Hand-in-Hand Trust and the Brassingtons – Conclusion

Today’s column completes a three-part article looking into the operations of this non-bank, deposit-taking financial institution as well as its murky relationship with the brother of a related party. Neither the company nor Mr Winston Brassington has responded to the claim by this column that by virtue of NICIL’s 10% shareholding in the Hand-in-Hand Trust (HIHT/the company) Winston and his brother Jonathan are guilty of using insider information in a substantial share transaction with the company.

It is instructive that all of this has surfaced even as we hear from the US that Rajat Gupta, who reached the pinnacle of corporate America was this week convicted of leaking inside information to his friend hedge-fund manager billionaire Raj Rajaratnam, who is himself serving an 11-year jail term for using insider information. Of course, as we say, this is Guyana where suspected corporate wrongdoings go uninvestigated, let alone prosecuted as we have seen in Globe Trust, Clico, NICIL and others.

In this concluding part I turn attention to the annual report and audited financial statements of the company Hand-in-Hand Trust Corporation Inc for the years 2007-2011. Here is a summary of the income statement extracted from the audited financial statements.

Over the five years the company’s after tax losses amount to $650 million of which $1,179 million arose from losses on investments, mainly in Stanford Investment Bank and to a lesser extent, Smith Barney, the US brokerage and investment banking house. In fact if a questionable gain on disposal to its parent of its only long-term asset is discounted, the losses incurred by the company over the period would be an astounding $900 million. Whoever decided on the Stanford investment has imposed on the company and by extension the insurance company with a huge loss overhang. Indeed had it not been for the very convenient sale and lease back of its office property, the company would have recorded a pre-tax loss of $158 million in 2011.

There are two reasons for considering the gain questionable: one accounting and the other law. The company entered into a sale and lease back agreement with its majority shareholder of its Middle Street premises. Ignoring relevant accounting standards, the company has failed to disclose the terms of that agreement and dismissed my own query to them for particulars of the transaction.

The balance of probability is that this transaction constitutes a finance lease and accordingly, the gain on disposal ought to have been deferred and recognised over the life of the lease. Recognising the $264 million gain therefore appears improper or aggressive revenue recognition and may have been entered into as a device to improve the company’s capital base for purposes of the FIA.

The legal reason is whether or not the company should have sought shareholders’ approval of the transaction under section 140 of the Companies Act which requires both a quantitative as well as a qualitative test for determining whether or not section 140 applies. With Hand-in-Hand Trust and its parent the Hand-in-Hand group sharing a common CEO – Keith Evelyn – the transaction without approval of the minority shareholders, is less than wholesome.

Other income comprises mainly fees charged for the seven pension plans with a combined balance of $14.9 billion at December 31, 2011, mortgage fees and management fees. On the expenditure side, the company has managed its expenditure well with a 21% increase between 2011 and 2007. There was a spike in the 2009 expenses because the financial statements were for an 18-month period, a change not mentioned in the directors’ 2009 report.

The company’s accounts show regular recoveries of doubtful debts and reversal of diminution in value of properties which have mitigated the other substantial losses incurred by the company.

The practice among companies paying comparatively larger sums to its key management personnel is evident with HIHT which paid an average in excess of $1.2 million per month to this group, estimated at more than eight times the average of the rest of the staff. Perhaps more significantly is the 8% per annum interest rate which the company charges its staff.

The financial statements do not indicate the actual rate of interest charged on a director’s (sic) mortgage which at December 31 was a whopping $95.9 million compared with staff mortgages of $7.0 million. According to the notes, “[T]he rates of interest and charges have been similar to transactions involving third parties in the ordinary course of business.”

Balance sheet
The balance sheet too raises some concerns in addition to the treatment of the sale and lease back arrangement. One person very familiar with the measurement of capital adequacy has expressed some scepticism about the company’s computation of the Tier 1 capital adequacy which the accounts claim stood at 31% at December 31, 2011 and total tier 1 and tier 2 capital of 35% and the comparative 14% in 2010. What is certain is that a significant part of an increase would be attributable to the sale of the building which released hundreds of millions in capital reserves. A realised gain is obviously more valuable than one that is unrealised.

Nor do I think that the amount of $778.0 million shown as Term Deposits is properly described since a significant portion of this relates to recoveries in CLICO Trinidad, but which are in the form of bonds maturing several years hence. The related parties balance is a sum receivable from the company’s parent for the sale of the building.

Other risks in the balance sheet include some of the investments in which there has either been a judgment or the filing of legal action. These can result in some losses to the company. On the other hand, if the stock market in the US does improve then some of the Smith Barney losses will be reversed, creating a gain.

The company’s non-accrual loans to total loans has declined from 28.8% in 2007 to 5.2% in 2011, allowing the company to reduce its loan loss provision from 8.4% to 1.5%. That percentage is as good as most other financial business in the country. As Darren Sammy would say, that is a good thing to take into 2012. Deposits have declined from $7,206 million at June 2008 to $5,708 million at December 31, 2011, a decline in excess of 21%. The company also saw the number of pension schemes under management reduced by one during the period.

I must also comment again on the issuing of preference shares and their redemption within one month of the balance sheet date. As noted last week, there is some doubt whether the redemption met the statutory requirements.

In mortgages, the company competes with the New Building Society which enjoys tax exempt status, and the larger financial houses with a far greater income base over which to spread their expenditure. For its trust business to succeed, it will have to attract what are called high net worth individuals. In this regard, its main competitor is probably Trust Company Guyana Limited which has the benefit of being a member of the DDL group which includes two public companies, of which one is a successful bank.

