RECOMMENDATIONS: Key expose into controversial Treasury bond issuance

Recommendations

The Presidential Warrant dated 27January 2017 issued to us, requires us to make recommendations with regard to the matters we have investigated and inquired into and reported on.

On the basis of the evidence placed before us and our determinations and conclusions based thereon and our observations, which are set out in our Report, we recommend:

1] The Monetary Law Act No. 58 of 1949 is, as stated in its Preamble "An act to establish the monetary system of Sri Lanka and the Central Bank, to administer and regulate the system and to confer and impose upon the Monetary Board of the Central Bank powers, functions and responsibilities necessary for the purposes of such administration and regulation, and to provide for connected matters.”

The Monetary Law Act was drafted by John Exter and his colleagues and was enacted soon after Ceylon [as it then was] obtained its independence.

While the provisions of the original Act are far sighted and prudent, much has changed in Sri Lanka and the world during the more than six decades that have passed.

There have been 22 piecemeal Amendments to the Monetary Law Act since 1949, but these Amendments have only addressed specific issues.

To the best of our knowledge, up to now, there has been no consideration, which is known in the public domain, of whether the overall structure of the Monetary Law Act suits the present day needs of Sri Lanka, its economy and the needs and aspirations of our people.

We recommend that, the CBSL and the Government carefully considers whether the Monetary Law Act, as it now stands, adequately services Sri Lanka's efforts to develop our country and its economy for the benefit of our people or whether the Monetary Law Act should be replaced with appropriate legislation which will better suitsthe present day needs and aspirations of Sri Lanka.

We stress that, we only recommend a careful consideration of this issue, so that the CBSL and Government could, after careful study of all relevant factors and analysis of all material implications and consequences, reach a prudent and far sighted decision with regard to whether the Monetary Law Act needs to be replaced by appropriate legislation.

Needless to say, if, after the aforesaid careful process is carried out, a considered decision is taken to replace the Monetary Law Act, we would assume that, the drafting of such legislation would be done in consultation with the CBSL and other stakeholders and after obtaining the required expertise, especially with regard to comparable exercises in comparable countries;

2] 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.

It is hardly necessary to emphasise 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.

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, in the Exter Report, which was referred to earlier:

"Although the ultimate authority rests in the Monetary Board, the draft law nevertheless recognises 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 recognised 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.’”

As we observed earlier, John Exter's perceptive and far sighted description of the nature of the office of Governor of the Central Bank and the character and expertise required of a Governor, remain very true and relevant more than six decades later.

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;

3] 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;

4] 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 Conductfor members of the Monetary Board;

5] As stated earlier, we consider that, the provisions of the Registered Stock and Securities Ordinance, which was enacted in 1937, are outmoded and are, sometimes impractical. The same observation is applicable to the provisions of the Local Treasury Bills Ordinance No. 8 of 1923.

Accordingly, we recommended that, the provisions of the Registered Stock and Securities Ordinance and Local Treasury Bills Ordinance are examined with a view to the repeal of these enactments and the enactment of appropriate legislation which not only will meet the requirements and realities of raising Public Debt in the present day but also provide for the Government Securities Market of the future;

6] We recommend that, the CBSL closely examines the Procedures followed in the Public Debt Department of the CBSL and the decision-making process appliedto the raising of public debt by the CBSL and determines how these procedures should be improved and made more secure. Further, measures should be taken to ensure that, the day-to-day operations of the Public Debt Department are reported to the senior management of the CBSL, so that the senior management exercises adequate supervision and control over the day-to-day operations of the Public Debt Department.

Following this process, the Operational Manual of the Public Debt Department of the CBSL should be revised and be considered and approved by theMonetary Board.

In fact, we would assume that, with the introduction of the new system for the issue of Treasury bonds in July 2017, the CBSL would have commenced and, perhaps, completed the aforesaid process.

We also recommend that the CBSL considers formulating Guidelines with regard to the determination of coupon rates payable on Treasury bonds which are to be issued;

7] In this connection, we recommend that, the CBSL ensures that, there is strict segregation effected in the course of the day-to-day operations of the several departments of the Public Debt Department and that measures are taken to impose the control of access from one department to another.

