KAMALIKA  PIERIS

There were three sets of inquiry into the Central Bank bond scam, the Pitipana committee, the Presidential Commission of Inquiry   and the COPE inquiry. These bodies could only probe and make recommendations. They could not issue charges.

Prime Minister Ranil Wickremasinghe appointed a three-member commission of lawyers, Gamini Pitipana (Chairman) Mahesh Kalugampitiya and Chandimal Mendis.  This committee was critiqued on two counts.  Firstly, they were dubbed UNP lawyers. They had been affiliated to the ruling UNP at one time or the other. Secondly, they knew nothing about the subject. A new committee with relevant expertise should be appointed said critics.  

In Parliament, some of the MPs refused to accept the UNP report. Therefore Speaker Chamal Rajapaksa set up a 13-member COPE team, headed by DEW Gunasekera, to inquire into the matter. This report faced two obstacles. Parliament was dissolved before the COPE report could be presented. Also UNP MP Sujeewa Senasinghe   went to District court of Colombo to obtain an injunction to stop the release of the COPE report ahead of the general election of August 2015.

A Presidential Commission of Inquiry appointed by the President on January 27, 2017. The Presidential Commission of Inquiry was only a fact finding one. It could not declare anyone guilty. It lacked the power to take action against the culprits. Therefore In its present form this Commission would not be able to achieve what the public really wants to see happen, said critics. The Commission should have been appointed in accordance with the Special Presidential Commission of Inquiry Act. The Commission would then have comprised three sitting Supreme Court judges and it would have had greater powers.  The commission sat for 11 months. Its report was handed over to the President and was thereafter submitted to the Attorney General.

The Presidential Commission of Inquiry   and the COPE report provided the eager public with the ‘inside story’ of the Bond scam.  The Presidential Commission of Inquiry, in particular, exposed much information on the bond scam. 

Preparations for the scam had started early. A major shuffling of Department Heads took place in the Central Bank after former Governor Arjun Mahendran took office, said an official at the Presidential inquiry. Altogether, 34 transfers took place in 2015 among 30 CBSL department heads. I have worked under eight governors and never in my entire service did I witness such a major shuffle,” the official said. “The CBSL usually undergoes around 250 Department Head transfers. After Mahendran came, it went up to a 500”. Previously not more than five to six departmental heads and 195 of general staff had been transferred. The internal transfers were done in a justifiable manner without upsetting the workings of the departments. 

14 heads of department had been transferred along with 20 other key persons. “Among those transferred were heads of four vital departments of the Central Bank   the transfers made were not helpful. Head of International Operations was transferred to the Communication Department. The Head of Supervision was transferred to Exchange Control. The Head of Exchange Control was sent to the Regional and so on. Other experienced officers were also removed from their positions. Pathuman of the EPF was transferred to Public Debt Department. He was one of the most experienced officers in the EPF and the head of department wanted him back.

These transfers of key officers had ‘shaken the very foundations of the Central Bank’. Mahendran’s action had caused dissent and dejection among the senior officers of the bank. The earlier practice had been to consult Deputy Governors and Departmental Heads prior to effecting transfers and to appoint persons with relevant expertise to head the departments.

Evidence presented at the Presidential Commission indicated that Mahendran had made these transfers with an ulterior motive. Mahendran had put in place as the Head of the Public Debt Department an officer who was not an expert in the subject. Deepa Seneviratne who was promoted to the post of Superintendent of the Public Debt Department in February 2015 told the Special Presidential Commission of Inquiry that she was surprised when she was appointed to that post because she did not have any experience or knowledge of the duties and functions of that department. It appeared that she had been appointed, so that the Governor could brush her aside and interfere with the decision making process.

From January 2014 till January 2015, money needed for the government was raised mostly through direct placements. Auctions were certainly held during this period, but only for very small amounts compared to the amounts being sold through private placements. But after the new government came into power in January 2015, and especially after March 2015, direct placements ceased completely and bonds are sold exclusively by auction.

 Mahendran told the Commission that it was Prime Minister Ranil Wickremesinghe who gave the directive to stop direct placement method. Mahendran under cross examining stated that Prime Minister Ranil Wickremesinghe ordered him to issue TBs only through public auctions, reported the media.

