s FINAL REPORT | FORENSIC REPORT | RFP 5 EXAMINATION ON CONDUCT OF SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBTParliament / DIRECTOR, SUPERVISION Copy OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMARY DEALERS FROM 1 JANUARY 2009 TO 31 DECEMBER 2017 THE CENTRAL BANK OF SRI LANKA 8 NOVEMBER 2019 Copy Parliament FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017 CONTENTS 1. INTRODUCTION ................................................................................... 11 1.1. BACKGROUND ............................................................................... 11 2. OBJECTIVE AND SCOPE .......................................................................... 18 2.1. THE OBJECTIVE AND SCOPE ............................................................... 18 3. WORK PERFORMED ............................................................................... 20 3.1. OPERATIONS OF REGULATION AND SUPERVISION FUNCTION.......................... 20 3.2. MAPPING THE DEPARTMENTAL PROCEDURES WITH APPLICABLE LEGISLATIONS .... 22 3.3. THE CBSL INTERNAL REPORTS ............................................................. 23 3.4. REVIEW OF DEPARTMENTAL PROCEDURE ................................................ 23 3.5. DIGITAL FORENSICS ......................................................................... 28 3.6. PUBLIC DOMAIN SEARCHES ................................................................ 40 4. PROCESS UNDERSTANDING ...................................................................... 42 4.1. BACKGROUND ................................................................Copy ............... 42 4.2. UNDERSTANDING FOR THE CONDUCT OF REGULATORY FUNCTION .................. 45 4.3. UNDERSTANDING FOR CONDUCT OF EXAMINATION - ON-SITE ........................ 48 4.4. UNDERSTANDING THE CONDUCT OF EXAMINATION - OFF-SITE SURVELLANCE ...... 49 4.5. UNDERSTANDING THE CONDUCT OF EXAMINATION – SPOT EXAMINATION .......... 50 5. EXECUTIVE SUMMARY ............................................................................ 51 5.1. SUMMARY OF KEY FINDINGS ............................................................... 51 6. RECOMMENDATION ............................................................................... 55 7. DETAILED OBSERVATIONS ........................................................................ 57 SECTION A: REGULATION FUNCTION ............................................................. 60 7.1. NO DEFINED PROCEDURALParliament FUNCTIONS / BENCHMARKING ............................ 63 7.2. NON-EXISTENCE OF TECHNIQUES TO MONITOR MARKET INTEGRITY ................ 65 7.3. NON UPDATION OF THE OPERATIONS MANUAL ......................................... 67 7.4. NO MECHANISM TO ANALYSE THE MARKET DEVELOPMENT ............................ 68 7.5. APPOINTMENT OF PRIMARY DEALERS..................................................... 70 7.6. ASSESSMENT OF FITNESS AND PROPRIETY OF DIRECTORS ............................. 76 7.7. POLICY FORMULATION ..................................................................... 80 7.8. ABRUPT EMPLOYEE TRANSFERS IN REGULATORY AND SUPERVISORY FUNCTION ... 81 SECTION B: SUPERVISION FRAMEWORK AND DIRECTION ....................................... 84 7.9. OBJECTIVE AND APPROACH:............................................................... 87 Strictly Private and Confidential Page 3 of 177 FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017 7.10. POLICY FORMULATION ..................................................................... 90 7.11. CAPABILITY ENHANCEMENT................................................................ 97 7.12. STAFFING DEFICIENCIES .................................................................... 99 SECTION C: SYSTEMIC AND DESIGN GAPS IN SUPERVISION ................................... 102 7.13. GAPS IN COVERAGE OF LAWS ............................................................ 102 7.14. ABSENCE OF PRIMARY DEALER RISK SCORING SYSTEM ................................ 107 7.15. ROOT CAUSE AND QUANTIFICATION ..................................................... 108 7.16. QUALITY SELF-ASSESSMENT AND BENCHMARKING ..................................... 113 7.17. OVERSIGHT RESPONSIBILITY .............................................................. 114 SECTION D: DEFICIENCIES IN OPERATIONS: CONDUCT OF EXAMINATION ................... 