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FINAL REPORT | FORENSIC REPORT | RFP 5 EXAMINATION ON CONDUCT OF SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMARY DEALERS FROM 1 JANUARY 2009 TO 31 DECEMBER 2017
THE CENTRAL BANK OF SRI LANKA 8 NOVEMBER 2019
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 3 of 177
CONTENTS
1. INTRODUCTION ................................................................................... 11
1.1. BACKGROUND ............................................................................... 11
2. OBJECTIVE AND SCOPE .......................................................................... 18
2.1. THE OBJECTIVE AND SCOPE ............................................................... 18
3. WORK PERFORMED ............................................................................... 20
3.1. OPERATIONS OF REGULATION AND SUPERVISION FUNCTION.......................... 20
3.2. MAPPING THE DEPARTMENTAL PROCEDURES WITH APPLICABLE LEGISLATIONS .... 22
3.3. THE CBSL INTERNAL REPORTS ............................................................. 23
3.4. REVIEW OF DEPARTMENTAL PROCEDURE ................................................ 23
3.5. DIGITAL FORENSICS ......................................................................... 28
3.6. PUBLIC DOMAIN SEARCHES ................................................................ 40
4. PROCESS UNDERSTANDING ...................................................................... 42
4.1. BACKGROUND ............................................................................... 42
4.2. UNDERSTANDING FOR THE CONDUCT OF REGULATORY FUNCTION .................. 45
4.3. UNDERSTANDING FOR CONDUCT OF EXAMINATION - ON-SITE ........................ 48
4.4. UNDERSTANDING THE CONDUCT OF EXAMINATION - OFF-SITE SURVELLANCE ...... 49
4.5. UNDERSTANDING THE CONDUCT OF EXAMINATION – SPOT EXAMINATION .......... 50
5. EXECUTIVE SUMMARY ............................................................................ 51
5.1. SUMMARY OF KEY FINDINGS ............................................................... 51
6. RECOMMENDATION ............................................................................... 55
7. DETAILED OBSERVATIONS ........................................................................ 57
SECTION A: REGULATION FUNCTION ............................................................. 60
7.1. NO DEFINED PROCEDURAL FUNCTIONS / BENCHMARKING ............................ 63
7.2. NON-EXISTENCE OF TECHNIQUES TO MONITOR MARKET INTEGRITY ................ 65
7.3. NON UPDATION OF THE OPERATIONS MANUAL ......................................... 67
7.4. NO MECHANISM TO ANALYSE THE MARKET DEVELOPMENT ............................ 68
7.5. APPOINTMENT OF PRIMARY DEALERS..................................................... 70
7.6. ASSESSMENT OF FITNESS AND PROPRIETY OF DIRECTORS ............................. 76
7.7. POLICY FORMULATION ..................................................................... 80
7.8. ABRUPT EMPLOYEE TRANSFERS IN REGULATORY AND SUPERVISORY FUNCTION ... 81
SECTION B: SUPERVISION FRAMEWORK AND DIRECTION ....................................... 84
7.9. OBJECTIVE AND APPROACH:............................................................... 87
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 4 of 177
7.10. POLICY FORMULATION ..................................................................... 90
7.11. CAPABILITY ENHANCEMENT................................................................ 97
7.12. STAFFING DEFICIENCIES .................................................................... 99
SECTION C: SYSTEMIC AND DESIGN GAPS IN SUPERVISION ................................... 102
7.13. GAPS IN COVERAGE OF LAWS ............................................................ 102
7.14. ABSENCE OF PRIMARY DEALER RISK SCORING SYSTEM ................................ 107
7.15. ROOT CAUSE AND QUANTIFICATION ..................................................... 108
7.16. QUALITY SELF-ASSESSMENT AND BENCHMARKING ..................................... 113
7.17. OVERSIGHT RESPONSIBILITY .............................................................. 114
SECTION D: DEFICIENCIES IN OPERATIONS: CONDUCT OF EXAMINATION ................... 118
7.18. EXAMINATIONS AS THE MEDIUM OF SUPERVISION ...................................... 118
7.19. PLANNING AND PREPARATION ............................................................ 119
7.20. EXAMINATION PROCEDURES .............................................................. 121
7.21. OPERATIONS ................................................................................ 122
7.22. COMMON FINDINGS ACROSS PRIMARY DEALERS ....................................... 124
7.23. CONDUCT OF EXAMINATIONS ............................................................. 126
7.24. REPEAT FINDINGS INDICATING GAPS IN FOLLOW-UP OR REMEDIATION ............. 144
7.25. NON-REPORTING TO THE MONETARY BOARD .......................................... 146
8. PUBLIC DOMAIN SEARCH ........................................................................ 150
9. DIGITAL FORENSICS .............................................................................. 160
9.1. REVIEW OF EMAILS ......................................................................... 160
9.2. DELETION OF OUTLOOK FILES ............................................................ 164
10. LIMITATIONS ...................................................................................... 172
11. ANNEXURES ...................................................................................... 175
12. EXHIBITS .......................................................................................... 176
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 5 of 177
GLOSSARY
# ACRONYM DESCRIPTION
1 ACRA The Accounting and Corporate Regulatory Authority
2 AG The Assistant Governor
3 ASPD Additional SPD
4 BDO India or We or Us BDO India LLP
5 Bn. Billion
6 BO Back Office
7 BOC Bank of Ceylon
8 BOE Bank of England
9 BSD Bank Supervision Department
10 CBSL The Central Bank of Sri Lanka
11 CDS Central Depository System
12 CEO Chief Executive Officer
13 CFT The Convention on the Suppression of Terrorist Financing Act, No. 25 of 2005
14 CID Criminal Investigation Department
15 CL Contract
16 Client or You The Monetary Board of Central Bank of Sri Lanka
17 CoC Chain of Custody
18 COPE The Committee of Public Enterprises
19 CSL or CSF Customer Accounts in LankaSecure
20 DFCC DFCC Bank PLC
21 DG Deputy Governor
22 DIT The Director of Information Technology
23 DOD Domestic Operations Department
24 DSNBFI Department of Supervision of Non-Bank Financial Institutions
25 DSPD Deputy Superintendent of Public Debt
26 EIC Examiner In-Charge
27 Entrust or ESL Entrust Securities PLC
28 EPF The Employees’ Provident Fund
29 ESI Electronically Stored Information
30 FAMC Forensic Audit Monitoring Committee
31 FED Federal Reserve System
32 FTRA The Financial Transactions Reporting Act 2006
33 HDFC The Housing Development Finance Corporation Bank of Sri Lanka
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 6 of 177
# ACRONYM DESCRIPTION
34 IBSL The Institute of Bankers of Sri Lanka
35 ILF Intra-day Liquidity Facility
36 ISIN International Securities Identification Number
37 IT Information Technology
38 ITD Information Technology Department
39 LTBO Local Treasury Bills Ordinance No. 8 of 1923
40 MB The Monetary Board
41 MLA Monetary Law Act
42 MO Middle Office
43 MOF Ministry of Finance
44 Natwealth or NWSL Natwealth Securities Limited
45 Nihal Fonseka Anthony Nihal Fonseka
46 PABC Pan Asia Banking Corporation PLC (Primary Dealer unit)
47 PAML Perpetual Asset Management (Private) Limited
48 PCHL Perpetual Capital Holdings (Private) Limited
49 PCOI The Presidential Commission of Inquiry on the issue of Treasury Bonds during the period 1 February 2015 to 31 March 2016
50 PD(s) Primary Dealers / Primary Dealer
51 PDD The Public Debt Department
52 PDD Operational Manual Public Debt Operational Manual applicable during the review period
53 PMLA The Prevention of Money Laundering Act 2006
54 PTL Perpetual Treasuries Limited
55 RBI Reserve Bank of India
56 Regulator Regulator of Primary Dealers - the PDD until June 2016 and D/SNBFI
57 Report Forensic Audit Report
58 Review Period 1 January 2009 to 31 December 2017
59 ROC Registrar of Companies
60 Rs. Sri Lankan Rupees (LKR)
61 RSSO Registered Stocks and Securities Ordinance
62 SPD Superintendent of Public Debt
63 SSSS Scripless Securities Settlement System
64 Supervision Division Supervision Division of Public Debt Department
65 T-Bills Treasury Bills
66 T-Bonds Treasury Bonds
67 WealthTrust or WTSL WealthTrust Securities Limited
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 7 of 177
TERMS FOR REFERENCE
# TERM DESCRIPTION/ MEANING/ INTERPRETATION1
1 Active Data Data on a computer that is not deleted and is generally accessible and readily visible to the user under normal use. Source: https://burgessforensics.com/computer-forensics-glossary/
2 Active directory A directory is a hierarchical structure that stores information about objects on the network. A directory service, such as Active Directory Domain Services (AD DS), provides the methods for storing directory data and making this data available to network users and administrators.
Source: https://docs.microsoft.com/en-us/windows-server/ identity/ad-ds/get-started/virtual-dc/active-directory-domain-services-overview
3 Captive Sources Captive sources are financial institutions which are required to purchase and hold Government securities.
Source: http://www.presidentsoffice.gov.lk/?p=5093
4 Central Depository System
A computerized central system which records primary issuance of Scripless securities and their trades taking place in the secondary market. Source: https://www.cds.lk/introduction.php
5 Chain of Custody The chain of custody in digital forensics can also be referred to as the forensic link, the paper trail, or the chronological documentation of electronic evidence. It indicates the collection, sequence of control, transfer, and analysis. It also documents each person who handled the evidence, the date/time it was collected or transferred, and the purpose for the transfer.
Source:https://resources.infosecinstitute.com/category/computerforensics/introduction/areas-of-study/legal-and-ethical-principles/chain-of-custody-in-computer-forensics/#gref
6 Department / Division
Supervision division of Public Debt Department until 3 June 2016 and Supervision of Non-Bank Financial Institutions Source:ahttps://www.cbsl.gov.lk/en/about/organisational-structure /departments
7 Department / Division Head
Superintendent of Public Debt Department until 3 June 2016 and Post 3 June 2016, Director of Supervision of Non-Bank Financial Institutions Source:ahttps://www.cbsl.gov.lk/en/about/organisational-structure /departments
8 Digital Footprint The information about a person that exist on the Internet as a result of their online activity. Source: https://www.lexico.com/en/definition/digital_footprint
9 Digital Forensics Digital forensics is a branch of forensic science focused on recovery and investigation of artefacts found on digital devices. Source: https://www.lawtechnologytoday.org/2018/05/digital-forensics/
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
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# TERM DESCRIPTION/ MEANING/ INTERPRETATION1
10 ESI or Electronically Stored Information
Electronically-stored information is any information created, stored, or best utilized with computer technology of any type. It includes but is not limited to data; word-processing documents; spreadsheets; presentation documents; graphics; animations; images; e-mail and instant messages (including attachments); audio, video, and audio visual recordings; voicemail stored on databases; networks; computers and computer systems; servers; archives; back-up or disaster recovery systems; discs, CD’s, diskettes, drives, tapes, cartridges and other storage media; printers; the Internet; personal digital assistants; handheld wireless devices; cellular telephones; pagers; fax machines; and voicemail systems. Source: https://www.foley.com/-/media/files/insights/events/2007/04/corporate-records-what-to-keep-and-what-to-toss/files/guidelines-for-state-trial-courts-regarding-discov/fileattachment/state_cs_eldiscccjguidelines.pdf
11 FInNet Financial Information Network (FInNet) is a common interface to submit financial information by Primary Dealers Source: http://fiusrilanka.gov.lk/
12 File Carving A process used in computer forensics to extract data from a disk drive or other storage device without the assistance of the file system that originality created the file. It is a method that recovers files at unallocated space without any file information and is used to recover data and execute a digital forensic investigation. Source: https://resources.infosecinstitute.com/file-carving/
13 Forensic image A forensically sound and complete copy of a hard drive or other digital media generally intended for use as evidence. Such copies include unallocated space, slack space, and boot record. A forensic image is often accompanied by a calculated Hash signature to validate that the image is an exact duplicate of the original Source: https://burgessforensics.com/computer-forensics-glossary/
14 Government Securities
Treasury Bills, Treasury Bonds and other securities issued by the CBSL on behalf of the Government of Sri Lanka.
Source: https://www.cbsl.gov.lk/en/financial-system/financial-
markets/government-securities-market
15 Hash Values A computed numerical value that represents a “digest” of the content of a file. If and only if two documents are identical to the letter will they return the same hash value. The Hash value is used as part of a digital signature and to compare document content in the de-duping process. Source: https://www.edrm.net/wp-content/uploads/2017/03/20160422-EDRM-Glossary-2.pdf
16 Keyword A significant word from a title or document used specially as an index to content. Source: https://www.merriam-webster.com// dictionary/keyword
17 LankaSecure System (“LSS”)
The Scripless Securities Settlement System and the Central Depository System established by the CBSL in terms of the Monetary Law Act. Source:https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/ publications/LankaSecure %282006%29.pdf
18 Leakage Deliberate disclosure of confidential information. Source: https://www.lexico.com/en/definition/leakage
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 9 of 177
# TERM DESCRIPTION/ MEANING/ INTERPRETATION1
19 Licensed Commercial Bank
A bank licensed under the Banking Act No. 30 of 1988 as amended from time to time to carry on commercial banking business as defined in that Act. Source:https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/acts/en/BankingAct30_1988.pdf
20 Licensed Specialized Bank
Any company or a body corporate which has been issued with license under the Banking Act No. 30 of 1988 as amended from time to time to carry on the specialized banking of accepting deposit money and investing and lending such money. Source:https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/acts/en/BankingAct30_1988.pdf
21 Litigation Hold A litigation hold, also known as a "preservation order" or "hold order" is a temporary suspension of the company’s document retention destruction policies for the documents that may be relevant to a lawsuit or that are reasonably anticipated to be relevant. It is a stipulation requiring the company to preserve all data that may relate to a legal action involving the company. Source: https://definitions.uslegal.com/l/litigation-hold
22 Metadata Data that provides information about other data. Source: https://www.merriam-webster.com/dictionary/metadata
23 Outright Transactions
Transactions by which ownership (title) of the Government Securities are transferred permanently to the buyer.
Source: https://www.cbsl.gov.lk/en/Monetary_Policy
24 Price Sensitive Information
Of information, likely to affect prices of securities if it were made public. Source: https://www.lexico.com/en/definition/price-sensitive
25 Primary Dealers Primary Dealer means any commercial banks, company or other person appointed by the Monetary Board for the purpose of dealing with the CBSL as counterparty in the primary market in Government securities.
Source: https://www.cbsl.gov.lk/en/financial-system/financial-system-
stability/primary-dealers
26 Primary Market Market where securities are first issued to buyers and; the initial allocation and issue of Scripless Securities by Public Debt Department of the CBSL on behalf of the Government of Sri Lanka to buyers i.e. Primary Dealers and Designated Non-Dealer Bidders against payment. Source: https://www.cbsl.gov.lk/en/node/2627
27 Regulations Regulations made under the Monetary Law Act, the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance Source: https://www.cbsl.gov.lk/en/financial-system/financial-infrastructure/laws-and-regulations-for-financial-Infrastructure
28 Regulator The department which is responsible to regulate the Primary Dealers and responsible for the issuing the direction under the applicable law i.e. PDD until June 2016 and D/SNBFI Source: https://www.cbsl.gov.lk/en/About_the_Financial_System
29 Report Forensic Audit Report
30 Repurchase Agreement (“REPO”)
A transaction involving a sale of Government securities with an agreement to reverse the transaction on a future date. Source: https://www.cbsl.gov.lk/en/financial-system/financial-instruments/financial-instruments
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 10 of 177
# TERM DESCRIPTION/ MEANING/ INTERPRETATION1
31 Reverse Repo A transaction involving a purchase of Government securities with an agreement to reverse the transaction on a future date. Source: https://www.cbsl.gov.lk/en/financial-system/financial-instruments/financial-instruments
32 Review Period 1 January 2009 to 31 December 2017
33 Secondary Market The market where securities are traded and exchanged among buyers and sellers after the securities are issued at the primary market. Source: https://www.cbsl.gov.lk/en/financial-system/financial-instruments/financial-instruments
34 Settlement Date Securities industry term describing the date on which a trade (bonds, equities, foreign exchange, commodities, etc.) settles. That is, the actual day on which transfer of cash or assets is completed. Source: https://www.investopedia.com/terms/s/settlement_period.asp
35 Spreadsheet An electronic document in which data is arranged in the rows and columns of a grid and can be manipulated and used in calculations. Source: https://www.lexico.com/en/definition/spreadsheet
36 Timeline Analysis Analysis of schedule of events and procedures. Source: https://www.merriam-webster.com/dictionary/timeline
37 Treasury Bill A short-term debt instrument issued usually on a discount basis and for maturities of 91, 182, and 364 days by the CBSL on behalf of the government under the Local Treasury Bills Ordinance.
Source: https://www.cbsl.gov.lk/en/About_the_Financial_System
38 Treasury Bond A medium to long-term debt instrument issued by the CBSL on behalf of the government under the Registered Stock and Securities Ordinance. Source: https://www.cbsl.gov.lk/en/About_the_Financial_System
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 11 of 177
1. INTRODUCTION
1.1. BACKGROUND
1.1.1. The Central Bank of Sri Lanka (“CBSL”) is the apex institution in the financial sector of Sri
Lanka. It was established in 1950 under the Monetary Law Act No. 58 of 1949 (“MLA”) as a
semi-autonomous body and with the two primary objectives2 of maintaining of economic
and price stability and financial system stability of Sri Lanka by managing the rate of
inflation in line with Government’s macroeconomic policies.
1.1.2. The CBSL acts as an advisor on economic affairs and banker to the Democratic Socialist
Republic of Sri Lanka (the “Government of Sri Lanka”) and tasked with managing the
Employees’ Provident Fund (“EPF”) and country’s public debt.
1.1.3. As per Section 21C of Registered Stock and Securities Ordinance (incorporating
amendments up to 31 December 2004), the CBSL shall have the authority to take any action
necessary for the issue and trading of scripless treasury bonds.
1.1.4. Arjuna Mahendran was appointed as the 13th Governor of the CBSL in January 20153. He
was born in Sri Lanka but held citizenship of Singapore.
1.1.5. Following concerns expressed in the public domain, with regard to the propriety of
Mahendran’s intervention in the Treasury Bond Auction held on 27 February 2015 and
questions raised on the Conflict of Interest his relationship with Arjun Aloysius of Perpetual
Treasuries Limited (“PTL”). The Presidential Commission of Inquiry (“PCOI”)4 was formed
to inquire into the allegation of irregularities in the issue of Treasury Bonds by the Public
Debt Department (“PDD”) of the CBSL during the period 1 February 2015 to 31 March 2016.
1.1.6. PCOI recommended5 the CBSL for appropriate investigation / forensic audit to assess the
effectiveness of the conduct of the Regulatory and Supervisory functions by the regulator
i.e. SPD / DSNBFI.
1.1.7. Accordingly, BDO India LLP (“BDO India” or “We”) was appointed to examine the conduct
of Regulatory and Supervisory roles by the superintendent of public debt / director,
supervision of non-bank financial institutions pertaining to selected Primary Dealers for the
Review Period (“1 January 2009 to 31 December 2017”).
2 Source: https://www.cbsl.gov.lk/en/about/about-the-bank/overview 3 Source: https://www.cbsl.gov.lk/en/about/about-the-bank/bank-history/arjuna-mahendran 4 As per Presidential Warrant of 27 January 2017 in pursuance of the provisions of Section 2 of the Commissions of Inquiry Act (Chapter 393) amended. 5 As per Chapter 33, Para 11 of The PCOI Report
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 12 of 177
1.1.8. One of the core functions of the CBSL includes licensing, regulating & supervising of banks
and selected non-bank financial institutions (E.g.: Licensed Finance Companies, Specialised
Leasing Companies, Licensed Microfinance Companies etc.).
1.1.9. As per Section 4 (31) of Local Treasury Bills Ordinance No. 8 of 1923 (“LTBO”), amended
section 4 (1) of 2004 and the Section 6 (32) of Registered Stock and Securities Ordinance,
1995 (“RSS0”), amended Section 4 (2) of 2004; the CBSL has the authority to appoint,
regulate and monitor the Primary Dealers with respect to their transactions in the
securities and the performance of their duties as Primary Dealers (“PDs”).
1.1.10. As per Section 113 of MLA, the CBSL shall, as agent of the Government of Sri Lanka, be
responsible for the management of public debt. Accordingly, the Public Debt Department
(“PDD”) engages in function relating to the issuance, servicing and management of
domestic debt and servicing of foreign debt on behalf of the Government of Sri Lanka.
1.1.11. PDD was responsible for carrying out various activities relating to the issue of Treasury
Bonds, Bills and other Government securities and Primary Dealers through segregated
divisions i.e. Front Office, Middle Office, Back Office, Central Depository System (“CDS”),
Supervision Division and Support Services Division. (Refer Exhibit 1)6.
1.1.12. Supervision division of PDD and Department of Supervision of Non-Bank Financial
Institutions (“DSNBFI”) are responsible to ensure sound and safe Primary Dealer (“PD”)
network including competition, liquidity and depth in to the Government securities market
and assisting the Government in reduction of borrowing cost and guarantees customer
protection by safeguarding their investments. (Refer Exhibit 1, Exhibit 2 and Exhibit 11)7.
1.1.13. The CBSL introduced dedicated Primary Dealer system in 2000 with two objectives, to
expand the Government securities market and to raise funds at lower cost.
1.1.14. There are two categories of institutions i.e. “Primary Dealer Units of licensed commercial
banks” and “Standalone Primary Dealers” eligible as authorized Primary Dealers. As on 6
June 20198, the CBSL has appointed 16 Primary Dealers under the Local Treasury Bills
Ordinance and the Registered Stock and Securities Ordinance.
6 Source: Refer Exhibit 1 PDD operation manual - supervision division 7 Source: Refer Exhibit 1 PDD operation manual - supervision division, version 2 updated as of 31 July 2013, Exhibit 2 PDD Operation Manual- Supervision division May 2015 and Exhibit 11 PDD operation manual – Supervision division 2007 8 Source: https://www.cbsl.gov.lk/en/authorized-financial-institutions/registered-authorized-primary-dealers/ https://www.cbsl.gov.lk/en/financial-system/financial-system-stability/primary-dealers
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 13 of 177
Table 1 - The list of Primary Dealers as following along with their Appointment and Suspension
dates
# PD NAME APPOINTMENT DATE
SUSPENSION DATE
Licensed Commercial Banks (Primary Dealers Unit)
1 Bank of Ceylon (Primary Dealer Unit) 17 Jan 1991 -
2 Commercial Bank of Ceylon PLC (Primary Dealer Unit) 1 Apr 2000 -
3 Pan Asia Banking Corporation PLC 1 Aug 2013 15 Aug 2017
4 People's Bank (Primary Dealer Unit) 1 Nov 2002 -
5 Sampath Bank PLC (Primary Dealer Unit) 21 Jul 2006 -
6 Seylan Bank PLC (Primary Dealer Unit) 26 Oct 1999 -
7 The Hongkong and Shanghai Banking Corporation Limited (Primary Dealer Unit)
30 Sep 2013 1 Apr 2016#
8 Union Bank of Colombo PLC (Primary Dealer Unit) 8 Apr 2011 -
Standalone Primary Dealers
1 Acuity Securities Limited 3 Jan 2000 -
2 Capital Alliance Limited 10 Jan 2000 -
3 Entrust Securities PLC 1 Apr 2000 24 Jul 2017##
4 First Capital Treasuries PLC 1 Mar 2000 -
5 Natwealth Securities Limited 1 Dec 2003 31 May 20191
6 NSB Fund Management Company Limited 1 Mar 2000 -
7 Perpetual Treasuries Limited 30 Sep 2013 6 Jul 2017
8 Wealth Trust Securities Limited 1 Aug 2011 -
# Withdrawn their Primary Dealership
## Refrained from the Primary Dealership
1 Suspended post Review Period
1.1.15. Primary Dealers play an active role in the development of “Government Securities” market,
both in its primary and secondary markets through obligations such as:
A. Participating in primary auctions;
B. Acting as agent and relationship manager for the investment in Government securities;
C. Predominance of investment in Government securities;
D. Achieving minimum secondary market turnover ratio; and
E. Maintaining efficient internal control system for fair conduct of business.
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 14 of 177
1.1.16. As part of Supervision, Regulation and continuous monitoring; the Public Debt Department
(“PDD”) of the CBSL continued to review the existing laws and regulations9 and introduced
system reforms to improve the Government securities market.
1.1.17. PDD Supervision division and DSNBFI (“department”) are responsible for Regulation and
Supervision of Primary Dealers. As part of Regulation function, the department conducts
assessment of application and appointment, policy formulation, assessment of fitness &
propriety of directors and suspension. For Supervision function, the department conducts
examinations, inspections and investigations to monitor and supervise the activities of the
Primary Dealers. Details of the activities conducted by the Supervision division are as
following: (Refer Exhibit 2)10.
1. Application and Appointment:
A. The application and the accompanying documents are assessed based on relevant Acts,
Regulations and Directions. The ability of the proposed applicant to conduct its business
activities in a prudent and efficient manner in the interest of Primary Dealer system
and investors in Government securities are taken into consideration for the assessment.
The applicant should furnish information and documents, that the CBSL deems
necessary for considering the suitability of the applicant.
B. A board paper is submitted after acquiring a complete set of information, with a
detailed analysis of the applicant, with relevant recommendation of the department.
The Monetary Board may grant ‘In principle approval’ with a specific timeline to fulfill
the remaining requirements (if any) and sufficient time to establish technical and
human resource requirements or reject the application. (Refer Exhibit 2)11.
2. Suspension:
A. The CBSL may suspend a Primary Dealer if it fails to comply with any law, regulation,
direction, guideline or code of conduct applicable to it or acts in a manner which is
unfavorable for the Primary Dealer system or to the national economy for a period not
exceeding six months or may cancel the appointment of a Primary Dealer. (Refer
Exhibit 39)12.
9 Source: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/otherpub/Public%20Debt%20Management%20in%20Sri%20Lanka.pdf 10 Source: Refer Exhibit 2 for PDD Operation Manual – Supervision division, May 2015 11 Source: Refer Exhibit 2 for PDD Operation Manual – Supervision division, May 2015 12 Source: Refer Exhibit 39 for Appointment and Suspension of PDS – LTBO and RSSO
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3. Assessment of Fitness & Propriety of directors:
A. The affidavits and declarations submitted by directors and senior employees are
assessed based on the criteria stipulated in the direction. The assessment sheets and
the documents sent by the director / senior employees are sent to Legal and
Compliance Department for legal clearance.
B. Upon receiving the legal clearance, the approval is granted to relevant officer, in
writing. With respect to existing directors and employees, Primary Dealer companies
shall obtain and submit affidavits and declarations to the SPD within 30 days of this
direction. (Refer Exhibit 2)13.
4. Policy Formulation:
A. Review of areas like broadening business lines for Primary Dealer activities, present
tax structure and its applicability and the prevailing reporting formats submitted by
Primary Dealers etc., to cope with the secondary market developments.
B. It is the task of the supervision department to suggest appropriate policies to make
available an efficient Government security market with a stable institutional
framework. Issuing instructions via directions and ensuring the implementation of the
same by issuing warning letters and show-cause notice form part of the Regulatory
function.
5. Off-site surveillance:
A. It is a continuous monitoring mechanism on the financial soundness and operational
performance of the Primary Dealers with an objective to identify potential adverse
developments of individual Primary Dealers and Primary Dealer industry; and
B. It includes collection and analysis of primary, secondary market information and
financial statements of the Primary Dealers. It also includes monitoring of transactions
in the Government securities in Scripless Securities Settlement System (“SSSS”),
Central Depository System (“CDS”) and the e-trading platform.
6. On-site examination:
A. As part of on-site examination, supervision division focuses on risk assessment of
Primary Dealers, adequacy capital, liquidity, asset quality, profitability and adherence
to prudential directions, guidelines and governance practices.
13 Source: Refer Exhibit 2 for PDD Operation Manual – Supervision division, May 2015
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7. Spot examination:
A. Spot examinations are the special case-based examinations conducted to examine the
specific areas raised due to certain concerns raised in the ongoing off-site surveillance,
customer complaints from customers / Primary Dealer industry.
1.1.18. Transfer of Primary Dealers’ Regulation and Supervision functions from PDD to SNBFI & BS
A. Supervision function was part of PDD until May 2016. The PCOI14 in the inquiry observed
that the supervision function of Primary Dealers vested with PDD, was unsuitable for
PDD, since PDD engages in day-to-day dealings with Primary Dealers for issue of
Government Securities, and, some employees of the PDD may form close relationships
with employees of Primary Dealers.
B. On 8 January 2016, the Monetary Board discussed about the PDD’s Regulatory and
Supervisory roles on the Primary Dealers and determined that it conflicts with its role
of market development and marketing securities.
C. In pursuance of aforesaid discussion, the former Deputy Governor, P Samarasiri, had
submitted a board paper on 5 February 2016 to seek the approval of the Monetary Board
to assign the Regulation and Supervision of the Primary Dealers in the Government
Securities market to DSNBFI.
D. The Monetary Board at its meeting held on 3 January 2016 raised serious concerns over
considerable lapses in the Regulatory and Supervisory actions of the PDD in the case of
Entrust securities PLC and expressed views on the need to examine the Regulatory and
Supervisory lapses of the PDD inclusive of the lapses of the PDD officials and to
introduce improvements to the Regulatory and Supervisory mechanism of the PDD to
prevent occurrences of instances similar to Entrust Securities PLC in future. In addition,
internal discussions on establishment of a new securities trading infrastructure for the
Government securities market which will require a new Regulatory and Supervisory
mechanism for the market in line with the best international practices.
14 Source: Chapter 12 of PCOI report dated 30 December 2017
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E. In view of the above, it was proposed to transfer regulatory and supervisory functions
of the Central Bank of Sri Lanka now carried out by the PDD to the DSNBFI with the
immediate effect. The PDD was made responsible to conduct auctions, maintenance of
issuance and secondary trading systems inclusive of issuance of system rules, securities
registry, debt servicing, Government securities market development, debt
management database and relevant correspondence and reports. DSNBFI was made
responsible to undertake all Regulation and Supervision on prudential, conduct of
business (other than system rules), compliance and consumer/ investor protection
aspects to promote safety and soundness and confidence on institutions and the
market.
F. The Director, SNBFI, will review the current regulatory and supervisory mechanism in
consultation with management and market participant as appropriate and issue revised
or new regulations appropriately.
G. The supervision division of Primary Dealers was transferred to DSNBFI with effective
from 3 June 2016 and supervision function of Primary Dealer unit of licensed
commercial banks were transferred to Bank Supervision Department (“BSD”), with
effective from 16 May 2018. (Refer Exhibit 3 and Exhibit 4) 15.
15 Source: Refer Exhibit 3 for Regulation made by The Ministry of Finance under Section 55 of the RSSO (Chapter 420) and Exhibit 4 for Regulation made by the Ministry of Finance under Section 16 of the LTBO (Chapter 417)
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2. OBJECTIVE AND SCOPE
2.1. THE OBJECTIVE AND SCOPE, DEFINED IN THE CONTRACT NO. RFP/CBSL/BS/FA/2018/05
ARE AS FOLLOWS:
2.1.1. The Monetary Board (“MB”) decided to conduct an independent examination to assess the
effectiveness of the conduct of the Regulatory and Supervisory functions by the regulator,
i.e. SPD / the DSNBFI with respect to the following Primary Dealers:
A. Entrust Securities PLC;
B. Perpetual Treasuries Limited;
C. Pan Asia Banking Corporation PLC (Primary Dealer Unit);
D. WealthTrust Securities Limited; and
E. Natwealth Securities Limited
2.1.2. With respect to the selected Primary Dealers as per 2.1.1 above, during the Review Period
1 January 2009 to 31 December 2017, the scope of work included to:
A. Examine the laws, regulations, policies, circulars, guidelines, manuals etc. applicable
to Regulation and Supervision of Primary Dealers;
B. Ascertain if there were any deviations from relevant laws, regulations, policies,
circulars, guidelines, etc. in performing the role of Regulation and Supervision of the
selected Primary Dealers;
C. Ascertain if there were any irregularities, lapses or misconduct or instances of
professional negligence in conducting the role of Regulation and Supervision;
D. Ascertain if there was any nexus between Central Bank Officers and external parties,
which had given rise to deficiencies/lapses, misconduct, market manipulations,
irregularities, violation of laws, regulations, policies, circulars, guidelines, code of
conduct of the Primary Dealers, etc. in performing the Regulatory and Supervisory
function.
2.1.3. Operations of the PDD / the DSNBFI to be examined with respect to Regulation and
Supervision of Primary Dealers.
The following practices adopted, and actions taken by the PDD / the DSNBFI with respect
to Regulation and Supervision of selected Primary Dealers during the period under review,
may require comprehensive audit / scrutiny:
A. Evaluation of applications and appointment of selected Primary Dealers;
B. On-site and Off-Site supervision of selected Primary Dealers and findings thereof;
C. Recommendations and or any regulatory actions taken by the regulator with respect to
such findings;
D. Regulatory actions recommended to the Monetary Board by the regulator;
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E. Regulatory actions approved / not approved by the Monetary Board, and
F. Implementation and monitoring of regulatory actions by the regulator.
2.1.4. Investigate into the matters referred to above, and any other matters which may come to
light during the examination which have a bearing or relevance to the matters referred
above.
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3. WORK PERFORMED
3.1. OPERATIONS OF REGULATION AND SUPERVISION FUNCTION
3.1.1. The detailed work performed to examine the review conducted by the Public Debt
Department (“the PDD”) - supervision division / Department of Supervision of Non-Bank
Financial Institutions to supervise selected Primary Dealers with respect to Regulatory and
Supervisory roles are as stated below.
3.1.2. Conducted meetings / discussions with the employees of the Department of Supervision of
Non-Bank Financial Institutions (“the DSNBFI”), Bank Supervision Division (“BSD”) and
Public Debt Department (“the PDD”) to gather the understanding on the Regulatory and
Supervisory process relating to Primary Dealer including application, appointment,
examination and issue of directions. The details of meetings scheduled are as follows:
Table 2 - The details of meetings scheduled with employees of the CBSL
# DATE OF MEETING
NAME OF EMPLOYEES CURRENT DESIGNATION CURRENT DEPARTMENT
1 8 May 2019 W Ranaweera Director SNBFI
K P K Weerasekara Deputy Director SNBFI
S Guruge Head of Division SNBFI
D Seram Assistant Director SNBFI
S Premachandra Senior Assistant Director Internal Audit
2 9 May 2019 N D Y C Weerasinghe Deputy Superintendent PDD
J Gamalath Additional Director BSD
N Rayigama Senior Assistant Director BSD
A Amarakoon Senior Assistant Director BSD
K Chandrasiri Assistant Director BSD
3 16 Sep 2019 N D Y C Weerasinghe Deputy Superintendent PDD
L S Fernando Senior Manager PDD
4 17 Sep 2019 Dr. M Z M Aazim Superintendent PDD
N D Y C Weerasinghe Deputy Superintendent PDD
5 18 Sep 2019 W Ranaweera Director SNBFI
6 20 Sep 2019 W Ranaweera Director SNBFI
K P K Weerasekara Deputy Director SNBFI
S P Sedara Senior Assistant Director SNBFI
3.1.3. Conducted meetings / discussions with the former employees who performed Regulation
and Supervision functions of Primary Dealers to gather an understanding on the regulatory
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and supervisory process relating to Primary Dealers including application, examination,
regulation and other Primary Dealer related Regulatory and Supervisory functions. The
details of meetings conducted are as follows:
Table 3 - The details of meeting conducted with former employees of Supervision division
# DATE OF MEETING
NAME OF EMPLOYEES DESIGNATION CURRENT DEPARTMENT
1
27 June 2019
N D Y C Weerasinghe Deputy Superintendent PDD
D L Nihal Deputy Superintendent PDD
R D T Gunasekara Additional Director Communications
2 28 June 2019
L Sritharan Acting Deputy Director Macro Prudential Surveillance
S M S M Kumari Senior Assistant Director Macro Prudential Surveillance
L P S Perera Senior Assistant Superintendent
Employees’ Provident Fund
3 1 July 2019
D M K B Dunuthilake Senior Assistant Director Regional Development
H M N D Herath Senior Assistant Director Legal and Compliance
L S Fernando Senior Manager PDD
A S Fernando Senior Assistant Director Regional Development
J D S J Nanayakkara Additional Superintendent Employees’ Provident Fund
4 3 July 2019
T M B A Goonetilleke Deputy Director Centre for Banking Studies
D S Thenuwara Senior Manager PDD
U P Jayasinghe Senior Assistant Superintendent
Employees’ Provident Fund
3.1.4. Attended meetings conducted by the Honourable Governor with various division heads and
the SPOC (appointed by the Monetary Board) to discuss the status, data dependency,
challenges faced, timelines for completion and the way forward. (Refer Exhibit 5) 16.
