Mauritius finds itself once again publicly in the condition of a place that has harboured some sort of a prolonged “mischief” in a key financial group of the country. Its regulators have been publicly projected for inefficiency and for having been circumvented by defaulting operators. Singaporeans must thank their stars that they haven’t been publicly projected in such a poor condition
The redacted version of the nTan report on the British American group (BA) was released to the public by the Bank of Mauritius (BoM) on 27th January. The Singaporean firm was tasked by the BoM to examine “the complex financial transactions carried out by Bramer Banking Corporation Ltd (In Receivership), its related parties, affiliates, shareholders, directors, and its connection with other financial institutions”. Eleven only of the 90 pages of the report deal with the Bramer Bank, the bulk of it covering the activities of the BA group’s other affiliates, chiefly the British American Insurance (BAI) and the Bramer Property Fund (BPF) and the group Chairman, Mr Dawood Rawat.
Thus, the Bramer Bank, over which the BoM has jurisdiction but not over the others actually examined by the Singaporean consultants, proved to be a useful Trojan horse to enable them to probe into the intricate systems adopted at the BA group level, according to the report, to override rules and regulations in place since a long number of years. The objective of these rules and regulations is to prevent abuse of our financial system and its regulatory rules by unscrupulous and/or negligent operators. The report states that operators flouted regulatory rules when these stood in their way to subvert due processes for private advantage.
Much before this Report, there was a suspicion among members of the public – not necessarily by only those who are financially literate – that the BA group’s apparent unending expansion into diverse areas of economic activity was merely the tip of the iceberg. That, one day or other, cracks would appear in the edifice and sweep it all, along with others who put their trust in it, unless timely corrective action is taken.
Much before a banking licence was given to the BA group in the final days of 2006, regulators would have had grave doubts about its financial mis-governance. The general view was that it wasn’t conducting itself in a manner as to deserve, on top of the various licences it had already been able to secure – deposit-taking, foreign exchange dealer, Western Union, insurance, brokerage, financial leasing, asset management, etc. – to be also given a banking licence, giving it even more room for making transactions going below the radar. Which happened in December 2006, that is, just before the Review Period – 2007-2014 –assigned to the n’Tan investigators.
That would only have encouraged it to take on even more below arm’s length transactions, making it more difficult to fetch it back to financial soundness in the event of a crash. Regulators’ pre-2006 apprehensions were reflected in the IMF/World Bank’s Mauritius’ Financial Sector Assessment Programme (FSAP) of those days, calling upon the authorities to bring the situation under control. Political patronage decided otherwise.
What the nTan report brings out today is the same as the objections regulators would have had at the time about its loose regard for complying with laid-down rules and regulations, its employment of questionable accounting practices and systematic over-valuation of asset values to paint a brighter picture of itself than was actually the case. If anything, the nTan report suggests that there has taken place an amplification of objectionable practices involving the ever more complex use of sister companies in the group to avoid explicit regulatory scrutiny.
The n’Tan report states that two of the BA group’s major players, notably the BA Insurance (BAI) and the Bramer Property Fund (BPF), became key instruments in the improper diversion of funds raised from the public by way of insurance policies issued and investments drawn in.
According to it, this is where most of the financial damage was wrought to the detriment of the public and in defiance of financial regulatory rules. The report reckons that total funds amounting to Rs 51 billion were raised by the two of them during the review period 2007 to 2014. During the same period, the group had to redeem insurance policies and repay investors a total amount of Rs 34 billion. Income from investments was meagre, out of tune with the returns promised to policyholders and investors. In other words, most of the business was unprofitable and unsustainable.
After meeting normal operating expenses, the report goes on to state that the group perpetually faced a situation of cash shortfall to meet commitments falling due. This is where sister companies would have been employed by means of a series of cross-flows of related party investments, supported by aggressive above-market-price marketing of financial products to collect additional needed cash, to bridge the financing gap. In the process, significant sums would have been appropriated by loss-making related parties.
The investigators come up with a figure of Rs 17.3 billion of this style of related party investments over the 8-year period, far in excess of the regulatory or prudentially safe limits for each one of the financial institutions concerned. The Report indicates that the group managers would have misled the regulators by concealing and under- or mis-reporting the actual exposures in this regard, going as far as window-dressing a last minute capital injection of Rs 3.6 billion in the face of objection raised by one of the external auditors, Messrs KPMG, in one of the earlier years.