There also seems to be a lot of room for improvement in ethical and governance conduct at the senior level. It was dismissive if not insincere in its response to my written questions while itself having been treated very kindly by the regulator which has not been known for strict insistence on accounting and reporting. Even as the company seeks to expand its income base by entering the lending business, it needs to consider its risk profile and to learn from its Stanford experiences from which it still has not recovered. And at a wider level, the company must be hoping that the high real estate prices can be sustained.

The company faces a challenging future.

Hand-in-Hand Trust and the Brassingtons – Part 2

Notwithstanding the caption of this article, the first part in last week’s Business Page dealt not with the Hand-in-Hand Trust Corporation Inc (HIHT/the company) but with Winston Brassington and his brother who Winston boasted had saved HIHT from the fate of Clico. I explained then that instead of using any speculative language with potentially adverse consequences to the company I would write the company for specific information and/or clarification on the company’s financial statements, the impact of its investment in Stanford Investment Bank, the directors’ efforts to rebuild the company’s capital base and its relationship with the Brassingtons.

Following receipt of my list of twenty-one questions, Mr Hewley Nelson, the company’s Managing Director and its finance officer visited me to give some explanations on the financial statements which are audited by Maurice Solomon & Co. Mr Nelson was as helpful as he could be, clarifying some of the disclosures in the financial statements and conceding that the notes to the financial statements could have been more explicit. I was told that persons “higher-up” would address me on the several other issues raised in my correspondence.

In the circumstances, I was optimistic about a factual and candid response from a company whose very survival depends on its own transparency and the public trust. Unfortunately the response communicated to me was disappointing. So be it. At the appropriate points in this column I will refer to the partial exchange which took place.

Jonathan Brassington
Let us start with the Brassingtons and the 2,250,000 shares issued to Jonathan Brassington in 2009. The general law and practice regarding the issue of new shares is to offer them first proportionately to existing shareholders so that the balance of control is unaffected by new issues. If this rule of pre-emptive right was followed, the offer of the shares would have had to be made to Hand-in-Hand Insurance group (90%) and NICIL (10%), leaving no place for Jonathan – or indeed anyone else – unless some shareholder(s) had passed up on the offer. To ascertain this, I asked the following questions:

Do the articles of Hand-in-Hand Trust Corporation Inc (Company) provide for pre-emptive rights on the issue of new shares?

How many shares were offered to the Hand-in-Hand group for the 2009 issue?

Was a prospectus or information package issued for the 2009 share issue? If yes, can I be provided with a copy?

How was the company informed that a Mr Jonathan Brassington might be interested in taking up shares in the company?

Was Mr Jonathan Brassington permitted to carry out a due diligence prior to his application and who carried this out on his behalf?

The company’s response – signed by someone who is certainly not among the higher-ups – that “All our shareholders were examined and approved by the Bank of Guyana” matches Dan Brown’s Da Vinci Code for mystery, complexity and improbability. I consider it perfectly proper to conclude that the company is willing to conceal the details of its transaction with the Brassingtons which many find improper and unlawful. That does so little to help strengthen the company’s reputation for integrity when under pressure. Or indeed for that matter of the Bank of Guyana which had not previously distinguished itself in its supervision of Globe Trust and Clico.

Hoops of circumvention
Readers and the public have a much better memory and sense of integrity than they are often credited with. They will recall how Mr Keith Evelyn, group CEO of the Hand-in-Hand Group including HIHT, took the country through a series of meandering hoops of circumvention after the news broke about the company’s investment in Stanford Investment Bank (SIB). Here is the sequence to which I add my comments.

On February 21, 2009, Mr Evelyn confirmed that the Trust Corporation had investments in Stanford International Bank (SIB) but said that “they are not substantial … and efforts are being taken to safeguard against possible losses.”

Four days later President Jagdeo publicly revealed that HIHT’s exposure to the Stanford group amounted to $827 million (US$4 million) and another to $297 million (US$1.5 million) invested on behalf of pension funds. As CEO of the group Mr Evelyn’s description of the investment as “not substantial” cannot be dismissed as ignorance on his part. Even the understandable motive to prevent any run on HIHT, a deposit taking financial institution, ought not to justify the misrepresentation contained in Mr Evelyn’s February 21 statement.

At that point the quantum and impact had been set straight, or partially so, by Mr Jagdeo – who himself understated the significance of the loss to HIHT by an inappropriate reference to its total assets and his description of the institution as having a “capital adequacy ratio of 26.9 per cent as at the end of January 2009.” But clearly not straight enough for Mr Evelyn who one week later announced that even in the possibility only of HIHT losing its investment in Stanford, it would remain a stable and safe institution. Yet, in the same statement about HIHT’s strength, Mr Evelyn announced that the Hand-in-Hand Group of Companies had submitted for the Bank of Guyana’s approval a plan to “restore HIHT’s capital adequacy.”

Neither Mr Jagdeo nor Mr Evelyn has ever explained why it was necessary to restore something that was never less than strong, that was above the industry average and above statutory requirement. Characteristically, Mr Evelyn announced that since approval might “take any time between two weeks to three months” the restoration plan could not be released to the public. It actually took the Brassingtons’ deal to bring some sunlight to the whole episode.

Poor standards
Then finally, two days later, unable to hold the fort weakened by damning information available to the world but only belatedly acknowledged by HIHT, Mr Evelyn announced in Stabroek Business that the investment in Stanford was “a loss and we’ll have to record it as a loss, that is what any prudent institution would do.” Had the institution recognised the need for such prudence and transparency earlier, maybe we would have been spared the loss of more than US$5 million.

