Counting the cost
The recent contagion caused by the collapse of CL Financial Group, which owns CLICO, has sent shock waves across the Caribbean with policyholders in Barbados among the hard hit.
In this first of a comprehensive series of articles, The Nation seeks to set the situation in context.
by ALBERT BRANDFORD
One overriding factor in the smooth functioning of financial institutions will continue to be the quality of the oversight by regulatory bodies. – Dr Marion Williams, former Governor of the Central Bank of Barbados, addressing Consolidated Finance’s 25th anniversary function at Sandy Lane on February 2, 2008.
THE NAMES of some of those institutions that have left Barbadian and other investors gasping have already, or will, become legend in the folklore of local financial circles: BCCI, Trade Confirmers, and lately, CLICO.
At the heart of the mess over the past 25 years has been the failure by those whom Williams so accurately described as the ones to keep “institutions on their toes” – maintaining the sector’s soundness and, importantly, investor confidence.
“In this regard, cooperation of these entities with regulators is important in ensuring the integrity of the system,” she added. “Resisting is not in the interest of either the entity itself or the system as a whole.”
Williams looked at the difficulties experienced by banks and other financial institutions across the globe, and noted that “notwithstanding these developments, the local financial system has remained strong”.
“[A]midst the turmoil at the global level and indeed in the region the domestic financial sector has been remarkably free from any failures.
“The only example of this nature was Trade Confirmers Limited in the mid-1980s; the evidence shows that the Central Bank was not empowered to deal with that matter.
Millions at risk
“The collapse of the local branch of the Bank of Credit and Commerce International in 1991 had its origins outside of this jurisdiction.”
So, how did we in Barbados, a country which the World Bank says has a reputation as “a reputable financial centre” come to a pass where some of those financial institutions have apparently benefited from lax oversight in less than a generation to the detriment of ordinary investors putting millions of dollars at risk?
Trade Confirmers Limited, incorporated here on March 31, 1982 – ostensibly as a majority-owned local company with a minority held in Trinidad and Tobago with a similar name – was later found by a commission of enquiry, after its collapse, to be a subsidiary of the Trinidad company that was liquidated in 1986, leaving, according to one researcher “much concern . . . by the depositors about the impact, if any this would have on the Barbados operation”.
“At this time,” wrote Juliana Thorpe-Taitt, in a July 2004 look at Corruption & The Role of Forensic Accountant: A Survey of the Caribbean, “the managing director gave the assurance to depositors that the collapse of the Trinidad company would have no impact on Trade Confirmers (B’dos) Limited since the Barbados company was a local company and the majority of shares were held by Barbadians”.
Despite assurances from Government that the operations of the CLICO operations here were still viable after the collapse of the parent company CL Financial in Trinidad, investors here and in the islands of the Organisation of Eastern Caribbean States (OECS) are still fearful that they may lose their money.
Measure of control
In her examination of the collapse of Trade Confirmers, Thorpe-Taitt noted that it was designated as a financial institution (share capital $5 million) by the Minister of Finance on recommendation of the Central Bank on April 8, 1983, enabling the bank to exercise a measure of control over the institution by making periodic inspections of its books and its accounts.
The company had been set up to carry out functions, including financing, discounting trade bills, acting as a confirming house, drawing bills of exchange, issuing promissory notes, lending money to customers, guaranteeing the performance of their contracts, and carrying on the business of insurers.
“Its lending activity was concentrated in short to medium-term loans,” Thorpe-Taitt said.
“Using an intensive advertising and sales promotional campaign, TCBL [Trade Confirmers (B’dos) Limited] encouraged the public to make cash deposits with the institution,” she added. “This campaign was also boosted by the promise to give higher interest rates on deposits than those offered by the established commercial banks.
“The campaign was successful and by the end of August 1983, total deposits received were BDS$4.7 million (US$2.4 million).
