FINAL REPORT| RFP 1| FORENSIC AUDIT / INVESTIGATION ON ISSUANCE OFParliament TREASURY BONDS Copy DURING THE PERIOD 1 JANUARY 2002 TO 28 FEBRUARY 2015 BY THE PUBLIC DEBT DEPARTMENT THE CENTRAL BANK OF SRI LANKA 8 November 2019 FINAL REPORT | RFP 1 | FORENSIC AUDIT / INVESTIGATION ON ISSUANCE OF TREASURY BONDS DURING THE PERIOD 1 JANUARY 2002 TO 28 FEBRUARY 2015 BY THE PUBLIC DEBT DEPARTMENT CONTENTS GLOSSARY ................................................................................................................... 5 TERMS FOR REFERENCE ................................................................................................... 7 NOTICE TO THE READER ................................................................................................... 9 LIMITATIONS ............................................................................................................... 11 1. INTRODUCTION ..................................................................................................... 14 1.1. BACKGROUND .............................................................................................. 14 1.2. SCOPE OF FORENSIC AUDIT .............................................................................. 16 2. EXECUTIVE SUMMARY OF OBSERVATIONS ........................................................................ 18 2.1. DEVIATIONS FROM THE LAWS, POLICIES AND GUIDELINES ........................................... 18 2.2. IRREGULARITIES IN DIRECT PLACEMENT ISSUES ....................................................... 21 2.3. COMPUTATION OF LOSS .................................................................................. 23 2.4. DIGITAL FORENSIC ................................................................Copy......................... 25 2.5. PUBLIC DOMAIN SEARCHES ............................................................................... 26 3. WORK PERFORMED ................................................................................................. 29 3.1. MANAGEMENT DISCUSSIONS AND PROCESS WALK THROUGH ........................................ 29 3.2. REVIEW OF RELEVANT LAWS / POLICIES / CIRCULARS / GUIDELINES / MANUALS ................ 32 3.3. REVIEW OF DOCUMENTS FOR AUCTION AND DIRECT PLACEMENT ................................... 33 3.4. DATA ANALYTICS PROCEDURES .......................................................................... 35 3.5. PUBLIC DOMAIN SEARCHES ............................................................................... 36 3.6. DIGITAL FORENSIC ......................................................................................... 37 3.7. COMPUTATION OF LOSS TO THE GOVERNMENT ....................................................... 47 3.8. VOICE RECORDINGSParliament REVIEW ................................ ............................................. 47 3.9. REVIEW OF CALL RECORDS ............................................................................... 51 3.10. TRAVEL DETAILS REVIEW ................................................................................. 53 3.11. REVIEW OF BANK ACCOUNT DETAILS OF PDs .......................................................... 54 4. PROCESS UNDERSTANDING ........................................................................................ 55 4.1. BACKGROUND .............................................................................................. 55 4.2. PROCESS OF ISSUE OF TREASURY BONDS ............................................................... 57 DETAILED OBSERVATIONS ................................................................................................ 75 5. DEVIATIONS FROM THE LAWS, POLICIES AND GUIDELINES ..................................................... 76 5.1. COMPLIANCE WITH REGISTERED STOCK AND SECURITIES ORDINANCE ............................. 76 5.2. APPROVAL PROCESS OF THE PDD OPERATIONAL MANUAL ........................................... 76 Strictly private and confidential Page 2 of 179 FINAL REPORT | RFP 1 | FORENSIC AUDIT / INVESTIGATION ON ISSUANCE OF TREASURY BONDS DURING THE PERIOD 1 JANUARY 2002 TO 28 FEBRUARY 2015 BY THE PUBLIC DEBT DEPARTMENT 5.3. PDD OPERATIONAL MANUAL NOT UPDATED ............................................................ 78 5.4. DEVIATIONS IN INFORMATION SUBMITTED TO THE MONETARY BOARD ............................. 79 5.5. DEVIATION FROM THE APPROVED YIELD RATES ....................................................... 84 5.6. SUSPENSION OF DIRECT PLACEMENTS ON 27 FEBRUARY 2015 ....................................... 90 6. IRREGULARITIES IN DIRECT PLACEMENT ISSUES ................................................................ 97 6.1. SETLLEMENT OF DIRECT PLACEMENTS MADE BEYOND FIVE DAYS FROM TRANSACTION DATE ... 