The COPE report on bond scams: Not

two reports as claimed but single one

by 25 members

COPE report on bond scams

Monday, 31 October 2016

The much talked about report by the Committee on Public
Enterprises or COPE on the irregularities that are alleged to have
taken place in the issue of Treasury bonds by the Central Bank

from February 2015 to May 2016 was presented to Parliament on

28 October 2016 (available at:
http://www.parliament.lk/uploads/comreports/1477651535015855
.pdf).
These irregularities have been popularly branded by the media as
bond scams, bond scandals or bond fiascos implying that they
have helped one party to profit at the expense of another. The
party reported to have benefited had been a primary dealer in
government securities, namely, Perpetual Treasuries, which had
started its business in February 2014 and went into making a
gigantic amount of profits, according to published figures, within a
matter of just 27 months. Those who had lost in the process are
numerous in number, but the main victims have been the
Treasury, EPF, other primary dealers and finally investors at large.
Numerous investigations into bond scams
Since there was a public outcry that these scams or scandals or
fiascos should be properly investigated in order to ascertain the
person or persons who are responsible for them, the
Parliamentary watchdog, COPE, went into action after the new
Government was formed in August 2015.

Prior to the present exercise, there were two other

investigations done on the first bond scam that took place in

February 2015 and another on the first as well as the subsequent

bond scams. One was by a committee of lawyers headed by
Gamini Pitipana and appointed by the Prime Minister. The other
was a subcommittee of the previous COPE headed by its
Chairman, Parliamentarian D.E.W Goonasekera.
The first report was duly submitted to the Prime Minister and it is
now available in the public domain (available at:
https://www.colombotelegraph.com/wpcontent/uploads/2015/05/Bond-Report.pdf ). The COPE
subcommittee report did not see the light of day since Parliament
was dissolved by the President before it could submit it to
Parliament. Though this report was not officially released, a draft
copy has been leaked to the media and is available in the public
domain (available at:
https://www.colombotelegraph.com/index.php/bond-scam-fulltext-of-interim-report-of-cope-inquiry/).
The third report was done by the Auditor General on the direction
of the present COPE on the alleged bond scams from February
2015 to May 2016. The current COPE report has presented the
first and the third report in an annexure so that they are now
officially available documents.
A leaked onsite examination report
While the present COPE report was being prepared, a confidential
draft onsite examination report done by the Central Banks onsite
examiners on the controversial primary dealer, Perpetual
Treasuries, was leaked to the media (available at:
http://www.lankatruth.com/site/index.php/2014-08-09-14-2831/item/2806).

A review of the implications of

this leaked report was discussed by this writer in a previous
article in this series earlier (available at:
http://www.ft.lk/article/572608/Whistle-blowing-on-PerpetualTreasuries--Embarrassing-but-vindication-of-CB-s-supervisory-staf
). The COPE does not appear to have benefited from the findings
in this report, since the Monetary Board which had not accepted
its existence officially had not submitted the same to the COPE.
However, a subsequent press release by the Monetary Board had
indirectly accepted its authenticity when it said that there was no
authorisation for anyone to release it to the media (available at
http://www.cbsl.gov.lk/pics_n_docs/02_prs/_docs/press/press_2016
1010es.pdf). The fallout from this indirect admission was analysed
by this writer in an article published in this series earlier
(available at: http://www.ft.lk/article/574057/The-Monetary-Boards-wake-up-from-slumber-while-hunting-a-whistle-blower).
Need for reading all five reports together
Hence, in order to appreciate the implications, gravity and nature
of the bond scams in question, one has to read all those five
reports together: the Pitipana Report, the aborted COPE

subcommittee report, the leaked onsite examination report, the

Auditor Generals report and finally, the present COPE report. The
combined story narrated by these five reports is pathetic,
frustrating and alarming. It tells the story of how good governance
and economic democracy, promised to people at both the
Presidential election and Parliamentary elections, have been
vindictively denied to them through a series of orchestrated
cover-up operations.
COPE members should act free of party lines
COPE was created in the late 1970s by Finance Minister Ronnie de
Mel by carving out the functions relating to public enterprises that
had been entrusted to the Public Accounts Committee, the
Parliamentary watchdog that existed since independence.
The objective of COPE was to specialise itself in its job of
assessing the performance of the public enterprises and report
back to Parliament on losses, malpractices, irregularities and
improprieties of such enterprises. Hence, it is not expected to
operate on party lines though its representation is basically
determined on the party strengths in Parliament.
Once appointed to COPE, members have to shed their party
affiliations and conduct their examinations objectively, impartially
and independently. For technical matters, they are also being
supported by another watchdog of the republic, the Auditor
General, who functions as the third eye of both the executive and
the legislature. COPE members, therefore, serve not the party
they represent, but the people who have been promised good
governance and economic democracy. This is the social contract
they have signed with people.
COPE members should necessarily explore, probe and be
critical