Doing away with the direct placement method is not within the purview of the Governor, said former Deputy Governor of the Central Bank Dr. W. A. Wijewardene .Governor Mahendran did so without obtaining Monetary Board approval.  He had claimed that the move would bring in foreign investors to the country.  Stopping direct placement also meant that the government could not obtain loans at lower interest rates, Wijewardene said.

 Auditor General observed that the auctions system has increased costs and worked to the benefit of the primary dealers who were able to dispose of their bonds in the secondary market at higher rates. If the government wanted funds immediately to settle payments, a one-year Treasury Bill could have been issued and rolled over periodically.

Central Bank Deputy Governor Dr. Nandalal Weerasinghe, said that the Central Bank had been compelled to print a large amount of money in 2015 and 2016 as the then Governor Arjuna Mahendran opted for long-term bond auctions. Never in the history of the Central Bank had such a large amount of money been printed before.

Governor Arjuna Mahendran had ordered Deepa Seneviratne to accept Rs. 10 billion worth of bids on Treasury bonds. Seneviratne said that the order had been given in the presence of two Deputy Governors and officials of her department and she had been left with no alternative but to comply with the Governor’s order. Governor Mahendran had used the words, “Do it”, in ordering her to proceed with the particular bond sale, Seneviratne said, giving evidence before the Commission.

Additional Director Dr M. Z. M. Azim had tried to point out the negative repercussions of the bond sale, four times but in vain, while the two Deputy Governors were keeping silent, she said. Seneviratne put up a note registering her strong opposition to Mahendran’s move.

Mahendran had walked into the Bank’s Market Operations Committee meeting on February 27, 2015 and told those present that the standard deposit rate of 5 percent would be removed and an auction held to issue 30-year Treasury Bonds. There was no discussion and no reason given. Officials were surprised when Mahendran walked in. CBSL Governors did not usually attend meetings of the Operations Department.  When questioned as to why they followed Mahendran’s orders, officials said that the Governor has enormous power within the CBSL.’ The officers will yield to what the Governor says.’

the need to issue 30-year bonds as opposed to those of shorter tenure was queried at the inquiry. According to Mahendran, the Secretary to the Treasury was facing the crunch” on massive payments including the unpaid bills of the year 2014 which were amounting to a large sum of Rs. 1.4 trillion. 

The decision to scrap the 5 percent deposit rate was highly sensitive and if that information leaked to one of the bidders, it would have given the bidder a definite advantage over others, said the Bank’s Deputy Governor Nandalal Weerasinghe. If a primary dealer had found out that the interest rate had been raised while the bond auction was ongoing, that particular dealer would have stood to profit far more significantly than others who were not privy to the information.

Thereafter, Mahendran instructed the Operations Department to draft a circular raising the rate to 6.5 percent. The instructions were given while a bond auction was taking place.  They were also instructed to take all the bids that had been received. There were dummy bids as well.

The 30 year Bond carrying a fixed interest rate of 12.5% was advertised by the CB for a value of Rs.1 Billion for the Auction to be held on 27th February 2015. Most dealers had made preparations to provide bids for the already announced Rs. 1.0b. . But at the auction, the amount was increased to Rs 10 billion, on the instructions of Mahendran.

 Raising the bids to Rs 10 billion has been done before ,but  the February 27 issue was of a scale) that was totally unprecedented, said Bank officials.  It was ten times the original offer. There was also a difference in the bid offer ratio. This was usually around two to four times the offer, but the bids on February 27 were 20 times the original offer.  In the earlier Rs 10b bids, the Bank had accepted offers which exceeded by 50% at the most, In the February 2015 issue the Bank accepted ten times the amount originally offered.

The media reported that  money markets were in an uproar on Friday, February 27 when the CBSL announced that it was accepting bids worth Rs. 10.0b at 9.50%-12.50% whereas clients and most primary dealers had made bids between 9.50% and 10.50%. Only a few bids, including those by Perpetual Treasuries were made in the 12% range. As a result, Perpetual Treasuries was the successful bidder, getting 50% of that amount at the highest price.

Bonds which would have been sold in the market for Rs.121/= was sold around Rs.91/=to Perpetual Treasuries , causing losses amounting to Rs.1.5 billion immediately to government  This caused heavy losses to other primary dealers and investors too. The biggest loser was the National Savings Bank.

