On the eve of the Golden Key crisis, Messrs Lalith Kotelawala and Khavan Perera issued a joint communiqué to all the depositors on December 3, 2008, which contained the following statement.
“There has been a fair amount of speculation recently regarding the ‘legal status’ of our operations. As a credit company we do not fall within the categories of a Banking Institution, Non Banking Financial Institution or a Leasing Company, the broad categories of institutions regulated by the Central Bank (CB) of Sri Lanka. We were in fact ‘examined’ by the Central Bank of Sri Lanka in 2005/2006, and the examination was terminated as our deposit taking was restricted to security deposits for the issue of credit cards. We trust that this clarifies any concerns that you may have regarding the ‘legitimacy’ and stability of our operations.”
The two were addressing directly the issue of ‘legal Status’ of the Golden Key Credit Card Company and justifying the ‘legitimacy’ of its operations. What can be assessed from this is;
a)The Golden Key Credit card Company does not fall within the categories of banking or other financial institutions regulated by the CB.
b) The company had been ‘examined’ by the CB in 2005/2006 and terminated examination after discovering the deposit taking was restricted to security deposits for issue of credit cards.
Taking these conditions together, one would conclude (as expected by Mr. Kotelawala and Mr Perera) that Golden Key was involved in a business that is not subject to the supervision of the CB.
According to recent statements, the CB also decided on the same thing but I believe this assumption is not correct and is a clear misdirection.
There are two statutes (laws) that mainly regulate the activities and relationship between banks, other financial institutions and the CB; the Monetary Law Act (58 of 1949) and the Banking Act (30 of 1988) . After the collapse of several financial institutions that collected money from the public as ‘deposits’, the Banking Act was amended in 1995 to bring a new category of financial institutions, namely, ‘licensed Specialised Banks’. According to newly introduced section 76A(1):
“from and after such date as may be determined by the Minister by Order published in the Gazette, the business of accepting deposits of money and investing and lending such money shall not be carried on except by a company which has an equity capital in an amount not less than fifty million rupees AND under the authority of ‘licence’ issued by the Monetary Board for such purpose under this part of this Act:”
Companies issued with such licence are known as ‘licensed specialised banks’ and come under direct supervision of the Monetary Board of the CB. The new law has taken several measures to assure the safety of the depositors including that, “Every licensed specialized bank shall at all times maintain a capital adequacy ratio as may be determined by the Monetary Board, which shall in determining such ratio to be maintained, as far as practicable adopt the guidelines for capital adequacy set out by the Bank for International Settlements in Basle.”
The Monetary Board has power to give directions to specialised banks regarding the manner in which any aspect of the business of such banks is conducted and in particular the maintenance of the reserve fund. The Monetary Board also has power to issue orders prescribing the minimum ratios which the capital and surplus of licensed specialized banks shall bear to the total volume of their assets or any specified categories of such assets.
Any company/person carrying on business in contravention with that law shall be guilty of an offence and be liable on conviction after summary trial before a Magistrate to a fine not exceeding five hundred thousand rupees or to imprisonment of either desription for a term not exceeding 18 months or to both such fine and imprisonment. The duty of initiation of/or prosecution is vested in the Director Bank Supervision and the Monetary Board (of the CB).
“Deposits includes a sum of money accepted from any person as a business on terms under which it will be repaid with or without interest or a premium, and either on demand or at a future time or in circumstances agreed to by or on behalf of the person making the payment and the person accepting it, provided that the persons accepting the money is a person who in the usual course of business, lends money or makes available the use or the benefit of the money so accepted to third parties…” the term Deposit here is NOT conclusive and the court can give a wider interpretation depending on the nature of the transaction.
The Central Bank is established under the Monetary Law (37 of 1974). It is the authority responsible for the administration, supervision and regulation of the monetary; financial and payments system of Sri Lanka; and charges with the duty of securing, the objectives of economic and price stability; and financial system stability of Sri Lanka.
The Department of Bank Supervision headed by the Director of Bank Supervision is responsible not only for supervising and issuing directions on such licensed specialised banks, but also the effective implementation of the law.
It was revealed in the Magistrates Court, Mount Lavinia that over Rs 5 billion (or maybe more) had been invested by the Golden Key Company in about 49 different companies. Mr. Kotelawala and Mr Perera were fully aware of this fact at the time of writing the said letter dated 3rd December. In view of this the deposits that the company obtained are falling within the definition of ‘deposits’ given in the Banking Act and their business of taking deposits for investment was illegal without obtaining a license from the Monetary Board. Therefore these two were still trying to mislead the public and the depositors even at the last moment before the breakdown of the GK Company.
Having such powerful tools in hand one can’t understand why CB officers failed to take action either to regularise the activities of this company or take action against the persons responsible for conducting such business, if the CB had conducted an examination into the nature of the business of the GK company? If the depositors did not pay back the money drawn using credit cards how did the company earn that money -- just keeping the deposits with them and without re-investing? Who is the officer responsible for taking the decision that the company did not come within the scope of the institutions that is liable to be supervised by the CB? In view of these concerns, the CB cannot evade the responsibility for letting the Golden Key scandal happen in the first place.
The CB by allowing the company to operate through collection of deposits, has not only evaded its responsibility but virtually been a party to ‘committing a crime’.
Canishka G. Witharana
Colombo
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