Forensic audit: Sunil Handunnetti in cuckoo land
Posted on February 1st, 2020

by C.A.Chandraprema Courtesy Island

*  Forensic audit tries to dilute 2015/2016 bond scam
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*  Forensic auditors facing fraud charges in India

February 1, 2020, 6:37 pm

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The forensic audit into the issue of Treasury bonds by the Central Bank has been released in five volumes. What is of primary interest to Sri Lankans is the fourth volume which deals with the issuance of treasury bonds between 1 February 2015 to 31 March 2016. The three specific transactions that took place on the 27th February 2015 and on the 29th March and 31st March 2016 are the transactions that all Sri Lankans refer to as the ‘bond scam’. Even the Bond Commission that recommended that a forensic audit be carried out was established to cover the period from February 2015 to March 2016. With regard to the original scam that took place on the 27th February 2015, and set alarm bells ringing in financial circles, the forensic audit report states that the Public Debt Department (PDD) of the Central Bank received a request on 23 February 2015 for a funding requirement of Rs. 13 billion. The PDD accordingly, conducted an auction on 27 February 2015 for which the advertisement was released on 25 February 2015 where the value offered was Rs. 1 Billion.

Explaining why only Rs. one billion was offered when Rs. 13 billion was required, Ms. C.M.D.N.K Seneviratne the then Superintendent of Public Debt had stated that when investors know that he Government requirement is high, they will bid at a higher rate of interest. Therefore, the PDD offered Rs. 1 billion at the auction with the intention of raising the remaining Rs. 12 billion through direct placements. The forensic audit report observes that on 27 February 2015 at the closure of Auction when Rs. 20 billion worth of bids had been received, the PDD prepared the Option Sheet recommending that Rs. 2.608 Million be accepted at the Weighted Average Yield Rate of 10.75%. Thereafter, the then Central Bank Governor Arjuna Mahendran had visited the PDD, looked at the Bids Received sheet and asked the PDD to accept entire Rs. 20 Billion bids received to which objections had been raised by Ms. C.M.D.N.K Seneviratne and Dr. M.Z.M. Aazim the Assistant Superintendent of Public Debt. Thereupon Mahendran instructed the PDD to accept bids for Rs. 10 Billion.

 It was further noted that Perpetual Treasuries Ltd placed a total of three bids, one for Rs. 3 billion and two bids for Rs. 5 billion each through the Bank of Ceylon at yield rates of 12.50%, 12.75% and 13% respectively on the day of the auction after 10:30 am, indicating that PTL was aware of the rates at which bids might be accepted by the PDD. It was observed that PTL was allocated only Rs. 27 Million in all the Auctions held since PTL started participation in auctions till February 2015. At the auction of 27 February 2015 however, PTL placed bids for Rs. 15 billion and was allocated Rs. 5 billion. Based on this high volume of bidding and allocation pattern in contrast to the results of previous auctions participated by PTL, it can be inferred that PTL was assured of high allocation in this Auction.

 Furthermore, the Bank of Ceylon had placed bids on behalf of Perpetual Treasuries Ltd (PTL) to the tune of Rs. 13 billion which led to PTL obtaining 50% of the Rs. 10 billion bond offer of 27th February 2015. How PTL was able to obtain this kind of credit from the Bank of Ceylon within a matter of minutes was the other aspect of the bond transaction of the 27th February 2015, which came to the attention of the public. With regard to this, the forensic audit says that it was noted that Arjuna Mahendran had a telephone conversation with Ronald Perera the Chairman of BoC on the date of Auction. Conversations were noted between Mr. J.K.D. Dharamapala, Chief Dealer of the BoC and Mr. Kasun Palisena of PTL which reveal that Mr. Dharmapala placed bids on behalf of PTL. Mr.Dharmapala however stated that no instructions were received from BoC Chairman Ronald Perera for the bids placed by PTL and neither did he inform Ronald Perera about the high bids placed by PTL. He stated that the BoC assumed that the bids placed by PTL were dummy bids.

Guilt established

 Even though this transaction of 27 February 2015 was what first sent alarm bells ringing, what the forensic audit report says about it is that the documentary and digital evidence available and the limited number of voice recordings of dealer rooms of Primary Dealers did not suggest that Arjuna Mahendran was directly involved in sharing insider information with Arjun Aloysius or PTL. The CBSL did not install a  voice record system at the PDD and significant limitations existed on the availability of email files. The data extracted from the mobile phone of Mr. Arjun Aloysius did not pertain to the review period. Hence, the involvement of Arjun Aloysius in any improper dealings related to the issuance of Treasury Bonds during the review period could not be established on the basis of data extracted from mobile phone.

 The forensic audit report states that on 28 March 2016, one day prior to the Auction of 29 March 2016,  senior officers from the state banks, namely, NSB, Bank of Ceylon and People’s Bank were requested to attend a meeting convened by Ravi Karunanayake the then Minister of Finance. The representatives of the three State Banks were requested to co-operate by bidding at low yield rates at the Auction to be held on 29 March 2016. Ravi Karunanayake prescribed a range of rates, lower than the prevailing market rates at the time, at which the three state banks should place their bids in coordination with each other. The State Banks raised their concerns with regard to the risk of losses to the state banks if bids at higher yield rates were accepted from other primary dealers. In response to these concerns, Ravi Karunanayake assured the state banks that bids at higher rates would not be accepted by the CBSL.

