- Real fraudulent activity happened in the stock market
- Central Bank Investment Committee didn’t approve investing EPF money in non-blue-chip companies
- Even parliament was directed by the outside parties
- Arjuna Mahendran had no authority to do what he did
- Finance Minister of 2010 regime had informed the CB not to release the information
- Rs. 9.4 billion loss in the Stock market between 2010/ 2011
- Rs 10.5 billion loss in private placement in the bond market pre-2015
- A minimum loss of about Rs 6.9b and maximum loss of Rs 9.9b in the bond market between 2015 and 2016
- They really milked the EPF through the stock market in 2012.then obtained a licence to operate in the bond market in 2013
- In 2012 Primary dealership in the Bond market was rejected for PTL, but it was reversed in 2013
- End of 2013 Ajith Nivard Cabraal’s sister was appointed to the board of Perpetual Holdings
- On February 27, 2015 Arjuna Mahendran changed no private placements to complete auction overnight
United National Party (UNP) Parliamentarian and Economist Dr. Harsha de Silva in a candid interview analysed what unravelled in the recently released Forensic Audit Report relating to the Central Bank Bond scam. Being a teacher on the subject of bond trading, Dr. Silva, one of the most eligible lawmakers to analyse what transpired from the report, explained how the notorious alleged financial frauds took place’ especially playing with the Sri Lankan citizens’ hard-earned EPF funds both during the Mahinda Rajapaksa regime from 2010 onwards and even during the Yahapalanaya Government from 2015 onwards. Dr. Silva, who was repeatedly fighting to probe what was happening in the stock market, and raised questions on 16 occasions in Parliament, complained that the Parliament was misled by not providing information during the Rajapaksa regime. He also pointed out that during Yahapalanaya regime vital information was not provided even to the COPE, in which he was a member.
Excerpts of the interview:
Q : What is your most interesting finding regarding the Forensic Audit Reports relating to the alleged Central Bank bond scam?
I see a pattern where certain people operated in more than one market which looks like supporting the infrastructure within the EPF over a long period of time. I am saying that they started in 2010/ 2011. You know that is the time they really milked the stock market or rather the milk the EPF through the stock market.
And when that activity died down they applied and obtained a licence to operate in the bond market in 2013. They then started operating in the bond market with the objective of milking the EPF. They had already established links with the EPF in the stock market. They called the stock market investment of the Rs trillion fund is only about seven percent. The 93 percent is in the bond market. So they started here, established links and obtained the licence in 2013, started operating in the bond market in 2014. In January 2015 the Government changed and that was of no consequence to those people, in fact it was a blessing because they got even closer access to the powers that be. They continued the operation in 2015 and there was a big fall out in 2015.
Instead of slowing down they accelerated the activity in 2015. They fraudulently played the EPF in the Bond market continuously throughout 2015 and in March 2016 they perpetrated the largest scam and then that ended. So this is a long process. There were others involved in 2010 and 2011 beyond Perpetual. Perpetual was only one player in 2010 and 2011. They had become the major player by 2015 and 2016. So that becomes really stark in this because you have to look at both markets to understand how one entity operated in both markets.
So when people say look at what happened to the bond market before 2015, it is not what happened in the stock market before 2015. So the real fraudulent activity happened in the stock market. So if you are looking for fraudulent activities in the bond market it is not as stark and I would tend to agree with some people who have basically said ‘look at the losses before 2015 in the bond market’. Such comments should be taken with a pinch of salt. To an extent I agree with it and I can explain as to why it is, but there was a sort of activity that happened that went beyond the accepted guidelines in the market.
Q : How and why did Perpetual Treasuries Ltd (PTL) enjoy such special status?
See what happened was after the war there was a lot of focus on the stock market. There were may be about half a dozen people in the stock market that were manipulative. If you recall it was called a mafia. Stock market mafia. So the names are identified in the reports, I don’t want to mention them here. How these people engaged in what is called ‘circular trading’ or in common parlance ‘Pump and dump’ and how they were able to get the EPF to finally buy the pumped share.