The CBSL should ensure that, a voice recording system is used in the front office of the Public Debt Department and that a CCTV system is installed in the Public Debt Department. Further, the use of mobile phones within the Public Debt Departmentshould be prohibited. The 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;

8] We also recommend that, the CBSL carries out a similar exercise and takes similar measures with regard to the EPF Department of the Central Bank.

Here too, we would assume that, the CBSL would have done so, by now;

9] We recommend that, the CBSL considers introducing a procedure which ensures that, Operational Audits of the Public Debt Department [and other departments] are regularly carried out on a structured basis and puts in place measures to ensures the independence of the officers of CBSL who carry out Internal Audit and Operational Audit functions;

10] We recommend that, the CBSL considers strengthening its Legal Department and ensures that the CBSL has competent in-house legal advisors.

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;

11] As set out earlier, 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 wereresponsible 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;

12] As set out earlier in Chapter 12, we recommend that, the CBSL considers whether it is appropriate to introduce a revised Code of Conduct for PrimaryDealers which could be updated to provide for themodern-day Market and, especially, to take into account technology which is now used and is available.

As we observed earlier, the preparation of a revised Code of Conduct for Primary Dealers would give the CBSL an opportunity to crystallise into a revised document, the experience gained and lessons learnt over the 14 years that have passed since the Code of Conduct was drafted;

13] As stated earlier in Chapter 14, we recommend that, the CBSL investigates the operations of the Primary Dealer arm of Pan Asia Banking Corporation PLC;

14] As stated earlier in Chapter 5, although there is 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, wecannot 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;

15] As stated earlier in Chapter 13, we have identified several areas of concern with regard to the manner in which the EPF operated and transacted upon Treasury bonds during the period of our mandate.

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.

As observed earlier, 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.

16] In view of the observations made earlier in Chapter 16, 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. We have previously recommended that, the direct placements accepted during this period, should be examined;

17] As set out earlier in Chapter 19, we have determined that, the Government of Sri Lanka suffered an avoidable loss of Rs. 688,762,100as a direct result of Mr. Mahendran's intervention in the Treasury Bond Auction held on 27February 2015 and the instructions he gave to both the PDD and the Tender Board that Bids to be value of Rs. 10.058 billion must be accepted at the Auction and we have determined that, Mr. Mahendran is liable and responsible for this loss.

Accordingly, we recommend that, appropriate proceedings are instituted against Mr. Mahendran to recover this loss.

18] As set out earlier in Chapter 19, we have also determined that, Mr. Mahendran directed that Bids to the value of Rs. 10.058 billion be accepted for the improper, wrongful and mala 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 and that Mr. Mahendran provided "inside information" (price sensitive information) to Perpetual Treasuries Ltd., which Perpetual Treasuries used to its benefit at the Treasury Bonds Auction held on 27February 2015 and thatMr. Mahendran acted in collusion with Perpetual Treasuries Ltd.

Therefore, we recommend that, appropriate proceedings are also instituted against Perpetual Treasuries Ltd. for the recovery of this lossof Rs. 688,762,100. In this connection, we consider that, the provisions of Section 21D (5) of the Registered Stocks and Securities Ordinance are likely to be relevant.

In this connection, we also recommend thatthe Attorney General and other appropriate authorities consider whether, Perpetual Treasuries Ltd has used and gained and benefitted from "inside information" (price sensitive information) at the Treasury Bond Auction held on 27 February 2015 and if so whether Perpetual Treasuries Ltd. should be prosecuted underthe provisions of section 56A(1) of the Registered Stock and Securities Ordinance and, in the event of a conviction being entered by a learned Magistrate after Summary Trialin such a Prosecution, recovering, from Perpetual Treasuries Ltd., a fine which is twice the value of the aforesaid sum of Rs. 688,762,100or such other amount as the Court may be pleased to determine.

Further, we recommend thatthe Attorney General and other appropriate authorities consider whether Mr. Arjun Aloysius and Mr.KasunPalisena 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;

19] We further recommend that, in view of the determinations referred to above, the Commission to Investigate Allegations of Bribery or Corruption and the other appropriate authorities 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.