 PTL bid at substantially high yield rates as compared to yield rates of the State owned banks and PTL was allocated 39% of the bonds issued. Furthermore Pan Asia bank placed bids on behalf of PTL for Rs. 5,000 million due to which the PTL allocation ratio increased to 53%. The forensic audit report reveals that on review of copies of voice recordings, various conversations were noted between Mr. Kasun Palisena and Mr. Arjun Aloysius that reveals that Mr. Arjun Aloysius had access to information which was only known to the members present at the State Bank meetings. Arjun had informed Kasun Palisena that the state banks had been instructed to bid low and he said that he has a ‘magical sixty billion’ in his    mind  and this       will    be the opportunity of a lifetime. With regard to the bond issue of 29 March 2016, the forensic audit observes as follows. “Based on the available voice recordings and subsequent bidding patterns of PTL and Pan Asia, it can be concluded that Mr. Arjun Aloysius had access to insider information of instructions given to state banks to bid at low prices at Auction of 29 March 2016.” PTL used this insider information and placed bids at substantially higher Weighted Average Yield Rates and was allocated maximum bids in this Auction due to lower yield rates of bids placed by State Banks. 

The Ministry of Finance requested a second meeting with the senior officials of State Banks on 30 March 2016. At that meeting, Ravi Karunanayake once again, requested the State Banks to bid at low yield rates at the Auction scheduled to be held on 31 March 2016. The State Banks were reluctant to agree to this request as the cut off rate at the 29 March Auction had been much higher than the rates prescribed to the State Banks after a similar request by the Ministry of Finance. Ravi Karunanayake agreed that bids at higher yield rates would not be accepted at Auction of 31 March 2016 and prescribed the rates in respect of the bids to be placed at the Auction. In the Auction of 31 March 2016, the PDD offered Rs. 25 Billion against which bids aggregating to Rs. 50 Billion were accepted by the PDD. The PTL allocation ratio of PTL was 69%. The forensic audit report states that based on the telephone conversations between Palisena and Arjun Aloysius, PTL was already aware of the fact on 29 March 2016 that another auction was going to be held on 31 March 2016 even though it had not been advertised by the CBSL. 

Another aspect of the bond purchases of 29 and 31st March 2016 was that PTL bought Rs. 42 billion worth of bonds at the auctions held on 29 and 31 March 2016 and obtained the funding to purchase these bonds from the Central bank itself. The way this was done was that PTL participated in the Open Market Operations auction to borrow Rs. 22 billion at 8% and used the Intra Day Liquidity Facility to borrow a further Rs. 20 billion. They were unable to provide the required security for Rs. 11 billion of the funding from the Open Market Operations and were fined Rs. Rs 7.6 million. They were unable to settle Rs. 11 billion of the Intra-day liquidity facility and they were fined a further Rs. 13.7 million in order to legitimize the transaction. PTL thus bought Central Bank bonds using the money of the Central Bank itself after paying a small fine to the CBSL when they were unable to meet their commitments.

 The forensic audit report states that on 1 April 2016 at a reverse REPO auction of Rs. 30 billion, bids to the value of Rs. 22 Billion had been accepted from PTL. However, PTL failed to tender collateral for the Rs. 22 Billion at the end of that day. On 4 April 2016, Mr. Kasun Palisena (PTL) sent an email to Mr. Arjuna Mahendran at 5:21 p.m. that “all transactions have been cleared and settled. Apologies for making your life miserable for the past few days”.  

What had happened here was that PTL had bought treasury bonds with Central Bank money and then sold the bonds on the secondary market primarily to the EPF and settled the Central Bank. The forensic audit report observes that the email sent by Kasun Palisena to Arjuna Mahendran appears to be in response to Mr. Arjuna Mahendran’s action of avoiding strict action against the PTL for default of dues. Based on the analysis of call log records, available voice recordings, transactions in the secondary market and policy decisions taken by the CBSL in the month of March 2016, indicates that there is substantial evidence of leakage of insider information to PTL enabling it to purchase large amounts of securities in the primary market at low weighted average prices and generate substantial gains in the secondary market.

Handunetti’s view of forensic audits

 There never was any need for a forensic audit for this information because people already knew all this. The only new thing that the forensic audit tries to do here is to say that there is no evidence that Arjuna Mahendran gave inside information to his son in law with regard to the bond issue of 27 February 2015. However with regard to the bond issues of 29 and 31 March, the forensic audit admits that Arjun Aloysius did have inside information but has not named Arjuna Mahendran as the possible source of that information. The forensic auditors therefore seem to be at pains to keep Arjuna Mahendran out of the bond issues of 27 February 2015, 29 March and 31 March 2016. However, The Bond Commission which had recommended this forensic audit had concluded that Arjuna Mahendran had acted improperly and wrongfully by intervening in the bond issue procedure and instructing the PDD to accept Bids to the value of Rs.10 billion on 27 February 2015.

