Sunday, December 04, 2011
SECP Regulatory negligence protected multi-billion rupees fraud:
Serious oversights by the country’s apex regulator, the Securities and Exchange Commission of Pakistan (SECP), have reportedly played a critical role in facilitating the multibillion-rupee National Insurance Company Limited (NICL) scandal, The News has learnt. Not only did the SECP not perform its obligatory role in blocking the appointment of an unqualified official as NICL chairman, it also failed to check multibillion-rupee fraudulent investments made by NICL under the stewardship of the same chairman.
“Not many people know that the SECP is the actual regulator and law enforcement agency that deals with the insurance sector, including the NICL which is an insurance company,” a former SECP chairman told this correspondent.
At the hearing of the NICL case on November 16, Chief Justice Iftikhar Muhammad Chaudhry had warned top officials of the Federal Investigation Agency of jail terms if they didn’t recover the Rs22.5 million in frozen assets released to the accused.
According to the procedures, however, the FIA has actually ended up standing in for the SECP, which in fact should have been the regulating and investigating authority in the NICL case.
The SECP, an autonomous statutory body, has been mandated to independently exercise state authority to regulate the corporate and financial sectors and all corporate companies across Pakistan, including the insurance industry of which NICL is a part.
The SECP has two basic powers under the SECP Act 1997: diligence and preventive powers; and enforcement powers. Under its preventive powers, the Commission has to approve the appointment of the chairman and chief executive officers of national insurance companies and ensure that the ‘fit and proper’ criterion is met. It also has to ensure that insurance companies meet the ‘reporting requirement’ and file their annual reports and accounts for examination by the SECP.
Under the enforcement powers as enshrined in Part VIII of the SECP Act 1997, the SECP has the authority to investigate and prosecute offences in the insurance industry.
In relation to the NICL, the SECP has failed to exercise both these responsibilities.
The two primary issues highlighted in the NICL scam relate to the nepotistic appointment of an unqualified person, Ayyaz Niazi, as its chairman; and fraudulent investments made at exorbitant prices by NICL under the said chairman in real estate property.
“The law provides that the directors and chairman appointed by the federal government must meet the ‘fit and proper’ criteria provided by the Insurance Ordinance and SECP,” an SECP former chairman told The News, seeking anonymity.
Section 12 of the Insurance Ordinance 2000 provides the criteria for sound and prudent management: “A person is a fit and proper person who possesses such experience and qualifications as are appropriate for the duties for which he is responsible, and conducts those duties with due diligence and skill.”
It was SECP’s legal obligation to ensure that Ayyaz Niazi, who had no experience or qualifications relating to the insurance industry, was not appointed as NICL chairman. “The chief executive could not have been appointed without SECP’s approval. If he [Niazi] had no experience why was he appointed? That’s a question SECP has to answer,” said Salman Raja, a Supreme Court lawyer and an expert in corporate-regulatory affairs.
At the time that Ayyaz Niazi was appointed Chairman NICL on February 12, 2009, Mr Salman A Shaikh was SECP chairman. He took charge on Jan 12 2009 and remained in office till Nov 29, 2010.
The second issue, which relates to fraudulent investments, also comes directly under SECP supervision. NICL’s financial accounts for 2008 show that total investment made in property was Rs647 million. In 2009, however, under Ayyaz Niazi, this investment suddenly shot up to Rs4,471 million, an over 700 percent increase in one year.
“Under the Insurance Ordinance 2000, and as per SECP’s diligence and preventive powers, the SECP is legally bound to examine the audited accounts of all insurers and see that they comply with laws, regulations and accounting standards,” an ex insurance commissioner at SECP explained, adding, “It is therefore SECP’s duty and function under the law to ensure that no fraudulent transactions are made by the insurance company.”
And yet, despite receiving details of NICL’s accounts and being aware of a whopping 700 percent rise in investments, what did SECP do?
Under section 160 of the Insurance Ordinance, the SECP was bound to take action against all persons - directors, chairman and officers or outside persons - who had defrauded the NICL of its property and money. This section required the SECP to take the matter to the specially constituted Insurance Tribunal that had the power to order the said persons to pay back the money and property to the NICL.
“Where the money has been lost, the tribunal has the power to presume that every person in charge of the NICL has become accountable and can order recovery along with attachment of their personal properties. Additionally these persons can be punished for two years imprisonment,” an insider explained.
On it’s part, SECP’s insurance commissioner says SECP called for explanation letters from NICL regarding non-submission of audited and regulatory returns as well as an information letter under Section 61 of the Insurance Ordinance 2000; and issued an Examination of Accounts letter and show cause notices on 3 different occasions. If this is true, the question still remains that a specialised legal framework in the shape of the Insurance Ordinance and a separate judicial forum in the shape of the Insurance Tribunal exist to prevent scams such as NICL and hold offenders to account. And yet, these mechanisms were never activated because all are dependant on the SECP initiating action - which it did not.
