Colman Report clears Central Bank of failing to act to prevent Clico’s collapse

ASHA JAVEED

Con­sul­tant Ed­i­tor In­ves­ti­ga­tions

It’s been al­most 17 years since the Colo­nial Life In­sur­ance Com­pa­ny (Cli­co) ran in­to a liq­uid­i­ty cri­sis and its chair­man, Lawrence Duprey, went cap-in-hand to the gov­ern­ment for a bailout, which even­tu­al­ly led to the dis­man­tling of the coun­try’s largest con­glom­er­ate, CL Fi­nan­cial (CLF), the par­ent of the in­sur­ance com­pa­ny.

In that pe­ri­od, while ad­min­is­tra­tions and pri­or­i­ties changed, bil­lions were spent on the bailout, the group has re­paid bil­lions, and it has cost tax­pay­ers hun­dreds of mil­lions in fees to lawyers, au­di­tors and liq­uida­tors to re­solve the com­pa­ny’s com­plex­i­ties.

Civ­il pro­ceed­ings, a crim­i­nal in­ves­ti­ga­tion and a Com­mis­sion of En­quiry (COE) lat­er, there has been no ac­count­abil­i­ty or charges against the group’s se­nior of­fi­cers. Last Au­gust, Duprey died.

Last Fri­day, At­tor­ney Gen­er­al John Je­re­mie an­nounced that he is of­fi­cial­ly end­ing civ­il lit­i­ga­tion by the State in­to the mat­ter, even as he de­scribed it as the largest case of fraud and fi­nan­cial tragedy in T&T and pos­si­bly the Caribbean.

To this end, he laid the CoE re­port, which was au­thored by Eng­lish judge Sir An­tho­ny Col­man,QC and com­piled from pub­lic hear­ings, in Par­lia­ment on Fri­day.

The doc­u­ment, which is 676 pages long, has been with the Di­rec­tor of Pub­lic Pros­e­cu­tions (DPP), Roger Gas­pard, for close to a decade.

The CoE was set up to look in­to the fail­ure of CLF, Cli­co, Cli­co In­vest­ment Bank Lim­it­ed (CIB), British Amer­i­can In­sur­ance Com­pa­ny (Trinidad) Lim­it­ed (BAT), Caribbean Mon­ey Mar­ket Bro­kers Lim­it­ed (CMMB), “with a view to as­cer­tain­ing why such events oc­curred and to make such find­ings, ob­ser­va­tions and rec­om­men­da­tions aris­ing out of its de­lib­er­a­tions as the Com­mis­sion may deem ap­pro­pri­ate.”

In his 2016 re­port, the late Sir An­tho­ny Col­man QC likened the CLF Group to an en­gi­neer­ing struc­ture which was not ef­fec­tive­ly ar­tic­u­lat­ed- if one part failed, there was a high risk that the en­tire struc­ture would give way.

He said the col­lapse of Cli­co, Cli­co In­vest­ment Bank (CIB), the in­sur­ance com­pa­ny British Amer­i­can Trinidad (BAT), and Caribbean Mon­ey Mar­ket Bro­kers (CMMB) was caused by:

• The de­fec­tive busi­ness mod­el of the CLF Group;

• The fail­ure of se­nior man­age­ment to act to change it; and

• The meth­ods of cor­po­rate gov­er­nance in ac­cor­dance with the re­quire­ments of the Cen­tral Bank; and

• Its re­fusal to ad­here to rec­om­men­da­tions of its ex­ter­nal au­di­tors, Price­Wa­ter­house­C­oop­ers (PWC).

Col­man ob­served that while the 2008 fi­nan­cial cri­sis in the US had not been felt in T&T, it fu­elled “a de­vel­op­ing loss of pub­lic con­fi­dence in Cli­co, CIB and BAT”, which in turn had caused heavy de­posit with­drawals, “that was the re­al or dom­i­nant cause of col­lapse.”

“This Com­mis­sion finds that the Group was un­du­ly and un­nec­es­sar­i­ly ex­posed to just such a risk of col­lapse in the face of se­vere eco­nom­ic storms. Its fi­nan­cial struc­ture was such that the in­trin­sic risk of sus­tain­ing ter­mi­nal dam­age ren­dered it un­cri­sis­wor­thy,” he said.

