By C. A. Chandraprema Courtesy The Island

*  Cabraal’s explosive allegation of a major cover-up
*  CBSL forensic audit biggest red herring in SL history
* Bond scammers not brought to book despite multiple investigations

Former Central Bank Governor and present Advisor to the Prime Minister Ajith Nivaard Cabraal’s latest book, “The Great Bond Scam Cover-up: The Mother of all cover-ups” released a week ago, is set to send shockwaves through the corridors of power and high finance. If those who have been following the news regarding the bond scam over the past few years had the feeling that something was not right, but they could not really put their finger on it, this is the book that puts the finger on what exactly was wrong. This is the book that connects the dots.

Sri Lanka’s biggest financial scam, which took place in February 2015 and March 2016, has been investigated and reinvestigated by multiple agents over five years, but nothing seems to have happened in terms of bringing the culprits to book. As we pen these words, the whole country is waiting to see what the forensic audit into the CBSL bond issues reveals, little realizing that the much spoken of ‘voharika vigananaya’ has absolutely nothing to do with the bond scams that took place in February 2015 and March 2016; it is only a red herring that has been thrown across the trail to deflect attention from the main issue.

There is no Sri Lankan who has not heard of the Central Bank bond scam. What everyone in this country recognizes as the bond scam are the glaring irregularities that have been revealed in the issue of Treasury bonds that took place on the 27th February 2015, just weeks after the so-called Yahapalanaya government came into power. What happened there was that the Central Bank of Sri Lanka (CBSL) announced to the market that it would be issuing Rs. 1 billion worth of 30-year Treasury Bonds on 27th February 2015, carrying an interest rate of 12.5%. The CBSL received Rs. 20  billion bids for this issuance, with Rs. 15  billion or 75% of the bids being received from one primary dealer Perpetual Treasuries Ltd.,  owned by the son-in-law of the then Central Bank Governor Arjuna Mahendran. On the day of the bond issue, Governor Mahendran personally visited the Public Debt Department (PDD) of the Central Bank and directly instructed the Superintendent to increase the amount to be borrowed to Rs. 20 billion. When the Central Bank officials protested, he instructed the PDD to borrow Rs. 10.0 billion. Governor Mahendran, justified the increase stating that a further Rs. 9 billion was urgently required by the government.

One-half of that Rs. 10 billion issue ended up in the hands of PTL. The information that the issue was going to be increased was not available to other primary dealers but it had been made available to PTL and that was why it had placed bids amounting to Rs. 15 billion for what was supposed to be a Rs. one billion bond issue. If Governor Mahendran’s attempt to increase the issue to Rs. 20 billion had succeeded, that would have resulted in all 15 billion of PTL’s bids being accepted. Since the issue was restricted to Rs. 10 billion due to resistance by CBSL officials, PTL managed to get only Rs. five billion worth of bonds. PTL had placed bids worth Rs. 2 billion in its own name, and a further Rs.13 billion bids via the state-owned Bank of Ceylon. All bids by PTL and BOC were placed at an unusually high interest rate because they knew that those bids were going to be accepted. Rs. 13 billion in bids had been made on behalf of PTL by the Bank of Ceylon which had extended credit to PTL for the purpose by some mysterious arrangement not available to any other primary dealer.

 Even as the controversy regarding this highly irregular bond issue raged, had been inquired into by a committee appointed by the Prime Minister and was in the process of being investigated by a COPE sub-committee, the same wrongdoers pulled off yet another scam which if anything was even more brazen than the first. 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 government related primary dealers like the EPF, the Bank of Ceylon, Peoples Bank and National Savings Bank had been specifically ordered not to bid at the auctions of 29th March 2016 and 31st March 2016 so that PTL would be able to corner the market. Later, the EPF purchased these bonds from PTL at a higher cost.

 Multiple investigations that

got nowhere

These two transactions of 27 February 2015 and 29 and 31 March 2016 are what Sri Lankans identify as the bond scam. None of those involved have yet been brought to book for what they did. Investigation followed investigation from 2015 onwards, each revealing more damning information than the one preceding, but none of this has led to the prosecution of those concerned. As the scandal hit the headlines, the Prime Minister appointed a three-member committee of lawyers comprising of Gamini Pitipana, Mahesh Kalugampitiya and Chandimal Mendis, on 10th March 2015, to probe the controversial bond issue. This committee was condemned by the Opposition as a group of UNP lawyers tasked with whitewashing the bond scam. Unsurprisingly, this three-member committee stated, in its final report, that Governor Arjuna Mahendran had no direct role in what had taken place, despite glaring evidence to the contrary. However, even this committee of pro-UNP lawyers concluded that the bidding pattern of PTL was unusual and warranted further investigations. They also recommended that the Bank of Ceylon should seek explanations from its chief dealer and others on the ad-hoc decision relating to the Rs. 13 billion lent to PTL at short notice.