The institution has clearly recovered from the imminent dangers it faced post-Stanford. But it seems not to have overcome the institutional and national culture of secrecy and evasion so pervasive in the corporate world. Here was a unique opportunity for the directors, including Chartered Accountant Paul Chan-a-Sue, Dr Ian McDonald, banker Alan Parris, Charles Quintin and Mr Timothy Jonas of de Caires, Fitzpatrick & Karran to let Mr Evelyn and his management team know that the HIHT was moving on to higher ground – ground on which is imposed on directors a statutory fiduciary duty to act honestly and in good faith with a view to the best interest of the company and a general duty of care to others, including in this case depositors. That specifically with respect to financial institutions, there is a fit and proper test that directors should meet. Mr Evelyn’s conduct appears to have fallen below those standards and the directors should have long since confronted this issue. Instead, they follow his lead refusing to give direct answers to questions on matters of public and depositors’ interest.

With the silence of the Bank of Guyana and non-interest by the Financial Intelligence Unit (the anti-money laundering agency) or the Registrar of Companies which has the power under section 506 of the Companies Act to apply to the court for an investigation order in respect of the shareholding in any company, the matter of the Brassingtons would appear to be closed to the public. In the case of the Bank of Guyana, the HIHT’s directors claim that the company’s shareholders “were examined and approved” by the central bank.

The lesson from the Brassingtons
We are unlikely ever to know whether HIHT’s parent company refused to take up the new shares in HIHT, whether a prospectus or issue memorandum was issued by HIHT for the 2009 share issue, whether Brassington, Evelyn or other directors approached Jonathan Brassington, and who carried out the due diligence on Jonathan’s behalf before he undertook his only public investment in Guyana. Their answer also puts a lid on the identity of the two pension funds which lost some $297 million of their funds under HIHT’s management. No doubt no one will ever be held responsible.

But before leaving the Brassingtons, just a brief comment on Winston’s claim that his brother rescued HIHT from a Clico-type collapse. The actual increase in the share capital was $500 million of which the Hand-in-Hand Group contributed $270 million, Jonathan Brassington $225 million and NICIL $5 million. This means that the HIHT group gave up a chance to take up $180 million of the new shares while NICIL gave up their right to take up $45 million – those shares were all taken up by Jonathan. Winston Brassington’s assertion that Jonathan saved HIHT can only be correct if no one else, including the HIHT group or NICIL was not prepared to take up any of those shares and if those shares were crucial to the restoration of the company’s capital base. That too we will never know, nor why the Bank of Guyana had not taken steps to suspend the licence of the company when the Stanford investment wiped out its capital base.

The number of shares available for take up by the shareholders, the amounts given up and the impact on capital is shown in the following table:

Another issue about shares
On August 24, 2011 the company had another share issue; this time in the form of 150 million preference shares approved by a resolution of the company to which are inscribed the signatures of Marcia Nadir-Sharma on behalf of NICIL and Winston Brassington on behalf of his brother. While these are only $1 shares, the proceeds did make the 2011 balance sheet look even stronger, adding another $150 million in stated capital.

While any concern about window-dressing could not be supported by available facts, the company’s failure to mention the redemption in a note to the 2011 financial statements as a post-balance sheet event, does not help the company. Indeed, that failure is compounded by another failure to make any reference to this 2011 share issue in the section Background on page 1 of the 2011 Annual Report which ends abruptly with the 2009 share issue.

The law requires that preference shares can only be redeemed out of a fresh issue of shares for the purpose of the redemption, or out of profits available for distribution. At December 31, 2011 the company had accumulated losses of $171M and there is no information that suggests that there was a fresh issue of shares to finance the redemption.

To be continued

Note: Ram & McRae acted as advisor to the Privatisation Unit on the privatisation of the GNCB Trust in 2002. The issues raised in this column all relate to events which took place at least seven years after that engagement came to an end, and are all matters in the public domain.

Hand-in-Hand Trust and the Brassingtons – Part 1

I intended to start today a two-part column on the recent disclosures on Hand-in-Hand Trust Corporation Inc. I wanted to evaluate the annual reports of the company and do an examination of the role played or not played by Mr Winston Brassington and his brother Jonathan Brassington in what the first Brassington described as “saving the company from going down the Clico road.” Ideally I would have preferred to consider the company’s financial position prior to its becoming another victim of Allen Stanford’s high profile Ponzi scheme, its performance since then and its current financial position, before addressing the role of the Brassingtons.

I am in possession of the company’s 2011 annual return, report and audited financial statements which I think raise some serious questions which in the interest of the public and more specifically of depositors of money in HIHT need to be answered. But aware that too many unanswered questions about a financial business can have serious consequences, including the loss of confidence in the institution, I will seek first some clarification from the company before commenting on the company’s performance and condition. Of course I am not unaware of the reluctance of the company and especially its point man Mr Keith Evelyn to avoid the press when things are not going well. On this occasion, such an approach is foolhardy and counterproductive and must be discouraged by the board chaired by the more enlightened Paul Chan-a-Sue.

Winston’s rescue
The board must surely recognise that Winston Brassington’s famous rescue statement was intended not to defend the Hand-in-Hand Trust but solely to counter strong public suspicions that he had misused information acquired in his official capacity for the benefit of his brother. In fact, what he did say amounts to an indictment of the Bank of Guyana as financial sector regulator, as well as the standards of governance in HIHT of which one of the country’s oldest insurance companies is a controlling shareholder.

