They thought that all Sri Lankans are idiots.  They lied to us and got into power.  Yes, no shame, I too voted.   We never thought that this so called  ” Yaha Palanaya Police” was going to be the most corrupt Government  in the History of Sri Lanka.

“Hitan:”  is trying to hoodwink the public by a commission, this man who is educated only up to 8th standard  Please correct me if I am wrong)  may be thinking that all Sri Lankans are idiots..  See Below

Bond Scam

The biggest financial crime in the history of Sri Lanka was carried out by gang of thieves headed by Perpetual Treasuries Ltd.   27^th February 2015 scam (1^st Bond Scam) is not the biggest fraud.  The biggest fraud tookplace thereafter.

History

Perpetual Treasuries Ltd, commenced its business on 5^th February 2014 with a capital of Rs. 300 Mln.  Governor Ajith Nevard Cabral’s   sister Ms Shiromi Wickremasinghe was one of the directors of the company.  She continued as a Director of the company till 9^th March 2015.

For the Year 2014/2015 the Company earned Rs. 959.8 Mln .as profit.

It was alleged that the   Employees Provident Fund (EPF) has routed all its transactions through Perpetual Treasuries with the blessings of the Governor, allowing them to make a huge profit.

Profitability of the Company

For the Year  2014/2015                –   Rs. 959.8 Mln . as profit.

Profit for the Year 2015/2016                       -Rs. 5,124.3 Bln   (1^st April 2014 to 31^st March 2016

Profit in April and May 2016                        – Rs. 4,652.7 Mln  ( As per  Central Bank  leaked Report)

Profit transferred to holding Company    – Rs.   323.6 Mln

Accordingly Company has earned over Rs. 10,100.6 Mln as profit after 1^st April 2015.

First bond scam was took place during Financial Year 2014/2015.   

 According to above figures it is very clear that   the magnitude of the 2^ndbond Scam is gigantic.

2^nd Bond Scam

This is the biggest well organized scandal which has taken place during   the years of    2015 and 2016.

Perpetual Treasuries Ltd abused CBSL Systems, Auction procedures, Best Market Practices and ethics while violating Central Bank directions in collaboration with under mentioned individuals/institutions. They have acted as gang of thieves.

• Central Bank Officials,
• Dealers of the Employees Provident Fund and officials of  EPF
• Dealers of Pan Asia Bank, DFCC Bank
• National Savings Bank
• Some Primary Dealers
• Money Brokers.

Fraudulent Activities were done through different modes.

1. Pump and Dump Deals
2. Insider Trading
3. Concealing of portfolio
4. Dealing through National Savings Bank
5. Bidding without Funds and Borrow excessively from Central Bank.
6. Front Running

1. Pump and Dump Deals with Employees Provident Fund (EPF)

Transactions were done through number of stages.

1. EPF Dealers pass information to Perpetual with regard to the funds available with them and details offuture cash flows.
2. EPF agree with Perpetual to

• Refrain from buying bonds from the Auction.
• Allow Perpetual to buy bonds from the auction.
• Buy Bonds from Perpetual in the secondary Market after the auction.

3. Perpetual buys Bonds from the Primary Market (auctions) at higher rates.

Officials in the Central Bank accept their bids over and above the offered amount and ensure highest rate for Perpetual.

4. EPF provide funds to Perpetual by way of Reverse Repo to fund the bonds purchased from Primary auction.

5. Deliberately move market prices by Perpetual together with few Primary Dealer and Banks.

Eg.

Buy  Rs. 1000  Mln from Auction   at   Price of  Rs. 94.00

They do deals in between themselves and increase the price of the particular bond in the market.

A  sells  100 Million   to    B       – Price      95.00

B sells   100  Million  to    C       – Price      97.00

C sells   100 Million  to    A        – Price    100.00

A Sells  100 Million   to    C       – Price    103.00

After few round of  trading market price of the bond  move up to  103.00.