97 6.2. ISIN OFFERED IN DIRECT PLACEMENTS WITHOUT CONDUCTING AUCTIONS ....................... 104 6.3. SAME ISIN OFFERED TO SAME PRIMARY DEALERS AT DIFFERENT PRICES ON THE SAME TRANSACTION DATE AND SAME SETTLEMENT DATE ................................................. 109 6.4. SAME ISIN OFFERED TO DIFFERENT PRIMARY DEALERS AT DIFFERENT PRICES ON THE SAME TRANSACTION DATE AND SAME SETTLEMENT DATE ................................................. 111 7. IRREGULARITIES IN ISSUANCE OF TREASURY BONDS THROUGH AUCTIONS ................................. 114 7.1. IRREGULAR BIDDING PATTERNS INDICATING POTENTAL LEAKAGE OF PRICE SENSITIVE INFROMATION ............................................................................................ 114 7.2. ANALYSIS OF CANCELLED AUCTIONS ................................................................... 124 8. COMPUTATION OF LOSS ........................................................................................... 132 8.1. COMPUTATION OF LOSS IN AUCTIONS ................................................................. 132 8.2. COMPUTATION OF LOSS IN DIRECT PLACEMENTS ................................Copy .................... 140 9. OTHER MATTERS ................................................................................................... 149 9.1. CONTROL LAPSES IN CONDUCT OF AUCTION AND DIRECT PLACEMENTS .......................... 149 10. DIGITAL FORENSICS ................................................................................................ 152 10.1. OVERVIEW ................................................................................................. 152 10.2. REVIEW OF EMAILS ....................................................................................... 152 10.3. DELETION OF OUTLOOK FILES .......................................................................... 153 11. PUBLIC DOMAIN SEARCHES ....................................................................................... 159 11.1. IDENTIFY ASSOCIATION BETWEEN THE EMPLOYEES OF THE CBSL AND PD ........................ 159 12. ANNEXURES ........................................................................................................ 168 13. EXHIBITS ................................Parliament................................ ............................................ 171 Strictly private and confidential Page 3 of 179 Copy Parliament FINAL REPORT | RFP 1 | FORENSIC AUDIT / INVESTIGATION ON ISSUANCE OF TREASURY BONDS DURING THE PERIOD 1 JANUARY 2002 TO 28 FEBRUARY 2015 BY THE PUBLIC DEBT DEPARTMENT GLOSSARY # ACRONYM DESCRIPTION 1 AG Assistant Governor 2 ASPD Additional Superintendent of Public Debt 3 Acuity Acuity Securities Limited 4 BDO India or We or Us BDO India LLP 5 Bn. Billion 6 BPS Basis Points 7 BO Back Office 8 BOC Bank of Ceylon 9 CBSL The Central Bank of Sri Lanka 10 Client or You The Monetary Board of the Central Bank of Sri Lanka 11 CDS The Central Depository System 12 CEO Chief Executive Officer 13 CID The Criminal Investigation Department 14 CoC Chain of Custody Copy 15 Commercial Bank Commercial Bank of Ceylon PLC 16 Daily FT Daily Financial Times 17 DDMC Domestic Debt Management Committee 18 DG The Deputy Governor 19 DIT Director of Information Technology 20 DOD Domestic Operations Department 21 DSPD Deputy SPD 22 DST Deputy Secretary to the Treasury 23 DVP Delivery versus Payment 24 EPF ParliamentEmployees’ Provident Fund 25 ESI Electronically Stored Information 26 ETF Employees’ Trust Fund 27 Entrust Entrust Securities PLC 28 FAMC Forensic Audit Monitoring Committee 29 First Capital First Capital Treasuries Limited 30 FO Front Office 31 HSBC Hongkong & Shanghai Banking Corporation 32 IBSL Institute of Bankers of Sri Lanka 33 ITD Information Technology Department 34 IT Information Technology 35 ILF Intra-day Liquidity Facility Strictly private and confidential Page 5 of 179 FINAL REPORT | RFP 1 | FORENSIC AUDIT / INVESTIGATION ON ISSUANCE OF TREASURY BONDS DURING THE PERIOD 1 JANUARY 2002 TO 28 FEBRUARY 2015 BY THE PUBLIC DEBT DEPARTMENT # ACRONYM DESCRIPTION 36 ISIN International Securities Identification Number 37 LSSS LankaSecure Settlement System 38 MLA Monetary Law Act 39 MO Middle Office 40 Natwealth Natwealth Securities Limited 41 NIC National Identification Number 42 NSB NSB Fund Management Company Limited 43 Pan Asia Pan Asia Banking Corporation PLC Presidential Commission of Inquiry on the issuance of Treasury Bonds 44 PCOI during the period 1 February 2015 to 31 March 2016 45 PD(s) Primary Dealer/s 46 PDD Public Debt Department 47 PDD Operational Manual Public Debt Operational Manual updated as of 31 July 2013 48 PTL Perpetual Treasuries Limited 49 Report Final Report 50 Review Period 1 January 2002 to 28 February 20151 51 ROC Registrar of Companies Copy 52 Rs. Sri