N’Tan Report Revisited

By S. Modeliar

By any standard what took place at the MCB goes against all basic principles of good governance that a bank should adhere to. Flouting of rules, failing to report frauds, granting loans to defunct companies and trying to justify all this as being sound banking practices cannot be good governance

It will be recalled that following the still unsolved mystery of the disappearance of nearly 900 million rupees of the National Pensions Fund (NPF), the Central Bank asked for a forensic auditing in the deposits made by NPF at the Mauritius Commercial Bank (MCB). N’Tan Corporate Advisory carried out that auditing pursuant to the relevant provisions of the Banking Act. The then Leader of the Opposition, Navin Ramgoolam mentioned that an amount of 1.5 billion rupees have been siphoned and that they concerned the accounts of about sixteen customers of the MCB. He questioned the then Prime Minister, Paul Bérenger in Parliament on that state of affairs. The answer of the Prime Minister was that the allegations of Navin Ramgoolam were simply false, ridiculous and irresponsible. Paul Bérenger even agreed to make the report public. This never materialized.

Against a backdrop of attempts at cover ups and attempts to gag the free press under the MMM-MSM regime of 2000-05, the facts contained in the N’Tan report on the mismanagement of the MCB were made public by a section of the press. When Mrs Rojooa reported to the then Prime Minister that the NPF account with the MCB was showing a disturbing state of affairs, Sir Anerood Jugnauth informed his then Minister of Finance Paul Bérenger who decided not to make the matter public immediately but to wait a few days. No wonder that, twenty four hours after the discovery of the missing deposit, overdraft facilities were given to two companies Handsome and Magarian on 29 January 2003 in the amount of 16.5 million rupees. And such overdraft facilities were afforded to defunct companies. Since the companies had been struck off the register of companies by the Registrar of Companies the N’Tan report rightly comments as “Handsome and Magarian had been struck off by the Registrar of Companies, it is not clear who was benefitting from the overdraft facilities extended to the accounts operated in the name of these companies.

Paul Bérenger stated unequivocally in Parliament that he did not get a copy of the N’Tan report. Nobody believed him. The leading papers even dismissed this assertion as puerile and one leader writer even suggested that he had not said the truth. The expression used was “mensonge d’Etat”. Public opinion did not believe him either. Only the MCB and the Central bank, then headed by Mr Basant Roi, who openly showed his affinity with the MMM at the last elections, believed him. Navin Ramgoolam made the allegations presumably after reading the Report. Paul Bérenger apparently did give instructions to the Central Bank to make the report public.

Damning censure of senior management

From the extracts of the Report that appeared in the press it is clear, until the contrary is proved, that there is a damning censure of the senior management of the MCB. The Report also refers to the complacent and indulgent attitude of the Central Bank towards the MCB. On the senior management, the Report observes: “It is a matter of serious concern that any bank, let alone a bank with the standing of the MCB, would allow the reported transfers (Rs 3,3 billion). It is difficult to believe that these transfers took place without the knowledge or acquiescence of senior management staff of MCB. The N’Tan report accuses the Central Bank of having allowed considerable latitude in its dealings with the MCB. As an example, the Report refers to the illegality in which that bank was operating for a decade as the MCB refused to ask for a Banking Licence to run the Mauritius Commercial Bank Finance Corporation (MCBFC).

It would appear that the Central Bank was not in a position to exercise any authority over the MCB in that respect and so the illegality persisted. The comments of the forensic auditors on this aspect constitute an indictment sheet against the Central bank for its total lack of authority over the MCB. The investigators recommend that this complacent attitude should cease. This conclusion of the investigators only confirms the incestuous relationship that has existed between the Central bank and the MCB. The N’Tan forensic team also found that the “Internal Audit Department of the MCB is not staffed with officers who are professionally qualified and there was not a formalised audit program.” The report also refers to a lack of supervision on Risk Appraisals. These Internal Control Weaknesses were the subject matter of a comment by DCDM who in 1999 wrote: “It is our view that the Internal Audit Department would have uncovered the transfers of funds from NPF/NSF, if they had taken a more systematic approach to internal audit of the Fixed Deposits Department.”