The Bank of Ceylon (BOC) had submitted a bid on behalf of their customers at 9.5% and Rs 121. However, after getting an extension of the closing time of the bid (during the last 30 minutes before the closure of the tender) the same BOC submitted bids at prices ranging between Rs.87 and Rs.97 on behalf of another Primary Dealer, Perpetual Treasuries. The Chief Dealer of BOC when questioned about this strange behavior said that the CEO of Perpetual Treasuries told him Awoth atha thamai” meaning tremendous profits, if successful.

Clearly Perpetual had access toinformation that other dealers did not have, which enabled them to come to the February 27 auction fully prepared to bid for bonds worth Rs 10b or more and also get the Bank of Ceylon to bid on its behalf for an additional Rs 3b.

The Treasury bond dealings had been planned in such a way that the company which gained the most couldn’t be identified. “There was a pattern of trading designed to mask the real beneficiary.” “Through this pattern of trading the lion’s share of profits went to Perpetual Treasuries while the lion’s share of the entire loss went to the EPF. Small net cash inflows went to Pan Asia Bank and DFCC.” Former Pan Asia bank chairman had attempted to influence a witness, regarding giving evidence at the bond scam. (Sunday Times 9.7.17 p 20)  

The pattern of activity of Perpetual Treasuries before, at, and after the auction gives rise to reasonable suspicion of that company having acquired some inside, privileged knowledge, said Samarasinghe and Mendis.

 Perpetual had sold large amounts of bonds in the market on February 26 when the market was under the impression that CBSL policy interest rates would remain unchanged at 5% and were not aware of the CBSL decision to scrap the 5.0%. The abolition of the 5% window meant that those who held the old bonds will see the market value of their bonds halved if they try to sell them before maturity. . Perpetual thereafter purchased bonds in the market the following week thus making a massive profit.

 An official of the Central Bank pointed out that the state had suffered an immediate loss of Rs. 878 million because of decision to raise funds by selling treasury bonds only through auction. Mahendran had ordered that bids for Rs 10 bn be accepted without direct placements and, therefore, the government had received only Rs 9.6 billion. If both direct placements and auction methods had been employed the government could have raised as much as Rs 10.5 billion. The Central Bank could have raised Rs 2.6 billion through auction method and the rest could have been raised through direct placements in accordance with the then current market interest rates, he said.

After the auction, Perpetual Treasuries, along with a few other Primary dealers also made high profits by selling the bonds to the Employees’ Provident Fund, Sri Lanka Insurance Corporation, the University Grants Commission, National Savings Bank and Mahapola Scholarship Fund.

Perpetual Treasuries bought treasury bonds worth Rs. 8,594 million and resold them to Sri Lanka Insurance Corporation for Rs. 12,708 million, within a few days, said the Centre for Human Rights. The company made a profit of Rs. 4,114 million. loss to Sri Lanka Insurance Corporation was over Rs 4.11 billion.

National Savings Bank and Perpetual Treasuries had at least five transactions. The company made a profit of Rs. 819 million while the NSB lost over Rs. 819 million. On March 17, 2015 the Secretary of the University Grants Commission (UGC) issued a gazette to utilize Universities Provident Fund for long and short term investments. UGC invested around Rs. 1 billion in the Bond deal,   said the Centre for Human Rights. the minimum loss made by the UGC was Rs. 146 million. the Centre also said it might not be the only time that Universities Provident Fund (UPF) had been misused in a similar fashion.

The total loss incurred by Employees’ Provident Fund (EPF)  due to the bond scam alone was over Rs. 26 billion said  Campaign for Free and Fair Elections (CaFFE. Employees Provident Fund Department sources at the Central Bank said   EPF had suffered losses due to the bond scam. They attributed the loss to buying Treasury Bonds from primary dealer Perpetual Treasuries without buying them at the auction direct. They said details about the losses had been already reported to the Central Bank and the Bank had launched an inquiry. The CB had initially asked for a committee consisting of outsiders for the probe as some CB employees were also to be investigated.

A special investigation, commissioned by the Monetary Board of the Central Bank of Sri Lanka, in March 2017, showed that bond scams under the current government led to a staggering loss of about Rs. 10 billion to the Employees’ Provident Fund (EPF). the report set out in detail the manner in which the EPF scam had been carried out by the two high ranking CBSL officials. The deals were done directly with the primary dealer or routed through other intermediary primary dealers. The team had looked into the investment of EPF monies in Treasury bonds in 2015 and 2016.

a CB official accused of committing irregularities had submitted his resignation on hearing about the proposed investigation, but the CB hierarchy had not accepted his resignation in view of the investigation.

