By Professor David Hoile
Despite being a long-time observer of British and Commonwealth politics and courts and more pertinently the occasional perverse interaction between these two fields – I was nonetheless somewhat surprised to note that a Sri Lankan High Court “Trial-at-Bar” has been established to try a former Central Bank Governor for criminal “corruption” arising from an investment in Greek Government Bonds made in April 2011.
This effort is made, notwithstanding the fact that the Supreme Court of Sri Lanka, in a judgment in SC FR 457/2012 delivered on 18 September 2014, had already evaluated and characterised that investment as being neither arbitrary or unreasonable, nor fraudulent.
The indictment instituted by the Commission to Investigate Allegations of Bribery or Corruption (CIABOC), appears to focus exclusively on the 0.6% of the Central Bank’s then reserve portfolio that had been invested in Greek bonds.
However, it makes no reference to the remaining 99.4% of the reserve portfolio, which was managed simultaneously by the same Central Bank team, under the same Central Bank Governor, through the same institutional processes, during the same period, and which generated a record net profit of US$ 430.2 million.
That profit confirmed by the Auditor General of Sri Lanka, a constitutional officer, and recorded in the Supreme Court judgment itself represented the highest ever annual reserve management profit in the Central Bank’s history.
In contrast, the loss incurred on the Greek bond position amounted initially to US$ 6.6 million, approximately 1.5% of the year’s total reserve management earnings. The loss was fully absorbed within the year’s overall results and did not remotely threaten the profitability of the reserve portfolio as a whole. It was merely one loss-making position within a diversified portfolio that nevertheless achieved record overall returns.
Equally problematic is that the prosecution’s theory therefore appears to invite the “Trial-at-Bar” to conclude that the Governor intended to cause a loss to the Central Bank and the Government through the Greek bond investment, while simultaneously leading the same institution to its most profitable reserve management performance ever, through the remaining 99.4% of the portfolio.
A memorandum dated 17 March 2011 submitted by the Director of the International Operations Department – and listed by the prosecution itself as evidence – stated:
“The proposed investment in Greece and Ireland which are not material as they are less than 1.0 percent of the reserves and the Central Bank will not expose to undue risk, given the success of the reserve portfolio managed so far by the Central Bank where no portfolio loss has been reported in last 25 years.”
The Supreme Court accepted that characterization.
It is clear that the Supreme Court’s findings on the “0.6% allocation” for Greek Bonds support at least four propositions that fundamentally undermine the prosecution’s case.
1. Absence of Mens Rea
The Bribery Act, particularly Section 70, requires proof that the accused acted with knowledge that wrongful loss “will be caused.” A person who produces record profits through 99.4% of a reserve portfolio in the same year cannot realistically be said to have intended to cause loss through the remaining 0.6%.
Record profitability and criminal intent are mutually inconsistent on these facts, and, frankly, with common sense. Yet, CIABOC now seeks to construct a criminal corruption charge based exclusively on the underperformance of one tiny segment of the portfolio, while ignoring the overwhelming success of the remaining portfolio. That is not objective financial analysis; it is a perversely selective prosecution.
If it is alleged that the Governor intended to cause loss through the Greek bond investment, it must simultaneously be acknowledged that he and his team produced a record US$ 430.2 million profit through the remainder of the reserve management strategy in that same year. The law cannot reasonably attribute both intentions to the same conduct at the same time. The record profit demonstrates a profit-oriented strategy, not a loss-oriented one. Accordingly, the mens rea, the intention to do so, required under Section 70 cannot logically be established.
2. No Wilful Default – therefore “Statutory Immunity” applies
Section 47 of the Monetary Law Act protects Monetary Board members from liability unless losses arise through “misconduct or wilful default.” Wilful default requires a conscious and deliberate failure to discharge duties in the face of known and unacceptable risk.
