An Edited Extract of The Implementation of Efficacious Corporate Governance

as a Substantial Deterrent for Financial Fraud and Economic Crime in the Commonwealth Caribbean

Alyssa Hill

Abstract

This research paper examines and explores the efficacy of implementing strict corporate governance in the Anglophone Commonwealth Caribbean as a substantial deterrent from financial fraud and economic crime. The reported occurrences of corporate crime in the Commonwealth Caribbean have increased at alarmingly high rates throughout time. It is suspected and has been investigated that in Commonwealth Caribbean countries such as Barbados and Trinidad and Tobago, large corporate crimes are mainly fuelled by politics and the governmental world, particularly due to the democratic political system in which these countries partake, high managerial corruption and business façade. These factors inform the focus of this paper and are expounded upon and criticized sufficiently.

The research for this paper was executed via varying articles, newspaper exerts, journals, credible published works, textbooks, and further readings. Incorporating the information sourced from these instruments, it has been established that corporate crime, especially whitecollar crime is exceedingly prevalent in the Anglophone Commonwealth Caribbean due to the ironic lack of legal consequence as most crime is committed by those whose standard job description require, they enforce the law, not abuse it.

It is for these reasons that this paper ultimately establishes the urgent need for the implementation, and not just implementation but most importantly – actionable and effective enforcement, of good corporate governance as a safeguard against economic crime and financial fraud and it suggests appropriate reform measures and recommendations of which great heed should be taken.

I. Background

Corruption continues to be of immense concern in many developing countries. Arguably corruption is mainly attributable to poor enforcement of proper corporate governance. This is because if proper corporate governance is enforced, the previously listed attributes would cease to exist. Thus, it is the disparaging role of any country to ensure the issuance of honest disclosure and accurate information along with reliable and sagacious financial and business reporting so as to encourage and ultimately implement proper corporate governance.205 Where these attributes are lacking, corruption prevails. Jackson posited that poor regulatory systems and unskilled and negligent directors in executing their duties formed the “Genesis,” so to say, of many serious consequences, financial failures, and scandals in the Caribbean.206

Further, Vindell Kerr posits it was also what happened in Asia and post-Soviet Russia that revealed further shortcomings with how legislators approach the development of the economy. To him, without binding rules and structures that govern all “players,” chaos would most definitely be the ultimate result. This statement holds extreme validity, and it is proven based on why the law was implemented. Binding rules, constituting of promulgated consequences, must be enforced in a society so as to disallow people from relying on their own vices and ultimately, enacting chaos. Once actively enforced, laws create a structure in which each citizen abides so as to avoid facing the consequences. Therefore, the rules of corporate governance should be binding, and should hold great consequence. It is only when these rules become binding upon entities that it will be enforced. It goes without saying that Commonwealth Caribbean countries need proper economic structure.

The very serious collapse of Colonial Life Insurance Company Limited (CLICO), a huge and once prominent financial conglomerate in Trinidad and Tobago, was another great example of another weakness in the way policy makers approach economic development. CLICO’s crumble was a complete shock and was devastating that its collapse on January 30th, 2009, is still being felt by today’s economy in Trinidad and Tobago and the wider Caribbean. CLICO encompassed over 65 companies in 32 countries with consolidated assets amounting to US$16 billion.207 This crisis will be further discussed however, in Chapter 3 of this paper.

205 Vindell L. Kerr, Towards a Caribbean Wide Corporate Governance Framework, 2004.

206 M K Jackson, “Ownership, Corporate Governance and Liquidity in Caribbean Firms” (MPhil thesis, Queensland University of Technology 2013).

207 Ibid

Also, Barbados experienced the collapse of Trade Confirmers Limited (TCL). This was a finance company which had been offering higher than market interest rates on deposits and in 1987, it collapsed leaving depositors out of pocket to the sum of US$1.2 million.208

However, it must be noted that while many Caribbean economies have experienced serious and detrimental collapses due to their inadequate implementation of proper corporate governance procedures, effort has been made to cure this economic deficiency. The Organization for Economic Cooperation and Development (OECD) for instance, officially developed their G20/OECD Principles of Corporate Governance209 in 1999. These principles set out specific guidance for policymakers, regulators and market participants in improving the legal, institutional and regulatory framework that underpins corporate governance, with a focus on publicly traded companies.

II. Introduction

The OECD posits that corporate governance is “the system by which business corporations are directed and controlled”210 and that “proper corporate governance aids to construct a trustworthy environment, a transparent environment and an accountable environment required for nurturing long-term investment, financial stability and business integrity, which in turn creates stronger growth and inclusivity.”211

Throughout the many satisfactory definitions, most fail to touch on the direct co-dependent relationship between both corporate governance and the political and overall, governmental world, especially in the Commonwealth Caribbean, where most of these countries are governed by a two-party democratic system.