Another very disturbing aspect of the Report relates to illegal transfer of funds from the fixed deposits of companies and transferred to companies that allegedly formed part of what the forensic auditors call companies forming part of the MCB Galaxy, the companies being Air Mauritius, Anglo-Mauritius, General Construction, Overseas Telecom Services (formerly Mauritius Telecom), Shell, the Sugar Insurance Fund Board, the Sugar Industry Pension Fund, the Swan Insurance Company Limited and United Docks Limited. In that vein, the Report quotes in details the ramifications of a transfer of 49 million rupees from the Sugar Insurance Fund Board in 1991:
“On 31 December 1991, SIFB requested MCB to place Rs 49,000,000, in the form of a cheque drawn on the Mauritius Sugar Syndicate payable to SIFB and crossed “account payee only”, on FD. Instead of paying the proceeds of this cheque into the FD account in the name of SIFB, the payment was in fact combined with monies of other customers and paid to PAD. An FDR (Fixed Deposit Receipt) dated 31 December 1991 in the amount of Rs 49,000,000 was issued to SIFB by MCB. However, the books and records of MCB did not reflect an FD of that amount having been placed with it. As such, the FDR in question did not reflect the true position of the FD of SIFB. On 6 January 1992, the Rs 49,000,000 that had been transferred from SIFB to PAD was reimbursed by PAD and paid into the SIFB FD account.

The auditors of N’Tan ask the Central Bank to investigate this matter further, as they did not have access to all the relevant documents. This is what the forensic auditors write: “We must caution our findings were obtained on a limited review of the books and records of the MCB and MCBFC for the related period.”

The other illegality referred to by the Report concerns the account held by Pierre Doger de Spéville. The forensic auditors say that “these transactions are of profound significance because it appears that Doger de Spéville’s monies were being held by the MCB, but not properly recorded in the books and records.” They also ask a very pertinent question when they write “the key question is what benefit was being sought by M. Doger de Spéville or MCB through this treatment,” the treatment being “Rs 15,8 millions that was handed over to M. Doger de Spéville in 2003.” The auditors ask what was the source of that money? They ask for a thorough investigation in that matter. They also show concern when they state “the most obvious issue that comes to mind is how widespread the practice is. For instance, the existence of other such accounts held at MCB.”

The extracts of the Report, as they appeared from the daily Le Mauricien, show that the senior management was by-passing rules and regulations and was operating in a state of total lawlessness. The comments of the N’Tan report on this illegal practice could not be more castigating and damning when it states that “when the MCB Group Company Transfers were allowed by MCB’s senior management staff, either directly or by failure to act, various messages were inevitably sent to members of the staff. One was that the internal controls that were in place to prevent such Transfers were not sacrosanct, and might be ignored or overridden.” These transfers were done over a long period of time according to the report, “from more than a decade ago, MCB allowed the occurrence of Transfers, thereby breaching a fundamental tenet of banking practice, i.e. that customers’ monies are not transferred or utilised without their consent. There appears to have been a lack in adequate internal controls or, where such controls existed, a failure to properly implement them.”

The criminal aspect of the practices is highlighted by the following passage of the report — “these transfers took place because senior management staff at MCB overrode or allowed the overriding of its existing internal controls. Calls by various parties, including BoM and MCB’s external auditors, for specific improvements to be made to enhance internal controls went substantially unheeded. In addition, the Report will show that MCB may have wilfully taken steps to avoid BoM regulations, guidelines and other pronouncements.” Note the use of the word “wilfully”, which connotes full criminal knowledge and intention. Who then acted willfully at the MCB regarding transfers? When the N’Tan report says that the only party that appears to have benefited from the Transfers was MCB, one should not be surprised. Who then benefited from these transfers at the MCB? No wonder that Le Mauricien ironically commented then “Jeux d’écriture” known or acquiesced to!

