@

 
   
   
   
   
   
HOME
NEWS  
NEWS FEATURES  
INTERVIEWS  
POLITICAL COLUMN  
THIS IS MY NATION  
MILITARY MATTERS  
EDITORIAL  
SPORTS  
CARTOON  
BUSINESS  
EYE - FEATURES  
LETTERS  
EVENTS  
SOUL - YOUTH MAG  
ENTERTAINMENT  
NATION SPECIAL  
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

 

News Features


 

CENTRAL BANK TRIPS ‘CHARGED’ LOAN

Minister Seneviratne seeks cabinet approval for US$ 500 m loan from unknown entity regardless of Central Bank warnings of money laundering pitfalls

A controversy has arisen with regard to the short-sighted decision by Power and Energy Minister John Seneviratne to obtain a loan of US$ 500 million from an unknown entity, in a bid to relieve the Ceylon Electricity Board (CEB) from its current financial crisis.

He had stressed that in order to overcome the present financial crisis of the CEB, backup finances were mandatory, especially, to settle short-term debts to the People’s Bank, Ceylon Petroleum Corporation and other independent power producers.

However, it is apparent that, in his urgency to settle CEB debts, the Minister had not even weighed up the credibility of the lender of such a colossal amount of money, which could, ultimately, cause the Government of Sri Lanka (GoSL) to fall into a money laundering trap.

The Central Bank, on request by the cabinet, had conducted a thorough investigation into the loan proposal and realised that the Minister, by even considering the loan from this unknown entity, had moved to jeopardise the government, as such offers are ridden with controversy.

This proposal comes only months after the Minister had already placed a similar proposal before the cabinet, which was also referred to the observation of the Central Bank , to ascertain its genuineness.
In a cabinet memorandum dated 23.02.2007, titled ‘Procurement of Loan of US$ 200 million from M/s Zhao Trading (Pvt) Ltd., by the CEB’ Minister Seneviratne had presented to the cabinet the offer made by M/s Zhao Trading (Pvt) Ltd. for a loan of US$ 200 million.

At that point, he had requested consideration from the cabinet to authorise the Treasury to secure the loan by issuance of a Government Guarantee and to authorise the CEB for issuance of Electricity Stocks (Bonds) to the value of US$ 260 million, an amount much higher than the loan.

The cabinet had decided to further study the proposal prior to approving the Minister’s proposal.
After only a lapse of several months, in another note to the cabinet tilted ‘Procurement of Loan of US$ 500 million by the CEB,’ dated September 12, 2007, the Minister had informed the cabinet of the proposal submitted by The North Face Ltd, situated at Suite 41/42, Victoria House, 26 Main Street, Gibraltar. The company had proposed a long-term loan of US$ 500 million at 2% simple interest per annum, payable at the end of five years, along with the capital.

The North Face Ltd. was to act as an agent for World Chinese Merchant International Holdings Investment Ltd (WCMIHIL) of Hong Kong and M/s Zhong Qi Shi Mao (China) Investments Company of Kowloon, Hong Kong.

The terms of the loan seem extremely attractive, especially, with the lavish funding and low interest rate. Also, there are no arrangement fees or any other payment as perceived in any other instances of loan transactions. Nonetheless, the loan is subject to the issuance of a Sovereign Bank Guarantee by the Central Bank of Sri Lanka. Hence, the incredibility of those immensely appealing conditions of the loan, raises qualms with regard to the integrity and intentions of the lender.

Interestingly, the said US$ 500 million loan comes as part of another US$ 1 billion loan. In a letter dated September 14, 2007, The North Face Ltd had laid down the terms and conditions for the US$ 1 billion loan, which was at a 2.5% simple interest per annum, to be paid annually for 10 years. According to the letter, it is intended for projects carried out by Eptron Enterprises Ltd. of Israel.

As security, they have requested the issuance of Sovereign Bank Guarantee by the Central Bank of Sri Lanka , for the whole amount of the loan. This condition was included in the letter sent by Zhong Qi Shi Mao (China) Investments Company, authorising The North Face Ltd to carry out the loan arrangement.
Therefore, from the full amount of the loan, the agent company had scheduled US$ 750 million for projects to be carried out by Eptron Enterprises and US$ 250 million for projects to be carried out by the government.