16 Refer Exhibit 5 for the summary of discussion with the Honourable Governor
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3.1.5. Conducted meetings with SPD and the DSNBFI, key officials of the PDD and the DSNBFI and
department personnel for clarification / additional understanding on the applicable laws,
ordinance, regulations, directions issued during the Review Period, policies and manuals
applicable for the Regulation and Supervision functions.
3.1.6. Meetings with legal and compliance department to gather an understanding on applicable
laws, regulations, ordinance, directions and other legal documents pertaining to the
Regulation and Supervision functions.
3.1.7. Conducted meetings with Criminal Investigation Department (“CID”) and team assisting
PCOI to understand the investigation and legal proceedings pertaining to the Regulation
and Supervision functions.
3.1.8. Provided fortnightly / regular updates to the Forensic Audit Monitoring Committee
(“FAMC”) regarding the scope of work, procedures performed and challenged faced during
performing Investigation / Forensic Audit. (Refer Exhibit 6) 17.
3.2. MAPPING THE DEPARTMENTAL PROCEDURES WITH APPLICABLE
LEGISLATIONS
3.2.1. Attained an understanding of the applicable laws, regulations, policies, circulars,
guidelines, manuals and other relevant documents relating to regulatory and supervisory
function of the Primary Dealers for the Review Period 1 January 2009 to 31 December 2017.
(Refer Annexure 1 and Exhibit 7)18;
3.2.2. Prepared compliance checklist and mapped with department procedures and practices
followed for Regulatory and Supervisory functions to ascertain whether proper procedures
and adequate safeguards have been adopted by the department to ensure effective
Regulation and Supervision of Primary Dealers.
17 Refer Exhibit 6 for Summary of discussions with the FAMC for status updates 18 Refer Annexure 1 for the list of applicable laws, regulations, manuals and Exhibit 7 for email communication with the Department for providing list of applicable laws and guidelines.
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3.3. THE CBSL INTERNAL REPORTS
3.3.1. The CBSL provided copies of 26 internal reports during the Review Period on the operations
of supervision division. Provided below is the list of internal reports reviewed:
A. The Presidential Commission of Inquiry Report (“PCOI”) on 30 December 2017 to
Investigate and Inquire into and report on the issuance of Treasury Bonds during the
period 1 February 2015 to 31 March 2016;
B. The Special Audit Report updated in accordance with the information discovered up to
23 September 2016 by the Committee of Public Enterprises(“COPE”) and Auditor
General since the release on 29 June 2016 of the special audit Report on the treasury
bonds issued by the PDD of the CBSL during the period from February 2015 to May
2016;
C. Report forwarded to The Ministry of Finance (“MOF”) in terms of Section 43 (2) of the
MLA no. 58 of 1949 (2008 to 2016);
D. Auditor General Report on audits of financial statement for the period 2011 to 2017;
and
E. Internal audit reports on supervision function for the period 2010, 2011, 2012, 2013,
2014, 2016 and 2017.
3.3.2. Gathered information from the above investigations and expert reports to identify any
discrepancies, irregularities and misconduct relating to regulatory and supervisory
function.
3.4. REVIEW OF DEPARTMENTAL PROCEDURE
3.4.1. Meetings were conducted with the Division Head and department personnel of the PDD, the
DSNBFI and BSD to understand the procedure for retaining the documents relating to
application / appointment, suspension of Primary Dealers, policy formulation, assessment
of fitness and propriety of directors, conducting examination – on-site, off-site and spot
examinations, communication to Primary Dealers and recommendations by the Monetary
Board for the concerns identified during the examinations.
3.4.2. The CBSL provided following documents relating to the Regulation and Supervision of
Primary Dealers during the Review Period:
A. Application and Appointment of Primary Dealers
3.4.3. Attained an understanding of the applicable acts, regulations and directions based on which
the appointment of the Primary Dealers was made. Review of files provided by the
department to consider the suitability of the respective Primary Dealer. Review of Board
paper submitted with the detailed analysis of the applicant, with the recommendation of
the department.
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3.4.4. Review of in-principle approval granted by the Monetary Board with respective timeline to
fulfill the pending requirements by the Primary Dealer.
3.4.5. Review of the below mentioned conditions stated in Local Treasury Bills (Primary Dealers)
Regulations No. 01 of 2009 and Registered Stock and Securities (Primary Dealers)
Regulations No. 01 of 2009, which are applicable to licensed commercial banks for
appointment as Primary Dealers:
1. The licensed commercial bank shall maintain separate books of accounts in respect of
activities relating to Primary Dealers (Government Securities);
2. The bank shall not have on its Board of Directors, a director or an employee of another
Primary Dealer;
3. The Primary Dealer (Government Securities) operations of a licensed commercial bank
shall be headed by a qualified and competent person holding a senior management
position in such bank who shall devote his time to such Primary Dealer operations;
4. The bank shall be subject to operating guidelines and prudential requirements imposed
by the Central Bank, from time to time, in respect of Primary Dealer activities and
operations;
5. The Primary Dealer (Government Securities) activities and operations of a licensed
commercial bank shall be monitored and supervised by the CBSL.
3.4.6. Review of the below mentioned conditions stated in Local Treasury Bills (Primary Dealers)
Regulations No. 01 of 2009 and Registered Stock and Securities (Primary Dealers)
Regulations No. 01 of 2009, which are applicable to licensed commercial banks for
appointment as Primary Dealers:
1. The Articles of Association of the Company shall limit its objects to carrying on the
activities set out in Schedule III and to activities ancillary to, or about such activities;
2. The company shall maintain a minimum capital as may be determined by the Monetary
Board, from time to time, of which the Tier II capital shall not exceed fifty per centum
of the Tier I capital;
3. The company shall not have on its Board of Directors, a director or an employee of
another Primary Dealer or except for the Chief Executive Officer an employee of the
Company;
4. The company shall not have on its Board of Directors any person who is subject to any
disqualification applicable to directors of a licensed commercial bank in terms of the
Banking Act, No. 30 of 1988 provided, however, an employee or a director of a licensed
commercial bank and where such bank is not a Primary Dealer, shall not be disqualified
to be a director of a Primary Dealer Company;
5. The company shall not register, without prior written approval of the Monetary Board,
any shareholding of a person if such shareholding results in a change in the controlling
interest in the Primary Dealer; and
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6. The company shall not without the prior written approval of the Monetary Board
register any shareholding of more than Ten per centum of the issued capital of the
company of a person if such person is the holding company or a subsidiary of any other
Primary Dealer.
B. Details and copies of orders of suspension of Primary Dealers
3.4.7. Review of files relating to suspension of Primary Dealers where a Primary Dealer has failed
to comply with any law, regulation, direction, guideline or code of conduct applicable to
it or acts in a manner detrimental to the interest of the Primary Dealer system or to the
national economy.
3.4.8. Review of files to verify the fact that the Primary Dealer whose appointment has been
suspended or cancelled does not have any dealings with the Central Bank as counterparty
in the primary and secondary markets in Securities and no transactions of any new business
with customers were done.
C. Assessment of fitness and propriety of directors
3.4.9. Review of the affidavits and declarations submitted by directors and senior employees were
assessed based on the criteria stipulated in the direction. The assessment sheets and the
documents sent by the director / senior employees were sent to Legal and Compliance
Department for legal clearance. Upon receiving the legal clearance, the approval was
granted to the relevant officer, in writing.
3.4.10. The timeline applicable for the submission of documents is as follows:
A. With respect to existing directors and employees, Primary Dealer companies shall
submit affidavits and declarations to the SPD within 30 days of the direction;
B. In respect of every continuing director/s, the Chief Executive Officer of the Primary
Dealer Company shall submit affidavits and declarations to the SPD annually thirty days
prior to the AGM of the respective Primary Dealer Company if such directors are
nominated for re-appointment;
C. In respect of every continuing Chief Executive Officer of a Primary Dealer Company,
the Chairman of the Board of Directors of the Primary Dealer Company shall submit an
affidavit and a declaration to the SPD annually thirty days prior to the commencement
of the calendar year; and
D. In respect of every continuing officer, the Chief Executive Officer of Primary Dealer
Company shall submit affidavits and declarations to the SPD annually thirty days prior
to the commencement of the calendar year, if such employees are nominated for
continuation in respective positions.
D. On-site examination reports with supporting documents
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3.4.11. Review of books, accounts, registers, files and other records kept in relation to its activities
as a Primary Dealer. Review of files relating to onsite examinations which are carried out
to verify the accuracy of records submitted by Primary Dealer and to assess the financial
viability of the Primary Dealer.
E. Off-site surveillance Report with supporting documents
3.4.12. Review of reports relating to offsite surveillance which is carried out to check the financial
soundness of a Primary Dealer and includes activities not limited to evaluation of financial
position and performance of Primary Dealer. Analysis of the “FInNet” which is a web-based
interface introduced in February 2012 and is used by the DSNBFI, wherein documents such
as Balance Sheet, Statement of Changes in Equity and Reserves, Profit and Loss Account,
Cashflow Statement, Mark to Market Report and Risk Weighted Capital Adequacy Return
are uploaded periodically by the Primary Dealers. These reports are then downloaded by
the department for its analysis and review. (Refer Exhibit 1 and 2) 19.
F. Spot examination reports with supporting documents
3.4.13. Review of reports relating to spot examinations which are conducted to examine specific
aspects on Primary Dealer operations and such requirements may arise due to certain
concerns raised in the on-going process of off-site surveillance, customer complaints or
complaints from the Primary Dealer industry. Therefore, the scope of this examination is
limited and will primarily be based on the specific concern(s) identified.
3.4.14. As per data provided by the CBSL, prepared the examination stock sheet containing the
count of examinations for selected Primary Dealers during the Review Period:
Table 4 - Count of examinations – Primary Dealer Wise
# PRIMARY DEALER NAME ON-SITE SPOT SPECIAL
1 Pan Asia Banking Corporation PLC– Primary Dealer Unit
3 - 2
2 Natwealth Securities Limited 5 2 4
3 WealthTrust Securities Limited 4 1 -
4 Entrust Securities PLC 4 4 9
5 Perpetual Treasuries Limited 2 5 1
TOTAL 18 12 16
19 Refer Exhibit 1 for the PDD Operational Manual – Supervision division 2013 and Exhibit 2 for the PDD Operation Manual- Supervision division May 2015
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Table 5 - Count of files received – Primary Dealer Wise
# PRIMARY DEALER NAME NO. OF FILES NO. OF BOXES
1 Pan Asia Banking Corporation PLC– Primary Dealer Unit
29 1
2 Natwealth Securities Limited 39 1
3 WealthTrust Securities Limited 29 1
4 Entrust Securities PLC 114 4
5 Perpetual Treasuries Limited 64 3
TOTAL 275 10
3.4.15. BDO India reviewed the documents provided by the CBSL to identify any discrepancies,
irregularities, negligence and misconduct in the following procedures:
A. Assessment of application and appointment of selected Primary Dealers;
B. On-site, off-site, spot, special investigation, policy formulation, assessment of fitness
and propriety of directors and officer’s Supervision of selected Primary Dealers and
findings thereof;
C. Recommendations and or any regulatory actions taken by the regulator with respect of
such findings;
D. Regulatory actions recommended to the Monetary Board by the regulator;
E. Regulatory actions approved /not approved by the Monetary Board; and
F. Implementation and monitoring of regulatory actions by the regulator.
3.4.16. Discussions were scheduled with the Division Head and the Department personnel on any
clarification / understanding required on the procedures followed.
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3.5. DIGITAL FORENSICS
3.5.1. During the review of documents related to Appointment, Examination and Surveillance of
Primary Dealer, deviation and / or anomalies were noted in the process followed and the
supporting documents maintained. A total of 21 CBSL employees (hereinafter referred to
as “custodians”) were identified who were responsible for taking decisions related to
Regulation and Supervision of Primary Dealers. The CBSL issued electronic devices (desktop
/ laptop computers, iPads and mobile phones, where applicable) to these custodians that
could have been used by them and were identified by the DIT based on the “Last Log-In
details” appearing in the “Active Directory”20 available. BDO India did not independently
verified the completeness and accuracy of the “Last log-in” information as assessed by the
DIT. The electronic devices identified (hereinafter referred to as “Target Devices”) by the
DIT were physically and handed over to BDO India for performing forensic technology /
eDiscovery procedures. (Refer Annexure 22)21.
3.5.2. BDO India relied upon the device identification method (based on “Last Log-In” details as
per the “Active Directory”) adopted by the DIT of CBSL, in the absence of IT Asset register,
with a detailed record of all electronic devices issued by the CBSL and the changes in the
devices issued, if any. It is possible that the identified devices weren’t used by the
custodians during “Review Period” under the TOR-5, as identification of device was based
on “Last Log In” details. This method would identify one (last / latest) machine used by
the custodian/s. These machine(s) could be different from the machine(s) used by the
custodians during the Review Period.
3.5.3. The Outlook email server backup / spooled copies of the respective custodians at the CBSL
email accounts were provided by the DIT for review, to BDO India. We have not
independently verified the completeness of the same. In respect of 20 custodians, the DIT
confirmed that email backup was not available at the server prior to June 2012 and the
email communications prior to this period were not accessible to BDO India for review.
(Refer Exhibit 20 and Annexure 2)22.
20 “The main service in Active Directory is Domain Services (AD DS), which stores directory information and handles the
interaction of the user with the domain. AD DS verifies access when a user signs into a device or attempts to connect to a server over a network.” (Source: https://searchwindowsserver.techtarget.com/definition/Active-Directory) 21 Refer Annexure 22 for the list of 18 identified employees and their respective Target Devices along with rationale for their
identification 22 Refer Exhibit 20 for copy of e-mail confirmation from the DIT for outlook e-mail backup and Annexure 2 for the list of 21
custodians along with rationale for their identification.
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3.5.4. The CBSL email platform migrated from IBM Lotus notes to Microsoft Outlook in June 2012.
As informed by the DIT, back-up of email communications related to the prior period of
June 2012, were not maintained. Accordingly, an email communication of the custodians
related to the Review Period prior to June 2012 were not accessible for BDO India for
review. (Refer Exhibit 55)23.
3.5.5. The table below is a summary of 25 Target Devices acquired from 20 custodians identified
as relevant for review under the TOR-5:
Table 6 - Summary of Target Devices
# PARTICULAR COUNT
1 Total number of custodians 20
2 Total number of Desktop Hard drives (A) 17
3 Total number of Laptop Hard drives (B) 4
4 Total number of I-pad (C) 4
TOTAL NUMBER OF TARGET DEVICES (A+B+C) 25
3.5.6. Provided below is a list of electronic devices and availability of email backup copies on
server identified (by the DIT) that pertains to the respective custodians:
Table 7 - Count of Target Devices and availability of email backup copies on server
# NAME DESKTOP LAPTOP I-PADS SERVER EMAILS
TOTAL
1 P Samarasiri 1 2 Not available
1 4
2 S S Ratnayake 1 Not available
Not available
1 2
3 C M D N K Seneviratne
1 Not available
Not available
1 2
4 T H B Sarathchandra
1 Not available
Not available
1 2
5 U L Muthugala 1 Not available
Not available
1 2
6 N D Y C Weerasinghe
1 Not available
Not available
1 2
7 N W G R D Nanayakkara
1 1 1 1 4
23 Refer Exhibit 55 for a copy of e-mail communication by the DIT regarding migration of email communication platform.
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# NAME DESKTOP LAPTOP I-PADS SERVER EMAILS
TOTAL
8 D S Thenuwara 1 Not available
Not available
1 2
9 L T Amarasinghe
1 Not available
Not available 1 2
10 W N S Fernando 1 Not available
Not available
1 2
11 S P Sedara 1 Not available
Not available
1 2
12 A S Fernando 1 Not available
Not available
1 2
13 J P B Ishanthi 1 Not available
Not available
1 2
14 P M C S Gunawardane
1 Not available
Not available
1 2
15 K P K Weerasekara 1 Not available
Not available
1 2
16 Arjuna Mahendran 1 1 2 1 5
17 SJK Guruge - Not available
Not available
1 1
18 M Z M Aazim 1 Not available
1 1 3
19 W Ranaweera - - - 1 1
20 U P Alawattage - - - 1 1
TOTAL 17 4 4 20 45
3.5.7. The below mentioned steps were followed while conducting digital forensic on each of the
respective Target Device:
Table 8: Work steps of Digital Forensics
### WORK STEP
1 Identification and Acquisition
2 Imaging
3 Returning Target Device
4 Data extraction
5 Recovery and repair of composite email files
6 Indexing of ESI data in Target Devices
7 Keyword search and review
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### WORK STEP
8 Keyword24 list preparation
9 Timeline Analysis25
10 Review of i-pad
11 Review methodology
(Refer Annexure 23 for tools used to perform Digital Forensics / e-Discovery on target
devices)26.
3.6.7 ACQUISITION OF TARGET DEVICES:
The Target Devices of 21 Identified CBSL Employees related to the scope of work under
TOR-5 were requested from the CBSL, to perform Digital forensic / e-Discovery procedures
explained as following:
A. Target Devices were identified by the DIT based on the “Last Log-In” details as
appearing in the Active Directory in absence of IT Asset register and hand-held (mobile)
devices.
B. Target devices pertaining to identified custodians, who are the current employees of
the CBSL were acquired directly from the respective custodians with the help of DIT.
Executives of the ITD at CBSL removed the “storage device” from the desktop / laptop
of the custodians and physically handed over to BDO India, for processing. Storage
media (HDD / SSD) was removed in the presence of the respective custodians and the
storage media was handed over by IDT to BDO India. The handheld devices pertaining
to the custodians, who are the current employees of CBSL, were identified by the DIT
and were handed over to BDO India.
C. Chain of Custody (“COC”) was documented in respect of each Target Device and
maintained through-out the examination. COC encompasses the custodian details,
Target Device details, time, date & location of handover from the DIT or the respective
custodian. COC (Refer Exhibit 5)27 was prepared for each device of the custodian and
related image was marked individually.
24 “a significant word from a title or document used specially as an index to content” (Source: https://www.merriam-webster.com// dictionary/keyword) 25 “a schedule of events and procedures” (Source: https://www.merriam-webster.com/dictionary/timeline) 26 Refer Exhibit 20 for copy of e-mail confirmation from the DIT for outlook e-mail backup and Annexure 2 for the list of
custodians along with rationale for their identification. 27 Refer Exhibit 5 for copies of COC forms of Target Devices for respective custodians
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D. The DIT or custodian signed-off the COC form after verification of the facts recorded
representing the acquisition of the Target Device and the associated activities
performed.
E. Handheld devices were given to BDO India by the respective custodians or the DIT in
presence of Executives from IT department. These devices were provided by the CBSL
for review Password (if any) was provided by the custodian for the screen lock and was
mentioned in COC form. Four electronic devices were identified by CBSL Board
Secretariat, as were issued to Arjuna Mahendran. During the handover of handheld
devices, custodians were asked to unlock the devices with the password in the presence
of the CBSL IT executives.
In case access to iCloud for Apple devices, the custodians agreed to administer the
password whenever required by BDO India. The password details were not captured in
the COC as the custodians rejected to share the same in the COC.
3.6.8 IMAGING OF TARGET DEVICES:
After the Target Devices were physically acquired from the respective custodian or the DIT,
forensic Image28 was created in the manner as explained under:
A. Each hard drive or handheld device provided by the custodian or the DIT was marked
uniquely in respect to the project. Same details were mentioned in the COC form of
the respective identified device.
B. Globally accepted Forensic imaging tools which includes Tableau TX-1, Logicube Falcon,
Tableau-T35u write blocker and Access Data Forensic Tool Kit Imager were used to
create the forensic image of the Target Devices.
C. During the process of creating forensic image or acquisition of handheld device details
such as case ID, evidence ID, examiner name and unique description was fed to the
machine.
D. These details also reflect in Additional log file (Refer Exhibit 6)29 that was generated
after creation of forensic image in case of hard drives. These log files encompass the
imaging details including but not limited to Target Device details, destination details,
task date & time, acquisition & verification hash values30 (Md5 & SHA-1), details of
forensic image and disk sectors etc.
28 “Forensic image of a device is the bit-by-bit, sector-by-sector direct copy of a physical storage device, including all files, folders and unallocated free and slack space.” (Source: https://whatis.techtarget.com/definition/forensic-image) 29 Refer Exhibit 6 for details of logs generated with forensic image of Target Devices. 30 “A Hash Value (also called as Hashes or Checksum) is a string value (of specific length), which is the result of calculation of a Hashing Algorithm. Hash Values have different uses. One of the main uses of Hash Values is to determine the Integrity of
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E. Forensic image created from the respective Target Device was marked as primary
evidence or master copy or original evidence. A duplicate copy of the forensic image
was created and marked as working copy. Original evidence was stored aside after
creating a duplicate copy from it. Further, Digital Forensic / e-Discovery procedures
were carried out on the working copy.
F. Handheld devices were acquired using globally accepted mobile acquisition tool
Cellebrite UFED. Best possible method recommended in the application for acquisition
of the Target Device was adopted.
G. Advanced logical extraction and file system extraction was adopted to acquire target
handheld mobile devices. Information such as but not limited to evidence ID, case ID,
custodian details, device details, acquisition details, tool details and task date & time
were updated in the COC form.
3.6.9 RETURNING OF TARGET DEVICES:
A. After completion of forensic imaging procedure / e-Discovery or acquisition of Target
Device and handheld devices respectively were returned to the DIT or the respective
custodian in the presence of the IT Executives of CBSL, as the case may be.
B. At the time of returning the Target Device, COC was updated with the required
information including but not limited to date of return, time & location, returned by
and recipient name.
C. Physical condition of the device was also verified by the DIT or the respective custodian
at the time of handing over of Target Device from BDO India to the DIT or respective
custodian. After verification of physical condition of the Target Device and verification
of information on COC, the DIT or respective custodian sign-off the COC.
any Data (which can be a file, folder, email, attachments, downloads etc.”. (Source: http://www.omnisecu.com/tcpip/what-are-hash-values-important-hash-value-algorithms.php).
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3.6.10 EXTRACTION OF ELECTRONICALLY STORED INFORMATION:
A. Duplicate or working copy was created from the original image which was directly
created from the Target Device. This duplicate forensic image was administered on the
forensic platform to carry out e-discovery procedures.
B. ESI31 contained therein the target Device was extracted using standard OEM provided
“Encase Enscript” which is based on 4632 extensions using Guidance Encase tool.
C. Target Device system information such as Operating System Information (Refer Annexure
2)33, User account information (Refer Annexure 3)34, and basic information and volume
details about the image (Refer Annexure 4)35 was extracted from the forensic image of
the Target Devices to gather information about the system.
D. In case of handheld device, ESI such as device information, messages and chats,
calendar notes, voice call log were extracted using mobile forensic tool.
E. The extracted ESI was verified to confirm that the extraction is comprehensive. As per
SECTION 3 OF EVIDENCE ORIDNANCE ACT, No. 14 of 1895 “Evidence means and
includes –
(a) All statements which the court permits or requires to be made before it by
witnesses in relation to matters of fact under inquiry, such statements are called
oral evidence;
All documents produced for the inspection of the court; such documents are called
documentary evidence” As per SECTION 38 OF COMPUTER CRIME ACT, NO. 24 OF
2007, the term “document includes an electronic record” and “electronic record
means, information, record or data generated, stored, received or sent in an
electronic form or microfilm, or by any other similar means”.
As per SECTION 3 OF ELECTRONIC TRASANCTION ACT, NO. 19 OF 2006 “No data
message, electronic document, electronic record or other information shall be denied
legal recognition, effect, validity or enforceability on the ground that it is in
electronic form.”
31 “Electronically stored information can be defined as any type of information that is created, used and stored in digital form, and requires a computer or other device for access”. (Source: https://www.legalmatch.com/law-library/article/electronically-stored-information-esi-laws.html) 32 Extensions used for extraction- doc, docx, docm, dot, dotx, wrd, wpt, wpd, dotm, rtf, pst, ost, dbx, eml, emlx, vcf, msg, otm, oft, ics,msf,nsf,mbox,mbx, bmp, pdf , txt , jpg, jpeg, png, tiff, tif, gif, csv, xlsm, xlsx, xls, xltm, xl, xlsb, xltx, xlb, xlc, xlt, xlk, and xlw. 33 Refer Annexure 2 for details of Operating system artefacts of reviewed Target Devices. 34 Refer Annexure 3 for details of User Accounts of reviewed Target Devices. 35 Refer Annexure 4 for Basic information and volume of data details of reviewed Target Devices.
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F. Based on the marked status of presence and user activity on the drive ESI comprised of
the four categories of data, which are as under:
1. ACTIVE DATA: Active data can be defined as ESI stored on the storage device of
computer systems, which can be directly accessed, readily visible to operating
system and / application software that was used to create it and is directly
available to users without un-deletion, alteration, or restoration. It was identified
by “Description” property in “Encase” forensic tool.
2. DELETED DATA: Deleted data comprises of files that are no longer readily
accessible to the user, due to the deletion activity requested by the user. When a
file is deleted by user, operating system only marks them as deleted, but they are
physically present on the hard drive. Deleted data will stay on the drive for as long
as it is not overwritten by the other data.
The overwritten files are the sub-set of deleted files which are overwritten by other
files on its physical location on the hard drive. Deleted and Overwritten files are
identified by the “Description” property in “Encase” forensic tool.
3. CARVED DATA: File carving is the process used to extract data from a disk drive or
other storage devices without the assistance of the file system that originally
created the file. Data extracted through this process is called Carved data and it
depends on the fragments.
On forensic image of the Target Device’s carving was attempted on “all at sector
boundaries” by “X-ways” Forensic tool based on the “recovery by type” option.
The extracted results may contain duplicates as well due to false positive hits or
repetitive attempt to carve the data. The availability / accessibility of the carved
files depends on the size of the original file deleted and respective file built up
from the unallocated spaces by file carving method.
“Recover my Email” forensic tool was used to recover deleted message (if any) and
repairing (if required) of composite email files (.ost or .pst) to the extent possible.
4. INTERNET ARTEFACTS: Internet artefacts relating to browsing activity, internet
banking, emails and chats and Internet artefact, extraction was performed by using
forensic tool “Magnet Axiom”.
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G. The count of files (Refer Annexure 5)36 per extension for the Review Period was
determined based on date of creation. Metadata for the ESI was extracted by means of
using “Encase Enscript”. Details such as the date of creation of file was identified by
“File created” metadata37 property.
H. The count of files per extension for the Review Period was determined based on date
of creation of the file. The duplicate files were identified based on the “Is Duplicate”
metadata were removed. “Duplicate” metadata for the file was derived from the hash
values of the file computed. In case the hash value of the file was not calculated,
stated file was taken as original. Count of files per extension for the review period of
TOR- 5 was deduced based on the metadata extracted for the files. The metadata was
extracted using “Encase Enscript” which was based on extensions. Report generated
with the help of “Encase Enscript” encompasses properties of file such as but not
limited to file created date, modify date, last accessed date, marked status of presence
on the hard drive i.e. active file or deleted file, hash computed of the file. Count of
file was calculated by following steps provided below:
1. Files were initially filtered based on the “created date” property to determine
the files that were created in the Review Period pertaining to TOR-5.
2. Later, duplicates were removed by filtering the column marked as “Duplicate” and
selecting “No”. File Duplicate “Yes” or “No” was determined on the basis on hash
value computed for the file. If Hash value is not computed for the file, file under
stated condition was assumed as Original file (not a duplicate copy of another
file).
3. Files then were filtered out on basis on their presence marked on the device i.e.
active file or deleted file. Files marked in column “Is deleted” or “Deleted” as
“Yes” or “No” were separated and count was taken for active and deleted files.
37 “a set of data that describes and gives information about other data”. (Source: https:// whatis.techtarget.com/
search/query? q=metadata)
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3.6.11 INDEXING OF DATA:
Globally accepted and standard tools were used to perform indexing of the ESI extracted
from the forensic image of the Target Device. Indexing of the ESI was performed to bring
completed data set of ESI on one single platform and perform keyword searches for each
custodian. Indexed Data comprised of active files, deleted files and carved user files
extracted from Target Device image, server emails provided by the CBSL and recovered
email file. Following is the classification of various indexed files:
Table 9: Classification of indexed files
To perform keyword searches, extracted ESI was distributed in two types of file formats
namely “searchable file format” and “non-searchable file format”.
The file formats and process of keyword searching on these file formats are as under:
A. In case of “searchable File format” such as word files, excel files, emails, pdf,
keyword searching can be performed by directly searching those identified keywords
in respective data set.
B. In case of “non-searchable file format” such as multimedia files, scanned pdf,
images, keyword searching cannot be performed and accordingly, manual review was
performed.
# TYPE OF FILES TYPE OF DOCUMENTS
1 User Files • Word documents
• Excel Files
• Notepad Files
2 Email Files • Lotus Notes
• Outlook message files such as msg, eml
• Composite email files such as nsf, ost and pst files
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Table 11: Summary of ESI extracted using work procedures mentioned above
# CUSTODIAN FORENSIC TOOL
ACTIVE ESI38 DELETED ESI39
SERVER EMAILS
1 Arjuna Mahendran
Tableau TX-1 18,326 719 13,374
2 Arjuna Mahendran
Tableau TX-1 18,021 34,830 13,374
3 N W G R D Nanayakkara
Tableau TX-1 21,740 323,199 35,805
4 N W G R D Nanayakkara
Tableau TX-1 36,209 241,605 35,805
5 S S Ratnayake Tableau TX-1 121,151 526,988 59,704
6 C M D N K Seneviratne
Logicube Falcon
40,956 219,383 33,806
7 M Z M Aazim Logicube Falcon
24,498 84,195 26,402
8 U L Muthugala T35u and FTK Imager
31,698 105,842 16,668
9 W N S Fernando Tableau TX-1 11,361 39,021 17,149
10 P Samarasiri Tableau TX-1 4,818 314,447 11,518
11 P Samarasiri Tableau TX-1 16,432 28,556 11,518
12 P Samarasiri Tableau TX-1 18,382 26,298 11,518
13 D S Thenuwara Logicube Falcon
26,046 215,348 67,254
14 L T Amarasinghe
T35u and FTK Imager
22,161 283,450 7916
15 S P Sedara Logicube Falcon
293,503 172,244 31,953
16 A S Fernando T35u and FTK Imager
19,098 297,200 17,721
17 J P B Ishanthi T35u and FTK Imager
55,515 256,768 7468
18 P M C S Gunawardane
Tableau TX-1 18,905 58,689 12,044
38 Active ESI comprises of the data which can be directly accessed, readily visible to OS and user 39 Deleted ESI comprises of data not readily available to the user, due to deletion activity
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# CUSTODIAN FORENSIC TOOL
ACTIVE ESI38 DELETED ESI39
SERVER EMAILS
19 K P K Weerasekara
Tableau TX-1 26,413 59,277 16,320
20 N D Y C Weerasinghe
Logicube Falcon
20,016 56,890 56,253
21 T B H Sarathchandra
Tableau TX-1 15,569 37,368 23,450
3.6.12 KEYWORD SEARCHING AND REVIEW:
A. After the extracted ESI was indexed on the e-discovery platform, the data set was
filtered in order to identify relevant document with the help of “keyword40”.
B. Keyword search was performed to filter relevant evidence from the extracted data set
of ESI to perform focused review.
C. The final list of keywords applied to the searchable ESI extracted from Target Devices
incorporate the following: (Refer Annexure 13)41
1. Case specific keywords such as Treasury Bonds, Perpetual, Arjun etc;
2. Custodian specific keywords such as name of custodian, parts of mail address,
mobile number of custodians and email addresses;
3. General Keywords that apply to engagements of this nature such as irregularity,
noncompliance, fraud, investments, confidential etc; and
D. In order to conduct the focus and precise review, keywords were created in
consultation with the CBSL based on the document review and information available in
public domain. As data set contains numerous files, keywords help to filter the relevant
data. (Refer Annexure 13)42.
E. After the keywords searching, results were extracted and email communication
pertaining to Review Period43 were reviewed in order to collect the evidence, if any
40 “a significant word from a title or document used specially as an index to content”. (Source: https://www.merriam-webster.com// dictionary/keyword) 41 Refer Annexure 13 for count of keywords for each identified employee of the CBSL 42 Refer Annexure 13 for count of keywords for each identified employee of the CBSL 43 Review Period is January 2002 to February 2015
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F. ESI provided to review manually and based on keyword searches was examined or
reviewed on two levels. First level review of the ESI was done on the complete data
set provided after extraction and keyword searching. The reviewer tags or marks
important information or file in the categories such as Informative, Relevant,
Suspicious, Corroborative etc. Relevant information extracted out from first level
review of ESI was again later reviewed as per its relevance to the case. Thereafter, the
observations were incorporated in the Report.
G. After the keywords searching, results were extracted and email communication
pertaining to Review Period were reviewed in order to collect the evidence, if any
H. For I Pad’s, Report of the device was generated which encompasses details such as
device information, message and chats, multimedia files, call records were exported
in readable format report and reviewed manually.
3.6. PUBLIC DOMAIN SEARCHES
3.6.1. Prepared a list of employees of the CBSL, who were responsible for Regulation and
Supervision functions of Primary Dealers during the Review Period, in which anomalies were
noted / identified (hereinafter referred to as “identified employees”);
3.6.2. Performed family mapping, to the extent available and gathered details with respect to
the business / professional associations of the identified employees as well as family
members, if any;
3.6.3. Performed analysis to identify if any business relationship / shareholding / association with
the Primary Dealers to the extent available;
3.6.4. Reviewed publicly available information for Primary Dealer and Primary Dealers’
associate;
3.6.5. Reviewed records with the Registrar of Companies44 (“ROC”) to the extent available in the
public domain in respect of five selected Primary Dealers to determine the list of
individuals associated;
3.6.6. Public domain searches were performed including but not limited social and professional
media profiling on the identified employees;
44 “ROC is the authorized government body to permit the companies to be incorporated in Sri Lanka and govern their activities regularly.”
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3.6.7. Ascertained association of the identified employees and their family members with Primary
Dealer; and
3.6.8. Conducted searches for the key employees of Supervision Division of the PDD and the
DSNBFI who resigned during the Review Period and identified their association with Primary
Dealer post exit from the CBSL, where available.
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4. PROCESS UNDERSTANDING
4.1. BACKGROUND
4.1.1. The appointment of Primary Dealers is governed by the Registered Stock and Securities
Ordinance No 7 of 1937 and Local Treasury Bill Ordinance No 8 of 1923. Under the
Regulations issued in the relevant Acts, the Regulatory and Supervisory functions of the
Primary Dealers were carried out by the Public Debt Department (“PDD”) until May 2016
and thereafter, the functions were transferred to the Department of Supervision of Non-
Bank Financial Institutions (the DSNBFI).
4.1.2. Understanding was provided by the department on the following parameters:
A. The list of laws, regulations, directions and manuals applicable for the Supervision
of Primary Dealers;
B. The procedures adopted for conducting examinations aimed at Supervision of Primary
Dealers; and
C. The way the recommendations were made with respect to any findings in the Report.
4.1.3. The Supervision division of the CBSL is governed by the Registered Stock and Securities
Ordinance (“RSSO”), the Local Treasury Bills Ordinance No. 8 of 1923 (“LTBO”) and the
Monetary Law Act (“MLA”).
4.1.4. Process45 for issue of directions by the CBSL is depicted below:
A. The CBSL issues directions, from time to time, to ensure the effective functioning of
Primary Dealers. These are issued under the reference of ordinances and regulations;
B. Post Parliament’s approval for Law, regulations are made by the CBSL with the
reference of Law; and
C. Then Ministry of Finance approves the regulation and post that it will be notified in
gazette.
45 Source: Operations Manual of the PDD
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4.1.5. The hierarchy46 of the department entrusted with the Regulation and Supervision of the
Primary Dealers is depicted below:
Till June 2016, The PDD was responsible for carrying out the Regulation and Supervision
functions after which it was transferred to the DSNBFI.
Hierarchy of Reporting in the Central Bank of Sri Lanka (Public Debt Department)
46 Source: Operations Manual of the PDD
The
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Hierarchy of Reporting in the Central Bank of Sri Lanka (the DSNBFI) 47
47 Source: Draft Operations Manual of Supervision Division
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4.2. UNDERSTANDING FOR THE CONDUCT OF REGULATORY FUNCTION
4.2.1. As per LTBO and RSSO, the CBSL has the regulatory and the supervisory powers relating to
the Government Securities market. The PDD acting on behalf of the Central Bank has issued
directions and several circulars signed by the SPD to the Primary Dealer
4.2.2. The PDD was entrusted with the responsibility of conducting auctions, maintenance of
issuance and secondary trading system inclusive of issuance of system rules, Securities
registry, debt servicing, Government Securities market development, debt management
database and relevant correspondence and reports. the DSNBFI was entrusted to undertake
all the regulations and Supervision on prudential, conduct of business (other than system
rules), compliance and consumer / investor protection aspects to promote safety and
soundness and confidence on institutions and the market. the DSNBFI was authorised to
have the access to records, systems and information on Securities issuance and trading
system of the PDD in terms of Section 45 of the MLA for regulatory and supervisory purpose.