If you recall at that time EPF was called the buyer of the last resort. So I give you an example, an interesting case I showed in the media earlier. So these people say you have to look for what is called ‘inverted V’. What it means is that is the price. Now suddenly there is an inverted V in the price. It is unusual. Take the case of Grain Elevators. That stock was trading at Rs. 30, Rs 40. Then suddenly by the end of 2010 December, I believe, it went to Rs 75. Then within the matter of two months from Rs 75 it went to Rs. 260. And then in a matter of within another two months, it came back to about Rs. 70 or Rs 60.
Now, what happened between January 2011 and about April 2011, in that period of about four months, the price was manipulated up and dumped on the EPF at Rs. 205 a share. The share value was only about may be Rs 30-40. Now two things happened; one is there was circular trading. That is, I have a large stock of shares, in this case Perpetual had something like 4 million shares. But you know some of those shares got rated around something called a rogue ring. So there are about two, three players and I sell at about 75 to you at Rs. 100 and you sell back to your friend at about Rs 150. He sells to me about Rs. 200, I sell to him at Rs 250 and he sells to me back At Rs 260 and so on. This is a small number of shares.
Then at a high price, you find a willing buyer to purchase these shares. Now if I am the willing buyer, I would be sceptical in purchasing shares that the price had suddenly increased. For you the market increase was only under 11 percent. This share increase was in the range of 270 percent. So now EPF is the caretaker, administrator and manager of workers’ money. It has several Rs trillion under its management. They were restricted in their investment because it is public money. The risk-free investment comprises basically government papers like treasury bills and treasury bonds. This is because they will always pay you back. Around end of 2009, the Central Bank, which controls the EPF started making larger and larger investments in the stock market. And they started creating a portfolio of stocks.
Now the EPF has what is called an investment policy statement and an investment trading guideline that mentions the rules and regulations about what you can invest in and cannot in the stock market. With regard to what you cannot invest in, is very explicitly stated. They are banks and financial companies. You can't do that because they are regulated by the Central Bank. So Central bank buys and sells shares in the banks. And you cannot invest in what are called non-blue-chip companies. If you really want to invest in companies invest in blue-chip companies that are stable. Now a company like Grain Elevators, that saw the share rise from Rs 40 to Rs. 250 and thump, why would the EPF want to buy these shares at a very high price?
This has to be looked at beyond politics. I have been critical of our own government. If I was playing only politics I would not be talking to you like this. I believe if you are true to yourself, the country comes first. I don’t care whether I am in politics today or tomorrow. It is of less significance to what I should do for my country
Then there is a pre-2015 loss to the government in private placement in the bond market which accounts to something like Rs 10.5 billion. Of the 10.5 billion, about Rs. 6.5 billion are transactions with the EPF and those are contestable because of the conflicts within the Central Bank. So therefore I would be very hesitant to point fingers at that. So one only needs to consider the remaining Rs. 4 billion. Of the remaining 4 billion, about Rs 3.5 billion has been transacted with government owned entities. So there again the question arises and one needs to dig deeper. About Rs 500 million is completely outside of the mandate and that needs to be investigated by the CID
This has been investigated and investigated. Besides Parliament, the Presidential commission and now top global accounting firms have completed a detailed forensic audit. I understand there is one more being done to look at various third party involvements. What needs to happen is to take all the evidence available and get the Attorney General to begin the judicial process.
In the years 2010 and 2011 most of the scams took place in the stock market. I have made 16 speeches in Parliament requesting information. I have written multiple letters as a member of the Committee on Public Accounts (COPA) and we wanted to summon the Central Bank to pose these questions, but it took years and nothing happened
Now if I am the willing buyer, I would be sceptical of purchasing shares that the price had suddenly increased. For you the market increase was only under 11 percent. This share increase was in the range of 270 percent. So now EPF is the caretaker, administrator and manager of workers’ money. It has several Rs trillion under its management. They were restricted in their investment because it is public money
Q : So why and how was this decision made?
Now the Forensic Audit Report shows how this decision was made. And the people they interviewed say it violated all the guidelines in the investment policy and it violated the guidelines in investment in stocks and shares. They were not given the approval to invest in these shares. They say the Investment Committee refused approval and the approval was given by the top management of the Central Bank. I am only explaining one. The EPF bought at Rs 205 and then the stock crashed again to its original level.
