Tuesday, March 14, 2006

Suisse Security Bank and Trust Ltd (SSBT) Loses Privy Council Appeal on Its License Revocation By The Central Bank of The Bahamas

Harajchi Loses Appeal 

By Candia Dames


Nassau, The Bahamas

14 March 2006

...the Central Bank governor was well within his legal rights to shut the bank down.

Saying that it would have been "inconceivable" for the Central Bank governor to have allowed Mohamad Harajchi’s Suisse Security Bank to continue operating, the Privy Council yesterday rejected the bank’s bid to have the decision of then governor Julian Francis overturned.

The high court said that SSBT’s audited accounts and its most recent quarterly reports to the Central Bank were "evidently erroneous".

"SSBT did not have cash on hand and in banks in the sums stated," said the ruling, which was written by Lord Mance.

The ruling said "the state of affairs disclosed by the evidence before their Lordships makes it inconceivable that SSBT could be allowed to continue as an operating bank", and the high court said it saw no basis on which to set aside or remit the governor’s decision to revoke SSBT’s licence and dismissed the appeal.

The bank’s licence was granted on July 20, 1993, and on March 5, 2001, Mr. Francis gave notice that he was of the opinion that the licence should be revoked on the ground that SSBT was carrying on its business in a manner detrimental to the public interest and to the interests of its depositors and other creditors.

Also on March 5, 2001, the governor appointed Raymond Winder as receiver of SSBT, but Mr. Winder had been unable to share the bank’s assets among its depositors and creditors because the appeal had been outstanding.

Mr. Harajchi had appealed a June 29, 2004 decision from the Court of Appeal, which dismissed an appeal filed as a result of the April 25, 2003 ruling handed down by Justice Austin Davis.  Justice Davis refused to overturn Mr. Francis’s decision to revoke the licence.

In a press release issued yesterday after the ruling was handed down, the Central Bank said it will take immediate steps to have Mr. Winder (now the provisional liquidator) appointed as liquidator of SSBT so that the company may be wound up and its assets duly distributed.

Attorneys for SSBT had argued before the Privy Council that by suspending, then revoking SSBT’s licence, the governor acted in breach of an interlocutory injunction granted by Justice Hartman Longley on March 2, 2001 in separate judicial review proceedings commenced by SSBT against the governor on February 22, 2001.

They had also argued that the governor, in breach of principals of procedural fairness, failed to give notice to SSBT prior to or on March 5, 2001 that he was minded to suspend its licence on the grounds on which he actually suspended it on that date, together with an opportunity to respond before he took any such step.

The third issue that the Privy Council considered was whether the governor, in breach of principals of procedural fairness revoked SSBT’s licence on April 2, 2001 on grounds different from, or additional to, those of which he had given notice on March 5, 2001, without giving SSBT an opportunity to respond to such new grounds, and in circumstances in which he did not regard the grounds of which he had given notice on March 5, 2001 as justifying such revocation.

In outlining the facts of the case, the ruling said during the second half of 2000 and early 2001 the Central Bank in correspondence and meetings insisted to SSBT that SSBT should as quickly as possible attract a significant institutional shareholder, that it should maintain a ratio of deposits to capital of 5 to 1 and that SSBT should commission a special audit of its debit card activities.

The ruling said it is the requirement to maintain the 5 to 1 ratio that was "particularly relevant" to the appeal before the Privy Council.

In a letter dated May 6, 1993, which preceded the issue of the bank’s licence, the Central Bank said that the ratio was the first "prudential norm" to which SSBT was to adhere.

The ruling said that as at September 30, 1999 SSBT’s audited accounts showed shareholders funds of $5,891,280.

In a note headed "contingency", the ruling said, SSBT had disclosed a United States judgment and stated that SSBT was appealing, but that it had paid $1.6 million into a trust account and that ‘the bank’s principal shareholder has committed to underwrite any potential loss resulting from this matter’.

In July 2000 the Central Bank sought explanations regarding SSBT’s apparently increased profitability shown by its quarterly return as at March 31, 2000 and a Visa debit card operation, about which it had not previously been informed and of which it feared use might be made by criminal elements for money laundering.

The ruling also said that at a meeting between Mr. Francis and Mr. Harajchi on August 21, 2000, the governor also objected to SSBT’s ownership being in the hands of a single family, the extent of 77.5 percent of its share capital, and urged the introduction of a significant institutional shareholder, which Mr. Harajchi refused.

The Central Bank ordered SSBT to find such a shareholder within six months.  It also confirmed its concern about SSBT’s Visa operation.

The Central Bank also ordered SSBT not to exceed the 5:1 ratio pending introduction of a credible institutional shareholder, but the ruling said SSBT soon exceeded the ratio.

On December 7, 2000, the governor expressed his disappointment in the bank’s failure to respect the Central Bank’s directive with regard to a prudential limit of $30 million it had placed on customer deposits and other funding activities, even though Mr. Harajchi had agreed to this limit and cautioned that "it is a very dangerous strategy to violate limits placed on the bank" and that "this clearly indicates as a complete failure to monitor our limit placed on the bank".

The ruling then goes into a lengthy series of correspondence between the parties, determining ultimately that based on the bank’s state of affairs, the Central Bank governor was well within his legal rights to shut the bank down.

The Privy Council said that the parties involved in the appeal have 14 days in which to make submissions in writing on costs in light of its opinion.