Sunday, November 25, 2012

Sunday Guardian report: DPP to AG on CL Financial probe: It looks like larceny

The following report by Anika Gumbs-Sandiford has been reproduced unedited from the SUNDAY GUARDIAN. You can read it in its original form by clicking on this link
Lawrence Duprey
A conspiracy to defraud and conceal millions of dollars is among the criminal charges expected to be slapped against former CL Financial officials as investigations into the wheeling and dealing at the collapsed conglomerate get under way. As the State begins to build its case, investigations have revealed questionable transactions taking place at CL Financial Ltd from as far back as 1992.

Serious allegations of fraud have been discovered, compounded with multiple breaches of the Insurance Act and fraudulent trading under the Companies Act. Instances in which depositors’ savings were taken to advance personal interest also form vital evidence. Before the collapse of the conglomerate in 2009, CL Financial controlled over $100 billion of assets in at least 28 companies throughout the region and the world.

The group’s financial interests covered several industry sectors, including banking and financial services, energy, real estate and manufacturing and distribution. 

This Sunday Guardian exposé examines the allegations about the “unlawful acts” which led to the demise of the financial giant—and left mogul Lawrence Duprey claiming he was without “a damn cent.”

They are stated in a letter obtained by the Sunday Guardian that Director of Public Prosecutions (DPP) Roger Gaspard sent to Attorney General Anand Ramlogan in September. The letter said, “The losses arising from the collapse were so large that it is difficult to conceive that they all resulted from honest but utterly incompetent management coupled with a sudden economic downturn.”

Gaspard concluded that on the basis of the documents forwarded to him that officials of CL Financial had a case to answer. “There is sufficient material before me to say that Clico appears to have been managed with a reckless disregard of the regulatory framework provided by the Insurance Act.

"Consequently, I am satisfied that a criminal investigation should be conducted into whether those who constituted the controlling mind of Clico committed breaches of the Insurance Act and similar related breaches of the Companies Act,” Gaspard stated.

In addition, Gaspard said, there is also ample material to justify an investigation into whether more serious offences—conspiracy to defraud and larceny—were committed by the “controlling minds” of Clico, Clico Investment Bank Ltd (CIB), Clico Energy and CL Financial.

“CIB had an important role in supplying what in reality were worthless fixed deposit notes to boost the paper strength of other companies. The basis of such a case would be that there was a conspiracy to defraud Clico policyholders and mutual fund investors by using assets and funds of Clico in a way which was completely contrary to their interest and whether that amounted to larceny,” he said.

The investigation, Gaspard said, would deal with whether there were conspiracies to defraud the State:
  • By disguising the true financial condition of companies that regulators had to report on
  • By failing to seek approval for the Clico Energy saleSÉ
  • By the Oman Methanol dividend diversion Gaspard also warned that it would cause “consternation” to policyholders of Clico if they were to hear there was to be no investigation when there were such compelling grounds for one
Outlining a summary of the allegations, Gaspard deemed the matter “extremely sensitive” and refrained from going into specific details, to avoid compromising the case. 

Bad transactions since 1992 Noting that the Clico bailout stood at $5 billion, Gaspard said the total cost of the collapse was likely to be higher. In 1992, Clico assets totalling $258 million were transferred to CL Financial.In return, CL Financial partially secured the inter-company debt by executing a debenture in favour of Clico for $62 million. However, for some reason, the capital repayment and interest due were never repaid. The inter-company debt was to grow to over $1 billion. It was the beginning of the end for the financial giant. Preliminary evidence showed that CL Financial acquisitions were financed by debt.

Some of these acquisitions failed to make any profit and resulted in severe losses. “Thus CL Financial had to rely on Clico’s cash and a few good performing companies’ dividends to meet its liabilities,” wrote Gaspard. “This led to a very large inter-company debt between two companies which was a nonperforming asset for Clico with worthless security.
At the end there was a debenture in favour of Clico of $1.3 billion on which interest had never been paid.” CL Financial’s demand for cash led the Clico Statutory Fund, from which policyholders’ liabilities were met, into a deficit. Gaspard noted, “Attempts were made to make up the deficit by creative circular paper transactions which only were to expose Clico to greater risk such as the HCU $200 million swap.”

Top executives and other senior managers, Gaspard said, were undoubtedly aware of the unacceptable size of the inter-company debt between CL Financial and Clico because of their involvement in such transactions. “They were prepared to disguise it if possible by creative circular transactions and creative accounting.”