This raises the question, if only US$ 250 million is allocated for government projects, how is it possible for CEB to obtain US$ 500 million. Minister Seneviratne had not made any reference to this fact in his note to the cabinet.
Presenting another twist to the matter, it was learnt by the Central Bank that neither the principal lender nor the agent company is in a position to finance such a massive loan.

According to the findings, M/s Zhong Qi Shi Mao (China) Investments Company is an associate company of WCMIHIL and the holding company’s paid-up share capital is only Hong Kong dollars 10,000. The main business activities of the associate and holding companies are centred in the Chinese mainland. The paid-up share capital of the authorised agent, The North Face Ltd in Gibraltar, is only £2,000 and equally owned by two businessmen, C.N.C. Waas of Colombo 6 and J. Danyluk of Ontario.

Therefore, the Central Bank had expressed its doubts with regard to the ability of The North Face Ltd. or its principal, to mobilise US$ 1 billion at an interest rate of 2.5% per annum, considering the prevailing LIBOR rate of over 5% and the financial strength of the principal.

This fact proves to be extremely alarming, especially, when considering the condition of an issuance of a Government Guarantee prior to the release of the loan.

It seems as if Minister Seneviratne, while attempting to overcome one impasse, is about to propel the Central Bank of Sri Lanka into a pitfall of international financial terrorism.

The Central Bank, in its observations on the loan offer by The North Face Ltd, had noted that the Central Bank Governor had already advised ministers and heads of institutions of the risks involved in such attractive and voluntary loan proposals.

It had stressed on a major feature of such offers, to which Minister Seneviratne seems to have been blind: The requirement for unconditional government guarantees for the entire loan amount, even before the loan is disbursed. In a stern note, the Central Bank has observed that it had already cautioned the authorities not to issue such guarantees. This was because there is a grave risk that those parties could raise loans against such guarantees and get away with the money raised. This will make the government liable for the guaranteed amount. Such guarantees will give these entities the opportunity to engage in money laundering at the expense of the GoSL.

In a letter dated January 30, 2007, Central Bank Governor Ajith Nivard Cabraal had informed the relevant authorities of risks involved in unsolicited proposals for foreign loans and grants based on Government Guarantees.
The Governor’s observations were based on a trend of foreign organisations offering enormous amounts to government institutions.

Citing several instances where such offers were made, the Governor had warned that if a ministry or an organisation were to provide such a bank guarantee, or any other collateral as requested, it may perhaps be used to raise funds abroad from various illegal sources, including funds connected to terrorist financing and/or money laundering. He had also noted that it is highly unlikely any person is willing to grant such loans, when considering the terms and conditions of the offer.

****

Note sent by cabinet Secretary to Power and Energy Ministry

September 27, 2007
Ref No – 07/1612/332/006-I
Title - Procurement of Loan of US$ 500 million by the CEB
(B) Agenda Items:
(I) Cabinet Papers
Cabinet Paper 07/1612/332/006-I, a Note to the cabinet dated 12.09.2007 by the Minister of Power and Energy on II Procurement of Loan of US$ 500 million by the CEB” - this Note was considered along with the observations of the Minister of Finance and Planning and comments made by the Central Bank of Sri Lanka, together with the letter dated 30.01.2007, addressed to all Ministries and Institutions under them, by the Governor of the Central Bank of Sri Lanka and it was decided that the matter be referred to the Central Bank of Sri Lanka to be considered in the first instance by its Monetary Board. It was also decided that, neither the Ministry of Power and Energy nor the CEB should commit itself to the proposed lender, till the matter is re-examined and decided upon by the cabinet, on receipt of a report from the Governor of the Central Bank of Sri Lanka on this matter.
Action by: My/Power and Energy
Copied to: My/Finance and Planning
Governor, Central Bank of Sri Lanka

