The Commission of Inquiry into the Development Finance Corporation (DFC) began to net some big fish in its hearing today, and with its many searching questions was able to catch one big fish by the mouth.
Today’s hearing climaxed with the testimony of former DFC chairman, Jorge Omar Espejo, who now serves as the managing director of the Alliance Bank. This is an interesting convergence, since the same bank is controlled by Glenn D. Godfrey, the man who preceded Espejo as DFC’s chairman.
For the almost two hours that Espejo testified before the Commission, Derek Courtenay, a senior counsel working out of the country’s oldest, largest and wealthiest firm – W. H. Courtenay and Co., sat to his left, advising Espejo several times late in his testimony.
Espejo’s responses were not definitive enough to give the Commission anything to go on, co-chair, Merlene Bailey Martinez pointed out.
Mr. Espejo told the Commission that he graduated from St. John’s College Sixth Form and has 34 years experience in banking, having worked with Barclay’s Bank, the DFC and now Alliance.
It was Hon. Said Musa and Hon. Ralph Fonseca, who at different points controlled the DFC, who had recruited him, Espejo told the Commission. His tenure was January 1, 2003 to March 31, 2005.
The Commission probed him on a number of issues: the spurious $50 million loan the DFC got with the Belize Bank, allegedly to repay its debt to the Government of Belize; what Commissioner Herbert Lord called “a phantom meeting” that was allegedly held on March 17, 2004, where the board had supposedly approved the transaction, and a number of other issues.
As we had reported last week, the former secretary to executive manager operations, Rosalia Moore, had handed Espejo the minutes to confirm, but he told the Commission he refused to sign those minutes, because they said that he was present at the meeting when he was not even in the country.
Espejo claimed that he doesn’t sign minutes for meetings he never attended, but Commissioner Bailey-Martinez indicated this was not always the case:
“Have you ever signed minutes that you were not present at the meeting?” she asked Espejo replied: “No”
“You haven’t? Not even if another director moved and a second director seconded. You did not sign those minutes?”
“If I wasn’t there, I wouldn’t sign the minutes.”
“Because we do have minutes that you have signed not being present. No. So I’m just asking. When you first took over…”
“I would need to see them.
“When you first took over after Mr. Godfrey you would have been the succeeding chairman.”
The Commissioners noted that both they and the forensic auditor, Mark C. Hulse, CPA, searched and could find documentation to confirm that there was a board meeting on March 17, 2004, as had been claimed. The meeting is significant because this is the meeting at which the $50 million Belize Bank transaction was supposedly authorized. The Commission said that there is nothing in the records to show that there was such a meeting.
Commissioner Bailey-Martinez said that they have interviewed other directors and have yet to find anyone who actually attended that meeting.
Espejo, who served as chairman, could not tell the Commission what was the basis on which that $50 million transaction was sealed, except to say that they had had a meeting with the chief executive officer in the Ministry of Finance about the matter.
He also did not explicitly say that he saw any documentation for the transaction itself, but he told the Commission that the documents would have been seen by the internal accounting staff that booked the loan.
The Commission informed that between April 1 to October 29 that year, DFC paid out almost half-a-million in interest to the Belize Bank.
The Commission also asked Espejo about the loan the DFC guaranteed for the Universal Health Services. On March 26, 2003, the bank approved bridge financing for the UHS. Bailey-Martinez questioned how it was that the DFC held a second mortgage for the assets.
“Why was that decision made?” she asked Mr. Espejo.
He said that there was a document signed by the previous board.
The spotlight was then turned to 14 loans given to the Novelos, Arnaldo Peña, James Jan Mohammed, allegedly for “working capital for their existing operations.” But what the Commission has revealed is that these loans were actually received to pay loans for these debtors that were already in default with the DFC.
Gian Ghandi, one of Government’s legal advisors, had cautioned that doing this was in breach of the securitization agreements in which these multi-million-dollar debts had been tied up.
Commissioner Bailey-Martinez pointed out that under the agreement, loans in default should be removed from the pool, and giving new loans to cover them “was in direct violation of the [securitization] agreement.”
Another transaction that came up was Print Belize Limited. The Commission questioned why it was that even though Bel State had assessed the assets as having $3.8 million in value, they were sold for $2.3 million to the principals of Print Belize – the same price at which GOB transferred the assets, as equity, to the DFC.
Next, the Commission questioned transactions totaling US$47 million with the International Bank of Miami – funds that were approved retroactively by the board two years after the fact, while DFC never got the funds. The Commission revealed that even though the loans were booked, no loans were transferred to DFC’s coffers.
Mark Hulse had presented a summary of his findings this morning. His final report is due mid-February.
He noted that the volume and percentage of non-performing loans (NPL) increased dramatically over the years. On 31 Dec 1999, 13% of loans were non-performing, but they increased to 36% by 2004. At 31 Dec 2003, the total book value of NPL was 84.5 million BZD. He pointed to one debtor, Arnaldo Peña and his company, who at the time owed $2.7 mil BZ and were still being granted new loans.
Novelo Holdings Limited, which had borrowed $30 million, found itself in the same situation of being granted new loans. Hulse said it appears that its non-performance was concealed by new loans, all of which became non-performing. DFC managed to recover some monies, he said, but the outstanding balance is $27.5 million even after the sale of assets following the termination of the receivership.
“Our review of the Novelo loan reveals many breaches of procedures, protocol and fiduciary duty,” said Hulse. “It also indicated conflicts of interest in which Mr. Godfrey, the chairman of DFC, appears to have been a beneficiary through his legal practice and a bank under his control.”
Hulse pointed out that a number of related party transactions involving Godfrey’s legal practice, real estate business and banking had not been disclosed in the DFC’s financial statements, and the board that Godfrey chaired had the fiduciary responsibility to ensure that they were disclosed as related party transactions under proper international accounting standards.
But beyond alleged violations of these standards, indications are that Godfrey and some other directors could also be called to answer for alleged breaches of the DFC Act, which requires that monies approved for a particular purpose are used as such. As with the case with the $50 million from the Belize Bank, it was said to have been needed for working capital, but DFC never got any money and instead, had to fork out about half a million to the Ashcroft bank for interest payments.
Apart from these concerns, Hulse remarked that Glenn Godfrey, while DFC board chairman, and his deputy, David Courtenay, whose uncle, Derek, who provided legal counsel for Mr. Espejo today, usurped control over DFC from the development bank’s executive managers.
The auditor noted that while the Musa administration was aiming to fulfill campaign promises, the external auditors had warned directors that they were risking the financial soundness and sustainability of the DFC.