“However, on October 9, 1987, the activities of the institution were brought to a halt. With . . . 135 deposit accounts totalling BDS$2.4 million (US$1.2 million), TCBL was placed in receivership.”
A commission of inquiry – the so-called Worrell Commission – headed by Justice Lindsay Worrell, and including Lionel Moe and Rawle Brancker as members, was set up by Governor General Sir Hugh Springer, and held its first meeting on March 28, 1988, at the Caribbee Hotel, Christ Church.
It was to investigate and report on:
1. the causes of the collapse of Trade Confirmers (Barbados) Ltd.
2. whether the business of Trade Confirmers was carried on negligently or with intent to defraud depositors or other creditors, and shareholders, or in anyway that was unfairly prejudicial to, or unfairly disregarded their interests; and
3. to make such recommendations as considered appropriate.
“What unfolded over the next three months,” Thorpe-Taitt wrote, “painted a picture of ineptness from directors, management and auditors; revealed a blatant effort to mislead and deceive depositors; and a lack of timely action by Central Bank authorities in dealing with the obvious [breaches] that were made by the institution.
“The inquiry also uncovered incompetence and negligence by the auditors. In verbal testimonies at the inquiry both the audit senior and the audit partner admitted that they had no experience in auditing financial institutions. This was contrary to the guidelines set out in the Handbook Of The Institute Of Chartered Accountants Of Barbados, of which the auditors were members.”
One of the most harrowing and painful testimonies on the impact of TCBL’s collapse came from one of the duped investors, Monica Marville, a 49-year-old laid-off garment factory cutting room manager, who had invested $120 000 from a joint account with her 63-year-old stepmother who worked in the Cheapside Market in The City.
Marville spoke of being attracted by the eight per cent interest rate on fixed deposits at a time when the commercial banks were offering only four per cent, and her own bank had just discontinued taking fixed deposits.
MARVILLE: After going a few times and having the [Personal Investment Plan] updated and being assured up until September, I think it is, that all interest was posted to the P.I. Plan and everything was going okay. I kind of put this transaction out of my thoughts and head, and I accepted it as normal.
“After this, it was not until a Sunday in October that my mother picked up the Sunday paper and she read that Trade Confirmers had gone into receivership.
CHAIRMAN: October of which year?
MARVILLE: October 1987, that is last year. She asked me if this was the same thing, so I had to pick up the paper and I read it and on reading I just froze. My mother on the other hand, about four days after, broke out in a rash all over. The doctor started to treat her for shingles. After this the rash went [haywire] and she had to recommend a dermatologist . . . .”
“Based on the above,” Thorpe-Taitt recalled, “the conclusions of the commission were that:
• The business of Trade Confirmers (Barbados) Limited was carried out by the Directors in a manner that unfairly prejudiced and unfairly disregarded the interests of the depositors, shareholders and creditors;
• The directors were negligent in failing to exercise due care and diligence in the management of the company;
• The chairman and managing director withdrew funds of the company without the authority of the board of directors;
• The managing director caused fictitious entries to be made in the account books of the company and that several of these transactions appeared to be fraudulent;
• The auditors failed to adhere to generally accepted auditing standards in the acceptance and execution of the audit; and
• The Central Bank of Barbados failed to exercise its powers under Section 36 of the Central Bank Act, allowing them to place restrictions on Trade Confirmers.
“The collapse of this institution reverberated throughout the Barbadian community for many months, even years. At its conclusion, the commission stated that “its Secretary had forwarded all the transcripts of the evidence to the Director of Prosecutions”. However no one was ever prosecuted and the depositors remained the ultimate losers.”
• DISCLOSURE: The Nation Group is the holder of annuity policies in Clico International Life Insurance Limited. Further, it is a matter of public record that Colonial Life Insurance Co. (Trinidad) Limited is a shareholder in our parent company One Caribbean Media Limited (OCM). This disclosure is made in the interest of transparency. The Nation wishes to assure its readers that the above will in no way inhibit its commitment to the time-honoured principles of journalistic integrity.