On 27 March 2015 three good governance activists Chandra Jayaratne, Dr. G. Usvatte Aratchi and Dr. A. C. Visvalingam,  filed a Fundamental Rights Petition in the Supreme Court with the plea that the SC declare that the CBSL Governor, Senior Deputy Governor and Superintendent of Public Debt have not discharged their duties in a manner that is necessary for the preservation of public trust, that the Monetary Board be directed to carry out an independent inquiry into the allegations relating to the controversial bond issue under the supervision of the Court, and to direct the Monetary Board to formulate new systems, processes, rules and regulatory frameworks which assure transparency and best governance practices in public debt issuance. Cabraal states, in his book, that many legal experts were to later admit that given the contents and pleas of the petition, this petition had been prepared in such a manner so that it was very likely to be denied leave to proceed by the Supreme Court. He alleges that the petitioners were themselves known to be associated with the UNP and that the objective was to use the dismissal by the Supreme Court to convince the general public that nothing untoward had happened in the bond Issue of 27th February 2015.

A Supreme Court bench comprising of Chief Justice K. Sripavan, Justice Priyasath Dep and Justice Rohini Marasinghe rejected this petition on the grounds that the procedures of the Central Bank had not been transgressed and no law had been violated by any of the respondents. President Counsel Romesh de Silva, PC., appearing on  behalf  of Governor Arjun Mahendran, is reported to have argued in court that ethics were not a matter for the Court and that Court should consider only whether there were any violations of legal provisions or not. Cabraal views this FR petition as another part of the cover-up exercise orchestrated by the governing party of the time. In fact, when this writer interviewed Arjuna Mahendran just before he was denied reappointment as Governor of the CBSL, he did claim that the Supreme Court had cleared him of all wrongdoing. On 22nd May 2015 Speaker Chamal Rajapaksa appointed a Sub Committee of COPE Chaired by D. E. W. Gunasekera to probe the bond scam. This 13-Member Committee was supported by the Auditor General. When the report of this COPE sub-committee was to be presented to the Speaker on 26th June 2015, President Maithripala Sirisena dissolved Parliament and suppressed it, for good, as all Committees of Parliament became defunct with the dissolution.

The draft interim report of the D. E. W. Gunasekera-led COPE sub-committee had concluded that Arjuna Mahendran and his son-in-law Arjun Aloysius were involved in a related party transaction. The sub-committee observed that the PTL, which before the 27th February 2015, had bid in amounts ranging from 125 million to 250 million, suddenly began bidding in billions from the 27th February 2015 onwards, with the bid on 27 February being a staggering 15 billion. It was further observed that PTL had been a very passive player in the Government Securities market from the time of its founding in 2013 and during the year 2014 but from 27th February 2015 onwards, the Company had become very active dealing in billions.

Prime Minister Ranil Wickremesinghe was vehemently opposed to the draft COPE Report by its Chairman D. E. W. Gunasekara, and on 7th July 2015, he held a press conference, where he said the interim report presented by the Chairman of COPE D.E.W. Gunasekara was illegal and breached the Parliamentary Privileges Act.

After the August 2015 Parliamentary election, a new 25-Member COPE Committee was appointed with JVP Parliamentarian Sunil Handunetti as its Chairman and they launched their own investigation into the bond scam using the evidence unearthed by the D. E. W. Gunasekera subcommittee. The Handunnetti Committee concluded that former Governor of the Central Bank, Arjuna Mahendran, had made an intervention and influenced the issuing of bonds at the transactions held on 27 February 2015. Tracing the manner in which PTL had obtained credit from the Bank of Ceylon to buy those bonds the Handunetti Committee revealed that PTL had instructed the Bank of Ceylon through an e-mail at 10.48 am on 27th February 2015 (12 minutes before the auction closed) to bid Rs. 3.0 billion at 12.5%, Rs.5.0 billion at 12.75% and Rs. 5.0 billion at 13% at the auction on behalf of PTL. The Bank of Ceylon duly carried out such instructions from PTL and the BoC’s bids were accepted by the CBSL at 10.57.22, 10.57.41 and 10.57.57 respectively, just 9 minutes after receiving instructions from PTL, and about 3 minutes before the bids for the auction closed. The Handunetti Committee further observed that the abrupt decision of Governor Mahendran in changing the existing bond issuing system to an auction only system had completely changed the borrowing pattern of the CBSL after 27th February 2015, causing a severe increase in the borrowing cost to the government while also opening an easy path for primary dealers who have inside information to earn phenomenal profit. As Chairman of COPE, Handunetti held Governor Mahendran directly responsible for the controversial bond transaction and urged that legal action be taken against those involved.

However, nothing happened and the controversy dragged on. The UNP MPs on COPE, acting as an organized group included their dissenting views in the footnotes to the Handunnetti COPE Report thus compromising its findings. On 27 January 2017 President Maithripala Sirisena appointed a Commission of Inquiry to investigate and inquire into and Report on the Issuance of Treasury Bonds during the period 01st February 2015 to 31st March 2016. The Commission comprised Supreme Court judge K.T. Chitrasiri – Chairman, and Supreme Court judge Prasanna Jayawardena, and retired Deputy Auditor General Kandasamy Velupillai. This Commission concluded sittings on 31st December 2017.