That $225 million can save a company which was a victim of one of the region’s most high profile Ponzi schemes suggests either that there was in fact no real problem in the first place – an unlikely proposition given that the company’s equity base had been completely wiped out – or that the rescue was not as solid or deep. If the latter is the case, then the company’s financial problems and its damaged capital base might merely have been deferred rather than solved.

In a long interview given to the Stabroek News Mr Brassington side-stepped the question of whether his brother Jonathan Brassington benefited from insider information before investing in HIH Trust by stating that he had done nothing illegal or unethical. Adding that the government company of which he Winston is head, had ceased to be represented on HIHT’s board from 2002 onwards, he disclosed that he and his entity “only had access to information which a normal shareholder would have access to – annual reports.” For good measure, Winston added that “the financial institution’s business is confidential other than what is in the financial statements.”

Memory lapse
In this matter, Mr Winston Brassington either suffered a critical memory lapse or is simply dissembling. Any increase in a company’s share capital requires an amendment to the company’s articles by way of a resolution passed at a shareholders’ meeting. This has nothing to do with the company’s annual report. As the representative of the government’s 10% shareholding in the company, Mr Winston Brassington would have received a notice of the meeting and a copy of the proposed resolution to increase the company’s share capital.

Mr Brassington is also reported as saying that he had sought to clear his action by writing to the Minister of Legal Affairs and Attorney General and to the Minister of Finance. He said that both of them had responded that they found no conflict of interest in his brother taking up shares in the company. Again, Mr Brassington might wish to reflect on the fact that conflict of interest is not how honest one might think one is, but whether there is in the mind of the ordinary person the perception of a conflict. The fact that Mr Brassington sought out what he might have considered independent opinion suggests that even in his own mind there was a perception of a conflict.


To ensure maximum fairness to Mr Brassington, early last week I sent to him the following email:

Dear Winston,

I propose writing on Hand-in-Hand Trust this weekend and would be grateful if you would provide me with a response to the following:

1. a) Did Jonathan learn that HIHT was looking for investor(s) by way of any public announcement by HIHT?

b) If the answer to a) is no, did you approach him and if so in what capacity?

c) Does Jonathan have any other major investment (over $25 million) in Guyana?

2. Did you play any role in Jonathan’s due diligence investigation in HIHT? (This does not mean that there would be a conflict.).

3. Do you hold a power of attorney for Jonathan in respect of his shares in HIHT?

4. Did the Attorney General and Dr. Ashni Singh provide you with written responses to your request for advice on whether or not there was or was likely to be a conflict of interest?

Thanks and I am again extending an invitation to you to come on Plain Talk.

Christopher Ram

To which Mr Brassington responded as follows:


I have already responded to many of the relevant issues on this matter.



Insider information
More developed markets and economies have been grappling with the phenomenon of insider dealing for decades. These almost invariably deal with the use of information by “insiders” a term generally defined to mean directors and officers but which in some cases includes a 10% shareholder as NICIL is in Hand-in-Hand Trust. The rationale here is that of the fiduciary obligation imposed by law on those in a position of trust, an obligation owed in any case to the company and not to any shareholder or member of the public.

Guyana’s general laws on the use of insider information are not well developed and any progress appears to have ceased with the Securities Industry Act 1998. The 1991 Companies Act was an improvement over the Companies Act it replaced, but as far as insider trading goes, it deals with the concept only in respect of narrowly defined transactions and persons. The Financial Institutions Act and the Securities Industry Act are both limited in their scope and only to companies within the ambit of those two Acts. The FIA’s provisions deal with conflicts of interest involving directors and officers and the disclosure of customer information, while the SIA defines “insider” to include a person (an outsider) who is informed of a material confidential fact by an insider.

This is not unlike the UK Criminal Justice Act 1993 which creates a distinction between a primary insider (a person who has direct knowledge of inside information) and a secondary insider (a person who learns inside information from an inside source). Under this definition, Winston Brassington would clearly be, at the very least, a secondary insider, except that the SIA deals only with a certain kind of company.

Wrong advice
But even applying private laws as Dr Luncheon (“NICIL is a private company”) and Mr Brassington (“I did nothing illegal”) seek to do, Mr Brassington may in fact be considered an insider. The general perception is that he made use of confidential information (an offer) which was not available to members of the public.

More relevantly, the persons who are reported to have supported or defended Mr Brassington including two Attorneys General, a Finance Minister and a medical doctor fail to recognise that his conduct has to be judged against the specific circumstances involving a public officer and a state company in which matters like conflicts of duties and duties are as likely to arise as those of conflicts of interest and duties in a private sector setting, which the Companies Act addresses. It would be unfair to expect Dr Luncheon and possibly Dr Singh to know that the framers of our Companies Act had explicitly rejected the Companies Act as the medium under which government companies should operate. That concession is certainly not available to any Attorney General.

A different dimension
But it suits their purpose to look at these general laws rather than whether Mr Brassington’s role was tantamount to misconduct in public office, which is a common law offence. Few would ascribe to the Guyana Police Force any capacity to recognise any breach of the Companies Act let alone pursue such a complex matter of misconduct in public office which seems relevant to this issue. Nor would they be able to count on the office of the Director of Public Prosecutions which appears to suffer from a crisis of confidence about its ability and capacity. In any case, the Attorney General Mr Anil Nandlall has already pronounced, gratuitously and wrongly in my view, that there is no conflict of interest.

