The Sunday Leader

Leading Finance House Engaged In Ponzi Scheme?

Good Governance Activists Question As To Why Regulator Turns A Blind Eye?

by Santhush Fernando

Employees picketting

The imbroglio created allegedly by the Managing Director of  one of Sri Lanka’s oldest finance houses and an ex-Ceylinco company which is on the verge of collapse has been further aggravated by the blind eye turned by country’s banking watchdog – Central Bank of Sri Lanka (CBSL), opine employees of the beleaguered finance institution.

“A staggering Rs 715 million loss was reported as at 31th September 2016.  All these details are available in the Colombo Stock Exchange (CSE). Things are getting from bad to worse with a Rs 150million loss reported in October  and  a Rs 200million loss reported in November which amounts to a total of Rs 350 million for just two months. Furthermore the asset base has gone down by rupees one billion and the Central Bank has failed to arrest this situation,” an official of the distressed finance house told The Sunday Leader.

The Sunday Leader is in possession of communication (i.e. emails dated September 6 and August 19) issued by the Compliance Officer who was ultimately forced to tender his resignation in the face of blatant violations regulations laid by the Central Bank. According to the emails, the senior officials of the company had warned the organisation several times  that it was violating interest rate ceilings set by the regulator and warning of a possible Ponzi scheme.

Email dated September 6, Email dated no 2 of August 19 and Email dated no 1 of August 19

“ The worst part is some officials of the regulator are allowing this to happen with ulterior motives,” lamented the official.

 

Dubious schemes

The Sunday Leader during the past few weeks reported serious and grave lapses in several finance companies. The newspaper recently reported the ex-Ceylinco company in question being engaged in a dubious scheme right under the nose of the regulator.

It has been found through our investigations that one of the biggest and oldest financial institutions in the country is on the verge of collapse due to collusion between its Managing Director and corrupt officials of the regulator.

The Sunday Leader has learnt that the said company has stopped all its investment activities suddenly in August and in the face of its severe liquidity crisis, started a Ponzi scheme.

“This is no different from Pramuka Bank or Golden Key. It is sad that this company stopped all investment activities with effect from August 20 and started repaying interest with deposits obtained, right under the nose of the Central Bank. Our question is why this is being allowed if the regulator states that it has both in-situ and ex-situ supervision and monitoring initiatives in place. Both its Managing Director  and its officials are hoodwinking the public,” a source previously told The Sunday Leader.

According to him, there is overwhelming evidence and reports which the Central Bank had ‘overlooked’ that the Managing Director is an  alleged unqualified crook whose resume was twice rejected for subordinate AGM and DGM positions. It is also reported that the Managing Director takes arbitrary decisions without consulting the Board of Directors or the senior management thereby aggravating the situation.

“The company is making a monthly loss in the range of Rs.120 -150 million, and there is an accumulated negative net worth of around a staggering Rs.15 billion. The government has to intervene now, because it is on the brink of collapse,” he warned. It is learnt that the Company’s loss has increased from roughly Rs. 1,843 million in 2014/15 to Rs. 2,417.7 in 2015/16.

Already four Key Management Personnel (KMP), the  Chief Finance Officer (CFO), AGM Finance, Compliance Officer, and Head of Legal, have left the company and more have tendered  their resignations due to suppression and oppression unleashed by the Managing Director.

“We are working solely in the interest of the public. We are negotiating with new investors to work towards a capital infusion and the response so far has been very positive,” Alawattage earlier told The Sunday Leader.

 

Warnings ignored

The Sunday Leader here publishes three emails (one dated September 6 and two August 19) issued by the Compliance Officer who was ultimately forced to tender resignations due to pressure by the Managing Director in question)

———————————————-

Email dated no 2 of  August 19

From: XXXXXXX
Sent: Friday, August 19, 2016 10:13 AM
To: XXXXXX
Cc: ‘Chairman’;
Subject: FW: Memo Ref No 2016/08/Deposits Division/159-Revision of Fixed Deposits Interest Rates

 

Dear XXXX,

 

With reference to the attached memo sent by you  , Company has  violate the Finance company ( Interest Rate ) Direction No 1 of 2014 on the following instance

 

1.      12 Month Maturity

2.      12 Month Senior Citizen Maturity

3.      36 Month Maturity

4.      36 Month Senior Citizen Maturity

5.      60 Month Maturity

 

Please amend the interest rate without violating the CBSL Direction

 

Thanks and Regards,
XXXXXX

(Compliance Officer)

———————————————-

1st mail dated September 6

 

From: XXXXX
Sent: Friday, August 19, 2016 9:35 AM
To: XXXXXXXX
Subject: Memo Ref No 2016/08/Deposits Division/159-Revision of Fixed Deposits Interest Rates

