Good governance activist Chandra Jayaratne has written to President Maithripala Sirisena calling for the appointment of an independent Presidential Commission to probe the questionable bond issues. This he says would be the only acceptable way forward to deliver justice to citizens negatively impacted by what he described as “unjust enrichment” via questionable bond issues. Following are excerpts of Jayaratne’s letter which has been copied to the Prime Minister, Snr. Advisors to the Prime Minister, Governor Central Bank and Chairman Parliamentary Committee on Public Enterprises

The Appointment of an Independent Presidential Commission is the Only Acceptable Way Forward to Deliver Justice to Citizens Negatively Impacted by Unjust Enrichment via Questionable Bond Issues

A majority of the citizens who voted for a “Yahapalanaya” Government under your leadership in January 2015 believe, in the context of the following over whelming evidence now emerging, that the immediate appointment of an independent Presidential Commission is the only acceptable way forward, to deliver justice to millions of citizens negatively impacted by purported unjust enrichment of a few corrupt persons who may have benefitted via questionable bond issues in 2015 and 2016;

1.The published accounts for the years ending 31st March 2015 and 31st March 2016 of the key suspect primary dealer, revealing that the said entity made net after tax profits of Rs. 960 million and Rs. 5,124 million respectively-copy attached.It is most likely that the profits made by the said suspect primary dealer in the six months ending today, 30th September 2016, will also be substantial as the trading gains from the bonds subscribed for on suspect issues of 29th March 2016 and 31st March 2016 are likely to be accounted for during this accounting period;

2.The long term bond issues made post 31st March 2016, including those made since the appointment of the new Governor of the Central Bank, also appearing prima facie to embed the unacceptable features seen in respect of the issues of 27th February 2015, 8th January 2016, 5th February 2016, 29th March 2016 and 31st March 2016 taken together with the several bond issues preceding above issues at which all bids received were rejected;

3.The trading actions of the suspect Primary Dealer just prior to the most recent rate adjustment by the Monetary Board, prima facie reflecting transactions possibly driven by insider information;

4.The new Governor and Monetary Board not initiatingindependent internal inquiries in to the suspect transactions and awaiting the outcomes of the COPE report and publicly stating that any such inquiries must be done by independent persons outside the Central Bank;

5.The essential internal restructures, making the Public Debt issuance and investment decision making functions of theof the Employees Provident Fund, being established as independent functions not within the Control of the Regulator of Banks and Primary Dealers, not yet being effectively implemented with the Central Bank’s Role limited to Oversight and Regulatory functions only;

6.The apparent failure of the Minister of Labour and Trade Union Relations and the Chief Accounting Officer of the Employees Provident Fund (both of whom have the trustee responsibility to the several million members contributing to the Employees Provident Fund )to initiate independent professional investigations to assess whether the said Fund has been denied of potential optimum return on its investments in long termbond issues, due to possible corrupt practices and unacceptable / unprofessional direct bid option decision making by investment officials of the Employees Provident Fund, currently coming under the supervision and control of Central Bank Officials; 

7.Possible continuation of insider information being passed on to primary dealers , banks and other investors, allowing them to game the processes of market information based professional decision making in bidding for bond issues;

8.Purported bond scams associated Public Servants, including Senior Officials of the Central Bank and Employees Provident Fund, who may have failed in their responsibility and accountability in effectively managing the issues transparently, yet continuing office and are reported to have placed barriers upon the effective investigations by the Auditor General and COPE;

9.Despite the proven integrity, independence and commitment of the Chairman of the Parliamentary Committee on Public Enterprises, with party directions based likely voting members of the Committee, the valiant efforts of the Chairman to produce a professional and unbiased report on the purported bond scams appear to be significantly hampered:

 In the light of above, I urge you to take immediate executive action as outlined hereinafter;

Appointment of an Independent Presidential Commission:

nAppoint a Presidential Commission with terms of reference to review the issuances by the Central Bank of bonds of duration four years or longer during the period 1st January 2015 to 30th September 2016 and the subsequent secondary market purchases of these bonds by State Banks, State Institutions, Employees Provident Fund, Employees Trust Find and Insurance Corporation. This review should also include such bond issues which were cancelled or auctions where all bids were rejected. 

nThe Commission should determine whether

nthe yields offered on issued bonds were in keeping with prevailing market interest rates; and whether bonds were issued at abnormally high yields; and were subsequently sold to State-controlled entities within a short period at much lower yields; thereby unjustly enriching persons or institutions in the private sector, at the expense of the State, State institutions, the public, with emphasis on any adverse impact on members of the Employees Provident Fund, Employees Trust Fund and Insurance Policy Holders; 

nPublic Servants within the Central Bank, the EPF, ETF, Insurance Corporation, state banks, state institutions, or ministries have colluded with any parties in the private or public sector and leaked confidential insider information and or engaged in any unprofessional malpractices associated with such Bond issuances;

nany officials of the Central Bank, the State, State institutions, State banks, State-controlled financial institutions, any provident, pension or thrift fund managed by the State were directly or indirectly responsible for any malpractice that caused a loss or opportunity cost to the State or investing public and members of provident funds or have engaged in any acts unjustly enriching themselves or any persons or institutions;

nthe members of the Monetary Board, have been provided with adequate information by the Central Bank staff and whether the Monetary Board has taken specific actions from February 2015, when the public outcry on this issue commenced to date in order to ensure best practices in the issuance of Treasury Bonds;

nRecommend internal control measures, compliance mechanisms, organisational restructures and change management practices to ensure market based transparent bond auctions take place, optimising the costs incurred by the state and assuring reasonable and fair market returns to the investing public/private institutions and other investors; and recommend systems, procedures, processes and controls enhancing transparency and effectiveness of issuances;and recommend practices bench marked to international best practices to be hitherto followed by all associated parties;