It ought not to come as a surprise to Mr Brassington’s assurers that a recent West Indian book, Corruption: Law, Governance and Ethics in the Commonwealth Caribbean written by Derrick V McKoy, a former Jamaican Contractor General deals extensively with the question of such misconduct. What I found surprising is that in the nascent Caribbean jurisprudence, there is already a useful body of case law on the subject.

As the Ombudsman of Victoria Australia wrote in a paper recently sent to me, he finds particularly troubling the widespread, mistaken belief that a conflict of interest is not of concern if there is no actual wrongdoing. He noted that the ‘perception’ of a conflict of interest – even when the conduct of a public officer is nothing short of exemplary – is as damaging to public trust as any misconduct.

The Guyana State Corporation of yesteryear has effectively been replaced with nothing. There is a vacuum in the governance of state-owned companies particularly in key organisations where ministers and their surrogates play a dominant role. Mr Bharrat Jagdeo has left a legacy of weak, corrupt or no governance. Things will get worse, particularly as the state increases its participation in the economy. The deafening silence of regulators in the face of calamitous developments in Globe Trust and Clico will almost certainly guarantee that they are not the last of the country’s financial failures.

We need to have rules of governance of state-owned or controlled enterprises. The head of one state body should never be placed in a position where he or a family member has to use their personal resources to save a regulated financial business as the Brassingtons claim to have done. The OECD has published a model Governance of State-owned Enterprises which we may find helpful. Let us use it.

Next week I will review the annual reports of Hand-in-Hand Trust Corporation Inc.

Note: Ram & McRae acted as advisor to the Privatisation Unit on the privatisation of the GNCB Trust in 2002. The issues raised in this column all relate to events which took place at least seven years after that engagement came to an end and are all matters in the public domain.

On the Line:National Insurance Scheme Annual Report 2007

The column on March 29, 2009 featured the National Insurance Scheme (NIS) along with the New Building Society in a supporting role to Clico Guyana in which the NIS stands to lose several billions of dollars worth of investments. Today’s column is entirely on the NIS and specifically its Annual Report for 2007 which recently became available, well outside the statutory deadline, a recurring feature of just about every public body. Yet, the 120-page report is a rich minefield of statistical, demographic and economic information of potential importance and relevance to those engaged in policy formulation.

Some of the data seem inconsistent with the statistics provided by the Finance Minister in his 2008 Budget presentation, particularly as they relate to sectoral growth and labour participation. I will refer to some of those apparent inconsistencies later but now offer a review of the operating performance of the scheme for the year and compare it with the preceding three years.

Source: NIS Annual Reports 2004-2007

Before discussing these numbers we need to be clear: Dr Roger Luncheon who has been Chairman of the Board since 1992 is incorrect in stating that the audited statements prove that the NIS is sound. The soundness of an entity, such as the NIS, that provides long-term benefits is determined, not by the auditors but by an actuarial examination which, using a range of data and assumptions, projects into the future. In fact the auditors draw specific attention to the report by the actuaries while the financial statements devote a full two pages to the recommendations of the actuary. Those, like the recommendations for the 2001 examination, are still being “reviewed” by the directors. Among the actuary’s many recommendations is the immediate need to address a shortfall of 7.1% in the contribution rate − hardly a sign of financial soundness. The problem for Dr Luncheon is that he seems unable to distinguish when he should speak as a politician, or as a director with fiduciary obligations or as a key policymaker responsible for oversight.

Income over the period 2004 to 2007 has increased by 24.6% while expenditure has increased by 38.4%. Expressed another way expenditure as a percentage of income has moved within the short period of three years from 80.7% to 89.5%, a significant increase indeed. On the other hand, the composition of expenditure between Benefits and Administrative Costs has remained − as the Table shows − extremely constant. The significance and danger of the increase is best seen when compared with say the average of the five years 1997 to 2001 when it was below 60%. The warnings to the decision-makers about the growth of expenditure relative to income are not new and have been as consistently made as they have been consistently ignored.

With over 80% of its expenditure being in long-term benefits, the scheme should be concerned primarily about its actuarial viability which automatically takes care of its financial soundness, to use Dr Luncheon’s word. But to make up for the unwillingness of the government to raise the rates of contributions to levels that would meet actuarial sustainability, the scheme has become involved in investments that could seriously undermine both its actuarial and financial viability.

The 2006 Actuarial Report projected that total expenditure would, in 2014, exceed total income for the first time in the scheme’s forty years and unless contribution rates are increased the scheme’s reserves would be exhausted by 2022. With the (temporary?) loss of its capital and income in Clico investments and the inaction of the government and the board, including in addition to Dr Luncheon, PPP/C fixtures like trade unionist Komal Chand and Chitraykha Dass, it is possible that the actuary’s fears about expenditure exceeding income may happen sooner rather than later.

Blame the employers
Much of the problems of the Scheme are attributed to delinquent employers not paying over their contributions. As the logic goes the scheme would have been able to invest those monies and earn investment income. However there is nothing to indicate that investments are managed any better than contributions. According to Dr Luncheon the scheme’s investments are made based on a Prudential Investment Progamme which was “baptised by cabinet.” It is therefore surprising that the President recently criticized investments made under that programme when he is the head of the cabinet.

Dr Luncheon correctly states that the law governs the NIS and its investments (particularly those outside government paper) but does not recognise or acknowledge that the report and recommendations underlying that programme did not once mention the restrictions which the law places on the type of investments which the scheme can make.

