By Namini Wijedasa   HSBC’s Sri Lanka branch allegedly passed “bogus” loans to agriculture sector clients, to meet a Monetary Board (MB) stipulation that 10% of the loan portfolio of all commercial banks must go towards the agriculture sector, an investigation by the Sunday Times (ST) has found. These loans were passed before the reporting date [...]


HSBC’s alleged ‘bogus’ Agri-loans hoodwink Monetary Board


 By Namini Wijedasa  

Pic by Anuradha Bandara

HSBC’s Sri Lanka branch allegedly passed “bogus” loans to agriculture sector clients, to meet a Monetary Board (MB) stipulation that 10% of the loan portfolio of all commercial banks must go towards the agriculture sector, an investigation by the Sunday Times (ST) has found.

These loans were passed before the reporting date at the end of certain financial quarters, when the figures are officially conveyed to the Central Bank of Sri Lanka (CBSL). The loans–which amounted to short-term cash injections to the relevant corporate clients– were then reversed after the reporting date. The ST has the names of at least two companies involved.

These bogus loans helped HSBC avoid the “penalty” and to hoodwink the regulator. The MB had stipulated that, in the event any banks do not comply with the minimum 10%,

the percentage shortfall as an equivalent amount in Sri Lankan rupees should be transferred to the refinance fund operated by the CBSL.

The ST was first alerted to this malpractice by way of letters sent to this writer. We investigated the claims over a period of several months. At least two of these missives alleged that former Chief Executive Officer (CEO) Patrick Gallagher, who was transferred to HSBC London this month, was involved. However, the bank categorically refuted this.

The letters also alleged that the bank is protecting senior Risk Managers and that, auditors “are covering up the issue”. The Chief Risk Officer (CRO) was suspended in December 2015, but reinstated to protect Mr Gallagher, they state, adding that, all this has led to a compromise of the compliance risk model. “It is always the local staff that suffer and have to pay the price,” one said.

HSBC, which is predominantly a corporate bank, can meet the 10% requirement because it has a few but large agriculture sector clients. However, when calculated at bank level–and because of a high percentage of loans in the retail banking division–HSBC Sri Lanka overall, fell short of the MB’s stipulation.

It was to overcome this shortfall that the bogus loans were allegedly passed. The malpractice came to light after some employees of the bank turned whistleblowers to an internal team of investigators who arrived in Sri Lanka to probe other irregularities.

Our confidential sources alleged that the CBSL was “informally” aware of what was going on but that, former Governor Arjuna Mahendran’s connections with HSBC (he was its former Wealth Manager in Singapore) had allegedly helped avert trouble.

The ST contacted HSBC Sri Lanka for its response, giving the bank sufficient time to respond. It did not deny that a malpractice had occurred but, stressed that, it had been reported to the CBSL (in June, 2016) and that, the employees responsible are no longer with HSBC. It also said the malpractice was no longer continuing. This was confirmed by our own investigations.

“The matter you refer to was investigated by the Bank and reported to the regulator,” an HSBC spokesman said, in writing and in response to questions sent via email. “HSBC senior management is determined to adopt and enforce the highest standards of behaviour and compliance within the company. HSBC has zero tolerance for malpractice or issues relating to conduct. HSBC is committed to doing the right thing: by our people, our customers and our shareholders.”

HSBC rejected the possibility that the agriculture sector clients whose accounts were used for the purpose of the malpractice, were not aware that loans were being passed to them. After repeating the above reply, the spokesman stated: “With regard to the matter you refer to, we found no evidence of the kind you mention”. (That is, that the clients were unaware).

The ST was unable to confirm whether or not the clients knew their accounts were being used–in the short-term–for the purpose of meeting the MB’s requirements. One company’s local office said it could not comment. An email to its top management in Singapore attracted no response.

Asked whether any loans were passed in the financial quarters ending September and December 2015, the HSBC spokesman said: “This is incorrect. Our investigation found no evidence of this. If you have further evidence, please provide that to us.”

The bank declined to provide its 2015 lending figures. “HSBC is committed to the agri-lending sector,” the Spokesman said. “We have a long history here and are keen to grow our business in general in Sri Lanka. We seek to abide by the local regulations regarding the CBSL’s requirement to meet certain levels of lending to this sector. I am unable to comment on our 2015 lending figures.”

HSBC also said, “The matters you refer to came to light because of the disclosures made by local employees.” As reported above, confidential sources and letters received by this writer–the contents of which were verified–claimed the CRO had been suspended and reinstated. The HSBC spokesman said: “The CRO is still employed at HSBC Sri Lanka and is carrying out his normal duties. He is in good standing.”

HSBC denied that the instructions to pass these bogus loans had come directly from Mr Gallagher. “This is incorrect,” the spokesman said. “Our investigation found no evidence of this. The individuals responsible have been dismissed/no longer work for the bank anymore.”