As per the Monetary Board Minutes on 19 February 2016. The Director, SNBFI reviews the
current regulatory and supervisory mechanism in consultation with the management of the
Primary Dealer and market participant as appropriate and issue revised or new regulations
appropriately. (Refer Exhibit 39)48.
4.2.3. As per the understanding gathered from the discussions held with the Supervision division,
it was concluded that the DSNBFI carries out four activities as part of regulation function
(Refer Exhibit 39)49:
A. Appointment and Suspension of Primary Dealers;
B. Assessment of fitness and propriety of directors;
C. Policy formulation including issuing instructions via directions; and
D. Performing Supervision function of the Primary Dealers via onsite examination,
offsite surveillance, spot examination and special investigations.
48 Refer Exhibit 39 for Appointment and Suspension of Primary Dealers – LTBO and RSSO 49 Refer Exhibit 39 for Appointment and Suspension of Primary Dealers – LTBO and RSSO
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A. Appointment of Primary Dealers
4.2.4. The appointment of Primary Dealers is done as per Regulation on 24 June 2009 of the RSSO
(Chapter 420) under Section 2, 3, 4 and 5. The applicant should furnish information and
documents that the CBSL deems necessary for considering the suitability of the applicant.
A Board Paper is submitted after acquiring a complete set of information, with detailed
analysis of the applicant, with relevant recommendation of the department.
Standardization of market regulations, the PDD of the CBSL continued to review the existing
laws and regulations and introduced system reforms to improve the Government Securities
market. The regulatory function objective is to reduce the information asymmetry,
increasing the core capital requirements, enhancing secondary market liquidity, improving
safety of investors and increasing the overall efficiency of the Primary Dealer industry.
(Refer Exhibit 39)50.
B. Suspension of Primary Dealers
4.2.5. The appointment of Primary Dealers is done as per Regulation of 24 June 2009 of the RSSO
(Chapter 420) under Section 9. The suspension of the Primary Dealers is made as per
Regulation on 24 June 2009. The CBSL may suspend a Primary Dealer if it has failed to
comply with any law, regulation, direction, guideline or the code of conduct applicable to
it or acts in a manner detrimental to the interest of the Primary Dealer system or to the
national economy for a period which shall not exceed six months or may cancel the
appointment of a Primary Dealer. (Refer Exhibit 39)51.
4.2.6. A Primary Dealer whose appointment is suspended or cancelled shall not have the right to
deal with the CBSL as counterparty in the primary and secondary markets in Securities and
shall not transact new business with customers and shall not be entitled to utilize the
facilities provided by the CBSL to Primary Dealers except to the extent permitted by the
CBSL for the discharge of such Primary Dealer’s obligations and duties to the CBSL, other
Primary Dealers, customers and others in accordance with directions issued by the Monetary
Board.
50 Refer Exhibit 39 for Appointment and Suspension of Primary Dealers – LTBO and RSSO 51 Refer Exhibit 39 for Appointment and Suspension of Primary Dealers – LTBO and RSSO
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C. Assessment of fitness and propriety of directors
4.2.7. As per Direction of 28 May 2013 for assessment of fitness and propriety of directors, the
Board approved on the issuance of the Direction by the SPD under Regulation 11 of the
Local Treasury Bills (Primary Dealers) Regulation No. 01 of 2009 and the Registered Stock
and Securities (Primary Dealers) Regulation No. 01 of 2009 for assessing fitness and
propriety of the Directors and employees performing executive functions of Primary Dealer
companies (Refer Exhibit 41)52;
4.2.8. With respect to existing directors and employees, Primary Dealer companies shall submit
affidavits and declarations to the SPD within 30 days of this direction;
4.2.9. In respect of every continuing director / s, the Chief Executive Officer of the Primary Dealer
Company shall submit affidavits and declarations to the SPD annually thirty days prior to
the Annual General Meeting of the respective Primary Dealer; and
4.2.10. In respect of every continuing Chief Executive Officer of a Primary Dealer, the Chairman of
the BOD of the Primary Dealer shall submit an affidavit and a declaration to the SPD
annually thirty days prior to the commencement of the calendar year.
D. Policy Formulation
4.2.11. As per the Operations Manual, the laid down departmental procedures for policy
formulation, state that the department employees need to engage in search of latest
market developments, especially with reference to the regulatory and institutional
framework. Constant updates on developments in the international markets are required.
Review of areas like broadening business lines for Primary Dealer activities, present tax
structure and its applicability and the prevailing reporting formats submitted by Primary
Dealers etc., to cope with the secondary market developments. It is the task of the
Supervision department to suggest appropriate policies to make available an efficient
Government security market with a stable institutional framework.
52 Refer Exhibit 41 for direction on assessment of fitness and propriety of directors and officers performing executive functions of Primary Dealer companies
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4.3. UNDERSTANDING FOR CONDUCT OF EXAMINATION - ON-SITE
4.3.1. On-site examinations are carried out to verify the accuracy of records submitted by Primary
Dealer and to assess the financial viability of the Primary Dealer. These are also conducted
to investigate certain aspects of Primary Dealer operations such as Custodial arrangements,
repurchase and reverse repurchase transactions. These examinations are conducted by
Supervision personnel by visiting Primary Dealer premises.
4.3.2. The examination procedures performed by the department aims to verify risk assessment
of the Primary Dealers, adequacy of capital, liquidity, asset quality, profitability etc. and
the adherence to prudential directions, guidelines and good governance practices.
4.3.3. The aforesaid examination is divided into four phases:
Phase I: This phase is preliminary stage wherein the examination team headed by an
examiner-in-charge establishes its objectives, defines a preliminary risk profile of Primary
Dealer, determines the scope of the examination and defines the areas to be focussed based
on analytical data gathered during off-site surveillance. It includes defining the
examination objectives, reviewing the existing the PDD documentation, advising the
Primary Dealer of the proposed examination, requesting the Primary Dealer for baseline
documentation, conducting initial risk assessment, drawing up preliminary risk profiles,
determining examination scope, preparing examination work plan and assigning specific
tasks to examination team.
Phase II: This phase involves conducting the following activities:
A. Visits the premises of Primary Dealer and reviewing the questionnaires that contain
the basic questions to be addressed for each functional area and are intended to
guide the examination team.
B. Verification of the material contained in each set of work papers which must be well
organised, indexed, legible and understandable to other members of the Supervision
division and the PDD. Each set of work paper should be dated and signed by the
examination officer responsible for their preparation.
C. Conducting meeting with the CEO and the executive management team for advising
on the status of the work, requesting assistance, arranging for specific meetings at
the premises of Primary Dealers or at the CBSL and advising on the problems in
securing the cooperation of the Primary Dealer personnel.
Phase III: This phase covers preparation and completion of the letter of findings and the
examination Report. Preparation and completion of the LOF and the Report is the
responsibility of the EIC.
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Phase IV: This phase, where the examination Report is submitted to the Monetary Board
with a time bound action plan for obtaining approval for issuing the rectification plan on
the findings raised by the department and then rectification plan is informed to the Board
of Directors and the executive management team of Primary Dealers to take immediate
action to rectify the supervisory concerns. Quarterly Report is required to be submitted to
the Monetary Board on the status of the rectification plan.
4.3.4. The Primary Dealer Supervision Unit plans on-site examination annually. The annual plan is
prepared by the head of division and the same is approved by the director. Standard scope
of work for on-site examination is approved by the Head of department.
4.4. UNDERSTANDING THE CONDUCT OF EXAMINATION - OFF-SITE
SURVELLANCE
4.4.1. Off-site surveillance is carried out to check the Primary Dealers financial soundness and
includes activities not limited to evaluation of financial position and performance of
Primary Dealer.
4.4.2. “FInNet” is the web-based interface introduced in February 2012 is used by the DSNBFI,
wherein documents such as Balance Sheet, Statement of Changes in Equity and Reserves,
Profit and Loss Account, Cashflow Statement, Mark to Market Report and Risk Weighted
Capital Adequacy Return are uploaded periodically by the Primary Dealers. These reports
are then downloaded by the department for its analysis and review. (Refer Exhibit 1 and
Exhibit 2)53.
4.4.3. Reports submitted by Primary Dealers are reviewed to check if there is any financial gap or
there is a possibility of identification of any potential issues in the working of the Primary
Dealers. Off-Site surveillance is like an early warning signal for the Supervision department.
In case of any major deviations noted in the working of any of the Primary Dealers, then
Spot Examination is carried out for detailed review of such deviations.
4.4.4. On quarterly basis, a Board Paper detailing the performance of Primary Dealer industry is
prepared and submitted to the Monetary Board for information. Any special concerns on
the Primary Dealer are highlighted in the Board Paper to seek the approval from the
Monetary Board for the remedial action along with the timeline proposed by the
department. (Refer Exhibit 1 and Exhibit 2)54.
53 Refer Exhibit 1 for the PDD Operational Manual – Supervision division 2013 and Exhibit 2 for the PDD Operation Manual- Supervision division May 2015 54 Refer Exhibit 2 for the PDD Operation Manual- Supervision division May 2015
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4.5. UNDERSTANDING THE CONDUCT OF EXAMINATION – SPOT EXAMINATION
AND SPECIAL INVESTIGATION
4.5.1. Spot examinations and Special investigations are conducted to examine specific aspects on
Primary Dealer operations and such requirements may arise due to certain concerns raised
in the on-going process of on-site examinations, off-site surveillance, complaints and other
notified issues. Therefore, the scope of this examination is limited and will primarily be
based on the specific concern(s) under observation.
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5. EXECUTIVE SUMMARY
The findings in this Report are based on the work performed on the information received
till 15 October 2019 on examination on conduct of regulatory and supervisory role by the
Superintendent of Public Debt / Director, Supervision of Non-Bank Financial Institutions
pertaining to selected Primary Dealer for the Review Period from 1 January 2009 to 31
December 2017. Refer to the Section “Coverage of the Forensic Audit Report” for the
procedures performed.
5.1. SUMMARY OF KEY FINDINGS
5.1.1. RSSO, LTBO and Operation Manual have not defined the roles and responsibilities of the
Regulatory function and the activities to be covered for the regulation & supervision of
operations of the Primary Dealers. The activities carried out by the PDD and SNBFI does not
include the coverage and monitoring of the key Regulations including market manipulation,
market development, investor education, customer redressal mechanism and investor
protection. The Regulatory function and activities of the PDD and the SNBFI were confined
to appointment supervision and suspension of the of Primary Dealers and policy formulation
for supervision function. Review of operations of the regulation function indicate that the
department has not leveraged on the technological advancements that enable
effectiveness of the function.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings and the CBSL
officer and Third party, if any, responsible for the deviations noted.]
5.1.2. Gaps were noted in the assessment of requirement for appointment of new Primary Dealers
wherein the Supervision department’s views against the appointment of Perpetual
Treasuries Limited as a new Primary Dealer, were not presented to the Monetary Board.
Appointment of Perpetual Treasuries Limited (“PTL”) was recommended in the Board Paper
of 9 May 2013. The assessment criteria do not include assessment to identify the
creditability, experience of holding company / directors and capacity for Investment by
the Primary Dealers.
[Refer Section 6 for the recommendation and Refer Sections 7 for detailed findings; the
CBSL officer and Third party, if any, responsible for the deviations noted.]
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5.1.3. The Regulation & Supervision functions are performed by the same department and same
staff, however the missing initiatives on the Regulatory front despite the knowledge of
findings from supervisory examinations indicate non-alignment of Regulation and
Supervision function roles & objectives. The Supervision function methodology does not
define linkage between examination and objective of Regulation and Supervision function
for ensuring effectiveness of the PD system that infuses greater competition, liquidity in
the Government Security market and reduction of borrowing cost of the Government of Sri
Lanka by way of regulating and supervising the Primary Dealers. The Supervision function
did not perform benchmarking of its operations, processes and procedures with the
functions of regulators in other / homogeneous economies and jurisdictions.
[Refer Section 6 for the recommendation and Refer Section 7 for detailed findings; the
CBSL officer and Third party responsible, if any, responsible for the deviations noted.]
5.1.4. The risk-based approach defined for Supervision requires assessment of risks of Primary
Dealer such as Liquidity Risk, Market Risk, Legal / Reputational Risk Management and
Strategic Risk, which are the risks associated with the operations of Primary Dealer
enterprise, for its own business continuity. The Supervision functions’ risk-focused
approach does not identify risks comprehensively such that the risks a Primary Dealer brings
on to the Government Securities market, such as the risks of market manipulation, money
laundering, corruption and insider trading that impacts investor confidence and financial
system stability.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party responsible, if any, for the deviations noted.]
5.1.5. There is no risk management framework set-out consisting of risk assessment methodology,
risk management protocols including Primary Dealer risk assessment / risk rating based on
examination findings and measures and mechanisms for risk prevention and detection.
There is no process for ongoing risk review and examination of quality enhancement
through independent reviews of the Supervision activities.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party responsible, if any, for the deviations noted.]
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5.1.6. The Operational Manual of Supervision function did not define the mechanism to ensure
comprehensive coverage of assessment of compliance with all applicable legislations,
during the examinations. The Questionnaires used by the examiners were not reviewed or
kept up-to-date and compliance requirements of legislations such as Financial Transaction
Reporting Act, The Convention on the Suppression of Terrorist Financing Act and
Prevention of Money Laundering Act were not included in the assessment criteria.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party, if any, responsible for the deviations noted.]
5.1.7. Review of on-site examinations indicated delays in timely completion of examinations,
conclusion of examination reviews and submission of “Letter of Findings” to Primary
Dealers and gaps in reporting to the Monetary Board. There are certain non-compliances
or deviations which were noted consistent across the PDs, indicating the potential systemic
deficiencies in terms of procedures towards regulation / policy / operational guidelines.
5.1.8. Certain deviations / non-compliances at the Primary Dealers t were repeated at the PDs
level, which indicated deficiencies in the identification of root cause for non-compliance
and missing effectiveness in the monitoring of “Time Bound Action Plan”.
5.1.9. A review of examination files indicated gaps in the comprehensive assessment of findings
to identify the root cause for rectification, wherein the examiner’s recommended
remedial actions were not directed towards the findings identified. Importantly, there
were no penalties levied / applied for repeated deviations and the consistency of non-
compliance across PDs and repeated violations were not highlighted to the Monetary Board
for regulatory action. Further, certain key documents evidencing the assessments
performed by the examiner and the information / explanations sought and reviewed
during the examination were not documented.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party, where available, responsible for the deviations noted.]
5.1.10. Review of operations of the Supervision function indicating that the operations are
handled through manual process and does not leverage on the technological advancements
that enable effectiveness of the function, both at the operations and monitoring levels.
While the FInNet system is used for performing off-site surveillance, the tool (external
vendor tool) was more used a repository of summarized information and does not have the
capability to perform analytics on the data collected. The data collected is not
independently verified for validity with source of data and the results of manual review /
analysis are not recorded and documented in a repository.
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5.1.11. There was no documentation tool for the department wherein details of all examinations
conducted and deviations noted historically are stored and used for the future analysis
and regulation framing. The extent of usage of technology was significantly limited
wherein, there was no opportunity for predictive analytics for futuristic monitoring or
early warning mechanism for timely review and actions.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party, if any, responsible for the deviations noted.]
5.1.12. The Supervision function is understaffed throughout the Review Period with 4 - 6
examiners handling the entire Regulation and Supervision functions’ activities including
on-site, off-site, spot, special examinations, fitness reviews, appointment and suspension
of Primary Dealers and policy formulation. The examiners are not technically qualified to
performs audits or examinations and there were no focused trainings for the employees
to enhance their subject matter capability and effectiveness of the reviews conducted.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party responsible for the deviation noted.]
5.1.13. Review of the process for reporting to the Monetary Board revealed that the reporting
process is driven by the division and not driven by the Monetary Board. Instances of
examinations not conducted as per the approved annual plan, examinations not conducted
at the defined (annual) frequency, significant delays in completion of examinations, delays
in reporting of findings or non-submission of examination reports by the division to the
Monetary Board were not identified as part of the reporting process.
[Refer Section 6 for the recommendation and Sections 7 for detailed findings; the CBSL
officer and Third party, if any, responsible for the deviations noted.]
This Executive Summary is intended to provide a high-level overview of key findings on this
investigation. For a complete understanding of the issues, work performed and detailed
findings, this Report should be read in its entirety and in conjunction with the detailed Report
including Annexure and Exhibits. This Executive Summary must be read in conjunction with
detailed Report and it cannot be treated as a substitute thereof.
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6. RECOMMENDATION
6.1.1. The Recommendations in this Section are based on the findings of our review of the onsite
examinations and offsite surveillance conducted by the Supervisory division with respect
to the select Primary Dealers. (Refer Section 7 – Detailed Observation).
A. The recommendations are currently, directional in nature and it is suggested that a
study may be conducted for achieving the objectives. The implementation of
recommendations also requires the department to align the strategy with inter-
department and intra department level and this should be in line with long term and
medium-term goals / objective.
B. The recommendations are categorized under two parameters based on the observations
with suggestive approach for mitigation:
i. Critical initiatives: Recommendations relating to regulatory changes, systemic
enhancements in operations of the Supervisory function and recommendations to
strengthen the compliance of Primary Dealers are classified as critical; and
ii. Essential measures: Recommendations on improvement in operations of the
Supervisory function such as examination coverage and capability enhancement
C. The suggestive timelines for implementation of the recommendations are as follows:
I. Short team: 0 – 6 months;
II. Medium term: 6 – 18 months; and
III. Long term: over 18 months.
CRITICAL INITIATIVES
6.1.2. A comprehensive study should be conducted to develop & define the Regulatory &
Supervisory framework in line with the best practices and implementation. Such study
should cover the following activities:
A. Benchmarking of Supervisory function with functions in other similar economies;
B. Comprehensive Risk assessment and supervision methods commensurate with the
risk assessment;
C. Continuous monitoring mechanism to be developed commensurately in line with
Global best practices;
D. Mechanism for tracking the need for new legislation or changes to existing
legislations; and
E. Defining the Governance Function.
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6.1.3. Conduct an assessment of need for additional regulations to be promulgated under the
current RSSO legislation to empower the Regulator including initiating additional
disciplinary actions and imposing penalties or specific restrictive actions to enforce
compliance. An indicative list of restrictive actions is as following:
A. Imposing restrictions on the Primary Dealers from trading in Secondary Market;
B. Refrain Primary Dealers from bidding in Primary Auction for stipulated time period;
C. Restrict Primary Dealer to open new investor accounts;
D. Restrict trade limit on the related parties of the Primary Dealers;
E. Restrict primary dealer to trade with investors where certain anomalies have been
observed; viz. high repo / reverse repo transactions, under allocation / non-allocation
of Securities, rollover of investments without instructions, preferential rate to
customer etc; and
F. Continuous monitoring of Primary Dealer operations for a defined period.
6.1.4. Conduct a detailed study of man-power requirement and capability enhancement measures
for Supervision function.
ESSENTIAL MEASURES
6.1.5. Operations Manual for Regulation function should be developed covering the processes to
be adopted for continuous oversight of market conditions and the requirement for
promulgation of Regulations on an ongoing basis;
6.1.6. Following changes to the Operations Manual, to be taken up in the medium term:
A. Onsite examinations to cover additional risk areas such as market manipulation,
money laundering and corruption by Primary Dealers;
B. Guidelines on sampling methodology for verification of transactions;
C. Identification of root cause as a process, during the supervision examination;
D. Action plan for rectification of all supervisory concerns with defined timelines;
E. Follow-up mechanism for implementation of action plan;
F. Guidelines for collection of evidence for implementation of action plans for
supervisory concerns; and
G. Reporting to the Monetary Board on status of examinations;
6.1.7. Assessment of tools and automation opportunities of Supervision activities and on-going
monitoring mechanism.
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7. DETAILED OBSERVATIONS
1. The methodology for assessment of regulation and supervision functions comprised of
review of available documents, reports, interviews and discussions with the CBSL
employees. The documents were scrutinised and analysed to assess the effectiveness of
the conduct of regulatory and supervisory function by the regulator i.e. SPD / the DSNBFI
during the Review Period.
2. The CBSL has the Regulatory and Supervisory powers over the licensed commercial banks
and standalone Primary Dealers. As the issuer of Government Securities, the CBSL also has
the Regulatory and Supervisory power over the Primary Dealers who participate both in
primary and secondary markets. As the debt market grows in terms of size and complexity
of government debts and the number, types and scope of Primary Dealer expand, a
fragmented regulatory system could possess significant regulatory challenges and
systematic risks. Establishing a single regulator covering all primary and secondary market
will greatly foster government debt market development and pivotal to measure the
success in future government debt market.
3. The detailed observations in this Section are based on an understanding of the Regulation
and Supervision functions, as detailed in Section 6 of this Report, conducted by the Public
Debt Department (“the PDD”) and Department of Supervision of Non-Bank Financial
Institution (“the DSNBFI”), through examinations on the following five (5) Primary Dealers
during the period 1 January 2009 to 31 December 2017 (the “Review Period”).
a. Perpetual Treasuries Limited (“PTL”);
b. Natwealth Securities Limited (“NWSL”);
c. Pan Asia Banking Corporation PLC (Primary Dealer Unit) (“PABC”);
d. Entrust Securities PLC (“ESL”); and
e. WealthTrust Securities Limited (“WTSL”)
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4. At the beginning of the Review Period, the regulation and supervision functions of primary
dealers was associated with the PDD. Subsequently, the regulation and supervision
functions over the primary dealers was transferred to DSNBFI during June 2016. The
“operations manual” of Supervision Division of the PDD, updated in 2007 was applicable at
the beginning of the Review Period. This manual was subsequently revised during 2013 and
2015, during the Review Period. The Monetary Board paper was submitted by the former
Deputy Governor P Samarasiri who was responsible for the PDD including supervision
division stating the regulatory and supervisory concern and suggested amendment in the
current regulatory and supervisory framework. Post the transfer of supervision function
from the PDD to the DSNBFI, DSNBFI continued to adopt the operational manual prescribed
by the PDD. (Refer Exhibit 3, Exhibit 11, Exhibit 1 and Exhibit 2)55.
5. As mentioned in para 7.10 of the Report, there was no evidence of review performed by
the assistant governor and deputy governor overseeing the department. In the absence of
the evidence, the accountability for deviations was determined in this Report based on the
guidelines prescribed in the operations manual, understanding of the practices followed by
the supervisory function, as confirmed by the CBSL and the employees associated with the
examinations, identified based on the documentation provided in support of the
examinations. (Refer Section 6 of this Report)31.
6. At the beginning of the Review Period, there were 11 Primary Dealers who were approved
by the CBSL under Registered Stock and Securities Ordinance and Local Treasury Bill
Ordinance of the five (5) Primary Dealers identified by the CBSL for review, three (3)
Primary Dealers were appointed during the Review Period.
Table 12 – Appointment and Suspension Date of Selected Primary Dealers
# PRIMARY DEALER NAME DATE OF APPOINTMENT
DATE OF SUSPENSION
1 Pan Asia Banking Corporation-PD Unit 1 Aug 2013 15 Aug 2017
2 Natwealth Securities Limited 1 Dec 2003 31 May 2018
3 WealthTrust Securities Limited 1 Aug 2011 -
4 Entrust Securities PLC 1 Apr 2000 24 Jul 2017
5 Perpetual Treasuries Limited 30 Sep 2013 6 Jul 2017
55 Refer Exhibit 3 for Regulation made by The Ministry of Finance under Section 55 of the RSSO (Chapter 420), Refer Exhibit 11 for the PDD Operational Manual Supervision Division 2007, Refer Exhibit 11 for the PDD Operational Manual Supervision Division 2007 and Exhibit 2 for the PDD Operation Manual- Supervision division May 2015
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List of the CBSL employees responsible for regulation and supervision functions of primary
dealers during the Review Period January 2007 to December 2017.
Table 13 – List of Deputy Governor, Assistant Governor and Directors / Superintendents
DG IN CHARGE-the DSNBFI AG IN CHARGE-the DSNBFI
NAME ID NO. PERIOD NAME ID NO. PERIOD
P Samarasiri 1422 10.2.2015-18.8.2017
R A A Jayalath 1514 19.4.2016-30.8.2017
C J P Siriwardana 1462 21.8.2017-31.12.2017
J P R Karunaratne 1532 31.8.2017-31.12.2017
DEPUTY GOVERNOR ASSISTANT GOVERNOR
NAME ID NO. PERIOD NAME ID
NO. PERIOD
W A Wijewardena 1335 15.10.2008-
6.7.2009 C Premaratna 1373
15.10.2008-26.5.2009
D S Wijesinghe 1346 7.7.2009-31.1.2010
H N Thenuwara 1401 27.5.2009-20.10.2009
K G D D Dheerasinghe 1368 12.2.2010-31.12.2011
J P Mampitiya 1399 11.11.2009-14.6.2010
C Premaratna 1373 1.1.2012-16.9.2012
C J P Siriwardana 1462 15.6.2010-27.9.2011
B D W A Silva 1427 17.9.2012-9.2.2015
C Premaratna 1373 28.9.2011-31.12.2011
P Samarasiri 1422 10.2.2015-18.8.2017
K D Ranasinghe 1441 1.1.2012-19.8.2012
C J P Siriwardana 1462 21.8.2017-31.12.2017
A Kamalasiri 1382 20.8.2012-20.4.2014
J P Mampitiya 1399 21.4.2014-9.2.2015
S S Ratnayake 2841 10.2.2015-21.10.2015
K D Ranasinghe 1441 22.10.2015-11.6.2016
K M M Siriwardana 1557 12.6.2016-4.7.2016
DIRECTOR / SUPERINTENDENT
NAME ID NO. PERIOD NAME ID NO. PERIOD
U P Alawattage
1521 21.9.2015-3.9.2017
C J P Siriwardana 1462 3.12.2007-14.6.2010
W Ranaweera
1550 4.9.2017-To
date S S Ratnayake 2841
21.6.2010-31.12.2011
N W G R D Nanayakkara
1575 1.1.2012-8.2.2015
C M D N K Seneviratne
1436 9.2.2015-20.9.2015
T H B Sarathchandra 1455 21.9.2015-1.10.2017
D M Rupasinghe 1442 2.10.2017-18.12.2017
Dr M Z M Aazim 1676 19.12.2017-To date
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SECTION A: REGULATION FUNCTION
1. An overview of the components of the Regulation function applicable for Primary Dealers market
dealing in Government Securities, covered as part of the review is provided below. Discussions
were held with the department employees and the examination files were to assess the
effectiveness of conduct of regulatory role by the Regulator. Coverage of all applicable
legislations / directions / manuals during examination for appointment of new Primary Dealers,
suspension of Primary Dealers, assessment of fitness and propriety of directors and policy
formulation aspects were evaluated.
2. Defined activities and roles to be carried out by the Regulator for achieving the objective i.e.
safe and sound Primary Dealer system, investor protection and stability in financial market of
Government Securities:
A. Appointment and Licencing - The Regulator needs to ensure that the activities have proper
credentials. The license granted by the Regulator governs the set of financial activities
that the dealer is permitted to engage. The grant of license includes the acceptance of
such conditions as per the direction which the Regulator may deem fit including regulatory
oversight, training requirements and to act in accordance with the established standards
or code of ethics. Non-compliance with the code of ethics could result in fines, penalties,
remedial actions, suspension and criminal charges.
B. Policy formulation – The Regulator issues the rules to implement regulations which lay out
the guidelines for market participants to comply.
C. Oversight and Supervision – This allows regulator to ensure that the rules are being adhered
to by the market participants, thus ensuring that any improper behaviour by the market
participant can be ceased or modified. The supervisory priorities and point of emphasis are
explained by the Regulator by issuing supervisory letters and guidance.
Financial Stability – Primary Dealers Market
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D. Enforcement and Resolution – This allows the Regulator to compel the market participants
to modify their behaviour through enforcement of powers, which includes the ability to
levy fines, penalties, cease / desist orders, to undertake civil or criminal actions in court
and to suspend Primary Dealers. The Regulator also has the power to resolve a failing
market participant by taking control of the same and running the Primary Dealer on an
ongoing basis i.e. initiating the judicial process.
3. Policy and procedures defining the role of Regulator in achieving the objectives and monitoring
the market participants i.e. Primary Dealers in primary and secondary market:
A. Prudential risk mitigation – The purpose is to ensure safety and soundness. It focuses on
risk management and risk mitigation.
B. Disclosure and Reporting – The purpose is to ensure that all the relevant financial
information is accurate and available to the public and the regulators to take well informed
financial decisions and for the effective monitoring of the same.
C. Competition and Price regulation – This allows the regulator to ensure that the market
participants do not exercise undue monopoly power, engage in price fixing or take any
dominant position to manipulate prices.
D. Standard Setting – This allows Regulator to prescribe standards for products, markets and
professional conduct. They can set permissible activities and behaviour for market
participants to achieve policy goals.
4. The objectives of a Regulator to achieve financial stability and developing the market for
Government Securities. This objective shall define the effectiveness in conducting the Regulation
function.
A. Market efficiency and integrity – To ensure that markets operate efficiently and that
market participants have confidence in the market’s integrity. Regulators contribute to
market integrity by ensuring that activities are transparent, and contracts can be enforced.
B. Investor and taxpayer protection – To ensure that consumers or investors do not suffer from
fraud, discrimination and manipulation. Further, it can be ensured that losses or failures
in financial markets do not result in pay-outs or liabilities that are ultimately borne by
taxpayers.
C. Capital Formation and Credit access – To ensure that market participants and consumers
can access the credit and the capital to meet their needs such that credit and economic
activity can grow at a healthy rate.
D. Illicit activity prevention – To ensure that the financial system cannot be used to support
criminal and terrorist activity which include policies to prevent money laundering, tax
evasion, terrorism financing and the contravention of financial sanctions.
E. Financial Stability – Financial regulation is to maintain financial stability through preventive
measures that mitigate systematic risk.
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5. On review of the documents pertaining to appointment of Primary Dealers, assessment of fitness
and propriety of directors, suspension of Primary Dealers, policy formulation conducted by the
department, deficiencies were noted indicating inadequate effectiveness in performing the
Regulation function. In absence of defined Regulatory framework and monitoring mechanism of
certain required Regulatory functions i.e. market efficiencies and interest, competition and price
regulation, disclosure and reporting, illicit activity prevention, capital formulation and credit
access and consumer / investor protection, the deficiencies indicate lack of effective Regulatory
role for ensuring financial stability through preventive and predictive analysis to mitigate any
uncertainty and circumstances impacting the economy and market participants.
6. Rectification of gaps noted above in the governance structure and regulation framework will
facilitate an efficient and effective regulation of government debt market. A review of existing
governance structure and regulation framework in relation to regulatory and supervisory function
with benchmarking to international organisation of quality standards and comparable countries
should be undertaken to assess the areas of development of Government security market capacity
and strengthening the governance of Primary Dealers.
Accordingly, the findings of the review are classified as following:
A. No defined procedural functions / benchmarking carried out by the department;
B. Non-existence of techniques to monitor market integrity and price regulation;
C. Absence of review process for updating the Operational Manual;
D. No mechanism to analyse the market development by Primary Dealers;
E. Appointment of Primary Dealers without fulfilment of necessary requirements;
F. Assessment of fitness and propriety of directors;
G. Policy Formulation; and
H. Abrupt transfer of employees for Regulatory and Supervisory function.
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7.1. NO DEFINED PROCEDURAL FUNCTIONS / BENCHMARKING CARRIED OUT BY
THE DEPARTMENT
SCOPE COVERAGE
7.1.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of implementation and
monitoring of regulatory actions by the regulator.
7.1.2. As per the RSSO and LTBO, the Central Bank shall have the authority to undertake and carry
out the appointment from time to time of Primary Dealers, and the Regulation, Supervision
or monitoring of such Primary Dealers with respect to their transactions in Securities and the
performance of their duties as Primary Dealers. However, the legislation does not indicate
the responsible department / personnel responsible to carry out Regulation and Supervision
functions for Primary Dealers.
7.1.3. The Operation Manual of the PDD does not indicate the roles and responsibilities of the
regulator to carry out the Regulation function and activities to be covered. There is no area
of focus been defined to carry out the Regulation function including disclosure and reporting
to be conducted and submitted by the Primary Dealers.
7.1.4. The department has not issued any direction for refraining the Primary Dealers to transact in
cash. There should be a Regulation for carrying out the transaction only through banking
system. The department does not monitor the cash transactions carried out by the Primary
Dealers in the Government Securities during the offsite and onsite examinations. Further,
based on the discussion with FIU department, it was noted that the Supervision division does
not carry out any Supervision on the Primary Dealers relating to the PMLA and CFT under
FTRA regulation.
7.1.5. The guidelines for the regulations relate to performing the supervisory function for the
Primary Dealers, determining the criteria for appointment of Primary Dealers, evaluating the
performance of the Primary Dealers, issuing directions for ensuring compliance by the
Primary Dealers and suspension / cancellation of the appointment of the Primary Dealer.
There are no provisions determining the need for any prudential law / regulation for
governing the functioning of the Primary Dealers in the Government Securities market. (Refer
Exhibit 39)56.
56 Source: Refer Exhibit 39 for Appointment and Suspension of Primary Dealers – LTBO and RSSO
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7.1.6. As per the Operation Manual, 2015, the department needs to amend the existing policies or
formulate new policies. Constant update on developments in the international market are
required and therefore assessment of updates from Bank for International Settlement (BIS),
Federal Reserve System (“FED”), Reserve Bank of India (“RBI”) and Bank of England (“BOE”)
on periodic basis is required. As per discussion with the W. Ranaweera, Director, SNBFI, it was
noted that the department has not conducted benchmarking exercise of its Supervision
function and methodologies adopted against the peer group departments such as BSD, Central
Bank Operations of comparable economies and with global professional standards. (Refer
Exhibit 2)57.
7.1.7. Hence, it can be concluded that the guidelines for the Regulation function are not defined in
a comprehensive manner.
7.1.8. During an interview, T H B Sarathchandra, SPD in the PDD, for the period September 2015
to June 2016, stated that there were neither any areas of scope nor any procedures defined
for the Regulation function. Further no examination methodology was defined for carrying
out the Supervision function. The Department has not performed any benchmarking exercise
for Regulation and Supervision functions with any international organisation and other
geographic central banks. There was no tracker being maintained for the policy formulation.
He also stated that there were no defined customer resolution procedures and the
department has not maintained any tracker for the complaints received from the customer
for the Primary Dealers. (Refer Exhibit 29)58.
57 Source: Refer Exhibit 2 for the PDD operation manual – supervision division, May 2015 58 Refer Exhibit 29 for Statement of Fact of T B H Sarathchandra
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7.1.9. During an interview, N W G R D Nanayakkara, SPD in the PDD, for the period January 2012
to February 2015, stated that there was absence of Regulatory and Supervisory framework
for monitoring of the Primary Dealers. The Regulation and Supervision functions were
limited only to Application and Appointment of Primary Dealers, Suspension of Primary
Dealers, performing Supervision function through onsite, offsite, spot and special
investigations and issuing of directions as a part of policy formulation. Further during that
period, the department lacked on the technology advancement and required skilled staff for
performing the Regulatory and Supervisory role. However, the efficiency of Supervision of
Primary Dealers was enhanced by reducing the onsite examination cycle from two years to
one year and submitting the examination reports, along with the Regulatory concerns and
proposed corrective actions to the Monetary Board. There were no directions from the
Monetary Board as to whether any changes to the extent in Regulatory and Supervisory
framework were to be done. (Refer Exhibit 37)59.
7.1.10. The above deficiencies were noted across the Review Period and implies the responsibility of
the SPD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
7.2. NON-EXISTENCE OF TECHNIQUES TO MONITOR MARKET INTEGRITY AND
PRICE REGULATION
SCOPE COVERAGE
7.2.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of Implementation and
monitoring of regulatory actions by the regulator.
7.2.2. As per the RSSO and LTBO, the Central Bank shall have the authority to undertake and carry
out the appointment from time to time of Primary Dealers, and the Regulation, Supervision
or monitoring of such Primary Dealers with respect to their transactions in Securities and the
performance of their duties as Primary Dealers. However, the legislation does not indicate
any defined procedures to be followed to determine the need for any regulation for
monitoring the functioning of the Primary Dealers in the Government Security Market.
7.2.3. The department has not implemented any monitoring tool to identify nor monitor any market
manipulation practices or strategies for price regulation including any procedures and
timelines for customer complaint and resolution.
59 Refer Exhibit 37 for statement of fact of Nanayakkara
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7.2.4. The department does not monitor the aspects to analyse whether the customer and investor
protection are being effectively carried out by the Primary Dealers.
7.2.5. During the discussion on 18 September 2019 with W. Ranaweera, Director, the DSNBFI, it was
stated that “the department had not implemented any monitoring tool to identify any market
manipulation and price regulation including any procedures and timeline for customer
complaint and resolution”. (Refer Exhibit 40)60.
