Mr. Evans McNiel Rogers
Following a spate of calls by a number of Anguillians, the Government of Anguilla has finally published details of key findings, conclusions and recommendations relating to the conservatorship of the National Bank of Anguilla and the Caribbean Commercial Bank by the Eastern Caribbean Central Bank.
The information was released by Chief Minister and Minister of Finance, Mr. Victor Banks, at the Government’s press conference on Tuesday, November 3.
The relevant Government of Anguilla’s Press Release and the Key Findings are published below:
“Government of Anguilla draft Press Release
AGREED PROCEDURES REVIEW OF LENDING PRACTICES PRIOR TO CONSERVATORSHIP – NATIONAL BANK OF ANGUILLA AND CARIBBEAN COMMERCIAL BANK
The Government of Anguilla is today (Tuesday, November 3), publishing details of the key findings from the recently concluded review of lending practices prior to conservatorship at the National Bank of Anguilla (NBA) and the Caribbean Commercial Bank (CCB).
The key findings, conclusions and recommendations from the report are set out in the attached appendix.
The preliminary conclusion from the report is that the current balance sheet deficiency at NBA and CCB is due primarily to the quantum of non-performing loans and increasing provisions being made against such loans as a result of falling property prices in Anguilla. This problem was in part contributed to by the overreliance on the valuation of the security being advanced as collateral in the loan approval process, as opposed to analysing cash-flows and the ability of the applicant to repay the loans in changing economic conditions. Given the limited issues identified surrounding related party loans it does not appear as though these were a major factor in causing the Banks’ current situation.
Commenting on this announcement, The Hon Victor Banks, Chief Minister, said:
“I welcome this initial review as an independent assessment of some of the circumstances and decisions that directly contributed to the banks being placed in conservatorship. Whilst the report concludes that there were weaknesses in the handling of related party transactions by both NBA and CCB, it concludes that these were not a major factor in causing the banks’ current situation.
The Government of Anguilla has now passed this report to the Eastern Caribbean Central Bank (ECCB) as the bank regulator and current managers of the banks. I have asked the ECCB to take all appropriate action on the report and look forward to them providing advice on what action they intend to take.
The Government continues to work with the ECCB, International Monetary Fund, Caribbean Development Bank, UK Government and others to provide a fair resolution to the current conservatorship which will be in the best interests of Anguilla. As we have done throughout, information will be shared with the public when it is appropriate to do so”.
By way of background, in January 2015 the then Minister of Finance requested that a preliminary study be undertaken to review lending practices at the National Bank of Anguilla (NBA) and Caribbean Commercial Bank (CCB). The Department for International Development agreed to fund this, and contracted Grant Thornton (BVI) to undertake the work.
The study was intended to investigate the handling by the banks of related party transactions during the period 2008 to 2013 and to review the governance and effective management of the loans. The investigations were carried out in accordance with the Terms of Reference (Appendix 2). These make it clear that the objective of the investigations was not to carry out a full and complete investigation but rather to perform an initial review. For that reason, the title of the report was subsequently changed to ‘Agreed Procedures Review of lending practices prior to conservatorship – National Bank of Anguilla and Caribbean Commercial Bank’.
Grant Thornton’s on-site meetings with the management of the Banks and review of related documentation, including loan files, took place on 9 and 10 April, 2015. The team from Grant Thornton consisted of three people who attended the on-site meetings and reviews in Anguilla. The Grant Thornton team also spent time liaising with ECCB and the Banks in advance of the on-site meetings to review preliminary information.
On 19 August, Grant Thornton (BVI) made a presentation of their draft report to the Chief Minister, Hon Victor Banks, and the Governor. Subsequently, on 4 September Grant Thornton (BVI) provided the final version of their report.
Appendix 1: KEY FINDINGS
The Key Findings include:
National Bank of Anguilla (NBA)
– The definition of related party was not clear and the term was not defined in any written policies of the Bank.
– There was no reference to the ECCB definition of a related party.
– There were no specific policies in place at the Bank for the treatment of related party transactions, with the exception of an Internal Policy Practices and Procedures (LPPP) document relating to loans to directors and employees stating that such loans cannot be on more favourable terms than any other lending.
– We were informed that such transactions were not treated any differently to any other transactions. These transactions were not tracked or recorded in any evident way.
– The schedules summarising loans to related parties are inconsistent year on year and in view of the lack of clarity surrounding the definition and tracking of these loans we cannot be certain that the schedules provided to us contain an accurate record of related party loans during the Investigation Period.
– The related party loan figures included in the quarterly reports to the ECCB, the audited accounts and the internal related party lending schedules were compared for each year of the Investigation Period and there were material differences between these figures, further supporting that NBA did not have a good handle on keeping track of related party loans.
– The reporting of related party transactions only includes loans and deposits and does not include any other transactions with related parties. Transactions with related parties excluding deposits and loans are detailed in the audited accounts of NBA.
– The following are generally included under the ‘related party’ notes on the accounts: management salaries, service fees paid to joint ventures, insurance expenses to associate, dividend income from subs and associates, rental income from other NBA entities, etc.
– The review of the Bank’s loan files did not identify any instances whereby related parties loans were treated differently to other loans.
– For non-cash secured loans the review team noted that generally the loan files contained minimal evidence that detailed consideration had been given to the ability of the applicant to meet repayment terms of the loan.
