Category Archives: corruption

Relief for Imperial Bank Depositors – Part III

This week, depositors at the closed Imperial Bank got some welcome news with the announcement that a third payment was going to be paid to them.

This comes after a first payment last December of up to Kshs 1 million per depositor that was paid through KCB and Diamond Trust banks and another one earlier this year of up to Kshs 1.5 million that was paid out by NIC bank.

This third payment is unique in that it targets the remains depositors many of who are believed to be large depositors.  After the first payment, the CBK had expressed concern that some  depositors had not bothered to claim the funds offered. But assuming that someone has funds of ~Kshs 50 million to Kshs 100 million at the bank, they were unlikely to be elated to received 1 million in the first or second rounds.

This time depositors can access up to 10% of the deposits, so the people above would get Kshs 5 or 10 million – still small, but much better- and depositors have a month to file claims at any NIC bank branches to receive the payments  (deadline 31 Jan 2017).

The news also comes after a few days after newspaper stories that revealed the names and evidence of correspondence of CBK officials  who may have benefited inappropriately from the largesse of the management of the bank that they were supposed to have supervises.

$1= Kshs 102

 

Why Imperial Bank May Not Reopen Part III

There are two or more sides to every story, and there are several at Imperial Bank. This is just one. The Central Bank (CBK) and the Kenya Deposit Insurance Corporation  (KDIC) have accused the shareholders/non-executive directors of the bank of being negligent in allowing the fraud at the bank estimated at Kshs 34 billion (~$34 million), and collecting dividends from what was a shell institution. The shareholders have fired back in replying affidavits saying they were not party to the fraud and that, among other things:

  • Documents they saw as directors (at board meetings). had been doctored by management of the bank (led by the late group managing director).
  • CBK officials helped doctor the records for many years during their inspection audits.
  • CBK officials received personal favours from Imperial Bank managers.
  • CBK staff and Imperial managers conspired to prevent one shareholder from becoming an executive director of the bank, which would have created a second centre of power (other than the GMD) and which might have uncovered the fraud.
  • The current CBK governor has made unreasonable demands on shareholders and failed to discipline his officers involved with Imperial – even appointing one of them as a receiver manager after Imperial closed.

Meanwhile, a judge issued a ruling that was interpreted differently and a group of depositors went back to court seeking a clarification of what the judge meant. It has been interpreted to mean:

  • Shareholders: The receiver managers (CBK/KDIC) must share information with, and consult, them on decisions affecting the bank.
  • Receiver Manager: Liquidation of the Bank can proceed liquidated.
  • Depositors: Judge said to pay us 40% of our deposits immediately.

Hearings continue next week.

Kabura’s Peculiar Banking Habits

Last week Josephine Kabura got to testify about her banking transactions before a televised Parliamentary Accounts Committee (PAC) hearing of an ongoing investigation of the National Youth Service (NYS), and she made some rather startling claims about having tens of millions of shillings from the NYS deposited into her company accounts which she instantly withdrew in cash to pay her suppliers. But in the absence of closed circuit television (CCTV) footage, which banks typically don’t keep for too long (the security companies erase them over if there are no security incidents), the documentation and bank rules covering cash handling risks, fraud, and money-laundering simply don’t support these claims.

While MP’s asked her about the physical improbability and difficulty of her carrying that money out of the bank (sums of Kshs 40 million in paper bags) to go pay suppliers at a quarry, the possibility of this is unlikely. A vault at an obscure bank branch is unlikely to have more than Kshs 10 million shillings sitting around. Banks allocate money to branches based on their usage (average daily deposits and withdrawals) and it is unlikely that such amounts of money in paper currency would ever sit idly around as there are insurance and cash handling costs and risks. 

Kabura testifies at PAC  (pic from Standard)

Kabura testifies at PAC (pic from Standard)

Within the bank, risks managers and systems would have noticed patterns in her company accounts, previously empty, and now suddenly receiving millions of shillings per day, that she immediately withdrew in cash. Also when someone tries to send, transfer, or withdraw over $10,000 i.e. ~Kshs 1 million, it triggers an extra form at the bank that must be filled out and later sent to the Central Bank explaining the purpose of the transaction. Usually, the head office of a bank will ask for extra documentation, such as invoices or contracts to support the processing of such a transaction. A similar case with suspicious payments received from the Youth Enterprise Development Fund at Chase Bank showed how such account activity triggered alarm bells within a bank and subsequently with the regulators.

When Kshs 100 million is wired to your bank, it does not mean that Kshs 100 million magically appears at your bank branch to be withdrawn as cash. At any branch, the tellers and cash managers have limits of cash they can handle or approve at any given time. They have to get approval, or witnesses to do larger transactions and those are in exceptional requests. Bank systems are set up not to allow suspicious transactions that exceed pre-set limits and daily  thresholds.

