UK authorities say Sanjeev Gupta’s Wyelands Bank provided a receivables financing programme without checking whether the underlying goods existed or whether there was any economic incentive for the underlying buyers.
The bank also measured its credit risk against the programme’s end buyers, rather than in relation to the company whose receivables it was purchasing – an unnamed member of Gupta’s GFG Alliance – in order to purchase a greater volume of receivables.
The findings come as part of enforcement action taken by the Prudential Regulation Authority (PRA) this week. The lender avoided an £8.5mn fine on the basis it is already being wound down, but was censured for “significant” breaches of exposure limits and risk management requirements between December 2016 and May 2020.
“Wyelands’ wide-ranging and serious failings resulted in the PRA taking swift supervisory action to minimise the risk to depositors and issuing today’s strong censure,” says Sam Woods, chief executive of the PRA and deputy governor for prudential regulation at the Bank of England.
The GFG Alliance company’s receivables programme is one of four transactions singled out by the regulator. By March 2020, when the PRA blocked Wyelands from entering into new transactions, it was owed around £43mn under the facility.
The censure notice published this week says that before starting to purchase receivables, Wyelands did not confirm whether stock actually existed, could be segregated from other GFG company stock or was already being used in manufacturing processes.
The bank also failed to “assess what economic rationale the [buyers] had for being involved in the transaction” as part of its due diligence.
The authority adds that the GFG Alliance company cancelled invoices owed by buyers at the end of each month, then issued new ones the next day, meaning payment was never due and the debt owed to Wyelands was repeatedly rolled over.
Effectively, the PRA says, this practice meant for a brief window each month Wyelands had “no claim to stock, no claim against any [buyer] in respect of any receivable and had received no payment in respect thereof”.
It also increased Wyelands’ aggregate exposure because those buyers became financially dependent on action taken by the GFG company.
In reality, those underlying buyers “do not appear to have completed any stock purchases” at all, the regulator adds.
Another transaction targeted by the PRA relates to Wyelands loans to two non-GFG special purpose vehicles (SPVs), used to purchase aluminium products from one GFG company and ultimately finance the acquisition of a smelter by another GFG company.
The regulator says the SPVs were only able to make a profit by trading those aluminium products in “very limited circumstances”, and that in practice they would be used as inventory for the smelter.
“The commercial rationale for either commodities SPV (or their respective owners) to take part in the transactions is therefore unclear,” it says.
“Their involvement in the transactions appears to have been with the intention that the firm’s debtors were entities which were unconnected to the GFG Alliance, such that restrictions on lending by the firm to GFG under the large exposures regime would be complied with.”
The PRA adds that the SPVs were in fact economically dependent upon one of the GFG companies, and so were not bankruptcy-remote as intended.
Wyelands says in a statement it welcomes the closure of the PRA’s investigation, adding: “The bank is currently in an inactive state, and the board continues to work to successfully complete the final stages of its solvent wind down process.
A spokesperson for GFG Alliance says: “Wyelands Bank’s shareholder has done what it can to support the PRA through this process and notes the PRA’s findings.
“The shareholder has injected significant funding into Wyelands Bank so all depositors were repaid in full, ensuring that none of Wyelands depositors suffered losses.
“The shareholder has also provided funding to ensure Wyelands Bank continued to operate in order to allow the regulatory process to be completed and for the bank to conclude its solvent wind down.”