There is increasing evidence that many of the scheme’s investments are not authorised by law and are not as profitable as they may appear. We will look more closely at the question of the investments under Balance Sheet but with respect to investment income, while $1.492B appears in the income statement, some $790M is shown as investment income receivable. The level was likely to be the same when Clico was put under judicial management and there is still uncertainty as to whether the government would cover accrued interest in its bailout of that entity. The possible infringement of the law, the high risks being undertaken in the search for high returns and the apparent delay in the receipt of investment income would cause even ordinary persons serious migraine. It is therefore very surprising that this does not seem to trouble the board which includes Messrs Maurice Solomon and Paul Cheong who have been on the board for several years and who would be fully aware of the concerns of the actuary about the viability of the scheme.

Source: NIS Annual Reports 2004-2007

Included in Current Assets for 2007 is an amount of $197M as sundry receivables (2006-$207M) and prepayments of $62M (2006-$2M). Neither of these amounts is explained for the poor contributor, a key stakeholder. Included as well is an amount of $790M (2006-$753M) described as Accrued income, ie income recognised but not received. Nothing would be wrong with such accounting unless the entities in which the investments are made do not have the cash resources to pay the interest. Other than Treasury Bills the scheme’s principal investments are the Berbice Bridge Company Inc $1.560B; Clico $5.195B; Hand-in-Hand Trust Corp Inc $2.465B; a 25-year US$4M loan to the Government of Guyana for the construction of the Caricom Headquarters and Laparkan Holdings Limited $276M. From a concentration perspective, directly and indirectly the NIS is dangerously exposed with the Berbice Bridge.

With one exception (Laparkan), the private sector entities have recently been subject to public scrutiny − mostly negative – which can impact on their own profitability and their debt service capability. Clico is an immediate and major problem for the NIS. The Berbice Bridge can become another if its cash flows do not pick up significantly to allow it to meet its huge annual interest obligations. Hand-In-Hand Trust (HIHT) has just lost almost its entire reserves with its Stanford investment and as a consequence, a major income stream.

At more than $10B, NIS investments and accrued income in Clico, the Bridge and HIHT account for about 35% of the reserves of the scheme. A significant portion of the $10B is already impaired. The loss has implications not only for the balance sheet and therefore its reserves but annual income as well. It has been estimated that the income the NIS is losing on a daily basis on the Clico investment alone is more than $1M. When the actuary predicted the evaporation of the scheme’s reserves, he did not contemplate the kind of man-made, governance-created misfortunes we are now experiencing. Employees and employers better prepare for what can be a rough and costly ride.

Some statistics
2007 was the year of the World Cup, the biggest sporting extravaganza ever hosted by Guyana. According to Dr Singh there was 5.4% real growth in the economy with increased contributions by sugar (2.7%); mining and quarrying (22.7%); engineering and construction (5.7%) and transportation and communication (9%). Inflation grew by 14% and the minimum wage in the public sector grew by 14.5%. These significant numbers and impressive statistics however are not matched by growth in contribution income (8.01%) or registrations of employers by industry types (Table A of the report) which disclose that not a single sector had a new employer registrant with over 100 employees, and only three had between 51 and 100 employees. These were Transport, Community and Business Services and Personal Services, an interesting and eclectic mix indeed.

Women registrants in the Employed Persons category are fast catching up with their male counterparts and in 2007 for every 100 males there were 87 females. In the self-employed category the ratio is about 2:1. Compared with the gender mix of pensioners (more than 3 males for every 1 female) there is a dramatic transformation in the workforce, even as women still carry the burden of the work to be done at home. Only in the age group 41-45 do women come anywhere close to men in the number of self-employed registrants in 2007. Table G of the report indicates that some sixty-five persons in receipt of Old Age Pension are aged 98 and a surprising 389 are 95 years and older. With such numbers we should have far more centenarians than our newspapers consider worthy of celebration. We need to make sure that there are no phantom pensioners.

One other significant gender difference appears in Table N which presents the number of sickness spells by diagnosis and sector. Here women seem to do very badly. Diseases of the female genital organs accounted for 880 sickness spells, the fourth highest. Complications arising from pregnancy and childbirth account for 845 sickness spells, the fifth highest. Such statistics should impress both our Ministers of Health, and the Ministers of Labour and Human Services. While the statistics are not significantly different from preceding years it is yet hoped that we will see some policy initiatives to address them.

The state of the NIS confronts the government with a real dilemma. The government seems to have an insatiable appetite for spending which it finances mainly through direct taxes (Income and Corporation Tax) and indirect taxes (VAT, Excise and Customs) borne mainly by the workers and the lower income group. As a result Guyana is now among the most taxed countries in the world. In public finance, NIS contributions are a tax. Except that in a contributions-based scheme such as ours, the contributor can get back benefits in proportion to contributions. Even without the Clico debacle and the other challenges, contributions should have been increased. Based on the recommendations of the actuary the required contribution rate (without Clico) should be around 20% instead of 13% but the government’s reluctance to increase the rate may reflect its own recognition that increased NIS contributions are already too high for the overtaxed Guyanese.

While the NIS inherited by the government in 1992 was not as healthy as one would like, its condition is now much worse. The expenditure to income ratio was already 67% in 1992. It is now 89%. Failure by the government over the years to act promptly on successive actuarial recommendations has aggravated the situation. This however does not exonerate the directors of the NIS who have sat back and done precious little to stem the drift.

Clico, contagion, containment and concealment

If a loss of public moneys should occur and, at the time of that loss, a Minister or official has caused or contributed to that loss through misconduct or through deliberate or serious disregard of reasonable standards of care, that Minister or official shall be personally liable to the Government for the amount of the loss.

