The Financial Gleaner presents the second in the 5-part series, 'Anatomy of a crisis', an examination of the 1990's financial sector crisis
"I must say that one of the greatest dilemmas of our time is the blatant dishonesty or lack of integrity which permeates nearly all sectors of our economic life, and I would issue a strong plea to professionals and their relative organisations - to purge from their companies men who fall short of good character and integrity."
- Don Crawford, Chairman, Century National Bank, September 1992.
THE behaviour of the principals involved in some affected institutions in Jamaica betrayed much more than shoddy management, and there is no credible case to be made for anyone mistaking "well-intentioned, entrepreneurial zeal" with unbridled greed and dishonesty.
The high levels of non-performing loans and other extensions of credit linked to members of the ownership and management of some banks were clear breaches of any conceivable ethical standards. These breaches were compounded by abuses akin to insider trading, and the maintenance of false accounting records or in some cases using "connected" auditors to perpetrate questionable business deals. In what is widely seen as a failure of the Jamaican government to bring appropriate closure to the 1990's crisis, only a few of the many individuals and activities involved have so far been the subject of meaningful legal action.
STEEPED IN FRAUD
In one rare instance of such legal action, in a case that is still on appeal at the British Privy Council, documents obtained from a May 1999 Jamaican Supreme Court judgement against former banker Donovan Crawford contain what Chief Justice Lensley Wolfe describes as a "transaction steeped in fraud". It involves dealings between Century National Bank and the Bahamas - based First Trade International Bank and Trust Limited.
First Trade commenced business in October 1993 - Donovan Crawford is a director.
Within two months of its establishment, Century National Bank, CNB, of which Donovan Crawford is CEO, began making large deposits into First Trade.
These offshore deposits began at a time when CNB was already in severe cash flow problems, the bank had already been the subject of adverse reports by the Bank of Jamaica to the Minister of Finance, and after the Minister had commissioned a special inspection of CNB entities by Coopers and Lybrand.
CNB deposited a total of US$25.5 million in First Trade, although First Trade has a share capital of below US$6 million.
First Trade then lends US$16 million to Century Holdings Limited. The majority shareholders of Century Holdings Limited are Regardless Limited (a company fully owned by Crawford, his wife, and his two children, and his mother, Alma Crawford). It also lends US$6 million to Century National Development Limited, in which Crawford is a 99.9 per cent shareholder. It extends credit of US$3.5 million to the Bahamas- registered Shelltox Investments Limited, which in turn is owned by Century Holdings Limited, Century Development Limited, Donovan Crawford, and CNB Vice President Valton Williams.
These three loans by First Trade to Crawford-connected companies total US$25.5 million the same amount CNB deposits with First Trade, and the loans are guaranteed with this deposit.
First Trade made these loans although two of the three companies, Century Holdings, and Century Development, are submerged in debt, have been recording losses for three years prior to the transaction, and although, according to the court documents, "the likelihood of these companies being able to repay the loans-was remote."
The three companies defaulted on the loans, and in May 1995 the loans were set off against the CNB deposit.
In a breach of standard accounting practice, the records of CNB did not reveal the full details of these transactions, reflecting the deposits as part of its readily available liquid assets. CNB earned no interest from any of the deposits.
First Trade is liquidated in November 1995, and US$25 million of a bank's money, depositors' money, goes up in smoke.
In addition to the First Trade fiasco, the same court documents also reveal that in their capacities as the most senior officers of CNB and CNB Building Society, Crawford, Balmain Brown, and Valton Williams personally approved unsecured loans to entities in which they had personal interest, when those entities were already undergoing financial difficulties. No evidence was found that these loans had loan agreements or any fixed terms of repayment, and they ran into default to the combined tune of $750 million. There is still more.
CNB made large payments to Crawford and Williams that are not reflected in the bank's records as being part of their salary packages. In six different payments between December 1993 and October 1994, Crawford was paid a total of US$307, 221.90 and $1.17 million. In three separate payments, Williams was paid a total of US$126,576.
Glen Harloff, a forensic investigator from PriceWaterhouse of Canada, investigated the Century Financial Entities and testified during the case that he had found no supporting vouchers to justify or explain these payments.
Justice Wolfe is scathing in his reference to this particular revelation.
"Both Crawford and Williams were not entitled to these payments. They were busy helping themselves to the bank's funds."
On July 25, 1995, Aulous Madden, auditor of CNB, resigns. Court documents in the case against Crawford reveal that along with other entities connected to Century, two companies owned by Madden are beneficiary to loans and/or overdraft facilities without proper security.
The exposure from CNB loans to connected parties alone was estimated at some $4.9 billion, about a third of its asset base. The judgement at stake in this case alone, if Crawford loses the appeal, is over $700 million Jamaican. Century was not alone in this kind of activity.
LOANS ESCALATED
The published records of Workers Bank reveal that it's non-performing loans escalated by 436 per cent between December 1996 and December 1997, moving from $839 million to $4 billion.
Over the same period, in only one year, the bank's reported non-performing credit exposure to connected parties increased by 543 per cent - from $575.9 million to $3.7 billion. A 1998 media statement by Finance Minister Omar Davies charged that a 1996 Bank of Jamaica inspection of the Workers Bank group revealed that the entities had: "-advanced additional massive sums to connected enterprises and major insolvent clients in the full knowledge of the said entities inability to pay."
As one lawyer observing the Crawford case put it, commenting on the larger issue of the amount of money lost by several banks during the crisis, money does not just disappear, it had to have gone somewhere, and it didn't get there by itself.
See this Sunday Gleaner's Business section for an update on Don Crawford and Paul Chen-Young.
Next week in Part 3 of the 5-part series: How Omar Davies ignored the warnings of the Bank of Jamaica and gave some bankers a 'bly'.