****

Minister Seneviratne’s note to cabinet

Procurement of Loan of US$ 500 million by the CEB
Due to the present liquidity crisis of the CEB, following proposals were made by my cabinet memorandum dated 23.02.2007, under the caption of ‘Procurement of Loan of US$ 200 million from M/s Zhao Trading (Pvt) Ltd., by the CEB,’ to the cabinet of ministers for its consideration.
(i) To authorise the CEB to proceed with further action in consultation with the Treasury, with regard to the offer made by M/s Zhao Trading (Pvt) Ltd, upon getting clearance from the Monetary Board to the Central Bank , Treasury and the Attorney General (AG) on terms and conditions acceptable to the GoSL in keeping with the provisions of Sections 41.42 of the CEB Act No. 12 of 1969.
(ii) To authorise the Treasury to secure such loan by issuance of a Government Guarantee as required under Section 42 of CEB Act No. 17 of 1969.
(iii) To authorise the CEB for issuance of Electricity Stocks (Bonds) to the value of US$ 260 million.
Cabinet of ministers, having considered the views of the Central Bank and the observation of Finance and Planning Minister, agreed that the proposal contained in my aforesaid cabinet memorandum, should be further studied in the light of the observations and comments made and thereafter, come back to the cabinet, depending on the outcome of those studies.
In the meantime, another proposal was submitted by The North Face Ltd, Suite 41/42, Victoria House, 26 Main Street, Gibraltar, for a long term loan of US$ 500 Million at 2% simple interest per annum, payable at the end of five years along with the capital. This proposal was, initially, scrutinised by the Bank of Ceylon and they have agreed to participate in the evaluation. Therefore, members of the CEB have decided to recommend to the GoSL, to appoint a technical evaluation team comprising the following:
* Member from the Board of Management of CEB
* Member from the Central Bank of Sri Lanka
* Member from the Bank of Ceylon
* Member from the General Treasury
* Member from the CEB
In order to overcome the existing financial crisis of the CEB, backup finances are required by the CEB to enable it to tide over the present impasse i.e. to settle short-term debts to the People’s Bank, Ceylon Petroleum Corporation and other independent power producers.
In the circumstances mentioned in my original cabinet memorandum dated 23.02.2007, I am in agreement with the above Board decision of the CEB, and recommend following course of action for the approval of the cabinet of ministers.
(i) To appoint a Technical Evaluation Team comprising the personnel mentioned above, to evaluate the offer of US$ 500 million by The North Face Ltd, Gibraltar.
(ii) Upon being satisfied with the feasibility, authorise the CEB to proceed with further action in consultation with the Treasury, Central Bank and the AG on terms and conditions acceptable to the GoSL, in keeping with the provision of sections 41 and 42 of the CEB Act No. 17 of 1969.
(iii) To authorise the Treasury to secure loan by issuance of a Government Guarantee as required under Section 42 of CEB Act No. 17 0f 1969, to read in conjunction with the provision of Foreign Loans Act No. 29 of 1957.
(iv) To authorise the CEB for issuance of Electricity Stocks (Bonds) to the value of US$ 500 million, under the provision of CEB Act No. 17 of 1969.

W.D.J. Seneviratne
Power and Energy Minister
493, T.B. Jayah Mawatha,
Colombo 10
September 12, 2007

****

Letter sent by The North Face Ltd

The North Face Limited
Suite 41/42, Victoria House, 26 Main Street. Gibraltar
September 14, 2007
Our ref: Zh/NF-09
Mr. Rohan Fernando
Eptron Enterprises Limited
Tefen
Israel

Dear Sir,
Ref: Loan Facility Request for US$ 1 billion for Projects/Eptron Enterprises Ltd - Israel
With reference to many communications we have had over the past one week, we are pleased to offer you a loan facility from M/s. Zhong Qi Shi Mao (China) Investment Company.
We, The North Face Ltd, have been authorised to negotiate and sign the relevant contracts pertaining to this offer, and once negotiations are complete, the proof of loan facility will be made available to the authorised party at the Treasury/Finance Ministry of Sri Lanka.
The terms of the loan are as follows:
Loan amount: US$ 1,000,000,000.00
Repayment period: 10 years
Interest: 2.5% per annum (simple) payable annually
Security: Sovereign Bank Guarantee issued by the Central Bank of Sri Lanka for US$ 1 billion, initially valid for 13 months renewable yearly thereafter for the full term of 10 years and one month.
Projects: All projects relative to the loan facility should be submitted at the time of negotiation and disbursement will be made according to the following schedule:
a) US$ 750 million for projects to be carried out by Eptron Enterprises
b) US$ 250 million for projects to be carried out by the government
US$ 1 billion will be treated as one facility with projects in place. Eptron Enterprises to submit reports on a monthly basis for projects including the government project.
Payment: US$ 200 million within 30 days from issuance of Bank Guarantee, followed by payments of US$ 200 million at the end of 30 days from first payment date, until full facility is disbursed with progress reports submitted at monthly intervals.
Terms: The Central Bank of Sri Lanka must issue a letter confirming title issuance of the Sovereign Bank Guarantee upon acceptance of ‘this offer and once negotiations are complete, to M/s Zhong Qi Shi Mac (China) Investment Company, who will show proof of funding through one of the top 25 world banks upon verification of the Central Bank letter. The bank coordinates for verification will be given to the Central Bank for bank to bank verification.
An invitation for the negotiation of the loan facility should be sent by the government’s authorized official to The North Face Ltd by letter/fax or email. A representative of Eptron Enterprises Ltd should be present during these discussions.
Validity: September 20, 2007.
All agreements must be completed by September 27, 2007 and security issued on completion of all formalities.
Respectfully yours,
For and on behalf of The North Face Limited
A.N.C. Waas, Director
Copy: Zhong OJ Shi Mac (China) Investment Company