20] As set out in Chapter 19, we have determined that, Perpetual Treasuries Ltd. obtained and used "inside information" (price sensitive information) at the Treasury Bond Auction on 29March 2016 and gained and benefitted thereby.

We have also stated that, 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 benefitted from the "inside information" (price sensitive information) at the Treasury Bond Auction on 29March 2016.

Here too, we recommend that, after the quantum of the sum to which Perpetual Treasuries Ltd gained and benefitted from "inside information" (price sensitive information) at the Treasury Bond Auction on 29March 2016 is estimated by means of a Forensic Audit or other similar process, the Attorney General or other appropriate authorities consider whether, Perpetual Treasuries Ltd. should be prosecuted under the provisions of section 56A(1) of the Registered Stock and Securities Ordinance and, in the event of a conviction being entered by a learned Magistrate after Summary Trial in such a Prosecution, recovering, from Perpetual Treasuries Ltd., a fine which is twice the value of the extent of the gain and benefit gained by Perpetual Treasuries Ltd. or such other amount as the Court may be pleased to determine.

Further, we recommend thatthe Attorney General and other appropriate authorities consider whether Mr. Arjun Aloysius and Mr.KasunPalisena 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;

21] As set out in Chapter 23, we are of the view that, 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.

Further, as set out in Chapter 23, it is reasonable to take the view thatthe total net cash inflows received [monetary gains made] by Perpetual Treasuries Ltd. from the sales of Treasury bonds during the period relevant to our mandate, to the EPF and other statutory bodies and Government institutions, and aggregating to Rs. 8,529,964,495/61have been made, by using "inside information" (price sensitive information) and by "market manipulation".

In these circumstances, we recommend thatthe Attorney General and other appropriate authorities should consider whether Perpetual Treasuries Ltd. is liable for prosecution for an offence in terms of the aforesaid Section 56A(1) of the Registered Stock and Securities Ordinance and, in the event of a conviction being entered by a learned Magistrate after Summary Trial, Perpetual Treasuries Ltd. could be held liable to a fine equivalent to twice the value of the aforesaid sum or in such other sum as the Court may determine.

Here too, we recommend thatthe Attorney General and other appropriate authorities consider whether Mr. Arjun Aloysius and Mr.KasunPalisena 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;

22] We recommend thatthe Attorney General and other appropriate authorities examine whether prosecutions should be instituted, under the Penal Code or other relevant provision of the Law, against Mr. Mahendran, Mr. Arjun Aloysius, Mr.Palisena and relevant officers of the CBSL and the EPF on the basis of the facts and circumstances established by the evidence placed before this Commission of Inquiry.

We also recommend that, the Commission to Investigate Allegations of Bribery or Corruption examines the evidence placed before this Commission of Inquiry and ascertains whether there are grounds to prosecute Perpetual Treasuries Ltd., Mr. Arjuna Aloysis, Mr.KasunPalisena and relevant officers of the CBSL and the EPF, for offences under the Bribery Act and other applicable Law;

Further, we recommend thatthe Attorney General and other appropriate authorities carefully examine the Report marked "C350" prepared by the CID [and related documents] which sets out, inter alia, details of telephonic contacts Mr. Arjun Aloysius had with dealers and other persons engaged in the Government Securities Market and investigates the transactions which such dealers and other persons had with Perpetual Treasuries Ltd., and ascertain whether such transactions involved wrongful and/or lawful acts and if so, consider instituting appropriate proceedings against such dealers and other persons.

We consider that the Monetary Board and the CBSL must carefully examine the Report marked "C350" [and related documents] and investigate the transactions which dealers and other persons named in that Report [as persons who had frequent telephonic contact with Mr. Arjun Aloysius] had with Perpetual Treasuries Ltd. and ascertain whether such transactions involved wrongful and/or lawful acts and if so, take appropriate regulatory action and other appropriate actions against such dealers and other persons;

23] As stated earlier in Chapter 22, we recommend thatthe Attorney General or other appropriate authorities consider whether the material contained in the Report "C350" [and related documents] establishes that, some of the evidence given by Mr. Mahendran and Mr.Palisena before us, is shown to have been incorrect and, if that is the case, whether there are grounds to prosecute Mr. Mahendran and Mr.Palisena under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948;