It is imperative corporate governance is implemented from the aspect of shareholders Indubitably the election of competent and skilled directors may lead to economic growth of the country in which the company operates through corporation tax, PAYE (Pay As You Earn) and NIS (National Insurance) contributions to name to a few.

To have effective corporate governance, there must be an effective government first. But in the same light, there must also be an equally effective corporate governance framework set up in

208 Ibid

209 OECD, G20/OECD Principles of Corporate Governance, < https://doi.org/10.1787/9789264236882en. > accessed October 15th, 2022

210 OECD Principles of Corporate Governance < https://link.springer.com/chapter/10.1007/978-4-43130920-8_10 > accessed October 13th, 2022

OECD. < https://www.oecd.org/corporate/ > the country, to not only regulate the powers and proper duties of a director, or a shareholder, but to regulate those of the government as well. It is not only crucial that the corporate governance within a corporate office be implemented effectively, but it is important that the same ideal framework be taken on by government as well. If an economy fails due to bad corporate governance, it reflects greatly on the government, particularly the legislative arm as it is their direct responsibility to ensure that one, there are laws in place to safeguard from detriment and two, these laws are effected, enforced and abided by. On the other end, when good corporate governance is enacted, corruption will seize. It is in this effort that the call for efficacious corporate governance be made now. Nonetheless, where good corporate governance is both recognized and implemented, a country will have a successful corporate sector and an equally successful government. In small developing countries “proper corporate governance results in resources being properly utilised, capital being easier to access, great improvement in opportunities for citizens to be employed, and a better chance of developing in a sustained way efficient domestic or regional capital markets. Corporate governance is also important for the effectiveness of public institutions; better-governed companies are less likely to bribe regulators and judges.”212 Further, it can attract foreign investors as it is a “prerequisite for attracting patient equity capital that can contribute to domestic sustainable growth.”213

III. CHAPTER ONE Directors’ Duties – Companies Act

Section95 of the Barbados Companies Act provides, “Every director and officer of a company in exercising his powers and discharging his duties must act honestly and in good faith with the company’s best interest in mind; all while exercising care, diligence and skill that a reasonable person would in a similar scenario.”214 Similarly, section 99 of the Trinidad &Tobago Companies Act instructs that, “Every director and officer of a company shall in exercising his powers and discharging his duties act honestly and in good faith with the company’s best interest in mind; all while exercising care, diligence and skill that a reasonable person would in a similar scenario.”215 When juxtaposed to each other the legislation in these

212 Why Good Corporate Governance is Crucial to Development

<https://www.oecd.org/newsroom/whygoodcorporategovernanceiscrucialtodevelopment.htm > accessed October 14th, 2022

213 Ibid two territories makes it clear that a director has a duty of care which must be undertaken by law. Folkes-Gibson posits that the director’s duty of care has evolved from very little expectation of directors and officers being based on a purely subjective standard, found at common law,216 to what has been accepted as an objective/subjective test of that which “a reasonably prudent person would exercise in comparable circumstances.”217 Peoples Department Stores Inc. (Trustee of) v Wise, 218 is authority for the view that duty of care, diligence and skill “imposes a legal obligation upon directors … to be diligent in supervising and managing the corporation’s affairs”. The test for directors’ duty of care is objective. Therefore, the decisions of directors and officers must always be reasonable business decisions regardless of circumstance, including the prevailing socio-economic conditions, about which they knew or should have known.219 In BCE Inc. v 1976 Debenture holders (BCE)220 it was noted that the duty of care, diligence and skill was owed to stakeholders, including creditors.221 In analysing this case therefore, creditors are allowed to bring an action for these breaches, where the statute does not limit the duty to the company alone.

IV. CHAPTER TWO: The Scandal that Shook Barbados – Trade Confirmers (Barbados) Ltd

In the previous chapter, the director’s duties were discussed. The focus of this present chapter is on one of Barbados’ most prominent corporate scandals, TCL. It will be discussed however, that there is need for greater focus on effective corporate governance in Barbados. Admittedly there has been a collective fervent effort to combat veritable threats of corruption. Lastly, this chapter will conclude by highlighting personal recommendations on how this crisis could have been avoided and how, by actively implementing both existing corporate governance rules and cultivating new methods, Barbados can avoid crises in the future.

TCL was a prominent, local, majority-owned, financial conglomerate incorporated in Barbados on March 31, 1982, under the Barbados Companies Act with an authorized share capital of

216 Ibid (n 214) chap 3. Pg 68-69. The case of Re City Equitable Fire Insurance Company Limited [1925]

1 Ch 407 (CA) is instructive here where Romer J set out the standard subjective test at that time, for whether a director had breached his or her duty of care as a director. This is now bad/old law.