– Due to the confusion and lack of clarity regarding the definition of a related party at NBA, it is possible that loans may have been made to related parties but not documented as such at NBA. No direct evidence was seen to confirm this.
– The files were generally well documented and showed appropriate loan approval in accordance with the policies.
Caribbean Commercial Bank (CCB)
– The CCB lending policy defines “insiders” as the board of directors and principal shareholders as well as any companies controlled by directors. This is close to the ECCB guideline but does not mention “immediate family”.
– Management confirmed that during the Investigation Period they did not treat immediate family members of the Board of Directors as related parties.
– While running totals for related party loans were not provided in the ECCB reports, we are able to compare the figures on the internal related party schedules at CCB with the audited accounts. As with NBA, there are significant inconsistencies between these figures, again demonstrating the lack of consistency in the identification and management of related party loans.
– Our review also indicates that the loans to related parties do not appear to have been subjected to the same levels of scrutiny as unrelated parties.
– The files were generally well documented and showed appropriate loan approval in accordance with the policies.
Conclusions
The report concludes that current balance sheet deficiency at NBA and CCB is due primarily to the quantum of non-performing loans and increasing provisions being made against such loans as a result of falling property prices in Anguilla. This problem was in part contributed to by the Banks’ overreliance on the valuation of the security being advanced as collateral in the loan approval process as opposed to analysing cash-flows and the ability of the applicant to repay the loans, and the sensitivity of the ability to repay in changing economic conditions. Given the limited issues identified surrounding related party loans it does not appear as though these were a major factor in causing the Banks’ current situation.
Recommendations
Related Party Loans
In order to ensure that related parties are accurately identified and managed throughout the loan process, we recommend the Banks implement the following:
– Adopt the ECCB’s definition of a related party into the internal policy of the Banks. It is our opinion that the ECCB definition is open to interpretation and we recommend that the ECCB review the wording and consider whether it would be helpful to update this.
– In addition, we recommend that the Banking Act be updated to define a related party in terms at least as inclusive as the ECCB definition.
– Segregate and track all related party loans.
– Report on the performance of all related party loans to the board every quarter.
– Obtain signed disclosures from all directors and key management listing their related parties as per the ECCB definition.
– Restrict loans to related parties to a certain % of the banks’ entire loan portfolio (and/or a certain % of the bank’s tier 1 capital).
All loans
– Place greater focus on analysing the future cash-flows of loan applicants from which the loan repayments will be met and obtain more evidence in respect of these cash-flows.
– Ensure that these cash-flows are “stress-tested” for a changing economic environment.
[ends]
Appendix 2: TERMS OF REFERENCE
Forensic Audit of Anguilla’s Commercial Banks 2014
The Government of Anguilla have requested that DFID contract independent consultants to carry out a forensic audit of Anguilla’s two commercial banks – the National Bank of Anguilla (NBA) and Caribbean Commercial Bank (CCB). Both banks were placed into conservatorship by the Eastern Caribbean Central Bank (ECCB) on 12th August 2013. As regulator of the banks, the ECCB agreed to commission a forensic audit once conservatorship had been completed. The Government of Anguilla have now made a formal request to DFID to take forward contracting to begin as soon as possible.
Objective
This investigation will be time limited to ten person-days. The aim of the investigation
will be to identify some of the circumstances and decisions that directly contributed to the banks being placed in conservatorship. The time limitations will not allow for a full and complete investigation, but rather will provide an initial diagnosis that can form the basis of a full investigation. The investigation is to cover the five years prior to September 2013 when conservatorship began.
Scope; Initial investigation of related party transactions and governance/effective management review of loans
1. Related party transactions: Identification of material or significant transactions with former senior management (including individuals or corporates related to such individuals), and their related parties.
This is to be determined through a combination of analysis of the banks’ loan files and other documentation (including credit committee papers), review of board meeting minutes and discussions with current management notably CFO of CCB and CFO of NBA during the investigation period.
Estimated duration (for each institution): 10-15 hours
2. Loan file review: For five loan files from each institution (randomly selected), review documentation to assess appropriateness of governance and management oversight.
This is to be determined by reviewing the loan documentation (including original application submitted to the bank, the internal review and approval processes, credit committee papers, approvals in respect of granting the loan and obtaining any security/collateral, legal and bank correspondence with the applicant, any changes to the original terms and conditions (including the internal approval process), and all bank documentation in respect of the ongoing review/monitoring of the loan’s credit performance (including confirming the credit status of the applicant)).
Estimated duration (for each institution): 25-30 hours.
3. Balance Sheet review. Preliminary examination of balance sheets for NBA and CCB shall be undertaken to assess current financial position.
Estimated duration (for each institution): 4 hours
Deliverables:
1. Summary report detailing interim findings (including factual analysis and data) and associated recommendations and conclusions (including next steps).
2. Presentation and discussion of findings to Governor of Anguilla and selected officials invited by the Governor.
3. Providing further follow up advice and discussions as required
Estimated duration (for each institution): 5-10 hours
The forensic audit will report to the Governor of Anguilla, Anguilla Financial Services Commission, and ECCB
Invitation to Tender
Bids should include C.Vs of the individuals who would undertake the work, along with an outline of how the work would be carried out (no more than one page), and details of previous experience of forensic investigation, preferably in the Caribbean region and/or of financial institutions (no more than one page).”