The ST earlier reported that Mr Gallagher was recalled to London prematurely. The bank was asked whether this was done to protect him from punishment. The spokesman said: “This is incorrect. Patrick Gallagher was the CEO for Sri Lanka and Maldives from April 2013, and his official tenure in Sri Lanka was completed in October 2016. He is now based in HSBC UK.”

The ST confirmed–and earlier reported–that Mr Gallagher had been granted an extension (with the regulator’s permission) till April 2017.

HSBC said the regulator, CBSL, “was informed of our investigation, our findings and the action we took (June, 2016).” It added that: “HSBC has zero tolerance for malpractice or issues relating to conduct, and the individuals responsible were dismissed. There were a number of unacceptable irregularities carried out by a small number of HSBC Sri Lanka employees. These incidents were investigated internally during the second quarter of 2016, following disclosures from a number of employees of the bank.”

“The findings of the investigation were reported to the CBSL. It is not our practice to comment on individuals or clients, but the Bank’s policy is to comply fully with all local laws and regulations, and we will continue to work closely with the CBSL, in our commitment to implement and enforce the highest standards of practice and professional standards.”

The ST earlier reported on other malpractices and irregularities at HSBC Sri Lanka. Our first report in June, revealed that some senior managers and staff at that bank were sacked after an investigation into allegations they had fudged incentives-linked performance figures.

It happened like this: HSBC has performance-driven remuneration schemes. The bank sets targets that are linked to incentives, particularly annual bonuses. The Corporate Banking team actively canvasses patronage from the business world in a bid to boost bank revenues.

Once performance targets are set for a particular year, however, there is no added reward for surpassing them or overachieving. It was typical for the HSBC Corporate Banking team (middle management) to surpass their targets in the first quarters of a financial year. But as it did not entail any additional benefit, they had contrived to spread out this increase–or to defer it–to the first quarter of the new financial year, thereby enabling them to kick off that year with a cushion. It effectively ensured that they were not under too much pressure to meet performance targets set for the new financial year.

This was done by manipulating interest rates on loans taken by corporate customers. They would lower the interest rate due on loans by certain percentage points during the final quarter of the year, in October, so that revenues drop. They would catch up for this by increasing the interest rate by the corresponding number of percentage points in the first quarter of the following year.

The practice, carried out by a handful in the Corporate Banking team, was brought to the notice of the Head of Corporate Banking in January this year, through a Relationship Manager who had detected a discrepancy. An investigation was launched, first locally, then by a visiting team of HSBC Hong Kong. The Head of Corporate Banking, who first initiated the inquiry, was fired along with two others.

Meanwhile, three others, including the Head of Compliance and Head of Human Resources, were shuttled out of the bank through a Voluntary Retirement Scheme (VRS) offered exclusively to them. The junior officer in this group was directly involved in the interest rate deferment scandal and it is not known why she was paid off rather than terminating her services. The two senior executives had been part of the interest rate investigation from the outset. Industry sources speculated that the bank had wanted to buy their silence, and gave them no option but to leave.

The three employees were paid significant amounts of money, authoritative sources said. There was so much secrecy that they were instructed to provide bank account numbers outside HSBC for their individual payments to be deposited, it is learnt. The money was then remitted from Hong Kong. All this caused disgruntlement among other employees, as the bank had been neither transparent nor fair in creating a VRS for a select group.

Our investigations also established that affected corporate clients were not notified by the bank that their interest rates were being bumped down, then up, all within a matter of months. This amounts to a fundamental breach of the bank’s contractual obligations to clients.

The ST also revealed how HSBC Sri Lanka allegedly violated exchange control regulations by opening offshore current accounts in its Maldives branch for domestic corporate sector clients who used the Sri Lanka Government’s External Commercial Borrowing Scheme (ECBS), investigations have shown.

The regulator, CBSL, is now looking into the matter. It had been brought up at a meeting on Monday, October 17.

The ECBS was available from January 2013 to December last year. It allowed local companies to borrow outside Sri Lanka up to US$ 30 million or its equivalent value in any other foreign currency. These transactions were done via various Sri Lanka-based banks.

According to investigations by the Sunday Times, HSBC Sri Lanka allegedly facilitated borrowings through the ECBS but, instead of setting up offshore loan accounts for clients, opened current accounts–which are transaction accounts and, therefore, prohibited–on behalf of several of them in infringement of Sri Lanka’s exchange control regulations. Authoritative sources confirmed that the regulator, CBSL, was not informed of this alleged violation.

A spokesman for the affected companies told the ST on October 4: “We were following bank instructions. From what we were told, it’s not an offence and there was no reason to doubt them. We rely on banks to advice us on forex transactions, as they are the experts. Since the story broke, we have asked HSBC to reconfirm that it is not an offence. We are awaiting their response.”

It was also revealed that HSBC stopped the practice after one of its own corporate clients — one that had been interested in using the ECBS — pointed out it would be an offence to open an offshore current account, as the bank was advising it to do.

The ST is in receipt of a letter that has been sent to the Director of Bank Supervision of the CBSL, urging him to take action on the malpractices at HSBC.

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