So who made a loss and who gained? EPF lost and Perpetual gained because it was the Perpetual Company, it was Mr. Aloysius who sold these dud shares to the EPF. So one transaction, this forensic audit report very clearly shows, cost something like Rs 600 million. Like that there are many other transactions which they have listed totalling up to something like Rs. 9400 million that the EPF lost in questionable investment in these companies. Of course, they had earned about Rs. billion or so in dividends in some of these companies.
So whether you want to net it or not is another matter, but the question is how were these decisions made? The Forensic report clearly shows that most of these decisions were not made by the Investment Committee but on the advice of very senior people in the Central Bank. And the names of those responsible are mentioned in the Forensic Audit report.
Q : So how did PTL enter the Bond Market? Does the report state how the PTL entered the Bond market?
So interestingly while all this was happening the PTL was a player in the Stock market and engaged in these transactions, when the market activity was reducing in the stock market. This is because the boom had ended; because it was manipulated. Then in 2012 they applied for a Primary dealership in the Bond market which was rejected. It was rejected by the Deputy Governor and the Superintendent of the Public Debt Department. The chronology of events is described here; what happened on each day. They also can’t explain why that decision was reversed.
And they were issued with the licence towards the end of 2013 and coincidently a lady by the name of Shiromi Wickremesinghe, who happens to be the sister of Ajit Nivard Cabraal was appointed to the board of Perpetual Holding in December 2013. And she remained on that board during the alleged 2015 February scam and resigned thereafter.
Q : Usually our trade union movements are strong and there is a lot of information shared with political parties. While being in the Opposition weren’t you aware of what was happening during 2012 and 2013?
In the years 2010 and 2011 most of the scams took place in the stock market. I have made 16 speeches in Parliament requesting information. I have written multiple letters as a member of the Committee on Public Accounts (COPA) and we wanted to summon the Central Bank to pose these questions, but it took years and nothing happened. During one instance they came and that was also for a brief period of one hour or so. They were supposed to come thereafter, but they didn’t respect the authority of parliament and they didn’t come.
The difference between the post 2015 and pre 2015 was that opposition members didn’t have powers in the committees. It was only under the Yahapalana regime that we appointed people like Sunil Handunetti to chair the committee. That is how proper democracies should be. The committees that look into various activities of the Government should be headed by the opposition and not by the Government.
Interestingly there is an official parliament question that I have raised asking for these details. This Forensic Audit report clarifies that the Central Bank had told the Minister in charge, who is the Minister of Finance.
Q : President Mahinda Rajapaksa?
Would have been. He was told not to release the information. It is mentioned in the report. So however much we tried in Parliament to get to the bottom of this, even the parliament was directed by outside parties not to release information that was critical in analysing what had happened. I recalled how people like Wasantha Samarasinghe, the JVP former MP, being one of the most vociferous critics along with me. But unfortunately, all kinds of roadblocks were placed upon us. We couldn’t really dig deep into that.
Q : But did you feel that what was happening was fishy?
Yes, I raised questions 16 times regarding this in parliament that this was happening. Now with the private placement, direct placement involving that, it is more complex than this. For instance, why did they go for a direct placement? Why wasn’t it auctioned? So direct placements were done to manage interest rates. So that the Central Bank was able to hold the interest rates low.
Now if you look at the Rs. 10400 million loss to the Government due to the direct placement, about Rs 6000 million or 60 percent went to the EPF. And the EPF could consider it as a profit. So this is a conflict that has been there from the day the Central Bank was established and people like W. A. Wijeyawardena and I have been arguing to remove this conflict of interest for the past 25 years. And that is what is to happen in the revised Monetary Law Act. All these came after the Bond Commission. So hopefully that would happen and we would put an end to this. The Central Bank manages the Public Debt department which is supposed to borrow at the lowest possible rate. It also manages the EPF whose mandate is to get the highest possible rate for the EPF.