At the Monetary Board meeting on March 23, board members demanded that the two officials found guilty for swindling public funds be interdicted immediately and disciplinary action taken against them. However, all that was done was sending two ‘show-cause’ letters to the officials, clearly named in the report as offenders. he soft-peddling of the issue and not taking clear action against the corrupt officials and allowing them to remain in the service at the same positions would result in they doing further damage and intimidating other officials who were against corruption, sources said.

One particular name had emerged in the investigations. P.H.I. Saman Kumara was transferred to the EPF on 08 June 2015.( Island 1.8.17 p 6)  The staff at the EPF  warned me against Saman Kumara whom they claimed to be a questionable dealer said Assistant Governor  Jayalath. Dealers carry a big responsibility. So I was scared. I put Saman Kumara in the Risk Management Division of the EPF.”

 Then I received a telephone call from the then Governor Arjun Mahendran, continued Jayalath. He called me and shouted at me for placing Saman Kumara in the Risk Management Division.” Mahendran told him I sent a fellow with CFA qualification and this fellow tells me he was not assigned to the EPF Front Office.”

Mahendran had wanted Saman to be put in the front office. And directed Jayalath to do so. I told Governor Mahendran that we cannot rely on Saman Kumara, concerns have been raised on his conduct. Then Mr. Mahendran asked me whether these rumors had any proof. I told him we do not have proof. Then he asked me ‘so with no proof how can you say Saman Kumara’s conduct as a dealer is questionable?’”

Jayalath was unhappy about the order,  but did not want to shift Saman Kumara to another position because if I (Jayalath) had shifted him (Saman Kumara) I would also have to walk out of my position.” He had heard what happened to some of the persons in the Central Bank who were against the then Governor Mahendran.”

as the Chief Dealer of the EPF ,Saman Kumara was responsible for buying treasury bonds purchased by Perpetual Treasuries in the secondary market. Saman Kumara had violated regulations by conducting dealings exceeding his daily limits. Daily dealing limit for a Chief Dealer in the EPF is Rs.2 billion.

Further, Saman Kumara was difficult to control, said  Jayalath. he was regularly not in his seat and continuously used the mobile phone, disregarding the instruction not to use mobile phones to carry out deals.” Saman Kumara was close to  Governor Mahendran and it seemed Saman Kumara was divulging details of discussions held at the EPF to Mahendran said Jayalath. (Island 1.8.17 p 6)

The government said initially  that it has not incurred any loss because the frozen PTL assets amounts to Rs. 12 billion while the total loss was Rs 11 billion. This was hotly contested. The total loss incurred by the state due to the bond scam was over Rs 33 billion  said Campaign for Free and Fair Elections (CaFFE)  .”Our experts have gone through the transactions and found that the loss to be around Rs. 33 billion.

Nalaka Godahewa, former SEC Chairman,  pointed out that  Rs. 11 billion is just the profit made by Perpetual Treasuries in one year through the bond scam. there are other factors to be taken into account such as the increase in the interest rates. This is no ordinary scam (horakama) but one that has affected the whole country and added to the cost of living of every citizen, Godahewa said.

Lastly, the Treasury bond scam had caused a 10 billion-rupee loss to the government coffers alone, former Deputy Governor of the Central Bank Dr. W. A. Wijewardene  said. there had been an immediate loss of Rs. 532 million to the government and the total loss for the 30 years would be Rs. 10 billion, he said, presenting a document outlining his calculation of the loss.

The loss to the government resulting from the interest rate increase alone is in the range of Rs. 126 billion. Further, he pointed out that as a result of the flight of foreign money from the bond market following this scam and other reasons, the value of the rupee depreciated by about 16% which resulted in the increase of the government foreign debt by about Rs 512 billion. As a result of the increase in the interest rates, the debt of companies and individuals had increased by about Rs. 280 billion. Thus the actual direct and indirect loss to the government and the people of Sri Lanka from the bond scam is over one trillion rupees. 

the Central bank will get back Rs 10.0b in interest earnings in about 8.5 years. Thus Sri Lanka will be paying the amount of the original amount borrowed at least three times over by way of interest payments only. the bond issue also  raised interest rates causing a loss to the taxpayer. The taxpayer is also affected, thought he does not know it.

