.

CBSL should introduce a 'code of conduct' for officers and staff of the members of the Public Debt Department and the Tender Board. In fact, we would assume that, the CBSL would have introduced these measures, by now; We recommend that, the CBSL considers strengthening its Legal Department and ensures that the CBSL has competent in-house legal advisers. We also recommend that, the CBSL examines the adequacy of its programmes to train and develop the professional knowledge and operational competence of its officers and the inculcation of standards of ethics which are expected from officers of the CBSL...
... we recommend that, the CBSL considers whether it is appropriate to introduce a revised Code of Conduct for Primary Dealers which could be updated to provide for the modern-day Market and, especially, to take into account technology which is now used and is available.

... the preparation of a revised Code of Conduct for Primary Dealers would give the CBSL an opportunity to crystallize into a revised document, the experience gained and lessons learnt over the 14 years that have passed since the Code of Conduct was drafted;
Nimal Perera
... there is (also) evidence before us with regard to several Transactions entered into between Mr. Nimal Perera, former Chairman of PABC, and the EPF, which require scrutiny, these Transactions have not been established to fall within the scope of our Mandate. Therefore, we did not summon Mr. Nimal Perera to appear before us and, accordingly, we cannot arrive at a determination adverse to Mr. Nimal Perera in these Proceedings.

However, we recommend that, the CBSL carries out a specific and detailed investigation into the Treasury Bond Transactions which Mr. Nimal Perera and his Company and other Clients of PABC, had with the EPF; We trust that, the investigation which the Monetary Board and the CBSL is carrying out will carefully examine the Transactions entered into by the EPF and identify whether a loss was caused to the EPF and, if so, identify the persons responsible and, seek to recover such loss from the persons responsible.
We trust that, where appropriate, the Monetary Board and CBSL will consider whether persons who are found to have committed any dishonest acts or who have received inducements in return for entering into Transactions on behalf of the EPF, should be prosecuted.

...the Monetary Board and the officers of the CBSL act in the capacity of trustees of the EPF and that are bound and obliged to carry out a comprehensive examination and take stringent action against any persons who are identified to be wrongdoers. ... consideration may be given to whether the operations and management of the CBSL prior to 2015 should be examined, particularly with regard to the reasons for the losses incurred by the CBSL in the years 2013, 2014 and 2015 and the Transactions entered into by the EPF on the Colombo Stock Exchange during the period 2010 onwards. ..'

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