217 Ibid

218 [2004] SCC 68 [62]

219 Ibid

220 [2008] SCC 69

221

(Trustee

$5,000,00.222 Trade Confirmers had a minority held in Trinidad and Tobago which had a similar name, and according to the Nation News Barbados, it was revealed that it was actually a subsidiary of the same Trinidad and Tobago company which had been liquidated in 1986.223 According to an unnamed researcher, this left “much concern . . . by all of the depositors about the impact, if any this would have on the Barbados operation ”.224 “At this time,” wrote Juliana Thorpe-Taitt, “the managing director gave the assurance to depositors that the collapse of the Trinidad company would have no impact on TCL since the Barbados company was a local company, and the majority of shares were held by Barbadians”.225 Thompson wrote that despite the assurances from Government that the operations in Trinidad of CLICO and operations in Barbados were still viable after the collapse of the parent company, CL Financial, investors in Barbados and in the islands of the OECS were still fearful that they may lose their money.226 The investors’ hesitancy was very warranted in this circumstance, especially when it was uncovered that the negligence and incompetency of the directors caused the ultimate demise of TCL. While it is traditional for investors to make deposits into known financial institutions, and it is understood that anything surrounding the daily business investors partake to be risky in nature, it is ludicrous to expect investors to trust a financial system that was never properly regulated and safeguarded in the first instance.

William Layne wrote that at the time, TCL was offering interest rates on deposits that were more than what the other regulated entities in Barbados were offering.227 Unfortunately, however, all the depositors lost their money. TCL, though a deposit taking institution, was not regulated by the Central Bank and this brought about a change of legislation after the event to regulate these Finance Companies.228 On more detail, “per the Memorandum of Association, Trade Confirmers (Barbados) Ltd offered a variety of financial services such as carrying on the business of financiers and granting loans to name a few. After only operating for one year, Trade Confirmers Barbados Ltd was designated an official Financial Institution on April 8, 1983, on recommendation of the Central Bank of Barbados. This new status allowed the Central Bank to exercise a measure of control over Trade Confirmers (Barbados) Ltd by conducting

222 Ron Sookram, Corporate Governance in the Emerging Economics of the Caribbean: Peculiarities, Challenges, and a Future Pathway University of the West Indies, January 2016

223 Rhonda Thompson, “Counting the Cost”(Nation News) September 19th, 2010

224 Ibid

225 Ibid

226 Ibid

227 William Layne, Recent Financial Failures in the Caribbean – what were the causes and what lessons can be learnt? 2012

228 Ibid periodic inspections of its books and accounts. The financial company launched a successful advertising and sales campaign boosted upon the basis of the promise to pay above-market interest rates on deposits, particularly, higher than those offered by already established commercial banks in Barbados at the time.”229 It was this way that they enticed depositors as these rates were unprecedented and highly attractive. “By the end of August 1983, Trade Confirmers (Barbados) Ltd had received deposits to the total of US$2.4M. Almost four years later, Trade Confirmers (Barbados) Ltd went into receivership on October 9, 1987.”230

In 2010, the Nation News Barbados reported that after the company’s receivership “A commission of inquiry … headed by Justice Lindsay Worrell, and including Lionel Moe and Rawle Brancker as members, was set up by the then Governor General Sir Hugh Springer, and held its first meeting on March 28, 1988, at the Caribbee Hotel, Christ Church.”231 The purpose of this Commission of Inquiry was to conduct a thorough investigation into TCL and report on the following:

1. “The causes of the collapse of Trade Confirmers (Barbados) Ltd.

2. Whether the business of Trade Confirmers (Barbados) Ltd was carried on negligently or with intent to defraud the depositors and or other creditors, and shareholders, or in any way that was unfairly prejudicial to, or unfairly disregarded their interests;

3. Lastly, to make such recommendations as considered and deemed appropriate.”232

“What was uncovered by the Commission was that TCL Ltd was under-capitalized from the genesis of business and in breach of many financial regulations. The Central Bank inspection in May 1984 revealed that the funding of TCL along with the fact that eightythree percent of all deposits were for periods of two years and less, thereby making the deposit base very volatile, alerted red flags for the Commission. It was uncovered that withdrawal of either and or both of these deposits could have placed TCL into serious liquidation.”233

During the premier inspection, there was a representation of a loan-to-deposit ratio of 204% and clearly indicated that TCL was severely overlent. The Commission also found that there was a lack of current financial information on the borrowers and that even where there was

229 William Layne, Recent Financial Failures in the Caribbean – what were the causes and what lessons can be learnt? 2012

230 Ibid

231 little financial information, many of the borrowers had poor credit ratings at other financial institutions. TCL was also guilty of breaches of the Barbados Rate of Interest Act, Chapter 316234, the Barbados Hire Purchase Act Chapter 328235, the Barbados Exchange Control Act Chapter 71236, and the stipulations in relation to unsecured loans to directors. As a matter of fact, two of TCL's directors had already obtained advances from the company, all of which were unsecured. In November 1984, a subsequent inspection ensued and uncovered that TCL had changed very little in their operations. The number of deposits had decreased from a total of 97 to a total of 91 and borrowings from commercial banks had increased by a total of 37%. Additionally, around 40% of Trade Confirmer’s loans’ portfolio was classified as “substandard.”