Col­man ab­solved the Cen­tral Bank of any wrong­do­ing in its han­dling of the Cli­co col­lapse. (See box)

He de­scribed CLF as a pri­vate­ly owned hold­ing com­pa­ny which op­er­at­ed out­side of any form of reg­u­la­tion from ei­ther the In­sur­ance Act (IA) or the Fi­nan­cial In­sti­tu­tions Act (FIA). CLF was cre­at­ed and op­er­at­ed as an in­vest­ment com­pa­ny.

He said that CLF and its sub­sidiaries were con­trolled by a small group of se­nior man­age­ment, who in turn were ef­fec­tive­ly con­trolled by Duprey.

“Ma­jor in­vest­ment de­ci­sions were tak­en by that group, as dis­tinct from the boards of di­rec­tors, in­clud­ing the boards of sub­sidiaries, such as CLI­CO and BAT. Those boards in­clud­ed a few in­de­pen­dent di­rec­tors. They met in­fre­quent­ly, and they per­formed the func­tions of ei­ther vot­ing in sup­port of rec­om­men­da­tions by se­nior man­age­ment, in par­tic­u­lar Mr Duprey, or by rub­ber-stamp­ing de­ci­sions by Mr Duprey to which ef­fect had al­ready been giv­en,” he not­ed.

Col­man said that the CLF Group’s busi­ness mod­el in­volved us­ing funds de­posit­ed in­to Cli­co, BAT and CIB as well as funds earned from the in­sur­ance com­pa­nies’ in­come and div­i­dends, to make in­vest­ments in eq­ui­ties and re­al es­tate and then to cov­er the op­er­at­ing ex­pens­es of CLF and oth­er Group com­pa­nies.

He said the in­ter-com­pa­ny in­debt­ed­ness was treat­ed as an “in­vest­ment” by the cred­i­tor com­pa­ny when it was in fact a loan with­out any pro­vi­sion for in­ter­est or se­cu­ri­ty, or re­pay­ment.

“In essence, there­fore, the in­sur­ance com­pa­nies were treat­ed as the means of fund­ing the in­vest­ments made by or di­rect­ed by CLF,” he said.

He said the fund­ing of Cli­co and BAT’s li­a­bil­i­ties to pol­i­cy­hold­ers was from in­vest­ment in­come by Re­pub­lic Bank Ltd and Methanol Hold­ings Trinidad Ltd. Even­tu­al­ly, he said Cli­co and BAT could on­ly ob­tain suf­fi­cient fund­ing to cov­er their li­a­bil­i­ties by in­creas­ing the sale of their an­nu­ities at high­er in­ter­est rates.

CIB al­so repli­cat­ed this mod­el—it took sub­stan­tial de­posits as well as from Cli­co and BAT, which left it with un­se­cured in­ter-CLF Group in­debt­ed­ness.

“The fun­da­men­tal de­fects in this busi­ness mod­el were first that, once funds had been trans­ferred out of Cli­co, CIB and BAT, and in­vest­ed by CLF and/or oth­er group com­po­nent com­pa­nies in re­al es­tate and eq­ui­ties, those as­sets lost the key at­tribute of liq­uid­i­ty, which was es­sen­tial to the con­duct of the busi­ness of both CIB and the in­sur­ance com­pa­nies, Cli­co and BAT. Con­se­quent­ly, those com­pa­nies lost the abil­i­ty to re­spond to the re­quire­ments of ex­ter­nal pol­i­cy­hold­ers and de­pos­i­tors for mon­ey pay­ments as and when they fell due,” he said.

This, he said, re­sult­ed in a mis­match be­tween the long-term na­ture of the CLF in­vest­ments and the short-term re­quire­ments for liq­uid funds to sat­is­fy the li­a­bil­i­ties of CIB, CLI­CO and BAT and CMMB to pay ex­ter­nal de­pos­i­tors and pol­i­cy­hold­ers.

In ad­di­tion, he said, the use of funds for rel­a­tive­ly “illiq­uid in­vest­ments” gave rise to a sig­nif­i­cant risk of loss of val­ue should there be a fall in the mar­ket in eq­ui­ties or re­al es­tate or even ex­change rate fluc­tu­a­tions.

Col­man said it was the “cred­i­tor” com­po­nent, as a re­sult of ex­ces­sive re­lat­ed par­ty in­vest­ments, which led to the col­lapse of the com­pa­nies.

“The more these com­pa­nies had on loan to or in­vest­ed in any giv­en CLF Group com­pa­ny, the more vul­ner­a­ble they be­came be­cause, if one “debtor” com­pa­ny in the Group ceased to be able to dis­charge its in­debt­ed­ness to oth­ers in the Group, they in turn might col­lapse and the ef­fect might be to col­lapse the Group as a whole.

