Panic in Banks

By E.M.G. Edirisinghe

What one finds writ ten into the law of a country is always a positive response of the State to negative social and moral responses of the people. One cannot divorce the operation of the law from the day to day life of the people whose aspirations and perspirations are reflected in the statutory and moral laws of the country.

It is the same with religion which at the outset reacted positively to negative social and moral values and acts working against the common and personal good of man. Even God was silent until He found His children ruining themselves and everything else good.

Then only He sent down Messiahs to remedy the situation with a set of commands and a moral code to put the man on the right path.

Similarly, section 92 (5) of the Inland Revenue Act was written into the statute books in 1984 when it was found that the banks were increasingly becoming a haven to conceal ''black money'', used to identify the earnings not disclosed to revenue. When it was being discussed, debated and finally delivered into law in 1984, there was no panic in banks or mayhem in business circles or shock waves running through the spine of some customers.

Either they considered the law neccessary or thought it was only a warning, not intended to be implemented. Hence the big silence in 1984. Above all, it could have been agreement with politics of the day too.

Section 92 (5) of the Act empowers a Deputy Commissioner of Inland Revenue (DC) to call for information and documents from any person so far as it is relevant and important to collect taxes and safeguard revenue. It is strongly and comprehensively worded to avoid ambiguities, and allows a wider interpretation which could eventually lead to prevent loss of revenue rightly due to the national treasury.

When any person from whom such information is sought by the DC that any person to whom the notice was issued should comply with the notice nothwithstanding anything to the contrary in ANY OTHER LAW PROHIBITING the furnishing of such information any person includes a ''banker'' as well.

This additional explana tory clause is brought into exclude the bankers who take refuge under the confidentiality provisions. A secrecy provision, which while upholding the confidentiality of the deposits, hides the true nature of the monies lying to the credit of some depositors as well, is couched in section 77 of the Banking Act of 1988.

This section in the Banking Act, however, provides an exception which excludes the operation of this secrecy provision to comply with any of the provisions in any other law which includes the Inland Revenue ACT too. The Banking Act had been passed in the legislature 4 years later, means that the legislators as well as the legal draftsman were aware of the presence of the section 92 (5) in the Revenue Law.

Therefore, the Revenue Law being made superior to Banking Law was a conscious, positive act on the part of the Legislature with the revenue law of a country receiving its legitimate prominent share in the statutory law.

The need for further clarification or fresh interpretation could arise out of a genuine doubt about the intention of the section in question or to gain time to stall the superior Revenue Law coming into effect. Safeguarding revenue is of paramount importance which is second only to the security of the state.

According to press reports, two DCC have called for information in respect of persons who have more than Rs. 100,000 in fixed deposits or savings accounts, and it has caused panic among the banks and customers.

I understand the panic among banks but why should the customers panic as Revenue has only called for information from banks. Has the inland Revenue hit the Achille's Heel? No customer who has safely deposited his 'clean money' cleared by Revenue by disclosure, should not have panicked or feared at all.

At least they should have been happy that at last the undisclosed money earned through various sources and means would get rightly taxed and the people of this country could get their due share of the national income too.

On the other hand, why should the banks have panicked? If it is for the reason of additional work cast on the staff for the amount being as low as Rs. 100,000/-, it is genuine and understandable as the work load in every bank could have been very heavy. If it is for another reason such as some customers withdrawing their deposits in large sums, it is an unwarranted fear.

Application of the law to all such deposits in all banks without any discrimination, people withdrawing money from one bank will not have another bank immune to the operation of the section 92 (5).

So the option for such customers will be either to keep the deposits as they are or stack them in bundles in a safe house. But, no place is safer than the bank.

Yet there is another reason that the money so withdrawn may be smuggled out of the country, and new deposits too, will cease to flow into the banks.

Hoarding and smuggling money is even today a widely practised anti-national act, by the more affluent in particular. It is common knowldege that many acts detrimental to our national security and national economy are being perpetrated by our own citizens living here and abroad.

Even in future these anti-national acts will continue. For many, it is natural to cherish and crave for their material possessions more than for their moral and spiritual qualities.

What is important here is not that the customers (may be a very few) are frantically withdrawing the money, but the banks trying to protect such possible revenue frauds who alone could have a good reason to withdraw money in such a hurry at the slightest sound of Revenue calls.

