Bombshell on hedging deal

We reproduce below the affidavit filed by Kimarli Fernando, formerly of Standard Chartered Bank, in the Supreme Court last week. The affidavit is published with the permission of Ms. Fernando.

In the Supreme Court of the Democratic Socialist Republic of Sri Lanka

Affidavit For SC (FR) Case No. 404/2009 As Directed By Your Lordships’ Court

In the matter of an Application under Article 126, read with Articles 17, 3, 4, Chapters III and VI of the Constitution of the Democratic Socialist Republic of Sri Lanka.

Nihal Sri Ameresekere

l67/4,Vipulasena Mawatha Colombo 10.

PETITIONER

S.C. (FR) No. 404/2009            Vs

1. Ceylon Petroleum Corporation 109, Rotunda Tower Galle Road, Colombo 3.

2. Sumith Abeysinghe, Secretary to the Treasury, The Secretariat, Colombo 1.

3. Standard Chartered Bank Sri Lanka Branch, 37, York Street, Colombo 1. Head Office at l, Basinghall Avenue, London, EC2V 5DD, U.K.

4. Citibank Sri Lanka Branch, 65C, Dharmapala Mawatha, Colombo 7. Head Office at Citigroup Center, 153, East 53rd Street, 16/F, Zone 19, New York, NY 10022, U.S.A.

5. Deutsche Bank AG Sri Lanka Branch, 86, Galle Road, Colombo 3. Head Office at Theodor-Heuss-Allee 70 60486, Frankfurt, Germany.

6. Commercial Bank of Ceylon PLC, Commercial House, 21, Bristol Street, Colombo 1.

7. People’s Bank, 75, Sir Chittampalarn A. Gardiner Mawatha, Colombo 2.

8. Mr. E.A. Hettiarachchi, Controller of Exchange, Exchange Control Department, Central Bank of Sri Lanka, 7th Floor, 30 Janadhipathi Mawatha, Colombo 1

9. Hon. Attorney General,

Attorney General’s Department, Colombo 12.

RESPONDENTS

To: His Lordship the Chief Justice and their Lordships & Ladyships, the other Honourable Judges of the Supreme Court of the Democratic Socialist Republic of Sri Lanka

I, Kimarli Fernando, holder of National Identity Card No. 647451470V of No. 14/2, Ward Place, Colombo 7 do hereby solemnly, sincerely and truly affirm and declare as follows:

1. I tender this Affidavit in response to the Notice issued on the direction of Your Lordships Court dated 20th July 2009 under the hand of the Registrar of Your Lordships’ Court requiring me to disclose information within my personal knowledge on matters set out in Petition in SC (FR) No. 404/2009.

2. I affirm to the facts herein contained of my own personal knowledge and belief and from documents available with me.

3. a) I am currently employed as the Chief Executive Officer and Director of Pan Asia Bank, located at 450, Galle Road, Colombo 3.

b) I serve as a Director, Sri Lanka Bankers Association (SLBA) appointed by the commercial banks

c) I serve as a Director of several companies

d) I am a holder of LL.B ( Hons) Degree from the London School of Economics, UK,  and a Barrister-at-Law from Lincoln Inn, UK. Attorney-at-Law, Sri Lanka, Child Psychology Diploma, Sri Lanka and Post Graduate Certificate Course in Human Resources Management from the Post Graduate Institution of Management, Sri Lanka.

e) I am the author of Company Law Of Sri Lanka  2nd Edition, a reference book for students and practitioners. I was also responsible for the publication of the book Barrier Free Access for Standard Chartered Bank, a first in Sri Lanka and a guide to comply with the law and spirit of inclusion of those with disabilities in the work place.

4. a) I was in employment of Standard Chartered Bank in Sri Lanka (SCB) from July 1, 2003 to February 2008, as the Head of Client Relationship responsible for all corporate relationship including lending to corporate, public and the multi national sectors.

b) Under this responsibility the Ceylon Petroleum Corporation (CPC) also fell within my purview.

c) As the Head of this function, my prime responsibilities included marketing of various banking facilities to optimise banks revenue, while managing risks and people talent.

d) I was also the Head of the Bank’s Diversity and Inclusion in Sri Lanka — a key initiative in the Standard Chartered Group in January 2007.

5. a) The SCB Sri Lanka and CPC relationship has been very cordial and the bank has been providing trade facilities for the importation of crude oil.

b) The CPC relationship was lucrative in terms of earnings to the bank and they have been meeting their commitments in a timely manner.

c) However, these facilities were within their day-to-day requirements and repayment capacity and capability of CPC, and structured after a thorough due diligence.

6. a) SCB Sri Lanka and Group Credit was however concerned that the bank did not have any guarantee or even a letter of comfort from the Government of Sri Lanka for the facilities extended by SCB,

b) The SCB was of the opinion that CPC had a poor cash flow and the internal risk rating was poor due to weak financials.

c) I recall that the credit committee of SCB had declined our request for increased facilities to accommodate import of oil and other working capital facilities, as they perceived CPC as a high risk, and profits that the bank made from CPC was not adequately rewarding as CPC was willing to pay only thin margins due to competition from other banks.