“Thus, when in the last months of 2008, CIB was con­front­ed with de­mands for re­pay­ment by its two largest de­pos­i­tors (NGC and NIB), its as­sets con­sist­ing sub­stan­tial­ly of de­posits by, and loans to, oth­er Group mem­bers such as Cli­co, BAT and CMMB could not be de­ployed be­cause the funds which it had ad­vanced to them had been re-in­vest­ed by, or at the di­rec­tion of, CLF and were not there­fore avail­able to en­able it to dis­charge its li­a­bil­i­ties. It was thus cash flow in­sol­vent. The ef­fects of that were that every de­posit in, or in­debt­ed­ness of, CIB be­came val­ue­less to those group com­po­nent com­pa­nies which were CBD’s “cred­i­tors”. This was the un­stop­pable im­pact of the con­ta­gion ef­fect of un­due con­cen­tra­tion of re­lat­ed-par­ty trans­ac­tions af­fect­ing each of the key com­pa­nies. Cli­co was there­fore de­prived of its abil­i­ty to com­ply with its du­ty to re­plen­ish its Statu­to­ry Fund,” he said.

He said this al­so af­fect­ed BAT as BAICO (its par­ent com­pa­ny) had fund­ed the Green Is­land prop­er­ty on the di­rec­tors of CLF, which left it with in­suf­fi­cient as­sets to top up its Statu­to­ry Fund.

He said the de­c­la­ra­tion and pay­ment of a $3 per share div­i­dend for share­hold­ers of CLF in Jan­u­ary 2009 was a reck­less ex­er­cise made worse by its cash flow sit­u­a­tion.

Col­man said the sec­ond ma­jor cause of col­lapse was the fail­ure of se­nior of­fi­cers to ad­here to CBTT re­quire­ments or those of their au­di­tors, PWC.

He said those in con­trol of the group- Duprey, Mon­teil, Ge­of­frey Leid, An­tho­ny Fi­fi and Michael Car­ballo “pur­sued a pol­i­cy of re­spond­ing to the re­quire­ments of CBTT and the rec­om­men­da­tions of PWC by ex­press­ly promis­ing to im­prove mat­ters and then do­ing lit­tle or noth­ing to ef­fect changes or by vig­or­ous­ly chal­leng­ing the le­gal­i­ty of what those reg­u­la­tors put for­ward.”

Col­man not­ed that the deputy in­spec­tor of fi­nan­cial in­sti­tu­tions, Wendy Ho Sing, spoke of a “per­sis­tent lev­el of un­re­spon­sive­ness” by the CLF group, which he found en­tire­ly ac­cu­rate.

He said dur­ing the pe­ri­od 2004 to 2008, had the com­pa­nies aligned their busi­ness mod­els in ac­cor­dance with the re­quire­ments of the CBTT or the rec­om­men­da­tions of the au­di­tors, “it is prob­a­ble that the col­lapse would have been avoid­ed.”

Among oth­er fail­ures in the or­gan­i­sa­tions, he not­ed that CIB had a high­ly de­fec­tive debt port­fo­lio man­age­ment, which gave rise to dis­crep­an­cies in the record­ing of loans and their sum.

He said there was a lack of an in­vest­ment com­mit­tee with ex­pe­ri­ence in the fi­nan­cial ser­vices in­dus­try, in par­tic­u­lar for ac­qui­si­tions like Las­celles de Mer­ca­do, the Ja­maican con­glom­er­ate that CLF ac­quired in 2008.

Col­man not­ed that in 2007-2008, Cli­co failed to make full dis­clo­sures to its au­di­tors. How­ev­er, he said PWC failed in not thor­ough­ly in­ves­ti­gat­ing the re­cov­er­abil­i­ty of Cli­co’s in­debt­ed­ness to CIB and CLF, as well as con­duct­ing a cash-flow analy­sis. He said, though, that even if this was done, it would have been too late to re­bal­ance CLF’s as­set/li­a­bil­i­ty struc­ture.

Col­man not­ed ar­gu­ments were made by the Min­istry of Fi­nance that the CBTT should have in­ter­vened in Cli­co un­der the In­sur­ance Act (IA), know­ing its ex­po­sure be­fore the end of 2008.

“This Com­mis­sion does not ac­cept that crit­i­cism of CBTT,” he said.

