The Insurance Act does not say it, but the intent of a reserve fund is to make a company have some savings account or another highly liquid asset to meet unexpected costs.
In this regard, the Financial Institutions Act requires a reserve fund to be equal to the share capital which was $26.9 million compared to the policyholders’ funds of $698.4 million for CLICO as at December 31, 2007.
The focus in the CLICO debacle ought to be on the way in which the policyholders’ funds were invested and not on the issue of the reserve fund which by definition is minor in terms of size. This is because policyholders are expecting a return of their investment which is possible only if CLICO is allowed to invest most of the money wisely.
Over the years, the Supervisor of Insurance with his limited staff would have relied heavily on the audited accounts of CLICO, properly prepared by an independent auditor in accordance with the law, to assess its performance.
There is no doubt that regulatory failure has to take some blame for the CLICO debacle but how can legislation account for the human condition? The recent forensic audit by Deloitte and Touche points to the issue of internal management failure which is a human condition.
Indeed, the auditors observed that “some of the documents we reviewed showed that the releases of funds by CIL [CLICO] were made based on directions from Mr [Leroy] Parris that were acted upon by executive management, such as Mr [Terrence] Thornhill”.
The specific reference to executive management makes it absolutely clear that not even the directors of the two companies were made aware of several of the transactions.
According to the auditors: “Our review of the minutes showed that the directors generally appeared to be informed of significant investments made, rather than providing specific approvals in advance.”
Investment decisions such as the purchase of Sam Lord’s Castle that invited discussions because of the issues it faced subsequently but the auditors “did not note specific ratifications made by the directors”.
In similar vein, “Mr Parris said that he made the decision to purchase a Lear Jet for the CLICO Group . . . . In this regard, CHBL [CLICO Holdings] had entered into a seven-year lease agreement with a monthly payment of [US] $71 000.”
To his eternal credit, Dr Frank Alleyne almost immediately on becoming a director of CLICO requested a copy of Mr Parris’ employment contract. Part 4 of the contract made reference to a letter dated December 5, 2002, which speaks to a gratuity of US$5 million to be paid to Mr Parris on May 15, 2008.
CLICO’S financial year ends on December 31. Some seven months after the due date of the gratuity, Thompson and Associates sent invoices for $3.333 million dated December 30, 2008, in lieu of legal fees or retainers. This would have been on the second last day of the financial year, by which time the parent in Trinidad was known to be on its knees.
It so happened that the payment to Thompson and Associates on January 16, 2009, was really a partial payment of Mr Parris’ gratuity. In all of this, the transaction should have attracted a 15 per cent VAT at the time, which was never mentioned.
Unfortunately any attempt to blame the shortcomings of the reserve fund is really a red herring that cannot mask what has already been revealed with respect to the former Prime Minister’s law firm in getting funds out of CLICO for legal fees that turned out to be gratuity for the former CEO of CLICO.
Notwithstanding the obvious attempt to deliberately shift the focus of the debate, there is a legitimate concern with regard to the regulatory process surrounding financial institutions; and the establishment of the Financial Services Commission is a start. However, it must be noted in the case of CLICO that not even the directors were aware of several transactions.
In light of the forensic audit, it is evident that it would have been virtually impossible for the Supervisor of Insurance, who relied on audited financial statements, to detect from such statements that which not even the directors of CLICO were made aware of.
