By Skandha Gunasekara Continuing its extensive examination of the Central Bank Forensic Audit (FA) reports over the past few weeks, The Sunday Morning analysed the third FA report which investigated the issuance of Treasury bonds and remittance of funds received to the General Treasury during the period from 1 February 2015 to 31 March 2016 by the Public Debt Department (PDD). The report has found that due to irregularities in the issuance of Treasury bonds, the Government had incurred a loss of Rs. 6.64 billion in addition to the instances of collusion between primary dealers. According to the FA report, a loss ranging between a minimum of Rs. 6,642.67 million (Rs. 6.64 billion) and Rs. 9,690.16 million (Rs. 9.69 billion) had been incurred by the Government in the review period from the issuance of Treasury bonds at the Weighted Average Yield Rate higher than the prevailing secondary market yield rates. The report had uncovered a number of irregularities in the review period, with many individuals being accountable, including the then Central Bank Governor. The report found fault with former Central Bank Governor Arjuna Mahendran as well as the PDD for the suspension of direct placements without the approval of the Monetary Board of the Central Bank of Sri Lanka (CBSL). Accordingly, on 27 February 2018, the PDD had discontinued direct placements as a method of raising public debt based on instructions given by former Governor Mahendran. It was a fault of the Governor for failing to procure the approval of the Monetary Board before issuing orders to cease direct placements, while the PDD was also criticised for following verbal instructions of the Governor without waiting for written approval by the Monetary Board. “The direct placements were suspended by Mr. Arjuna Mahendran without prior approval of the Monetary Board and the powers of Monetary Board cannot be delegated to the Governor, to exercise in his individual capacity. Also, this decision can be treated as unapproved decision as the Monetary Board did not ratify subsequently, the instruction by Mr. Arjuna Mahendran. C. It was an inappropriate action by the PDD by relying on verbal instruction of the Governor instead of the written approval from the Monetary Board for discontinuing direct placements as method of raising public debt by the PDD (sic).” Following the analysis of specific auctions of Treasury bonds, the FA has found several offers which needed “further scrutiny and correlation with corroborative evidence”, and details the possible loss incurred by the Government as a result. Accordingly, the largest estimated loss for a single auction had taken place on 29 March 2016 between Perpetual Treasuries Ltd. (PTL), Pan Asia Banking Corporation PLC, and the Employees’ Provident Fund (EPF) with the involvement of PTL Chief Arjun Aloysius and CBSL Head of the Domestic Operations Department P.W.D.N. Rodrigo. This transaction had resulted in a minimum loss of Rs. 1,249.75 million (Rs. 1.24 billion) and a maximum loss of Rs. 1,495.02 (Rs. 1.4 billion). Following the analysis of call log records, available voice recordings, transactions in the secondary market, and policy decisions taken by the Central Bank in March 2016, it was discovered that there was substantial evidence of leaking insider information which enabled PTL to purchase large amounts of securities in the primary market at prices below the auction weighted average and generate substantial gains in the secondary market. PTL had utilised the price-sensitive instructions given to state banks to bid at lower prices and bid at high volume in this auction. Another transaction that directly involved PTL in addition to the then Central Bank Governor was on 27 February 2015. The transaction was between PTL, WealthTrust Securities Ltd., Pan Asia Banking Corp., Bank of Ceylon, and the EPF, while former Governor Mahendran and PTL CEO Kasun Palisena were the individuals involved. As indicated based on the review of call log records provided by the Criminal Investigation Department (CID), available copies of voice recordings provided by primary dealers, front-end transactions, and transactions in the secondary market, the auction outcome and the exceptional bidding pattern of PTL were based on insider information as bids placed by PTL were 15 times over and above the volume offered by the PDD. The volume of bidding and allocation made by PTL were inconsistent with its historical bidding patterns; bids placed and allocated to PTL were inconsistent with the bidding pattern of PTL in past auctions since its incorporation. The Governor had suspended direct placements without prior approval of the Monetary Board, thus increasing pressure on the auction to accept requisite funds at higher yield rates. The total minimum loss incurred by the Government was Rs. 1,106.44 million (Rs. 1.106 billion) while the maximum loss could have been Rs. 1,114.63 million (Rs. 1.114 billion). With regard to the irregularities in carrying out auctions, the FA has found that PTL had consorted with Pan Asia Banking Corp., and DFCC Bank PLC had taken advantage of insider information and entered transactions into the secondary market where a high volume of identified securities were obtained at low prices in the primary market. These securities were sold to the EPF at substantially higher prices as compared to the daily and weekly average trading prices prevailing in the secondary market. “It was noted that in 10 offers out of 97 accepted offers, PTL in consort with Pan Asia and DFCC had entered transactions into the secondary market wherein high volume of identified securities were obtained at low prices in primary market by taking advantage of insider information. It was also noted that the EPF either did not participated or placed bids in less volume or at higher yield rates in primary market and at the settlement date, the EPF bought securities at higher prices in secondary market (sic).” Additionally, instances of unwarranted cancellation of auctions by the Tender Board had resulted in increased pressure to accept funds from other offers on the same or following auction dates. This had been revealed following the analysis of 30 offers out of 127, which were cancelled by the Tender Board during the review period. One key reason for cancellations was the concealment of acts from the Tender Board. Pertaining to a probable nexus between employees of the CBSL and the primary dealers and other market participants, the report makes note of a connection between Pan Asia Banking Corp. CEO (during the review period) Dimantha Seneviratne and then CBSL Governor Mahendran. The connection therein is that Seneviratne served as Chief Risk Officer in Sri Lanka, the Maldives, Thailand, and Bangladesh from February 2000 till February 2014, while Mahendran was the Managing Director for Asia at HSBC from May 2008 to June 2013. “Therefore, it can be inferred that the geographical areas where Mr. Dimantha Seneviratne was employed, falls under the purview of Mr. Arjuna Mahendran and indicates a possible association between Mr. Mahendran and Mr. Dimantha Seneviratne (sic)”, the audit report states while highlighting that the examining of the contents of PTL’s Aloysius’s mobile phone revealed that he had interacted with Seneviratne in the latter part of 2016. It was further uncovered that Pan Asia Banking Corp. Deputy General Manager – Treasury (during the period of review) Richie Dias, testifying before the Presidential Commission of Inquiry (PCoI), said Pan Asia had entered into secondary market transactions of buying Treasury bonds from PTL and selling them to the EPF after keeping a small profit margin for Pan Asia – with all such transactions having been undertaken by Pan Asia Banking Corp. under the instructions of its former Chairman Nimal Perera. In addition, the PCoI was told that Perera had a company named M/S NP Capital Ltd. which dealt in Treasury bonds in the secondary market and that Perera was engaged in the practice of “dumping” Treasury bonds at low yield rates on the EPF. Dias disclosed that Perera had ordered the former to enter into secondary market transactions with PTL and had asked him to go to Aloysius’ office to discuss the manner in which business was to be done. “This meeting took place sometime in June 2015 and Mr. Arjun Aloysius explained to Mr. Richie Dias that PTL wanted Pan Asia to play an intermediary role between PTL and the EPF (sic).” Concerning the links between PTL and DFCC, it was found that PTL was involved in transactions in the secondary market in collusion with DFCC. PTL had sold bonds to DFCC at increased prices and DFCC in turn had sold to the EPF, earning large capital profits in the secondary market through DFCC acting as an intermediary. “It was observed that Mr. Kasun Palisena and Mr. Nuwan Salgado had contacts in DFCC which could have resulted in market manipulation of by PTL via its contacts (sic).”