Has this abdication of its obligatory responsibilities forced the court into seeking FIA’s intervention? Conceding the fact, a very senior SECP functionary said, “Had the SECP investigated and prosecuted the culprits in the NICL scam, the time and effort wasted by the Supreme Court on needless ancillary issues like interference from the political leadership, transfer of investigation officers and non-cooperation by relevant authorities and officers would have been avoided.”
“SECP’s inaction by itself warrants an official enquiry into the matter and requires that SECP functionaries involved be punished for criminal negligence,” a corporate lawyer told The News. “The only plausible explanation for this complete failure of the SECP may be that the regulator has itself has been captured by the powerful nexus between political and market lobbies and interest groups through illegal appointments at the top, just as NICL itself.”
A senior insurance adviser opined: “It may be time for the Supreme Court to summon SECP heads and ask them why they’ve been sleeping all this time. “
However, SECP insiders defend the Commission’s laxity by saying the SECP Act necessitates that between 5-7 commissioners be employed at any time to oversee the corporate and financial sectors. “We have been operating with two, maximum three, commissioners,” a source said. “This is contrary to the SECP Act and means we are understaffed and overworked.”
Asif Arif, SECP’s insurance commissioner, told The News: “SECP does not have the authority to approve NICL’s Chairman. As per Memorandum and Articles of NICL, the CEO is appointed by the Board which in turn is appointed by the shareholders, which in this case is the government of Pakistan.”
Even if that is the case,the SECP Act and Insurance Ordinance read together make it completely clear that the SECP is indeed responsible for approving the chairman nominee appointed by NICL’s shareholders by ensuring that the ‘fit and proper’ criterion was met. This it did not do.
Arif also said that “the fit and proper criteria as mentioned in Section 11 and 12 of the Insurance Ordinance puts the onus on the insurer to ensure compliance with the criteria.”
This is tantamount to the SECP expecting the insurance sector to self-regulate and abdicating its preventive responsibilities under established rules to ensure “the professional competence and capability of all persons engaged in the provision of services in the insurance sector.” Articles 29-34 of the SECP Act clearly detail the enforcement and investigation responsibilities of the SECP.
“What is the point of having the SECP as an independent regulator if we are going to leave it to the insurer to ensure compliance with rules?” said a corporate-insurance expert. “And what is the point of the SECP at all if it is left to the courts and the FIA to deal with insurance fraud?”
Recently, the SECP has made some changes in the way it supervises the insurance industry and finalised new solvency rules for insurance companies. But with the courts and FIA already in the thick of the NICL case, is this too little, too late?
“Not many people know that the SECP is the actual regulator and law enforcement agency that deals with the insurance sector, including the NICL which is an insurance company,” a former SECP chairman told this correspondent.
At the hearing of the NICL case on November 16, Chief Justice Iftikhar Muhammad Chaudhry had warned top officials of the Federal Investigation Agency of jail terms if they didn’t recover the Rs22.5 million in frozen assets released to the accused.
According to the procedures, however, the FIA has actually ended up standing in for the SECP, which in fact should have been the regulating and investigating authority in the NICL case.
The SECP, an autonomous statutory body, has been mandated to independently exercise state authority to regulate the corporate and financial sectors and all corporate companies across Pakistan, including the insurance industry of which NICL is a part.
The SECP has two basic powers under the SECP Act 1997: diligence and preventive powers; and enforcement powers. Under its preventive powers, the Commission has to approve the appointment of the chairman and chief executive officers of national insurance companies and ensure that the ‘fit and proper’ criterion is met. It also has to ensure that insurance companies meet the ‘reporting requirement’ and file their annual reports and accounts for examination by the SECP.
Under the enforcement powers as enshrined in Part VIII of the SECP Act 1997, the SECP has the authority to investigate and prosecute offences in the insurance industry.
In relation to the NICL, the SECP has failed to exercise both these responsibilities.
The two primary issues highlighted in the NICL scam relate to the nepotistic appointment of an unqualified person, Ayyaz Niazi, as its chairman; and fraudulent investments made at exorbitant prices by NICL under the said chairman in real estate property.
“The law provides that the directors and chairman appointed by the federal government must meet the ‘fit and proper’ criteria provided by the Insurance Ordinance and SECP,” an SECP former chairman told The News, seeking anonymity.
Section 12 of the Insurance Ordinance 2000 provides the criteria for sound and prudent management: “A person is a fit and proper person who possesses such experience and qualifications as are appropriate for the duties for which he is responsible, and conducts those duties with due diligence and skill.”
