BDO et KPMG montrées du doigt

Le rapport final de nTan confirme aussi que la Bramer avait déjà beaucoup emprunté de la Banque centrale au moment où l’augmentation de capital demandé ne se conclut pas, que de nouveaux emprunts sont sollicités et qu’une autre Banque centrale est, au même moment, sollicitée pour parquer USD 200 millions pour  trois individus associés à des compagnies soeurs de la Bramer. Des taux élevés de prêts non performants, associés à de dangereuses saignées de liquidités, parachèvent la toile de fond ayant mené à la décision de ne pas attendre plus longtemps. La licence bancaire est donc enlevée en avril 2015.

Dans cette interview, le gouverneur de la Banque centrale justifie aussi le fait que le rapport nTan sur la BAI soit publié, même en version réduite, alors qu’il n’avait pas publié, en 2005, le rapport sur l’affaire MCB-NPF ; explique pourquoi la Banque centrale a choisi cette firme singapourienne plutôt que des talents locaux ; et affirme que, sur la fin, la BAI était, en effet, au beau milieu d’un Ponzi Scheme avec son lot de réévaluations d’actifs systématiques pour «équilibrer» les comptes alors que le cash-flow ne cessait d’être de plus en plus dans le rouge.

Deux firmes comptables sont mises à l’index par nTan : BDO et KPMG. La firme singapourienne suggère que si elles avaient été plus «responsables» au niveau de leurs obligations, moins de personnes auraient risqué leur argent. Finalement, après avoir reconnu que les régulateurs n’ont pas été sans reproches, Ramesh Basant Roi mentionne le courage de quelques officiers indépendants qui, bravant le courant ambiant, ont donné de la voix contre certains accommodements. Et souligne, dans une formule dont il a le secret, que les licences bancaires ancrées sur des actionnaires individuels majoritaires sont souvent de bons candidats pour des «starring roles in zombie movies». De citer DelphisBank, First City, Union Bank, IOIB, Bramer Bank, etc.

In this exclusive interview, the Governor of the Bank of Mauritius gives an insight of the nTan Report, whose first part will be published tomorrow, during a press conference.

Governor, have you received the nTan Report?

We have received a version of the Report for release to the public. It’s being examined. The Report will be released by sundown tomorrow, barring unforeseen circumstances.

What’s your appreciation of the Report?

The Report is a skillfully woven documentation of an incredible number of findings that are appalling. It’s a riveting thriller of fraudulent practices within the defunct BAI Group. I read the Report in a kind of ascetic solitude. After having finished reading it, I felt like having sailed along streams of toxic wastes in a glass-bottomed boat. It’s ugly times ugly. And ugly got going for several years. The BAI Group had grown prematurely old, weary and exhausted under the staggering weight of its ever-growing liabilities. Like an old man anticipating death, the Group kept itself busy trying to stop the clock.

The dimming of the lights on the 21st century BAI Group made the picture clearer. The Report more than amply bears out manipulative twists, turns and round-tripping of funds funneled here and there, and cover-ups. It’s a perfect storm of bad news for many; there is an ominous cloud in the horizon for those who lost their bearings in the awful games played out for several years. One of Frederic Bastiat’s thoughts came to my mind: when plundering becomes the business of life for a group of men living in a society, they eventually create for themselves a legal system that authorizes it and a moral code that glorifies it. Even the BoM Act wasn’t spared. One of my predecessors, Goorparsad Bunwaree, would have said the talent for dishonesty “leaps out of the text and hits you in the eyes.” When you happen to discover a lingerie shop in a nunnery and blatant accounting hoaxes and auditing firms’ statements of opinion that would even embarrass Nigerian email scammers, wouldn’t you conclude that moral standards have collapsed? The indifference and obliviousness to the plight of others fleeced in the Ponzi finance game in the recent past seize you with a visceral force that is terribly upsetting; it freezes the soul. This is what I make out of the Report.

Let it be clearly stated that the nTan team of forensic accountants, lawyers and IT experts are, of course, not scriptwriters for science fiction movies.

Why this emphasis on “21st century BAI Group”?

Because the business model of 20th century BAI Group evolved into a kind of business in the 21st century, the survival of which  became totally dependent on systematic wrongdoings.

