Ani­ka Gumbs-San­di­ford

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 ex­pos&ea­cute; 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 saleS&Ea­cute;

• 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. Rules bro­ken 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.