Should the banks be stores to hide black money which has failed to pass through the tax sieve? How far a highly respected institution like a bank knowingly or reasonably knowingly help anyone who may be wilfully and surreptitiously trying to avoid paying taxes legitimately due. ''To Ceaser what's unto Ceaser''.

What the bankers call blatant violation of the vital common law principle of confidentiality in banking is spoken in strong words in defence of whom they think are 'scared' of Revenue for reasons best known to them. The common law principle in this regard limps and falls with the section 77 of the Banking Act yielding to the superior Revenue Law.

State must survive first for the banks to exist next. Common good should finally supercede the individual interest. Certain religions profess that those who kill humans in defence of religion and motherland are born in heaven. Such is the extraodinary importance of common good. In Buddhism what you give to the community is more meritorious than what you give to the individual.

Since section 92 (5) is yet to be judicially interpreted, the bankers are right in their opinion that a correct interpretation of the law in the light of the intention of the legislature, interests of the business and in what manner it should be given effect to by the Revenue should be obtained.

Since both Acts carry penalties for violation of the relevant secrecy provisions, it is also necessary for a judicial review as to which law concedes to the other and to what extent.

Income upto Rs. 144,000/- is exempt. But, that is not the end of the story. If someone's sole source of income is interest, he should have at least around Rs. 1.4 million in one or more accounts to be made liable to income tax. However, if he has other liable sources, even 100,000 rupees in a single deposit is sufficient to attract liablility.

Moreover, there are instances of a single individual making 30 to 40 deposits of Rs. 100,000/- each in different accounts to distract both income tax and witholding tax. Also, what matters most is not really the interest, but how the money was received to make the deposits in whatever form, which itself is liable if it is from a taxable source.

So if there are enough reasons over-riding the gentle cover of confidentiality why should the deposits be probed within the legitimate limits. Also, some customers and the bankers may have more than one reason to find a loop-hole or a narrow interpretation disregarding the greater good of the country and the good intention of the legislature.

A relevant case illuminat ing the law in this regard is reported in the UK Tax cases. So according to R. v O' Kane and Clarke (1996), notice under section 20 (3) of Tax Management Act, the relevant section parallel to section 92(5) of our law, was issued to the Bank requiring the latter to furnish certain information in respect of certain specified persons. The only difference in our law is that it can call for any information from any person to realise the objectives of the Act. The notices issued under section 20 (3) were quashed, and the Courts held.

1. It is permissible by means of section 20 (3) to require the Bank the delivery of all correspondence between the Bank and the identified persons in respect of identified accounts.

2. The service of the notices on the Bank was not in breach of any legitimate expectation on the part of the bank.

3. The considerable compliance cost on the Bank in identifying and producing material was highly oppressive with no regard for the burden imposed on the Bank.

The notices on the Bank were quashed generally as that they were grossly oppressive and unfair and thus irrational.

Hence the judiciary in this case has clearly found no contravention of the common law relating to confidentiality towards the customer the cover under which the banks wish to take blanket cover to 'protect' the rights of the customers.

It is pertinent to lay down here that in O 'Kane's case the Bank's attack on the notices for documents was under the following heads of which only the first part of the last was accepted by the judiciary.

1. The notices are bad because they go beyond what s. 20 (3) allows.

2. Notices are vitiated by procedural errors.

3. The notices should be quashed on the ground that they are irrational, as that expression is used in the field of judicial review or issued in breach of certain legitimate expectations of parties in the position of the Bank.

The courts inter alia held that the investigation of alleged revenue fraud may require an individual to give acccess to documents which would not normally be in the public domain..... The Courts while recognizing the needs of Revenue had also to safegard the interest of the individual.

"To work, capitalism requires a secure moral foundation in society, and public bodies committed to something other than the ineluctable triumph of market forces. Without those, capitalism can bring disasters" (Lessons from Russia - the Tablet).

As the banks now have successfully or effectively stalled the operation of section 92 (5), at least as far as it is applicable to banks, that itself is good reason for both Revenue and the banks to pursue the matter without delay as the Revenue has to find the money for the government to run, and the Banks have to function as part of the engine of growth.

SLSI moves to its own building

Sri Lanka Standard Institution's (SLSI) head office shifted to its own building at No. 17, Victoria Place (Off Elvitigala Mawatha), Colombo 8 last week. The Institution has rented out offices for the last 33 years, a SLSI release said.

