BoU probe report out: Cosase seeks punishment for officials

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COSASE chair Hon Abdu Katuntu

The Chairperson of Parliament’s Commissions, Statutory Authorities and State Enterprises (COSASE) committee Hon Abdu Katuntu has Thursday presented the committee report on the closed commercial banks.

This is his statement:

The Auditor General was not availed with an inventory report for Teefe Trust Bank contrary to Section 32 (3) of the Financial Institutions Statute, 1993.

The committee observes that whereas BoU claims that the bank was closed under the provisions of the Banking Act, 1969 which did not require preparation of an inventory, the closure was actually in November 1993 pursuant to the FIS, 1993, which required the Central Bank to prepare an inventory as soon as possible after taking over of the financial institution.

Whereas the Central Bank provided a balance sheet, not an inventory as required by the law.

The National Bank of Commerce was closed and sold on the same day, 27 September 2012.

The Auditors were appointed on 17 October 2012 and an inventory report was produced on 15 January 2013.

The takeover and sale of the Bank happened on the same day and was concluded within six hours in contravention of section 99 (1) and (2) of the FIA, 2004 which require that the Central Bank can only intervene after making a winding up order and publishing the same in the newspaper for general circulation.

The Committee observes that this section is impracticable. Crane Bank was placed under statutory management on the 20 October 2016.

The auditors were appointed on 28 October 2016 and the inventory report was produced on 13 January 2017. This bank was sold on 25 January 2017.

The committee therefore observes, as it earlier did with other defunct banks, that there was no compliance with the requirement of Section 89(3) of the Financial Institutions Act, 2004.

Whereas the resolution of financial institutions in distress has been under the Bank of Uganda supervision department, it is recommended that the mandate of resolving financial institutions in distress be independent of the bank supervision function.

The Central Bank should strengthen the supervision function to ensure that it is able to adequately supervise financial institutions in real time. This may require investment in human resource and systems, technological or otherwise.

Bank of Uganda management conceded the absence of operating guidelines on resolution of financial institutions in distress.

They however, stated that the circumstances of each institution’s resolution differ and cannot always be predicted in advance.

BoU management stated that the process of selecting a purchaser commences by identifying prospective purchasers within the industry and sharing with them preliminary information of the institution in distress.

Once the potential buyer expresses credible interest to purchase the bank, the buyer is required to sign a Non-disclosure Agreement in order to access information on the targeted institution.

By sharing information of a financial institution in distress with a third party, more so, with a competitor in the industry, BoU has, in all resolutions, acted in breach of section 40 (3) of the Bank of Uganda Act which provides that the bank shall not publish or disclose any information regarding the affairs of a financial institution or of a customer of a financial institution unless the consent of the institution or the customer has been obtained.

BoU did not keep the asset movement ledgers & all records relating to the liquidation of the three financial institutions in distress i.e. ICB, Greenland, Co-operative Banks (whose liquidation started under the FIS, 1993 and continued under the FIA, 2004).

This offended the provisions of section 106 (1) of the FIA, 2004. All officers who flouted the law as herein above indicated should take personal responsibility.

In the case of ICB, Greenland Bank and Co-operative Bank, the total loan portfolio sold of shs135 billion included secured loans of shs34.5 billion which had valid legal or equitable mortgage on the real property and were supported with legal documentation but were sold, to M/s Nile River Acquisition Company at 93 per cent discount.

The committee observes that whereas the purchase & asset agreement clearly state excluded assets and liabilities respectively, there was no indication or schedule for total assets purchased and liabilities assumed by dfcu Group.

The inevitable conclusion therefore, is that BoU did not know the exact assets and liabilities it was disposing of.

Whereas the outstanding liability owed to BoU by Crane Bank was Shs478 billion, dfcu group only assumed liability to the extent of Shs200 billion whose value was to be recovered from the bad book.

This, in the committee’s considered opinion resulted in a financial disadvantage to both BoU and Crane Bank.

The committee finds that BoU’s failure to observe principles of financial prudence & in the course breaching their statutory duties provided under the FIA thereby financially disadvantaging Crane Bank it should make good the loss occasioned to the commercially fair extent of the value of the Bad Book.

All BoU officials who failed to properly execute their duties in accordance with the law should be held responsible for their commissions and/or omissions.

The Auditor General observed that liabilities amounting to Shs503.76 billion were still outstanding as at the time of writing this report from a total liability of Shs1,617 billion held at closure.

The process of settling liabilities for ICB, Cooperative Bank & Greenland Bank has taken over 17 years & affected the winding up process despite the three banks in receivership holding cash balances of Shs19.5 billion on their recovery accounts as at 30/6/2016.

The winding up process of all the defunct banks has taken a long time to settle creditor claims.

For Teefe Trust Bank (26 years), Co-operative Bank (20 years), ICB (21 years), Greenland Bank (20 years), NBC (7 years), GTB (5 years) & CBL (2 years).

Regrettably, many of the creditors and shareholders have and indeed continue to die.

BoU should end the winding up processes of all defunct banks within a period not exceeding one year.

In the case of Crane Bank, the BoU management stated that Crane Bank is still under receivership & not progressed into liquidation.

Following the completion of the current court cases a statement of affairs will be prepared in accordance with the law.

It is the committee’s observation that the cost of liquidation would have been mitigated had BoU relied on its internal human resource as opposed to outsourcing professional services.

BoU has well trained lawyers with masters degrees but they went ahead and outsourced. The Central Bank is one of the best paying institutions with well trained staff but you wonder why it went out.

The Auditor General in the special audit report observed that Crane Bank was placed under statutory management from 20 October 2016 to 20 January 2017.

During this period, the Statutory Manager did not prepare a plan detailing efforts to return the bank into compliance with prudential standards despite BoU injecting shs478.8 billion to support the operations of Crane Bank.

BoU stated that when they took Crane Bank into statutory management, it was found to be grossly insolvent.

It is not possible to revive a bank with this level of insolvency & restore it to full compliance with capital adequacy & other requirements.

The committee further established that the processes leading to the sale of Crane Bank (in Receivership) commenced during the period of statutory management contrary to section 95 of the FIA, 2004.

The special audit report of Feb 2019 on the accountability for the shs47.8 billion injected into Crane Bank, the Auditor General observed that Crane Bank liquidity position was significantly below compliance level for the first 2 months of the statutory management period.

However, in the last month of statutory management, from 01 January 2017 to 24 January 2017, Crane Bank met the required liquidity compliance levels. Therefore the bank’s liquidity position had stabilized.

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