7.2.6. During an interview, T H B Sarathchandra, SPD in the PDD, for the period September 2015
to June 2016, stated that “there was no alert / monitoring mechanism for identifying any
market manipulation and illicit activities carried out by the Primary Dealers in the
Government Securities and absence of any tools and techniques for carrying out the
Regulation and Supervision functions. Supervision division only performed activities relating
to appointment, suspension, performing examinations – onsite / offsite / spot / special
investigation and issuance of directions / circulars”. (Refer Exhibit 29)61.
7.2.7. During an interview, N W G R D Nanayakkara, SPD in the PDD, for the period January 2012
to February 2015, stated that “there was absence of Regulatory and Supervisory framework
for monitoring of the Primary Dealers. The Regulation and Supervision functions were
limited only to Application and Appointment of Primary Dealers, Suspension of Primary
Dealers, performing Supervision function through onsite, offsite, spot and special
investigations and issuing of directions as a part of policy formulation. Further during that
period, the Department lacked on the technology advancement and required skilled staff
for performing the Regulatory and Supervisory role. However, the efficiency of Supervision
of Primary Dealers was enhanced by reducing the onsite examination cycle from two years
to one year and submitting the examination reports, along with the Regulatory concerns and
proposed corrective actions to the Monetary Board. There were no directions from the
Monetary Board as to whether any changes to the extent in Regulatory and Supervisory
framework were to be done”. (Refer Exhibit 37)62.
7.2.8. The above deficiencies were noted across the Review Period and implies the responsibility of
the SPD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
60 Refer Exhibit 40 for email copy – Discussion with W Ranaweera relating to regulation function – Government Securities 61 Refer Exhibit 29 for Statement of Fact of T B H Sarathchandra 62 Refer Exhibit 37 for statement of fact of Nanayakkara
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7.3. NON UPDATION OF THE OPERATIONS MANUAL
SCOPE COVERAGE
7.3.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of any other matters which
may come to light during the examination which have a bearing or relevance to the matters
referred as part of scope.
7.3.2. During the Review Period, there was no process of review of Operational Manual by Monetary
Board of CBSL. As per the RSSO, there is no explicit and mandatory requirement for the
Monetary Board to approve the departmental operations manuals. Accordingly, the processes
followed at PDD and SNBFI with respect to Regulation and Supervision, can at best be
considered as “practices” followed the departments. As informed by the Monetary Board,
effective 2007, the Assistant Governor overseeing the PDD and the SNBFI review annually,
the updates to the operations manual.
7.3.3. It was noted that the last update activity for the PDD operational manual was in 2015.
However, there is no evidence of review and sign-off on the updated the PDD Operational
manual. Based on the developments in the market conditions, available policies need to be
updated or new policies should be formulated. This requires the respective department to
engage in search of latest market developments, especially with reference to the regulatory
and institutional framework.
7.3.4. Constant updates on the developments in the international markets needs to be assessed and
review of areas such as broadening of business lines for Primary Dealers activities, present
tax structure and its applicability and the prevailing reporting formats submitted by Primary
Dealers etc to cope with the secondary market developments. It is a task of the department
to suggest appropriate policies to make available an efficient Government Securities market
with a stable institutional framework.
7.3.5. For policy formulation, the department needs to regular visit the website of various
international organisation and the Central Bank outside geographies i.e. BIS, RBI, Federal
Reserve, Bank of England to understand the changes and update in Regulatory and Supervisory
framework of Primary Dealers market and in Government Securities. However, there is no
evidence maintained by the department for the review carried out.
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7.3.6. As per Board Paper of 5 February 2016, The Director, the DSNBFI was entrusted with the
responsibility for reviewing the current regulatory and supervisory mechanism in consultation
with management and market participant to issue revised or new regulations as appropriate.
(Refer Exhibit 27)63.
7.3.7. During an interview, W N S Fernando, EIC / Examiner – Onsite examinations for the period
February 2013 to till date, stated that inputs for updating of the operations manual were
given once during the period Mid-2013 to Mid-2016. The inputs to be incorporated in the
operations manual were discussed verbally in the department and amendments were
communicated by HOD or the designated person by the HOD. Further it has been stated that
the technique of sampling to be followed for verification of data has not been updated in
the operations manual. (Refer Exhibit 30)64.
7.3.8. During an interview, A S Fernando, Examiner - Onsite Examinations for the period October
2015 to July 2018, stated that the detailed methodology for conducting examinations was
not documented as part of the operations manual. (Refer Exhibit 31)65.
7.3.9. During an interview, S J K Guruge (Head of Division, the DSNBFI) for the period August 2011
to October 2012 and June 2016 to till date, stated that detailed methodology for conducting
examinations was not documented as part of operational manual i.e. Relating to sample
selection, work procedure and templates for pre-examination plan. (Refer Exhibit 33)66.
The above deficiencies were noted across the Review Period and implies the responsibility of
the SPD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
7.4. NO MECHANISM TO ANALYSE THE MARKET DEVELOPMENT
SCOPE COVERAGE
Examining the implementation and monitoring of regulatory actions by the regulator.
7.4.1. As per the RSSO and LTBO, the Central Bank shall have the authority to undertake and carry
out the appointment from time to time of Primary Dealers, and the Regulation, Supervision
or monitoring of such Primary Dealers with respect to their transactions in Securities and the
performance of their duties as Primary Dealers. However, the legislation does not indicate
any defined procedures to be followed to determine the functioning of the Primary Dealers
towards the development done by them in the Government Security Market.
63 Refer Exhibit 27 for board paper for transfer of Regulation and Supervision role from the PDD to DNBFI 64Refer Exhibit 30 for Statement of Fact – W N S Fernando 65 Refer Exhibit 31 for Statement of fact – A S Fernando 66 Refer Exhibit 33 for Statement of Fact - S J K Guruge
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7.4.2. The Primary Dealers are entrusted with the responsibility for the development and
introduction of international best practices with respect to the Government Securities
trading. They are also responsible for deepening the financial market, the introduction of
new technology and the use of more complex financial instruments. They are responsible for
creating and maintaining a secondary market in Securities.
7.4.3. They are supposed to act in fiduciary capacity in respect of its customers in the holding of
and in the collection and payment of maturity proceeds and interest on Securities and shall
for this purpose segregate the assets of its customers from its own assets. The assets of
customers shall not form a part of the assets of the Primary Dealer in winding up.
7.4.4. It was noted that there are no prescribed procedures / programs through which the Central
Bank keeps a watch on the objective of appointing Primary Dealers in the country.
7.4.5. On the review of CDS data, noted significant transaction carried out by the Primary Dealers
through own investment instead of infusing investor funds into the Government Securities.
This indicates the Primary Dealer has not concentrated on market development, increasing
the investor base in Government Securities and volumes in primary market.
Table 14- List of transactions – Primary Dealers and customer investments**
YEAR 2014 2015 2016 2017
PRIMARY
DEALER
NAME
PRIMARY
DEALER
NAME INVT.
CUSTOMER INVT.
PRIMARY
DEALER
NAME INVT.
CUSTOMER INVT.
PRIMARY DEALER
NAME INVT.
CUSTOMER INVT.
PRIMARY
DEALER NAME INVT.
CUSTOMER INVT.
ESL 66.82 33.18 91.12 8.88 100 - 100 -
NWSL 95.78 4.22 99.47 0.53 99.87 0.13 100 -
PABC 100 - 99.75 0.25 99.37 0.63 86 14
PTL 97.66 2.34 99.82 0.18 99.92 0.08 100 -
WTSL 98.5 1.5 98.17 1.83 98.29 1.71 98.21 1.79
** Source-Data of CDS transaction recordings
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7.5. APPOINTMENT OF PRIMARY DEALERS WITHOUT FULFILLMENT OF
NECESSARY REQUIREMENTS
SCOPE COVERAGE
7.5.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of evaluation of
applications and appointment of selected Primary Dealers.
7.5.2. As per Section 2 of RSSO (Chapter 420) and LTBO (Chapter 417), the CBSL shall have the
authority to undertake and carry out the appointment from time to time of Primary Dealers
and the Regulation, Supervision or monitoring of such Primary Dealers with respect to their
transactions in Securities and the performance of their duties as Primary Dealers.
The appointment of PTL - 6 September 2013
7.5.3. The following events are noted on the review of the application and appointment documents:
Comments Date
Note on the PTL application and observations related to legal matter were submitted to SPD - Nanayakkara
06-Nov-12
Draft Letter prepared for informing the further documents needed for evaluation of the proposal as detailed in minutes by DSPD Bandara
09-Nov-12
Draft letter was submitted for review with legal concerns to SPD – Nanayakkara
16-Nov-12
SPD - Nanayakkara Instructed Senior Manager - Priyanka that letter should be addressed to DG Ananda Silva and AG Kamalsiri and instructed to check if the PTL had any secondary dealing in Government securities
04-Dec-12
Note to DSPD Bandara; a draft report regarding the evaluation of the application prepared based on inputs from Priyanka and submitted for review.
04-Dec-12
The assessment note on the rejection of PTL appointment submitted by SPD Nanayakkara to DG Ananda Silva and AG Kamalsiri.
07-Dec-12
Draft BP submitted by SPD Nanayakkara to DG Ananda Silva and AG Kamalsiri
02-May-13
DG Ananda Silva approves the Draft Board Paper and instructed to submit the Board Paper
06-May-13
The Monetary Board providing in principle approval for appointment of PTL as Primary Dealers
09-May-13
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7.5.4. On review of application and appointment documents provided by the department, we noted
the following deviations:
A. The application of PTL indicated that the company did not have adequate free capital
amounting to Rs. 300 Million and the company had raised a debt for raising the debt. In
absence of adequate free capital, the assessment did not consider the failure of PTL
operation impacting the investor.
B. The assessment of PTL application did not assess the following key points for the
appointing as Primary Dealers:
1. Prior Experience of PTL group in financial services industry;
2. Risk of Standalone Primary Dealer in terms of Market Development, Market Integrity
and Compliance towards the applicable Laws;
3. Issues noted in ESL, where the company misused the customer monies, high Related
party transaction, high Staff incentives, no security allocation and non-recording of
transaction in CDS; and
4. Infrastructure available with PTL for the development of Government Securities
Market in rural areas of the Sri Lanka
C. In this case, recommendation was given not to give dealership to PTL. On 5 December
2012, note was addressed from Supervision department, recommending that the request
of PTL to be appointed as a Primary Dealer cannot be accepted. The list of regulatory
concerns on non-bank Primary Dealers were enumerated which included lack of an
institutional arrangement for the management of risks, inherent liquidity risk, non-bank
Primary Dealers act as the conduit of funding for parent companies, limited participation
at primary auctions, high level of borrowing and leverage. However, there was no
communication noted towards not to give dealership to PTL. (Refer Exhibit 42)67.
67 Refer Exhibit 42 for PTL appointment rejection note
Draft BP of PTL on time extension to fulfil the conditions imposed by MB - submitted by Head of Supervision to DSPD Bandara
01-Aug-13
Draft BP on appointment of PTL is submitted to DG/S 25-Sep-13
Press release on appointment of PTL submitted to SPD/ASPD/DSPD (B)/Head of Supervision by Dilani (MT/D)
09-Oct-13
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During an interview, N W G R D Nanayakkara, SPD-the PDD, for the period January 2012
to February 2015, stated that the issue of appointment letter of PTL as a Primary Dealer
was done against the advice of appointing him as a stand-alone Primary Dealer.
Nanayakkara submitted the advice to the Deputy Governor (B D W A Silva) and the
Assistant Governor (A. Kamalasiri) on the application received on 5 December 2012.
(Refer Exhibit 37)68.
However, the Board paper submitted through the Deputy Governor (B D W A Silva) did
not include all the points from this submission for considering various factors and issue
in the appointment as a standalone Primary Dealer. Ajith Cabral, the former Governor,
even called him once to understand the reasons for delay in the submission of Board
papers regarding the application of PTL.
D. Hence, it can be concluded that the appointment of PTL was done overlooking the
considerations as were stated by the Supervision department. The submissions done for
non-appointment of PTL as a Primary Dealer were modified to delete certain critical
points. No remarks as to why the said critical points were deleted could be in the
documents provided by the department for review, hence, the activity of deletion
remains questionable.
E. Furthermore, the appointment of PTL was done subject to in-principle approval for 90
days against which further extension was provided for 21 days against for the fulfilment
of one of the conditions. However, on review of the onsite examination of PTL done in
2014, non-compliances were noted against which the clearance for the in-principle
approvals was granted. The table below shows the in-principle approvals which were
cleared and against which the findings were noted in 2014 onsite examination. Hence, it
can be concluded that the assessment done for granting clearance was not done in a
proper manner. Moreover, there is no defined regulatory action was not considered for
such non-compliances.
68 Refer Exhibit 37 for statement of fact of Nanayakkara
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Appointment of PABC - 1 August 2013
7.5.5. Noted instances where the fulfilment conditions provided for the appointment of Primary
Dealer were not met and no evidences for the assessment performed by the department for
evaluating and finalising the appointment of Primary Dealer.
# INITIAL APPLICATION OBSERVATION OBSERVATION NOTED IN ONSITE
EXAMINATION
1 The work plan stated that PABC
expects to engage in services such
as portfolio management, project
appraisal, loan syndication and
other related fee-based activities
for business expansion and
enhancement of its market share.
• As per onsite examination conducted
in February 2014, it was raised that
PABC– PDU does not have a proper
Business Plan formulated for business
expansion and enhancement of its
market share.
# INITIAL APPLICATION OBSERVATION OBSERVATION NOTED IN ONSITE
EXAMINATION
1 Arrangements for contingency
funding lines to mitigate liquidity
risk have not received Primary
Dealer comment-PTL has clean
facility with following two banks to
meet the intraday liquidity facility
of the company. This will make
PTL to manage its liquidity risk
management without any
Government Securities as
collateral
As per onsite examination conducted
in October 2014
• Non-availability of a contingency
funding plan.
• In spite of the undertaking given
by PTL to put in place a
contingency funding
arrangement, PTL has failed to
comply as of examination date.
2 Board approved Business Plan
should be made available. Primary
Dealer comment Business Plan for
2013 - 2016 is available.
• As per onsite examination
conducted in October 2014,
Although PTL has a Strategic
Business Plan, there is no Board
approval for the same.
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2 The work plan stated that through
the Bloomberg e-trading platform it
was stated to increase the
efficiency as well as profitability in
trading Government Securities and
hope to reach to a very wide
audience by the aid of it.
As per onsite examination conducted
in February 2014 it was raised that an
e-trading platform was introduced to
execute and record secondary market
transactions, enabling price
discovery, transparency, generating
yield curve for the development of
the secondary market for Government
Securities. However, none of
PABCPDU transactions have been
recorded for four (4) months from
September to December 2013.
3 The work plan stated that
educating and selling Government
Securities to investors efficiently
and to cater the needs of retail
investors.
As per onsite examination conducted
in March 2016 it was raised that the
senior management of PABC- PDU has
failed to conduct any market
promotion programs on the
Government Securities for the
development of Securities market and
the Primary Dealer system.
Appointment of ESL - 1 April 2000
7.5.6. On review of application and appointment documents provided by the department, it was
noted the following documents were not available in the files:
A. Articles of Association of the Company;
B. Certificate of Incorporation of the Company;
C. Resolution of the Board of Directors to make an application to the CBSL for appointment
as Primary Dealers and authorizing the signatory of the application to sign the application
on behalf of the applicant;
D. An undertaking from the Company to abide by the rules and regulations, directions, code
of conduct and related guidelines pertaining to Primary Dealers and to primary/secondary
market transactions issued by the Central Bank from time to time; and
E. Last audited financial statements of the Company.
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Hence, it can be concluded that the assessment of documents at the time of appointment of
ESL as a Primary Dealer was not conducted effectively.
Appointment of WTSL - 1 August 2011
7.5.7. On review of application and appointment documents provided by the department, we noted
a non-compliance for requirement relating to increase in paid up and issued capital by Rs.
100 million against which in-principle approval was granted. Hence, assessment done for
providing clearance to in principle approval was not done in the right manner.
The deficiencies noted in evaluation of the application and appointment of Primary Dealers. The
following are the CBSL employees who were responsible along with respective department:
PTL and PABC
• B D W A Silva, Deputy Governor overseeing the PDD
• A Kamalasiri, Assistant Governor overseeing the PDD
• N W G R D Nanayakkara, SPD
WTSL
• K G D D Dheerasinghe Deputy director overseeing the PDD
• C J P Siriwardana, Assistant Governor overseeing the PDD
• S S Ratnayake, SPD
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7.6. ASSESSMENT OF FITNESS AND PROPRIETY OF DIRECTORS
SCOPE COVERAGE
7.6.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of implementation and
monitoring of regulatory actions by the regulator.
7.6.2. As per Direction on 28 May 2013 issued under Regulation 11(1)(p) of the Local Treasury Bills
(Primary Dealers) Regulations No. 01 of 2009 and Regulation 11(1)(p) of the Registered Stock
and Securities (Primary Dealers) Regulations No. 01 of 2009 for assessment of fitness and
propriety of directors needs to be done to ensure good governance and risk management on
the conduct of business of Primary Dealer companies which promote safety, soundness and
stability of the Primary Dealer industry. Further ensuring fitness and propriety is important
to promote and maintain high standards of conduct and management in the provision of
Government Securities transactions and related services thereby protecting the interests of
investors, creditors or public against future conduct by the officer in Primary Dealer company
which may involve loss to the investors, creditors or the public.
7.6.3. No person shall be appointed as a director / officer of the Primary Dealer company unless
that person is a fit and proper to hold office as a director / officer. Non-compliance with any
one of the criteria as per the direction shall disqualify a person to be appointed, elected or
nominated as a director or an officer. (Refer Exhibit 41)69.
7.6.4. As per clause 4.2 with respect to existing directors and employees, the Primary Dealers shall
submit the affidavits and declaration within thirty days (30) days of the direction. However,
on review it was noted that in 2013, in case of WTSL and ESL, eight (8) instances and five (5)
instances were noted respectively when the documents were not filed within timeline of 30
June 2013. No reporting to the Monetary Board for this non-compliance was done nor any
action was taken by the Supervision department for the same as it was evident from the files
shared with us. Moreover, there was no regulatory action defined in the law for non-
compliance of the fitness and propriety of directors.
69 Refer Exhibit 41 for direction on assessment of fitness and propriety of directors and officers performing executive functions of Primary Dealer companies
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Table 15 - The list of instances – non-compliance of timeline
# COMPANY NAME
NAME OF THE INDIVIDUAL
DESIGNATION APPOINTMENT DATE
DATE OF SUBMISSION
OF DOCUMENTS
1 WTSL S A B Ekanyake Chairman 8/18/2010 8/8/2013
2 WTSL D H B Ranawana Managing Director/ CEO
1/1/2009 7/15/2013
3 WTSL E M M Boyagoda Non- Executive Director
4/25/2011 8/15/2013
4 WTSL W S Weerasooria Non- Executive Director
1/11/2010 8/8/2013
5 WTSL R P Weerasooria Non- Executive Director
1/11/2010 8/8/2013
6 WTSL M R C Cooray Non- Executive Director
8/18/2010 8/8/2013
7 WTSL K A H Kuruppu Non- Executive Director
6/20/2011 8/8/2013
8 WTSL R R Gomez Head of Treasury/CEO
10/1/2011 7/15/2013
9 ESL Romesha Dushyanthi Senerath
Director-736610434V
11/14/2012 9/26/2013
10 ESL Nalin Noamal Perera Jayasuriya
Director-503210266V
8/15/2011 9/4/2013
11 ESL Godakande Aratchige Kishantha Nanayakkara
Director-671870840V
10/6/2011 9/13/2013
12 ESL Isira Dharmapriya Bandara Dassanayake
Director-730410930V
11/23/2012 9/23/2013
13 ESL Chanuka Upendra Ratwatte
Director-730820445V
11/23/2012 9/27/2013
7.6.5. As per Clause 4.3 with respect to continuing directors, the Primary Dealers shall submit the
affidavits and declaration annually thirty days (30) prior to the AGM if the directors are
appointed for re-appointment. However, on review it was noted in case of WTSL, for a
continuous period from 2014 – 2017 and in case of ESL for 2014, three (3) instances and six
(6) instances were noted when the documents were filed but the date of AGM was not stated
anywhere. Hence, it can be concluded that the assessments carried out in these years without
recording the date of annual general meeting was not comprehensive.
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Table 16 - The list of such instances – absence of AGM date
# COMPANY NAME NAME OF THE INDIVIDUAL DESIGNATION
1 WTSL S A B Ekanyake Chairman
2 WTSL W S Weerasooria Non- Executive Director
3 WTSL K A H Kuruppu Non- Executive Director
4 ESL Romesha Dushyanthi Senerath Director-736610434V
5 ESL Nalin Noamal Perera Jayasuriya Director-503210266V
6 ESL Godakande Aratchige Kishantha Nanayakkara
Director-671870840V
7 ESL Isira Dharmapriya Bandara Dassanayake Director-730410930V
8 ESL Chanuka Upendra Ratwatte Director-730820445V
9 ESL Ravindra Manohara Sri Tillakawardana Director-671690079V
7.6.6. In case of ESL, two instances were noted where the documents were not filed for assessing
the fitness and propriety of directors for 2015. No reporting to the Monetary Board for this
non-compliance was done nor any action was taken by the Supervision department for the
same.
Table 17 - The list of such instances – no documentation files
# COMPANY NAME
NAME OF THE INDIVIDUAL DESIGNATION
1 ESL Ravindra Manohara Sri Tillakawardana
Director-671690079V
2 ESL Godakande Aratchige Kishantha Nanayakkara
Director-671870840V
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7.6.7. In case of PTL, N N D Jayasekara was appointed by the Board on 23 December 2013 as
Accountant. Further, as per fitness and propriety directions “whenever director or officer
submit their Affidavit and Declaration, they have to disclose in the declaration form any
business transaction the director or officer performing executive functions presently has with
the Primary Dealer Company or its related companies, if any”. As per the on-site Report 2016,
it was noted that she had done Repo transaction with PTL and the same transaction was not
disclosed in the Declaration of Assessment of Fitness and Propriety done for 2016. (Refer
Exhibit 49)70.
7.6.8. Noted two (2) instances where appointment has been done, however there was no assessment
of fitness and propriety being performed during the period 2014 and 2015. (Refer Exhibit 50)
71.
A. U M P Samarasinghe, was appointed by the Board of PTL on 1 November 2013 as Officer
RTGS. However, there was no Affidavit and Declaration presented by CEO of PTL to the
CBSL. The said declaration was submitted 8 December 2015.
B. W M Priyadarshana, was appointed by the Board of PTL on 25 November 2013 as Officer-
Allocation. However, there was no Affidavit and Declaration presented by CEO of PTL to
the CBSL. The said declaration was submitted on 8 December 2015.
7.6.9. On 3 February 2017, A S Fernando (Senior Assistant Director) provided list of Primary Dealer
directors and key employees for whom the Fitness and Propriety Assessment were delayed.
However, there was no evidence for any action being taken for the non-compliance. (Refer
Exhibit 51) 72.
7.6.10. On 25 April 2017, A S Fernando (Senior Assistant Director) provided to the Deputy Director H
D Ajith on the list of concerns and issues noted during the assessment of Fitness and Propriety
of Primary Dealer directors and key employees. The Deputy Director, H D Ajith instructed A
S Fernando that the discrepancies noted in PTL should be considered serious and a warning
letter to be issued. However, there was no evidence available for any such warning letter
being issued to PTL during the period. (Refer Exhibit 10)73.
70 Refer Exhibit 49 for fitness and Propriety of N. N. D. Jayasekara_2016 and N N D Jayasekara -Repo outstanding 71 Refer Exhibit 50 for no Fitness and Propriety performed for Manju Priyadarshana and Upeka Samarasinghe 72 Refer Exhibit 51 for delay in Fitness and Propriety by SNBFI 73 Refer Exhibit 10 for direction to issue warning letter instead of declaring un-fit
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It was noted that there is no such warning clause mentioned under assessment of fitness and
propriety direction and if there is a serious non-compliance by the director or officer they
should be declared as un-fit.
The below mentioned officials during the period 2013 to 2017 were responsible for the
deviation / deficiencies noted in performing the Regulatory and Supervisory role:
• N W G R D Nanayakkara – SPD - 1.1.2012 - 8.2.2015
• C M D N K Seneviratne- SPD - 9.2.2015 - 20.9.2015
• T H B Sarathchandra - SPD - 21.9.2015 - 1.10.2017
• S J K Guruge – Senior Assistant Director – 1.5.2016 – till date
• UP Alawattage- Director, SNBFI- 21.9.2015- 3.9.2017
• HD Ajith -Deputy Director – June 2016 – October 2017
7.7. POLICY FORMULATION
SCOPE COVERAGE
7.7.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers
7.7.2. As per the understanding provided during the discussions held with the department officials,
it was noted that there was no laid down procedure to be followed for issuance of directions.
The laying down of the factors to be considered were not stated in the procedure for issuance
of direction.
7.7.3. No mechanism for tracking of developments in the market was established according to which
the directions can be framed / drafted.
7.7.4. The procedures followed for reviewing of directions issued by the DSNBFI was not included in
the operations manual of the DSNBFI.
7.7.5. As per the understanding provided during the discussions held with the CBSL employees, it
was noted that there were no laid down procedures for the Monetary Board to give their
recommendations on the findings presented to them.
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7.7.6. During an interview, N W G R D Nanayakkara, SPD-the PDD, for the period January 2012 to
February 2015, stated that there was an absence of Regulatory and Supervisory framework
for monitoring of the Primary Dealers. The Regulation and Supervision functions were
limited only to Application and Appointment of Primary Dealers, Suspension of Primary
Dealers, performing Supervision function through onsite, offsite, spot and special
investigations and issuing of directions as a part of policy formulation. It was also mentioned
that the department lacked on the technology infrastructure and required skilled staff for
performing the Regulatory and Supervisory role. However, the efficiency of Supervision of
Primary Dealers was enhanced by reducing the onsite examination cycle from two years to
one year and submitting the examination reports, along with the Regulatory concerns and
proposed corrective actions to the Monetary Board. There were no directions from the
Monetary Board as to whether any changes to the extent in Regulatory and Supervisory
framework were to be done. (Refer Exhibit 37)74.
The above deficiencies were noted for formulating and issue of directions to Primary Dealers
are responsibility of SPD (the PDD) and Directors (SNBFI) during the tenure. (Refer Table 13).
7.8. ABRUPT EMPLOYEE TRANSFERS IN REGULATORY AND SUPERVISORY
FUNCTION
SCOPE COVERAGE
7.8.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of any other matters which
may come to light during the examination which have a bearing or relevance to the matters
referred to in the scope.
74 Refer Exhibit 37 for statement of fact of Nanayakkara
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7.8.2. The Monetary Board discussed about the PDD’s Regulatory and Supervisory role on the Primary
Dealers and determined that it conflicts with its role of market development and marketing
Securities. In pursuance of aforesaid discussion, the former Deputy Governor, P Samarasiri,
had submitted a board paper (on 5 February 2016) to seek an approval to assign the Regulation
and Supervision of the Primary Dealers in the Government Securities market to the DSNBFI.
Internal discussions on establishment of a new Securities trading infrastructure for the
Government Securities market which will require a new regulatory and supervisory
mechanism in line with the best international practices. In view of the above, it was proposed
to transfer regulatory and supervisory functions of the Central Bank to the DSNBFI on 5
February 2016. (Refer Exhibit 27) 75.
7.8.3. However, only three (3) employees were transferred – A S Fernando, W N S Fernando and S P
Sedara on 7 April 2016 as per the correspondence stated above.
7.8.4. It was noted that there was no notification received in the official gazette from the
Parliament for transferring of power from the PDD to the DSNBFI to regulate Primary Dealers.
Hence, the transfer of three (3) employees remains questionable.
7.8.5. The notification was received in the official Gazette after two (2) months when the
Supervision division of Primary Dealers was transferred to the DSNBFI effective 3 June 2016
and Supervision function of the Primary Dealer unit of Licensed Commercial Banks was
transferred to Bank Supervision Department (“BSD”), effective from 16 May 2018. (Refer
Exhibit 3 and Exhibit 4)76.
7.8.6. During the transition period, critical onsite examinations were in progress for PTL and PABC
and noted that there was no evidence for the handover of understanding, issues noted,
challenges and way forward. There was no defined handover procedure during the
termination, transfer, resignation, retirement and long leave for the employees of
Supervision division.
7.8.7. During the period March 2016, ongoing examination of PABC was transferred from W NS
Fernando to A S Fernando. During the discussion with A S Fernando, he stated that the
examination handover was not appropriately being provided for completion and submission
to the Monetary Board. (Refer Exhibit 44)77.
75 Refer Exhibit 27 for board paper for transfer of Regulation and Supervision role from the PDD to DNBFI 76 Source: Refer Exhibit 3 for Regulation made by The Ministry of Finance under Section 55 of the RSSO (Chapter 420) and Exhibit 4 for Regulation made by The Ministry of Finance under Section 16 of the LTBO (Chapter 417) 77 Refer Exhibit 44 for copy of email sent by W N S Fernando for Handover - PABC
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7.8.8. The employees responsible for the deficiencies noted in performing the Regulatory and
Supervisory roles during the transfers during 2016 are as follows:
• P Samarasiri, Deputy Governor overseeing the PDD
• R A A Jayalath, Assistant Governor overseeing the PDD
• U P Alawattage, Director - SNBFI
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SECTION B: SUPERVISION FRAMEWORK AND DIRECTION
1. The operations of Primary Dealers are regulated by the Registered Stocks and Securities (Primary
Dealers) Regulations No. 01 of 2009 and Local Treasury Bills (Primary Dealers) Regulations No. 01
of 2009, Regulations issued by the Ministry of Finance (“MOF”) and Directions issued by the CBSL.
As per the Operations Manual updated during 2007, the main functions of Supervision division are
to carry out / attend to: (Refer Exhibit 11)78
a. Off-site surveillance;
b. On-site examination;
c. Market monitoring;
d. Supervision policy issues; and
e. Other activities.
2. The subsequent amendments to the Operations Manual during 2013, modified the main functions
of the division as to carry out: (Refer Exhibit 1)79
a. Off-site surveillance;
b. On-site examination;
c. Spot examination;
d. Policy Formulation; and
e. Other activities / Any other activities required to ensure smooth functioning of the Primary
Dealer system (Refer Exhibit 2)80.
3. The CBSL has identified five (5) Primary Dealers out of 16 Primary Dealers for the review. As on
1 January 2009, the CBSL has appointed 11 Primary Dealers under Registered Stock and Securities
Ordinance and Local Treasury Bill Ordinance. During the Review Period, three (3) out of five (5)
identified Primary Dealers (one bank Primary Dealer and two non-bank Primary Dealers) were
appointed.
4. The Supervision division did not maintain a consolidated listing of examinations conducted.
Accordingly, the count of examinations is compiled based on the documentation provided for
review, in support of the examinations. As on the date of this Report, the Department has
confirmed on the count of examination files and reports applicable for the Review Period.
78 Source: Refer Exhibit 11 for the PDD Operational Manual Supervision Division 2007 79 Source: Refer Exhibit 1 for the PDD Operational Manual Supervision Division 2013 80 Source: Refer Exhibit 2 for the PDD Operational Manual Supervision Division 2015
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The count of examinations conducted by the Supervision Division at the PDD or with the DSNBFI
during the Review Period are provided below:
Table 18 - Count of examinations
# PRIMARY DEALER DATE OF APPOINTMENT
DATE OF SUSPENSION
EXAMINATION TYPE
ON-SITE SPOT
1 Pan Asia Banking Corporation-PD Unit 1 Aug 2013 15 Aug 2017 3 -
2 Natwealth Securities Limited 1 Dec 2003 31 May 2019 5 2
3 WealthTrust Securities Limited 1 Aug 2011 - 4 1
4 Entrust Securities PLC 1 Apr 2000 24 Jul 2017 4 4
5 Perpetual Treasuries Limited 30 Sep 2013 6 Jul 2017 2 5
TOTAL 18 12
The Primary Dealer-wise and year-wise count of examinations conducted is as following:
Table 19 - Primary Dealer-wise and year-wise count of examinations-Onsite and Spot
# PRIMARY DEALER 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
1 Pan Asia Banking Corporation– Primary Dealer Unit
NA NA NA NA - 1 1 1 - 3
2 Natwealth Securities Limited
1 - 1 1 1 2 1 - - 7
3 WealthTrust Securities Limited
NA NA - 1 2 1 - - 1 5
4 Entrust Securities PLC
1 1 1 2 1 1 1 - - 8
5 Perpetual Treasuries Limited
NA NA NA NA - 1 2 - 4 7
TOTAL 2 1 2 4 4 6 5 1 5 30
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5. An overview of the components of the Supervision function applicable for Primary Dealers market
dealing in Government Securities, covered as part of the review is provided below. The
examination files were reviewed to assess effectiveness across the phases of planning,
examination, review of findings, operational workflow management and reporting. Coverage of
all applicable legislations during examination, analysis of root cause for non-compliances,
oversight of the Supervision function by the Monetary Board were evaluated along with the
framework for capability enhancement of the Supervision employees and policy formulation with
functional vision and direction.
6. On review of the documents in support of the examinations conducted by the Supervision division,
deficiencies were noted that could have reduced the effectiveness of the Supervision function.
The nature of deficiencies includes systemic and operational deficiencies along with gaps in the
direction, approach and methodology / mechanisms adopted for Supervision. Certain deficiencies
at the operations indicated absence of proactive initiatives by the division to enhance
effectiveness of Supervision. Accordingly, the findings of the review are classified as following:
A. Observations on the Supervision framework and direction;
B. Systemic and design gaps in the Supervision function;
C. Deficiencies in the Operations: Conducting examinations; and
1. Common findings across Primary Dealers – indicating absence of constructive measures;
2. Repeat findings indicating gaps in follow-up or remediation;
3. Other findings specific to Primary Dealers; and
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D. Deficiencies related to reporting to the Monetary Board.
(Refer Annexure 15 – The list of all on-site examination findings noted in the select Primary
Dealers)81
Refer subsequent Sections of the Report for detailed finding across the above categories along
with the associated details of examinations.
7.9. OBJECTIVE AND APPROACH:
SCOPE COVERAGE
7.9.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof.
7.9.2. The Operations Manual of Supervision Function defines the objective of the Supervision as
“…to ensure a safe and sound Primary Dealer system which infuses greater competition,
liquidity and depth in to the G-sec market and thereby reducing the borrowing cost of the
Government, ensure investor protection and financial system stability”. The approach for
Supervision of Primary Dealers was to be “…based on a risk-focussed approach, which
evaluates whether the Primary Dealers have sufficient capability in terms of assets, capital
and portfolio for managing the risks associated with the business they engage in”. (Refer
Exhibit 2)82.
7.9.3. During the meetings / discussions with the current and former CBSL employees who were
responsible for Supervision function during their tenure, the following understanding was
provided for Supervision function of Primary Dealers:
A. Supervision of Primary Dealers is carried out by conducting On-site, Off-site and Spot
examinations. There was no link or relation defined along with the guidelines in adequate
detail as to how Supervision would ensure a Primary Dealer system that infuses greater
competition, liquidity in the Government Security market and would ensure reduction of
borrowing cost of the Government of Sri Lanka;
81 Refer Annexure 15 for list of on-site examination findings identified by the Supervision division for the selected Primary Dealers 82 Source: Refer Exhibit 2 for the PDD Operational Manual Supervision Division 2015
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B. The criteria for assessment of a “safe and sound” Primary Dealer system is not defined.
The mechanisms to be set up by other departments in the CBSL, the compliance of which
to be supervised by the division for ensuring “investor protection and financial system
stability” were not indicated; and
C. The scope / areas of review for conducting examination were provided in the form of an
examination questionnaire and coverage of examination Report. There is no defined
detailed procedures and assessment parameters for evaluating the coverage of
examination, leaving the actual method of assessment to the experience and capability
of the examination team including examiners and examiner in-charge (“EIC”). (Refer
Exhibit 12)83.
7.9.4. The approach for Supervision was defined to be risk-focussed. The areas of coverage for on-
site examination include risks but not limited to Liquidity Risk, Market Risk, Legal /
Reputational Risk Management and Strategic Risk Management, which are the operational
risks of Primary Dealer enterprise, for its own business continuity. The risks identified for
examination are not comprehensive such that the approach for risk-based assessment does
not focus on the risks that a Primary Dealer would bring to the Government Security Market
when onboarded or approved as a Primary Dealer. The defined risk areas (Liquidity risk,
Market risk etc) are not translated into the risks that the Primary Dealer would bring into the
system, which include the risk of money laundering, corruption etc and the measures to be
taken by Supervision function to combat the risks.
7.9.5. The directional deficiency in the risk-based approach included missing guidelines on risk
identification mechanism, risk universe definition, risk prevention and detection
methodology and definition of risk mitigation plan encompassing risk avoidance, risk
management and risk transfer.
7.9.6. The risk-based examination emphasis on the risk management frameworks that categorize
risks based on risk controlling stage such as pre-incident prevention, post incident detection,
risk appetite and risk deterrence. The Supervision assessment through examination is more
of a detection procedure (post facto) that has associated with limitations and is deficient in
terms of prevision and deterrence.