A second controversial bond auction took place on the 29 march 2016. this second scam,  was even worse than the first scam. Central Bank issued treasury  bonds worth Rs 80 billion in March 2016 after announcing that they will  only issue bonds to Rs 40 million. The amount accepted by the Central Bank at this auction was 07 times greater than the amount accepted in 2015. Bank of Ceylon, the People’s Bank and the National Savings Bank had  twice received instructions    at this auction to make bids at lower rates.

Again Perpetual Treasuries benefited. PTL obtained 34% and 31% of the relevant bonds. Perpetual Treasuries borrowed from the Employees Provident Fund (EPF), the DFCC Bank and the Pan Asia Bank to pay for these bonds. Perpetual  was also helped by the Central Bank  which allowed Perpetual to borrow from the Central Bank under the ‘Intra-day Liquidity Facility’ (ILF).

 Thereafter, Perpetual  had been charged an additional Rs. 88 million  because of  an increase in the market rate. Central bank thereafter returned Rs. 88 million to Perpetual  after the market value went up. the payment of Rs. 88 million had been done with the approval of the Central Bank. Central bank officials said it was against the Central Bank regulations to pay money back  in this way. This had never been done before. it was unusual and unprecedented.

Critics commented, we have now  heard how a  primary dealer borrowed money from the Central Bank at low interest rates to buy high interest yielding bonds issued by the Central Bank itself. Perpetual Treasuries Ltd made a Net Profit of Rs. 5.124 billion in the
Financial Year ended 31 March 2016 and a Net Profit of Rs. 6.365 billion in the Financial Year ended 31 March 2017.

DEW Gunasekera said that if Yahapalana  had allowed  COPE to present its report to Parliament, the second treasury bond scam could have been  prevented. the 2016 scam was much bigger than the one perpetrated soon after the change of government. The PTL had, with political backing, borrowed from the state and then the same funds were given back at a higher interest,  DEW Gunasekera  observed.

The Pitipana commission, though dismissed as ignorant and biased made several very  significant recommendations. The Pitipana Commission said, inter alia, ‘We have  determined that Mr. Mahendran directed that bids to the value of Rs. 10.058 billion be accepted for the improper, wrongful and Bala fide collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury Bonds at that Auction, at low Bid Prices and high Yield Rates’.

We also find that Mr. Mahendran provided inside information (price sensitive information) to Perpetual Treasuries Ltd., which Perpetual Treasuries Ltd used to its benefit at the Treasury Bonds Auction held on 27th February 2015 and that Mr. Mahendran acted in collusion with Perpetual Treasuries Ltd.

 in view of the determinations referred to above. the Commission to Investigate Allegations of Bribery or Corruption and the other appropriate authorities should consider whether the aforesaid acts of Mr. Mahendran amount to acts of “Corruption” as defined in Section 70 of the Bribery Act and, if so. prosecute Mr. Mahendran under the Bribery Act and other applicable law.

the Pitipana Committee continued, Perpetual Treasuries Ltd has made the major part of its profits by using ‘inside information’ (price sensitive information) and by market manipulation in the Secondary Market and, thereby, knowingly violated and acted in breach of the provisions of the Code of Conduct for Primary Dealers, which has been issued by the CBSL under and in terms of the Regulations issued under the Registered Stock and Securities Ordinance No. 7 of 1937.

given the complexity of the task and the expertise needed. a Forensic Audit or similar process should be carried out to accurately estimate the quantum of the sum to which Perpetual Treasuries Ltd gained and benefited from the ‘inside information’ (price sensitive information) at the Treasury Bond Auction on 29th March 2016.

Pitipana committee continued, we recommend that, appropriate proceedings be  instituted against Perpetual Treasuries Ltd for the recovery of these monies. we consider that, the provisions of Section 21D (5) of the Registered Stocks and Securities Ordinance are likely to be relevant.

we recommend that. the Hon. Attorney General and other appropriate authorities consider whether Mr. Arjun Aloysius and Mr. Kasun Palisena are parties to and directly responsible for the commission of an offence under section 56A(1) of the Registered Stock and Securities Ordinance and, if so, proceed against these two persons too, in terms of Section 56B of the Registered Stock and Securities Ordinance, concluded  Pitipana committee. ( continued)