Two recent high-profile financial institution debacles has provided a timely reminder of the importance of good corporate governance, and also, the importance of the ethical behaviour of high-ranking officials in private and public sectors, according to a top capital market official.
“Even the conduct of internationally renowned Auditors was questioned in both these cases, in the sacrosanct areas of ‘due professional care’ and ‘conflict of interest’,” Udayasri Kariyawasam, Chairman of Sri Lanka’s Securities and Exchange Commission (SEC) said, delivering the keynote address at the 27th International Symposium on Economic Crime at Jesus College, University of Cambridge last week.
“In developing countries like Sri Lanka, we generally associate corruption with public-sector enterprises. In the present scenario, this perception needs revision. Many instances of corporate fraud in Sri Lanka and elsewhere have been associated with private-sector enterprises, with public-sector officials playing a secondary role,” he said.
He said that there are two effective antidotes to corrupt corporate practices. “The first is good corporate governance founded on ethical management practices, which are deeply embedded in an organisation and formally enforced. The second is Public Interest Litigation, if the detrimental results can be reversed, as in the case of corrupt privatisations of public enterprises. We have had two such instances in Sri Lanka within the past few months, where the Supreme Court reversed two major privatization transactions, effected six and seven years ago, as part of the Public Enterprise Reform Program.
The Court censured and fined several high-ranking individuals including top government officials,” he said.
He said that a commercial bank in Sri Lanka, which had an ‘inflated’ remuneration scheme for its treasury operations staff, discovered a breach of procedure in its dealing room which led to a huge exchange loss, which caused the two top officials of the bank to resign, triggered an investigation by the Central Bank, and a probe by the SEC into possible insider dealing in share sales prior to the discovery of the forex loss.
“Clearly, the ‘greed factor’ tempted some officers at this bank to cut corners, and take disproportionate risks due to the exorbitant treasury bonuses they could earn, if things went well. Indeed, in the absence of proper control procedures, if things went well as they expected, their improper actions would have gone undetected, they could have covered the losses, and even won accolades for their outstanding performance in forex trading.”
“A very large group of successful companies in Sri Lanka, carrying one of the oldest and most respected brand names, got into financial difficulties recently and started collapsing like a house of cards. Closer scrutiny revealed a dubious corporate structure and operations that were very far from good governance.
There were over 250 companies in the group, with a complex holding company structure that was hard to trace. They all had the same chairman and many common directors. Formal management procedures and internal controls were almost nonexistent. Some companies were regulated while others were not.
In a criminal breach of trust, the unregulated ones used their common name to mobilise public deposits by offering very high interest rates,” he said, adding that the Chairman of the group and many of the directors are currently in remand custody. “Probably for the first time in the world, a Sri Lankan court has sanctioned the conduct of a board meeting in prison to pass a resolution to sell the assets of a company to refund the depositors’ money,” he said.