7.9.7. During the Review Period, it was noted that the employees entrusted with the responsibility
of driving the Supervision function have not initiated steps to set-up effective risk
management framework or have not recommended for measures to improve the effectiveness
of the Supervision function.
83 Source: Refer Exhibit 12 Examination Questionnaire
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7.9.8. During the meetings with employees of the DSNBFI, it was noted that there was no initiative
taken to evaluate the design effectiveness of the Supervision function through benchmarking
with the other economies of similar Government Securities (primary) market / Primary Dealer
operations.
7.9.9. Review of minutes of the Monetary Board during the Review Period, wherein the findings of
the Supervision examinations were presented, did not indicate evidence that
recommendations were made to the Monetary Board for setting up of a comprehensive
Supervision framework or to enhance effectiveness of the function.
7.9.10. It can be concluded that there was no link or relation defined along with the guidelines in
adequate detail as to how Supervision would ensure a Primary Dealer system that infuses
greater competition, liquidity in the Government Security market and would ensure reduction
of borrowing cost of the Government of Sri Lanka.
During an interview, S J K Guruge, Head of Division, SNBFI, for the period August 2011 to
October 2012 and June 2016 to till date, stated that detailed methodology for conducting
examinations was not documented as part of the operational manual i.e. the description of
technique to be used for sampling, work procedure and templates for pre-examination plan.
(Refer Exhibit 33)84.
During an interview, A S Fernando, Examiner - Onsite Examinations for the period October
2015 to July 2018, stated that the detailed methodology for conducting examinations was
not documented as part of the operations manual. (Refer Exhibit 31)85.
The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
84 Refer Exhibit 33 for Statement of Fact - S J K Guruge 85 Refer Exhibit 31 for Statement of fact – A S Fernando
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7.10. POLICY FORMULATION
SCOPE COVERAGE
7.10.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of recommendations and
or any regulatory actions taken by the regulator with respect to the findings noted during
examinations.
7.10.2. The following deficiencies were noted with respect to framing of guidelines in the Operations
Manual for Supervision during the Review Period, which indicate gaps in the direction for
Supervision function:
A. There was no mechanism defined pertaining to method and channels of communications
with Primary Dealer in relationship to the Regulation functions for recommendations on
issue of regulations and directions, following the findings of examinations such as repeat
violations by Primary Dealers, common findings across Primary Dealers and missing
compliance with the directions issued post examinations by Supervision division. (Refer
Annexure 8)86.
B. Auditor General’s annual reports for 2013, 2015, 2016 and 2017 identified that the
following violations of different regulations and directions was consistent across the
Primary Dealers and clearly indicates the absence of setting up control mechanism by the
supervisory function to the regulatory function for issue of suitable additional regulations
on such repeated and consistent violations.
1. Lanka Settle Systems Rules Version 2.1 (2003) on usage of the Intra-Day Liquidity
Facility (ILF): “…The Primary Dealer had used its customer’s Securities as collaterals
to obtain ILK…”;
2. The Direction of Repurchase and Reverse Repurchase Agreements on 2 May 2001:
“…The Primary Dealers had failed to allocate adequate Securities against the
borrowings from the customers under the Repurchase Agreements and to obtain
Securities with sufficient market value for lending under the Reverse Repurchase
Agreements…”; and
86 Refer Annexure 8 for Repeated observation identified in each Primary Dealer
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3. Section 2.2 of Lanka Settle System Rules Version 2.1 (2013) Custodial Responsibilities:
“…The Primary Dealer had failed to record some customer outright transactions in
the Central Depository System of the Lanka Settle System…”
C. As per LTBO and RSSO, the legislation does not specify the penalties or fines to be levied
for repeated violations. Also, operational manual does not specify the procedure for
penalties or fines to be levied to Primary Dealer for repeated violations. Regulatory action
despite levy of penalty on repeat violations was not recommended by the supervisory
function to the regulatory function; (Refer Exhibit 1, Exhibit 2 and Exhibit 11)87.
D. The Operational Manual does not include the assessment criteria for compliance with
Financial Transactions Reporting Act, 2006 (“FTRA”), Prevention of Money Laundering Act,
2006 (“PMLA”) and The Convention on the Suppression of Terrorist Financing Act, No. 25
of 2005 (“CFT”) that requires supervisory systems to Report on violations noted during
their audits / examinations, on the non-compliance with the requirements of the
legislations. Section 22 and Section 23(a) of FTRA are provided below for reference; Refer
Exhibit 1, Exhibit 2 and Exhibit 11)88.
Section 22 of FTRA:
E. “Supervisory authority to ensure compliance by all Institutions. The relevant supervisory
authority of an Institution Shall verify through regular examinations whether that an
Institution is complying with provisions of the Act and shall Report any non-compliance
to the Financial Intelligence Unit
Section 23 (a) of FTRA:
F. “Functions of supervisory authority of an institution and Auditors Where a supervisory
authority or an auditor of an Institution has reasonable grounds to suspect that
information that it has concerning any transaction or attempted transaction may, be (a)
relevant to an investigation or prosecution of a person or persons for any unlawful
activity; The Financial Intelligence Unit shall consult the supervisory authority in respect
of the issue of guidelines, directions or regulations to an Institution which is regulated
by such supervisory authority and shall furnish to the supervisory authority copies of all
guidelines, regulation or directions issued to such Institution.”
87 Refer Exhibit 1 for the PDD Operational Manual Supervision Division 2013, Exhibit 2 for the PDD Operational Manual 2015 and Exhibit 11 for the PDD Operational Manual 2015 88 Refer Exhibit 1 for the PDD Operational Manual Supervision Division 2013, Exhibit 2 for the PDD Operational Manual 2015 and Exhibit 11 for the PDD Operational Manual 2015
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As per PMLA and CFT:
“The supervisory authority or the auditor of the Institution shall Report the transaction
or attempted transaction to the Financial Intelligence Unit”
7.10.3. During the review of Operations Manual and meetings with current and former employees of
the Supervision division with respect to the supervision policy, it was noted that:
A. The Operations Manual defines 16 areas of examination coverage with the objective of
the review. It does not provide key aspects to be covered for specified scope of work
and methodology pertaining to examination / assessment of defined areas.
Example 1:
As per annexures of operations Manual, 2015, under operational risk which contains
information technology, page 49 which states that, “Are there sufficient audit trails to
evaluate and ensure data integrity for the range of functional applications provided by
the IT system and the assessment of IT risk been included in the work program of the
internal auditor or special system auditor”.
While the objectives of review are defined, how exactly the assessment is to be
performed by the examiner is not defined.
Example 2:
As per annexures of operations Manual, 2015, under internal control which contains
outsourcing, page 48, which states that, “Is the service provider an affiliated institution
or an independent extra-group company and all the information relevant outsourced
activity been made available to examination officer”.
The details of what parameters to be considered for the review, along with the
associated risks were not defined.
Example 3:
As per annexures of operations Manual, 2015, under liquidity risk, page 48, which states
that, “Are policies and procedure routinely reviewed and updated as be appropriate”.
The details of what parameters to be considered for the review, along with the
associated risk weightages were not defined.
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Example 4:
As per annexures of operations Manual, 2015, under legal risk, page 59, which states
that,
“Has the Primary Dealer established document requirements covering all aspects of
training operations.”
The details of what parameters to be considered for the review, along with the
associated risk weightages were not defined.
Example 5:
As per annexures of operations Manual, 2015, under code of conduct, page 61, which
states that, “Are there specific restrictions to limit or preclude trading for an employee’s
personal account.”
The details of what parameters to be considered for the review, along with the
associated risk weightages were not defined.
Example 6:
As per annexures of operations Manual, 2015, under market risk, page 63, which states
that, “Are meaningful management information reports on market risk generated and
distributed in a timely manner and have there been instance of market disruptions
related to market risk that have affected the ability of the Primary Dealer to conduct tis
trading operations.”
The details of what parameters to be considered for the review, along with the
associated risk weightages were not defined.
B. The Operational Manual does not define as to how the documentation was to be
maintained in support of the activities required in the operations manual, to be
performed by the examination teams in respect of the examinations conducted and
evaluations performed. There is no definition of document retention requirements in
terms of periodicity and the nature of retention. For the purpose of our review, the PDD
and DSNBI could not precisely confirm the number (count) of examinations conducted
across the identified Primary Dealers during the Review Period, due to the absence of
detailed guidelines on documentation. During the review of on-site examinations
conducted for the Review Period, the following key documents are not available in the
examination files provided.
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Table 20 – The list in relation to absence of key documents in the examinations’ files
C. The operations manual does not define procedures to be followed in case the
observations were to be dropped during the process of review of examination files by
the Examiner-In-Charge or were not reported as part of the “Letter of Findings” issued
to Primary Dealer for their responses. There was no requirement in the Operations
Manual to document and evidence the detail of reviews performed, additional
information or explanations evaluated and recording the rationale for not proceeding
with the initial findings of the examiner. A summary of Primary Dealer-wise count of
examiner’s findings which were either not included in the quarterly assessment pf
Primary Dealer industry or not reported to the Monetary Board, is provided below. In the
absence of these requirements, the effectiveness of the examination conducted, review
and reporting process is questionable. (Refer Annexure 10)89.
Table 21 – Dropping observations
YEAR / COUNT OF INSTANCES
# PRIMARY DEALERS 2011 2013 2014
1 Natwealth Securities Limited ("NWSL") 1 - 2
2 Wealth Trust Securities Limited ("WTSL") - 4 -
3 Perpetual Treasuries Limited ("PTL") - - 2
Total 1 4 4
89 Refer Annexure 10 for dropping of examination findings from “Letter of Findings”
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D. The Operations Manual of Supervision division does not specify the roles and
responsibilities of the employees in the Supervision division of the CBSL. The Supervision
division was a team with 6 (six) levels of employees, headed by a Director (in the DSNBFI)
/ Superintendent (in the PDD). The role of a Management Assistant and that of an
Examiner-In-Charge, who is a Senior Assistant Director, level in the examinations team,
was defined in the manual, however, the role of other employees till the Director /
Superintendent of the department was not defined / documented. During the meetings
with the current and former employees of the division, we were given to understand
that the examination reports are prepared by the examiners and reviewed by the
Examiner In-Charge. The examination reports are subsequently reviewed by all
employees in the chain of command till the Head of the Department. However, this
appears to be a practice followed that was not documented in the operations manual.
During the review, the following inconsistencies were noted that indicated gaps in the
effectiveness of the examinations and review process. However, the role played by
various employees in the Supervision function was not evidenced in finalization of the
“Letter of Findings” that was issued to the Primary Dealers. In the absence of defined
roles and responsibilities, the accountability for driving effectiveness of the examination
and Supervision function cannot be assigned to any specific employee.
Inconsistencies in the examination findings:
1. Examination findings reported to Primary Dealers were not comprehensive;
2. Gaps in the examination plan, coverage, sampling methodology adopted; (Refer
Annexure 2090).
3. SNBFI prepares an annual examination plan with regard to onsite examinations.
However, the methodology followed for the preparation of the plan was not clear as
it was not documented properly;
4. SNBFI does not have a formal mechanism to communicate the performance of the
annual examination plan elaborating the deviations of the plan to the senior
management on a periodic basis;
5. Findings of the examiner not supported by adequate work papers;
6. Repeat observations at the same Primary Dealers;
7. “Time bound action plan” (remedial action) not directed towards the examination
finding;
90 Refer Annexure 20 for Coverage and Sampling technique
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8. Missing evidence of evaluation of action plan response submitted by Primary Dealers;
and
9. Removal of findings initially included by the examiner.
7.10.4. It can be concluded that there were gaps in the review process of the documents and the
elaboration on the technique followed for sampling while doing the verification of data.
Further SNBFI does not have a formal mechanism to communicate the performance of the
annual examination plan elaborating the deviations of the plan to the Monetary Board on a
periodic basis.
7.10.5. During an interview, P M C S Gunawardana, Management Assistant, stated that the EIC reviews
the examination Report and the working files for preparing the Letter of Findings. The Letter
of Findings was submitted to SPD for finalisation. However, SPD does not verify the
observations with working files and supporting documents to ensure the completeness of
examination conducted. (Refer Exhibit 34)91.
7.10.6. During an interview, S P Sedara, Senior Assistant Director, stated that annual examination
plan was submitted to the Directors of SNBFI (U P Alawattage and W Ranaweera) for review.
The annual examination plan was not submitted to the Monetary Board for the consideration
during the period 2016 and 2017. (Refer Exhibit 35)92.
7.10.7. During an interview, A S Fernando, Examiner- Onsite Examinations for the period October
2015 to July 2018, stated that the detailed methodology for conducting examinations was
not documented as part of the operations manual. (Refer Exhibit 31)93.
7.10.8. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
91 Refer Exhibit 34 for Statement of P M C S Gunawardana 92 Refer Exhibit 35 for Statement of S P Sedara 93 Refer Exhibit 1 for the PDD Operational Manual 2013, Exhibit 2 for the PDD Operational Manual 2015 and Exhibit 11 for the PDD Operational Manual 2015
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7.11. CAPABILITY ENHANCEMENT
SCOPE COVERAGE
1. Ascertaining if there were any irregularities, lapses or misconduct or instances of
professional negligence in conducting the role of Regulation and Supervision of the selected
Primary Dealers as part of other matters which may come to light during the examination
which have a bearing or relevance to the matters as referred in the scope.
2. During the meetings with the current and former CBSL employees of the Supervision division,
the following deficiencies in the capability of the examination employees were noted that
reduced the effectiveness of the examinations performed.
A. The Supervision employees did not possess prior experience of conducting audit or
examinations of entities in the financial services sector. It was noted that approximately
60% of the interviewees stated that they did not possess the prior experience in
conducting examinations or audits of entities in the banking or financial services sector.
This deficiency existed throughout the Review Period. Further, details about employees
with lack of necessary experience would be gathered during interviews with the PDD and
the DSNBFI employees.
B. For effectiveness of conduct of Regulatory and Supervisory function by the regulator,
regulator requires to build technical competencies of department employees in the areas
of activities including legal and enforcement, supervision surveillance, government debt
market development, market education, training and research and fund administration.
C. It has been noted that the department employees have competency gaps in the area
such as information system audit / IT policy, understanding on international best
practices relating to Regulation and Supervision of financial institutions, knowledge on
guidelines issued on prudential requirements and Report writing. But it was noted that
the mechanism available with the department to assess the employees’ competencies
and communicate the gaps to the Human Resource Department in the stated areas, was
not adequate.
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D. During the discussion, examiners and EIC stated that their educational and professional
background does not include qualification related to in conducting audits or
examination. Further, details about educational and professional background would be
gathered during interviews with employees of the PDD Supervision and SNBFI for the
Summary of discussions with the selected employees of the Supervision function. (Refer
Annexure 9)94.
E. Additionally, 9 out of 12 interviewees confirmed that there were no focused trainings on
the conduct of examinations and procedures to be followed during on-site examinations,
off-site surveillance and spot examinations. In the absence of structured and targeted
training programs in the areas of examination to enhance the skills-sets of the
examination employees. All new joiners in the CBSL undergo trainings and familiarization
programs that introduce CBSL operations. These trainings are generic capability trainings
covering Code of Ethics to Central Bankers, Outward Bound Professional Development
Programme, Applied Econometrics: Practical Approach Using E-Views Software etc.,
which are common for all employees of the CBSL. However, the PDD and SNBFI employees
has not attended any focussed trainings to improve subject matter expertise on topics
such as examination procedure, risk assessment, transaction monitoring etc. relevant
for conducting effective examinations. Some of the training needs highlighted by the
employees during the discussions are provided below. (Refer Exhibit 13 and Annexure
9)95.
Training requirement:
1. Examination methodology;
2. Understanding the laws, ordinances, regulations and directions and related updates;
3. Procedures to be performed by Primary Dealers to comply with the laws; and
4. Assessment of key findings in the examinations.
F. The Operations Manual 2013, (page number 69 and para 7 of work-paper) requires the
Head of Department (the PDD or SNBFI) or Head of Division (Supervision) to provide
“examination feedback” to the examiner and EIC on the conduct of the examination.
However, during the review, it was confirmed that no such feedback process was
followed during the Review Period. (Refer Annexure 9)96.
94 Refer Annexure 9 for the Summary of Discussions with the selected employees of the supervision function 95 Refer Exhibit 13 for list of training programs attended by the PDD Supervision / SNBFI employees and Annexure 9 for the Summary of Discussions with the selected employees of the supervision function 96 Refer Annexure 9 for the Summary of Discussions with the selected employees of the supervision function
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G. No evidence could be located to prove that there was a defined methodology to record
and share the experiences gained, with respect to the new issues and developments
identified, through onsite examinations, among the employees. The establishment of
such a policy is useful for the improvement of the onsite examination process and the
employees.
H. During an interview, S P Sedara, Examiner – Onsite Examinations, for the period July
2015 to till date, stated that the understanding and knowledge of performing the
Supervision of Primary Dealers was acquired during on-job training and discussions with
other members of the Supervision team. (Refer Exhibit 35)97.
I. During an interview, L.T Amarasinghe, Examiner – Onsite examinations for the period
July 2014 to September 2015, stated that she obtained on-the job training in relation
of Supervision of Primary Dealers. (Refer Exhibit 32)98.
J. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
7.12. STAFFING DEFICIENCIES
SCOPE COVERAGE
7.12.1. Ascertaining if there were any irregularities, lapses or misconduct or instances of professional
negligence in conducting the role of Regulation and Supervision of the selected Primary
Dealers as part of other matters which may come to light during the examination which have
a bearing or relevance to the matters as referred in the scope.
7.12.2. During the meetings with the current and former CBSL employees of the Supervision division,
the following deficiencies in staffing were noted which reduce the effectiveness and ability
of Supervision employees in conducting the examinations:
A. Discussions with the department revealed that the employees were allocated for onsite
examinations based on certain criteria, size and nature of business, past issues and
observations of the off-site examinations. However, the methodology had not been
defined in the Operational Manual.
97 Refer Exhibit 35 for Statement of Fact – S P Sedara 98 Refer Exhibit 32 for Statement of fact – L T Amarasinghe
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Table 22 - Year-wise count of employees
# DESCRIPTION 2009 2010 2011 2012 2013 2014 2015 2016 2017
1 Total employee count 4 4 5 5 5 6 6 6 6
2 Count of employees with tenure < 1 year
1 1 2 2 1 2 1 - -
3 Count of employees with tenue 1 -2 years
1 2 1 1 2 3 3 3 3
4 Count of employees with tenue > 3 years
2 1 2 2 2 1 1 3 3
7.12.3. During an interview with the current and former employees of the Supervision division, it was
noted that the Supervision division operated with an average count of 4 – 5 employees during
the Review Period. The interviewees commented that considering the count of Primary
Dealers and the average duration of on-site examinations and off-site surveillance to be
conducted on an ongoing basis, these employees count was a significant challenge in ensuring
coverage of all examination areas comprehensively (Refer Annexure 9)99.
7.12.4. It can be concluded that there was deficiency of employees in the department and hence no
rotation policy for the employees could be implemented. The team selection for the
examination was done as per the availability of employees during that period of examination.
Further staffing deficiency was responsible for delay in the conduct of examinations scheduled
7.12.5. During an interview, S P Sedara, Examiner – Onsite Examinations, for the period July 2015
to till date, stated that the requirement of rotation of employees was not described in the
Operations Manual. Further due to limited number of employees in the DSNBFI, the rotation
of employees was not possible. This problem of officer deficiency had also been informed
to the Monetary Board in 2018. (Refer Exhibit 35)100.
7.12.6. During an interview, S J K Guruge (Head of Division, the DSNBFI) for the period August 2011
to October 2012 and June 2016 to till date, stated that verbal communication was made to
Directors ( U P Alawattage and W Ranaweera) of the DSNBFI in relation to staff deficiency
in the department. Further, it was stated that the deficiency had an adverse impact on the
efficiency and effectiveness of Supervision function carried out during the period. (Refer
Exhibit 33)101.
99 Refer Annexure 9 for the summary of discussions with the former employees of Supervision function. 100 Refer Exhibit 35 for Statement of fact – S P Sedara 101 Refer Exhibit 33 for Statement of Fact - S J K Guruge
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7.12.7. During an interview, W N S Fernando, EIC / Examiner – Onsite examinations for the period
February 2013 to till date, stated that conducting examinations (On-site and Spot) were
delayed due to staff deficiency. Further, it was stated that this concern has been
communicated to employees on frequent basis and it was presumed that the request for more
employees was communicated to the Human Resources Department by the Director of the
DSNBFI. (Refer Exhibit 30)102.
7.12.8. During an interview, T H B Sarathchandra, SPD – the PDD for the period September 2015 to
June 2016, stated that there were only three employees allocated for the Regulation and
Supervision functions and no additional employees had been provided to the department
despite numerous verbal request placed to the HR department and P Samarasiri, Deputy
Governor. Department was not able to carry out the Regulation and Supervision functions
effectively due to inadequate staff. (Refer Exhibit 29)103.
7.12.9. During an interview, A S Fernando, Examiner - Onsite Examinations for the period October
2015 to July 2018, stated that non-transfer of all the employees in the Supervision division
of the PDD to SNBFI lead to severe shortage of employees in Supervision division of SNBFI,
resulting in delay in the preparation and submission of examination Report to the Monetary
Board. (Refer Exhibit 31)104.
7.12.10. During an interview, K P K Weerasekara, EIC / Examiner / Senior Assistant Director / Deputy
Director for the period July 2011 to till date, stated that there were three to four employees
to conduct on-site examinations, off-site surveillance and spot examinations. Further, she
stated that SPD decides the employee requirement for the Supervision division along with
the administration division of the PDD. (Refer Exhibit 53)105.
7.12.11. During an interview, H D Ajith, Deputy Director for the period June 2016 to October 2017,
stated that the staff deficiencies were verbally communicated to the director U P Alawattage
and additional staff were allocated to Supervision division. Further, U P Alawattage raised
the concern in various forum and meetings with management. (Refer Exhibit 54)106.
7.12.12. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
102Refer Exhibit 30 for Statement of Fact – W N S Fernando 103 Refer Exhibit 29 for Statement of Fact - T B H Sarathchandra 104 Refer Exhibit 31 for Statement of fact – A S Fernando 105 Refer Exhibit 52 for Statement of fact - K P K Weerasekara 106 Refer Exhibit 54 for Statement of Fact – H D Ajith
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SECTION C: SYSTEMIC AND DESIGN GAPS IN SUPERVISION
7.13. GAPS IN COVERAGE OF LAWS
SCOPE COVERAGE
Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof.
7.13.1. The Supervision over functioning of the Primary Dealers is to ensure compliance with laws,
ordinances, regulations and directions that govern the operations of Primary Dealers. A
summary of the count of legislations identified as applicable for oversight by Supervision
function is provided below (Refer Annexure 1)107.
Table 23 – Count of Applicable Legislations
# CATEGORY NUMBER OF ISSUANCES
1 Law 1
2 Ordinance 2
3 Manuals 3
4 Circular 1
5 Regulations 16
6 Directions 36
Total 59
7.13.2. During the review, it was noted that the last update to the Operational Manual of Supervision
division was conducted in the 2015 and there has not been any amendment for the directions
and circulars issued subsequent to the update to the Operational Manual. (Refer Exhibit 2)108.
107 Refer Annexure 1 for List of applicable Laws, Regulations, Manuals and Directions 108 Refer Exhibit 2 for the PDD Operational Manual -2015
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Table 24 – List of directions and circulars were issued subsequent to the updates to the update of
the PDD Operational Manual 2015
# Issue Year
Direction / Circulars Details
1 2015 Direction Primary Dealer companies (minimum core capital) direction no. 1 of 2015
2 2015 Direction Primary Dealer companies (RWCAR-amendment) direction no. 2 of 2015
3 2016 Direction Recording of ownership of Government Securities in the LankaSecure Settlement System
4 2016 Direction Secondary Market trading and reporting
5 2016 Circular Payment and Settlement System circular no. 1 of 2016
6 2017 Direction Mandatory reporting of repurchase transactions in Government Securities
7 2017 Direction Direction on primary issuance of treasury bonds
7.13.3. The Supervision division does not have a comprehensive compliance checklist with detailed
mapping of compliance requirements under the legislations. On review of the examination
files, it was noted that the examination teams use “Questionnaire” to understand the client’s
operations and compliances towards regulations and seek information / data from the
Primary Dealer through “Initial Data Request”. It was noted that the Questionnaire used by
the examination teams did not map the specific questions referring to the compliance
requirements, leading to a possible exclusion of compliance assessment requirements.
7.13.4. On comparison of applicable legislation requirement and examination procedures i.e.,
Questionnaire, Initial information request from the Primary Dealers and the reports sought
for the off-site surveillance. It was noted that not all compliance requirements were covered
as part of the Questionnaire, data request and reports obtained during Off-site surveillance.
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Table 25 – Summary of compliance requirements not covered in the Questionnaire
# REFERENCE AREAS COMPLIANCE REQUIREMENT
1 Circular on 1 September 2016, Secondary Market trading of Government Securities and reporting by Licensed Commercial Banks and licensed specialized banks
Bloomberg trading
platform
All licensed commercial banks and licensed specialized banks shall use the Bloomberg trading platform (fixed income quotes- FIQ) available for Sri Lanka to (i) Conduct all outright trades with other banks and Primary Dealers and (ii) Report yield rates and volumes of all outright trades carried out over the counter in excess of Rs. 50 million, within 30 minutes of each such trade. In case of trades carried out through brokers, selling side banks shall Report under (ii) above
2 Section 3 of Direction on Diversification of Primary Dealer Activities on 20 November 2009. Issued under Section 11 of the regulations on June 24, 2009, issued by the Minister of Finance under the RSSO and the LTBO (effective from 2 December 2009)
Limit- capital
utilization for
diversified activities
Primary Dealers shall engage in diversified activities only with capital over and above the minimum required capital under the existing directions and the said capital which is utilized for the said diversified activities should be limited to 25% of the total capital of the Primary Dealer. Total capital should be the capital stated in the latest audited financial statements.
3 Direction on Adjusted Trading (Away Prices) Issued in terms of Section 12 of the Regulations on February 1, 2002 issued by the Minister of Finance under the RSSO and the LTBO
Methodology for
transaction
recording
1) Primary Dealers are hereby required to refrain from having adjusted trading or using away prices for recording their transaction 2) Primary Dealer should use current market prices, for recording their transactions
4 Code of Conduct Honesty and
Fairness
Primary Dealer must ensure that the advertising of their services does not misrepresent the services that they are capable of performing for a customer or the expected performance of any Government Securities when a Primary Dealer advises or acts on behalf of a customer.
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Conflicts of Interest
Primary Dealer must not undertake business with or on behalf of a customer where it has directly or indirectly a conflicting interest unless it has disclosed to the customer the nature and extent of the interest before the customer enters into any relevant transaction. A conflicting interest may be between the Primary Dealer and its customer or between the customer and another customer.
Supervision by
senior management and
the compliance officer
Senior management and the compliance officer should check the active dealers trading accounts to identify any deviations, non-compliances, violations, prohibited trading practices, such as churning.
Customer Trade
Priority-Honesty
and Fairness
Primary Dealer should formulate policies, procedures, mechanisms etc. to identify and prevent the prohibited activities performed by any customer or dealer. The activities might include front running / forward trading, churning, market manipulation and insider dealing etc. Front running: An activity in which a trader takes a position in a security in advance of a large trade by the dealer or a customer of the dealer that will move the security's price in a predictable fashion with the intent of making a profit on trading in the Securities thereafter. Churning: Excessive trading in a customer's account by a person seeking to maximize fees and commissions regardless of the customer's best interests. Market manipulation: Any deliberately dishonest attempt to affect the market price of a security through trading. Insider dealing: A person or company has inside information when they have information about an issuer or its Securities that has not been publicly disclosed and that is likely to have an effect on the market price of the issuer's Securities when disclosed.
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7.13.5. It can be concluded that the Questionnaire did not include assessment questions to evaluate
compliance requirement.
Requirements under the Financial Transaction Reporting Act, No. 6 of 2006" (“FTRA”)
7.13.6. The act defines the roles and responsibilities of supervisory authority under Section 22 and
23 of the Act respectively. The respective sections of FTRA are reproduced below:
A. Sec 22 of Financial Transaction Reporting Act
Functions of supervisory authority of an institution and Auditors:
1. Where a supervisory authority or an auditor of an Institution has reasonable grounds
to suspect that information that it has concerning any transaction or attempted
transaction may, be relevant to an investigation or prosecution of a person or
persons for any unlawful activity; and
2. The Financial Intelligence Unit shall consult the supervisory authority in respect of
the issue of guidelines, directions or regulations to an Institution which is regulated
by such supervisory authority and shall furnish to the supervisory authority copies
of all guidelines, regulation or directions issued to such Institution.
B. Sec 23 (a) of Financial Transaction Reporting Act
1. Supervisory authority to ensure compliance by all Institutions; and
2. The relevant supervisory authority of an Institution shall verify through regular
examinations whether that an Institution is complying with provisions of the Act and
shall Report any non-compliance to the Financial Intelligence Unit.
C. Applicability of AML and CFT
1. Functions of supervisory authority of an institution and Auditors;
2. Assistance in the enforcement of the provisions of the Prevention of Money
Laundering Act, No. 5 of 2006 and the Convention on the Suppression of Terrorist
Financing Act, No. 25 of 2005; and
3. The supervisory authority or the auditor of the Institution shall Report the
transaction or attempted transaction to the Financial Intelligence Unit.
During the discussion with D M Rupasinghe, Director- Finance Intelligence Unit, we were being
informed that the department conducts examinations based on the risk criteria assigned for
each type of financial institution. Department has not conducted any examination for Primary
Dealer, since the Primary Dealer is considered as low risk institution comparing to other
financial institutions.
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During an interview, D S Thenuwara, Senior Manager, stated that questionnaire was used to
gather information for all examination to be conducted for respective Primary Dealers and
questionnaire does not include any information on Bloomberg transactions, separate
recording of related party transactions, limited capital utilisation for diversified activities
and conflict of interest (Refer Exhibit 36)109.
The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
7.14. ABSENCE OF PRIMARY DEALER RISK SCORING SYSTEM
SCOPE COVERAGE
7.14.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof.
7.14.2. The framework and methodology for Supervision over Primary Dealers does not include a Risk
Scoring mechanism whereby; the Primary Dealers are assessed risk scores to assess the
criticality of non-compliances or deviations from regulations are identified during an
examination. The composite impact of the individual findings noted during the examination
is not comprehendible. There is no monitoring mechanism to identify the extent of concerns
and non-compliance towards applicable legislation and for computing the composite risk
scoring. Consequently, all the Primary Dealers are subjected to same level of monitoring
during the off-site surveillance without cognizance of the previous examination findings.
7.14.3. During the meetings, W Ranaweera, Director and with K P K Weerasekara, Acting Deputy
Director of SNBFI, confirmed that the Supervision function has not devised a risk-based
assessment system for Primary Dealers.
7.14.4. In the absence of an objective, structured system of risk assessment of a Primary Dealer
based on the examination findings, the assessment of severity of the assessment findings are
left to the best subjective evaluation of the Supervision division. Absence of risk rating system
does not empower the Monetary Board of the CBSL to determine the nature of responsive
actions and direct a sustainable remedial action for the non-compliances reported at a
Primary Dealer.
109 Refer Exhibit 36 for Statement of fact – D S Thenuwara
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7.14.5. During an interview, S J K Guruge, Head of Division - the DSNBFI, it was noted that the
department has not documented the assessment of pre-examination plan and risk profiling
for the Primary Dealer prior to the commencement of On-site examinations. (Refer Exhibit
33)110.
7.14.6. During an interview, A S Fernando, Senior Assistant Director, it was noted that the
department has not defined detailed methodology for pre- examination and risk assessment
of Primary Dealer. (Refer Exhibit 31)111.
7.14.7. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
7.15. ROOT CAUSE AND QUANTIFICATION
SCOPE COVERAGE
7.15.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof.
7.15.2. The Operations Manual does not require analysis of “root-cause and quantification” for the
examination findings before determination of “Time-bound action plan” to mitigate the non-
compliances identified with the Primary Dealers. During the review, noted that the root-
cause for findings were not analysed and documented for remedial action provided to Primary
Dealers. Further, significant gaps were noted between the examination findings and the
action plan defined for remediation. There was no practice of doing impact assessment in
the form of possible loss quantification for the findings issued by the department. Thus, the
action plan defined was not comprehensive and missed the direction of ensuring visible and
sustainable remediation to ensure non-recurrence of the deviations.
110 Refer Exhibit 33 for Statement of Fact - S J K Guruge 111 Refer Exhibit 31 for Statement of fact – A S Fernando
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7.15.3. Examination findings are summarised below.
Example: 1
Examination finding:
Supervisory Observation – “Use of customers’ Securities as collateral for obtaining ILF
facility without the knowledge of such customers”
Time-bound action plan defined:
Supervisory Recommendation – “NWSL should immediately discontinue the unauthorized
usage of Securities that belong to customers for obtaining Intra-Day Liquidity Facility
facility and put in place an internal control mechanism to ensure strict compliance with
the said System Rule”
Primary Dealer comments – “Already being addressed”.
Possible root causes that lead to the finding:
“Use of customer Securities for obtaining Intra-Day Liquidity Facility indicates gaps in
monitoring mechanism at Primary Dealers, missing controls, review and reconciliations and
missing internal audit reviews for timely detection of such gaps. The examiner's finding did
not highlight the root cause and oversight deficiencies”
Gaps in action plan due to missed RCA:
The action plan recommended by the Supervision division is based on the ongoing deficiencies
identified however, it doesn’t oversee basis and future implication of such deficiencies.
Further, action plans were not recommended differently for repeated violations.
“The action plan mentioned about on-going deficiency which has occurred, it doesn’t talk
about what would be the implication in future and nor it talks about any warning if it is
repeated violation”
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Example: 2
Examination finding:
Supervisory Observation – “Re-investments of customer balances upon maturity have
been done for over one-year period without receiving fresh instructions from the
respective customers and It was also observed that certain deal tickets have been raised
without written requests of the customers”
Time-bound action plan defined:
Supervisory Recommendation – “NWSL should immediately take necessary steps to make
sure all investments and subsequent roll-over of investments is supported by a customer
request, If the product matures more than one time during a year, NWSL shall obtain new
written instructions from the customer on a yearly basis and If the maturity of product
happens in more than one-year cycle, automatic roll-overs are not allowed and should obtain
such instructions at the time of each and every maturity”
Primary Dealer comments – “Concern was noted, and steps are being taken to get fresh
instructions from client for Rollovers. The process of obtaining such instruction will be
started immediately and outstanding ones will be completed by 30 Jun 2014”
Possible root causes that lead to the finding:
“The extent of deviation in terms of count of transactions, number of customers, frequency
of occurrence and the total transaction value were not assessed. The adequacy of
(mitigation) action plan cannot be assessed in the absence of such details of the depth/
extent of deficiencies noted. The examiner's finding did not highlight the root cause and
methodology deficiencies”
Gaps in action plan due to missed RCA:
“The action plan recommended by the Supervision division is based on the ongoing
deficiencies identified however, it doesn’t oversee basis and future implication of such
deficiencies. Further, action plans were not recommended differently for repeated
violations”
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Example: 3
Examination finding:
Supervisory Observation – “It was noted that some customer transactions in the selected
sample had not been recorded in CDS-CSL account and Non-recording of transactions causes
inability of claiming the ownership of the investment for the Client, as the ownership of
the security is not transferred to the CDS account of the customer”
Time-bound action plan defined:
Supervisory Recommendation – “PABPD should take necessary actions immediately, to
record all transactions in Lanka secure promptly and accurately”
Primary Dealer comments – “Not available”
Possible root causes that lead to the finding:
“Non-recording of transactions in CDS indicates gaps in monitoring mechanism at Primary
Dealers, missing controls, review and reconciliations and missing internal audit reviews for
timely detection of such gaps. The examiner's finding did not highlight the root cause and
oversight deficiencies”
Gaps in action plan due to missed RCA:
“The reviewer’s remarks / noting on examination work paper do not indicate the above
deficiencies identified during the review process or the examiner was asked to gather facts
around the above possible deficiencies, the implementation recommendation is not
comprehensive covering the measures to be taken to mitigate the above deficiencies at the
Primary Dealer”
7.15.4. As stated in examples above relating to non-recording of transactions in CDS, as part of the
rectification action, the punitive provision which was not implemented as stated below:
(Refer Exhibit 38)112.