Thorpe further posited that “what unfolded over the next three months painted a picture of ineptness from directors, management and auditors and the inquiry revealed a blatant effort to mislead and deceive depositors; and a lack of timely action by Central Bank authorities in dealing with the obvious [breaches] that were made by the institution.237 This is why good and effected corporate governance by way of competent service providers is necessary.

The inquiry also uncovered high incompetence and gross negligence by TCL’s auditors. In verbal testimonies at the inquiry, both the audit senior and the audit partner admitted that they had no experience in auditing financial institutions. This was a pellucid contravention of what was legally required by the guidelines set out in the Handbook of the Institute of Chartered Accountants of Barbados (ICAB), of which the auditors were members. As members, there was no excuse for their dishonesty and incompetency. As a member of ICAB, it was reasonably expected of them to both know the guidelines as well as abide and carry out honest business in accordance with them. However, it was the upmost duty of TCL to ensure their auditors were competent as one of the most basic corporate governance rules/principles is to have competent service providers.

In continuance, the lack of conformance to corporate governance not only affects the government, but individuals as well. The commission concluded the following:

234 Trade Confirmers Ltd more than likely contravened s. 3 of the act which reads: “no person, other than an exempted person, may in any contract made in Barbados, after the 8th October 1973 (a) directly or indirectly charge, secure or reserve a rate higher than the prescribed rate.

235 1959-19

236 1967-53

237 William Layne, Recent Financial Failures in the Caribbean – what were the causes and what lessons can be learnt? 2012

• “The business of TCL was carried out by the Directors in a manner that unfairly prejudiced and unfairly disregarded the interests of the depositors, shareholders and creditors;

• The directors were negligent in failing to exercise due care and diligence in the management of the company;

• The chairman and managing director withdrew funds of the company without the authority of the board of directors;

• The managing director caused fictitious entries to be made in the account books of the company and that several of these transactions appeared to be fraudulent;

• The auditors failed to adhere to generally accepted auditing standards in the acceptance and execution of the audit; and

• The Central Bank of Barbados failed to exercise its powers under Section 36 of the Central Bank Act, allowing them to place restrictions on Trade Confirmers.”238

Thus, “The collapse of this institution reverberated throughout the Barbadian community for many months, even years. At its conclusion, the commission stated that “its secretary had forwarded all the transcripts of the evidence to the Director of Prosecutions”. However, no one was ever prosecuted, and the depositors remained the ultimate losers.”239

The last point is why bad corporate governance will continue. It is certain that this lack of sanction is a key factor to the rampant abuse of power, lack of implementation of good corporate governance and the devastatingly, common occurrence of corruption. Nevertheless, TCL’s downfall is a classic example of the lack of good corporate governance and particularly showcases the sad reality that where corporate governance is taken for granted, a corporation will ultimately fail.

Implementations

In February 2013, the Central Bank of Barbados released a “Corporate Governance Guideline”, of which all licensees should abide. The central bank recognised various crucial elements to good corporate governance, namely the nature and frequency of both internal and external audits, in respect of the nature of the particular corporation, along with a specified overview of the role of the bank, risk management, the role of the board members and qualifications amongst other things.240 Pertaining to qualifications specifically, the guideline requires that, “Board members should possess, both at the individual and the collective levels, appropriate experience, competencies and personal qualities, including professionalism and personal integrity to enable them to exercise their duties of care and loyalty.”241 This guideline is particularly important, as a major component of the biggest financial crisis Barbados ever experienced was rooted directly in the incompetence and negligence of the directors. Thus, the need for directors is further enforced and emphasized in the Corporate Governance Guideline and was a great implementation by the Central Bank.

Further, the Government of Barbados implemented a Corporate Governance Authority by establishing the Financial Services Commission on April 1st, 2011, which was born by virtue of the Financial Services Commission Act 2010.242 The Financial Services Commission enacted this recently developed act so as to enable the efficacious implementation of good governance, thereby requiring all financial institutions in Barbados to create and effect clear company policies, procedures and systems within a corporation to act as reliable and sensible guides for the management of both governance risk and the behaviour and conduct of all Directors, senior management, officers and other key personnel within an organisation.243 The implementation of this 2022 Corporate Governance Guideline is highly progressive and sets out very clear and effective guidelines for better corporate governance that if actioned, Barbados can both minimise board incompetency and negligence and also become a beacon for the rest of the Caribbean.