Conclusions and implications for Mauritius
There was “something rotten in the kingdom of Denmark”. This rot did not occur all at once. Regulators had at the early stage spotted out the flaw and the malpractice which served to disguise the “black hole” before it assumed unmanageable proportions. The report of n’Tan states that the hole deepened in the years after.
There are two possible interpretations for this situation.
First, the British American group may have started its business in the very early period with an objective to honestly grow and vie against the much larger groups then operating in Mauritius, perhaps in a more limited range of activities than the others. But ambition interfered. That would explain the steady diversification and expansion of the business from insurance to property, to trade and investments and retail outlets, a hospital and eventually stepping out of the country.
With time, the size of the portfolio would have become unmanageable. It must then have considered that having a bank of its own would support it in much the same way as the original conglomerates of the country had been supported by banks which were highly dedicated to them. Hence, the banking licence of 2006 and eventually the Bramer Bank. This was miscalculated. Many businesses – here and overseas — have grown through a series of all-and-sundry mergers and acquisitions to finally implode under the weight of mountains of debt and lack of adequate profitability and weak oversight of the entire range of the inflated business.
Why, then, did the promoter of the Group not stop for a moment, excise away unsupportable activities and limit himself to a smaller core area of viable activities? It is in fact the route chosen by outsized companies to get back on their feet again. But the promoter of the BA group didn’t do that. This explains the second reason why the situation would have gotten out of hands with time.
To shrink the company to manageable size would have been perhaps out of question for a promoter who had so far cultivated a high profile image of himself in business, political and social circles. This high profile and display of an expensive lifestyle would have attracted all the major political parties which allegedly had obtained financial support from the BA group over time. In the circumstances, none of the politicians in power would have contemplated setting up a Commission of Inquiry to sort out matters in the public interest before they got out of hands.
Dawood Rawat must have thought that an ever-stronger business presence would secure political patronage and support from politicians across the board. He would lose it all if he downplayed the scale of the business.
Ruling out this option, the BA Group would have proceeded from exaggeration to reckless management in the hope that the situation would eventually improve. This kind of overconfident hubris, backed by politicians from all major political parties alternately coming to power, has intimidating effect on subordinate management which, when made fully subservient, leads to disaster. This is what might have landed the BA Group into a deepening spiral of persistent illiquidity and unprofitability as expansion proceeded apace.
The problem is there are occasions when even tried and tested politicians contribute to this kind of downfall by interfering in and preventing the regulatory redress process from taking steps to improve the situation. Knowing this, regulators would not press the point or act considerately to save the business or as much of it as possible before the damage done takes unmanageable proportions. The latter need not be seen therefore as wilful defaulters, knowingly precipitating the downfall of business. They are the victims of a system of camouflage hidden under the veneer of a high-level political-business nexus. This is why advanced countries speak about the necessary independence of regulators.
The n’Tan report highlights the large scale of diversion of money having taken place. This goes in the direction of pointing out guilt, wilful misbehaviour and gross negligence. It is the stuff out of which punishment is contemplated. It is not the stuff which indicates how, despite all the damage done by the various parties contributing to this disastrous situation, repairs should be done, which bits and pieces can be stitched together to get the lost serenity of the country back again. The investigators can’t be blamed however for not addressing such issues if they have been tasked to limit themselves to fault-finding in the BA group, as their terms of reference show.
Mauritius finds itself once again publicly in the condition of a place that has harboured some sort of a prolonged “mischief” in a key financial group of the country. Its regulators have been publicly projected for inefficiency and for having been circumvented by defaulting operators. Singaporeans must thank their stars that they haven’t been publicly projected in such a poor condition.
Those with a good memory will recall how when the ING-Barings Bank bankruptcy scandal broke out in Singapore in 1995, it was expeditiously shelved away. So, Singapore has kept maintaining its Five-star regulatory rank in the world. By not throwing mud on each other, we should perhaps learn from them how they do it and how they’ve kept growing the size of their financial sector whereas we may have fudged it up even where the going was good for us. Quite some business that would normally have materialized in Mauritius has now landed in Singapore: why should they, in Singapore, blame themselves for it?