The commission inquired into a series of rigged bond auctions during the tenor of Central Bank Governor Arjuna Mahendran, where he was found to have interfered in auctions and policy rates while officials ‘supinely’ stood by.
Perpetual Treasuries, a company connected to his son-in-law Arjun Aloysius made a killing by buying bonds at low prices at auctions using insider information and dumping them at high prices on the central-bank-managed Employees Provident Fund by paying off front office dealers.
But culture of tolerance of irregularities prior to 2015 had allowed the scams to proceed, the commission said.
Politicization
It was public knowledge that Nivard Cabraal who was Governor of the Central Bank from 2006 to January 2015 was a close a "close associate of and was seen to have been politically aligned to the Executive and Government," the commission noted.
"It has often been stated in the public domain, that this led to a certain degree of ‘politicization’ of the actions of the then Governor and the operations of the CBSL during this period.
The resignation of Governor Cabraal and two appointed members, Nimal Welgama and Neil Umagiliya, as soon as the elections results of January 2008 was known was an indication of the extent to which the Governor and Monetary Board was politicized, commission said.
Though the Governor and member of the board are appointed for six year terms and removal is for specific reasons, under Sri Lanka’s central bank law.
"The fact that Mr. Cabraal, Mr. Welgama and Mr. Umagiliya considered it necessary to resign as soon as a new President was elected and the President who appointed them ceased to be President, suggests that, these three gentlemen regarded themselves to be political appointees who held office at the will of the President," the commission noted.
"A situation where a Governor or members of the Monetary Board or high officials of the CBSL demonstrate that they are unduly `politicized’ or even create perception to that effect is very likely to gravely prejudice the CBSL and its ability to perform its statutory duties.
"Further, a situation where a Governor or members of the Monetary Board or high officials of the CBSL demonstrate that they are unduly ‘politicized’ or are perceived as being so, is likely to influence the senior staff of the CBSL to follow suit and, also, to be readily amenable to the instructions of the Governor or members of the Monetary Board or high officials of the CBSL, irrespective of the propriety or good sense of such instructions.
"It appears to us that, these attitudes are likely to have held sway in the corporate culture and ethos which prevailed in the CBSL at the beginning of 2015."
President Maithripala Sirisena said the Governor and members of the monetary board should be appointed by a constitutional council.
Cabraal and monetary board officials had been in office for eight years before the bond scams and two Deputy Governors for three years, the commission said.
When the Monetary Board made decision on May 2013 to appoint Perpetual Treasuries as a primary dealer, it had not considered whether there was a conflict of interest involving Siromi Wickramasinghe, sister of Cabraal, who was a director of its holding company.
"It is also relevant to note that, Perpetual Asset Management (Pvt) Ltd, which, at that time, was the immediate Holding Company of Perpetual Treasuries Ltd, had made substantial investments in the "Renuka Group of Companies" in which Mr. Nivard Cabraal had close family connections.
Blind Eye
There was also an "undue reverence" for the position of Governor, over a long period of time where an incumbent Governor was "elevated to a position of unquestioned authority."
There have been cases of Deputy Governors being removed for questioning the authority of the Governor, retired Deputy Governor W A Wijewardene had told the commission.
"We also note that, the evidence placed before us suggests that, several aspects of the actions and operations of the CBSL during the period prior to February 2015 reflect that, there was a degree of laxity in the level of supervision over the day-to-day operations in some areas of the CBSL or even, perhaps, a willingness, on the part of high officials to close a blind eye to some aspects of the operation of the CBSL during that period.
"The evidence placed before us also suggests that, some decisions and acts of the CBSL during the period prior to February 2015, raise questions with regard to the propriety and prudence of those decision and acts."
"It is likely that, these circumstances, influenced the manner in which the senior staff of the CBSL approached the performance of their duties and may have fostered a sense of laxity in the levels of supervision exercised by senior staff and, perhaps, a degree of tolerance in instance where it was apparent that specified Procedures had been disregarded in the day to day operations in some areas of the CBSL."
EPF scams
It was public knowledge that stocks were being "pumped and dumped" on the EPF by some investors including the Perpetual Group.