So there is a conflict here. You cannot be the same monetary board doing both things. How can you do that? So there is conflict and you cannot resolve it. You can argue both ways. You cannot resolve it unless the law is changed. I will keep that discussion aside. If you look at the rest, that is where the problem is; not the entire Rs. 10. 4 billion, but the amount of money outside of the EPF money. NSB is one of the big players in that and there are other banks and so on. Most of these guys are not buying for themselves. They may be buying for themselves, but they may be buying for other people as well, like private entities. Now that makes up 95 percent of the direct placements during that time. There is five percent. Let’s say that is about Rs 500 million. Now that five percent is completely outside the regulations; meaning you can only place directly who are called captive sources- EPF and ETF. But these five percent is not captive sources.
They are Perpetual Treasuries and various other primary dealers. So there was no mandate to place as a primary, direct place with what you called non-captive sources. So you need to really dig deep and that is why I didn’t want to go much deep into it. When people refer to before 2015 there was an Rs.10,400 million loss, I don’t necessarily agree with that, because of the administrative muddle with the conflict of interest between the EPF and the public debt; some of it may have ever been avoided. You really need to look at outside the EPF losses. So there are issues, but they need to be considered.
Q : So this continued even after 2015 and during Yahapalana regime?
So what happened was this private placement was a norm, wasn’t it? And then on February 27, 2015 Arjuna Mahendran changed that overnight- from no private placements to complete auction. And he said he was going to raise one billion. And then after having seen the bid sheet, where he saw 20 billion bids were coming, whereas 15 billion was from his son-in-law, he told them to take all 20 billion. They then refused, then he said to take 10 billion. Then they took ten billion. By taking that 10 billion the loss to the Government of Sri Lanka was calculated at 1.1 billion in the primary market.
Arjuna Mahendran had no authority to do what he did. Now that we have all the information we can clearly see. It is only now that we realise from these documents that the monetary board never ratified that decision. When we were sitting in the COPE we had no such information. We just have to rely on what people said. So we got mislead at the COPE. I am admitting that for the first time, because we were not provided with all the information. None of these informations was provided to us by the Central Bank. They said they didn’t have it.
Q : When did this happen?
This happened during this time. They said they didn’t have it. I asked multiple times. My requests are on record and I asked multiple times so that we could find out what had happened. So all these notes that we are talking about are technical notes relating to these. Now today all that is available. And to whom have they sold it to? To EPF. But in this case most of it was done through Pan Asia Bank and Acuity. And I am going to mention those two names because those are the ones that are coming up at every instance.
And it is very clear that Pan Asia Bank was in collusion with EPF and Perpetual Treasuries. That is in black and white in Forensic Audit reports. So it was in the highest level of Pan Asia Bank, EPF which is the Central Bank and Perpetual Treasuries that these deals were struck. So what happens is, let's say I have a bond at Rs 80, I sell to Pan Asia Bank at 94 and then Pan Asia Bank sells to EPF at Rs. 95. Actually EPF buys at Rs 95, so there is a private transaction between Pan Asia bank and Perpetual to give that money back to Perpetual. So most of the deals have not been sold directly. Almost 95 percent of the time there is a middle man and most of the time the middle man is Pan Asia Bank. Some of the time that middle man is Acuity and the rest of the time there were few others.
Q : Is the bank mentioned also partly responsible in these deals?
Yes, they are. The Forensic Audit report refers to the names of the banks. All that is there in the report. That is how the scam was operated in the bond market and funnily EPF doesn’t bid in the primary market. When they can why don’t they bid? And why are they buying at very high prices? So were they told not to bid by somebody? Who was that person who told not to bid? And sometimes auctions are cancelled for two weeks and three weeks. There is the classic case in 2016 March, 29th auction which is about two and half times bigger than the February auction everybody is talking about the loss to Government was two and half times more.
That is about Rs two and half billion as opposed to Rs one billion loss to the Government in February 2015. The whole sequence of events as to meetings that certain banks had with certain financial institutions and how they were told to bid at a lower price and they went and bid at a lower price. They were assured that the Central Bank would not go above a certain price. How can anyone know all these things? And how they actually went above that and bought from Perpetual. And there was a second auction two days after that. All the information is recorded between two employees of Perpetual and it is reproduced in verbatim the Forensic Audit Report. So there was a lot of private inside information that was shared by a few people and that was how they made money in the bond market between 2015 and 2016.