7. a) It was in the latter part of 2006, the Standard Chartered Banks product teams based in Singapore, India and Dubai suggested marketing oil hedging instruments to CPC.

b) As the local team was not, initially, aware of the details of the oil hedge product, several persons from Standard Chartered Banks overseas office visited Sri Lanka to solicit the support of the local management team and the management of CPC to enter into oil hedging transactions.

8. a) Initially, the explanations provided were less complex and were short tenors. I saw that the product team’s focus was more on the earning opportunity for Standard Chartered Bank in Sri Lanka and globally.

b) The SCB local office projected a commission of approximately one billion rupees in Sri Lanka, and looked at commissions to be booked at one billion rupees overseas.

c) I noticed that the CEO Mr. Clive Haswell was very adamant that the oil hedging deals were concluded as soon as possible given the commissions for the bank. This was mainly because the bank’s earnings are directly linked to the CEO and the other top management’s bonus.

9. I was aware that the CEO Mr. Clive Haswell did not have prior experience of working in risk management, corporate or as a CEO and explained to him at least the following as I recall.

a) The oil hedging transaction can expose CPC to unbearable losses if the oil prices decline because there was no down side protection for CPC,

b) I explained that CPC did not have the understanding and expertise to consider the risks involved.

c) I highlighted that CPC and Sri Lanka can be exposed to severe foreign exchange exposure and repayment will need capital outflow from the country, which requires the approvals of the Central Bank of Sri Lanka as per exchange control guidelines.

d) I explained that no sensible private sector company will enter into such risky oil hedging instrument which appeared to me one sided and that to me the transactions appeared extremely speculative.

10. a) I recall my discussions with Mr. Asantha De Mel, the former Chairman of CPC at his office on the 24th of October 2007 and he informed me that he has no appetite to lose money and he had no interest on one year structures and looked for short tenors.

b) He also said that he expected the banks to guide him daily to ensure that the transaction has value and profits.

I attach hereto in this connection four e-mails all dated 26th October 2007 compendiously marked X 1 and two e-mails dated 21st November 2007 and 22nd November 2007 also compendiously marked X 2.

11. a) I also noted that CPC had refused to sign the ISDA, which is the basic document for the agreement.

b) In fact the first oil hedging transaction between CPC and SCB was concluded with no ISDA agreement in place.

c) I was told that CPC had delayed to get Attorney General’s approvals.

d) However, SCB suggested that CPC obtain external legal firm assistance.

e) There was no subsequent Attorney General approval for ratification of the documentation.

However, CEO Clive Haswell’s views were that the risks were worth it given the commissions exceeding millions of dollars to the bank.

12, a) I was also aware that Standard Chartered Bank was preparing to make presentation to the Central Bank of Bangladesh on these oil hedging products, which they subsequently rejected even after a much attractive proposal was made to them.

b) Mr. Chanaka Peiris from Standard Chartered Bank Global Markets in Sri Lanka was to visit Bangladesh for this purpose.

13. a) I am a corporate banker who has always believed that banking business should be done under the highest ethical environment meeting our local and international regulatory and compliance standards.

b) It was in this context that I opposed the oil hedging transactions and signed approved credit applications on the terms that there should be no mis-selling and that there should be adequate disclosure.

c) I made a separate note on these needs. I recall this led to the Senior Credit Officer, Mr. Robert Green, based in Singapore calling on my phone one evening and asking me why I was getting worried.

14. a) I was under severe pressure by the CEO Mr. Clive Haswell to sign the credit application but I made it mandatory that the CEO and Mr. Rukshan Dias, Head Global Markets, who was strongly supporting the requirements of the CEO to sign the credit application.

b) I also made it a condition that the CEO takes personal responsibility that the regulators and the government understand the risks versus the limited benefits that the bank could offer.

15. a) The CEO Clive Haswell was of the very strong view that oil prices will not fall during a 12 month period.

b) He also strongly believed that if State Banks were involved, SCB’s interest would be safeguarded.

c) SCB decided to approach Bank of Ceylon and People’s Bank. Mr. Rukshan Dias the Head of Global Markets during this period said that he could convince and get People’s Bank on board as he had prior working relationships with Mr. Wasantha Kumar and Kapila Ariyaratne of People’s Bank.

d) The CEO said that if the State Banks are hooked to the transaction, the Central Bank of Sri Lanka would not find State Banks having violated the guidelines.

