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Home THE CENTRAL BANK BOND SCAM: WHERE DOES THE BUCK STOP?
THE CENTRAL BANK BOND SCAM:WHERE DOES THE BUCK STOP?
May 7, 2015, 7:08 pm
On 15th March Mr. Mahendran said that he would go on leave and
appointed as Senior Deputy Governor the Chairman of the Tender
Board which had handled the bond issue at Mr. Mahendrans behest.
This officer is the most junior among the Deputy Governors of the
Central Bank, and his appointment as Senior Deputy Governor at the
time of Mr. Mahendrans temporary departure gave him the right to
exercise all the powers and authority of the Governor during Mr.
Mahendrans absence.The market had been told that 1 billion would be
required when, in fact, 10 billion was accepted a situation without
parallel at any time. The result was that the interest rate went up
to 12.5%, and indeed most of the Perpetual Treasuries bonds were
received at 12.5%. Having regard to the benchmark of 9.5% indicated
as the expected yield in the guidance issued by the Central Bank,
the interest rate differential is 3%. This situation, involving an
intolerable burden on the public because of the unavoidable
increase in the cost of living, is the direct result of the
Governors action.The loss without comparison in our history is not
finished and done with, but continuing and accumulating week after
week, and month after month. Inactivity in the face of this scandal
is unpardonable. Urgent action by Parliament, which has been called
for by more than 90 Members of Parliament in a formal Resolution
submitted to the Speaker last week can be delayed no longer.by
Bandula Gunawardena,Member of Parliament
The Opposition is giving the highest priority to dealing with
several aspects of what is undoubtedly the most colossal fraud and
cover-up ever perpetrated on our people. We consider it our public
duty to take every possible measure to mitigate the continuing and
increasing loss to the nation.
To recall the history of this matter, several Cabinet Ministers,
according to their public statements, expressed strong opposition
to the proposal by the Prime Minister for the appointment of Mr.
Arujuna Mahendran, to the post of Governor of the Central Bank.
Despite these objections, the Prime Minister insisted on the
appointment for which he took personal responsibility. When the
scandal broke out into the public domain within the first 50 days
of the new administration, the Prime Minister appointed a three
member panel of lawyers to investigate the matter. This had the
effect of pre-empting a thorough, competent and impartial
investigation which His Excellency the President had proposed. We
are now told that the Prime Ministers panel concluded that Mr.
Mahendran is not "directly" responsible for the loss. On the basis
of this purported finding, Mr. Mahendran is now back at work after
temporary absence of leave.
Just as disturbing as the extent of the fraud, and its
ramifications, is the sophisticated cover-up that was attempted.
The evidence available indicates dishonesty of unimaginable
proportions extending beyond the Central Bank to other public
institutions, and warranting rapid and effective intervention by
Parliament in the public interest.
Careful Preparation for the Fraud
According to fragments of the so-called report selectively
leaked to the media, the primary responsibility is sought to be
transferred to the Central Banks Department of Public Debt.
In the immediate run-up to the fraud, Governor Mahendran took a
series of calculated steps to set the stage for it.
As a first step, he made several changes in the personnel of the
Department of Public debt, the Central Banks single largest value
department, handling 62 billion dollars of public debt. He removed
the Superintendent of Public Debt, Mr. Dhammika Nanayakkara, and
replaced him with Mrs. Deepa Seneviratne. He also removed the
Deputy Governor in charge of Public Debt, Mr. Ananda Silva, and
brought in Mr. M. Samarasiri who was subsequently elevated to the
position of Senior Deputy Governor when Mr. Mahendran was compelled
to go on leave. All this happened within the first month of Mr.
Mahendrans tenure and two and a half weeks, before the bond
issue.
Meanwhile, Perpetual Treasuries owned by Mr. Arjun Aloysius, Mr.
Mahendrans son-in-law, was equally active. A few days prior to the
bond issue, they liquidated some of their bond positions in order
to have additional funds at their disposal to move into the new
issue about which they clearly had information.
The Bond Issue Itself
Notice went out to all the primary dealers that the issue would
be for Rs. 1 billion. There were 16 primary dealers and each had to
bid for at least 10%. The total bids amounted to Rs. 20
billion.
The consistent practice of the Central Bank is that the Governor
never attends the auction meeting at which the bids are considered.
Departing inexplicably from this well established practice,
Governor Mahendran not only attended the auction meeting personally
but looked at the bids himself
The Next Developments
The market had been told that 1 billion would be required when,
in fact, 10 billion was accepted a situation without parallel at
any time. The result was that the interest rate went up to 12.5%,
and indeed most of the Perpetual Treasuries bonds were received at
12.5%. Having regard to the benchmark of 9.5% indicated as the
expected yield in the guidance issued by the Central Bank, the
interest rate differential is 3%. This situation, involving an
intolerable burden on the public because of the unavoidable
increase in the cost of living, is the direct result of the
Governors action.
Several serious elements of the fraud now become apparent:
(i) The Central Bank advised and announced to the primary
dealers that bids were being entertained for Rs. 1 billion.