This is a direct quote from section 49 of the Fiscal Management and Accountability Act which President Jagdeo signed into law in late December 2003. The Clico affair and related matters may be a good time to draw attention to the provision which has never been tested at the higher levels. When the dust settles, the taxpayers, NIS contributors and beneficiaries, members of pension and medical schemes and depositors in Clico and potentially in Hand-in-Hand Trust (HIHT) and the New Building Society could lose collectively several billions from the fall-out in the financial sector.

Other consequences will be equally severe, if not always as direct. Jobs will have to go. Moreover, with perhaps billions invested in Stanford Investment Bank (Stanford) by the HIHT and other so far unidentified pension schemes and individuals, their losses and their income stream − all in US dollars – will be gone. With the assertion that our economy is ring-fenced having proved naively misleading, and claims by Clico, the President, the Minister of Finance and the Commissioner of Insurance − all acknowledged as very bright persons − having proved to have been misguided at best and been guilty of misrepresentations at worst, there is a loss of confidence not only in the judgment and competence of our economic managers, but also in the independence and ability of the regulators to protect the public interest.

Last Wednesday, Ms Maria van Beek, the Commissioner of Insurance, presented a petition to the court seeking an order that Clico be wound up or alternatively, that a Judicial Manager be appointed. One day later, Ms van Beek was granted her wish by Chief Justice Ian Chang in an order returnable tomorrow, Monday, appointing her as Judicial Manager of the entity which she has supervised for more than five years. Instead of immediately issuing a statement advising affected persons – numbering tens of thousands – of the implications that flow from the order, Ms van Beek proceeded to the Office of the President for a press conference, where along with the Minister of Finance Dr Ashni Singh and the Governor of the Bank of Guyana (the Bank) Mr Lawrence Williams, she sat silently as the President made excuse after excuse for the failure of Clico and gave vague statements about protecting pensioners without once using the G word – guarantee − which is what people, worried about their savings, pensions, medical schemes and jobs most need.

Blame The Bahamas
President Jagdeo, who is not the responsible Minister, told the nation that it was the collapse of Clico Bahamas that triggered the action by the commissioner. Yet that is not what the commissioner said in an affidavit sworn to the court one day earlier. She said it was the business model and investment policies pursued by the company. The President, seeking to protect Ms van Beek and by extension his Minister of Finance, told the nation that the commissioner had told Clico more than one year ago that they should have regularised their investment position. So, did the commissioner write the company and then sit back as they breached the law even further? The problem with the President’s style of intervention is that at best, he does not check the accuracy and implications of the statements he makes and increasingly often, he is wrong. There is no need to remind anyone of the damage caused by such lack of respect for accuracy as we saw in the saga of tax concessions necessitating an amendment in the law to facilitate Queens Atlantic Investment Inc’s tax concessions.

In matters financial details are important and so is judgment, particularly when it involves self-serving statements. When the President assured the nation on February 5 that Clico’s assets were sufficient to meet its liabilities he was repeating a company line without having read the December 31, 2007 analysis showing that 81% of the company’s assets was invested in related parties, all of which were under various degrees of threat (SN February 7 and Business Page Feb 8 reported on this analysis). In fact as Minister-Extraordinaire he should have known that the 2008 figures had shown some deterioration, suggesting that the commissioner’s call was ineffective and/or ignored. Both he and the Minister of Finance should have wondered how a company that issued “insurance policies” with premiums running into billions of dollars only needed a statutory fund of under fifty million dollars.

Disregard for reasonable care
The disregard for reasonable care does not end with them. The nation would have expected the Commissioner of Insurance and the Bank of Guyana to recognise that those policies were investment products dressed up as insurance. It is hard to believe that such a major issue would have escaped the attention of the Bank with illustrious directors of the calibre of Drs Gobin Ganga, Prem Misir and Cyril Solomon.

Given the poor oversight exercised by the regulators in general and the Commissioner of Insurance in particular, the court would have been reluctant to appoint Ms Van Beek to manage the operations of Clico under its supervision. Her demonstrable failures to act expose her inappropriateness for such a job, or even to have been the lead regulator for an industry which also required legal expertise. The problem for the court is that the law appears to have given it little choice. Yes, the court could have made a winding up order on the ground that Clico is insolvent, and use the more practical test of “inability to pay one’s debt on demand” that may very well have been the case. But the Insurance Act makes it a bit more difficult for the court by requiring a determination of the value of a troubled company’s assets and liabilities, never an easy task even for accountants. The President compounded the difficulty by volunteering that he hoped that the entire sum from The Bahamas company would be recovered even as he failed to address the billion dollar debt owed by CRL, the Guyana forestry product subsidiary of the troubled CL Financial which has guaranteed the debt.

Once the court chose not to go with the winding-up option – though this may still happen at some time – section 68 of the act gave it no choice but to appoint the commissioner as the Judicial Manager. Apart from the fact that her past supervision of Clico inspires little confidence, and her inattention to detail was embarrassingly exposed when she wrongly identified the name of Clico in her petition, what then becomes of her statutory role and function as Commissioner of Insurance over Clico and the rest of the industry, including Fidelity, which would ordinarily require full-time attention? Additionally, there appears to be a conflict between her two roles which the court would have to consider given that the court itself is not equipped to make business judgments.