Lastly, it was announced to the island via radio broadcasting on the early morning of November 17th, 2022, which was later published in print media, that there would be the creation of an Anti-Money Laundering Sector (Compliance Unit) within Sandals Hotel via the FATF Action Plan

Financial Action Task Force. The Minister of Home Affairs and Information, Wilfred Abrahams, in speaking on behalf of Attorney General Dale Marshall, noted that “in February 2020, Barbados made a high-level commitment to the Financial Action Task Force (FATF), signalling its intention to remain a good international partner in the fight against money laundering and terrorist financing, by implementing an agreed Action Plan.”244 Thus, the

240 Central Bank of Barbados Corporate Governance Guideline 2013:01.

241 Ibid, 4.3.1.

242 Barbados Financial Services Commission Act.

243 Financial Services Commission Corporate Governance Guidelines functions of this Anti-Money Laundering Compliance Unit will include identifying emerging risk and compliance trends on a macro basis, identifying specific entities that may merit increased scrutiny through an inspection or targeted follow-up, and increasing the knowledge of the DNFBP (Designated Non-Financial Businesses and Professionals) sector.245

In conclusion, though Barbados suffered the detrimental effects of the collapse of TCL in 1987, along with other crises not discussed246 it is evident that in 2022, Barbados is ready to get on track to recover from these stains on their financial industries by way of developing the 2022 Corporate Governance Guideline and the Anti-Money Laundering Compliance Unit. The view is that with the creation of this statutory authority and the Unit good corporate governance can finally be effected in Barbados. The pre-existence of corporate governance measures is respected, as the purpose of this paper is not to imply that guidelines and statute do not exist, and while it is appreciated that a Guideline has been effected in 2022, it is also appreciated that these acts alone are not enough, if only prima facie performative inter alia.

Recommendations

As such, a few recommendations can be made.

1. Corporate Governance in Barbados must have a governing body. The Financial Services Commission is most suitable since its body developed the Guideline. Therefore, Corporate Governance should be made more of a priority going forward by the Commission, where they are mandated annual reports and bi-annual investigations executed.

2. There should be serious penalties similar to those of the failure to meet Economic Substance Requirements. Deterrence, especially of a general nature, is a great method of doing so. If harsh monetary or criminal penalties are instated for breach of the Corporate Governance Guideline, the occurrence of such will surely diminish. This is especially important when you consider the statement coming out of the Inquiry of Trade Confirmers by the secretary, where it was recorded that no prosecutions were carried out. If Barbados starts carrying out prosecutions for these breaches – breach of directors' duties, breach of the Guideline etc., an exceeding number of corporations will take corporate governance seriously and implement effective corporate governance.

3. Great heed must be taken to the knowledge, expertise and qualifications of a director, auditor, shareholder or general staff personnel. Thorough background checks and interviews should be conducted to ensure that directors are capable of carrying out their duties and possess basic traits such as transparency, reliability and responsibility, along with proper qualifications and knowledge because Trade Confirmers is a classic example of the failure to do so.

4. Lastly, directors, shareholders, auditors etc must take their roles seriously and carry out their fiduciary duties as prescribed within both the company policy – which should have taken reference from the anti-money laundering legislation and corporate governance guideline – and the legislation, codes and guidelines.

V. CHAPTER THREE: The Financial Scandal that Shook Trinidad and Tobago – Colonial Life Insurance Co.

In this chapter, the financial scandal that shocked Trinidad and Tobago and the entire Commonwealth Caribbean at large, the Collapse of CLICO, is discussed. Further discussion will be had regarding the intricacies behind CLICO’s collapse as well as how this collapse could have been avoided as well as a dive into the Trinidad and Tobago Corporate Governance Code of 2013. This chapter will also examine the omnipresent corruption in Trinidad and Tobago, which is a prominent showcase of the lack of corporate governance. Lastly, this chapter will conclude by highlighting the implementations, where any, that Trinidad and Tobago have made pursuant to this scandal to enforce good Corporate Governance as well as personal recommendations on how this crisis could have been avoided and how by actively implementing both existing corporate governance rules and cultivating new methods, Trinidad can avoid or limit financial crises in the future, thereby eroding economic crime and financial fraud as well as successfully make strides to eventually efface the proverbial stain corporate and political corruption has left on Trinidad.