****

Lender’s authorisation to The North Face Ltd

The North Face Limited,
Gibraltar
Attn: Mr. A.N.C. Waas/Director
To whom it may concern
We, Zhong Qi Shi Mao (China) Investments Company, hereby duly authorise The North Face Ltd and, or Mr. A.N.C. Waas, to negotiate and sign agreements pertaining to the offer presented to M/s. Eptron Enterprises Ltd by The North Face Ltd, dated September 14, 2007.
Before successful negotiation and reaching agreement with the GoSL, the Central Bank of Sri Lanka must issue a letter to Zhong Qi Shi Mao (China) Investments Company that they are ready to issue a Sovereign Bank Guarantee in … (this part of the letter unintelligible) … verify its authenticity, upon which, we will issue our … to the Central Bank of Sri Lanka for verification of the funding through banks. Arrangements related to this loan offer must be carried out through The North Face Ltd, its officers and directors, who are fully authorised by us.
Yours faithfully,
Huang Al Fen
Director
Zhong Qi Shi Mao (China) Investments Company

****

Central Bank’s note to cabinet

Procurement of Loan of US$ 500 million by the CEB

Background
The cabinet of ministers, at the meeting held on September 19, 2007, decided to obtain a report from the Central Bank Governor on a loan of US$ 500 million arranged by The North Face Ltd. to the CEB. According to the cabinet note (memo No. 54/2007/PE) submitted by the Hon. Minister of Power and Energy, the purpose of the loan is to overcome the existing liquidity crisis of the CEB, by settling short-term debts to banks and independent power producers.

The financing proposal
According to the cabinet note, a proposal has been received from The North Face Ltd. with their registered office in Gibraltar, offering a loan of US$ 500 million to the CEB, at an interest rate of 2%, per annum repayable at the end of fifth year in one bullet payment.

Observations
Although the terms and conditions of the loan proposal look very favourable, the entire proposal needs to be scrutinised carefully, as the loan proposal has been submitted by an unknown entity. Upon verification, it was revealed that The North Face Ltd. will act as an agent for WCMIHIL of Hong Kong and M/S Zhong Qi Shi Mao (China) Investments Company of Kowloon, Hong Kong and is fully authorised to negotiate and enter into any agreements on behalf of the Principal with respect to financing of GoSL projects, including the US$ 500 million loan proposal to the CEB.

Also, it is learnt that the loan offered to the CEB, is a part of the overall US$ 1 billion financing proposal submitted by The North Face Ltd. to GoSL projects. According to the overall financing proposal, which was referred for Central Bank’s observations (Ref. BE/ISRAEL/01), The North Face Ltd. will arrange financing from the WCMIHIL of Hong Kong and M/S Zhong Qi Shi Mao (China) Investments Company of Kowloon, Hong Kong. The US$ 1 billion loan carries an annual interest rate of 2.5% and has a maturity period of 10 years. The repayment will be in one bullet payment or as agreed at the negotiations. The proposed loan carries no arrangement fee or any other charges. A Sovereign Bank Guarantee issued by the Central Bank of Sri Lanka for the full amount of the loan, is mandatory for the arrangement of loan.

According to available information, M/s Zhong Qi Shi Mao (China) Investments Company is an associate company of WCMIHIL, and the holding company’s paid-up share capital is merely Hong Kong dollars 10,000. The main business activities of the associate and holding companies is mainly centred in the Chinese mainland. The paid-up share capital of the authorised agent, The North Face Ltd in Gibraltar, is Sterling Pounds 2,000 and equally owned by two businessmen, namely M/s C.N.C. Waas of Colombo 6 and J. Danyluk of Ontario.

