Central Bank orders int’l forensic audit into Rs. 13.2bn NDB fraud

In a decisive regulatory response to a staggering Rs. 13.2 billion internal fraud, the Central Bank of Sri Lanka has mandated National Development Bank PLC to undergo a comprehensive forensic audit led by international experts. The regulator has officially announced that the commercial lender, in consultation with the Central Bank, is finalising arrangements to engage a leading international firm to thoroughly investigate the incident. 

The Central Bank stated in its release that it continues to closely monitor the day-to-day developments surrounding the bank. Recent industry updates confirm that the scale of the financial misconduct remains estimated at approximately Rs. 13.2 billion, representing roughly 1.3 percent of the bank’s total assets, with no official indication that the overall size of the illicit transactions has expanded.

The scope of this upcoming international audit will, apart from matters directly related to the commission of this fraud, also fully address and assess any failures in compliance with regulatory requirements on control, oversight and governance during the period in which the fraudulent transactions took place. The forensic audit is expected to commence shortly. The Central Bank confirmed that the audit’s progress, including any interim findings and the final report, will be submitted directly to the regulator, who will engage with the auditors as necessary during the audit.

In parallel with the forensic probe, the Central Bank has directed the commercial lender to take immediate and expeditious measures to strengthen its internal controls and governance processes, focusing particularly on addressing identified lapses. The bank has also been required to commission an independent third-party review to assess the adequacy and effectiveness of its policies, procedures, systems, and internal controls. These swift regulatory directives follow recent actions by global credit rating agencies, including Fitch Ratings downgrading the bank’s national long-term rating in light of the incident and the subsequent pressures on its capitalisation.

Despite the ongoing investigations and financial implications, the regulatory authority noted that the bank continues to meet all regulatory requirements relating to capital and liquidity. The Central Bank stressed that it remains in close and continuous engagement with the bank’s board and management, as well as other relevant stakeholders, and stands ready to take any further measures necessary to safeguard depositors’ interests and ensure the stability of the financial system. Reassuring the wider market, the regulator explicitly stated that there is no evidence of any other regulated financial institution suffering any loss arising from the incident at the bank, and requested the public not to be misled by any contrary statements made in various fora.

Beyond the immediate regulatory fallout, the massive financial hit is poised to significantly dent state coffers and diminish shareholder returns. The Rs. 13.2 billion loss will drastically erode the bank’s profitability, directly translating to a substantial drop in corporate income tax revenue for the government.

Shareholders are bracing for a severe impact, with anticipated dividend payouts likely to be withheld or sharply reduced. This includes a direct hit to the state, as key state-owned institutions hold substantial equity stakes in the commercial lender. Notably, the Employees’ Provident Fund (EPF) holds a massive block of shares in the bank—consistently ranking among the largest shareholders alongside other state entities like the Bank of Ceylon—and this anticipated reduction in dividend income will directly impact these public funds.

Given the sheer scale and duration of the illicit transactions, industry observers are now raising serious questions regarding the oversight capabilities of the bank’s external auditors, Ernst & Young, alongside the internal audit committees, questioning how a fraud of this magnitude bypassed multiple layers of financial scrutiny.  (NF)