Though COPE has submitted a single report regarding the Central

Banks bond fiascos, according to its Chairman, it has to be read
as two separate reports. One is the main report without footnotes,
signed by 16 out of 26 members, all representing parties other
than UNP. The other is the main report with footnotes signed by
nine members belonging to the UNP.
However, all 25 members have agreed to the recommendations
made in the main report. Thus, footnotes appear to have been
inserted to qualify the analysis done in the body of the report or
provide counterviews on the same warranting further
examination.
It, therefore, testifies to the fact that COPE members have arrived
at their decision after engaging themselves in a vibrant debate or
discussion. There is nothing wrong in doing so since the truth can
be found not by agreeing but by exploring, probing and
questioning the accepted view. If decisions are made by any
social group without following these steps, it is likely to build a
group of intellectual slaves that would not augur well for the
continued existence of that group. Obviously, COPE is not
expected to build such a group of intellectual slaves. Hence, the
critical approach by COPE members to issues before them is
praiseworthy.
Footnotes falling into four categories
In this writers view, the footnotes presented by the disagreeing
group of COPE members could be classified into four main
categories. In the first place, some footnotes have further clarified
the observations in the main report and therefore they have not
changed its context.
Second, some have presented an alternative view implying that
COPE should go for further inquiry before making a final
conclusion. Third, some footnotes have strengthened the

conclusions in the main report. In fact, some of the footnotes in

this category have made stronger suggestions than the main
report. Fourth, some contradictions in the footnotes have
weakened the arguments made by this group.
Footnotes further clarifying the main report
Footnotes 1 to 13 and those from 15 to 18 have provided further
clarifications and therefore, as mentioned above, have not
changed the thrust and context of the main report. In fact, they
have added additional value to the main report.
The main alternative views have been presented in footnotes No.
14, and from 19 to 25. They pertain to the position of the
Monetary Board with regard to the continued use of private
placements for raising funds from 2008 onward and the
methodology used for calculating the loss by the Auditor General.
Footnotes presenting alternative views
The dissenting group has claimed that there had not been any
evidence that the Monetary Board had approved of the use of
direct placement with EPF and other captive sources and with
other primary dealers after 2009. It, therefore, suggests that a
thorough investigation should be made in order to ascertain
whether there had been any loss to the Government as a result of
the overwhelming use of direct placements during 2009-14.
This is a fair enough suggestion because any doubt has to be fully
investigated. But since the direct placements had been made at
the weighted average interest rate pertaining to the auctions
concerned and the system is usually approved every year by the
Monetary Board when it approves the forthcoming years
borrowing program, it could be concluded a priori that there
cannot be any loss to the Government or illegality in the practice.

Other captive sources have to come through primary

dealers
Further, when the Board has approved of the use of other captive
sources, it invariably meant the use of primary dealers since
these other captive sources like ETF or insurance funds have to
necessarily come through a primary dealer. Apparently, this latter
information may not have been provided to COPE for otherwise it
would not have made this observation.
With regard to the loss calculation, the dissenting group has
opined that such loss calculations have been made under very
specific assumption that direct placements have been the order of
the issue rather than exception. But, this has been the case
throughout and, as mentioned above, had got the Monetary
Boards approval continuously. Hence, it is difficult to fault the
Auditor General for making that assumption when he calculated
the losses.
Contradictions in footnotes
The footnote No. 30 has contradicted itself. It has sought to
dispute the observation in the main report that it was illogical for
the Public Debt Department to fix the coupon rate for the 30-year
bond to be issued on 27 February, 2015 at 12.5% when the
secondary market yields of a bond of equal maturity had been
between 9.48% and 10.01%.
What it meant was that a Rs. 100 bond carrying a coupon rate of
12.5% was being traded in the secondary market at prices
ranging from Rs. 125 (price relevant to a yield of 10.01%) to Rs.
132 (price relevant to a yield of 9.48%).
The argument in the main report had been that the coupon rate
could have been fixed close to these rates so that the
Government would not have to pay interest at the high rate of

12.5% for over a 30-year period.