16. a) From our internal meetings and discussions at SCB, I gathered that the CPC Chairman, initially was not keen to proceed with oil hedging.

b) The CEO Mr. Clive Haswel and Head Global Markets Mr. Rukshan Dias were very keen to get a deal closed fast.

c) With a view to convincing me and some of the senior staff in Client Relationships, a training session was arranged for us by an Indian gentleman from SCB India.

d) At this meeting, I highlighted that CPC’s financials are not sound and in fact we are having issues even getting approvals for opening of LCs and that the client being a corporation is not sophisticated enough to understand complicated products, and it will be a lengthy process to obtain the necessary clearance from the CPC Board, Attorney General, CBSL, Minister of Petroleum, Cabinet and the Finance Minister who was then the President.

e) The CEO, Mr. Clive Haswell got very angry and annoyed with my views. He thought, that I was not allowing the bank to make more money.

The CEO Mr. Clive Haswell said I should not try to be a product expert and should just support the process. He said we will all get rewarded if I support the transaction.

g) SCB was moving towards making LKR 1 billion from CPC and this would have been the highest revenue recorded from a customer in Sri Lanka.

h) However, I stood by my values and principles and told the CEO, Mr. Clive Haswel that the bank could lose our license, if CBSL eventually finds out. In addition, there was a reputation risk and a risk of us losing our jobs.

i) The CEO, Mr. Clive Haswel insisted that these transactions will be done with or without me.

17. a) Then there was a strategy agreed by the CEO, Mr. Clive Haswell and Head Global Markets, Mr. Rukshan Dias to somehow get the Chairman of CPC convinced.

b) CPC Chairman’s personal account was with SCB and I recall the CEO requesting me to ignore a CBSL rule and allow exchange for the Chairman’s trips. I also recall one instance when the CEO, Mr. Clive Haswell came with the paper and got my signature.

c) During this time Mr. Rukshan Dias became very close to Mr. Clive Haswell as he obliged and did whatever he desired.

d) The CEO then successfully recruited the daughter of the CPC Chairman, Asantha de Mel and placed her under Head Global Markets, Mr. Rukshan Dias himself.

e) Expecting CBSL to be a hindrance, SCB hired the son of a Senior Official of CBSL and also placed him under the Head Global Markets Mr. Rukshan Dias, normally a restricted area for the bank.

Both these recruitments violated the bank’s internal requirements to first place an internal job watch and then advertise in the local press, giving equal opportunity to all candidates. In fact neither was done.

g) From internal discussions I became aware that the CPC Chairman was entertained by SCB senior officals.

18. I recall that on one of the trips to Singapore, Head Global Markets, Mr. Rukshan Dias was accompanying CPC Chairman, Mr. Ashantha De Mel and I was requested to join but I declined.

Instead, Head Global Markets, Mr. Rukshan Dias and Mr. Dushan Cassie Chetty, relationship manager accompanied him.

19. a) After sometime the CEO, Mr. Clive Haswell informed me that they have successfully managed the Chairman, CPC.

b) However, they still needed my signature to proceed. At one stage a paper was submitted for my signature. I declined to sign the paper since we would be in violation of the CBSL guidelines and because of CPC’s weak financials and moreover CPC had also refused to sign the ISDA, which is a basic documentary requirement.

c) At the management meeting I was pulled up and ridiculed by the CEO, Mr. Clive Haswell, who said I am dragging my feet and blocking very remunerative deal with CPC. He indicated that I am ignorant of the oil hedging product.

20. a) CEO Mr. Clive Haswell realised that my position of not supporting the oil hedging transaction would not allow the bank to earn several millions dollars of profits.

b) However, my reasons for not supporting was because I felt it was mis-selling coupled with several breaches of the Central Bank guidelines.

21 a) As a SCB employee I was also bound by the SCB’s ‘Group Code of Conduct,’ copy of which, I attach hereto marked X 3.

b) SCB’s ‘Group Code of Conduct’ stipulated my responsibilities as an SCB employee to include inter-alia the following

- comply with local laws

- an employee is responsible for compliance and the Bank is a guest in each country and can be asked to leave

- do not be afraid to speak up or compromise compliance for revenue

i.e. ‘taking shortcuts,’  for example, to achieve revenue targets may expose the Bank to risk. The penalty would be severe for anyone doing this,

- openness and transparency must be our watchwords, when dealing with our regulators

- ensure that products are suitable for customers

i.e. the basic rule we must not sell an unsuitable product to a customer, that is a product that does not meet their needs. Doing so is mis-selling and may expose the Bank to regulatory penalties, reputational damage and legal action by customers.

- advertise products fairly and truthfully

- reject bribery and corruption

i. e. Bank opposes all forms of bribery and corruption - you should not offer or provide any kind of unofficial or unorthodox payment or benefit to government officials and others with decision-making power over the Bank’s affairs or offer to pay an employee of a customer or a potential customer for their business.

- identify your customer and know your customer

- fraud involves obtaining a benefit (often financial) by deception

- Bank relies on each one to make a Judgment of what is right and proper in any particular situation

22. I regret to have to say that my values and the CEO Mr. Clive Haswell’s expectation unfortunately were not in the same direction.

The Affirment herein above mentioned having read over and understood the contents hereof, and having admitted the correctness thereof, affirmed to and signed at Colombo on this 24th day of July 2009

sgd

Before Me

Sgd.

Justice of Peace