112 Refer Exhibit 38 for Violation of LankaSettle System Rules Version 2.1 (2013): Custodian Responsibilities
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Table 26 – Penalties for violation of Lankasettle System Rules
FREQUENCY OF NON-COMPLIANCE
The CBSL ACTION
First Instance Severe Warning
Second Instance Rs. 5000 per transaction or 0.5% of the value of the transaction (face value) whichever is higher
Third Instance Rs. 10000 per transaction or 1% of the value of the transaction (face value) whichever is higher
Over three instances Severe regulatory action, as may be determined by the CBSL including the suspension of the DDP status of a Licensed Commercial Banks and suspend the Primary Dealer status as appropriate for a period of time determined by the CBSL
7.15.5. Dealer Direct Participant shall comply with applicable law, regulations and directions issued
by the CBSL in conducting of their business. The DDP shall act as custodians for their
customers in the Lanka Secure System. The custodial role includes the responsibility to
promptly and accurately record the name, address and NIC, CRN or the number of any other
identification document approved by the CBSL, of each customer in the Lanka Secure System
when the customer obtains legal ownership of Securities. It also includes prompt and accurate
recording in the LSS, ownership or any change of ownership or owner details of Securities and
in the event of failure to record the said details, the CBSL may in its sole discretion impose
a charge on the DDP as stated above.
7.15.6. It can be concluded that the action plan defined was not comprehensive and missed the
direction of ensuring visible and sustainable remediation to ensure non-recurrence of the
deviations.
7.15.7. During an interview, T H B Sarathchandra, SPD of the PDD, stated that department has not
imposed any penalty towards the non-compliance of LankaSecure System Rules (Refer Exhibit
29)113.
7.15.8. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
113 Refer Exhibit 29 for Statement of Fact – T B H Sarathchandra
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7.16. QUALITY SELF-ASSESSMENT AND BENCHMARKING
SCOPE COVERAGE
7.16.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof and implementation and
monitoring of regulatory actions taken by the regulator.
7.16.2. The Supervision division does not have a process of Independent Quality Review or Self-
Assessment Process to ensure effectiveness of the Supervision examination. The gaps noted
the approach for examination, coverage of applicable laws during the examinations and
missing direction of time-bound action plan would be avoided and the effectiveness of
Supervision could be enhanced through a Quality Self-Assessment by the Supervision function.
7.16.3. As per the Operation Manual, 2015, for update in the existing manual and issue of new
directions, the department needs to periodically evaluate the development in international
market and internal institutions i.e. Bank for International Settlement (BIS), Federal Reserve
System (“FED”), Reserve Bank of India (“RBI”) and Bank of England (“BOE”) (Refer Exhibit 2)
114.
7.16.4. As per discussion with the W Ranaweera, Director, SNBFI, it was noted that the department
has not conducted benchmarking exercise of its Supervision function and methodologies
adopted against the Peer Group departments such as BSD, the CBSL Operations of comparable
economies and with global professional standards.
7.16.5. Hence it can be concluded that the Supervision division does not have a process of
Independent Quality Review or Self-Assessment Process to ensure effectiveness of the
Supervision examination.
7.16.6. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
114 Source: Refer Exhibit 2 for the PDD Operational Manual Supervision Division 2015
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7.17. OVERSIGHT RESPONSIBILITY
SCOPE COVERAGE
7.17.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
Supervision of selected Primary Dealers and findings thereof.
7.17.2. The Operational Manual of Supervision function defines the requirement of reporting to the
Monetary Board. With respect to the on-site examinations, the Supervision division is required
to Report the findings to the Monetary Board, post receipt of action plan to Primary Dealer
and receipt of responses from the respective Primary Dealer. On a quarterly basis, the division
has to Report to the Monetary Board on the status of “Time-Bound Action Plan” to be complied
by the Primary Dealers.
7.17.3. On review of the examination reporting process defined, it was noted that the process was
driven by the Supervision function but not overseen by the Monetary Board for reasoning and
absence of monitoring mechanism indicating the following deficiencies noted:
A. Total of 18 on-site examinations were conducted during the Review Period against 35
examinations possible, considering the annual examination cycle;
B. In case of the bank Primary Dealer, Pan Asia Banking Corporation PLC (Primary Dealer
Unit), Onsight examination was conducted during 2015 and 2016, however, the Monetary
Board was not informed on the examination findings;
C. Certain examination findings were consistent across the examination on Primary Dealers
indicating either systemic deficiencies or need for additional regulatory action. However,
such actions were not recommended or taken by the Regulatory division;
D. Certain findings were repeated during the examinations at Primary Dealers indicating
gaps in the effectiveness of the “Time-Bound Action Plan” monitoring by the Supervision
function;
E. Noted gaps in the examination findings, where the remedial action provided in the
“Time-bound Action Plan” was not consistent during the review of examinations by the
examination team;
F. Significant delays (more than 200 days in certain instances, Refer below Table 27-29 for
details) in completion of on-site examinations and significant delays in issue of “Letter
of Findings” from the date of completion of examination field work;
G. No evidence is required to be maintained for performing the off-site surveillance as per
the Operations Manual of Supervision function; and
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H. No evidence of review by Assistant Governor and Deputy Governor (overseeing the PDD),
for Operations Manual being developed for Supervision function of Primary Dealers.
7.17.4. On review of Minutes of the Monetary Board meetings, it was noted that:
A. Deviations from the approved Annual Audit Plan, if any, were not reported by the
Supervision division to the Monetary Board; and
B. The gaps highlighted in para 7.25 were not reported to the Monetary Board.
Refer the below tables for an overview of significant delays noted in On-site examination
Table 27 – Time taken to send the LOF sent from the examination commencement date
Table 28 - Time taken to submit the Board Paper to the Monetary Board from LOF to Primary Dealers
Table 29 – Time taken to submit the board paper to the Monetary Board from the examination
commencement
(Refer Annexure 24 for detailed delays in submitting the Monetary Board papers)115.
115 Refer Annexure 24 for detailed delays in submitting the Monetary Board papers
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7.25.1. On the following events noted on the review of the application and appointment document
COMMENTS DATE
Draft LOF submitted by M/S/SU to DSPD(B) - O/S Repo list with CBSL funds
3-Dec-15
Note by M/S/SU to DSPD(B)- amended documents submitted. All customers within repo balances as at 30 Sep 15 were checked
8-Dec-15
Amended LOF submitted by M/S/SU to ASPD 11-Dec-15
Note by SM/F - BP preparation on hold until the new format is discussed with DG by SPD
11-Feb-16
Note by SM/F - ASPD instructed to continue with current format 1-Mar-16
Draft BP was forwarded by SM/F to SDPD and H/Supervision 3-Mar-16
Draft BP was forwarded by SM/F to ASPD 15-Mar-16
Note to SPD- Since the supervision division is to be transferred to DSNBFI soon, it is proposed to submit this through SNBFI with new supervisory mechanisms
15-Mar-16
7.25.2. Despite several issues noted during the onsite examination of PTL and the observation noted
in the examination was not reported to the Monetary Board instead Samarasiri, Deputy
Governor submitted the board paper for the transfer of department from the PDD to the
SNBFI without concluding on the examination report. The employee was transferred on April
2016 whereas the gazette was notified on the month June 2016 and there was no rationale
for the supervision division to be transferred from the PDD to the SNBFI without concluding
the examination report of PTL and PABC 2016.
7.25.3. During an interview with various employees who were responsible for Supervision of Primary
Dealers, it was noted that delay in the reporting examination reports were due to staff
deficiency and the existing employees were involved in providing the documents for the PTL
and ESL ongoing investigations.
7.25.4. During an interview, W N S Fernando, EIC / examiner – onsite examinations for the period
February 2013 to till date, stated that conducting examinations (on-site and spot) were
delayed due to staff deficiency. (Refer Exhibit 30)116.
116Refer Exhibit 30 for Statement of Fact – W N S Fernando
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7.25.5. During an interview, A S Fernando, examiner- onsite examinations for the period October
2015 to July 2018, stated that non-transfer of all the employees in the supervision division
of the PDD to SNBFI lead to severe shortage of employees in supervision division of SNBFI,
resulting in delay in the preparation and submission of examination Report to the Monetary
Board. He further stated that U P Alawattage (former director) informed that P Samarasiri
(Deputy Governor) instructed to submit the one-page PTL’s onsite examination Report for
the period 2016 to the Monetary Board and hence it was submitted without the signature of
Jayalath (Assistant Governor). (Refer Exhibit 31)117.
7.25.6. During an interview, W. Ranaweera, Additional Director / Director for the period September
2016 to till date, stated that delay in submitting the reports to the Monetary Board was due
staff deficiency and the existing employees were involved in providing the documents for
the PTL and ESL ongoing investigations. (Refer Exhibit 19)118.
7.25.7. During an interview, S J K Guruge (Head of Division, the DSNBFI) for the period August 2011
to October 2012 and June 2016 to till date, stated that verbal communication was made to
Directors ( U P Alawattage and W Ranaweera) of the DSNBFI in relation to staff deficiency
in the department. Further, it was stated that the deficiency had an adverse impact on the
efficiency and effectiveness of Supervision function carried out during the period. He
further stated that P Samarasiri (Deputy Governor) did not signed the PTL’s board paper for
the period 2016. Hence, U P Alawattage (former director) got the approval from the
Governor to submit the one-page board paper to the Monetary Board. (Refer Exhibit 33)119.
7.25.8. During an interview, T H B Sarathchandra, SPD – the PDD for the period September 2015 to
June 2016, stated that the delay in submitting the report to Monetary Board was due to
denial of the approval to submit Board paper by P Samarasiri, Deputy Governor. He further
stated that the Deputy Governor had instructed to change the reporting template despite
several findings noted during the examination of the Primary Dealers. (Refer Exhibit 29)120.
7.25.9. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
117 Refer Exhibit 31 for Statement of fact – A S Fernando 118 Refer Exhibit 19 for Statement of Fact – W Ranaweera 119 Refer Exhibit 33 for Statement of Fact - S J K Guruge 120 Refer Exhibit 29 for Statement of Fact - T B H Sarathchandra
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SECTION D: DEFICIENCIES IN OPERATIONS: CONDUCT OF EXAMINATION
7.18. EXAMINATIONS AS THE MEDIUM OF SUPERVISION
SCOPE COVERAGE
1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite examination and
off-site surveillance of selected Primary Dealers and findings thereof.
A. Supervision function is charged with evaluating the safety and soundness of individual
Primary Dealers. For evaluation, Supervision function carries out on-site examinations
and off-site surveillance.
B. On-site examinations are carried out to verify the accuracy of records submitted by
Primary Dealer and to assess the financial viability of the Primary Dealers. These are also
conducted to investigate certain aspects of Primary Dealer operations such as Custodial
arrangements, repurchase and reverse repurchase transactions. These examinations are
conducted by Supervision personnel by visiting Primary Dealers premises.
C. Off-site surveillance is carried out on the information submitted by the Primary Dealers
on daily, weekly, monthly and quarterly basis to check the Primary Dealer’s financial
soundness and includes activities not limited to evaluation of financial position and
performance of Primary Dealers.
2. The supervisory authority carries out examination to inspect the trading operations,
governance and its compliance with applicable laws and supervisory requirements.
3. During an interview, A S Fernando, Senior Assistant Director, stated that there was no
finding of any short selling of transaction conducted by PTL in the draft examination
Report. However, on the review of CDS transactions (extract), it appears that PTL has
submitted the incorrect and manipulated data. Further, during the spot examination for
the period 2016, several instances of error transactions were deleted without source
documents. There were no checks performed to identify if the transactions reported were
appropriate and genuine. (Refer Exhibit 31)121.
121 Refer Exhibit 31 for Statement of fact – A S Fernando
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4. During an interview, S P Sedara, Senior Assistant Director, stated that officers were not
assigned for off-site surveillance in the PDD. However, the surveillance was carried out by
all officers of the division based on specific areas assigned to them by the supervisors. In
the DSNBFI, Primary Dealers were assigned to the officers for the surveillance. The
monthly off-site surveillance Report was developed after transfer of Supervision to the
DSNBFI and submission commences later part of 2017. (Refer Exhibit 35)122.
5. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
FINDINGS ON REVIEW OF EXAMINATIONS
7.19. PLANNING AND PREPARATION
SCOPE COVERAGE
7.19.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and off-site
Supervision of selected Primary Dealers and findings thereof.
7.19.2. As per the Operation Manual for Supervision, the department is required to perform the pre-
examination assessment and preparatory plan to be conducted to assess the coverage of
examination and special areas to be covered during the on-site examination.
7.19.3. During the review of on-site examinations for selected five Primary Dealers. It was noted that
excluding work allocation sheet, none of the examinations files has documented the pre-
examination assessment and preparatory plan. The following table shows the frequency
towards non-availability of work allocation plan during the review of examinations files:
122 Refer Exhibit 35 for Statement of S P Sedara
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Table 30 – Absence of work allocation plan in the on-site examination’s files
Note: (“x”- Workplan not available, “” - Workplan available, “-” – No examination
carried out, “NA”- Not Applicable)
7.19.4. As per the discussions with the former and current employees of Supervision division, it was
noted that the on-site examination team has not maintained any documentation / evidence
pertaining to the assessment pre-examination plan.
7.19.5. During an interview, S J K Guruge, Head of Division, the DSNBFI, it was noted that the
department has not documented pre-examination plan and risk assessment of Primary
Dealers before the commencement of on-site examination. (Refer Exhibit 33)123.
7.19.6. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
123 Refer Exhibit 33 for Statement of Fact - S J K Guruge
# PRIMARY DEALER NAME ESL NWSL WTSL PABC PTL
EXAMINATION YEAR
1 2009 - NA NA NA
2 2010 - -
3 2011
4 2012
5 2013 - -
6 2014
7 2015 -
8 2016 - - -
9 2017 - - NA NA
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7.20. EXAMINATION PROCEDURES
SCOPE COVERAGE
7.20.1. Ascertaining if there were any irregularities, lapses or misconduct or instances of
professional negligence in conducting the role of Regulation and Supervision of the selected
Primary Dealers as part of onsite and offsite supervision of the selected Primary Dealers
and findings thereof.
7.20.2. Based on the discussion with the Supervision function on the process and procedure adopted
for the examination procedures, we were informed that following keys steps to be
considered for the on-site examination:
A. Opening meeting with the Primary Dealers;
B. Assigning of examination team member and defining the specific responsibilities;
C. The scope and objective of examination to be reviewed;
D. Finalization of the examination testing procedures;
E. Conducting examination fieldwork as per the scope of examination;
F. Monitoring of examination to ensure that the planned examination activities are
completed properly;
G. Preparation of draft supervisory concern Report;
H. Upon review, prepare a Letter of Finding and obtaining the response from Primary
Dealers;
I. Documentation of procedures, analysis of the management response and working
papers with indexed and referred to examination Report;
J. Closing meeting with the Primary Dealers and finalization of the remedial action;
K. Preparing time bound action plan and upon review, prepare Board paper for Monetary
Board; and
L. Reporting to the Monetary Board for regulatory action.
7.20.3. On review of the on-site examination for the selected Primary Dealers, it was noted that
the following key documents were not documented across the period of examination.
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Table 31 – List of missing documents from the examination files
7.20.4. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
7.21. OPERATIONS
SCOPE COVERAGE
7.21.1. Ascertaining if there were any irregularities, lapses or misconduct or instances of
professional negligence in conducting the role of Regulation and Supervision of the selected
Primary Dealers as part of onsite and off-site supervision of selected Primary Dealers and
findings thereof.
7.21.2. Based on discussions with the supervision division, it was noted that, there is no formal
system / tool in place for the PDD Supervision and the DSNBFI for timely reporting and
effective monitoring of examination activities performed by the department. There is no
process followed by the department for systematically recording activities performed
during on-site, off-site and spot examinations. Non-availability of audit / examination /
work-flow tool results in lack of standard procedure for execution and documentation of
examination process.
7.21.3. As per current practice followed by the supervision division, examinations are conducted
with reference to the PDD operational manual, thus no streamlined process were defined,
and no tracker / tool was used for conducting each work step in defined manner. In the
absence, standard procedures for conducting examination and non-availability of
documentation, it is difficult to identify completeness of various work steps performed
during the examinations.
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7.21.4. During the review of examination files, it was identified that various documents viz. risk
profile of Primary Dealer, examination work plan, work allocation sheet, working papers,
individual examiner Report, Minutes of meeting etc. required to be documented by the
examiner however, the documents were not available in the examination files.
7.21.5. Audit / workflow tools will enable supervision division in conducting examinations in
systematic, and standard and aligned with Laws, Regulation and Manuals.
7.21.6. Analytical use of FInNet for effective off-site surveillance:
A. Off-site surveillance works on developing an effective risk-based approach that
continuously monitors different types of developments of potential risk faced by
Primary Dealer market. Surveillance activity works on enhancing the early warning
system, which permits supervision division to perform proactive measures for smooth
functioning of the market
B. Under off-site surveillance requires full-fledged review of key risk parameters, analysis
and assessment of Primary Dealers risk profile. This process involves review and analysis
of financial statements, periodical capital adequacy, liquidity, profitability and various
risk reports. Off-site surveillance supports to identify the scope of the on-site
examination by detecting the most relevant and prioritized risk areas.
C. As per the PDD Operational Manual of Supervision Division, as part of off-site
surveillance, “FInNet” (computer-based reporting system) is used for collecting
financial and trading information on weekly, monthly, quarterly and annual basis for
performing analysis to detect potential issues and emerging risks from Primary Dealer.
D. Concerns identified during Off-site surveillance works as triggers for spot examination
and special investigation. In such examinations / investigations specific identified
outliers are reviewed by the supervision division to mitigate risks and concerns of
Primary Dealers and Primary Dealer market.
E. On review of Off-site Surveillance reports it was noted that various activities viz.
analysis of financial statements, Monitoring the recording of transactions in the Central
Depository System (“CDS”) and e-trading platform, and preparation of analytical
reports is performed manually by the department. There is no automated system in
place for analysis of financial and other reports collected through FInNet system.
Further, there is no mechanism in place to provide automated alerts to supervision
division to inform various risks from the uploaded data of Primary Dealers.
F. Non-updating of the FInNet system - All the Primary Dealers had to adopt the
International Financial Reporting Standards (IFRS) from 1 January 2013 onwards. The
reporting format available in the FInNet system was not updated to be in line with the
IFRS requirement.
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G. The objective of off-site surveillance is to provide early warning signals to supervision
division from analysis of data to restrict various risks of each Primary Dealers and
Primary Dealer market. Due to limited use of FInNet, various reports involving analysis
of data collected is performed manually by the supervision division. Manual analysis of
data depends on skills of individual examiner, thus scope for errors occurrence will be
high and leads to ineffective examination function.
H. During off-site surveillance of Primary Dealers, the analysis is not performed on key
financial and operational parameters viz. profitability statements, capital adequacy,
risk weighted capital adequacy, mark to market, statement of changes in equity and
reserves etc., due to non-availability of automated system.
I. During discussion with employees of the PDD supervision and the DSNBFI, it was
informed that use of FInNet system was planned for automated alerts and analysis for
continuous monitoring activities, however, such update was not introduced.
J. In the absence of comprehensive use of FInNet for providing analytical reports and
presumptive triggers of potential risks, the objective of Off-site surveillance cannot be
accomplished.
7.21.7. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
7.22. COMMON FINDINGS ACROSS PRIMARY DEALERS – INDICATING ABSENCE OF
CONSTRUCTIVE MEASURES
SCOPE COVERAGE
7.22.1 Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers as part of onsite and offsite
supervision of selected Primary Dealers and findings thereof.
7.22.2 Review of on-site examination reports along with supporting work paper revealed that certain
critical non-compliances were noted across the identified Primary Dealers. Details of the
common findings are provided below along with the details of count of Primary Dealers where
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the observations were noted and the percentage of frequency occurrence: (Refer Annexure
19)124.
Table 32 - Details of common findings
7.22.3 On the review of meeting minutes of the Monetary Board, it was noted that there is no
analysis being submitted on common findings across multiple Primary Dealers and they were
not reported to the Monetary Board.
7.22.4 It can be concluded that the occurrence of findings across multiple Primary Dealers indicates
potential systemic deficiencies that necessitate targeted regulatory actions.
124 Refer Annexure 19 for common observations
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7.22.5 During an interview, D S Thenuwara, Senior Manager, it was noted that common findings
and repeated observations were not communicated to the Monetary Board across the Review
Period and no instruction received from the department by SPD / Director for reporting on
the same. (Refer Exhibit 36)125.
7.23. CONDUCT OF EXAMINATIONS
1. On review of the examination conducted on Pan Asia Banking Corporation PLC (Primary Dealer
Unit) (“PABC”), the following are the key findings noted during the examination:
Observation 1 – Examination period March 2016
Section 2.2 of Violation of Lanka Settle System Rules Version 2.1, 2013 on Custodial
Responsibilities
Examination Findings Supervision Department Comments
• It was noted that some customer
transactions in the selected sample had not
been recorded in CDS-CSL account
• Non-recording of transactions causes
inability of claiming the ownership of the
investment for the Client, as the ownership
of the security is not transferred to the CDS
account of the customer
PABC should take necessary actions
immediately, to record all transactions
in Lanka Secure promptly and
accurately
Examiner - A S Fernando and P M C S Gunawardana, Examiner In-Charge - W N S Fernando.
ASPD / SPD - U P Alawattage
Deficiencies noted in the procedures followed during examination
• The review Report was not sent to Primary Dealer for the comments nor was it sent to
the Monetary Board for regulatory action.
• Methodology used for concluding the findings was not detailed to assess the
effectiveness of recommendation provided for ratification.
• The sample pertaining to January 2016 only was considered, whereas the Review Period
for the examination was February 2015 to January 2016.
• Overall the examination work paper does not indicate identification of period of
review.
125 Refer Exhibit 36 for Statement of fact – D S Thenuwara
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• Non-recording of transactions in CDS indicates gaps in monitoring mechanism at
Primary Dealers, missing controls, review and reconciliations and missing internal audit
reviews for timely detection of such gaps. The examiner's finding did not highlight the
root cause and oversight deficiencies.
• The reviewer’s remarks / noting on examination work paper do not indicate the
identification of procedural deficiencies identified during the review process.
• The implementation recommendation is not comprehensive covering the measures to
be taken to mitigate the above deficiencies at the Primary Dealer.
• No evidence of the action plan testing for compliance by Primary Dealer.
• No procedure defined for the communication/ notification of any such serious violation
of rules defined in Act, regulation, circular and direction by the regulator.
During an interview, P M C S Gunawardana, Management Assistant, stated that CDS outright
transactions during the month January 2016 were selected as sample and the same was
discussed with W N S Fernando (EIC) verbally and this was not documented. (Refer Exhibit
34)126.
Observation 2 – Examination period February 2015
Direction of Customer Charter for Primary Dealers and their Customers issued on
7.11.2013
Examination Findings Supervision Department Comments
PABPD has failed to obtain fresh customer
instructions for continued roll-over of
investments over one-year period. Also, it has
failed to establish a written procedure to
obtain fresh instructions for the roll-over
instructions by the customers as and when a
transaction requires a roll-over.
PABPD should develop a proper procedure
to obtain fresh customer instructions
from the customers, for all roll-overs
extending over a period of one year,
obtain approval from the Board of the
PABC for the same and make relevant
changes to the process.
Primary Dealers Comments
• Noted for Future Compliance.
• As we have now gone live on new treasury system, i.e. “Finacle Treasury” we have
implemented a process to notify the maturing Repo / Reverse Repo portfolios to the
126 Refer Exhibit 34 for Statement of P M C S Gunawardana
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clients and renew such contracts on or before the maturity, based on customer fresh
instructions.
• We shall obtain the required approvals of the Board as stipulated
Examiners - T M B A Goonetilleke and N D S Kumara. Examiner In-Charge - U P Jayasinghe.
ASPD / SPD - N W G R D Nanayakkara, C M D N K Seneviratne and T H B Sarathchandra
Deficiencies noted in the procedures followed during examination
• The extent of deviation in terms of count of transactions, number of customers,
frequency of occurrence and transaction value were not assessed. The adequacy of
(mitigation) action plan cannot be assessed in the absence of such details of the depth
/ extent of deficiencies noted;
• The possibility that, the Primary Dealer’s transactions without underlying instructions
from the client, could indicate potential financial improprieties or missing business
ethics, is not assessed by the examiner;
• Missing customer authorization for the roll-over indicates gaps in monitoring
mechanism at Primary Dealers including missing controls, review and reconciliations
and missing internal audit reviews for timely detection of such gaps. The examiner's
finding did not highlight the root cause and oversight deficiencies;
• The reviewer’s remarks / noting on examination work paper do not indicate the
identification of procedural deficiencies identified during the review process;
• The mitigation measures defined may not be appropriate enough to counter the extent
of gap identified, based on the defined parameters;
• The timeline for compliance by Primary Dealer for carrying out rectification was
extended by three quarters without any documented rationale for extension;
• The time-bound action plan did not document the action performed by the Primary
Dealer for the stated remediation timeline for improvement. Comments from Primary
Dealer indicate futuristic compliance without a defining specific timeline for each
remedial action. There is a missing clarity as to how the supervision department
considered the appropriateness of the response for future assessment of compliance;
and
• Documents were not maintained in the examination relating to the review of
implementation made by the Primary Dealers as part of time bound action plan. In the
absence of the same, it is not possible determine if the non-reporting to Monetary
Board is appropriate or otherwise.
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Observation 3 – Examination period February 2014
Violation of the Scripless Treasury Bills (Transactions) Regulations No. 02 of 2004 and
Scripless Treasury Bonds (Transactions) Regulations No. 02 of 2004
Examination Findings Supervision Department Comments
PABC has failed to separate own
transactions from customers
transactions. Even though PABC
maintains a separate bank account for
monies due to its customers as
required by the Section 6(2)(d) of the
cited regulations, it had used the said
dedicated customer bank account to
make brokerage payments.
PABC should take necessary measures to take
immediate action to discontinue the use of the
customer bank account for/PABC transactions.
Primary Dealers Comments
Discontinued the use of customer bank account for payment of brokerage transactions
effective 1 March 2014.
Examiner – T M B A Goonetilleke and G G N H Jayasinghe. Examiner In-Charge - D S
Thenuwara. ASPD / SPD - N W G R D Nanayakkara.
Deficiencies noted in the procedures followed during examination
• The extent of deviation in terms of count of transactions, amount of brokerage
payments done through the bank account, frequency of occurrences was not assessed.
The adequacy of (mitigation) action plan cannot be assessed in the absence of the
such details of the depth / extent of deficiencies noted;
• The possibility that, the Primary Dealer’s transactions in violation to the said
regulations, could indicate potential financial improprieties or missing business ethics,
is not assessed by the examiner;
• The absence of usage of dedicated bank account for brokerage transaction indicates
gaps in monitoring mechanism at Primary Dealers, missing controls, review and
reconciliations and missing internal audit reviews for timely detection of such findings.
The examiner's finding did not highlight the possibility of such deficiencies;
• The reviewer’s remarks/ noting on examination work paper do not indicate the above
deficiencies identified during the review process or the examiner was asked to gather
facts around the above possible deficiencies;
• The mitigation measures recommended were not appropriate to counter the extent of
gaps identified in examination procedures;
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• There is missing clarification as to how the supervision department considered the
appropriateness of the response for future assessment of compliance;
• Details as to how the implementation was tested by the examiner, are not available
on records; and
• No remedial action defined in terms of penalty etc. to avoid this kind of non-
compliance.
On review of the examination conducted on Natwealth Securities Limited (“NWSL”), the
following are the key findings noted during the examination:
Observation 1 – Examination period July 2012 and January 2014
Non-compliance with System Rules of LankaSettle, Version 2, issued in September
2009 on usage of Intra-Day Liquidity Facility (ILF)
Examination Findings Supervision Department Comments
Use of customers’ Securities as
collateral for obtaining ILF facility
without the knowledge of such
customers i.e. Lankaputhra
Development Bank.
NWSL should immediately discontinue the
unauthorized usage of Securities that belong to
customers for obtaining ILF facility and put in
place an internal control mechanism to ensure
strict compliance with the said System Rule.
Primary Dealers Comments
Already being addressed.
Examiner - In 2012 examiners were L P S Perara and K M U I Kanakarathne and in 2014
examiner were D S Thenuwara, W N S Fernando and G G N H Jayasinghe. Examiner In-
Charge - In 2012 EIC was K P K Weerasekara and in 2015 EIC was T M B A Goonetilleke.
ASPD / SPD - N W G R D Nayanakkara
Deficiencies noted in the procedures followed during examination
• The above findings are repeated violation and same findings were noted in July 2012
and January 2014. However, no action was taken against Primary Dealer for second
instance of non-compliance as per Section 2.2.2.1 of System Rules of Lankasettle;
• The extent of deviation in terms of count of transactions, number of customers,
frequency of occurrence and total transaction value were not assessed. The adequacy
of (mitigation) action plan cannot be assessed in the absence of the details of the
depth / extent of deficiencies noted;
• Detailed assessment on the method / procedure performed to arrive at the
observation was not available;
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• The examination work paper does not indicate the identification of sample considered
during the examination;
• The action plan is not comprehensive covering the measures to be taken to mitigate
the above deficiencies noted during the examination file;
• Use of customer Securities for obtaining ILF indicates gaps in monitoring mechanism
at Primary Dealers, missing controls, review and reconciliations and missing internal
audit reviews for timely detection of such gaps. The examiner's finding did not
highlight the root cause and oversight deficiencies;
• Details as to how the implementation was tested by the examiner, are not available
on examination work-paper. In the absence of the same, it is not possible to determine
if the reporting to the Monetary Board is appropriate or otherwise;
• Absence of Sampling methodology and examination procedure to be followed during
the review process; and
• Absence of rating mechanism defined for the finding noted during the examination.
Observation 2 – Examination period January 2014
Roll-over of customer investments for extended periods without fresh instructions
Examination Findings Supervision Department Comments
• Re-investments of customer
balances upon maturity have been
done for over one-year period
without receiving fresh
instructions from the respective
customers.
• It was observed that certain deal
tickets have been raised without
written requests of the customers.
• NWSL should immediately take necessary
steps to make sure all investments and
subsequent roll-over of investments is
supported by a customer request.
• If the product matures more than one time
during a year, NWSL shall obtain new
written instructions from the customer on a
yearly basis.
• If the maturity of product happens in more
than one-year cycle, automatic roll-overs
are not allowed and should obtain such
instructions at the time of each maturity
Primary Dealers Comments
Concern was noted, and steps are being taken to get fresh instructions from client for
rollovers.
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The process of obtaining such instruction will be started immediately and outstanding
ones will be completed by 30 Jun 2014.
Examiner - D S Thenuwara, W N S Fernando and G G N H Jayasinghe. Examiner In- Charge
– T M B A Goonetilleke. ASPD / SPD - N W G R D Nayanakkara.
Deficiencies noted in the procedures followed during examination
• Methodology used for arriving at the observation was not clear;
• The examination work paper does not indicate identification of sample during the
examination;
• The extent of deviation in terms of count of transactions, number of customers,
frequency of occurrence and the total transaction value were not assessed. The
adequacy of (mitigation) action plan cannot be assessed in the absence of such details
of the depth / extent of deficiencies noted;
• Missing customer authorization for the roll-over indicates gaps in monitoring
mechanism at Primary Dealers, missing controls, review and reconciliations and
missing internal audit reviews for timely detection of such gaps. The examiner's finding
did not highlight the possibility of such deficiencies;
• Observation noted during On-site examinations were not identified earlier during off-
site surveillance;
• Details as to how the implementation was tested by the examiner, are not available
on records. In the absence of the same, it is not possible determine if the reporting
to the Monetary Board is appropriate or otherwise;
• No defined examination procedure aligned with the questionnaire and areas defined
in the work allocation; and
• No remedial action defined in terms of penalty etc., to avoid this kind of non-
compliance.
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Observation 3 – Examination period August 2009
Absence of separate records on transactions of employees, which is a requirement
under the Code of Conduct
Examination Findings Supervision Department Comments
Though employees of the Primary Dealer have
done investments with the company no
records have been kept separately which is a
requirement under the Code of Conduct
issued by the PDD.
To maintain separate records on
transactions of employees.
Primary Dealers Comments
Already implemented; A file has been opened and; Reports will be generated monthly.
Examiner - R M A S K Ratnayake. Examiner In-Charge - R D T Gunasekara. ASPD / SPD -
C J P Siriwardena.
Deficiencies noted in the procedures followed during examination
• Completeness of review for clause 3.4 of the Code of Conduct could not be identified
due to non-availability of work allocation sheet;
• EIC has not evaluated the functions of Compliance Officer cited in the Code of Conduct
i.e. quarterly reporting of non-compliance of Primary Dealer to the supervision
division;
• Methodology used for arriving at the observation was not clear;
• The examination work paper does not indicate the identification of sample during the
review process;
• The extent of deviation in terms of count of transactions, number of employees,
frequency of occurrence was not assessed. The adequacy of (mitigation) action plan
cannot be assessed in the absence of the details of the depth/ extent of deficiencies
noted;
• Details as to how the implementation was tested by the examiner, are not available
on records. In the absence of the same, it is not possible determine if the non-
reporting to the Monetary Board is appropriate or otherwise;
• No defined examination procedure aligned with questionnaire and areas defined in the
work allocation; and
• No remedial action defined in terms of penalty etc. to avoid this kind of non-
compliance
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On review of the examination conducted on Entrust Securities Limited (“ESL”), the following
are the key findings noted during the examination:
Observation 1 – Examination period September 2011
Non-compliance with the System Rules relating to Intra-Day Liquidity Facility
Examination Findings Supervision Department Comments
ESL uses the customer Securities to obtain the ILF
facility, which is clearly restricted by the Lanka
Settle System Rules. The participants are clearly
instructed to use their own Securities in obtaining
the ILF.
Not Available.
Primary Dealers Comments
We have addressed this issue and negotiating with few banks to obtain ILF facilities. Will
be rectified soon.
Examiner - L P S Perera and S D C P P Fernando. Examiner In-Charge - K P K Weerasekera.
ASPD / SPD - S S Ratnayake.
Deficiencies noted in the procedures followed during examination
• The extent of deviation in terms of count of transactions, the amount obtained through
Intra-Day Liquidity Facility, frequency of occurrence was not assessed. The adequacy
of (mitigation) action plan cannot be assessed in the absence of the details of the
depth/ extent of deficiencies noted;
• The use of the said customer Securities indicates gaps in monitoring mechanism at
Primary Dealers, missing controls, review and reconciliations and missing internal audit
reviews for timely detection of such gaps. The examiner's finding did not highlight the
possibility of such deficiencies;
• The reviewer’s remarks/ noting on record do not indicate the above deficiencies
identified during the review process or the examiner was asked to gather facts around
the above possible deficiencies;
• The mitigation measures defined may not be appropriate enough to counter the extent
of gaps identified, based on the above parameters;
• There is missing clarification as to how the supervision department considered the
appropriateness of the response for future assessment of compliance; and
• Details as to how the implementation was tested by the examiner, are not available on
records.
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Observation 2 – Examination period September 2011
Counter party limits are not fed into the system
Examination Findings Supervision Department Comments
Though ESL has Board approved counter
party limits, those limits are not fed
into the system.
Feed counter party limits into the system.
Primary Dealers Comments
The Counterparty limits are currently manually monitored. However, discussions are
being carried out with the System Developers to assess the possibility of monitoring same
from the system.
Examiner - L P S Perera and S D C P P Fernando. Examiner in-Charge - K P K Weerasekera.
ASPD / SPD - S S Ratnayake.
Deficiencies noted in the procedures followed during examination
• The extent of deviation in terms of number of instances in which the limits were
manually fed into the system, frequency of occurrence was not assessed. The adequacy
of (mitigation) action plan cannot be assessed in the absence of the details of the
depth/ extent of deficiencies noted;
• The possibility that, the Primary Dealer’s transactions in violation to the said
regulations, could indicate potential financial improprieties or missing business ethics,
is not assessed by the examiner;
• The manual feeding of limits in the system indicates gaps in monitoring mechanism at
Primary Dealers, missing controls, review and reconciliations and missing internal audit
reviews for timely detection of such gaps. The examiner's finding did not highlight the
possibility of such deficiencies;
• The reviewer’s remarks / noting on record do not indicate the above deficiencies
identified during the review process or the examiner was asked to gather facts around
the above possible deficiencies;
• The mitigation measures defined may not be appropriate enough to counter the extent
of gaps identified, based on the above parameters;
• There is missing clarification as to how the supervision department considered the
appropriateness of the response for future assessment of compliance; and
• Details as to how the implementation was tested by the examiner, are not available on
records.
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On review of the examination conducted on Perpetual Treasuries Limited (“PTL”), the
following are the key findings noted during the examination:
Observation 1 – Examination period 2014 and 2015-16
Related Party Transactions
Examination Findings Supervision Department Comments
Entered into non-arm’s length
transactions with its holding company
i.e. Perpetual Capital Holdings Private
Ltd (PCHPL).
The sample checked revealed that PTL
has offered significantly high rates to
PCHPL compared to its other
counterparties.
PTL should ensure rate offered to related
parties are in line with market rates and the
risk management function should carry out a
weakly sanity check on related party
transactions.
Primary Dealers Comments
Noted
Examiner - In 2014 examiner were, N D S Kumara and L T Amarasinghe and in 2015/16
examiner were S P Sedara, A S Fernando, J P B Ishanthi and P M C S Gunawardana.
Examiner In-Charge - In 2014 EIC was D S Thenuwara and in 2015 EIC was W N S Fernando.