This move will save considerable expenditure incurred annually as rent and facilitate better co-ordination and supervision of different divisions.

The first phase of the Building Project was completed in 1993 and the Laboratory Services Division was shifted to the new location in the same year. The third and the final phase presently under construction will be completed in March 2000 and will provide accommodation to the rest of the divisions presently located in Colombo 4 and Colombo 7.

Absence of a central location for the Institution has inconvenienced the business community particularly those in the Imports/Exports trade for a long time. SLSI is taking steps to provide all services under one roof from year 2000. The new telephone numbers are: 671567 to 671572 (05 lines) and the fax number is 671579.

SGS certifies hotels for Green Globe requirements

SGS has worked closely with to TTC to develop Green Globe standards, a specialised international standard for travel and tourism.

A recent auditor training course for the Green Globe standards, concluded successfully with delegates from India, Nepal and Sri Lanka participating. SGS spokesman said representatives from Hotel Kandalama and Third Wave Consultants and Trainers also participated in the programme.

Green Globe, described as the environmental "arm" of World Travel and Tourism Council (WTTC) is a membership organisation with over 100 countries. Created in 1994, it is dedicated to improving environmental practices and increasing environmental awareness in the travel and tourism sector.

WTTC, with backing from the Earth Council, studied the well known Agenda 21 (one of the key achievements of the 1992 Rio summit) topics and the ways in which they relate to the travel and tourism sector. From the study key areas were identified where improved performances can contribute directly to sustainable development

The Green Globe Standard covers 6 important performance elements.

1. Waste reduction, re-use and re-cycling.

2. Energy efficiency, conservation and management.

3. Management of fresh water resources.

4. Waste water management.

5. Environmentally sensitive purchasing policy.

6. Social and cultural development.

SGS has worked with WTTC to develop the Green Globe Standard which is a specialised international Standard for the travel and tourism sector.

SGS is hoping to conduct training for consultants who intend to develop quality systems for Green Globe, awareness programmes for Managers and Chief Executives in the near future.

SGS Lanka will concentrate on the Sri Lankan market and Maldivian market for certification and training services.

SGS Lanka (Pvt) Ltd., an affiliate of the SGS group, is the world's largest auditing, inspection, testing and verification organisation. SGS has certified over 24,000 organisations to ISO 9000 and 14,000 standards.

Common rules for global finance

Thomas A. Russo, Managing Director and Chief Legal Officer of Lehman Brothers, has called for a single body of voluntary rules to govern international finance that would replace the existing multiplicity of conflicting rules imposed by regulators and self -regulators worldwide.

Addressing the Financial Services and Insurance Commission of the International Chamber of Commerce, Mr. Russo said: "These different regulatory requirements fragment and divide businesses in a manner that often defies logic and prudent management.

He said that from a corporate point of view, it would be far preferable to be subject to a single set of rules embodying best practices that would be drawn up by the financial services industry participants and associations, and endorsed by governments.

Mr. Russo suggested starting with a "tabula rasa" - an assumption that multiple rules, regulatory bodies and jurisdictions did not already exist.

The guiding principle for any new regime should be transparency, he said. "Transparency is to a marketplace what freedom was to the American Revolution. It is a goal to obtain and, once obtained, a guiding principle to maintain." He went on to define transparency as the key factor in stripping away confusion, ambiguity and conflict between regulatory structures.

Implementing transparency would involve the assumption of seven guiding principles - the key chapters in a "mythical textbook of best practices", he said. They are:

• Risk Management: incorporating properly staffed and equipped risk management teams for all financial institutions, reporting at Chairman or CEO level, and operating independently of the business.

• Credit Procedures: operating with similar disciplines, aggregating exposures where possible and netting where appropriate.

• Sales practices: including codification of the relationships between a financial institution and its counterparties, aimed at avoiding subsequent litigation, and education for sales forces particularly around leveraged or derivative products.

• Credit information availability: designed to address the issue of outdated or opaque information about counterparties such as hedge funds. The extent of disclosure would depend on a mutually agreed template for disclosure.

• Documentation practices: designed to include credit approval and emphasizing the authority of signatories, and controlled by a 'documentation deficiency list' which imposes specific time periods for the execution of documentation.

