Sri Lanka regulator to prosecute wrongdoers in Treasuries scam
Jan 05, 2016 09:10 AM GMT+0530 | 1 Comment(s)
ECONOMYNEXT - Sri Lanka's central bank would prosecute those involved in a Treasury securities fraud that may run into billions of rupees, while police investigations are also underway, officials said.
The central bank said Monday it would take-over the management of Entrust Securities Plc, a regulated primary dealer in government securities, to prevent a systemic crisis due to any inability of the firm to repay clients.
"If the investors have mis-behaved they will be prosecuted," Central Bank Governor Arjuna Mahendran said.
"If the management of this company in particular has mis-behaved - investigations are ongoing - then the management will also be taken to task."
"I can also inform you that the police and the CID (criminal investigations department) had been involved in the investigations for several months now."
Mahendran said a 'managing agent' appointed by the regulator would run the company while those involved would "in parallel prosecute" officials if they are found to have been involved in a criminal offence.
The missing money at the primary dealer could amount of seven billion rupees or more, according to estimates.
Initially state-run National Savings Bank will assist in managing the taken-over company will pump money to provide short-term liquidity and the people could eventually pick up the tab.
"In the longer term obviously the central bank or the government through the treasury can make good the funds that had been invested in the company," Mahendran said.
Mahendran said efforts would be made to recover assets from the group including real estate assets and also from the personal assets of directors.
Sri Lanka's new administration recently bailed out investors of Golden Key Credit Card Company, an unregulated Ponzi scam belonging to the failed Ceylinco group with people's money.
Depositors who launched legal action to recover assets of directors were asked by the new administration to withdraw the cases aimed at recovering other assets of directors.
Entrust Securities was also a part of the Ceylinco group which collapsed following a property bubble fired by a low interest rates period which ended in 2008 with a balance of payments crisis.
When interest rates are low for extended periods of time, borrowers and financial intermediaries take excessive risk and speculate in assets and businesses that cannot survive when interest rates normalize.
The firm was then taken over by members of the politically-connected Ratwatte family and re-named as Entrust Securities. At least part of the losses are believed to have been incurred before the take-over.
Chanuka Ratwatte, a son of a former government minister was chairman and managing director of the group, but he resigned on October 30, 2015 according to a stock exchange filing.
In the group are also a real estate company and Multi-Finance, aregistered finance company.
There have been complaints including by the pension fund of state-run Ceylon Electricity Board that government securities that it had invested in were missing from its depository account.
Several clients had complained to the police over missing securities, while the central bank itself has not complained to the police, Deputy Governor P Amarasiri said.
Mahendran said problems were found at the primary dealer from 2013 and the firm was asked to rectify them.
Amarasiri said following investigations in 2015, the firm was asked to bring in new capital and rectify wrong doing (ayathar katayuthu) and was given time to submit a re-structuring plan. The deadline ran out on Tuesday.
Mahendran said investigations were under way whether the firm had sold securities on their own account or transferred clients' securities without permission.
Allegations made against the firm includes that client securities were sold or used in repurchase transactions with others to raise deposits which were then injected to related companies.
Mahendran said investigations were also under way to find whether personal loans have been taken by directors.
Some clients were also lured by high interest rates paid on repurchase transaction which were higher than the rates offered by the underlying securities, according to some sources.
Entrust group was known for its lavish sports sponsorship during the last regime including horse racing and rugby. It sponsored the police rugby team and had its own rugby team to play in the Carlton Rugby sevens tournament.
Ex-President Mahinda Rajapaksa's son Yoshitha Rajapaksa was the captain of the Western Warriors team owned by Western Sports Management (Pvt.) Limited, an Entrust group company, according to a company statement.
"A spokesperson for Entrust mentioned that the group is quite confident that the team will perform exceptionally well at this tournament, under the able guidance and stewardship of Captain Yoshitha Rajapaksa, ably supported by the local and top international Sevens stars in the team," the statement said.
"The Company is also of the view that, Carlton Super Sevens Rugby tournament helps inculcating team work through fair-play and also creating a healthy environment on how to work along with others, paving way to build a better society and enhance corporate culture." (Colombo/January 05/2016 - Update II)