CLICO (Colonial Life Insurance Company) was incorporated on December 15th , 1963 and began operating in July 1937 by Lawrence Duprey.247 When Duprey first considered establishing CLICO, the existence of the local insurance industry was nil because mainly foreign life insurance companies operating through local agents ruled this industry.248 As such, the initial response to the physical manifestation of a local life insurance company consisted of mixed opinions. CLICO quickly became the largest insurance company in Trinidad and Tobago. “In CLICO’s first year of operations, through selling Industrial Health and Accident and Life Insurance products with a unit premium of six cents per week, the insurance agents were able to collect a booming $21,472.25 in premium and policy fees. A surplus of $636.18 was realized in that year alone.”249 CLICO’s imposing presence in Trinidad and Tobago and across the region, coupled with its phenomenal business success made it the entrepreneurial flagship of the entire Caribbean.250

In the wider Caribbean region, the flagship of CLICO, CL Financial, was the major privatelyowned corporation in the region who provided insurance, financial services, real estate, manufacturing, forestry and agriculture, distribution and retail, energy, media and communications.251 CL Financial was located in thirty-two countries via various associated and joint venture companies and more than sixty-five subsidiaries spanning the Commonwealth Caribbean, Florida, Europe, the Middle East and Asia.252 CL Financial controlled total assets in excess of TT$100 billion; owned 55 percent majority ownership of Republic Bank, which is the largest and most prominent bank in Trinidad and Tobago, owned Methanol Holdings of Trinidad Ltd. which operates M5000, which is the world's largest methanol plant at Point Lisas and controlled BA (British American Insurance Company.) This company had a few branches which possessed assets worth more than TT$38 billion, which is more 25% of T&T’s Gross Domestic Product.253

CLICO underwent 3 fundamental development stages. In Phase One, this concerned the first forty years of CLICO’s existence. During these first forty years, Colonial Life grew steadily and operated strictly within the confines of a conventional life insurance company committed to regionalism. C L Duprey established life insurance agencies in the south of Guyana, to the north in Jamaica, however, Trinidad and Tobago remained its ultimate base and about 85% of its business was obtained right in Trinidad and Tobago. A subsidiary was also established in the United Kingdom. CLICO held investments in British Government securities, company

249 Ibid

250 Wayne Soverall, “CLICO: The Rise and Demise of a Caribbean Conglomerate”, (Department of Management Studies, UWI Cave Hill) February 2012

251 Ibid

252

253 stocks and shares, mortgages and project financing. At the end of these forty years, CLICO’s assets stood at TT$125 million.254

During that period, COLFIRE was incorporated, and a decision was taken in 1977 to acquire the T&T portfolio of Confederation Life Insurance Co.255 Nevertheless, management remained consistent throughout this phase.

Phase Two occurred during the year 1978 up until the year 1986. During these next ten years, a lot of economic activity was experienced in Trinidad & Tobago as the so-called â-oil boomâ stimulated construction, increased salaries and employment and an industrialization program was embarked upon by the Government. Along with this, there was also the acquisition of the Confed. CLICO’s portfolio increased insurance sales to the extent that its assets increased to 4815 million at the end of that period. There was little change in its original philosophy during this phase, which remained solely life insurance oriented. However, the pressure of finding suitable investments influenced the company to acquire two branch banks operations in Barbados, Citibank and Chase Manhattan. At this time, CLICO also established two insurance subsidiaries were also incorporated in Barbados. At the end of this decade, CLICO’s investment strategy changed to one of a particularly diverse palette and entered the primary financial market through direct investments in enterprises of its selection.

Phase Three depicts the period from 1987 till shortly before the collapse of CLICO. It is documented that the “most significant event which took place during this period was the appointment in 1987 of Mr. Lawrence Duprey as Chief Executive; and with his appointment emerged a new management team, a new philosophy and a new investment strategy.”

Mr. Lawrence Duprey, being heavily inspired by his experience in Barbados and the Eastern Caribbean, as well as using his international connections, made it his mission to transform the entire character of CLICO. CLICO expanded their portfolio to profitably exploit the natural resources of the Caribbean through export-oriented enterprises. This philosophy was growth; the experience was phenomenal, direct investments were made in property companies such as shopping malls and or supermarkets, energy companies, forestry and or wood products groups and financial services. Further, CLICO expanded to the CLICO Conglomerate and at the end of this phase, the total assets of the CLICO group were totalled at US$2.5 billion as compared to $135 million in 1986.

CLICO’s impressive business portfolio was unfortunately not substantive enough to prevent the financial institution’s collapse, however. Soverall posits that CLICO’s demise was attributed to many factors but two will be discussed, namely a flawed business model and the lack of effective corporate governance. These two factors were the most crucial to the company’s demise.

Firstly, the flawed business model of CLICO plagued them and played a majorly significant role in the collapse of CLICO on January 30th, 2009. As stated previously, CLICO was a subsidiary of the parent company, CL Financial. However, CLICO functioned as the primary source of deposits that were used to finance CLF’s expansion through investments and acquisitions held in the name of other entities in the group. “The nature of the ownership structure of these enterprises significantly varied. Some were wholly owned and managed by CL Financial, others were simply investments that CL Financial did not participate in managing, and some were a mixture of both. In some cases, CL Financial borrowed from other subsidiary financial institutions to invest, and in most cases, it used CLICO, Clico Investment Bank Limited (CIB), British American Insurance Company (BA), or Caribbean Money Market Brokers (CMMB) as the conduit to purchase investments or borrowed from them to do so. In short, CLICO became the guarantor for many of CLF’s assets most of which were heavily pledged and, therefore, limited in terms of the potential proceeds from asset sales.” Soverall furthers this point by positing that because of this, both CLICO and Clico Investment viewed as isolated cases of an overly aggressive and risky business model.