The commission noted that Indika Saman Kumara and Udayaseelan, dealers at the EPF who bought bonds from Perpetual Treasuries worked in the Fund Management Division of the EPF during 2010-2012 when "some companies the Perpetual Group of Companies figured" in some of the deals.
In evidence before the commission, the Chief Dealer of Perpetual Treasuries testified under oath that "monetary inducements" to Saman Kumara from 2014, who the commission noted had acquired wealth beyond his 200,000 rupee salary.
The 2011 stock market scams had also led to Indrani Sugathadasa, a respected civil servant who was the Chairperson of the Securities and Exchange Commission to resign to ‘uphold her principles’, the commission noted.
But no action had been taken by the central bank to probe the EPF deals.
Perpetual Treasuries in their application to become a primary dealer in 2013 had said that it will apply the same techniques learned in the stock market to the bond market.
"Lack of a developed secondary market for government securities also one of the concern (sic) of Public debt department Perpetual Treasuries will promote secondary market transaction using different technique(sic), which its learn (sic) from the equity secondary market transaction (sic)."
There was not even a voice logging system at the front office of the EPF. Conversation with Saman Kumara and others played at the commission came from banks and dealers.
"It is pertinent to observe here that, there is evidence before us which suggests that, Perpetual Treasuries engaged in ‘market manipulation’ and as Dr W A Wijewardne put it ‘pumping and dumping’ in the secondary market in Treasury bonds," the commission observed.
"A question arises as to whether this was one of the "different technique, which its learn from the equity secondary market transaction," (sic) which Perpetual Treasuries Ltd, perhaps unwittingly, mentioned when it made an application to obtain a Primary Dealers license.
"The fact that, CBSL took no action despite these circumstances, had to have an adverse effect on the manner in which the senior staff of the CBSL approached their duties," the commission noted.
Before 2015, there irregularities were found in direct placements where bonds were sold to primary dealers outside the five basis points difference from market price.
The monetary board had approved the bonds to be sold only to ‘captive sources’ (state funds), but they had also been sold to primary dealers.
Wrong Message
A decision to buy ‘Greek Bonds’ which went bad causing a 15.6 million dollar loss was also taken at an ‘informal meeting’ or ‘gathering’ off senior officials which was approved by Governor Cabraal but not approved by the monetary board, the commission noted.
It indicated "the existence of a culture within the CBSL which vested in the Governor and some high officials, the power to take very significant decisions without necessarily adhering to proper Procedures, which require first carrying out a careful and prudent assessment of all the relevant facts, policies and long term consequences which such decisions may have," the commission said.
The Central Bank also did not have a ‘Regulatory Compliance Department’ or a ‘Risk Management Department," which even large companies now consider essential now.
That the Central Bank did not consider it necessary to operate such units may given the message to senior officials that regulatory compliance and risk management was not a high priority.
"The pliant and acquiescent attitudes adopted by the senior staff of the CBSL in the course of the events of February 27, 2015 - which took place just over a month after Mr. Mahendran assumed office as the Governor of the CBSL and, therefore, in the background of the corporate culture and ethos he inherited - tellingly demonstrate the manner in which senior staff of the CBSL approached their duties, at that time," the commission said.
Supine Negligence
The commission said Deputy Governor (P) Samarasiri who chaired Tender Board in February 2015, which had recommended the acceptance of 2.0 billion rupees of 30 year bonds had "supinely acted in compliance" with a directive by Governor Mahendran to accept 10 billion rupees of bonds, most of it made by Perpetual.
There was gross breach of duty.
"…Deputy Governor Samarasiri who, as the Chairman of the Tender Board, had a duty to ensure that the Tender Board reached an independent and considered decision, acted in gross breach of this duty and supinely obeyed the instructions given by Mr. Mahendran," the commission said.
"We are of the view that, the aforesaid conduct on the part of Deputy Governor Samarasiri amounts to gross negligence and a grave breach of his duties and responsibilities as the Chairman of the Tender Board and a Deputy Governor of the CBSL."
The commission also said Deputy Governors (Ananda) Silva and (N) Weerasinghe were negligent and failed to fulfil their responsibilities as Deputy Governors by remaining silent" when they heard the direction issued by Mahendran to suspend or stop Direct Placements suddenly.
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