If you don’t mind, may I say that a handful of observers still believe that the BAI Group saga is staged for reasons other than regulatory. How do you react to it?

It’s a characteristically flawed belief; it reflects the powerlessness of reason over sentiment. Defunct BAIGroup is reported to have been an employer of about 2,700 persons. No Government of this country, having employment creation high on its political agenda in such challenging times as we find ourselves today, would dare take the risk of treating the Chief Executive Officer (CEO) of such a Group as politically damaged goods. Make no mistake. A very high risk of a raging financial inferno was clear and present. The truly moral thing to do was to protect the innocent and the society as a whole by preventing a Greek tragedy.

Powerlessness of the crowd, I mean the disenchanted crowd, to reason aright prevents it from displaying critical spirit, that is, from discerning truth from error or from forming a precise judgment on any matter. This is also the kind of a crowd that has a superstitious confidence in Ponzi finance schemes. When the planners and plotters of schemes and the winners from the schemes play into the belief that wealth is not something to work for, but something to scheme for, you better be watchful. The power of reason hits the rock. Don’t argue. You might lose your shirt in the bargain. Try not to lose your trousers, too.

In opposition to the handful of disenchanted observers who tend to be the most vocal, we also have a broad mass of silent observers at all levels of our society who think that the authorities took the right steps. Insiders at the defunct BAI Group and the external auditors were aware that the Group was already in the process of a fatal crash with disastrous consequences for the financial sector and the economy. The Group was like the rabbi who was falling from the topmost level of a multi-storey building. Half-way the rabbi said to himself : “So far, so good.”

Several months ago, you said “there was no silver bullet left” to save the Bramer Bank. You have the interim nTan Report now. Can you confirm to us that your decision to revoke the banking license of the bank was justified?

Forget the barstool gossips. It’s cut and dry. There was definitely no silver bullet left to save the Bramer Bank. Some of the regulatory considerations for the revocation of the banking license are best left unsaid. By definition, regulatory authorities speak very sparingly and very mindfully.

Nonetheless, let me give  you the example of a specific situation and set a question mark thereafter. A regulatory authority requests a distressed bank – stuck with high levels of non performing loans and acutely suffering from a fast deteriorating liquidity situation – to inject capital. The distressed bank has already borrowed money up to the neck from the central bank against an unconventional collateral. The distressed bank does not meet the deadline for the capital infusion. The distressed bank asks for massive bailout funds from the central bank against suspicious collaterals to be used for the capital infusion. But the central bank is, at around the same time, intimated by one of its peers that three persons, including a woman, associated with the sister companies of the distressed bank, are vainly seeking regulatory approval for parking US$200 million in a neighbouring country. Would you still believe that capital infusion will take place and wait for it in great expectation while the distressed bank is bleeding liquidity and is about to collapse? The past is past; there are things better left unsaid. Those who have pink elephants dancing around their heads need to stop having a jaundiced view of the demise of the Bramer Bank.

Like Caesar’s wife, regulators should be above all suspicion. Effective regulators are however disliked; they constantly have hostile forces working against them. It’s a phenomenon not confined to Mauritius only; it’s worldwide.

What made you decide for having a forensic report on the BAI Group?

I do not know of any credible regulatory authority in a jurisdiction that has not gone for a forensic investigation/examination in the wake of the collapse of a financial conglomerate that wiped out vast sums of people’s money. Technically, the BAI Group was clinically dead since a few years ago. The Group was sustained by aggressive campaigns for fund-raising that kept expanding its liabilities that, by any cannon of logic, couldn’t have been extinguished. A diagnosis of what went so terribly wrong by an independent team of world renowned forensic investigators, lawyers and IT specialists was felt imperatively needed, more so if it all happened under the watch of regulatory authorities. The systemic threats to our financial industry were more than disturbing. Professionals in the financial industry, politicians, the judiciary, regulatory authorities, university students, the victims who have been fleeced, the public at large, Moody’s, IMF, World Bank and regulatory authorities in the rest of the world must be made aware of how a financial conglomerate finally had recourse to Ponzi finance to ensure its own survival. All of us have lessons to learn from the Report.

But you hadn’t release the nTan Report on MCB/NPF scandal?

