Protecting a wounded company (Part 2)

Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice-President of the Lending Services Division. Mr Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.

Legal Stew

The problems of Clico (Guyana) became public the moment that the officials of the CL Financial subsidiary disclosed that G$6.9 billion was at risk with the collapse of Clico (Bahamas). The size of this investment was an important disclosure for it may now be at the centre of likely legal headaches of Clico (Guyana) that stretch beyond the shores of the country. That possibility moved closer to reality when the Prime Minister of the Commonwealth of the Bahamas observed, a few weeks ago, that he could not find evidence of the investment that Clico (Guyana) claimed to have made.  Since then, the Government of Guyana has supplied information that it asserts supports Clico’s (Guyana) investment in Clico (Bahamas).  Adding spice to the currently slow-cooking legal stew of Clico (Guyana) is the additional realization that it could face serious ramifications at home of under reporting its foreign assets to the Guyanese authorities.  That is, of course, if the local authorities are intent on carrying out their responsibilities and upholding the law.

Reporting Deficiency

The likelihood of Clico’s reporting deficiency emerges from the data contained in the 2008 Statistical Bulletin of the Bank of Guyana (BOG).  The BOG, as part of its regulatory and supervisory roles, collects data on the financial institutions, including the insurance companies.  In managing the data, it classifies the foreign assets of the insurance companies into four groups.  One category refers to commercial bank deposits.  This category of foreign assets includes all the balances held by the insurance companies in bank accounts outside of Guyana.  The bank deposits are the most liquid and least risky of the foreign assets.  They are not typically defined as investments and are usually regarded as cash on the balance sheet of the companies.

A second category of foreign assets pertains to securities.  In this case, the insurance companies could be holders of either equity securities or debt securities of foreign companies.  Insurance companies that invest in common stock and/or preferred stock hold an equity stake in foreign companies.  Those insurance companies with secured bonds and unsecured bonds or debentures hold debt securities and are creditors to the foreign companies.   It is possible to hold both types of securities.  The debt securities and the preferred stock offer stability of income but prevent the holders of the securities from participating in asset appreciation.

The third category of foreign assets includes loans and advances.  These assets also arise from the creation of debt.  In contrast to bonds and debentures that tend to be long-term, loans and advances could be of a shorter duration.  There is a fourth category used by the BOG into which everything else falls.

Accuracy of Reporting

By providing these classifications of foreign assets, the BOG gives the public the same opportunity as the administration to form judgments about the accuracy of Clico’s reporting on its foreign dealings.  In what could prove to be a challenge for Clico (Guyana), there appears to be a discrepancy between what the BOG reported as the foreign assets of all the insurance companies and what we now know as the foreign investment of Clico (Guyana) specifically.

According to the BOG, the foreign assets of all the insurance companies amounted to G$14 billion in 2007 and G$16.5 billion in 2008.  The largest class of foreign assets for both years was bank deposits.  The insurance companies saved G$11 billion of their assets in bank accounts in 2007, leaving G$3 billion as investments in other forms of foreign assets.  The importance of these numbers lies in their contradiction of the size of the Clico Guyana investment at risk and what would have been reported to the Guyanese authorities.

By eliminating bank deposits, a sizable chunk of foreign assets, the BOG leaves the combined investments of all the insurance companies at G$3 billion in 2007 and G$4.5 billion in 2008.  Now that it has run into trouble and all eyes are on it, the public now knows that Clico (Guyana) had over G$5 billion invested overseas in 2007.  Applying the G$6.9 billion figure that has been reported in the news media by the administration to the year 2007 means that Clico under reported its foreign investments by about G$3.9 billion.  This discrepancy leaves open the possibility that Clico (Guyana) was not fully disclosing all the cross-border movements of its assets.  Even as it struggles with internal conflicts, Clico (Guyana) must confront the implications of the gap between its financial reports and the records supplied to the administration.  This variance also provides justification for the relevant authorities in Guyana to look deeper into the activities of this company to determine the real scope and extent of the risks to which it may have exposed its policyholders and other stakeholders.

Ownership Structure

But the broader issue of Clico’s investment in the Bahamas remains.  Pursuing this angle of the matter would not be easy because of the ownership arrangements of the companies with which Clico (Guyana) is involved.  Examining this issue will take time and access to lots of information. However, Guyanese know that Clico (Guyana) and Clico (Bahamas) are part of the CL Financial family of companies.  But their relationships differ.  Clico (Guyana) is a direct subsidiary of CL Financial and its primary shareholder is CL Financial which owns 100 percent of the shares.

As an aside, this means that Guyanese taxpayers will be giving CL Financial all of its investment back if the administration carries through on its promise that no investor in Clico (Guyana) will lose his, her or its money.  That burden will fall to the 40 percent of Guyanese who give up 61 percent of their income in the form of income taxes, value-added taxes and NIS contributions. They will be digging deeper into their pockets to protect a company whose revenues are four times greater than the total annual expenditure of Guyanese.

Returning to the discussion on ownership, Clico (Bahamas) is part of a more complex multilevel ownership structure.  Clico (Bahamas) is owned by Clico Holdings of Barbados, which, in turn, is owned fully by CL Financial.  Unlike Clico (Guyana), Clico (Bahamas) owns Clico Enterprises Limited.  This latter company also owns Wellington Preserve, Shabisco, Toma Beverages, and has a 100 percent stake in the assets of Grand Bahama Millworks, and may be the key to understanding Clico’s (Guyana) investments.  Wellington Preserve is located in Florida.  Shabisco is located in Haiti and Grand Bahama Millworks is located in the Bahamas.

Anonymity

As the lawyers and liquidators unravel the financial interrelationships among these companies, they were likely to discover the exact form and size of the investments of Clico (Guyana).  Their discovery might not be entirely favourable to Clico (Guyana) and could prove embarrassing to its directors and its management.  Guyanese must hope that their

government is not implicated in this mess as well.
It should strike any reader of the financial statements of Clico (Bahamas) as to how difficult it is to find a reference to the investment of the size claimed by Clico (Guyana).

An investment of $34 million would have given Clico (Guyana) a controlling interest in Clico (Bahamas) since it would have been the largest shareholder by far.  With an equity stake in the company, Clico (Guyana) would be identified as a shareholder of Clico (Bahamas) in the reports of that company.  That is not the case.  If Guyana had made a loan, it would be among the largest creditors to Clico (Bahamas).  That status would also warrant at least a line identifying Guyana as either a secured or unsecured creditor.  The anonymity of the investments of Clico (Guyana), therefore, is itself a mystery, and one wonders how much it has to do with sidestepping the limitations imposed by local regulations.

Economic Substance

Instead, Guyana has been mentioned as a related party in the notes of the financial statements upon whose behalf Clico (Bahamas) received money.  There is no description of the purpose or the source of the money, leaving open the investments of Clico (Guyana) to all sorts of interpretations.   That possibility also raises questions about the economic substance of the investments of Clico (Guyana), the thing that concerns most people about related party transactions.

At this stage, Guyanese can only await the outcome of the investigations and hope that the results are fully disclosed to them.  In the meantime, an effort is being made to gather more information on this unfolding story.

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