It is respectfully submitted that the entire concept of CLICO’s business model operated arguably along the lines of a Ponzi scheme because it would take consumers depositing extremely large amounts of deposits on a short-term basis, all the while still paying high interest rates, which were then used for long-term investments that resulted in significant cash flow problems which precipitated CLICO’s eventual collapse.256 On June 7th, 2011, the Central Bank of Trinidad and Tobago alleged that CLICO operated both an external Ponzi scheme in which the life insurance company took in new money from policyholders and mutual fund investors as well as an internal Ponzi scheme in which money was diverted or misappropriated away from CLICO to fund CLICO Investment Bank, CL Financial or any other group entities within the CLICO conglomerate….257

Secondly, Soverall posits that the corporate governance structure of the conglomerate CL Financial must be factored into the examination of CLICO’s collapse because although the business model was high risk and dangerously flawed, the regulators were not blameless. Ewart Williams instructs that the evidence indicated that the “soft touch approach to regulation” which was essentially based on moral suasion while aligned to the philosophy of the market mechanism had led to the excesses that caused the CLICO crisis.258 It is concurred that the corporate collapse of CLICO, more than anything, highlighted the critical need for legislation and regulation to keep pace with the rapidly evolving operations of financial institutions.259A corporate governance legislation within every country is required to ensure that regional regulators have supervisory authority over the operations of the conglomerate or holding company structure which has now become the preferred form of organization for large financial institutions such as CLICO.260 In addition to the regulatory gaps, the CLICO case perfectly illustrates that poor corporate governance, weak risk management practices, and inadequate management information systems were also major contributing factors that led to the collapse of CLICO.261 Further, the CLICO case acts as the perfect physical manifestation of an example of the demise a lack of good corporate governance eventually leads to.

Soverall identified some of the deficiencies in CLICO’s corporate governance structure to be too much control by the chairman,262 who also held the position of the Chief Executive Officer, the failure of directors to carry out their fiduciary duties and failure to abide to their duty of care and as well as a prominent lack of skill, conflicts of interest, poor risk management as

257 “Trinidad Central Bank claims misuse of CLICO funds,” (Daily Nation Newspaper) June 11, 2011.

258 Ewart Williams, Governor, Central Bank of Trinidad and Tobago, Opening Address on “The Future of the Financial Industry After the Crisis,” (The Caribbean Centre for Money and Finance 14th Caribbean Business Executive Seminar, Port of Spain) April 30, 2010.

259 Note, this legislation and regulation Wayne speaks of his in article is simply the development and institution of a corporate governance guideline, or code/act. Seeing as CLICO collapsed in 2009, and this article was produced in 2012, this information represents the former state of the law prior to the Trinidad Corporate Governance Code being brought into force in 2013. This will be examined further within this chapter.

260 Ibid

261 Ibid previously stated, strong political influence and overall weak supervision by the Central Bank of Trinidad and Tobago. However, there were signs that CLICO was going to collapse way before 2009. A 1998 Report of the Office of the Supervisor of Insurances had raised the red flags on the affairs of CLICO. “The Report indicated that CLICO had failed to satisfy its STAT fund, which was a safeguard used to ensure the dependability of life insurance institutions. The fund recorded a TT$62.4M deficit in 1992, a $1.3M deficit in 1993, a $64.7M deficit in 1995, a $574.1M deficit in 1996, and a $690M in 1997. It also stated that CLICO was “essentially bankrupt,” illegally paid dividends though the STAT fund was in scarcity, understated liabilities by not submitting adequate actuarial certificates, and was using policyholders’ funds to offer guarantees to affiliates. CLICO had also requested the Office of the Supervisor of Insurances to approve a debenture for TT$571M from CL Financial. The Office refused noting the company’s low returns and the lack of free assets to support the debenture as well as the company defaulting in 1996/1997 on payment of $4M on a debenture already issued to CLICO in 1992. This was a result of CLICO’s loan to CL Financial which increased from $350M in 1995 to $571M in 1996.

262 This is a major red flag as just with politics where if the majority of the parliamentary seats are held by the same political party there will be little opposition and as such, all decisions made will be onesided, like-minded and heavily biased.

A blind eye cannot be taken on the effect of a lack of good corporate governance by way of political corruption had on CLICO’s collapse as well. The Trinidad Express Newspaper reported that CL Financial and subsidiaries provided $TT 20 million for the People’s National Movement campaign in 2007 and that Mr. Lawrence Duprey also provided gifts and scholarships to the Panday family while Mr. Panday was Prime Minister.