(This will happen during few days)

6. Sell Bonds to EPF at 103.00

Profit -Rs.  9.00 Per every Rs. 100 (Rs 103 – Rs. 94)

Profit for   Rs 1000 Million is Rs.90 Million

In the latter part of the scam, bonds have been sold to EPF by Perpetual through Pan Asia Bank and  DFCC Bank. This kind of deals is known as SWITCHES.

EPF want to hide (from Internal Auditors/Investigators) that they had purchased bonds from Perpetual. Therefore Perpetual and EPF got together and arrange switches” through money brokers.

In switch deal

First leg –   Perpetual              sell     Bonds   to         DFCC or Pan Asia

Second Leg    –     Pan Asia/DFCC    sell     Bonds   to          EPF

Pan Asia Bank and DFCC receive a small profit margin for their intervention. Money Brokers receive Brokerage.

(Refer table 17 under clause 5.3 Central Bank leaked report – Capital gain earned from Pan Asia  Rs. 3,302.94 Mln  and  DFCC Rs. 2,990.77). Actually, entire Capital Gain is coming from EPF.  EPF is the loser who is at the receiving end)

Finally in EPF books the sellers name appears as DFCC or Pan Asia.  Name of the Perpetual who is the main culprit behind the chain does not appear in EPF books.

Majority of the profit was earned through the above operation. This is the great injustice to the contributors of the Employees Provident Fund.

Matters to Investigate

• Transactions done by Perpetual Treasuries with other Primary Dealers and Banks (Specially DFCC and Pan Asia) should be scrutinized to identify pump deals.

• All the Deals done by EPF with Pan Asia Bank, DFCC, Perpetual and other Primary Dealers should be examined carefully to identify dump deals.

• Details of Reverse Repo transaction of EPF with Perpetual.(To trace funds provided by EPF to fund Perpetual portfolio)

• Details of SWITCH deals done by money brokers.

• Assets of the EPF employees who directly involve in the Transactions of Perpetual.

2. Front Running

Front running is the unethical practice of a Primary Dealer executing transactions on bonds for its own account while taking advantage of advance knowledge of pending orders from its customers.

The front running Primary Dealer buys for its own account before receiving customer buy orders that drive up the price. Front running is considered unethical since the Primary Dealer is making a profit at the direct expense of its own customers.

In this case Perpetual Treasuries receive information in advance from EPF that they will buy bonds in the secondary market.  Therefore Perpetual buy bonds from the auction and thereafter jack-up prices of the bond as describe in the example under 1 above.

This can be clearly identified through published financial account of Perpetual Treasuries for the year 2015/16.  Their trading portfolio had declined to Rs. 495.1 Million as at 31.03.2016. This indicates that they had sold their portfolioby this date and getting ready for the next auction. As per the leaked CBSL report Perpetual has purchased Rs. 36 Billion worth of bonds even without a proper funding plan.  A Stand-alone Primary Dealer cannot purchase such a huge amount unless he has a backing of a client. Since bonds have later been sold to EPF it is very clear that they have targeted EPF while they were submitting bids.

Matters to investigate

• Reason for excessive bidding of Rs. 36 Bln in the Treasury Bond auction?
• Who purchased these bonds in the secondary market from Perpetual?
• Price at which they sold bonds in the secondary Market?

3. Insider Trading

1. First Bond Scam

• At the meeting held on 27^th Feb 2015 the Domestic Debt. Management Committee(DDMC) which is  the committee responsible for  managing the domestic public debt,  with a view to minimizing  the cost and risk of government public debt,  comprising 5 members of the  Central Bank and Ministry of Finance  recommended to raise Rs. 1,000 Mln from primary  auction and further Rs. 12,500 Mln  by direct placement method.

• However at the Tender Committee meeting held on 27^th Feb 2015 decided to accept bids up to Rs. 10,058 Miln instead of Rs. 1,000 Mln decided by the (DDMC) which is a deviation from the Decision of the DDMC.

