The latest news about the controversial oil hedging transaction is that the Minister in charge of the petroleum industry has been quoted in the press as saying that the Arbitration panel in Singapore has yet to provide its opinion while the case in London has not yet begun. His statement clearly indicates that the matter will be contested by the Sri Lankan Government.
As these cases will undoubtedly have serious repercussions to the image as well as the economy of Sri Lanka it is relevant to examine in retrospect the salient steps and revelations made from time to time in this connection.
Sequence of events:
1. Governor of the (Central Bank) CBSL makes a presentation to the Cabinet of Ministers on the advantages of oil hedging (06-09-2006)
2.Appointment of a study Group by Secretary M/F & P (Ministry of Finance and Planning - 19-10-2006) comprising 17 officials from CBSL, BoC (Bank of Ceylon), PB (People’s Bank), CPC (Ceylon Petroleum Corporation) and M/F & P.
3. Study Group report submitted by CBSL to Secretary M/F & P (16-11-2006)
4. Submission of the cabinet Paper by the Petroleum Minister based on the recommendations of the study group (16-01-2007)
5. Cabinet Approval ( 24-01-2007) subject to special directives;
6. CPC enters into Hedging Derivative agreements with Standard Chartered Bank, Citi Bank NA, eutsche Bank, Commercial Bank and People’s Bank. It had transpired that all these hedging contracts were based on the same formula and format and designed to be favouring only the banks.
7.On December 10, 2008 a public interest activist filed a petition in the Supreme Court of Sri Lanka, alleging that a fraud ‘schemingly and intentionally’ has been perpetrated on the Government and prayed inter-alia, the courts to make an interim order directing the Attorney General (AG) to cause the CID to carry out full and proper investigations into all aspects of the CPC entering into Hedging derivative instruments and to cause warranted action to be taken against those persons concerned on findings of such investigations.
8. The case was argued and decided on November 28, 2008 and the Supreme Court ordered as follows;
- Granted leave to proceed to the petitioners on the alleged infringement of fundamental rights
- Based on the admitted conduct of the Chairman CPC, suspended him with immediate effect from functioning as the Chairman of the CPC
- The court opined that the President should consider taking over the functions of the Minister in charge of the subject under his purview and appoint a suitable person to function as chairman and pending such appointment the Secretary to the Treasury was authorized by the Courts to function as Chairman of the CPC.
- All purchases of Petroleum products be made directly by the Government of Sri Lanka
- To suspend all payments by the CPC to the respective banks on account of Hedging instruments
- The Monetary Board was directed to carry out an investigation as regards the impugned transactions and to take action thereon.
- Court also directed the Secretary to the Treasury to submit a report on the taxes and the pricing formula of petroleum products before 15/12/2008
9.On January 27, 2009, the Supreme Court vacates and terminates the interim orders after the government fails to implement court decisions relating to fuel pricing.
10. The CEOs of foreign banks meet the President to explain their case in response to which the President appoints a Ministerial committee.
11.This Committee appointed by the President comprises cabinet Ministers Dr Sarath Amunugama, A.H.M.Fowzie, Prof G.L.Pieris and Nimal Siripala De Silva. The banks refuse to re-negotiate any of the contracts and instead offer to reschedule the payments due to them. The committee has been informed by the AG and the CBSL that there were serious problems with the contracts and if they were to be enforced the CPC would stand to lose an estimated $800 million.
12. After talks between the Ministerial Sub Committee and the five banks fail, the foreign banks take steps to file papers for arbitration under the International Arbitration process. Deutsche Bank has filed a case against the Sri Lankan Government (cse no.ARB/09/2) in the Washington based International Centre for Settlement of Investment Disputes. Standard Chartered Bank (SCB) has initiated legal action in the London High Courts. This case has not yet started.
The new Petroleum Minister turns tough and contemplates “action to be taken locally against banks and officials over hedging deals.” He is quoted in the media saying “there is evidence of various flaws to the deal and the Supreme Court and Regulator has already expressed the transactions are tainted and should be considered null and void. In short it was a corrupt deal that requires investigation on the ethics of a few bankers engaged in promoting these transactions.”
It is good to hear such proclamations even belatedly after a couple of years if such a thing is possible. But those who perpetrated the crimes from the foreign-owned banks have already left the soil under transfer privileges. Those in the local banks alleged to have links to the tainted operations are flying high and going scot free. Sri Lanka has already lost significant amounts by way of foreign exchange in hedging related transactions.
On a FR case filed and taken up for support in October 2009, the petitioners exposed the remittance of $107 million alleging circumvention of Exchange Control directives by the SCB. Another bank has lost $6.5 million due to a forfeiture of a deposit by an overseas bank. The Bench presided by Chief Justice Asoka Silva directed notices to be issued on several bank officials including SCB’s CEO Clive Haswell who has left the country now.
The Minister’s statement to expose the corruption element of this transaction is praiseworthy and the investigations into the various violations by authorities and bank officials should proceed speedily and unhampered.
Within the realities of possible collusive deviations by interested parties, let us wait hoping for the best to witness the action to be taken by the Minister against the culprits!
(The writer is a former chairman of the BoC and former Chairman of the National Gem and Jewellery Authority).