Panel of Professionals:

nAppoint a Panel of Professionals with integrity, in-depth practical knowledge, capability and experience in treasury management, bond market operations, fund management and other relevant fields to advise the Presidential Commission on all aspects of their investigation and also advise on essential change management processes, enhancing transparency, controls and compliance mechanisms.

Are lacunae in regulatory oversight permitting tax avoidance by primary dealers?

Good governance activist Chandra Jayaratne has written to President Maithripala Sirisena inquiring whether there is a lacunae in the regulatory oversight permitting tax avoidance by primary dealers.Following are excerpts of the letter also copied to the Prime Minister, Snr. Advisors to the Prime Minister, Governor Central Bank, Commissioner General of Inland Revenue andChairman Parliamentary Committee On Public Enterprises

You are well aware that as a consequence of the tax revenue to GDP ratio in Sri Lanka falling from around 20% in 1990 to around 10% in 2015http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=LK), the capacity of the State to fund;

1.essential infrastructure;

2.human development (especially investments in health, education and ICT sectors and in focused human capability development meeting tomorrows market needs);

3.research and promote innovation; and 

4.specially targeted programmes aimed at alleviating poverty, removing inequity and lack of inclusiveness in society and aimed at bringing within the focus of development marginalised and vulnerable segments of society

is severely restricted. In fact it is reported that Sri Lanka holds an adverse record amongst nation states, in that it has experienced the sharpest and longest impacting annual decline in tax revenue to GDP. 

It is commonly believed that Administrative and Regulatory Oversight Lacunaemay be the primary cause of the phenomenon experienced as reported above; and it is most likely that this lacunae is the primary reason leading to a significant drop in tax revenue ( both direct and indirect), customs duty, excise duty as a percentage of GDP.

As a specific single case in point, your kind attention is drawn to the Accounts of a Primary Dealer recently published in the newspapers, in compliance with the applicable regulatory framework, a copy of which is enclosed.You will note that the Primary dealer in question, having declared in its accounts for the years ending on 31st March 2015 and 31st March 2016 respectively, trading profits before revaluation of trading securities of Rs. 713 million and of Rs 5,378 million, appears to have declared a NIL tax charge in respect of both years.

The above accounts lead to the question whether the activities of a Primary Dealer (being a licensed professional intermediary, who as a part of a trading business, and not as an investor in securities, invests in such securities, mainly on behalf investors (whereas investors whose investment earnings from the securities are taxed at source) should be exempt from tax on the trading profits made as an intermediary trading in securities carried out as a business.The Primary Dealer in question may have incorrectly treated the trading gain from carrying on business as a Primary Dealer as a capital gain exempt from tax .

In the specific case in point there is also a need to validate whether the intermediary in question is liable to 

1.Financial VAT

2.Deemed Dividend Tax (for not having declared the expected minimum threshold of dividends despite having more than adequate liquidity to do so).

It is generally believed that a majority of tax opinions are likely to confirm that a Primary Dealer should be liable to income tax, financial VAT and deemed dividend tax.

In the context of the need to ensure that tax leakages, due to whatever cause does not impose barriers on the state in recovering its due share of tax revenue, without effective tax avoidance by business entities engaged financial services, it is suggested that you obtain the best independent advisory opinion on the aforesaid matters in question.

One option open to you, in obtaining early an independent professional opinion on this matter of significant importance, is to make a Presidential Executive one off request of the Tax Appeals Commission, supported by the Commissioner General of Inland Revenue and other Senior Commissioners selected as appropriate, together with selected members of the panel of advisors appointed under the Tax Appeals Commission Act, to review and make a determination (say within a month) whether the Primary Dealer in question should be made liable to

1.Income Tax on trading profits (including gains from trading)

2.Financial VAT and

3.Deemed Dividend Tax 

In respect of the years of assessment 2014/15 and 2015/16; and

1.If so, what steps should be made to recover any such taxes due from the Primary Dealer in question and other similar businesses;

2.Going forward, what amendments to the statues should be made, to bring the Primary Dealers within the tax net andliable to pay tax revenue on a fair and equitable basis;

3.What administrative and regulatory oversight measures must be exercised over the operations of Primary Dealers by the Inland Revenue Authority and the relevant Regulator (Central Bank) on an ongoing basis to ensure the primary dealers comply with the liability to duly settle their taxes on a fair and equitable manner

In making the above recommendation, it is realised that the proposed request of the Tax Appeals Commission on a one off exceptional basis by the President is outside the due terms of reference of the Tax Appeals Commission as set up in terms of the Tax Appeals Commission Act.

I sincerely trust that this appeal made in good faith as governance activist receives your urgent personal attention.