Q : So it is a clear open case. Can these be used for the judicial process?
Yes, because they say that this information was collected under the Evidence Ordinance. So if it is under the Evidence Ordinance, it can be done. All the evidence is here. I mean there are three types of losses. One is 2010/ 2011 loss in the Stock market which accounts to something like Rs. 9.4 billion. Then there is a pre-2015 loss to the government in private placement in the bond market which accounts to something like Rs 10.5 billion. Of the 10.5 billion, about Rs. 6.5 billion are transactions with the EPF and those are contestable because of the conflicts within the Central Bank.
So, therefore, I would be very hesitant to point fingers at that. So one only needs to consider the remaining Rs. 4 billion. Of the remaining 4 billion, about Rs 3.5 billion has been transacted with government-owned entities. So there again the question arises and one needs to dig deeper. About Rs 500 million is completely outside of the mandate and that needs to be investigated by the CID. That is where the real amount is. Then the third area of loss is in the bond market in between 2015 and 2016. Those direct to a minimum loss of about Rs 6.9 billion and maximum loss to the government of about Rs 9.9 billion. Those are the three loss groups.
Then the other side is how much did the EPF lose. It is very clear in the case of the stock market because it was their mandate to look at the EPF which comes to about Rs 8 billion or something. And then one is to look at the losses at the EPF, in the bond market pre-2015 and post 2015. Some of that is there and some of that is not there. Then one needs to look at how much money Perpetual and others made by engaging in these transactions. The part of the data to calculate that is already available in the forensic report. Part of data needs yet to be collected and they recommend that those be collected and acted upon because their terms of reference only refer to transaction in the EPF not outside.
Q : So according to you what is the most urgent action we should take?
The state must recover its losses. Those are the losses that were forced upon the people of this country. So in the different markets at different times that could be calculated. It is not that difficult. Is it 10 billion or 12 billion? There is already there is 9.5 billion in 2015 and 2016. There are some amounts during pre-2015. The exact amount of billions of rupees must be recovered from those who perpetrated that loss. Then one has to assess the amount that EPF lost due to these fraudulent transactions. Now lost to the EPF in the stock market is about Rs 9.5 billion and those must be recovered also.
Q : Could this be recovered through a criminal action?
So this is a case of insider trading. You have to establish an insider trading case. That is what they did with Raj Rajaratnam in New York. There were partners of audit companies who leaked inside information to Raj Rajaratnam. They got telephone conversations. That is how they got recovered the money. They put him in jail for many years. Of course now he has been released. So next is the CID must take all these data and construct its case in the stock market and bond market. I don’t think it is difficult because all the details are here in the Forensic Audit reports.
Q : Former CB Governor Ajith Nivard Cabraal has said that a fresh investigation into the bond scam has to be initiated. What is your response?
This has been investigated and investigated. Besides Parliament, the Presidential commission and now top global accounting firms have completed a detailed forensic audit. I understand there is one more being done to look at various third party involvements. What needs to happen is to take all the evidence available and get the Attorney General to begin the judicial process. The CID can certainly do any further investigations if necessary. That is perfectly ok. But let us not delay taking legal action anymore. Everyone, immaterial of status or party affiliation must be brought to book.
Q : The political analysts have stated that since both governments are responsible for the massive fraud, it is unlikely that proper action would be taken to bring the culprit before justice. What is your response?
This has to be looked at beyond politics. I have been critical of our own government. If I was playing only politics I would not be talking to you like this. I believe if you are true to yourself, the country comes first. I don’t care whether I am in politics today or tomorrow. It is of less significance to what I should do for my country. Politics is a dirty game at the end of the day if people don’t want me to be in parliament so it be. Let the people decide that. But I will do what I have to do. This is what I have to do. If it is going to be detrimental l to my political career so let it be.
Pix by Waruna Wanniarachchi