The poor NIS could stand to lose six billion dollars in investments in Clico which may not have been made in compliance with the NIS Act. This is no small change. It is the equivalent of more than 20% of earnings accumulated over forty years by the Scheme and about one year’s benefits payment. To check on the propriety of the investments, I wrote Minister of Finance Dr Ashni Singh a letter on February 24, pointing out that the NIS Act only allows the NIS to invest in securities approved of by the Co-operative Finance Administration (COFA) established under the Co-operative Financial Institutions. I pointed out that he is not only the Chairman of COFA but as Minister, appoints the Board of COFA. The Minister of course also appoints the Board of the NIS. I asked him the following questions:

1. The names of the persons he appointed to COFA currently serving as members of the administration, and the commencement and termination dates of their appointments.

2. The securities which COFA approved for purposes of investment.

3. Whether the NIS had sought and received approval for any investments other than those determined by the administration and if so, the securities which have been so approved.

4. Whether the administration during his tenure as Minister has ever taken the opportunity under section 4 of the act for its Chairman or Secretary to attend any meeting of the National Insurance Board, and in particular the meeting at which any decision was made by the board for any special investments.

I am awaiting his response. But if it were owing to the Minister’s “misconduct or through deliberate or serious disregard of reasonable standards of care” COFA did not approve of NIS investing in Clico the Minister would have some serious questions to answer, not to Business Page but to the nation.

To make matters worse for the NIS, Clico was allowed, even while Commissioner van Beek, the Minister of Finance, the President and the Bank of Guyana were “monitoring” the imperilled insurance company, to divest itself of $1.5 billion dollars of bonds in the Berbice Bridge Company Inc. The Board of the NIS, all the members of which are either ducking or hiding, needs to explain to the nation whether the terms of their $6 billion investment in Clico were breached by the sale of the bonds and whether the Scheme feels that its investment is any safer now.

The New Building Society
More than ten years after privately as a director of NBS and publicly as a columnist, I advocated that the country’s only building society with more than one hundred thousand persons’ savings and loans involved be brought under the supervision of the Bank of Guyana, the Bank exercises no jurisdiction over the NBS. During that time the government has drastically increased the lending limits while relaxing the conditions and security required to back the loans made. One only has to consider the Savings and Loans crisis in the US in the late eighties to appreciate the possible consequences of such laxity. But there is more to worry about. The board has also become increasingly politicized with its current Chairman being Head of the Public Service in the Office of the President and the decision about the new Head Office involving hundreds of millions of dollars being made against technical professional advice. Quietly, the NBS has been joined in the failed attempt to prevent the demise of Clico. The NBS has bought over $1.5 billion dollars of bonds in the Berbice Bridge Company Inc from Clico, and it is unlikely that this would have happened without the official agreement and sanction of the Office of the President in which both the Chairman of the NIS and the Chairman and one director of the NBS are based, or the Ministry of Finance which has to approve investment in securities issued by the Berbice Bridge Company.

The danger is obvious. The NBS with assets in excess of $30 billion is unsupervised and unregulated but subject to powerful political influences. If the bridge company which is proving the sceptics right about the hugely optimistic traffic projections, and the board, which is chaired by the Clico CEO, cannot meet its financial obligations to bondholders, $1.8 billion of the funds of the NBS – representing about 40% of its reserves – would be at risk. That is real money which added to the Head Office being constructed at a cost of approximately $800 million could pose real trouble for the society.

Once again the recurring players are the President, the Minister of Finance and the Bank of Guyana, the last-named of which has failed to assume any jurisdiction as it should have. Of course this in no way exonerates the Chairman and directors of the NBS from their fiduciary obligations.

Hand-in-Hand Trust
The President also referred at the press conference to the investments made in Stanford by the Hand-in-Hand Trust, which holds depositors’ funds and manages some of the country’s largest pension schemes. He said that in the case of the HIHT, “total current exposure” to the Stanford Group amounts to $827 million or US$4 million, in addition to $297 million or US$1.5 million invested on behalf of pension funds. He then went on to confuse the nation by referring to the direct exposure which he said represented 9 per cent of the total assets of HIHT.” Whether it is 9% or closer to 10% is less important than the fact that this is not how one measures exposure. With the head of the Bank of Guyana and the Minister of Finance sitting in at the press conference as his technical advisors, the President as an economist should know that the measure should have been total exposure of the company – direct and indirect – relative not against total assets which do not belong to the company but only to equity which does. In other words he was downplaying the problem in more than one way.

The question has also been raised whether it was permissible for the HIHT, regulated by the Bank of Guyana under the Financial Institutions Act, to place so much of its funds in a single investment – what lay persons would refer to as putting too many eggs in one basket, but which the more technically-minded Bank of Guyana would call asset concentration. In the case of the failed Globe Trust, the Bank of Guyana received more than a mild criticism from then Chief Justice Carl Singh for its poor oversight. It must now hope that by some miracle the investment by HIHT in Stanford will be recovered. If that does not happen, then the Bank can expect not only a strong rebuke but perhaps even a lawsuit.

Faced with a financial crisis, the first step is containment. Instead we had concealment with the consequence that it has widened and enlarged now including, with potential negative and costly consequences, the National Insurance Scheme, the New Building Society, pension schemes and savings accounts of hundreds of thousands. Confidence is also crucial but this comes only from the competence, judgement and independence of our leaders and regulators. None of these qualities has been adequately demonstrated in this instance by the President, the Minister of Finance, the Commissioner of Insurance, the Bank of Guyana, the National Insurance Scheme and the New Building Society.

The rest of the financial sector and perhaps with one exception the insurance sector all appear very solid. Every effort must be made not to contaminate them and to restore confidence in the entire system. I believe that the National Assembly needs to take an active role in this.