Providence smiles on white collar criminals

17 December 2013 07:42 pm - 0 - {{hitsCtrl.values.hits}}

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Recently, United National Party (UNP) National List Parliamentarian Professor Harsha de Silva raised serious questions about the controversial investments of workers’ savings in the Employees’ Provident Fund (EPF) and its financial irregularities.
Daily Mirror interviewed Dr. de Silva with regard to the allegations against the EPF and the government’s misuse and mismanagement of the retirement fund.

Q What exactly is the Employees’ Provident Fund and what is its objective?

The EPF was established in the late 50s, for private sector employees retiring after a long stint in service to enjoy the evenings of their lives. How EPF works is that employees contribute 8 per cent of their salaries every month while the employer contributes 12 per cent. It is a compulsory saving mechanism for private sector employees. The Central Bank is the custodian and the manager of this fund while the administrative side is handled by the Labour Department.

"There are allegations that the stock market mafia used the EPF as their buyer, as a last resort. What that means is that the mafia sells low value shares with falling prices, to the EPF."

Q What then is the backdrop for the EPF crisis - how did it start?

From the beginning, there was a conflict of interest. The Central Bank raises funds for the government’s treasury. So its objective is to raise funds at the lowest possible cost. However, the EPF Department of the Central Bank, as the caretaker of the fund, has the objective of getting the best possible return for the fund and the retiring employees. So the Central Bank wants to lower the interest rates while the EPF Department wants higher interest rates to get more returns. So, there is an issue. Who gets priority? Does the Public Debt Department take priority or does the EPF Department take priority? Is it the government or the workers who get priority? Since the EPF fund is in the Central Bank, which belongs to the government sector, obviously, the government gets priority. So the EPF has always got fewer returns than it should have.

"The Central Bank wants to lower the interest rates while the EPF Department wants higher interest rates to get more returns. So, there is an issue. Who gets priority? Does the public debt department take priority or does the EPF Department take priority? Is it the government or the workers who get priority?"

In the late 1990s the question arose as to where the Central Bank could invest the EPF money apart from the government securities. Could it invest in the Stock Market? They consulted the Attorney General and based on his advice, by 2002, a new set of investment and good governance guidelines were established. And in that, very clear conditions were laid.

One was that the EPF must never invest in commercial banks. The reason for that was, the Central Bank was the regulator of commercial banks. The Central Bank therefore has advanced (inside) information. Then there is an absolute conflict of interest as it sends a message to the market.

And the second important one was that they should only invest the EPF money in blue chip shares and never in junk companies.

However, after the war, when the stock market bubble began and the mafia began to manipulate the market, and pump and dump started to happen, the EPF got totally entangled in the stock market. It became one of the most active investors in the market. From almost nothing, it invested about 7 per cent which equalled to about 70-80 billion rupees in the stock market.

Q How did the problem get worse and come to the point of the crisis that is experienced today?

When they started buying shares of commercial banks we protested. In fact, I was the first to raise alarm bells, but they did not pay attention and went ahead. The EPF became one of the largest shareholders of almost all the big commercial banks in the country. To make matters worse, they even started appointing directors in these banks. So the government and the EPF have effectively taken control of these private commercial banks. This is way beyond the original caution that was registered in 2002.

Then something even worse was that EPF started buying into junk companies at exorbitant prices. There are companies such as Ceylon Grain Elevators, Galadari Hotels, Browns, Laugfs Gas and so on. Who authorised the investment in such dud companies? The values of these shares have fallen so much that the loss is in billions of rupees. So they have violated both fundamental principles of good governance and the investment guidelines, notwithstanding the caution and the criticism not only of the opposition but of many other activists, trade unions, employees and even the International Monetary Fund (IMF).

"It is the employees’ right to know how their money is invested, the ability to question the investments and the transparency of their retirement fund. After all it is their money and Central Bank is only the caretaker of this money"

Then came the crash of the market and we saw the value of these junk shares just completely collide, and then came the questions. This is the people’s money they have lost. They are saying it is only a paper loss. But at the end of the year it is the paper value of the fund that matters when the calculation is made on how much to pay the employees. They also can’t sell these shares and make capital gains. So loss, whether it is on paper or actual basis, is detrimental to the ultimate owners of the fund. So now questions have arisen, particularly by the opposition UNP and the JVP as well as trade unions and the civil society while there are multiple allegations of misusing EPF money for personal gains. There are allegations that the stock market mafia used the EPF as their buyer, as a last resort. What that means is that the mafia sells low value shares with falling prices, to the EPF. What an unfair outcome for the owners of the fund and what a massive profit for the white collar criminals operating in the stock market!

Q Is this why you have been so vociferous in asking for the audited accounts of the EPF?

Yes, it is in this background that I have been asking for the audited accounts of the EPF. The law says that the Minister of Labour at his earliest possible date must table

the audited accounts of the EPF in Parliament. Now the shame is that it is the end of the 2013 Parliament sessions and the EPF has not tabled its audited accounts even for 2011, a period where there are serious allegations of violation of investment guidelines of the EPF.

Also, the EPF must come in front of the Public Accounts Committee annually to inquire about their Accounts. I am a member of the Public Accounts Committee. After having fought very hard I was somehow able to summon the EPF to the committee for the first time in six years on the February 6, 2013 where audited accounts up to 2009 were being discussed. However, the meeting was abruptly adjourned to be re-summoned at the earliest possible date. To this date, the re-summoning has not taken place.

So, serious questions arise about the management and the investment decisions of the EPF in the stock market. These questions become even more serious because two chair people of the SCC had resigned abruptly stating issues of conscience in the recent past. This is why, on behalf of the millions of people who have their money in the EPF, we need transparency of the EPF.

Q What is the implication of the crisis on the private sector employees?

It is the employees’ right to know how their money is invested, the ability to question the investments and the transparency of their retirement fund. After all it is their money and Central Bank is only the caretaker of this money. And the value of the pension fund has fallen by almost nine billion rupees in the last one-and-a-half years.
And at a broader level, confidence in the government securities market in Sri Lanka, confidence in the stock market and confidence in good governance are at stake.

Q Who should be held responsible for the EPF crisis?

For the violation of the EPF investment guidelines, I would hold the Monetary Board of the Central Bank, the Investment Committee of the EPF and the Superintendent of the EPF Department at the Central Bank responsible. For the failure to submit the audited accounts, I would hold the Minster of Labour and Labour Relations, Commissioner of the EPF and the Superintendent responsible.

Q In your viewpoint, what action needs to be taken?

I have called for immediate measures to be taken. One is the immediate submission of 2011 and 2012 audited accounts of the EPF as well as the immediate re-summoning of the EPF to the public accounts committee to complete the examinations of the accounts up to 2009. Another measure is the summoning of the EPF to examine the accounts of 2010 and 2011. Another one is to urgently review the investment guidelines to remove the existing conflicts of interest in the management of the EPF. And finally but most importantly, my recommendation is to appoint representatives of workers on to the board of the EPF and the investment committee.
(Pix by Kushan Pathiraja)

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Providence smiles on white collar criminals

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