• Enhanced roles for internal and external audit and compliance departments: they would assume greater responsibilities under the 'tabula rasa' regime where regulatory bodies do not exist and rules are enforced voluntarily.

• New role for government: it would differ from the usual role of regulator, and would imply the provision of more information to governments globally to facilitate judgements regarding systemic risk.

Commenting further on his 'tabula rasa' approach, Mr. Russo argued that a new system must involve end-users of financial markets such as pension funds and international money managers, in order to achieve the goal of transparency. However, it would be misleading to devise specific regimes for types of market players such as hedge funds. A more consistent framework would be an overall approach to systemic risk that avoided the contradictions arising from "entity typecasting", he said.

Having set out the "mythical best practices" approach, Mr. Russo discussed how change could be achieved. Citing the successful work of the Derivatives Policy Group (DPG) in drawing up voluntary guidelines governing over-the-counter business, he stressed the importance of government encouragement. A G-8 meeting, supported and aided by a prominent group such as ICC, would arguably be the most appropriate forum for the project.

With the project launched in this way, and government encouraging the development of the seven chapters, industry could proceed to write the code. Arguing the case for voluntary compliance, Mr. Russo noted: "Market participants tend to embrace endeavours in which they participate and resist restrictions superimposed on them."

UMLL: slight decrease in turnover

During the period 31 March to 30 September 1998, United Motors Lanka Ltd. and its subsidiaries reported a consolidated net turnover of Rs. 471.6 million, a decrease of 2.5% over the net turnover of Rs 483.4 million achieved in the first half of 1997/1998. The Group Profit Before Tax of Rs. 78.6 million and Group Profit After Tax and Minority Interest of Rs. 52.4 million improved by 3.5% and 5.4% respectively over the results of the corresponding period of the previous year.

With the introduction of the "Montero" jeep to the Mitsubishi range of vehicles early this year, vehicle sales during the first six months of 1998 improved marginally over the first half of 1997/98, although profitability was lower due to reduced margins. While the workshop recorded an improvement in turnover and profitability, spare part sales were marginally below the figures reported for the first half of 1997/1998.

Despite unfavorable market conditions, there were more tractor sales during the six month period than in the corresponding period of the last financial year. The Chinese-built EMEI 7A model in particular, proved popular. Sales are likely to increase in the second half of 1998/1999, following a widening of the dealer network and further technical improvements introduced to the EME1 tractors.

UMLL subsidiary companies contributed Rs. 22.2 million to group turnover as against a turnover of Rs. 6.5 million recorded in 1997/98. This increase was mainly due to the incremental revenue from AUML (Autogas) Ltd.'s first LP gas filling station which commenced operations in April this year.

Construction work on the building complex at Orugodawatte which will house UMLL's new vehicle workshop, is nearing completion.

The company is in the process of sourcing equipment for the workshop in order to provide Mitsubishi vehicle owners with modern facilities and a superior after- sales service.

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Commercial Bank in Moratuwa

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Sam Stembo honoured by APMF

Mr. Sam Stembo, Executive Director of the Sri Lanka Institute of Marketing (SLIM) became the first South Asian to be honoured by the Asia Pacific Marketing Federation (APMF), for his contribution to the Federation.

Mr. Stembo began his marketing career at Elephant Lite Corporation Ltd., as a Sales Representative and rose to the position of Sales Co-ordinator and then went on to work as an Area Sales Manager of George Steuart & Co Ltd. He also worked at The Finance Ltd. as the Sales Manager of the Nugegoda branch, Account Planner of Mel Ads Ltd., Marketing Manager, GTE Directories Lanka (Pvt) Ltd. before joining the Sri Lanka Institute of Marketing as its Executive Director.

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Seminar on "Enhancing Business Efficiency"

The CIMA IT Centre conducted a day seminar on "Enhancing Business Efficiency through voice and date communication facilities" to create awareness on the diverse aspects and use of voice and date facilities available in Sri Lanak on 18th November 1998 at the Ceylon Intercontinental, Colombo. The seminar was addressed by Prof. Rohan Samarajiva, Dr.Gihan Dias, Dr.Mrs,Dilleka Dias, Mr.Gihan Wanigasekera, Mr.Kithsiri Samarasinghe and Dr.Nihal Ramanahake.

The Official Telecommunications Partner for the seminar was Dialog GSM

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