It is doubtful that The North Face Ltd. or its Principal could mobilise US$ 1 billion at an interest rate of 2.5% per annum, considering the prevailing LIBOR rate of over 5% and the financial strength of the principal. Therefore, the CEB or Ministry of Power and Energy may request more information on these Companies, including; (a) audited accounts for last three years, (b) credit report from M/s Zhong Qi Shi Mao (China) Investments Company of Kowloon, Hong Kong, (c) credit report from WCMIHIL of Hong Kong, (d) credit report from The North Face Ltd, Gibraltar and (e) a detailed list of similar fund arrangements made by these Companies, etc. in advance to establish the genuineness of the loan proposal.

The Governor, by his letter dated January 30, 2007, already advised Ministries and Government Institutions of the undesirability and risks involved in unsolicited financing proposals. A major feature of these offers was the requirement for unconditional government guarantees for the entire loan amount, even before the loan is disbursed. The Central Bank of Sri Lanka has cautioned the authorities not to issue such guarantees, as there is a grave risk that those parties could raise loans against such guarantees and get away with the money raised, thereby making the government liable for the guaranteed amount. Such guarantees also pave the way for these entities to engage in money laundering at the courtesy of the government. Please find enclosed herewith a copy of the letter sent by the Governor, Central Bank of Sri Lanka , to all secretaries of ministries and provincial councils, chairmen of corporations/government boards and all banks, highlighting the dangers of these types of loan offers.

Recommendations
It is recommended that no further action be taken to proceed with this proposal, as it is not a genuine proposal.

****

Letter issued by Central Bank Governor

January 30, 2007
To: All Secretaries of Ministries
All Secretaries of Provincial Councils
All Chairmen of Corporations/Government Boards
All Chairmen/CEOs of Licensed Commercial Banks and Licensed Specialised Banks
Dear Sir / Madam,
Proposals for Foreign Loans and Grants Based on Government Guarantees
Since of late, the Central Bank has noted lavish funding proposals being offered to several government institutions from various foreign organisations, sometimes operating through Sri Lankan counterparts.
The general features of such proposals have been: a) offering of a very high amount as a loan at low interest rate or as a grant, and
b) subjecting such offers to receiving a Sri Lankan Government, or an Institutional or a Bank guarantee.
Among the proposals that have been referred to us recently have been:
a) An offer of a loan of US$ 1 billion to finance crude oil and petroleum products from a firm said to be based in Kyrgyzstan
b) An offer of a grant of US$ 500 million submitted by a local organisation said to be on behalf of an Italian organisation
c) An offer of a loan of US$ 1.5 billion from an organisation said to be from Switzerland
d) An offer of a loan of £500 million from a person said to be affiliated to an organisation in the UK
It is our view that if a Sri Lankan Government ministry or an organisation were to offer a bank guarantee, or any other collateral as requested, it may perhaps be used to raise funds abroad from various illegal sources, including funds connected to terrorist financing and/or money laundering.
We also believe that it is very unlikely that any person could expect to receive these types of promised foreign loans or grants on the terms as mentioned. Hence, we would urge you to be alert to such offers and forward, any such offers you may receive to the Central Bank for our evaluation and advice, before you proceed with such offers.
You may contact Assistant Governor, K.G.D.D. Dheerasinghe (Tel. 2477649) if you need any further information or clarification.

Yours sincerely,
Ajith Nivard Cabraal
Governor
Central Bank of Sri Lanka
Copies to: Secretary, H.E. the President, Lalith Weeratunga
Secretary, Hon. Prime Minister, Mahinda Bandusena
Secretary, Ministry or Finance, Dr. P.B. Jayasundera

****

Observation request made by Finance Ministry

Director
Economic Research
Central Bank of Sri Lanka
September 3, 2007

Loan facility of US$ 1 billion to the Sri Lankan Government for projects
The Zhong Qi Shi Mao (China) Investments Company offers a loan facility of US$ 1 billion to the GoSL for implementation projects. The North Face Ltd has been authorised to negotiate with the GoSL in this regard.
We shall be grateful if you could send observations on the terms and conditions of the above proposed loan facilities which are attached herewith.
Your kind cooperation in this regard is greatly appreciated.

A. Kumarasiri
Director/Bilateral East
for DG/ERD
External Resources Department, Finance and Planning Ministry

****