The Commission was received well by the public because of the sensational revelations that regularly emanated from its hearings. Finance Minister Ravi Karunanayake was forced to resign his portfolio and spend some time in the wilderness as a result of those hearings. Throughout the year 2017, the UNP led government was taken to the cleaners by the Bond Commission and this kept the vociferous and active Joint Opposition also happy. However, even while the Bond Commission was in session, certain disturbing signs were apparent and these were commented on in the media at that time.

The great red herring

The Commission accorded Prime Minister Ranil Wickremesinghe special privileges by sending him questions in writing and allowing him to reply by way of an affidavit. When he appeared before the Commission it was only to clarify any issues arising from the answers given. Governor Arjuna Mahendran was able to obtain assurances of a respectful attitude towards him before he turned up to be questioned. Mahendran’s son-in-law Arjuna Aloysius was allowed to abstain from being questioned. In fact, none of those actually responsible for the bond scam was given the kind of grilling that Ravi Karunanayake got. Cabraal has drawn attention to the manner in which Aloysius’ Personal Assistant Steve Samuel, who had many text messages in his mobile phone which referred to ‘Honorable PM’, ‘RK’ & ‘AM’, was allowed to come before the Commission and confidently swear under oath that he did not know what those abbreviations meant. While the Bond Commission was in session, there was some disquiet due to the revelation that the daughter of one of the Commissioners the late Prasanna Jayawardene was working as an intern in the Ministry of National Policy and Economic Affairs, which came under the Prime Minister. Even though Justice K. T. Chitrasiri was the Chairman of the Commission, Cabraal states that it was the late Prasanna Jayawardene who appeared to take the lead in the proceedings and it was he who had conflict of interest issues which are outlined by Cabraal in his book.

Be that as it may, the Bond Commission 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 and, therefore, PTL obtained bonds worth Rs. 5 billion at low bid prices and high yield rates. Since Mahendran had perused the Bids Received Sheet prior to issuing his instruction to accept bids to the value of Rs. 10 billion, 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.

Having said that, the Bond Commission, which was appointed to look into the bond issues that took place from the 01st February 2015 to 31st March 2016, then went into unrelated matters such as investments made by the EPF (which is run by the CBSL) in the Stock exchange in 2010 and 2011, and the purchase of Greek bonds worth Euro 30 million by the CBSL in 2011. There is no doubt that if any irregularities had occurred in the investments made in the stock market by the CBSL in 2010 and 2011 and in the purchase of Greek bonds in 2011, those should be investigated separately. The task of the Bond Commission of 2017 was to look into the CBSL bond issues that took place on the 27th February 2015 and on the 29th and 31st March 2016. This was what the public was interested in, and what the media covered when the Bond Commission was in session. However, when the report of the Bond Commission was written, extraneous matter which should have been examined in separate investigations were deliberately brought in, obviously with the purpose of smearing the Rajapaksa government with the same brush and thereby minimizing the negative impact on the UNP. If in 2017, the public had become aware that the Bond Commission was trying to dilute what the UNP government had done by conducting parallel investigations into allegations against the previous Rajapaksa government there would have been an immediate public outcry. However, the digressions are more apparent in the report than they were in the media reports on the public hearings of the Commission. The biggest and most unforgivable digression made by the Bond Commission was to recommend that a forensic audit be done into bond issues that had taken place before 2015.

Today, when any talk of the Bond scam comes up, the first thing that comes into mind is this forensic audit. Even the former COPE Chairman Sunil Handunneththi keeps talking about the ‘voharika vigananaya’. Almost everyone who hears this term assumes that this much-talked of forensic audit has something to do with the Bond scams which took place on 27 February 2015 and on the 29th and 31st March 2016. But in reality, it has nothing to do with those bond scams and is a red herring thrown across the trail to deflect attention from the matter at hand. Cabraal has argued very convincingly, that if an independent audit was being carried out into the bond issues that took place before 2015, it should have been commissioned by the Auditor General and paid for by a special vote by the government. However, in this case, it was the Monetary Board of the CBSL that commissioned the forensic audit and paid for it. The amount paid to the auditors is also said to be a staggering Rs. 1.5 billion spent for no other reason than to throw a red herring across the trail to deflect attention from the culprits of the bond scams of 27th February 2015 and 29 and 31 March 2016. As such the forensic audit is in itself a major scam.

The CBSL bond scam must be the most investigated offence in Sri Lankan history. First there was the Pitipana Committee appointed by Prime Minister Ranil Wickremesinghe on 10th March 2015. Then there was the COPE Subcommittee inquiry headed by D. E. W.Gunasekera from June 2015 to August 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. In addition to all this there was an investigation by the Commission to Inquire into Allegations of Bribery and Corruption. The police inquiry was carried out by the CID and yet nothing has happened by way of bringing the culprits to book. As these words are being penned everyone is waiting for the release of a forensic audit report which has nothing to do with the bond scams of 2015 and 2016. As Cabraal says in his book this is indeed the mother of all cover-ups.