(ii) The guidance interest rate announced by the Central Bank
was 9.5%.
(0) Perpetual Treasuries applied for Rs. 2 billion directly in
their own name, and a further 11 billion through the Bank of
Ceylon, when the Central Bank had called for bids of only 1
billion. Issues arise here relating to unethical and fraudulent
leaking of information and intention to secure unjust enrichment at
the expense of the State.
(i) The decision was made to accept Rs. 10 billion worth of
bonds and, through that increase, Rs. 5 billion worth of bonds from
Perpetual Treasuries, of which 2 billion were direct bids and the
other 3 billion were through the Bank of Ceylon. The vast majority
of these bonds were at the higher end of the cut-off point of
12.5%, although the guidance interest rate was 9.5% - a truly
staggering differential.
The Cover-Up
We next see Governor Mahendran working assiduously to cover up
the fraud. The steps taken after the fraud bear comparison with the
meticulous preparations made by him prior to the event.
His main objective at this point is to try to justify, by
artificial means, the increase in the interest rate brought about
by his actions. He increases the interest rate by tightening
monetary policy. This entails a bizarre contradiction because
inflation in the country was coming down significantly, with the
figure for January being only 3.2%. With the reduced prices of fuel
in January, the figure for February, in the natural course of
events, would have shown a further decrease. Contrary to this
strong downward trend, Mr. Mahendran tightened monetary policy to
force interest rates upwards. He did this by resorting to a
particular strategy. Access that was limited by the Central Bank to
its standing deposit facility of only 3 times at the 6.5% rate, and
any excess to be only at 5%, was changed overnight, with the 5%
penal rate being removed.
At this time, Dr. Harsha de Silva, Deputy Minister of Policy
Planning and Economic Affairs, announced that a 3 member committee
would be appointed to investigate the matter. Shortly afterwards.
Finance Minister Ravi Karunanayake stated that the committee would
find that no wrong had been done by Mr. Mahendran.
On 15th March Mr. Mahendran said that he would go on leave and
appointed as Senior Deputy Governor the Chairman of the Tender
Board which had handled the bond issue at Mr. Mahendrans behest.
This officer is the most junior among the Deputy Governors of the
Central Bank, and his appointment as Senior Deputy Governor at the
time of Mr. Mahendrans temporary departure gave him the right to
exercise all the powers and authority of the Governor during Mr.
Mahendrans absence.
On 17th March, with the controversy swirling around the
government, the Prime Minister, in Parliament, made a statement in
which he attempted, among other things, to justify the appointment
of 3 lawyers of his choice to investigate his own nominee, the
Governor of the Central Bank, and thereby stultify the independent
investigation proposed by His Excellency the President.
Does the Buck Stop with Governor Mahendran?
The striking feature of this sordid saga is a pattern of
sustained and intricate collusion clearly transcending the Governor
and his role.
There are many questions which urgently require an answer in the
public interest. A few will suffice at this stage by way of
illustration.
Is it at all credible that the Bank of Ceylon would commit 11
billion rupees of public funds to bid on behalf of Perpetual
Treasuries without authorization by higher authority? Who are the
officials of the Bank of Ceylon responsible for this extraordinary
action, and on what authority did they act? What is the link which
unites the Central Bank, Perpetual Treasuries and the Bank of
Ceylon throughout this sequence of events? What lies at the bottom
of Governor Mahendrans unique behaviour in personally attending the
auction and perusing the bids himself? Does anyone in their senses
believe that his behaviour before, during and after the bond issue
represents a series of fortuitous coincidences unrelated to
collusion or instigation from elsewhere? Above all, is it in the
least likely that the elaborate cover-up currently under way is for
the protection of Mr. Mahendran alone?
In particular, the substantial role played by the Bank of Ceylon
in this transaction, taken as a whole, cannot possibly be
attributed to any decision or action by Mahendran himself.
The degree of direction and co-ordination evident in this regard
is clearly indicative of a much wider, and higher level, operation.
The compelling question which arises in these circumstances is
whether Mahendran can be credibly regarded as the sole, or even the
main, actor or whether he was, in fact, merely a cats paw.
Urgency of Parliamentary Action
The governments persistent state of denial is causing a
haemorrhage of public funds which places a crippling burden on an
entire generation, since the time span of this disgraceful
transaction is 30 years.
The crucial need, in terms of ensuring integrity in public life
and mitigating the immense loss inflicted on our people, is to
ascertain who the actual beneficiaries of this fraud are and to
apply to them the full gamut of sanctions prescribed by the civil
and criminal law. The mishandling of public property and the abuse
of fiduciary relationships represent aggravating aspects of the
total situation. After all that has happened, the country is
treated, adding insult to injury, to the spectacle of Governor
Mahendran back at work in his exalted office, with cynical
impunity.
The loss without comparison in our history is not finished and
done with, but continuing and accumulating week after week, and
month after month. Inactivity in the face of this scandal is
unpardonable. Urgent action by Parliament, which has been called
for by more than 90 Members of Parliament in a formal Resolution
submitted to the Speaker last week can be delayed no longer.
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