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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Sri Lanka regulators must curb securities fraud: lawmaker

Sri Lanka regulators must curb securities fraud: lawmaker

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CSE.SAS

CSE.SAS
Global Moderator
Sept 02, 2011 (LBO) - Sri Lanka's securities regulator must curb widespread securities fraud in the Colombo Stock Exchange, where insider dealing, front-running and money laundering is "well known", a lawmaker has said.

"The reason for tough action is to discourage white-collar crime," Harsha de Silva, who represents the opposition United National Party said.

"Why US prosecutors are seeking a near 25-year sentence for Raj Rajaratnam (a Sri Lanka born fund manager charged with insider dealing) is to drive home this point.

"However the cancer of insider dealing, front-running and money laundering that is going on at the Colombo Stock Exchange (CSE) is well known but nothing is being done about it."

Deficit of Justice

But legal analysts say Sri Lanka is gripped by a comprehensive deficit of rule of law, justice and liberty, where the stock market is just a tip of the ice berg.

Sri Lanka now does not have an independent public service to ensure rule of law, justice or to protect the individual citizen from the arbitrary action of rulers. the rich and the powerful.

"There are some who may be of the view that today's problems of justice, rights and the Rule of Law has come about as a result of the peculiar political environment in which we find ourselves in today," lawyer Kishali Pinto Jayewardene said in a June speech.

"But this is not actually the case. The problem is far deeper than this.

"It is very apparent that at each historical point in time, the framers of Sri Lanka's post independence constitutional documents suffered from a deep rooted distrust of giving practical effect to the rule of law and the idea of justice."

In the criminal justice system itself, there is routine selective implementation of law, and widespread police torture, according to right activists.

In capital markets for example there are cases where firms connected to international pyramid scams have been investing in Sri Lanka's stock market with impunity despite the existing of anti money laundering legislation in the country.

Permanent Secretary

The development of Sri Lanka's system of government and justice system came alongside that of Britain, when the island was under British rule.

"The British civil service, like the entirety of the British system, was based on the foundations of the rule of law," says Basil Fernando, a lawyer and rights advocate.

"The interference into the country's constitutional framework in 1972 and 1978 led to not just the politicization of the civil service, but the abandonment of the supremacy of the law.

"Supremacy of the law rather than supremacy of the ruler was deeply entrenched into the British justice and administrative systems."

The institution of 'permanent secretary' was the lynchpin of a system of governance that ensured justice and fair treatment to citizens by the state, and protection of individual citizens from the rich and powerful.

Sri Lanka's public service was broken beginning from a constitution enacted in 1972 where a civil service commission was abolished and the institution of permanent secretaries was undermined by an administration led by the current main ruling party.

A 1978 constitution made by a UNP administration destroyed the remnants of the public service and all secretaries now serve at the pleasure of the president. Even judges' residences were stoned soon after.

Now there is hardly any distinction between ministry secretaries and ministers and even private sector representatives are appointed as ministry secretaries. In 2001 the UNP even appointed its party chairman as Treasury secretary.

Legal Crisis

Critics say Sri Lanka's stock market has now become almost a symbol where the rich and the powerful trample on minority shareholder rights. For economic development and social cohesion rule of law and justice is essential.

"Within this economic activity, if there is no guidance from the law there simply has to be all kinds of problems and crises which do not provide the kind of stability needed for economic activity," says Fernando.

"Therefore if Sri Lanka is to enter the path of development it is essential that the country faces this legal crisis.

"Development without law is simply an illusion within the modern context. It is not only an illusion but a dangerous exercise for the government as well as for the people.

"Within any discussion on putting the country back on a modern path which is capable of engaging in modern economic activities such as commerce, trade and social development the crisis of the law should be addressed as one of the most important aspects of development."

An attempt at redressing some of the problems in Sri Lanka with the establishment of a series of independent commissions was recently overthrown with an 18th amendment to the constitution.

The office of attorney general has also been brought under direct presidential rule.

Probe

De Silva said ERI is listed as an investor in a games village in Sri Lanka's Hambantota area, which is the home constituency of Sri Lanka's president.

SEC sleuths have been probing ERI in the context of an overall deficit of rule of law and governance.

It is known that sometimes investigators themselves receive death threats and other pressure.

ERI became a top ten capitalized company despite having hardly any operating revenues, and its stock prices have fluctuated widely. The firm later bought some troubled firms. It also issued equity warrants prolifically until the regulator brought curbs on the practice.

There are also other pervasive problems in the stock market itself. A fund managed by Sri Lanka's central bank is investing in banks which it regulates drawing criticism that de facto 'insider trading' is taking place.

De Silva says the "the Central Bank continues to buy and sell shares of almost all commercial banks," despite conflicts of interest being pointed out many times.

"When the SEC keeps silent it sends the wrong message on white-collar crime at the CSE and destroys the confidence among bona fide investors," de Silva said.

"The status quo does not augur well for the CSE or the economy in the long run. This is particularly so when Sri Lanka is looking for large scale private investments to sustain the post-war development effort."

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