The footnote 30 had clarified that fixing the rate at 12.5% had
been done by the Public Debt by using an equation after making a
market survey. But the secondary market yield for a 30-year bond
had been, according to the footnote, at 10.14%, which is pretty
much close to the upper rate reported in the main report. It also
translates to a market price of Rs. 123 per Rs. 100 bond
vindicating the observation in the main report.
EPF should be fully investigated
Footnotes 29 and 33 have made suggestions even stronger than
those contained in the main report. The footnote 29 has
suggested that the investments by the EPF during the last sixyear period should be fully investigated since there have been
accusations that such investments have resulted in losses to the
members. This is a demand made continuously by civil society
activists but has fallen on the deaf ears of authorities. Hence,
what has been suggested in the footnote 29 should be
implemented promptly.
This is in addition to the investigation, suggested in the main
report, of losses to EPF due to its not bidding at certain primary
auctions and buying bonds at high prices from the secondary
market during 2015-2016.
Stronger recommendations than the main report
Footnote 33, while highlighting the limitations of the Auditor
Generals report as revealed by the AG himself, has come up with
a very strong set of recommendations further strengthening the
recommendations made in the main report.
It has found fault with the Central Bank for not submitting full and
accurate information to the Auditor General to enable the latter to

overcome the limitations in his study. There should be a complete

investigation of the bond issues to ascertain the losses to the
Government during 2008-2016.
The Auditor General should be empowered to investigate the
operations of even private entities that operate in the primary
dealer market. All officers in the Central Bank who are involved in
the debt issue are culpable for the bond scams in question.
The inside information relating to the bond issue on 27 February
2015 had been known to many other than the primary dealers.
One such instance is a Central Bank officer trying to invest his
private money at a high interest rate at the last minute to take
advantage of the previous Governors decision to borrow more
from the auction.
The footnote has opined that Perpetual Treasuries had had access
to inside information in the Public Debt Department. There are
rogue rings operating in the government securities market
involving primary dealers, Central Bank offices, officials in EPF
and BOC to take undue advantage from the market activities. This
should be prevented as early as possible.
Information has not been made available to all the primary
dealers in the bond auction on 27 February 2015. The Tender
Board that determined the auction on this date allowing Perpetual
Treasuries to get 50% of the total amount issued is also guilty of
negligence. Perpetual Treasuries has bought bonds amounting to
Rs. 29 billion by borrowing from the Central Bank in March 2016.
This should be fully investigated.
Admission of bond scams by the dissenting group
The dissenting group has admitted that there have been bond
scams during February 2015 to May 2016. However, through
footnotes, it has tried to question the conclusion in the main

report that former Governor Mahendran had been directly

involved in those scams. But it has admitted the former Governor
Mahendrans culpability directly as well as indirectly.
Direct and indirect admission of the culpability of
Governor Mahendran
The direct admission has been its acceptance of the conclusion in
the main report that Governor Mahendran has been directly
responsible for the bond scam of February 2015. The indirect
admission is when it has concluded that it is the Central Bank
officers, including the Tender Board members, who are
responsible for the alleged bond scams. This is because of the
specific provisions in Section 21 of the Monetary Law Act
regarding the responsibility of the Governor.
The particular section says that the Governor shall remain and
continue to be responsible to the board for and in respect of any
act or thing done or omitted to be done by any such delegate of
responsibilities to other officers of the bank. Hence, for any
misdemeanour done by Central Bank officers regarding the bond
scams, it is the Governor who is responsible. This is the practice
followed in other Central Banks as well.
Governor Artiur Rahman of the Bangladesh Bank tendered his
resignation promptly taking responsibility for the loss of funds as
well as the reputation due to a hacker penetrating the computer
system of the bank and transferring foreign reserves illegally.
Governor Raguram Rajan of the Reserve Bank of India who had
earlier expressed his willingness to serve another term
immediately announced that he would not seek reappointment
when a Government party politician questioned his loyalty to
India.
It is a single report

Though the COPE Chairman has said that it is two reports, one
without footnotes and the other with footnotes, it is clear that it is
a single report that had been submitted by 25 members of COPE.
(W.A Wijewardena, a former Deputy Governor of the
Central Bank of Sri Lanka, can be reached at
waw1949@gmail.com
Posted by Thavam