24] As stated earlier in Chapter 24, we recommend that, the Commission to Investigate Allegations of Bribery or Corruptionshould consider whether Ravi Karunanayake, MP, while he was Minister of Finance, derived a substantial benefit from the lease payments made byWalt and Row Associates Ltd. [which is an Associate Company ofPerpetual Treasuries Ltd. and which is owned and controlled by the same persons who ownand control Perpetual Treasuries Ltd.] for the lease of apartment occupiedby Ravi Karunanayake, MP and his family and,if so, determine whether appropriate action shouldbe taken against Ravi Karunanayake, MP, under theBribery Act;

25] As stated earlier in Chapter 24, we also recommend thatthe Attorney General and other appropriate authorities considerwhether some of the evidence given by Ravi Karunanayake, MP before us is shown to have been incorrect and, if that is the case, whetherMr. Karunanayake should be prosecuted under Section 179 and/or Section 188 ofthe Penal Code or other relevant provision of the Law, read with Section 9of the Commissions of Inquiry Act No. 17 of 1948;

26] As stated earlier in Chapter 29, we recommend thatthe Attorney General and other appropriate authorities consider whetherPerpetual Treasuries Ltd. has, wrongfully and fraudulently, deleted callrecordings for the purpose of concealing the true nature of the transactionsentered into by Perpetual Treasuries Ltd. and attempted to suppress evidencewith regard to wrongful acts of Perpetual Treasuries Ltd. and, if so, whetherprosecutions should be instituted against Perpetual Treasuries Ltd., Mr. Arjun Aloysius and Mr.KasunPalisena for criminal offences under Chapter X and ChapterXI of the Penal Code, including Sections 175, 189, 193, 198 and 201 ofthe Penal Code read with Section 9 of the Commissions of Inquiry Act No. 17of 1948. The appropriate authorities may also consider whether Mr.NuwanSalgado and Mr.SachithDevathanthri should be prosecuted in this regard;

27] We also recommend thatthe Attorney General and other appropriate authorities consider whether Mr.Palisena's statements in the Affidavit affirmed to by him, where he declares that completetelephone call recordings have been submitted to the Commission of Inquiry by Perpetual Treasuries Ltd, were false and, if that is the case, whether Mr.Palisena should be prosecuted under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948;

28] We recommend that, pending the consideration of institution of the aforesaid Proceedings, the Assets of Perpetual Treasuries Ltd. and its beneficial owners – namely, Mr. Arjun Aloysius and Mr. GeoffreyAloysius – andthe persons who were in day-to-day control of Perpetual Treasuries Ltd.– namelyMr. Arjun Aloysius and Mr.KasunPalisena– includingallmonies lying to the credit of Perpetual Treasuries Ltd.'s accounts withthe CBSL and other banks, the aforesaid shares in National Development Bank PLCand the dividendsaggregating to Rs. 641.556 million paid byPerpetual Treasuries Ltd to its beneficial owners, should be held or placed "under lien" so that such assets cannot be disposed of in the meantime.

Thereafter, if decisions are taken to institute such Proceedings, appropriate Orders may be sought from the Courts in which such Proceedings may be instituted;

29] We also recommend that, consideration is given to recovering the Costs of this Commission of Inquiry, from Perpetual Treasuries Ltd.

30] While we have recommended that, consideration is given to instituting appropriate Proceedings in Court for the recoveryof the aforesaid monies from Mr. Mahendran, Perpetual Treasuries Ltd. and itsbeneficial owners – namely, Mr. Arjun Aloysius and Mr. Geoffrey Aloysius andalso Mr.KasunPalisena [in the manner and for the sums referred to earlier],we would also think that, in view of the extreme gravity of the facts andcircumstances which formed the subject matter of our mandate and the verysubstantial prejudice caused by these facts and circumstances to our economy andour nation, Parliament may wish to carefully consider whether it isappropriate and necessary to take steps to recover the aforesaid monies, by exercising itsLegislative powers.

Click here to read the Executive Summary of the Presidential Commission of Inquiry into the Treasury bond issuance