Yes, I hadn’t. And I don’t regret it. The decision not to release the Report is, however, like an unlocatable ache, a pain without a name that makes me edgy even after a dozen years.

The Report was overwhelmingly loaded with names of account holders and their bank balances. It could not be released by law. Anyone sincerely willing to have a copy of the Report way back in 2005 could have asked his representative(s) in the National Assembly to move for an amendment of the Banking Act. Nobody did ask. Just a simple exercise in the National Assembly and the Report could possibly have been out. Often, we uncritically enjoy the comfort of opinion of others and we avoid the discomfort of serious thinking.

In the MCB/NPF case, right from the outset the shareholders of the MCB had made up their mind to repay the missing amount to the NPF. Taxpayers did not have to bear the brunt of the missing amount. Nor the public was required to by any power of compulsion. By the way, Air Mauritius, a Government-owned enterprise, had incurred billions of rupees of losses related to hedging. It was revenue foregone by the Government. The STC, too, incurred billions of rupees of losses related to hedging. Consumers of petroleum products and taxpayers footed the bill – happily. No investigation/examination was conducted. No Reports were produced and published. The laws of Mauritius did not come in the way. Why the fuss about the nTan Report on a private sector-owned enterprise like the MCB and no fuss at all on consumers and taxpayers funding losses due to hedging losses incurred by public sector bodies?

Don’t we have local firms instead of nTan to conduct the forensic examination?

No doubt, we do have some excellent accountants and excellent commercial lawyers. Individually, they are great. But they are employed in different organizations. I wonder if they would have teamed up along with local folks with IT forensic skills for a forensic examination without fear or favour to any party. I also gathered that local auditing firms, if at all they were entrusted with the assignment, would have had to seek external assistance. After all, many of the folks in our local firms, that are involved in the auditing of financial institutions in the country, would have had conflicts of interests. Besides, the team of experts should necessarily have a reputable track record in forensic accounting. nTan is neutral and has all the required qualities.

Ever yone’s judgment is coloured by his worldview. The kind of investigations/examination nTan conducts require not only knowledge but wisdom, too. We can be knowledgeable

about other people’s knowledge but we cannot be wise with other people’s wisdom. Wisdom is precious. You don’t get that in the Internet. You have to pay for it – with bitter experience. nTan has the track record. How independent a local team of investigators would have been is questionable.

You have made references to Ponzi Finance. What is a Ponzi scheme?

In 1920, Charles Ponzi established the fraud of using one investor’s money to pay another while advertising that the payment was the result of a little-known investment idea. He kept on promising higher and higher rates of return to his victims. His liabilities kept on ballooning. And the balloon busted when Ponzi had promised a 50 per cent return in less than two months’ time. Bernie Madoff was a giant in his field. He out-Ponzied Charles Ponzi. Madoff’s firm used to advertise ethical standards. When he took people’s fortune to manage, he refused to tell them how he would invest and obtain high rates of return. Even when the markets were against him he was still making money, almost every month and every day. The victims were paid so much to look the other way. A pile of dung was burning for years. Madoff’s scheme blew up in the wake of the 2008 financial crisis.

The concept of Ponzi  scheme has evolved over the years. There are different methods and structures used by swindlers. There is not one but a variety of Ponzi schemes. Like in the reptile family, one is an alligator. The other one is a crocodile or a fat lizard and so on. The essentials are the same. The dramatis personae in the game changes.

In any Ponzi scheme, the early birds get the money as promised and the late birds pay the money. In a very elementary Ponzi finance game, initially, the rates of return are above prevailing market rates. The early birds are paid out of funds provided by successive birds. Rumors of the winnings travel fast. It’s an infectious game. The number of participants in the scheme increases and the early birds keep getting back money at the promised rates of return. Over time, it gets tougher for the swindler to raise funds. The swindler progressively raises the rates of return. Persuasion, seduction and greed come into play. Increasingly, more birds join in. The swindler, finding himself lucky, discovers how much the birds and the rabbits are willing to bet on the rumours and how investors are willing to invest in fantasies. Often, even investors, otherwise very calculating, get seduced by the high rates of returns; they pop up like rabbits in the game. And the game goes on interestingly. More birds and more rabbits walk freely and happily into the slaughterhouse with bucketful of cash. In the fullness of time, the liabilities of the swindler outgrow his capacity to service them by far. The swindler eventually runs out of cash. The endgame is reached when repayments can no longer be effected. The house of cards collapses. Early birds and rabbits got the money; latest birds and rabbits paid the money. Ponzi debt units get destroyed. What started out with a bang ended with a whimper.