Memo Ref No 2016/08/Deposits Division/159-Revision of Fixed Deposits Interest Rates

Please refer this attachment

 

Regards,

 

Head Office Administration Division,

XXXXXXX

Colombo 04

———————————————-

 2nd email dated September 6

From: XXXXXXX
Sent: Tuesday, September 6, 2016 12:57 PM
To: XXXXX
Cc: ‘Chairman’;
Subject: Regulation Violation
Importance: High

 

Dear XXXX,

It has been observed that the Company has violate the Finance company ( Interest Rate ) Direction No 1 of 2014 for 681 instant for Deposit value of Rs. 326,309,009.04 ( Please find the attachment for details ) during the month of August 2016.

When the Memo was circulated to the Branches without considering the ceiling rate , I have re educated you to amended the rates and the new memo was circuited by you within the ceiling .

Therefore please provide the reasons how the Branches violated the instruction given by the Head of Deposit and how the system permit to allow the higher interest rates by not adhering to the Memo Ref No 2016/08/Deposits Division/162-Revision of Fixed Deposit Interest Rates & Introducing a new Incentive Scheme.

Please response before 5.00 pm today as the company need to furnish details of the interest rates paid/discounts/coupon rates applied for time deposits, saving deposits, non-transferable certificates of deposit and debts instruments, on or before the 7th day of the following month as per the instructions given by the Director Non Bank Supervision.

Thanks and Regards,
XXXXX

( Compliance Officer)

 

Watchdog or lapdog?

In September 2016, The Sunday Leader exclusively reported that two former companies of Ceylinco  Consolidated – the Fingara Town and Country Club along with one of Sri Lanka’s oldest financial institutions have found themselves again in troubled waters, allegedly due to deliberate weakening by certain individuals in the top management and bad supervision by the banking watchdog, stakeholders complain.

Although timely intervention by the Supreme Court salvaged the Fingara Town and Country Club, unscrupulous  individuals appointed none other than the Central Bank which has been the cause for the fall of the financial institution.

“This is all because of the fault of the Central Bank. We have overwhelming evidence of similar malpractices and we will publicise them in due course,” Convener of the Voice Against Corruption Movement and President of the Inter Company Employees Union (ICEU) Wasantha Samarasinghe earlier told The Sunday Leader.

“Just as in the case of Fingara Club, another former Ceylinco company which is one of Sri Lanka’s oldest financial institutions is in grave danger due to arbitrary actions of its Managing Director. Already four Key Management Personnel (KMP) including Chief Finance Officer (CFO), AGM Finance, Compliance Officer, Head of Legal have left and more will leave due to suppression and oppression unleashed by the Managing Director. In addition our loss has increased from roughly Rs. 1,843 million in 2014/15 to Rs. 2,417.7 in 2015/16. Why do we need to have a regulator if this was allowed to happen?” queried an official.

 

A Repeat Of Golden Key/Entrust?

In the light of  The Sunday Leader exposing during the recent weeks how several entities in the finance sector are facing liquidity and regulatory issues mainly due to alleged collusion between corrupt individuals in the top management and the authorities, Entrust Securities PLC became the latest victim of rampant fraud prevalent in the industry.)

In January at the eleventh hour, the Central Bank decided to take-over the management of Entrust Securities PLC from 6 p.m. January 4, 2016 and later appointed National savings Bank (NSB) as the Manager. Although Entrust was appointed as a Licensed Primary Dealer by the Central Bank to deal exclusively in Government Treasury Bills and Treasury Bonds in April 2000 the Company was engaged in diverting funds into other operations, it was revealed.

On September 15, its Chairman Dharmapriya Bandara Dassanayake, Managing Director Chanuka Ratwatte and Directors  Romesha Dushanthi Senarath, Sanjeewa Dayaratne, and Niloshan Romelo Mendis were arrested. Chanuka Ratwatte is the brother of Kandy District UPFA Parliamentarian Lohan Ratwatte, both were arrested for the cold-blooded killing of 10 SLMC supporters in Udathalavinna on the day of the 2001 General Election along with their father – defamed ‘General’ Anuruddha Ratwatte.

It was revealed that nearly Rs 3 billion funds belonging to the Ceylon Electricity Board (CEB), over Rs 2 billion of the  Central Bank’s Regional Development Lending Programmes and  nearly Rs 200 million invested by The Finance Company among other funds had been surreptitiously utilised for other investments in other group companies of Entrust in breach of laws and regulations. Although the directors were apprehended in connection to mismanaging Rs. 4.2 billion, according to some estimates, nearly Rs 12-17 billion had been reportedly misappropriated by the influential directors of Entrust Group. “This is just one of a series of serious lapses on part of the Central Bank,” charged Wasantha Samarasinghe, Convener of the Voice Against Corruption Movement. “Not only this company in question, we also have conducted our own probe and uncovered a number of serious lapses on part of the authorities. Not only the companies that were caught during the fallout of the 2008 Global Financial Crisis (GFC), but we have also evidence of scores of illegal financial institutions and unauthorised deposit taking entities operating with the knowledge of the regulator,” lamented Samarasinghe.