ASPD / SPD - In 2014 SPD was N W G R D Nanayakkara and in 2015/16 SPD was T H B
Sarathchandra and Director of the DSNBFI was U P Alawattage.
Deficiencies noted in the procedures followed during examination
• There were related parties existed in 2014 examination, however that was not
highlighted in 2014 examination;
• Methodology used for arriving at the observation was not clear:
- The examination work paper does not indicate the identification of sample during
the review process;
- The reviewer’s remarks/ noting on record do not indicate the above deficiencies
identified during the review process or the examiner was asked to gather facts around
the above possible deficiencies;
- The implementation recommendation is not comprehensive covering the measures to
be taken to mitigate the above deficiencies at the Primary Dealer;
• The extent of deviation in terms of count of transactions, number of related parties,
frequency of occurrence was not assessed. The adequacy of (mitigation) action plan
cannot be assessed in the absence of the details of the depth/ extent of deficiencies
noted;
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• No remedial action carried out in terms of penalty etc. to avoid this kind of non-
compliance in the future; and
• Review period of data, sampling technique and completeness check of data for
examination is not clearly stated in operational manual for supervision division.
Observation 2 – Examination period 2014 and 2015-16
Non-availability of a contingency funding plan
Examination Findings Supervision Department Comments
In spite of the undertaking given by PTL
to put in place a contingency funding
arrangement, PTL has failed to comply
as of examination date.
The senior management of PTL should expedite
formulating a Board approved contingency
funding plan consisting of a standby liquidity
facility with a licensed commercial bank to
bridge any unforeseen liquidity shortfall,
before June 30,2015.
Primary Dealers Comments
• Noted to obtain a Bank facility to meet our liquidity shortfall with the BOD approval
within the time granted to us
• Later extension was requested till 31-Oct-15, because of not having audited account
• No banks had agreed to provide funding, letter of comfort issued by sister concern “W
M Mendis and Co Ltd.” dated 1-7-2016.
Examiner - In 2014 examiner were, N D S Kumara and L T Amarasinghe and in 2015/16
examiner were S P Sedara, A S Fernando, J P B Ishanthi and P M S Gunawardana. Examiner
In-Charge - In 2014 EIC was D S Thenuwara and in 2015 EIC was W N S Fernando. ASPD /
SPD - In 2014 SPD was N W G R D Nanayakkara and in 2015/16 SPD was T H B Sarathchandra
and Director of the DSNBFI was U P Alawattage and W Ranaweera
Deficiencies noted in the procedures followed during examination
• Repeated observation noted for the period 2014 till suspension;
• Absence of rational for extension of remediation timelines and implications for non-
compliance not clearly stated;
• Methodology used for arriving at the observation was not clear;
• Details as to how the implementation was tested by the examiner, are not available
on records. In the absence of the same, it is not possible determine if the non-reporting
to the Monetary Board is appropriate or otherwise;
• The timeline for compliance by Primary Dealer for carrying out rectification was
extended without any rationale for extension;
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• There is no specific procedure defined for repeated non-compliances for key risk to
ensure the remediation actions to be carried out appropriately and within stipulated
time frame; and
• No remedial action carried out in terms of penalty etc. to avoid this kind of non-
compliance in the future
Observation 3 – Examination period 2014 and 2015-16
Signature verification of customers
Examination Findings Supervision Department Comments
Maintains database of scanned
authorized signatures for cross
verification of customer payment
instructions.
As per observation, some scanned
signatures are not available for cross
verification of customer requests.
Entity should take necessary steps to scan all
signature templates in the system and ensure
signature verification of customer instructions,
immediately.
Primary Dealers Comments
As of date all existing customer signatures are scanned and are available for verification
Examiner - In 2014 examiner were, N D S Kumara and L T Amarasinghe and in 2015/16
examiner were S P Sedara, A S Fernando, J P B Ishanthi and P M C S Gunawardana.
Examiner in-Charge - In 2014 EIC was D S Thenuwara and in 2015 EIC was W N S Fernando.
ASPD / SPD - In 2014 SPD was N W G R D Nanayakkara and in 2015/16 SPD was T H B
Sarathchandra and Director of the DSNBFI was U P Alawattage
Deficiencies noted in the procedures followed during examination
• In 2014, the observation has not been included in the letter of findings sent to Primary
Dealers and also not included for reporting of the Monetary Board;
• Methodology used for arriving at the observation was not clear whether the
examination work paper does not indicate the identification of sample during the
review process;
• The extent of deviation in terms of number of customers, frequency of occurrence,
value of transactions etc. was not assessed. The adequacy of (mitigation) action plan
cannot be assessed in the absence of the details of the depth/ extent of deficiencies
noted;
• Rational for omitting / deletion of any observations noted during the examinations is
not provided;
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• Details as to how the implementation was tested by the examiner, are not available
on records. In the absence of the same, it is not possible determine if the non-reporting
to the Monetary Board is appropriate or otherwise;
• No remedial action carried out in terms of penalty etc. to avoid this kind of non-
compliance in the future; and Review period of data, Sampling technique and
completeness check of data for examination is not clearly stated in operational manual
for supervision division.
Key findings noted for NWSL spot examination- August 2014
Background-A letter from NWSL was received on 31 July 2014 informing the resignation of
CEO. Market is of the opinion NWSL is facing internal issues. Therefore, the market assumes
it is risky to trade with / lend to NWSL. The Spot Examination covered the issue relating to
the tax liability, dealer limits and violation reports, repo / re-repo allocations, transactions
with Trillion Securities Pvt (TSL) and Virtual Investment and Trading Lanka Ltd (VTL),
personal files of selected employees, dealer communications for transactions with TSL and
VTL and the broker fees.
Examination Finding Supervision Department Comments
• NWSL has Board Approved Dealer Limits and
such approval had been granted on 31 March
2014
• Also, the IT system (Deal Net) support
monitoring of Dealer Limits on an on-going
basis
• However, it was observed that dealers have
exceeded the limits and getting approval for
those breaches from Riyaz - CEO (via a memo)
after executing the deal
NWSL should take necessary actions
to set up proper system to review
Dealer limits on an on-going basis
Deficiencies noted in the procedures followed during examination
• No defined work plan available for the examination performed
• The extent of deviation in terms of name of the dealers, number of dealers, count of
transactions, frequency of occurrence and value of transaction were not assessed. The
adequacy of mitigation plan cannot be assessed in the absence of the details of the
depth/ extent of deficiencies noted.
• The mitigation measures defined may not be appropriate enough to counter the extent
of gaps identified.
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• No document was available in the examination files relating to the findings sent to
Primary Dealer for the ratification / implementation. Further, no Primary Dealer
comments were available relating to implementation of dealer limits review.
KEY FINDING NOTED DURING SPOT EXAMINATION-WTSL- JUNE 2013
Document relating to objective for the spot examination was unavailable in the
examination file.
Examination Finding Supervision Department Comments
and Primary Dealer comments
• 38 numbers of customer mandates were
checked. It was observed some mandates do
not include signature template and supporting
documents, (copies of National Identity Card
(NIC) and Certificate of Incorporation)
• Example:
1. C S P Ramanayaka - Copy of NIC not
available
2. Commercial Bank - Authorized Signature
template not available
3. HNB Securities Ltd - Authorized
Signature template not available
4. HNB Assurance - Copy of Certificate of
Incorporation not available
5. Management Corporation condominium -
Copy of Business registration form not
available
6. Catholic Bishop Conference - Copy of
Business registration form not available
7. International Water Management - Copy
of Business registration form not
available
Supervision Department comment-
Maintain complete customer profiles
for all the customers, before
November 30,2013
Primary Dealer comment- 1 July
2013 Letter from WTSL
All customer profiles supported by
signature templates and other
supporting documents where
applicable are complete and
documented
8 July 2013 meeting with SPD
Customer Mandates: To commence
immediately and completed by
October 2013
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Strictly Private and Confidential Page 141 of 177
Deficiencies noted in the procedures followed during examination
• The examiner has not mentioned the work-step performed covering each activities and
documentation carried out for adhering to KYC norms.
• The extent of sample and population considered is not documented.
• The extent of deviation in terms of number of customers, frequency of transactions and
their value were not assessed. The adequacy of (mitigation) action plan cannot be
assessed in the absence of the details of the depth / extent of deficiencies noted.
• As per Primary Dealer operational manual, a Primary Dealer has to maintain records to
verify the identity of counterparties and ascertain the counterparties’ source of funds.
The supervisory concerns identified by examiner does not specify list of transactions
entered with such customers and various potential risks of money laundering on
transactions carried with such identified customers.
• Action plan recommended by the examiner does not comprehensively restrict Primary
Dealer from such non-compliance in future and to mitigate the identified non-
compliance.
It can be concluded that there were gaps in the comprehensive verification of the KYC documents of
the customers.
1. During an interview, with W N S Fernando, Senior Assistant Director, stated that as part of the
examination process, the KYC documents of the customers were checked including the
availability of the NIC, registration documents and other preliminary documents. However, the
document verification for authenticity cannot be performed by the CBSL employees due to lack
of tools or resources to do so (Refer Exhibit 30)127.
2. During an interview, with T H B Sarathchandra, SPD – the PDD, stated that there are no defined
procedures for verifying the existence of the customer and compliance with KYC norms. There
were instances where the customer agreements with customer and signature details were not
available and furthermore the department had not performed any procedures to ensure that
the customer transactions were legitimate (Refer Exhibit 29)128.
The above design deficiencies were noted across the Review Period and implies the responsibility of
the SPD, the PDD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
127Refer Exhibit 30 for Statement of Fact – W N S Fernando 128 Refer Exhibit 29 for Statement of Fact - T B H Sarathchandra
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Key finding noted during spot examination-ESL- August 2010
Document relating to objective for the spot examination was unavailable in the
examination file.
Examination Finding Supervision Department Comments and
Primary Dealer comments
• Non-recording of transactions done by Sri
Lanka Telecom - Provident Fund (SLT-PF)
• A mismatch between the amount invested
in Government Securities by the SLT - PF
and the amount outstanding in the Lanka
Secure system was revealed.
• ESL had originally recorded all the
outright transactions done with the SLT-
PF in the Lanka-Secure system. However,
subsequently they had reversed most of
those entries creating the above
mismatches.
• As a result, the customer is exposed to a
very high-risk due to non-recording of
ownership in the Lanka-Secure system.
• Since the revelation of the above incident,
records in the Lanka-Secure of another
customer of ESL was reviewed. It was
found that ESL had utilized the Securities
of the said customer to obtain ILF facility
from the Central Bank on a regular basis.
Supervision Department comment-
Further investigation is necessary to
establish how they had utilized the
funds obtained through ILF.ESL has
breached the following regulations and
is carrying on the business in a manner
harmful to the investors and to the
stability of the Primary Dealer system.
Primary Dealer comment- The officers
of ESL said that they recorded a lesser
amount in the Lanka-Secure than the
actual investments based on the mutual
understanding with the counterparty,
verbally, on the basis that the client
would be offered a higher interest rate.
They also revealed that they had been
engaged in this practice for the last few
years. They also said that the funds so
obtained were lent to Entrust Limited
by ESL. These statements should be
verified with their records.
Deficiencies noted in the procedures followed during examination
• The Primary Dealer comments as recorded by the department indicate that the
Primary Dealer didn’t comply with the CBSL rules. There is missing clarification as to
how the supervision department considered the appropriateness of the response for
compliance purpose. The response indicates that the non-recording of the
transactions was a regular feature in which the Primary Dealer business was carried
out.
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• The adequacy of mitigation action plan cannot be assessed in the absence of the
details of the depth / extent of deficiencies noted to counter the extent of gaps
identified.
• The extent of risk due to non-recording of the ownership in the Lanka-Secure system
was not assessed.
• Missing customer details in terms of customer authorization etc. indicates gaps in
monitoring mechanism at Primary Dealers, missing controls, review and
reconciliations and missing internal audit reviews for timely detection of such gaps.
The examiner's finding did not highlight the possibility of such deficiencies.
• The finding noted are repeated in September 2011 and May 2015 onsite reviews.
• Details as to how the implementation was tested by the examiner, are not available
on records. In the absence of the same, it is not possible determine if the reporting to
the Monetary Board is appropriate or otherwise.
Key finding noted during spot examination of PTL- September 2015
PTL had published a newspaper advertisement on 14.9.2015 offering a 7.5% annualized
return for 2-week, 1 month, 2-month and 3-month Repos. The examination focused on
the procedures being followed by PTL in offering the said rate
Examination Finding Supervision Department Comments and
Primary Dealer comments
• Spot Examination Finding-Allocation of
Securities- Sufficient Securities had been
allocated to outstanding repo transactions
as at 17-September-2015.
• Onsite Examination finding- Non-
compliance with the Direction on
Repurchase and Reverse Repurchase
Agreements (2 May 2002)- PTL has failed
to allocate adequate Securities for some
customers against the borrowings from
the customers under Repurchase
Agreements
• Details of under-allocation of Securities
for repurchase transactions as at 30-
September-2015
Supervision Department comment-
Take action to ensure that adequate
Securities are allocated for
outstanding repurchase transactions. A
mechanism, including regular reviews
by the internal audit function should
be put in place to ensure proper
allocation of Securities for all
repurchase and reverse repurchase
transactions with customers.
Immediately
Primary Dealer comment- PTL has
granted Rev Repos to customers who
have been under allocated.
Accordingly, the net security
requirement has been allocated
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Strictly Private and Confidential Page 144 of 177
Deficiencies noted in the procedures followed during examination
• As per on-site examination for the period 30 September 2015, noted that the
Securities allocation is not adequately been maintained however as per offsite
examination during the period 17 September 2015, the Securities allocation is
adequately being maintained. The remarks stated in both examinations are
contradicting.
• The extent of deviation in terms of number of customers, frequency of transactions
and their value were not assessed. The adequacy of (mitigation) action plan cannot
be assessed in the absence of the details of the depth/ extent of deficiencies noted
• Inadequate security allocation indicates gaps in monitoring mechanism at Primary
Dealers, missing controls, review and reconciliations and missing internal audit
reviews for timely detection of such gaps. The examiner's finding did not highlight
the possibility of such deficiencies.
The above design deficiencies were noted across the Review Period and implies the responsibility of
the SPD, the PDD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
7.24. REPEAT FINDINGS INDICATING GAPS IN FOLLOW-UP OR REMEDIATION
SCOPE COVERAGE
Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc. in performing the role of
Regulation and Supervision of the selected Primary Dealers.
7.24.1. Review of on-site examination reports along with supporting work papers revealed that
certain critical non-compliances were repeated by the Primary Dealers across Review Period
(Refer Annexure 8)129.
129 Refer Annexure 8 for Repeat Findings indicating gaps in follow-up or remediation
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7.24.2. It can be concluded that there was gap in the review process during the finalisation of Report
along with the follow-up and remediation procedures followed because of which the repeat
findings were again highlighted in the next examination Report. Furthermore, it can be
concluded that the non-compliances are not taken up seriously by the Primary Dealers as
there is no strict regulatory action for the same and the occurrence of findings across multiple
Primary Dealers indicates potential systemic deficiencies that necessitate strengthening the
review mechanism and targeted regulatory actions.
7.24.3. During an interview, L.T Amarasinghe, Examiner – Onsite examinations for the period July
2014 to September 2015, stated that the repeated findings of the onsite examination done
for WTSL in 2013 with respect to availment of roll over facility was also highlighted in onsite
examination done in 2014 but the same was not highlighted as a repeated finding in 2014
examination Report. (Refer Exhibit 32)130.
7.24.4. During an interview, S P Sedara, Examiner – Onsite Examinations, for the period July 2015 to
till date, stated that repeated non-compliances by Primary Dealers especially in areas such
as entering into agreements (MRA and customer agreements) with customers. These non-
compliances were because of lack of seriousness by Primary Dealers about the requirements
imposed by Regulations and Directions. The responsibility for recommending the regulatory
action to mitigate the non-compliances observed during onsite examinations starts with the
EIC and moves up to all the employees who review the examination Report and Board paper.
(Refer Exhibit 35)131.
7.24.5. During an interview, D S Thenuwara, EIC / Examiner for Onsite Examinations, for the period
February 2013 to February 2016, stated that the repeated observations identified were
communicated to the Monetary Board. However, department could send letters to the
relevant Primary Dealers asking to take necessary measures to rectify the stated concerns.
No additional recommendations were ever given by the top management for the same. (Refer
Exhibit 36)132.
7.24.6. The above design deficiencies were noted across the Review Period and implies the
responsibility of the SPD, the PDD and Director, the DSNBFI for rectification during their
tenure. (Refer Table 13).
130 Refer Exhibit 32 for Statement of fact – L T Amarasinghe 131 Refer Exhibit 35 for Statement of fact – S P Sedara 132 Refer Exhibit 36 for Statement of Fact – D S Thenuwara
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7.25. NON-REPORTING TO THE MONETARY BOARD
SCOPE COVERAGE
7.25.1. Examining the laws, regulations, policies, circulars, guidelines, manuals etc. applicable to
Regulation and Supervision of Primary Dealers and ascertaining if there were any deviations
from relevant laws, regulations, policies, circulars, guidelines, etc., in performing the role
of Regulation and Supervision of the selected Primary Dealers.
7.25.2. The following observations were recorded in the “Examiner’s Report” but not reported to the
Monetary Board. The rationale for not reporting the observation and additional information/
documentation considered is not documented in the examination file.
Table 32 – List of observations not reported to the Monetary Board
# OBSERVATION PRIMARY DEALER NAME
YEAR OF EXAMINATION
1 Signature verification of customers – Primary Dealers maintains database of scanned authorized signatures for cross verification of customer payment instructions and the same were not available for cross verification of customer requests
PTL Oct-14
2 No regular updates for the IT and information security policies, subsequently no approval from the PTL board
3 No regular updates for the IT and Operational manuals, subsequently no approval from the WTSL board
WTSL Nov-13
4 Unavailability of e-trading facility. WTSL should look into the possibility of obtaining this facility
5 Incomplete organizational structure – it does not clearly indicate reporting lines, authorization levels and personnel
6 Excessive brokerage fees paid to SMB Money Brokers Limited
7.25.3. There are no defined guidelines / procedure in operational manual of the supervisory function,
to be followed to omit the initial findings noted in examination. The following observations
were reported by the individual examiner; however, the observations have not been included
in the draft supervisory concerns and Monetary Board paper.
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7.25.4. On review of the on-site examination conducted for PABC during the period from February
2015 and March 2016, following are noted: (Refer Annexure 18)133.
7.25.5. The examination performed, and the findings were not reported to the Monetary Board for
two (2) consecutive periods. Further, absence of any documented rationale for omission/
deletion of the reporting to the Monetary Board and the last on-site examination Report
submitted to Monetary board was on February 2014.
7.25.6. The findings and recommendations for the corrective action were also not communicated
to PABC for the period March 2016 and following key findings noted during the period:
Table 33 – List of key findings noted
# KEY EXAMINATION FINDINGS
1 Violation of Lanka Settle System Rules Version 2.1 (2013) – Non-recording of transaction in CDS systems.
Non-compliance with the Scripless Treasury Bills and Bonds – PABPD has failed to maintain a separate bank account for monies due to its customers
2 PABPD’s transfers the outright purchased security of a customer directly to Re-repo account and difficulties in identifying the security allocation for outright transactions for such customers in CDS
A sample verification of related party transactions revealed that, there are deviations in offered Buy/Sell rates to the customer compared to Daily Report rates and competitor offered rate
3 PABPD had failed to enter into agreements with 20 out of 132 customers having Repo transactions
PABPD has failed to obtain fresh customer instructions for continued roll-over of investments. Sample verification revealed that the following investments have been rolled over without customers’ written requests. This is a repeated violation
4 The percentage of repurchase and re-repurchase transaction outstanding of top five counter parties account for 63 per cent and 97 per cent of the total outstanding as at 31 January 2016 respectively. It is observed that 37 per cent of the reverse repurchase value outstanding and 17 per cent of the repurchase value outstanding are with related parties.
133 Refer Annexure 18 for Non-reporting of examination Report to the Monetary Board
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7.25.7. On the following events noted on the review of the application and appointment document
COMMENTS DATE
Draft LOF is submitted by SAN/ NSF to DDA 24-May-16
Draft LOF submitted to D/SNBFI, Act Add director, DD/A and H/PDSU by SAD/ASF
7-Oct-16
Note by S J K Guruge (HOD) to D/SNBFI, Additional director and DD(A) Seek advice whether to conclude the examination conducted till 30 Jan 16 or to do a follow up examination to cover the period till 30 Jun 16 to incorporate current information to the report
1-Nov-16
Note by DD(A) to DSNBFI and Additional director - refer to S J K Guruge minute - Capital gain was generated from the transactions with PABC by PTL - with a view to continue the examination to cover primary and secondary market transactions and comment on status of non-compliances identified
1-Nov-16
Note by DD(A) to DSNBFI Further I agree that the examination be conducted to examine the present position within a short period of time
1-Nov-16
Note to Additional director, DD/A and SAD/Guruge To start a fresh onsite examination to update/validate the findings of unconcluded examination. Check the transactions with other Primary Dealers like PTL to have risk based on new examination methodology. You may think the malpractices exposed in Entrust and PTL too
2-Nov-16
7.25.8. Despite several issues noted during the onsite examination of PABC and Issues noted in PTLs’
spot examination on the involvement of PABC in the market manipulation, the observation
noted in the examination was not reported to the Monetary Board instead SPD instructed to
the start a fresh onsite examination to conclude the examination report. Further there was
no onsite examination been conducted for the Primary Dealer.
7.25.9. On discussion with the examiner in-charge during the period March 2016, it was informed
that the EIC responsible for the issuance of examination Report have been transferred to
another department and no handover procedures been carried out for transferring the
responsibilities to other team member.
7.25.10. There is no evidence of SPD / the DSNBFI notification for the submission of examination
Report and finding noted during the examination. It can be concluded that no rationale was
documented for non-submission of reports for the respective examinations conducted of
PABC.
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7.25.11. During an interview, S J K Guruge, Head of Division, SNBFI, for the period August 2011 to
October 2012 and June 2016 to till date, stated that the examination reports of PABC for
the period 2015 and 2016 were outdated, hence then director – U P Alawattage instructed
to conduct fresh examination to update / validate the findings reported in the respective
examination reports. Further the reasons for non-submission of the already prepared Report
to the Monetary Board were unknown. (Refer Exhibit 33)134.
7.25.12. During an interview, A.S Fernando, Examiner- Onsite Examinations for the period October
2015 to July 2018, stated that the draft onsite examination Report of PABC for 2016 was
submitted to Deputy Director (Ajith) and the Director (Alawattage) instructed to perform
fresh examination and the Report was not presented to the Monetary Board. (Refer Exhibit
31)135.
7.25.13. During an interview, W Ranaweera, Additional Director / Director for the period September
2016 to till date, stated that instructions were not given by U P Alawattage to submit the
onsite examination Report of PABC for 2016 to the Monetary Board as an interim Report and
he has instructed to continue with the ongoing examination to update / validate the findings
of the concluded examination. (Refer Exhibit 19)136.
7.25.14. During an interview, T H B Sarathchandra, SPD – the PDD for the period September 2015 to
June 2016, stated that the delay / non-reporting of findings/ Report to Monetary Board was
due to denial of the approval to submit Board paper by P Samarasiri, Deputy Governor. He
further stated that the Deputy Governor had instructed to change the reporting template
despite several findings noted during the examination of the Primary Dealers. (Refer Exhibit
29)137.
The above design deficiencies were noted across the Review Period and implies the responsibility of
the SPD, the PDD and Director, the DSNBFI for rectification during their tenure. (Refer Table 13).
134 Refer Exhibit 33 for Statement of Fact - S J K Guruge 135 Refer Exhibit 31 for Statement of fact – A S Fernando 136 Refer Exhibit 19 for Statement of Fact – W Ranaweera 137 Refer Exhibit 29 for Statement of Fact - T B H Sarathchandra
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8. PUBLIC DOMAIN SEARCH 1. During a review of documents for Regulation and Supervision Function of Primary Dealers,
there were instances wherein deviation / anomalies were noted in the process followed
during the Regulation and Supervision functions of Primary Dealers. A list of 21 identified
employees of the CBSL was prepared who were responsible for taking decisions related to
Regulation and Supervision functions of Primary Dealers during the Review Period. (Refer
Annexure 2)138.
2. As per the PCOI Report, one of the Primary Dealers, PTL, was alleged to have had conflict of
interest and to verify the sources which could be involved in sharing sensitive information.
3. Public domain searches were conducted for 21 identified the CBSL employees, selected
Primary Dealers and 104 Key Managerial Personnel of Primary Dealers to identify possible
nexus with them. (Refer Annexure 21)139.
4. The information regarding the identified CBSL employees was collated from various sources
to the extent possible, to unveil any association with the Primary Dealers. The Due Diligence
was conducted which consisted of online public record research to obtain their employment,
professional and family background, news media to identify political / business affiliations,
directorship details and adverse publicity and checks on subscribed Global Compliance
Databases.
5. The data regarding 5 (five) was also gathered from various sources including publicly available
information, subscribed databases, Annual Reports as obtained from the respective
company’s website and the data received from the Registrar of Companies (RoC). The
detailed information of selected Primary Dealers for January 2009 to December 2017 were
gathered and analysed which included the officer details, corporate records and filings to
identify company details, corporate structure and its associated individuals. Additionally, the
details were reviewed and analysed to the extent of publicly available information for
Primary Dealers and the identified employees of the CBSL.
138 Refer Annexure 2 for List of 21 identified personnel 139 Refer Annexure 21 for List of Primary Dealers’ directors and CEOs
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POTENTIAL NEXUS BETWEEN IDENTIFIED EMPLOYEES OF THE CBSL AND PRIMARY
DEALERS
A. Searches of information as available in the Public domain, subscribed database and media
archives was performed to assess, any possible, link between the identified officials (current
and former employees) and the employees (current and former) of the Primary Dealer. The
identified officials were selected based on the review of documents and data provided by the
CBSL and other data retrieved including the roles and responsibilities.
IDENTIFY ASSOCIATION BETWEEN THE OFFICIALS OF CBSL AND PRIMARY DEALERS
8.2.1. During the review of documents provided by the CBSL; there were deviation / anomalies were
noted in the process followed and the supporting documents for regulation and supervision
function carried out.
8.2.2. The identified officials operated in / worked in the supervision Department and officials
having authority for approval or initiate action. Potential relationships which could turn out
to be potential conflicts of interest, non-compliance with the CBSL Code of Conduct,
professional misconduct or personal benefits were as follows:
A. Former officials of Supervision Division taking up position in other Primary Dealers;
B. Social Media connections such as, personal and professional, between the CBSL officials
and officials of other Primary Dealers;
C. Relatives of CBSL officials in the roles of key staff employees of Primary Dealers;
D. Business partnership and shareholding pattern in Primary Dealers and group companies
by any higher management of the Primary Dealers involved in conducting regulation
and supervision function; and
E. Properties / assets held by the CBSL identified officials disproportionate to their
remuneration.
8.2.3. The Due Diligence was conducted on the identified officials which covered public domain
searches, press releases to identify business profile, business affiliations and adverse
information through media archives. The searches were conducted for them on subscribed
Global Compliance Databases to identify any involvement of these identified officials for
illegal activity or litigation cases, if any.
8.2.4. During media checks performed for the former Governors of CBSL, it was noted that the
relatives of the former Governors had beneficial interest, held key managerial positions
through directorship or shareholding in other Primary Dealer and / or its associated company.
Further, research was conducted and the below mentioned details were gathered for them:
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A. AJITH NIVARD CABRAAL
i. Ajith Nivard Cabraal (“Mr. Cabraal”) was appointed as Governor of Central Bank of
Sri Lanka effective from July 2006. Until November 2005, Ajith Nivard Cabraal headed
a management consulting company called Cabraal Consulting Group, specialised on
corporate governance, the strategic planning and turnarounds. But he resigned from
all his private positions to work full-time for CBSL. Ajith Nivard Cabraal was the Chief
Economic Advisor to Mahinda Rajapaksa during his term period July 2006 to January
2015.
ii. As per the Presidential Commission of Inquiry (“PCOI”) Report, electronic media and
Annual Reports of various Primary Dealers and Banks supervised by the CBSL, former
Governor Ajith Nivard Cabraal, while holding office from July 2006 to February 2015,
had several of his close relatives appointed to the chief positions in Banks under the
purview of CBSL.
iii. Family relationships to be considered as conflict of interest, such as all direct
descendants and ancestors, without regard to financial interests. The determination
of the red flags from these identified relationships could led to a deliberation.
iv. The Establishments Code of Democratic Socialist Republic of Sri Lanka issued in 1985
by the Public Administration Circulars.
As per the Establishment Code – Chapter XLVII: (Section: General Conduct Sub
Section 1.5) “An officer shall not do anything which will bring his private interest
into conflict with the public duty or which compromises his office. He should
always so conduct himself as to avoid giving rise to any appearance of such
conflict or of being so compromised.”
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FAMILY TREE OF AJIT NIVAD CABRAAL (TERM 2006- 2015) AND THEIR RELATIONSHIPS ASSOCIATED
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v. It was mentioned in PCOI Report and as noted during the public domain searches that
the relatives of Ajith Nivard Cabraal held influential positions in Primary Dealers and
/ or related company of Primary Dealers, during his tenure as a Governor of the CBSL.
vi. Noted that Siromi Noel Wickramasinghe and Shibani Renuka Thambiayah identified
as relatives of Ajith Nivard Cabraal directly / indirectly connected to selected
Primary Dealers.
vii. Siromi Noel Wickramasinghe, sister of Ajith Nivard Cabraal was associated with the
holding company of PTL, Perpetual Capital Holdings (Private) Limited as a Director
from 23 December 2013 till 9 March 2015. The details with regards to her background
were gathered from various sources which revealed that she was associated with HNB
Assurance (fully owned subsidiary of HNB) as a Director from 2013 till 2017 and with
Commercial Bank of Ceylon as a Director from 1 February 2009 till 26 May 2010. She
was chairperson of the Housing Development Finance Corporation Bank of Sri Lanka
(HDFC) from May 2010 till January 2015. It was gathered that Arjun Aloysius, son-in-
law of Arjuna Mahendran (Governor of the CBSL from January 2015 till June 2016),
was also associated with HDFC Bank during the said period and was appointed as a
Director from May 2011*. It was noted that Siromi Noel Wickramasinghe was sharing
key managerial positions at the holding company of PTL and previous organisation
along with Arjun Aloysius and the details are as under:
Table 34 – Relationship of PTL and Siromi Noel Wickramasinghe
NAME OF ORGANISATION
NAME OF INDIVIDUAL
TYPE OF ASSOCIATION
TENURE COMMON TENURE
HDFC
Siromi Noel Wickramasinghe
Chairmanship May-2010 – Jan-2015
2010 –2012
Arjun Aloysius Director From May 2011*
Perpetual Capital Holdings (Private) Limited
Siromi Noel Wickramasinghe
Director December 2013 till 9 March 2015
December 2013 till 9 March 2015
Arjun Aloysius Director Since its inception on 10-Jun-2010
* The date of termination of association could not be confirmed. Arjun Aloysius’ association with the
HDFC was not noted in the Annual Report of 2014 and onwards.
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viii. Shibani Renuka Thambiayah, niece of Ajith Nivard Cabraal associated with Renuka
Group where PTL had invested and During public domain search, as per the media
article dated 19 March 2017 in the Sunday Times, Perpetual Asset Management (Pvt)
Limited, which was the immediate Holding Company of Perpetual Treasuries
Limited140, made substantial Investments in "Renuka Group of Companies"141 in which
Ajit Nivard Cabraal had close family connections. The annual report of DFCC Bank
during the period 2015, states that Shibani Renuka Thambiayah, niece of Ajith Nivard
Cabraal was appointed to the Board of DFCC Bank as of March 2015. She was Joint
Managing Director of Renuka Hotels Limited and Renuka City Hotels PLC at the same
time. She was the General Manager from 2001 to 2010 prior to assuming the
contemporary position of Managing Director of the Board with Renuka Hotels Limited.
ix. Potential Conflict of Interest noted during the period July 2006 to January 2015 when
Ajith Nivard Cabraal was the Governor and his family members in Primary Dealers
including Banks under the supervision of CBSL:
a. Siromi Noel Wickramasinghe, sister of Ajith Nivard Cabraal, was appointed as
Director of Perpetual Capital (Private) Limited on 23 December 2013. She was a
director and shareholder in HNB Assurance during the period 2013 to 2017. She
was also director of Ceylon Asset Management Company Limited during the
period 2000 to 2018. These companies mentioned in which she was a director
were the subsidiary / holding companies of the Primary Dealers namely
Perpetual Treasuries Limited, Hatton National Bank and Bank of Ceylon.
b. Shibani Renuka Thambiayah, niece of Ajith Nivard Cabraal associated with
Renuka Group where PTL had invested
c. Initially, Perpetual Treasuries Private Limited, a private limited liability
company incorporated on 1 October 2012 under the Companies Act. No 7 of
2007, submitted application for approval as licensed Primary Dealer of CBSL on
17 October 2012. The application was rejected in view of the foregoing and
however, application was again submitted on 9 May 2013. It is also to be noted
that the company name had changed from “Perpetual Treasuries (Pvt) Limited”
to Perpetual Treasuries Limited.
d. As per the Monetary Board Paper No. MB/PD/23/19/2013 dated 30 September
2013, appointment of Perpetual Treasuries Limited (“PTL”) as a Primary Dealer
in Government Securities was approved in principle on 9 May 2013. Based on
conditions to be fulfilled within 90 days, as a Direct Participant and a Dealer
140 http://www.sundaytimes.lk/170319/news/bond-issue-26-mps-want-to-give-evidence-233340.html 141 Refer Exhibit 102 PCOI Chapter 15, Pg. 482
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Direct Participant in the Lanka Settle System was to be carried out. However,
the conditions were fulfilled as on 25 September 2013 which had crossed the
timeline of 90 days from the date of approval. The Primary Dealer had been
approved by the Monetary Board members namely B.D.W.A. Silva (Deputy
Governor), P Samarasiri (Secretary Monetary Board), A. Kamalasiri (Assistant
Governor) and N W G R D Nanayakkarra (Superintendent Public Debt). It is also
to be noted that N W G R D Nanayakkarra had recommended for rejection of the
appointment of PTL during October 2012, at the time of initial application.
e. In May 2013, when PTL was granted permission or approved by the Monetary
Board, Siromi was also appointed as the director of the Perpetual Treasuries
Limited’s holding company in December 2013. The concern related to conflict
of interest of the then Governor, were not raised before this appointment.
x. As per PCOI Report following were key aspects which were considered for relationship
mapping with PTL, the employees of EPF, and officials of other Primary Dealers about
former Governor Ajith Nivard Cabraal.
a. The Governor and the Monetary Board which held office in 2015 had been
“politicized” is demonstrated by the fact that the former Governor, Ajith
Nivard Cabraal and two appointed members of the Monetary Board - namely,
Nimal Welgama and Neil Umagiliya - resigned from the offices on 9 January
2015 immediately after the Presidential Election results announced on 8
January 2015. As per Section 16 of the Monetary Law Act stipulates that, a
Governor of the CBSL or an appointed member of the Monetary Board can be
removed from office only by the President. It also proceeds on the basis that,
a Governor or an appointed member of the Monetary Board shall hold office for
a full term of six years. However, Ajith Nivard Cabraal, Welgama and Umagiliya
considered it necessary to resign when the new president was elected in
January 2015 before completion of the required term period of six years as per
the Act. It was noted that the President who appointed the three gentlemen
ceased to be President, so they regarded themselves to ‘political appointees’
who held office at the will of the President and resigned from the Monetary
Board.
b. W A Wijewardana is a retired CBSL Official who was Deputy Governor from 7
August 2002 to 6 July 2009. In his witness statement at PCOI; where he was
questioned about his views on aspects pertaining to steps to be carried out in
a situation where a Governor of the CBSL finds himself in a situation where
there could be conflict of interest. Also, Ajith Nivard Cabraal’s sister, Ms.
Siromi, was director of the Holding Company of PTL while Ajith Nivard Cabraal
was the Governor of the CBSL. In his response he stated, “if Nivard Cabraal has
disclosed it to the Monetary Board and if he had refrain himself from any
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dealings with PTL that would have been fine, but of course I know after my
retirement from the Central Bank, Cabraal’s sister was appointed chairperson
of the HDFC Bank. One of the Banks that needs to be regulated by the Central
Bank and will have to examine whether the correct Governance practices had
been followed by him.” When the Commission of Inquiry asked W A
Wijewardena for his views on whether a failure by Ajith Nivard Cabraal to
disclose to the Monetary Board that his sister, Ms. Siromi, was a Director of the
Holding Company of PTL, would have been inappropriate. He replied in
affirmative.
c. The witness statement at PCOI of Mano Ramanathan who was appointed as a
Member to the Monetary Board on 6 December 2007. She was questioned by
the Presidential Commission that whether Ajith Nivard Cabraal or Arjuna
Mahendran had brought to attention of the Monetary Board, the fact that a
close relative was a Director of the Holding Company of Perpetual Treasuries
Limited namely Ms. Siromi and Mr. Arjun Aloysius respectively. She had replied
that the fact was not disclosed to the Monetary Board.