Referring to one particular instance, Gaspard explained that in 2001 CL Financial obtained a US$80 million loan from the International Bank of Miami in order to pay down on its inter-company debt with Clico. CL Financial then bought a bond from CIB in the same amount which was placed in the statutory fund required under the Insurance Act.

The money, documents showed, was then used by CIB as security for the original loan from the International Bank of Miami. Such transactions, Gaspard said, needed to be further examined. 

The document revealed that Clico failed to comply with the Insurance Act, which states companies must maintain a statutory fund in which they must place assets equal to their liabilities.This is evident given that in June 2011 the Government gave assistance to the tune of $5 billion. It was also found that Clico’s assets, including policyholder funds, were wrongly used to fund CIB, CL Financial and other group entities, in return for worthless consideration and/or security. Cash was provided for in the following ways, resulting in a substantial breach of the act:
  • Payment of management fees to CL Financial and settlement of other expenses such as staff wages. In 2007, management fees totalled $200 million
  • Diversion of Republic Bank Ltd and Methanol Holdings dividends due to Clico to CL Financial
  • Provision of fund (whether by way of loan or otherwise) guarantees and security to CL Financial entities and for other projects which were not in Clico’s interest, such as real-estate projects in Florida
Gaspard noted that the marketing practices of Clico agents needed to be examined in detail. Policies they sold included ordinary life insurance, annuities and managed funds.

“Those returns were often far above the market rate and could not be financed in the long term from revenue generated by its assets. By 2007 Clico’s insurance premium revenue had reached about $15 billion with liabilities to policyholders of $18 billion. It had other assets to just be able to meet those liabilities on paper. Over $6 billion of those assets included inter-company debt and deposits held at CIB.

At least $2 billion of those assets were worthless, leaving Clico with a massive deficit,” Gaspard explained. To compound matters, documents showed Clico also sold units in the Colonial Life Funds, which included the Core Fund. New premiums were used to settle liabilities to existing policyholders and mutual fund investors, without regard to how these new obligations were to be funded.

Revenue from energy sector, but… The energy sector was found to be one of the most profitable sectors of the group, both in dividends and net asset value. The funds were used to also cover operating expenses of other companies. But questionable transactions need answers.

Among them:
  • Were dividends from MTHL, Caribbean Petroleum and Oman Methanol Company unlawfully diverted from the beneficial owners of the shares? • Was the shareholding in the Caribbean Petroleum and in Eurotechnica Melamine SA (ETM) unlawfully transferred outside the CL Financial group?
  • Was the sale of Clico Energy shares in February 2009 at an undervalue and thus a fraud on the policyholders of Clico?
  • Was the sale—especially that of the 17 per cent Clico holding—in breach of the Memorandum of Understanding (MoU), and did it amount to a conspiracy to defraud the Government by depriving it of the opportunity to value the shares and otherwise assess the validity of the sale?
Question marks over MoU The circumstances surrounding the MoU between the former administration and CL Financial have also raised several red flags. The MoU was signed off on January 30. It involved Central Bank taking control of CIB under section 44D of the Central Bank Act. All third-party assets and liabilities on the books of two subsidiaries were transferred to First Citizens Bank (FCB).

The liabilities were matched by resources from the sale of CIB’s holdings of certain high-quality assets and the bank provided short-term liquidity as needed to ensure that these liabilities were serviced. But Gaspard said there was an attempt to defraud the State and the Government and the policyholders of Clico by:
  • Depriving the Government of the opportunity of approving the sale of Clico Energy shares, in breach of the MoU
  • If approval for the sale was given, depriving the Government of the opportunity of approving their value in breach of the MoU • Depriving Clico of assets to satisfy their liabilities by selling the same at an undervalue
  • Depriving CL Financial of assets which could be used to satisfy any deficit in the Clico Statutory Fund by selling them, in breach in terms of the MoU Gaspard concluded, “I have no doubt that there is a case to investigate as to whether others thought that energy assets should be fraudulently extracted from the group so they could continue to benefit from their undoubted value.”
He said various individuals needed to be made to account for the misuse of the company assets by selling them without board approval.


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Jai & Sero

Jai & Sero

Our family at home in Toronto 2008

Our family at home in Toronto 2008
Amit, Heather, Fuzz, Aj, Jiv, Shiva, Rampa, Sero, Jai