118 7.18. EXAMINATIONS AS THE MEDIUM OF SUPERVISION ...................................... 118 7.19. PLANNING AND PREPARATION ............................................................ 119 7.20. EXAMINATION PROCEDURES .............................................................. 121 7.21. OPERATIONS ................................................................................ 122 7.22. COMMON FINDINGS ACROSS PRIMARY DEALERS ....................................... 124 7.23. CONDUCT OF EXAMINATIONS ................................Copy............................. 126 7.24. REPEAT FINDINGS INDICATING GAPS IN FOLLOW-UP OR REMEDIATION ............. 144 7.25. NON-REPORTING TO THE MONETARY BOARD .......................................... 146 8. PUBLIC DOMAIN SEARCH ........................................................................ 150 9. DIGITAL FORENSICS .............................................................................. 160 9.1. REVIEW OF EMAILS ......................................................................... 160 9.2. DELETION OF OUTLOOK FILES ............................................................ 164 10. LIMITATIONS ...................................................................................... 172 11. ANNEXURES ...................................................................................... 175 12. EXHIBITS ................................Parliament................................ .......................... 176 Strictly Private and Confidential Page 4 of 177 FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017 GLOSSARY # ACRONYM DESCRIPTION 1 ACRA The Accounting and Corporate Regulatory Authority 2 AG The Assistant Governor 3 ASPD Additional SPD 4 BDO India or We or Us BDO India LLP 5 Bn. Billion 6 BO Back Office 7 BOC Bank of Ceylon 8 BOE Bank of England 9 BSD Bank Supervision Department 10 CBSL The Central Bank of Sri Lanka 11 CDS Central Depository System 12 CEO Chief Executive Officer The Convention on the Suppression of Terrorist Financing Act, 13 CFT No. 25 of 2005 Copy 14 CID Criminal Investigation Department 15 CL Contract 16 Client or You The Monetary Board of Central Bank of Sri Lanka 17 CoC Chain of Custody 18 COPE The Committee of Public Enterprises 19 CSL or CSF Customer Accounts in LankaSecure 20 DFCC DFCC Bank PLC 21 DG Deputy Governor 22 DIT The Director of Information Technology 23 DOD ParliamentDomestic Operations Department 24 DSNBFI Department of Supervision of Non-Bank Financial Institutions 25 DSPD Deputy Superintendent of Public Debt 26 EIC Examiner In-Charge 27 Entrust or ESL Entrust Securities PLC 28 EPF The Employees’ Provident Fund 29 ESI Electronically Stored Information 30 FAMC Forensic Audit Monitoring Committee 31 FED Federal Reserve System 32 FTRA The Financial Transactions Reporting Act 2006 The Housing Development Finance Corporation Bank of Sri 33 HDFC Lanka Strictly Private and Confidential Page 5 of 177 FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017 # ACRONYM DESCRIPTION 34 IBSL The Institute of Bankers of Sri Lanka 35 ILF Intra-day Liquidity Facility 36 ISIN International Securities Identification Number 37 IT Information Technology 38 ITD Information Technology Department 39 LTBO Local Treasury Bills Ordinance No. 8 of 1923 40 MB The Monetary Board 41 MLA Monetary Law Act 42 MO Middle Office 43 MOF Ministry of Finance 44 Natwealth or NWSL Natwealth Securities Limited 45 Nihal Fonseka Anthony Nihal Fonseka 46 PABC Pan Asia Banking Corporation PLC (Primary Dealer unit) 47 PAML Perpetual Asset Management (Private) Limited 48 PCHL Perpetual Capital Holdings (Private) Limited The Presidential Commission of Inquiry on the issue of Treasury 49 PCOI Bonds during the period 1 CopyFebruary 2015 to 31 March 2016 50 PD(s) Primary Dealers / Primary Dealer 51 PDD The Public Debt Department Public Debt Operational Manual applicable during the review 52 PDD Operational Manual period 53 PMLA The Prevention of Money Laundering Act 2006 54 PTL Perpetual Treasuries Limited 55 RBI Reserve Bank of India Regulator of Primary Dealers - the PDD until June 2016 and 56 Regulator D/SNBFI 57 Report ParliamentForensic Audit Report 58 Review Period 1 January 2009 to 31 December 2017 59 ROC Registrar of Companies 60 Rs. Sri Lankan Rupees (LKR) 61 RSSO Registered Stocks and Securities Ordinance 62 SPD Superintendent of Public