A portfolio manager who allocates 0.6% of a diversified reserve portfolio to a higher-yield investment, while the remaining 99.4% generates record profits, cannot reasonably be characterised as having acted with an intention of causing wilful default.
On the contrary, such conduct reflects precisely the type of measured and risk-calibrated management decision that Section 47 was designed to protect. The Supreme Court itself recognised this distinction.
3. No “Wrongful Loss”
A US$ 6.6 million loss incurred within a year in which reserve management generated US$ 430.2 million in net profit cannot also be reasonably characterised as a “wrongful loss.” It is a normal and foreseeable feature of active portfolio management.
Indeed, the Supreme Court explicitly observed: “The investment in Greece Bonds and its trade forms part of the risk management strategy.
If all investments are maintained as risk free investments the return would be negligible. The Central Bank therefore has to select a mix of low risk and risk bearing investments expecting a reasonably high return.”
The Greek bond allocation therefore represented the type of diversified risk allocation that modern reserve management requires, which was also consistent with accepted portfolio management principles.
To illustrate the absurdity of the prosecution’s position, consider a fund manager overseeing a diversified portfolio of 1,000 shares. Suppose that portfolio produces its highest annual return ever, but one position representing only 0.6% of the portfolio declined in value.
The prosecution’s argument is effectively equivalent to accusing the fund manager of criminal corruption solely because of that one declining position, while completely disregarding the remaining 994 successful positions and the record overall return achieved by the portfolio.
No serious investment professional, regulator, or court anywhere in the world evaluates portfolio management in that manner.
4. The Supreme Court has already evaluated the transaction
The Supreme Court has already described the Greek bond investment as “a very small part of [the] portfolio” and “a tolerable proportion of its resources.” Those are not incidental observations; they form part of the Court’s direct evaluation of the transaction itself.
At page 4 of the judgment, the Court stated: “The decision to invest in such Bonds was based on the trade-off between different risks faced and the Central Bank’s tolerance for higher risk on a very small part of its portfolio (Only 0.6% of its portfolio was invested in Greece Bonds).
Investing in high yielding sovereign paper is an integral part of fund management of many funds in the world and the Central Bank too had followed a similar practice in investing a tolerable proportion of its resources (0.6%) in Greece Government Bonds.”
The Court further noted that when conditions in the Eurozone deteriorated, the Central Bank sold part of the Greek bond holdings at a loss of US$ 6.6 million in order to mitigate further exposure, and that this loss had already been factored into the overall 2011 reserve management profit of US$ 430.2 million.
No shareholder, regulator, central bank, or investment professional evaluates portfolio management performance by isolating the worst-performing 0.6% of a portfolio while ignoring the successful 99.4% that produced record returns. That is not how portfolio management works.
That is not how risk management works. And, according to the Supreme Court’s own findings, that is not how this investment decision should be evaluated. Reduced to its essence, the prosecution’s contention is that a portfolio manager who produced his institution’s highest-ever reserve management profit through active management of a diversified reserve portfolio is nevertheless criminally corrupt, because one small position within that portfolio declined in value.
Such a proposition is economically irrational and fundamentally inconsistent with globally accepted principles of portfolio management. It is also legally incoherent. No court applying coherent principles of law, logic, and finance could accept such a proposition.
Those behind this move are clearly ignorant not only of market forces, bond markets and investment portfolios, they also ignorant of the basic principles underpinning our shared legal jurisprudence. One cannot but help but be reminded of the Queen take on the law in Alice in Wonderland: “Sentence first—verdict afterwards.”
Professor David Hoile is the director of the London-based International Justice Matters.
ABOUT THE AUTHOR
Dr. David Hoile is a public affairs consultant specialising in African and international affairs. He is an elected Fellow of the Royal United Services Institute for Defence and Security Studies (RUSI), and a member of the Royal Institute of International Affairs, the Royal African Society, and the African Studies Associations of both the United Kingdom and the United States. He is the author of numerous book