 Since Mahendran had perused the Bids Received Sheet prior to issuing his instruction to accept bids to the value of Rs. 10 billion, the Bond Commission observed that he knew that, PTL would succeed in obtaining the bonds at high yield rates. Mahendran directed that bids to the value of Rs. 10 billion be accepted for the improper and wrongful collateral purpose of enabling PTL to obtain a high value of Treasury bonds at low bid prices and high yield rates. PTL had inside information that a very large amount of bids would be accepted at that auction. PTL acted upon inside information when it placed bids for Rs. 15 billion though only Rs. 1 billion had been offered. Mahendran was the source from which PTL obtained this inside information. Mahendran had thus acted wrongfully, improperly, mala fide, fraudulently and in gross breach of his duties as Governor of the CBSL. 

JVP Parliamentarian Sunil Handunnetti who headed the second COPE investigation always had high expectations with regard to this forensic audit. The only thing he spoke about after his own COPE report was about this ‘voharika vigananaya’. He is probably the politician who has used this term most often in public. After the forensic report came out, he expressed his views on it in a video clip that has been reproduced in Chapa Bandara’s you tube channel on https://www.youtube.com/watch?v=QgyWvKqpBek. 

What Handunnetti says in this video is that the very meaning of a forensic audit is to carry out an audit that is linked directly to a judicial process. He compared it to forensic autopsies and investigations ordered by courts in the case of murder investigations. Because this audit carries the name ‘forensic’, Handunnetti genuinely seems to be under the impression that this equal to forensic investigations ordered by a court of law. He states that there is no better evidence than this forensic report to report matters to courts. When the Bond Commission recommended that a forensic audit be done into the bond scam, they obviously meant an independent audit in which case it would have to be carried out under the supervision of the Auditor General’s Department which would select the auditors, instruct them and pay them. When a court orders a forensic investigation into a murder case, the investigation is carried out by the judicial medical personnel and institutions of the government.

 No court of law has ever told a murder suspect to get the forensic investigation into the murder done by a medical team selected by him, to instruct the forensic medical personnel on what has to be done, and to pay for the forensic investigation out of his own pocket, and to present the findings to court so that the court could decide whether he was guilty or innocent! Yet this is exactly what has happened with regard to the forensic audit into the Central Bank bond scam. The forensic audit has been carried out by the Central Bank of Sri Lanka, which was controlled by the very government responsible for the bond scam. They have selected the auditors, instructed the auditors on what needs to be done and they have paid the auditors. The Auditor General’s Department has not been involved in the process at any stage. To make things worse, the Indian audit firm BDO India LLP which was contracted by the Monetary Board of the Central Bank of Sri Lanka to do the forensic audit is itself facing serious charges of corruption in India. The Economic Times of India reports that BDO which had been providing forensic services to the Indian tax department had sacked one partner and another partner had resigned due to an expose by a whistleblower that bribes had been demanded from a company that was being investigated.  

This had happened last year after BDO had been contracted by the CBSL to do this forensic audit. The other Indian audit firm KPMG India which was involved in this forensic audit under the supervision of BDO, has its own share of problems. The Indian government is planning on banning a KPMG India affiliate BSR & Associates for five years for auditing lapses while investigating a fraud at a financial company. Reuters claims that they have seen tribunal documents to the effect that KPMG India affiliate BSR & Associates had given clean audit reports and ‘deliberately’ failed to report fraudulent activities at the financial company under investigation. This scandal also happened to come out into the open when KPMG India was involved in the forensic audit of the CBSL Bond issues. The CBSL forensic audit which is said to have cost in excess of Rs. 300 million, is not worth the paper it’s written on.

 No court will accept a forensic audit commissioned and paid for by the very institution being investigated. Furthermore, the fact that the Indian audit firms hired by the CBSL to do the audit are themselves facing charges of fraud and corruption seriously compromises the credibility of the forensic audit they did for the CBSL. Both Indian audit firms had been carrying out work for the Indian government when the fraud and corrupt practices are said to have occurred. This makes their findings on the CBSL bond scam worthless in a court of law. The bond scam has been going round in circles for five years. The first inquiry into the bond scam was by the three member Pitipana Committee appointed by Prime Minister Ranil Wickremesinghe in March 2015. Then there was the COPE Subcommittee inquiry headed by D. E. W.Gunasekera in June 2015. This was followed by the COPE Inquiry headed by Sunil Handunnetti from January 2016 to July 2016. Then there was the Bond Commission from January 2017 to December 2017.

 Investigations have been carried out by the Commission to Inquire into Allegations of Bribery and Corruption and the Criminal Investigation Department as well. A wealth of information and evidence has been unearthed by design or by accident during the course of all these investigations, but nothing further has happened. One would think that it’s about time that some concrete action was taken with regard to the issues pertaining to the bond issues that took place on the 27th February 2015 and on the 29th March and 31st March 2016 instead of waffling over piles of useless paper work that seems to go round and round in circles.

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