These are just some of the widespread violations of credit union laws as well as the HCU’s own by-laws, which were among the grim warning-signs unearthed since 2007 in a detailed report submitted to the Commissioner for Co-operative Development.
Last Wednesday, after years of concerns and complaints about the HCU the Government finally acted, obtaining an ex parte order which froze the union’s assets and appointed a provisional liquidator to manage what remains of the cash-strapped, but asset rich organisation.
Today, many members of the union are fearful that they will not be able to get back the money that they invested. Delinquent borrowers, too, must now realise that they are going to be called upon to account and repay.
The Commissioner’s report, dated June 8, 2007, was prepared by a seven member inspection team and submitted to Charles Mitchell, the Commissioner for Co-operative Development after the former Commissioner, Bheemal Ramroop, ordered an inspection of the HCU under Section 3 of the Co-operative Societies Act on July 4, 2006.
The report concludes: “In our opinion the HCU has not adhered to the Co-operative Societies Act, the Co-operative Societies Regulations and its by-laws. Further, the HCU has violated most of its written policies (loans, investments, etc).
“The core business of the Society (the granting of loans) was replaced by the acquisition of properties. This placed the Society in an adverse cash-flow position.”
The seven-member inspection team examined HCU records as far back as January 2000 and visited all branches of the HCU during the period September 18 to September 26, 2006.
Among their findings were: illegal and delinquent loans to several HCU officials, mortgages in violation of company by-laws, illegal loans to HCU subsidiaries, incomplete and unsigned board meeting minutes, questionable land transactions, and million-dollar discrepancies in the union’s financial statements.
So that the HCU story began long before the High Court order granted on Wednesday by Justice Nolan Bereaux. The Government was aware that all was not well with the HCU which, based on the 2007 report, was an organisation destined for a bad ending.
Among the findings of the report with regards to the granting of loans, there was evidence of loans to non-members as well as delinquent loans to HCU officers.
“Generally it was found that persons became members by purchasing $25 in shares and received huge loans in excess of $100,000 on the same day. There was little or no securities found for these loans,” the report found.
“The fact-finding sheets in members’ files found that although members did not qualify for a loan, the loans officers were instructed to grant these loans through telephone conversations...In some cases these loans subsequently became delinquent.”
Loan payments were disbursed even though there were incomplete loan application forms, no valuations of securities offered and violations of loan agreements. There was also “a large number of unsecured loans”, as well as loans granted to non-members without the approval of the Commissioner. For example, a non-member who is a Costa Rican was granted loans with a balance totalling roughly $500,000 at the time of the report.
Of the delinquent loans unearthed, the report concluded: “During the period 2000 to 2003, huge loans were granted to persons on the same day that they became members.” But additionally, a great number of delinquent loans went to HCU officials.
“Huge loans were granted (over $500,000) in excess of their (the HCU officers’) shareholding (with some officers holding shares of only $30),” according to the report.
Among these were:
...a $1.6 million loan to an official of the HCU with a stated loan interest rate of one percent. However, review of the loan by the inspectors revealed that interest was, in fact, calculated at 0.5percent. Further, several phantom deposits of $100,000, which were withdrawn exactly one week later, were discovered on the official’s statements;
...a loan to another official totalling $721,000 even though that official held $1,000 in shares;
...a loan totalling $662,165 between the period August 16, 2001 to December 10, 2002 to a member with $2,110 in shares at a rate of zero percent. These loans became delinquent by May 6, 2005 but the member was granted a further loan on that date for $150,000;
...outstanding loan balances to a member with only $25 in shares totalling $536,156. This member continued to be granted loans despite being delinquent;
...a loan totalling $305,000 for an employee who held $5,646;
...a loan for $393,000 to another official who had a shareholding of only $7,000;
...a loan totalling $268,025 to a union employee who held $30 in shares;
...similar loans, like one totalling $150,651 to a member with a $25 shareholding;
A review of all senior management loans and a random selection of staff loans found instances where approvals were not granted, but funds were disbursed; that senior managers were granted loans at varying rates of interest at the same time and that “there were instances where senior managers were granted loans, with no security offered, in excess of $500,000”.
Officers employed with the union continued to serve in their posts despite delinquent loans, in contravention of credit union laws. Loans were not granted in accordance with Section 43(3) of the Co-operative Societies Act and By-Law 29 (F).
The inspectors also found illegal loans to several of the HCU’s 22 subsidiaries. “There were no approvals from the Commissioner for Co-operatives for the loans granted to the subsidiaries (which should have been obtained) in accordance with Section 43 (1) of the Co-operative Societies Act.
“We found that the loans to subsidiaries were granted inappropriately...There were no repayments for the loans. However, the accrued interest was capitalised,” the inspectors found.
Questions were also raised over the HCU’s financial statements, particularly one recording the appreciation of investment properties placed at $25 million without independent valuation being conducted. The seven inspectors also encountered difficulties when conducting their inquiries, including the “non co-operation from management resulting in the Commissioner having to intervene on several occasions.”
Such was the case this year, according to a July 18, 2008 letter from the Commissioner of Co-operatives to the HCU, after another inquiry, this time by Ernst & Young was launched by the Commissioner.
“I wish to record my alarm and to state that I am taken aback by your statement that you cannot guarantee the security of the files...in the possession of the HCU whether at all times or during the course of the inquiry,” Mitchell said in his letter, just one such letter in a long exchange of correspondence between his office, the HCU board and attorneys.
In a sworn affidavit dated July 22, Mitchell noted that there have been roughly 100 complaints against the HCU by its members, as well as 1,600 disputes referred by the HCU against delinquent members.
Additionally, there have been several court judgments against the union, notably a judgment in the sum of about $25 million against the union by the Export/Import Bank of the United States. According to Mitchell, the value of HCU fixed deposits and shares exceeds $25 million.
“I am of the view that the HCU is unable to meet its financial obligations both to its members and creditors,” he concluded adding that it was now, “virtually impossible for the society to engage in its core business, that is, the facilitation of credit.”
And on the issue of the HCU’s core business, he noted, “the core business of the HCU, which is to be a financial intermediary, was replaced by the acquisition of properties which placed the society in an adverse cash flow problem.”
This would appear to include property purchases noted by the inspectors in their 2007 report, such as a purchase of the HCU Convention Centre in Princes Town for $2.5 million without a valuation report on file. The property was valued at $1 million previously.
According to the 2007 report, some properties were sold for less than the purchase price, some were purchased and sold to the same person and there was no sale agreement for some properties for which deeds of conveyance appeared not to have been filed.
On Friday, Minister of Finance Karen Nunez-Tesheira hosted a press conference at the Ministry of Finance on Independence Square over the HCU.
Asked why the Government had taken so long to move in on the HCU, she said: “You have to have evidence that stands up in a court of law...You can’t go on hearsay allegations. And one must remember that the issue was one of illiquidity as opposed to insolvency.”
The Minister, a qualified attorney, added, “we did not have the information to go to the court.
The Commissioner of Co-operatives could not go to the court. The court does not lightly grant an injunction...The court must be satisfied that it is an urgent situation and that what you have brought to them is sufficient upon which they can act. Did we have that? No.”
Asked what assurances the Government will make to HCU shareholders, she said the Government was planning to table legislation to reform the credit union sector. But she could offer no guarantees, saying the facts were not yet clear as the Ernst & Young inquiry was still on-going. She assured, “we are concerned. Clearly, we are concerned.” So, indeed, are the shareholders of the Hindu Credit Union.