• The Public Debt Dept. recommended accepting only Rs. 2,208 Mln from the auction.

It was revealed that the deviation has occurred due to the intervention of the Governor (Refer : the leaked COPE  Report  prepared By Mr Dew Gunasekera). He had requested the Tender Committee to accept all Rs. 20,000 Mln bids.  But Superintendent of Public Debt and Addl. Supdt. of Public Debt did not agree. Therefore he instructed them to accept Rs. 10,000 Bln.

Matters to investigate.

• Offer amount was only Rs. 1,000 Mln. Why Perpetual Treasuries submitted bids to the value of Rs. 15,000 Mln for Rs. 1000 Mln Offer?

(Total Bids submitted by all other PDs  were only Rs. 5,000 Bln). Excessive bidding pattern indicate insider trading.

• Intervention of the Governor in the Tender Committee proceedings.

Why he instructed to accept all bids?   Definitely he was aware of the details of   bids of Perpetual Treasuries.

1. Policy Rate  Decision

Monetary Board of Central Bank   at its meeting held on 23^rd February 2015   had taken a decision to maintain policy rates unchanged until the meeting of next month. However, just after the announcement of the Treasury Bond results on 27^th February 2015, Central Bank announced the change of policy Rates and removed the 5% SDF rate, on 27^th February 2015.

Before the policy Rate announcement Perpetual Treasuries Ltd sold bonds in the secondary market with forward value dates. After the policy rate announcement bonds rates in the market went up. (Prices of the bond declined).  At this point Perpetual purchased bonds from the market to deliver short sale bonds  making a huge profit.

Matters to investigate.

• According to the Central Bank Directions Primary Dealers cannot perform short sales in the market. This is a clear violation of Central Bank Directions.

• It is evident that Perpetual has prior information that Central Bank was going to increase policy rates which amounts to insider information. Who passed the information to them?

4. Concealing portfolio

According to Central Bank of Sri Lanka (CBSL) Directions all Primary Dealers should adhere to the Capital Adequacy Requirements stipulated by CBSL.   As per direction portfolio limitations have been imposed on Primary Dealers in line with their Capital.

Throughout its operations Perpetual Treasuries maintained a very high portfolio over and above  limits violating CBSL directions..

We suspect that they used following banks to hide their portfolio as well as to fund the same portfolio,

Bank of Ceylon

National Savings Bank

DFCC Bank

Pan Asia Bank

Other Primary Dealers.

In order to hide the portfolio they executesell and buy Bond Swap deals with these institutions. According to the accounting procedure, forward leg should be accounted as a contingency liability. However Perpetual records only the sale leg in their books thereby hiding its own portfolio.

Matters to Investigate.

• Information should be called from all Banks and Primary Dealers institutions with regard to Bond Swap Deal done with Perpetual from Year 2014.

5. Dealing Through National Savings Bank

A Dealer who is an employee of Central Bank (attached to Employees Provident Fund) was transferred (seconded his service) to National Savings Bank Treasury as a Chief Dealer in the early part of year2016. According to our knowledge, the purpose of this transfer was to provide funding facilities for Perpetual Treasuries as well as to support their illegal activities through NSB fund base.

It is highly irregular being the regulator of banks, Central Bank of Sri Lanka to appoint its own employee to run a treasury of a bank which comes under its purview.

This was an unprecedented move  in the history of  NSB, that  an employee of the Central Bank was assigned to  handle  dealing  activities of  NSB Treasury  while highly talented  and experienced treasury experts  are available in the  treasury.

It was alleged that this person had made questionable high value transactions with Perpetual Treasuries utilizing NSB funds. When the Deputy General Manager (Asset Management) who was in charge of the Treasury functions of NSB refused to authorize his deal tickets, she was transferred tothe International Division of NSB. The Chief Manager attached to Primary Dealer unit of NSB was also transferred out making false allegations in order to clear the ground for fraudulent activities. Deal tickets of the Dealer were authorized by the General Manager thereafter overlooking the Treasury Consultant, working in the  NSB Treasury.