“Our fear is not the mere collapse of Entrust per se but that this could spill over to other finance companies or other entities since many are questioning the role and the measures of Central Bank in preventing such contagion or lack of such.  There is  no point in this government being clean and corrupt-free if it cannot prevent the corruption of the Rajapaksa regime from spilling over to this administration,” lamented a high-ranking official.

 

Closing of stable doors after the horses had bolted

In October, the Central Bank announced that it will set up a new Enforcement Division in order to bring fraudsters in Non Bank Financial Institutions (NBFIs) to book, which some had likened to closing of stable doors after the horses had bolted.

“Central Bank will set up a new Enforcement Division in the Department of Supervision of Non Bank Financial Institutions to institute legal action against Directors and managers who have been responsible for fraud and misappropriation of funds and to make every effort to recover such funds from them,” Central Bank said in a release.Accordingly, three troubled finance companies – The Standard Credit Finance Ltd, City Finance Corporation Ltd, and Central Investments and Finance Ltd along with distressed primary dealer – Entrust Securities PLC are to be bailed out by the watchdog. However many good governance activists question as to why the Central Bank would allow NBFIs to become errant companies in the light of The Sunday Leader exposing during the recent weeks how several entities in the finance sector are facing liquidity and regulatory issues mainly due to alleged collusion between corrupt individuals in the top management and the authorities.

“Irregularities of Entrust Securities PLC and the other three NBFIs have been brought to the notice of not only the CBSL but even the Criminal Investigations Department (CID) and Police many times, but why wasn’t any proper action taken to prevent a repeat of Golden Key Credit Card Company by authorities?  Is it because authorities had been complicit in this horrendous crime with them?” several disgruntled investors told The Sunday Leader.

 

What is a Ponzi scheme?

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organisation, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.

The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. The idea, present in novels (for example, Charles Dickens’ 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme), was actually performed in real life by Ponzi who with his operation took in so much money that it was the first to become known throughout the United States. Ponzi’s original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors’ money to make payments to earlier investors and himself. 

(Internet)

5 Comments for “Leading Finance House Engaged In Ponzi Scheme?”

  1. S it is dirty business as usual. The supervisors or the guardians have also an offer , extremely, tempting, and in the current culture, very difficult to refuse. What with the conspired delay in the bond scam. So, anything goes.

  2. kudson

    the penal system has to be changed to punish the white collar criminals with the same sentence as with murder
    the rich influential ,connected monkeys are the biggest crooks

  3. Nimal

    MR Comaraswami of Central bank must thoroughly investigate the collapse of former Cylinco.It was a well run, honest finance house once managed by two dedicated persons, Mr(Senator) Justin Kothalawala and Mr Justin Silva and their hard work and dedication inspired people like me and Mr Upali Wijewardena.
    I had an office there in the building in early 60s.
    Someone or some people pull the rug underneath. There were other roughish companies that ran Ponzi like schemes with innocent depositors’ money and ran out of the country. I too lost several millions in a such a finance company where they offered excessive ,unattainable ,interests.
    I doubt that Justin’s son Lalith had it in him to run his father’s company where the directors under him would have exploited him and made bad decisions. Perhaps their assets may have being striped by some third party that included some past politicians.
    Hope some serious investigation is done to this and have proper regulations to curb excesses.
    The other bank mentioned above should be investigated too
    as there was a rumor that they have invested that money in UK,in a care home.
    I truly feel sorry for people who have lost their precious savings.

  4. It is upto the Central Bank to institute a thorough investigation to the alleged fraud and arrest the situation before it is too late and ends up like Golden Key and other defunct Ceylinco Companes Save the poor unsuspecting investor.

    How many died as a result of the Golden Key scam The Perpetrators are enjoying the spoils even now. The collapse was in December 2008. Why are the authorities taking so long to liquidate the assets. The Treasury has settled a certain amount with it’s own funds and is supposed to settle the balance soon. The investors have not received any interest since it’s collapse. They are also supposed to liquidate the Company’s assets later. Will they pay the poor investor the interest not received since December 2008, or will it be credited to the Treasury ?

  5. Nimal

    People to be blamed for this disaster are the authorities. Perhaps some people other than the Cylinco group made money or stripped it’s assets by creating conditions for it’s collapse?

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