Implementations

The entire region felt and still feels the effects of CLICO’s collapse. So much so that in 2018, compensation was only then being distributed through Reslife.263 Nonetheless, four years after the collapse of CLICO, the Government of Trinidad and Tobago brought into force the Trinidad and Tobago Corporate Governance Code 2013.264 The justification of this code was to enhance business governance and performance, strengthen transparency and efficiency in the market as well as improve the overall investment culture.265

263 “Nine years after CLICO meltdown, compensation begins” BNAmericas News Article, March 10th 2018.

264 Trinidad and Tobago Corporate Governance Code 2013

265 Ibid

The code encompasses five main principles. Principle one is to establish a framework for effective corporate governance. To do so, the code instructs that every company should be headed by an effective Board to ensure the long-term victory of the company.266 Principle two is strengthening the composition and performance of board and committees since there should be a balance of independence and diversity of skills, knowledge, experience, perspectives and gender among Directors to ensure that the Board works effectively.267 Principle three is to reinforce loyalty and independence since all Directors should act honestly and in good faith, in the company’s best interest.268 Principle four is to foster accountability since the board should present an accurate and understandable assessment of the company’s performance, position and prospects.269 Lastly, principle five is to strengthen relationships with shareholders to facilitate their ownership rights and engagement with the company.270 Within each principle excellent recommendations are provided which should be legally binding requirements of every corporate and financial institution within Trinidad and Tobago. The Code is only intended for all companies with public accountability for voluntary adoption under an “apply or explain” basis.271

Ultimately, while the implementation is appreciated, it is not substantive. CLICO was too big of a devastation for Trinidad to implement a voluntary adoption code; these principles should be legally mandatory. When compared to the Revised Barbados Corporate Governance Guideline 2022, this code does not actively place a duty on corporate and financial institutions to abide to corporate governance.

Recommendations

1. A proper corporate governance body and authority must be established as soon as possible. There must be legally binding rules set out for director’s duties, shareholder responsibilities, auditor responsibilities etc which require and promote transparency, responsibility and a high level of accountability from each member of the board, where if breached strong consequences follow. The expectancy, however, is that the rules and requirement be abided to in the first instance.

2. Training and education are crucial for each board member to ensure that each position and duty is executed as expected.

3. The disbursement of funds to political parties must be supervised and controlled since bribery is prominent in Trinidad. Bribery must be acted upon now and can be dismissed through the removal and or prosecution of corrupt CEOs, directors and or government officials, along with the call for regular audit reports and implementing Compliance Units within both the Government and corporate institutions.

VII. Final Recommendations

Firstly, while regulation needs to focus on corporate governance, it also needs to focus on risk governance and management in order to prevent further financial scandals and by proxy, financial fraud and economic crime. Both crises discussed revealed severe gaps in existing regulation which need to be filled. To be successfully executed however, there needs to be the implementation of governing corporate governance body to enforce these saving factors. There needs to be an overseeing body because even with codes and guidelines corporate crimes are prevalent. Further, the government needs to implement harsh considerations with appropriate sanctions to overhaul the regulation of the financial services sector within their countries.

Secondly, when auditors fail to execute their duties, they directly fail to implement proper corporate governance. For example, the auditors for both Trade Confirmers (Barbados) Ltd and CLICO failed to mention the fact that these companies did meet their obligations under the STAT Fund within any audited statements. Therefore, there must be a stricter call for the adherence to their respective chartered Accountant’s Act by all auditors and commensurate sanctions for contraventions.

Thirdly, the Government must be careful with their injections into big financial and corporate institutions, especially where there is a lack of transparency and eminent presence of discrepancy in their annual financial statements for example. This is because taxpayers bear and foot the consequences of ineffective regulation the most. Trinidad and Tobago till this day is still recovering the hole driven into their economy by the large injection ($TT 7 billion) into CL Financial.

Lastly, one person should never hold the position of Chief Executive Officer and Chairman at the same time. There must be a dichotomy between the two positions. CLICO is the classic example of the need for this dichotomy as Mr. Lawrence Duprey held both positions.

Unfortunately, this paper concludes with the forewarning that the recommendations provided will do no good for the Commonwealth Caribbean unless our governments take affirmative action against the lack of corporate governance and dramatically alter their economic regulation. It is hoped that this paper will further awaken the eyes of our governments because it is clear, after extensive research, that the Caribbean still has not fully learned their corporate lesson. Trade Confirmers Ltd collapsed an entire twenty-three years before CLICO did and yet, they both collapsed extremely similarly and because of the same deficiencies. They both ignored director’s duties and other salient corporate governance requirements and as a result, both failed. The Caribbean has the chance now to implement effective corporate governance to prevent future occurrences of financial and economic crimes and scandals.