It was SECP’s legal obligation to ensure that Ayyaz Niazi, who had no experience or qualifications relating to the insurance industry, was not appointed as NICL chairman. “The chief executive could not have been appointed without SECP’s approval. If he [Niazi] had no experience why was he appointed? That’s a question SECP has to answer,” said Salman Raja, a Supreme Court lawyer and an expert in corporate-regulatory affairs.
At the time that Ayyaz Niazi was appointed Chairman NICL on February 12, 2009, Mr Salman A Shaikh was SECP chairman. He took charge on Jan 12 2009 and remained in office till Nov 29, 2010.
The second issue, which relates to fraudulent investments, also comes directly under SECP supervision. NICL’s financial accounts for 2008 show that total investment made in property was Rs647 million. In 2009, however, under Ayyaz Niazi, this investment suddenly shot up to Rs4,471 million, an over 700 percent increase in one year.
“Under the Insurance Ordinance 2000, and as per SECP’s diligence and preventive powers, the SECP is legally bound to examine the audited accounts of all insurers and see that they comply with laws, regulations and accounting standards,” an ex insurance commissioner at SECP explained, adding, “It is therefore SECP’s duty and function under the law to ensure that no fraudulent transactions are made by the insurance company.”
And yet, despite receiving details of NICL’s accounts and being aware of a whopping 700 percent rise in investments, what did SECP do?
Under section 160 of the Insurance Ordinance, the SECP was bound to take action against all persons - directors, chairman and officers or outside persons - who had defrauded the NICL of its property and money. This section required the SECP to take the matter to the specially constituted Insurance Tribunal that had the power to order the said persons to pay back the money and property to the NICL.
“Where the money has been lost, the tribunal has the power to presume that every person in charge of the NICL has become accountable and can order recovery along with attachment of their personal properties. Additionally these persons can be punished for two years imprisonment,” an insider explained.
On it’s part, SECP’s insurance commissioner says SECP called for explanation letters from NICL regarding non-submission of audited and regulatory returns as well as an information letter under Section 61 of the Insurance Ordinance 2000; and issued an Examination of Accounts letter and show cause notices on 3 different occasions. If this is true, the question still remains that a specialised legal framework in the shape of the Insurance Ordinance and a separate judicial forum in the shape of the Insurance Tribunal exist to prevent scams such as NICL and hold offenders to account. And yet, these mechanisms were never activated because all are dependant on the SECP initiating action - which it did not.
Has this abdication of its obligatory responsibilities forced the court into seeking FIA’s intervention? Conceding the fact, a very senior SECP functionary said, “Had the SECP investigated and prosecuted the culprits in the NICL scam, the time and effort wasted by the Supreme Court on needless ancillary issues like interference from the political leadership, transfer of investigation officers and non-cooperation by relevant authorities and officers would have been avoided.”
“SECP’s inaction by itself warrants an official enquiry into the matter and requires that SECP functionaries involved be punished for criminal negligence,” a corporate lawyer told The News. “The only plausible explanation for this complete failure of the SECP may be that the regulator has itself has been captured by the powerful nexus between political and market lobbies and interest groups through illegal appointments at the top, just as NICL itself.”
A senior insurance adviser opined: “It may be time for the Supreme Court to summon SECP heads and ask them why they’ve been sleeping all this time. “
However, SECP insiders defend the Commission’s laxity by saying the SECP Act necessitates that between 5-7 commissioners be employed at any time to oversee the corporate and financial sectors. “We have been operating with two, maximum three, commissioners,” a source said. “This is contrary to the SECP Act and means we are understaffed and overworked.”
Asif Arif, SECP’s insurance commissioner, told The News: “SECP does not have the authority to approve NICL’s Chairman. As per Memorandum and Articles of NICL, the CEO is appointed by the Board which in turn is appointed by the shareholders, which in this case is the government of Pakistan.”
Even if that is the case,the SECP Act and Insurance Ordinance read together make it completely clear that the SECP is indeed responsible for approving the chairman nominee appointed by NICL’s shareholders by ensuring that the ‘fit and proper’ criterion was met. This it did not do.
Arif also said that “the fit and proper criteria as mentioned in Section 11 and 12 of the Insurance Ordinance puts the onus on the insurer to ensure compliance with the criteria.”
This is tantamount to the SECP expecting the insurance sector to self-regulate and abdicating its preventive responsibilities under established rules to ensure “the professional competence and capability of all persons engaged in the provision of services in the insurance sector.” Articles 29-34 of the SECP Act clearly detail the enforcement and investigation responsibilities of the SECP.
“What is the point of having the SECP as an independent regulator if we are going to leave it to the insurer to ensure compliance with rules?” said a corporate-insurance expert. “And what is the point of the SECP at all if it is left to the courts and the FIA to deal with insurance fraud?”
Recently, the SECP has made some changes in the way it supervises the insurance industry and finalised new solvency rules for insurance companies. But with the courts and FIA already in the thick of the NICL case, is this too little, too late?
No comments:
Post a Comment