B. ARJUNA MAHENDRAN
i. Arjuna Mahendran is a Sri Lankan born, Singaporean economist and banker. He was
appointed by the Honourable President Maithripala Sirisena, in January 2015 as the
Governor of CBSL and served till 30 June 2016. He was the former Managing Director
of HSBC Private Bank, Chief Investment Officer of Emirates NBD as well as the
Chairman and Director-General of the Board of Investment of Sri Lanka.
ii. Arjuna Mahendran’s son-in-law, Arjun Aloysius was previously associated with PTL
(subsidiary of Perpetual Capital Holdings (Private) Limited) as its Chief Executive
Officer and was appointed to its board from 19 September 2012 till 16 January 2015.
As per a media article, Arjuna Mahendran had given assurance to the Honourable
Prime Minister that his son-in-law will sever all associations with PTL prior to Arjuna
Mahendran’s appointment as a Governor of the CBSL on 15 January 2015142.
iii. In 2015, Arjun Aloysius’ association with Perpetual Capital (Private) Limited and
other group companies of PTL was noted. The same was corroborated by the
statement made by Arjuna Mahendran before Commission of Inquiry that his son-in-
law had a beneficial interest in PTL and continued to be a Director and Shareholder
of the Holding Company of PTL while he was the Governor of the CBSL.
142 Source: Colombo Telegraph
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iv. Arjun Aloysius started his career as a consultant to the Free Lanka Group and was
later heading the Free Lanka Group’s investment arm. He was CEO of Perpetual Asset
Management, Deputy Chairman of WM Mendis and Company as well as a Board
member of HDFC.
v. The background details of identified personnel of PTL143 were obtained during public
domain searches, PCOI Report and review of ROC records, to identify their previous
association in any organisation and / or with any CBSL official prior to becoming a
part of PTL from 2013 onwards. The previous employers of the personnel were
identified to further ascertain if any such former association coincide with the
irregularities or non-compliance to applicable laws and regulation by the CBSL during
the examination and to those previous employer organisations.
vi. Potential Conflict of Interest noted during the period January 2015 to June 2016 when
Arjun Mahendran was the Governor of the CBSL:
a. It was also noted that there was significant delay in the submission of the
examination report to the Monetary Board and several deviations noted in
the examination report conducted by the Supervision Division during the
tenure as the Governor of the CBSL. Refer Section 7 for the detail findings
b. The witness statement at PCOI of Mano Ramanathan who was appointed as a
Member to the Monetary Board on 6 December 2007. She was questioned by
the Presidential Commission that whether Ajith Nivard Cabraal or Arjuna
Mahendran had brought to attention of the Monetary Board, the fact that a
close relative was a Director of the Holding Company of Perpetual Treasuries
Limited namely Siromi and Arjun Aloysius respectively. She had replied that
the fact was not disclosed to the Monetary Board.
143 https://lk.linkedin.com/in/gajan-devarajan-b905602a, https://lk.linkedin.com/in/nuwan-salgado-65602836
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A S FERNANADO
vii. During the searches conducted, it was noted that A S Fernando’s sister namely
Wlisarage Fernando Shrima was the one of the directors in Novel Equity Investments
Private Ltd. The other directors in this company are Ruwan Karunaratne and Udana
Siriwardena. Further, on the review of CDS transaction data and disciplinary action
file of A S Fernando, it was noted that the aforesaid company was involved in bond
transaction with Perpetual Treasuries Ltd. In 2014 amounting to Rs. 100 million and
earned a capital gain of Rs. 43 million. During an interview with A S Fernando, he
stated that the he was not aware about this transaction with the PTL and he was
informed that the company was liquidated (Refer Exhibit 31144). However, there are
no further document evidences available for concluding on the significant deviation
noted during the examination involving A S Fernando.
144 Refer Exhibit 31 for A S Fernando’s statement of fact_
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9. DIGITAL FORENSICS
1. Appointment, Examination and Surveillance of Primary Dealer, deviation and / or anomalies
were noted in the process followed and the supporting documents maintained. A list of 21
identified employees of the CBSL was prepared who were responsible for taking decisions
related to Regulation and Supervision of Primary Dealers during the Review Period
(hereinafter referred to as “custodian”) and their electronic devices (hereinafter referred as
“Target Devices”) were identified and informed to the CBSL. The ITD identified the
computers (desktops / laptops) issued to these employees, based on the last “Log-In” details
recorded in the “Active Directory”.
9.1. REVIEW OF EMAILS
9.1.1. The summary of available digital evidences for all the 21 identified employees of CBSL was
prepared and evaluated for potential linkage with the deviations and irregularities explained
in the previous sections of the report. The specific electronic evidences considered relevant
to the findings of the report are detailed in the respective sections of the detailed
observations. (Refer Annexure 2)145.
9.1.2. The table below represents the availability of data/ emails/ facts considered relevant in
respect of the deviations and irregularities in Regulation and Supervision of Primary dealers
for TOR-5:
Table 35 - Summary of Evidences from ESI
# NAME OF THE OFFICIAL AVAILABILITY OF DIGITAL EVIDENCES RELEVANT TO DEVIATIONS OR IRREGULARITIES
1 Arjuna Mahendran Relevant Finding
2 S S Ratnayake No relevant Finding
3 C M D N K Seneviratne No relevant Finding
4 U L Muthugala No relevant Finding
5 M Z M Aazim Relevant Finding
6 N W G R D Nanayakkara No relevant Finding
7 W N S Fernando Relevant Finding
8 P Samarasiri No relevant Finding
9 D S Thenuwara No relevant Finding
10 J P B Ishanthi No relevant Finding
145 Refer Annexure 22 for the list of 20 identified employees and their respective Target Devices along with rationale for their identification
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# NAME OF THE OFFICIAL AVAILABILITY OF DIGITAL EVIDENCES RELEVANT TO DEVIATIONS OR IRREGULARITIES
11 K P K Weerasekera No relevant Finding
12 L T Amarasinghe No relevant Finding
13 P M C S Gunawardana No relevant Finding
14 S P Sedara No relevant Finding
15 T H B Sarathchandra No relevant Finding
16 A S Fernando Relevant Finding
17 S J K Guruge No relevant Finding
18 N D Y C Weerasinghe No relevant Finding
19 U P Alawattage No relevant Finding
20 W Ranaweera No relevant Finding
21 C J P Siriwardana No relevant Finding
9.1.3. The below mentioned observations were made basis the activities performed and completed
till date:
A. REVIEW OF DESKTOP OF Dr M Z M AAZIM
1. Unauthorised access to the email account of SPD
a. During the digital review of Dr Aazim’s desktop, it was noted that Nuwan
Salgado, Chief Dealer of PTL sent an email to SPD ([email protected]) on 4 January
2016 and requested for an appointment. The email was forwarded to T H B
Sarathchandra’s email address, who was the SPD during the said period. (Refer
Exhibit 21) 146
b. It was obtained that Dr Aazim was working in Statistics Department during the
stated period and his email ID was not marked in the email. Further, two
instances were noted wherein emails from Nuwan Salgado / Kasun Palisena
were sent on 30 July 2016 and 5 January 2016 to email account of SPD
([email protected]) and said emails were found to be in the deleted folder of Outlook
file ([email protected](2)_12.ost/Root - Mailbox/Shared Data/Superintendent of
Public Debt/Deleted Items). (Refer Exhibit 22)147.
146 Refer Exhibit 21 for the email sent by Nuwan Salgado to SPD 147 Refer Exhibit 22 for the emails sent by Nuwan Salgado/ Kasun Palisena to SPD
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2. Potential association with PTL
a. During the review, Curriculum Vitae (CV) of Dr M Z M Aazim’s wife (Fathima
Rizwana) was found which was last modified on 16 February 2017, listing
Avanthi Dassanayake as a Reference. She was found to be the Vice President
of NDB Investment Bank, a subsidiary of the NDB Group during February 2017.
During research conducted on the NDB Group, it was obtained that PTL and
its group company (Perpetual Equities (Private) Limited) were listed among
the largest shareholders of NDB Bank and held a total of 6.17% shares as at 31
December 2016148. Hence, an association of Dr M Z M Aazim was found with
an organisation with which PTL is also connected. (Refer Exhibit 23)149.
B. REVIEW OF DEVICES OF ARJUNA MAHENDRAN
The review was conducted for devices of Arjuna Mahendran which included one desktop
and one laptop; following observations were made during the review:
1. Potential Conflict of Interest
a. During the review, following four instances were noted wherein Kasun Palisena
(+94777444669) had shared confidential information to official email ID of
Arjuna Mahendran, i.e., “[email protected]”. (Refer Exhibit 26)150.
i. An email of 4 April 2016 at 17:21 was noted wherein Kasun Palisena wrote
to Arjuna Mahendran that all the transactions are settled and cleared. He
also apologised for some difficulties caused for Arjuna Mahendran because
of him.
ii. The above-mentioned abnormal success ratio of 96% for PTL and the
verbiage mentioned in the email of CEO of PTL indicates that Arjuna
Mahendran potentially shared some unpublished price sensitive
information with Kasun Palisena of PTL and he acknowledged the assistance
of Arjuna Mahendran vide subject email.
iii. As per an email of 16 May 2016 at 10:22, Kasun Palisena asked Arjuna
Mahendran for his email address for forwarding a circular. However,
response, if any, to the said email by Arjuna Mahendran was not noted
during the review.
148 Source: https://www.ndbbank.com/annual-Report/2017/investor-relations.index 149 Refer Exhibit 23 for CV of MZM Aazim’s wife (Fathima Rizwana) 150 Refer Exhibit 26 for copies of emails sent by Kasun Palisena to Arjuna Mahendran
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iv. The email of 9 June 2016 at 9:06 from Kasun Palisena to Arjuna Mahendran
contained the verbiage, “Franklin highest amount maintained during the
month of June 2014- approx. Rs. 460-470bn Lowest amount last week 2nd
June 2016- approx. Rs. 205-210bn”.
v. It was gathered during research, that Franklin is an American investment
company which offers a wide range of mutual funds and investment
solutions. It could not be established if Kasun Palisena referred to the same
‘Franklin’ in this email.
vi. Another email of 9 June 2016 at 9:31 was noted wherein Kasun Palisena
shared exit yield for 2014 – 2016. No company name or any additional detail
was mentioned in the email.
b. The above email communications between Kasun Palisena and Arjuna
Mahendran, indicate that Arjuna Mahendran was in regular touch with the key
managerial personnel of PTL for matters not related to the CBSL.
C. REVIEW OF DEVICES OF A S FERNANADO
The review was conducted for devices of A S Fernando which included one desktop;
following observations were made during the review:
1. Potential Conflict of Interest
a. During the review, following instance was noted wherein emails
communications were exchanged between A S Fernando, Ruwan Karunaratne,
Udana Siriwardana and Indika Rajakaruna
i. An email of 26 November at 10:43 was noted wherein A S Fernando sent an
email from his personal email id i.e. “[email protected]” to CBSL email
id i.e. “[email protected]”.
ii. The email contains two attachments (one word and one excel document)
namely “Ice Making Process draft 01” and “ICECO”. (Refer Exhibit 45)151.
b. Upon enquiry with A S Fernando, he stated that the emails were pertaining to
a company namely “Novel Equity Investments Private Ltd.” Where his sister
was a director. He further stated that he was not aware about the transaction
with the PTL and Novel Equity Investments Private Ltd. During the period 2014,
and he was being informed that the company is liquidated and the termination
of the directorship
151 Refer Exhibit 45 for copy of email sent by A S Fernando to his personal id – Novel Equity Investments Private Ltd. Related files
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c. Further, an email of 26 October 2016 at 8:34 was noted wherein transactions
were identified between PTL and Novel Equity Investments Private Ltd. (Refer
Exhibit 46)152.
d. However, another email of 30 October 2013 15:23 was noted wherein he shared
a word document named “TO DO LIST” to his personal email id. The documents
states that “Winding up Novel” (Refer Exhibit 47)153.
D. REVIEW OF DEVICES OF W N S FERNANADO
The review was conducted for device of W N S Fernando which included one desktop;
following observations were made during the review:
1. Continuous Non-Compliance by ESL
a. During the review, an email of 8 January 2016 was noted wherein W N S
Fernando shared a document namely “BP observations ESP” to U L Muthugala
with N D Y C Weerasinghe in CC. The document contains the list of non-
compliances made by ESL from 2007 onwards till 2015 (Refer Exhibit 48)154.
9.2. DELETION OF OUTLOOK FILES
During the extraction of ESI, logs indicating deletion of outlook .pst and .ost files were
identified on target devices pertaining to custodian. The identification of deleted outlook
files and the anomalies identified are explained as under: (Refer Table 36)
A. An email platform / application is used for sending or receiving emails, maintain
calendar, contacts etc. the CBSL implemented, Microsoft Outlook as email platform
for email communication from June 2012 (Refer Exhibit 24)155.
B. Mentioned below are the data file formats used by Microsoft Outlook156.
1. Outlook data file (.PST):
It contains messages and other outlook items and is saved on the local computer
(Target Device). In Outlook 2013 and earlier versions, IMAP account also used as
an Outlook Data file (.pst).
152 Refer Exhibit 46 for copy of email sent by S P Sedara to A S Fernando – Transaction between PTL and Novel Equity Investments Private Ltd. 153 Refer Exhibit 47 for the email sent by A S Fernando to his personal email id relating to wind up of Novel 154 Refer Exhibit 48 for the email sent by W N S Fernando 155 Refer Exhibit for email communication on 30 September 2019 156 According to Outlook app website
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An Outlook data file (.pst) can also be created for creating backup of email
messages, calendar, contact and task data. When messages or other outlook items
are saved in an outlook data file (.pst), the items are available only on the
computer where the file is saved.
The location of outlook data file (.pst) created by using Outlook 2013 or Outlook
2016 typically is in “documents\outlook files” folder. Outlook data file (.pst)
created by microsoft outlook 2007 or earlier is on different location at
“drive:\users\user\Updata\local\microsoft\outlook”.
2. Offline outlook data file (.OST):
The offline outlook data file (.ost) stores synchronised copy of mailbox
information on local computer (Target Device). When the relationship to the mail
server is interrupted, one can still access all emails, calendar data, contacts etc.
and on the restoration of connection, changes are automatically synchronized.
The location of the offline outlook data file is at:
“drive:\User\user\Update\Local\Microsoft\Outlook”.
3. Database file for Mac:
It is used for Mac OS X systems; Outlook stores the indices in a proprietary
Database file and stores the data records as a series of files nested within
folders.
C. The deleted and overwritten Outlook files were identified through description
mentioned in the Encase tool.
D. As confirmed by DIT that “the user does not require any admin rights to access, delete
and modify the email data file (format type “.pst/ .ost") since it is automatically
created in the C:\Users folder in any laptop / desktop.” (Refer Exhibit 24)157.
However, for deletion of “.ost” and “.pst”, user had to access the location
“drive:\User\ user\ Updata\ Local\ Microsoft\ Outlook” OR “Documents\Outlook Files”
respectively, which may require the technical assistance to the user.
E. The deletion of “.pst” and “.ost” files by a user is less common when compared to the
deletion of emails through the email box and such deletion indicates a deliberate
action by the user, with knowledge of the effects, to remove information from the
Target Device.
157 Refer Exhibit 24 for the email communication with DIT of 29 July 2019
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F. As per the logs generated by “Encase” tool, it was observed that composite outlook
files (ost and pst) were deleted from the Target Devices and the table provided below
summarizes instances of deletion of outlook files: (Refer Annexure 16)158
Table 36: Details of deleted outlook files
## CUSTODIAN DEVICE NAME OF THE FILE DELETED
OBSERVATION
1 Arjuna Mahendran
Laptop [email protected] An outlook file named “[email protected]” was observed as deleted on his Device. The description of the file in Encase Forensic tool was “File, Deleted, Overwritten, Archive, Not Indexed”. It was noted that “Entry modified159” detail was 30 June 2016 at 20:13 HRS.
2 C M D N K Seneviratne
Desktop [email protected] Six instances were noted during the review where outlook files were deleted on the following instances from the system. The description of the file in the Encase Forensic was “File, Deleted, Overwritten, Archive, Not Indexed”. It was noted that the “Entry Modified” for the deleted files were as followed: 18-Aug-2016 at 9:24 HRS 25-Apr-2017 at 15:16 HRS 18-Jun-2018 at 9:10 HRS 2-Jan-2019 at 9:00 HRS. 2-Jan-2019 at 9:00 HRS 10-Jan-2019 at 17:54 HRS
158 Refer Annexure 16 for the details of deleted outlook files 159 Entry Modified date refers to the date when the Master File table was modified for the file
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## CUSTODIAN DEVICE NAME OF THE FILE DELETED
OBSERVATION
3 Dr M Z M Aazim Desktop [email protected](2).ost [email protected] achive.pst
Six instances were noted during the review where outlook files were deleted on the following instances from the system. The description of the file in the Encase Forensic was “File, Deleted, Overwritten, Archive, Not Indexed”. The “Entry Modification” date as followed: 13- Dec-2013 at 14:48 HRS 15-Aug-2017 at 18:43 HRS, 15-Nov-2017 at 17:11 HRS 27-Aug-2018 at 16:19 HRS 20-Jun-2019 at 12:11 HRS 24-Jun-2019 at 9:10 HRS An .pst file was also deleted from the system on 13-Dec-2013 at 14:48 HRS.
4 U L Muthugala Desktop [email protected] archive.pst muthugala.pst Muthu.pst archive.pst muthugala.pst outlook.pst BOSS.pst outlook.pst
Eight instances were noted where outlook files were deleted from device. “Entry Modified” dates as followed: 17-Apr-2004 at 9:39 HRS 23-Sep-2014 at 9:41 HRS 23-Sep-2014 at 10:05 HRS 23-Sep-2014 at 9:41 HRS 10-Aug-2016 at 16:15 HRS 26-Aug-2016 at 09:29 HRS 16-Nov-2018 at 15:33 HRS 17-Apr-2019 at 09:34 HRS
5 A S Fernando Desktop archive1.pst [email protected] - MAIL.ost [email protected] - MAIL.ost [email protected] [email protected] - MAIL.ost archive.pst archive1.pst [email protected] - MAIL.ost archive1.pst archive.pst
Ten instances were noted where outlook files from the device. “Entry Modified” dates are as followed: 6-May-2019 at 16:12 HRS 6-May-2019 at 16:12 HRS 10-Jun-2019 at 09:12 HRS 17-May-2019 at 11:05 HRS 22-Jan-2019 at 09:16 HRS 24-Apr-2019 at 14:23 HRS 24-Jun-2019 at 12:14 HRS 24-Jun-2019 at 12:17 HRS 24-Aug-2018 at 10:21 HRS 11-Dec-2018 at 07:57 HRS
6
N D Y C Weerasinghe
Desktop [email protected] [email protected] [email protected] [email protected] archive.pst archive.pst
Eleven instances were noted where outlook files were deleted from the device. “Entry Modified” date of the files are as follows: 11-Feb-2019 at 08:09 HRS
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## CUSTODIAN DEVICE NAME OF THE FILE DELETED
OBSERVATION
archive.pst archive.pst archive.pst archive.pst archive.pst
13-Dec2018 at 11:29 HRS 7-Dec-2018 at 16:59 HRS 7-Dec-2018 at 10:25 HRS 30-Oct-2018 at 10:54 HRS 13-Dec-2018 at 12:03 HRS 30-Oct-2018 at 10:54 HRS 13-Dec-2018 at 12:03 HRS 13-Dec-2018 at 12:03 HRS 7-Dec-2018 at 10:25 HRS 7-Dec-2018 at 16:59 HRS
7
P Samarasiri Desktop outlook.ost One instance of outlook file deletion was noted from the device. “Entry Modified” date of the file is 11-Nov-2015 at 17:01 HRS
8
P Samarasiri Laptop [email protected] [email protected] [email protected]
Three instances were noted where outlook files were deleted from the device. “Entry Modified” date of the files are as follows: 14-Jul-2017 at 12:20 HRS 14-Jul-2017 at 12:20 HRS 26-Apr-17 at 14:18 HRS
9 THB Sarathchandra
Desktop BOSS.pst [email protected] [email protected] [email protected] [email protected] [email protected]
Six instances were noted where outlook files were deleted from the device. “Entry Modified” date for the files are as follows: 7-Oct-2014 at 14:35 HRS 22-Mar-2019 at 16:20 HRS 2-Apr-2019 at 15:52 HRS 19-Dec-2018 at16:35 HRS 21-Jan-2019 at 9:17 HRS 6-Jun-2019 at 10:05 HRS
G. In the case of Dr M Z M Azim, the confidential list of devices to be procured for digital
imaging was originally sent on 18 June 2019 and subsequently, the .ost file was found
to be deleted on his device. It raises a concern if there was any potential leak of
confidential communication between BDO India and the CBSL. Further, Dr. M Z M Aazim
received a Memo on 21 June 2019 from the Governor of the CBSL mentioning that the
electronic device issued to him would be obtained by the Forensic Auditors for a digital
image. However, the procurement of his device was delayed and procured on 25 June
2019 due to his official commitments.
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H. It was noted that the file named “[email protected]” was also deleted from his device.
“Entry Modified” property for the mentioned file was 24 June 2019 at 9:10, a day
before the date when the system was due for handover and three (3) days after memo
was issued to surrender his device. The deletion of outlook files appears a deliberate
attempt to remove the data available on the device, which also is a breach as per the
Information Security Policy of the CBSL.
I. During an interview, Dr M Z M Aazim stated, “I regularly delete emails after responding
or forwarding to respective department or employees. I delete operational emails
and clean delete folder as well due to limit restrictions. I remember most of the
information I receive. I don’t know if it is in policy to keep emails/ files maintained.
I am not aware of any deletion of outlook files from my system. It should be checked
with IT department.” He also explained that he is unaware of the method of deletion
of .pst or .ost files. As a practice, he deletes emails from outlook through the user
interface, by selecting the emails manually and subsequently removes emails from the
‘delete’ folder. He confirmed that he deleted emails post 1 January 2019 as well.
However, he maintained that he is not aware of the deletion activity at the date and
time stamps as recorded in the digital forensic review. On further inquiry, Dr M Z M
Aazim confirmed that during the date of recorded deletion activity, the target device
was in his possession. The access to the target device is possible only through user
specific log-in credentials, which were in his possession (not shared with anyone) and
is known and used only by him. Also, he did not handover the target device to any
other CBSL official during the process of acquisition of the device by BDO.
J. Summary
A. The logs of deletion of MS Outlook data files (“.pst” & “.ost”) were generated
during the digital forensic procedures where the globally accepted forensic
technology tools and evidence identification and extraction procedures were
adopted. These logs were generated using the “Encase” forensic tool-based
filters and standard OEM scripts in the “Encase” forensic tool.
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B. Users of electronic email applications usually delete selected non-essential
emails (such as notifications, reminders and business development
communications) and other emails considered redundant, to free-out the
assigned storage space in the electronic device. Identification of such emails is
performed selectively, individually and manually through the email system front-
end user interface. This mode of deletion is considered usual and a general
practice. This method of deletion is a standard functionality of the email
application / tool and does not result in deletion of entire data file160 itself.
Deletion of email data files requires the user to access specific location of files
on the machine (laptop / desktop, usually referred-to as “client machines”),
which is a designated location of the data files. Such deletion method is not a
standard functionality feature of the email application. Accordingly, this
method of deletion requires a deliberate attempt / action by the user. To avoid
unintentional deletion of files and loss of organizational data, as a better
practice, organizations usually restrict users’ access to the designated locations
of the email data files through user access controls & permissions and through
“Administrative” access rights to the computer device.
C. IDT confirmed that CBSL employees’ access to the such designated locations in
the client machines and the right to delete files in that folder, was not restricted
and users could delete the files if they had the awareness of the file location
along with an intention to perform such deletion action.
D. During an inquiry, MS Outlook publisher’s technical support division confirmed
that there is no technical feature or action that results in auto deletion of
Outlook email data file stored in the designated (Program Files) folder, supporting
the possibility that such deletion requires a deliberated action by people having
access to the client machine.
E. During the inquiries, the selected officers of CBSL (on whose machine this
deletion activity was identified during the forensic technology procedures)
denied having knowledge of the file location and method of deletion. However,
they also confirmed that:
1. During the dates of logs indicating the deletion, the devices were in their own
possession;
160 Refer paragraph B for the details of the functionality & purpose of the email data file.
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2. Access to the devices is restricted by user-specific access controls (log-in
credentials) set-up by IDT;
3. The officials have not shared the device access credentials issued by IDT to any
other employees of CBSL;
4. Azim also stated that there no occasion when he handed over the device to any
other officers of CBSL or to IDT staff for any IT support requirement.
K. Conclusion
A. Based on the information gathered and confirmations received, it cannot be
interpreted that the deletion activity could be the result of an automated action
triggered by any other IT process or activity. It cannot also be construed that the
deletion activity was performed by officials other than those, who these devices
were assigned-to. Despite the active denial / rejection by the selected officials,
of having performed the deletion activity, the possibility of deletion of the data
files by the users themselves cannot be ruled-out.
B. It is pertinent to noted that in case of Dr. Azim, the deletion activity was logged
on the dates, subsequent to the intimation of requirement for handover of the
electronic devices for forensic investigation purposes and prior to the handover
the device. Azim also stated during an inquiry that usually, he deletes the older
date email communications regularly to free-out the assigned disk-space on his
computer machine. He also confirmed that her performed such activity post
intimation of the need for surrender of the device or forensic investigation
purposes with a specific requirement to handover the device without affecting
the integrity of the data on the machine.
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10. LIMITATIONS
The findings of this Report should be read in conjunction with the following limitations:
1. The copies of operational manual applicable to the Supervision function, were evidence of
review performed by Assistant Governor and Deputy Governor overseeing the PDD is not
available.
2. For the review, CBSL provided hard copies of documentation and information pertaining to
the application / appointment, examinations, regulatory actions conducted for selected
Primary Dealers during the Review Period. BDO India has not independently identified or
collected the documentation. Accordingly, the confirmation by the DSNBFI and the PDD of
the CBSL on the completeness of the data / documents / information has not been
independently verified/ validated by BDO Team.
3. The review was based on the documentation and information provided by the CBSL.
4. The understanding of the operational process for regulatory and supervisory function of
Primary Dealers during the period 3 June 2016 to 31 December 2017 was obtained based on
the explanation provided by the current officials of the PDD and the DSNBFI and same
understanding was extended to the remaining period.
5. Inability to examine the discussions between the officials of the CBSL with Primary Dealers
as the telephonic discussions had not been recorded at CBSL and email communication is
limited to the availability and retrieved/ recovered through e-discovery procedures.
6. Information Technology (“IT”) Asset Register was not maintained by the Information
Technology Department (“ITD”) at the CBSL, accordingly, the details of IT assets assigned
to CBSL employees cannot be identified with certainty. The electronic devices pertaining
to the identified individuals were identified by the ITD based on the last User Account Log-
In Information available. Hence, it cannot be established if acquired devices were the only
device/s used by the selected employees of the CBSL during the Review Period.
7. The completeness of the email communication data cannot be established as multiple
instances of email data file deletions were noted during the Digital Forensics procedure on
the devices provided by the ITD and backup of the email data was not available
comprehensively, on the email server. Vide an email of 29 July 2019, ITD confirmed that
Litigation Hold was introduced effective January 2019 and all emails which are not
permanently deleted as on January 2019, are available on the server. Our review of emails
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was limited to the extent of email data backup provided by the IDT of the CBSL. (Refer
Exhibit 25)161.
8. The CBSL migrated email communication platform from Lotus Notes to Microsoft Outlook
in June 2012 and email backups prior to June 2012 were not maintained. The backup files
and Lotus user id and password were not retained for the same and review of emails is
limited to the extent data backup provided by the ITD of the CBSL.
9. Licensed tools were used in conducting digital forensic on the devices provided by ITD of
identified officials of the CBSL. However, due to rapid change in computer’s operating,
processing and storage techniques, there could be occasions when licensed forensic tools
are unable to gather 100% evidence from the acquired devices.
10. The audit logs for FInNet application for the Review Period were not available. Hence,
modification / changes / additions / deletion of data uploaded by Primary Dealer for
examinations could not be independently verified and the person responsible for changes
cannot be identified.
11. We gateway logs (year wise segregated files – text / csv format), web gateway log metadata
files, network firewall configurations and change logs, network firewall activity logs for
internet traffic (both inbound and outbound) for the review period were not made available
for review. Server logs for Inbound and Outbound emails across the CBSL email domains,
from the earliest mail from outlook till March 2018, were not available for review. (Refer
Exhibit 52)162.
161 Refer Exhibit 25 for the email of 5 July 2019 for implementation of litigation hold 162 Refer Exhibit 52 for email of 2 August 2019 for requesting the firewall logs
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NOTICE TO THE READER
This Forensic Audit Report (“Report”) has been prepared by BDO India LLP (“BDO India”, or “We, or
“us”) for The Monetary Board of Central Bank of Sri Lanka (the “CBSL” or the “Client” or “You”) in
accordance with the scope of work defined in Contract of 1 April 2019 (“Contract”).
The Report issued by BDO India is in accordance with the Contract and for use by the CBSL. Usage of
this report by the CBSL is with the understanding that (i) The CBSL will keep BDO India LLP informed
about the distribution; (ii) The CBSL would take appropriate measures to avoid unauthorized
distribution of the whole or part of the report; and (iii) The disclosure is in line with applicable laws.
We accept no responsibility or liability to any external agency or parties not forming part of the
Contract.
BDO India does not render any legal advice or related services and, therefore, none of the Services
rendered under the Contract should be considered to be legal services. In respect of any and all legal
matters, the CBSL may consult its legal advisors, as they deem fit in their own discretion. Our work
does not make any representation regarding questions of legal interpretation and cannot render legal
advice. The Client should consult with its attorneys with respect to legal matters or items that require
legal interpretation.
The Report issued is to be read in totality, and not in parts, and in conjunction with the relevant
sections referred to, in this Report.
We relied on the information and explanations provided to us by the CBSL and we have not
independently verified the completeness of the same. Whilst, we have taken reasonable steps to
corroborate the information (Refer Section 3 - Work Performed), we cannot guarantee its reliability
or completeness. Hence, our ability to perform all the procedures depended on the nature and quality
of the information and explanations provided to us by the CBSL. Our observations in this Report are
limited accordingly.
This Report is based on the information received and discussion with stakeholders up to 27 September
2019. We / you may come across information that may have bearing on the findings and observations
made in this Report subsequent to the submission of this Report. However, we take no responsibility
for the possible impact of such events and circumstances including updating this Report for the same.
Although, in circumstances where additional information may become available with respect to the
engagement, we would be glad to carry out additional procedures as may be separately agreed with
the Client.
This engagement shall not create privity between BDO India and any third party. Neither this Report
nor the services provided hereunder are intended for the express or implied benefit of any third party.
Our services and our Report are not intended to be, and shall not be construed to be, investment
advice or legal, tax or accounting advice in accordance with the accounting standards. BDO India
shall ensure all confidential information acquired shall be and remain as part of the Report rendered
by BDO India in accordance with the Contract.
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11. ANNEXURES
LIST OF ANNEXURES
# NAME OF ANNEXURE NO. OF PAGES
1 List of applicable Laws, Regulations, Manuals and Directions 4
2 List of 21 identified employees 4
3 Complete list of extensions of ESI extracted 1
4 The basic information of acquired devices 1
5 Operating system information of Target Devices 8
6 User account information of Target Devices 16
7 List of keywords 7
8 Repeated observation identified in each Primary Dealers 26
9 Summary of discussion with the employees 23
10 Dropping of examination findings from “Letter of Findings” 1
11 The profiling of the identified employees of the CBSL 13
12 The list of companies and individuals associated with Primary Dealer 4
13 The count of keywords for each identified employee of the CBSL 4
14 The count of files (extension wise) for each custodian 10
15 List of on-site examination findings identified by the Supervision division for the selected Primary Dealers
63
16 The details of deleted outlook files 7
17 Server email count for each identified official 1
18 Non-reporting of examination Report to The Monetary Board 12
19 Common findings across Primary Dealers 2
20 Coverage and Sampling technique 7
21 List of Primary Dealers’ directors and CEOs 9
22 List of 21 identified employees for ESI review 4
23 Tools used to perform Digital Forensics / E-discovery on target devices 2
24 Detailed delays in submitting the Monetary Board papers 1
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12. EXHIBITS
LIST OF EXHIBITS
# NAME OF EXHIBIT NO. OF PAGES
1 The PDD Operational Manual – Supervision division 2013 17
2 The PDD Operation Manual- Supervision division May 2015 17
3 Gazette copy of transfer of role from the PDD to the DSNBFI 1
4 Gazette copy of transfer of role from the DSNBFI to BSD 2
5 Summary of discussion with the Honourable Governor 6
6 Summary of discussion with FAMC for status updates 98
7 Email communication with the department for providing list of applicable laws and guidelines
1
8 Copies of all CoC forms of target devices provided by IT team of the CBSL till date 50
9 Logs for forensic image of target devices 121
10 Direction to issue warning letter instead of declaring un-fit 2
11 The PDD operation manual – Supervision division 2007 18
12 Examination Questionnaire 32
13 List of training programs attended by the PDD Supervision / SNBFI employees 45
14 Article of 6 January 2018 published in Colombo Telegraph 36
15 The documents retrieved by the PDD during On-site Examination as at 30 September 2015
1
16 Article of 28 July 2016 published in Lanka Business Online 3
17 Article of 26 March 2015 published in Ground views 16
18 Article of 4 December 2016 published in The Sunday Times 5
19 Statement of fact of W Ranaweera 2
20 The extract of email of 4 July 2019 for discussion of email backup 4
21 The email sent by Nuwan Salgado to SPD 1
22 The emails sent by Nuwan Salgado/ Kasun Palisena to SPD 2
23 CV of MZM Aazim’s wife (Fathima Rizwana) 3
24 The email communication with DIT of 29 July 2019 3
25 The email of 5 July 2019 for implementation of litigation hold 3
26 Copies of emails sent by Kasun Palisena to Arjuna Mahendran 4
27 Board Paper for transfer of Regulation and Supervision role from the PDD to DNBFI 6
28 Gazette copy for Appointment and Suspension of Primary Dealers 1
29 Statement of fact of T H B Sarathchandra 4
30 Statement of fact of W N S Fernando 2
31 Statement of fact of A S Fernando 2
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# NAME OF EXHIBIT NO. OF PAGES
32 Statement of fact of L T Amarasinghe 2
33 Statement of fact of S J K Guruge 2
34 Statement of fact of P M C S Gunawardana 2
35 Statement of fact of S P Sedara 2
36 Statement of fact of D S Thenuwara 3
37 Statement of fact of Nanayakkara 4
38 Violation of Lankasettle System Rules: Custodian Responsibilities 2
39 Appointment and Suspension of Primary Dealers – LTBO and RSSO 22
40 Email copy – Discussion with W Ranaweera relating to regulation function – Government Securities
2
41 Direction on assessment of fitness and propriety of directors and employees performing executive functions of Primary Dealer companies
11
42 PTL appointment rejection note 6
43 The Monetary Board Paper – Appointment of PTL as a Primary Dealers in Government Securities and as a direct participant and a dealer direct participant in the LankaSettle System
4
44 Copy of email sent by W N S Fernando for Handover - PABC 1
45 Copy of email sent by A S Fernando to his personal id – Novel Equity Investments Private Ltd. Related files
34
46 Copy of email sent by S P Sedara to A S Fernando – Transaction between PTL and Novel Equity Investments Private Ltd.
2
47 Copy of email sent by A S Fernando to his personal id – Winding up Novel 2
48 Copy of email sent by W N S Fernando – ESL continuous non-compliances from 2007 onwards till 2015
3
49 Fitness and Propriety of N N D Jayasekara_2016 and N N D Jayasekara -Repo outstanding
11
50 No Fitness and Propriety performed for Manju Priyadarshana and Upeka Samarasinghe for 2014 and 2015 – PTL
12
51 Delay in Fitness and Propriety by SNBFI 2
52 Email of 2 August 2019 for requesting the firewall logs 3
53 Statement of fact of K P K Weerasekara 2
54 Statement of fact of H D Ajith 2
55 Copy of e-mail communication by the DIT regarding migration of email communication platform
1
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FINAL REPORT | RFP 5 | EXAMINATION ON THE CONDUCT OF THE SUPERVISORY AND REGULATORY ROLE BY THE SUPERINTENDENT
OF PUBLIC DEBT / DIRECTOR, SUPERVISION OF NON-BANK FINANCIAL INSTITUTIONS PERTAINING TO SELECTED PRIMAY DEALERS FROM 01 JANUARY 2009 TO 31 DECEMBER 2017
Strictly Private and Confidential Page 178 of 177
FOR MORE INFORMATION:
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