Exposé

Speculating, gambling, betting, wagering – certainly not a purchase contract

New Supreme Court action by Nihal Sri Ameresekere

Public interest action undertaken against banks

Conduct “is unbecoming and unworthy of a professional bank”

Banks “induced Public Officers” 

By M. Asgar

Sri Lanka’s premier public interest litigator, Nihal Sri Ameresekere has filed action in the Supreme Court, charging that the Ceylon Petroleum Corporation was misled and miss-sold the so-called hedging contracts, resulting in possible grave and “irremediable” loss to the people and Republic of Sri Lanka. Ameresekere’s action points out that Sri Lanka stands to lose monies in the region of US$ 600 million (in excess of Rs. 69 billion) – a figure he says that Sri Lanka can ill-afford especially so in context of the prevailing economic situation and that the payment of such monies to the banks could affect Sri Lanka’s negotiations with agencies such as the International Monetary Fund (IMF).

Conduct unbecoming of a professional bank

In the most serious of charges levelled against some of the world’s leading banks like Standard Chartered Bank, Citibank and Deutsche Bank, it is alleged that Standard Chartered Bank in particular had “induced the CPC and its former Chairman, and (those) others involved, into unsuspectingly entering into the said questionable ‘deals,’ which conduct is unbecoming and unworthy of a professional bank.”

Induced public officers

According to Ameresekere’s plea, “it appears that the Standard Chartered Bank has unprofessionally induced or enticed or compromised public officers to enter into such questionable ‘deals,’ in that, from available evidence air travel costs of public officers concerned, appear to have been borne by the Standard Chartered Bank.”

Those public officers included the former Chairman of CPC, the former Finance Manager at CPC and K. Ariyarathne and Vasantha Kumar of People’s Bank. Documentary evidence also allegedly refers to the air travel costs of the families. They were said to have been accompanied by an official of Standard Chartered Bank.

Ameresekere urges the Supreme Court to summon these officials and various bank officials including Clive Haswell, Chief Executive Officer, Standard Chartered Bank, Kimarli Fernando, former Head of Corporate Client Relationships, Nigel Beebe – Senior Credit Officer and Rukshan Dias, Head of Global Markets – the official said to have accompanied the CPC and People’s Bank officers abroad.

The crux of the petition is that, to the detriment of the Republic of Sri Lanka, the banks miss-sold a contract which they termed “Oil hedging purchase contracts” when in fact, there was no relationship between the purchase of oil and the entering into of these contracts. These contracts were, the plaint states, nothing more than wagering contracts.

The CPC is mandated to purchase and retail oil amongst other specifically energy related issues but certainly not mandated to enter into contracts of a speculative, gambling, betting and wagering nature.

CPC might as well have sent its chairman to the casino

In an astonishing analysis of the actions of the CPC in connection with this saga,  Ameresekere suggests that the CPC might as well have sent its former Chairman and former Finance Manager, to a casino to gamble in an attempt to mitigate the cost of oil! Such is the parallel drawn. He does not stop there: “as a result of the fiduciary professional nature of a bank/client relationship, one would expect the bank to act in the customers’ interest in as much as one would not expect a doctor to rape a patient!”

Bank remits US$ 100 mn without approval

In perhaps the most sensational revelation, the plaint states that Standard Chartered Bank has already transferred out of Sri Lanka, a staggering US$ 100 million (Rs. 15 billion) without prior approval of the Controller of Exchange. This was apparently done on the back-to-back arrangements the bank had allegedly undertaken at the time of activating the so-called ‘hedging contracts.’ Still at it, the bank is set to transfer a further US$ 20 million (Rs. 2.3 billion) it is alleged.

Central Bank regulations flouted?

According to directives issued by the Central Bank, the CPC was required not to pay the banks for these transactions, as they were said to be “Significantly tainted.” In that context, the Central Bank’s “Regulations for Banks” requirements may well have been compromised if these banks have not made provision for bad-debt as required by the rules. This will naturally have a significant impact on the country’s banking system as a whole.

Agreements unfair and one sided

The agreements entered into by the CPC with the banks appear to be one sided and unfairly places the banks at an advantage over the CPC. That, ensures the agreements would be considered ab-initio — bad and null and void with no effect in law. There certainly appears to be no form of equitable reciprocity to ensure the fairness of the contracts.

In the context of the severe losses made by some of these banks in their principal places of business – in the West – and the amounts of monies doled out by their respective governments, it is then that the significance of these miss-sold products and their values – anything between US$ 600 and 800 million (Rs. 69 and Rs. 92 billion) can be best understood. In fact one of the prime reasons for the current crisis in the global financial markets is due to the scams and frauds associated with certain Hedging Through Derivatives Instruments. The internet is full of the details.

Miss-sold and ill-advised

The in-equity and unfairness of the agreements is r  brazen: whilst the maximum profit to the CPC would have been no more than US$ 10 million ( Rs 11.5 billion) there was no limit to the ‘losses’ the CPC would have made as the oil prices tumbled. In other words the maximum these banks — complete with their “fiduciary duty” — would have lost was just US$ 10 million — whereas there was no maximum loss specified for the CPC.

It is this lack of transparent reciprocity and equality that possibly will render the contracts bad in law. So in essence, in an attempt to gain a maximum of US$ 10 million, the CPC along with the respondent banks, gambled the tax payers funds and incurred a thumping loss of between US$ 600 million and US$ 800 million. That’s inequitable and smacks of unprofessional advise that is at best tainted.

If oil prices go down to US$ 25 per barrel, as some analysts expect, the losses the CPC will face — or the gains the banks will make — is set to go beyond US$ 1 billion — Rs. 115 billion. It starkly points out what the combination of no knowledge and greed and unethical practices can achieve.

No relationship: Hedging v. Purchasing Oil

The basis of this petition is that when the CPC entered into these agreements, what the banks in effect offered was a contract which offered “bets” on the movement of oil prices, with each side protecting itself from any unacceptably large losses. Except that whilst the banks protected their losses, no such comfort was reciprocally granted to the CPC.

There  was no contract to purchase oil! The inference that these instruments were linked to the purchase of oil was “camouflagedly” made, according to the petitioner.  In fact if this was the case, the CPC might as well have bet (taken out a contract) on the outcome of a Sri Lanka Cricket match or the prices of commodities like gold, silver, tea, rubber or sugar. As none of these, like the contracts the CPC were sold by their bankers, has anything remotely to do with the purchase of oil!