He not­ed that while there was an un­sat­is­fac­to­ry de­lay in fi­nal­is­ing an on-site ex­am­i­na­tion re­port of Cli­co, he agreed with for­mer Cen­tral Bank gov­er­nor Ewart Williams that if the CBTT had in­ter­vened un­der Sec­tions 65 to 67 of the IA, giv­en the com­pa­ny’s spread through the fi­nan­cial sys­tem, it would have been per­ceived by the pub­lic as a pre­lude to wind­ing up.

The in­sur­ance com­pa­nies’ at­trac­tive in­ter­est rates had at­tract­ed over 25,000 peo­ple to in­vest bil­lions, and Cli­co’s breadth had stretched from cred­it unions to prime state en­ter­pris­es to ow­ing mil­lions to lo­cal banks. Duprey had de­scribed his em­pire, which com­prised some 65 com­pa­nies in 32 coun­tries, as be­ing caught up in a per­fect storm of eco­nom­ic col­lapse.

“When deal­ing with a com­pa­ny (Cli­co) which con­trolled 53 per cent of the mar­ket and had sig­nif­i­cant sys­temic im­pli­ca­tions, any re­spon­si­ble reg­u­la­tor had to weigh the ar­gu­ment for in­ter­ven­tion and to make a judge­ment as to what the im­pact of in­ter­ven­tion could mean. It would be per­ceived that Cli­co was go­ing to be closed down, giv­ing rise to a re­al risk of a tremen­dous run and im­me­di­ate, which is what the reg­u­la­tor was try­ing to con­trol. This Com­mis­sion does not find fault with the judge­ment of CBTT,” he said.

In a state­ment to Par­lia­ment on re­ceipt of the Col­man re­port in Ju­ly 2016, for­mer prime min­is­ter Dr Kei­th said he had writ­ten to the DPP and “re­quest­ed that, giv­en the sen­si­tive na­ture, and I might now add, the wide­spread pub­lic in­ter­est and an­tic­i­pa­tion, in this Cli­co saga and this Re­port of The Col­man Com­mis­sion, the DPP, give should give the mat­ter his ur­gent at­ten­tion.”

“Hav­ing pe­rused the Re­port my­self, I can ad­vise the pop­u­la­tion that it con­tains very se­ri­ous al­le­ga­tions of crim­i­nal mis­con­duct on the part of a hand­ful of priv­i­leged in­di­vid­u­als who were as­so­ci­at­ed with the CLI­CO/ CLF group of com­pa­nies.

 “Ac­cord­ing­ly, these find­ings of the Re­port must, of ne­ces­si­ty, re­quire the at­ten­tion of law en­force­ment through the of­fice of the DPP and there­fore pend­ing the re­ceipt of the spe­cif­ic ad­vice that has been re­quest­ed of the DPP, it would be whol­ly ir­re­spon­si­ble of this Gov­ern­ment to pub­lish or pro­vide copies of the Re­port, at this stage. It has been sent to the DPP, and we shall await the re­ceipt of his guid­ance and ad­vice,” he said.

Dur­ing the CoE, DPP Gas­pard an­nounced that a crim­i­nal in­ves­ti­ga­tion against for­mer Cli­co ex­ec­u­tives and sev­er­al cor­po­rate en­ti­ties aligned to the col­lapsed in­sur­ance gi­ant had be­gun.

Gas­pard had writ­ten to Col­man ex­press­ing con­cern about how the pub­lic en­quiry, which had been 19 months-old at the time, could im­pact the crim­i­nal in­ves­ti­ga­tion by the po­lice.

“I am par­tic­u­lar­ly con­cerned that an oth­er­wise cred­i­ble pros­e­cu­tion might be stopped by the court on the grounds that a de­fen­dant’s right to a fair tri­al had been fa­tal­ly com­pro­mised by the pub­lic­i­ty at­ten­dant up­on your en­quiry. As such, I shall be is­su­ing a press re­lease warn­ing the me­dia against the pub­li­ca­tion of any ma­te­r­i­al which may jeop­ar­dise the po­lice in­ves­ti­ga­tion and any po­ten­tial crim­i­nal pro­ceed­ings,” Gas­pard had said.

Gas­pard al­so made a re­quest to the At­tor­ney Gen­er­al at the time, Anand Ram­lo­gan, to have the CoE dis­con­tin­ued. The DPP’s of­fice did not bring crim­i­nal charges against any­one named in the CoE re­port.

De­spite Gas­pard’s re­quest, the En­quiry con­tin­ued, but wit­ness­es such as Duprey and Mon­teil failed to turn up, con­cerned that they would in­crim­i­nate them­selves.