However this person has left NSB recently after the 2^nd bond scam was exposed. It is believed that he has taken leave from Central Bank and gone abroad for higher studies in order to evade possible action against him.

Matters to Investigate:

• Under whose instruction the Central Bank assigned an Official of EPFto the NSB Treasury?
• What is the motivation behind his appointment?
• Details of the Deals done by EPF Officer with Perpetual Treasuries and losses incurred by NSB if any?
• Benefits enjoyed by Perpetual Treasuries through this appointment.
• Reasons to transfer Deputy General Manager (Asset. Management) from NSB Treasury
• Reasons for the General Manager of NSBto authorize deal ticketsoverlooking the Treasury Consultant.

6. Bidding without Funds and Borrow excessively from Central Bank

It was pointed out in the leaked Central Bank report that Perpetual Treasuries has exposed itself and Primary Dealer system as a whole to excessive risk by bidding excessively without contingency funding arrangement. It was further revealed that they have excessively borrowed from Central Bank amounting to Rs 66 Bln during the period from 1^st to 8^th April 2016. This kind of behavior cannot be expected from a standalone Primary Dealer. In the other hand Central Bank has accepted unusual excessive bids   of Perpetual Treasuries Ltd and accommodated their extraordinary funding requirements.  It is very unlikely that a Primary Dealer will behave in this manner unless strong support is received from the Central Bank.

• Under whose authority the Primary Dealer handled its affairs in high handed manner?
• Who were the officials of Central Bank assisted Perpetual Treasuries and approve massive facilities in these unethical transactions?
• Who gave them instructions?

7. Unethical Transactions

Provide Funds Under Reverse Repo to a Money Broker to run a leveraged  portfolio.

According to Section 12(a) of Money Broker regulations issued by the Central Bank of Sri Lanka An authorized money broking company shall act only as a broker, agent, facilitator or mediator for the transactions being brokered and not as a principal”

However, according to the leaked Central Bank Report Perpetual Ltd had provided funds under Reverse Repo facility to authorized money broker Bartleet Macklai & Roy Private Ltd (BMR) to run a leveraged portfolio.

Accordingly, BMR has deposited Rs. 42,424,450 with Perpetual under Repo. BMR was given a Reverse Repo facility of Rs. 403,571,250 (approximately 10 times more) to run their own portfolio. This is a clear violation of the above direction. (Refer Table 6 and 8 CBSL leaked Report)

For  the Perpetual Treasuries,  it is unethical and violation ofthe Customer Charter  for Primary Dealer Industry in Sri Lanka issued by CBSL to provide Reverse Repo Facility to a Money Broker to run its own portfolio.

Matters to investigate

• Reason for money broker to run a portfolio as a principal.
• Reason for Perpetual to provide funds to BMR to run its own portfolio.

Conclusion

As discussed above, this is the biggest financial crime that took place in the history of Sri Lanka. Therefore, culprits should be brought to the book and punished.

Central Bank Officials including former Governor, high ranking officers, and dealers of EPF, National Savings Bank, Pan Asia Bank, DFCC, Money Brokers and some Primary dealers are involving in this racket. It is alleged that these individuals have received financial benefits from Perpetual Treasuries for  assisting this financial crime. Therefore a proper investigation   should be carried out to reveal theirassets accumulated during the recent past.

We do not expect, the Solicitor General, officials attached to his department or CID , FCID   to have necessary expertise  to carry out such an examination . If a case is filed in courts without a proper investigation all these culprits will escape.

Therefore, it is highly essential that a high powered Presidential Commission should be appointed comprising of a  Supreme Court Judge, persons with sound practical/technical knowledge in the field and a Representative from   the Association of Primary Dealers to investigate the crime  The committee should order  a Forensic Audit to be carried out by a Local or Foreign Auditcompany covering all the institutions who were involving  in the scam.