Unsound practice

Another glaring example of unsound practice and which the N’Tan report highlights is the transfer of monies from fixed deposits of customers to the accounts of companies close to the MCB. These illegal transfers were carried out to bypass the rules and regulations of overdraft facilities in non-priority sectors of the economy. The forensic investigators explain how this was operated. A company that had reached the ceiling of its overdraft facility could not be given additional facilities. What the MCB was doing was to transfer amounts of money from other fixed deposits and credit them to the accounts of these companies so that it would look as if these companies were not being afforded facilities over and above what they were entitled to. The monies were left for a few days in the accounts of these companies close to the MCB and retransferred to the original accounts by means of office cheques. The report states: “In almost all of the cases we reviewed the transfers were only for a few days straddling month-end after which the transferred money were paid back to the customers’ accounts. MCB even allowed an account to be set up in its own name, which was used, inter alia, as a conduit for part of the monies that were transferred from and to MCB’s customers. This account was allowed to exist at MCB, and was reflected in the books and records of MCB, without any query being asked.”

The principal beneficiaries of these generosities from the MCB were three MCB-Related Companies, namely MCB Properties Ltd, Promotion and Development and Les Villas de La Preneuse. All these companies were engaged in land dealings, a sector which was not considered a priority then. The monies were transferred initially from the accounts of the following companies, Air Mauritius, Anglo-Mauritius Assurance, General Construction, Overseas Telecommunication Services, Shell Mauritius Limited, Sugar Insurance Fund Board, Swan Insurance et United Docks. Some brow rising is provoked by this ingenious method devised by the MCB to by-pass the Credit Ceiling Regulations and Reserve Ratio Regulations imposed on commercial banks by the Central Bank.

Mr Gerard Hardy, chairman of the Board of Directors of the MCB, tried to justify these transfers. In a communiqué issued by the MCB, he stated that it is not true to state that only MCB related companies benefited from that largesse of the senior management of the MCB. But Mr Hardy was cautious enough not to reveal the names of other beneficiaries. Why, may we ask? The transfers were made so as not to prejudice the economy and as such the MCB afforded facilities over and above the ceiling authorized. In that process the MCB borrowed from other clients with their consent in order to create an appearance of compliance with Central Bank regulations. If money was being borrowed even for a few days from these other clients, was interest being paid to them and if the answer is in the affirmative did the books of the MCB and those of the companies reflect that fact? Mr Hardy added that the MCB “a choisi des pratiques bancaires qui contribuaient au développement économique plutôt que d’adhérer à un strict respect des procédures de contrôle de crédit dictées par une politique monétaire restrictive, imposée par le FMI au pays, et qui a d’ailleurs été abolie depuis 1993.” Was it a case of the MCB arrogating to itself the right to bend the law and formulate its own rules according to a given situation?

The other presumed culprit is the Central Bank. The report comments on this as follows, “given the leeway allowed it by BoM, and its standing in Mauritius, it is possible that, over time, MCB’s position at the pinnacle of Mauritius banking sector and economy allowed its senior management staff to lapse into complacency and perhaps even arrogance.” The vital question is why did the Central Bank, whoever the Governor may have been, not take any action? The international community is moving fast from a culture of impunity to one of transparency, investigation and punishment. We seem to be taking the retrograde step to keep the flame of impunity burning for some sacred cows that have enjoyed impunity for too long. These days are gone.

By any standard what took place at the MCB goes against all basic principles of good governance that a bank should adhere to. Flouting of rules, failing to report frauds, granting loans to defunct companies and trying to justify all this as being sound banking practices cannot be good governance. MCB did not follow these basic values as well as the basic principles on good governance in the banking sector issued periodically by the Basel Committee on Banking Supervision. It did not have proper internal control as highlighted by the N’Tan report. It flouted rules of the Central Bank on credit ceilings to favour a group of people close to it.

* Published in print edition on 23 July 2010

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