Anyone with a bent of  mind for running a Ponzi scheme must be reminded of the greatest lessons in the world from a convicted felon, Bernie Madoff: “Be sure, your sin will find you out.” Even the best engineered schemes on the planet come undone at some point. No Ponzi scheme can continue forever. But if you are very bright, you can keep the game going for a long, long time. But it will certainly crash with tragic finality at some point in time.

The economist, Hyman Minsky, who achieved eminence during the 2008 financial crisis, had created his own categories of balance sheets, which reflected the degree of risk market participants (Super Cash Back Gold) assumed. The riskiest of these he categorized as “Ponzi finance.” Ponzi finance, in Minsky’s terminology, describes the condition of those who can neither repay the principal on their liabilities nor meet their interest payments from current cash flows. To survive they must refinance, either by selling assets or by raising more debt. For this to happen, asset prices must continue to rise. Fraudsters use accounting gimmicks to overvalue their assets to hide losses and contract more debt either to pocket the money or to meet repayment obligations. The bigger the losses, the more exaggerated are the overvaluation of assets.

Did the BAI Group operate a Ponzi scheme?

Yes, the defunct BAI Group, short of cash, did eventually end up with a Ponzi scheme. An authoritative international financial institution and several other personalities share this view. The defunct Group had an arborescent structure – a complex cluster of many connected and intertwined companies. A look at the Group structure gives you the impression of a galaxy – a galaxy of loss-making planets with funds orbiting in and out conveniently without respecting regulatory rules. There was a regular haemorrhage of outflows that largely explained the losses made by the companies in the Group. Short of funds, the defunct Group came up with schemes to fund its loss-making companies. Occasionally, when fund-raising through the schemes toughened, the Group kept borrowing from the Bramer Bank, commercial banks, BoM etc. to meet its ever growing obligations. The larger the repayment of its obligations, the larger werethe amounts of funds it raised by all means. Its ever-growing liabilities drove the Group to excessively overvalue the assets of the loss-making companies so as to balance their books. This process of overvaluation was repeated abusively over the years. It is wondered if the suppliers of funds to the Group were told about how their money was invested in ways that could bring them Madoff’s kinds of returns. TheBAI Group should have had an annual consolidated balance sheet, but it didn’t have one. The BA Investment was listed on our Stock Exchange. Disclosure is a listing requirement. Why had the BAI asked for and obtained its de-listing in 2010? Read the nTan Report when it will be out.

There are thousands of people who have lost their money with the demise of the BAI Group. What would be, in your opinion, the solution to their plights?

I was in Lima, Peru, for the IMF/World Bank meetings in October 2015. I seized the opportunity to meet with the Governor of the central bank of Trinidad and Tobago and tried to get an idea of how the Government was handling a similar case over there. The suppliers of funds to the swindlers in Trinidad and Tobago were made to accept a substantial haircut. I am with the vast majority of the people in Mauritius who entertain the view that the suppliers of funds to the defunct BAI Group should accept a haircut.

People need to realize that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or even in our ethical thinking, we are dominated by a relatively small number of persons who understand the mental processes and social patterns of the masses. In the wake of the revocation of the banking license of the Bramer Bank, rumours about the defunct BAI Group salespersons purportedly practising skilled seduction and deception were rife. Some, if not all, of the suppliers of funds to the Group were driven solely by greed. True: they were seduced and are now hurt. True: they acted volitionally. The victims were all motivated to grow their money. They rang a bell; they cannot un-ring the bell.

In November 2015, you had quite some tirades against external auditors. They have not been spared in the nTan Report also. Is it so?

