In the clearest sign that the CID investigations into the February 2015 treasury bond scandal are fast reaching a conclusion, sleuths last Monday (25) arrested five additional suspects, including four board directors of Perpetual Treasuries Limited (PTL) and a retired senior Central Bank official.
Last February, when PTL owner Arjun Aloysius and CEO Kasun Palisena were arrested by the CID, they were charged with aiding and abetting former Central Bank Governor Arjuna Mahendran to commit criminal breach of trust against treasury funds.
The suspects arrested last week were additionally charged with offences of ‘insider trading’ and ‘market manipulation’ criminalised by the Registered Stocks and Securities Ordinance. The four arrested directors are Chairman Geoff Aloysius, who is the father of Arjun Aloysius, Pushya Gunewardane, Ranjan Hulugalle and Mutturaja Surendran.
Of the four, Geoff Aloysius and Ranjan Hulugalle had been extensively questioned by the CID in 2018 in connection with investigations into suspected money laundering by affiliate company W.M. Mendis, of which both were board directors.
Former Deputy Governor of the Central Bank, P. Samarasiri, who was also arrested on the morning of 25 March, was charged with conspiring with Arjuna Mahendran to induce the Head of the Central Bank Public Debt Department, Deepa Seneviratne, to accept bids for Treasury Bonds to the face value of Rs 10.058 billion and thereby preventing Seneviratne from acting in compliance with the Registered Stocks and Securities Ordinance.
In 2017, Seneviratne testified at the Commission of Inquiry into the ‘Bond Scam’ that Arjuna Mahendran had directly intervened to override the Monetary Board and increase the amount of treasury bonds to be sold on 27 February 2015 from Rs 1 billion to over Rs 10 billion, at a high interest rate, against the objections of several senior officials.
Mahendran had told the Tender Board and the Public Debt Department of the Central Bank that the decision to raise Rs 10 billion resulted from a meeting with Cabinet Ministers held the previous day.
However, the Bond Commission found this claim to be false. “We find that Mr. Mahendran’s claim made to the PDD and Tender Board that it was necessary to accept Rs 10 billion to meet additional government fund requirements is demonstrated to be false,” the Bond Report states.According to Seneviratne, Samarasiri, who was the Tender Board Chairman for the 27 February Auction, decided to follow Mahendran’s direction and compel the acceptance of Rs 10 billion in bids. Of the accepted bids, at least Rs 5 billion were placed by or on behalf of PTL.
The Bond Commission Report also chastised Samarasiri, and held him accountable for “gross negligence and a grave breach of his duties and responsibilities”.
“Mr. Samarasiri’s passivity negated the whole purpose for which the TenderBoard was constituted. While we are aware that, a Governor of the CBSL holds a position of high authority in the eyes of the staff of the CBSL, we consider that a Deputy Governor who is entrusted with the vitally important duty of chairing the Tender Board was required to ensure that, the Tender Board reached an independent and considered decision and not merely be the conduit and implementer of the instructions given by Mr. Mahendran to accept Bids to the value of Rs. 10.058 billion,” the Report stated. “We are of the view that, the aforesaid conduct on the part of Deputy Governor amarasiri amounts to gross negligence and a grave breach of his duties and responsibilities as the Chairman of the Tender Board and a Deputy Governor ofthe CBSL.”
An Additional Supervisor of the Central Bank’s Public Debt Department, Upullatha Muthugala, corroborated Seneviratne’s account and further testified that had the Central Bank accepted only up to Rs 2.6 billion at the auction instead of Rs 10 billion, the remaining sum could have been raised through direct placements at a lower interest rate, saving a large amount of money for the state.
Had only the first Rs. 2.6 billion in bids been accepted by the Central Bank as these officials urged, the Weighted Average Annual Return, or net interest rate paid by the Central Bank for the bond issue, would have been 10.724 per cent.
In this scenario, no bids by or on behalf of PTL would have been accepted, as the Rs 5 billion in bids submitted by and on behalf of PTL were at much higher interest rates ranging from 11.5 percent to 12.5 percent.
The Bond Commission noted that the bids by and on behalf of PTL for the February 2015 auction totaled Rs 15 billion, even though only Rs 1 billion was to be offered at the auction.
“It is ex facie reasonable to conclude that, in a Market where the PDD was well known to usually accept only about 2-3 times the value of the Bids offered at anAuction, the only reason why Perpetual Treasuries Ltd would place Bids for an unprecedented value of Rs. 15 billion at the Treasury Bond Auction held on 27 February 2015, at which only Rs. 1 billion had been offered, would be, if Perpetual Treasuries Ltd had information that, the PDD was likely to accept avery high value of Bids at that Auction,” the Bond Report concluded.
Another Central Bank official, who directed the Domestic Operations Department of the Bank during the controversial auction, Chandana Ajith Abeysinghe, has testified that on 27 February 2015, Arjuna Mahendran personally directed that a special facility provided to Primary Dealers such as PTL that allowed them to deposit surplus funds at the Bank at an interest rate of 5 percent be increased to a 6.5 percent rate, and that a previous limit preventing the use of this facility more than three times per month be scrapped.
In a report filed by the CID with the Colombo Chief Magistrates Court when the four arrested suspects were produced on 25 March before Chief Magistrate Lanka Jayaratne, detectives set out several witness statements that indicated that the decision of the Central Bank to alter the special deposit facility for Primary Dealers had been leaked out to primary dealers prior to Mahendran issuing the directive to Central Bank officials.
The CID alleges that the arrested directors, and one other director who is said to be overseas, are responsible for violating the “Code of Conduct for Primary Dealers” issued by the Central Bank, which amounts to a violation of the Registered Stocks and Securities Ordinance, by allowing market manipulation and insider trading to take place at PTL.
According to the Code of Conduct, “The board of directors and management are fully responsible for the firm’s operations, including the development, implementation and on-going effectiveness of the firm’s compliance, risk management and internal controls systems andfor the adherence by the directors and the employees to the standards sets.”