I understand it’s Gresham’s dynamic at work for several years. Bad ethics have driven good ethics out of the market in the business of auditing. The basic understanding that  bad things are bad and good things are good is conspicuously absent in the auditing world. When it is affirmed that bad things are okay and good things are irrelevant, all hell breaks loose. Two auditing firms, KPMG and BDO, have been named. It’s even mentioned that if these two auditing firms had responsibly carried out their duties, investors and suppliers of funds might not have lost their money. Auditors have a fiduciary duty towards the investors.

It appears that the BoM and the FSC have been criticized in the Report. How do you react to criticisms by the very consultant recruited by the BoM?

Does it not reflect nTan’s independence in the examination? If there have been regulatory failures, what must be truthfully said must be truthfully said. Should you have in mind to lead me to a destination of your choice with this question, you would be driving me to a point where every word uttered by me would displease those before me at the BoM. It’s like being exactly in the position after you have forgotten your wife’s birthday. I’m quite familiar with the famous one liner in journalism, “if it bleeds, it leads.”

I cannot say that the BoM has been faultless. With regard to the BoM, we need to differentiate between regulatory forbearance and regulatory failure due to incompetence. The November 2015 FSAP mission of the IMF/World Bank, nTan and I have read the working files and the recommendations of the staff of the Supervision Department on various issues having to do with the Bramer Bank. It was a revealing exercise. The staff recommendations on the regulatory stands of the BoM and the final decisions of the BoM do not necessarily match. There were voices of sanity within the Bank; they just did not prevail at the final decision-making level. A few officers took the risks of being ostracized into insignificance instead of “going along to get along” to have a wonderful and star-quality career. The BoM remains credible as a regulatory authority.

Did the Bramer Bank satisfy all the conditions for a banking license in 2008? What are the lessons learned in that case as opposed to the Delphis Bank, for instance?

One very important condition regarding shareholding was not satisfied. Defunct Delphis Bank, First City Bank, Union International Bank, Bramer Bank as well as SEAB (later acquired by Bramer Bank) and IOIB (later acquired by State Bank of India) had high risk of failures baked in the cake. Each of these banks had a single majority shareholder having a very strong domineering influence in the banks’ management. Once the shareholders of these banks were authorized to hold more than 10 per cent of the shares at the time of the issue of the licenses with a dilution clause, the BoM found itself trapped in a regulatory dilemma. In none of the above mentioned cases, the BoM was able, in subsequent years, to make the banks bend to the regulatory rule regarding the pattern of shareholdings. The pattern of shareholdings in the banks mentioned above has been the  root cause of their failures. The philosophy underpinning the provision in our Banking Act that no single shareholder should have more than 10 per cent cannot be taken lightly.

Applicants for banking licenses requesting for majority shareholding are strong candidates for starring roles in zombie movies. No matter how many times the BoM kills them, they keep coming back to life to scare the regulatory authorities in Mauritius.

Statistically speaking, my second observation is that almost all the banks mentioned above have had some sort of a political clout unkind to regulatory discipline. The second lesson to draw is that politicians must not have a say on matters relating to the issue of licenses to financial institutions; they should trust the regulators and stay out of the regulatory perimeters. Regulators of financial systems are generally perceived to be cruel creatures. They are cruel only to be kind to the financial system. It’s not fun to be cruel.

What do you now think of Mr Dawood Rawat as an entrepreneur?

I cannot claim to know Mr Dawood Rawat’s entrepreneurial talents. I have met with him on many occasions in my office. Like many of us, I only have the benefit of hearsays.

But I, rightly or wrongly, understand that Mr Rawat had started out daringly as a businessman. I cannot say if he has a highly polished Cartesian rationalism with an impeccable “geometrical” idea of reality as an entrepreneur. He ended with presiding over a Corporate Group whose modus operandi gave rise to suspicions in later years. The Group’s perception of direction did not agree with reality and ethics. The Group, suffocated with burdensome liabilities that, by any stretch of imagination, would not have been extinguished – teetered to the edge of collapse and busted in the end. The Group rolled on and on with the help of Ponzi finance.

I have a message for all the CEOs of financial institutions operating in the country; it’s a gem from Bernie Madoff, infamously known as the US$50 billion Ponzi schemer: “In today’s regulatory environment, it’s virtually impossible to violate rules… And this is something the public doesn’t really understand… It’s impossible for a violation to go undetected, certainly not for a considerable period of time.” Pottery barn rule: you break it, you own it.