For more money to be allocated to a bank branch, a top decision would have to be made by bank directors to allocate and transport more money to serve the enhanced needs of customers at a particular branch. But it is more probable that such a customer would be “upgraded” and transferred to another branch for premium customers with better security and with higher cash limits. Such a customer would also be assigned a relationship manager to help them manage their liquidity (in this case – Kshs 1.6 billion in 14 months) even better and cross-sell them other bank products.

It is more probably, as MP Abdikadir Aden, postulated at the PAC hearing, that the cash was never really there. When large sums were wired in, withdrawal transactions were initiated to show that cash was being withdrawn, but that the reality was that, simultaneously, other transfers were done and cash deposit slips were filled in to reflect cash deposits for the exact same amounts, into other accounts, a few minutes later.

Finally, earlier this year, the Central Bank issued new rules that further restricted deposit or withdrawal of cash. Could this have been due to the same Kabura activities that happened over a year before?

Financial Sanctions for South Sudan?

Yesterday, the Sentry Group, whose mission is dismantling the financing of Africa’s deadliest conflicts, released a report on corruption in South Sudan. As the fighting in South Sudan has gotten worse, with the leaders unable or unwilling to pursue peace, it’s been an open secret that thy have economic links, some of which are in Nairobi, especially in real estate and banking.

Excerpts

Findings & Recommendations

  • Even President Kiir and Vice President Machar themselves have acknowledged that corruption is at the core of the country’s current crisis. “An estimated $4 billion are unaccounted for or, simply put, stolen by former and current officials, as well as corrupt individuals with close ties to government officials,” President Kiir wrote in a June 2012 letter to government officials that was leaked to the press.
  • Most of the funds that these kleptocrats have amassed appear to come from the oil, mining, foreign exchange, and banking sectors as well as food procurement and defense supply contracts from the government.
  • South Sudanese leaders have paid lip service to the need for oversight, but public institutions have been transformed from entities that are supposed to safeguard the rule of law and provide social services into predatory entities that do quite the opposite.
  • Top South Sudanese officials and their immediate family members hold stakes in numerous commercial ventures are not actually available to the public…Immediate family members of South Sudanese PEPs should be required to declare their assets.
  • U.S. authorities, as well as their counterparts overseas—in places like Australia, the European Union, Kenya, and Uganda— should open investigations that could lead to the forfeiture of criminally derived assets and to the prosecution of those involved in profiting from corruption in South Sudan.
  • Governments should thoroughly examine whether or not banks involved in these transactions fulfilled their due diligence, reporting, and compliance requirements.
  • The facilitators and enablers of corruption and mass atrocities should be priority targets for sanctions designations. .. been facilitated—knowingly or not—by a wide range of lawyers, brokers, banks, and foreign companies.
  • The U.S. government and U.N. Security Council have already sanctioned a series of mid-level commanders from both sides of the conflict in South Sudan. The failure to follow on these actions with any meaningful scrutiny of higher level targets muted any message these actions may have had, resulting in a perception in South Sudan that the international community is not serious about imposing consequences.
  • Kenya and Uganda, in particular, have relatively solid anti-money laundering legal frameworks on paper that can provide a basis for action against corruption, as well as demonstrate that local laws are being violated by banks that process suspicious transactions on behalf of South Sudanese PEPs. These banks should already be conducting enhanced due diligence on South Sudanese PEPs, according to the FATF Recommendations, and taking other measures required to prevent suspicious transactions.
Pic by @mankangwafo

Pic by @mankangwafo

Kenya links

  • Kenya Commercial Bank processed large payments from multinational companies operating in South Sudan into the accounts of two senior South Sudanese politically exposed persons over a period of several years.
  • “Some of these ministers have bought apartments, have bought very beautiful houses, villas,” President Kiir continued. “They are hiding it in Kenya and they refuse to reveal it.” … A source within South Sudan’s government confirmed to The Sentry that the Kiir and Machar homes in Nairobi were close to one another in Lavington
  •  Violent takeover of KK Security”: One of Machar’s relatives became involved—albeit highly controversially—in KK Security, a Kenya-based company active throughout East and Central Africa.

For KCB, or any other Kenyan banks operating in South Sudan,  they are really without blame. The report does not highlight if the transaction with the leaders were in Kenya or in South Sudan where they have 18 branches.

South Sudan is relatively small for Kenya banks, accounting for just 13% of assets outside Kenya (Tanzania is 39%, Uganda is 30%). In the absence of rules from the (regulator) Bank of Southern Sudan, (unlikely) or Kenya’s CBK, or the Kenya government, to freeze doing business with people who probably are in charge of other South Sudan government accounts at the bank, is asking too much.

Forensic Audits and other Peculiar Kenyan words

One of the most used phrases this year has been forensic audit. But many people don’t understand what these special audits into past matters and closed files are,  or how they differ from regular / normal / annual / other audits.  e.g. MCA’s in Nairobi and Mombasa have asked for a forensic audit to look at car loans and imprest at their respect county assemblies.  Audit Files

One of the reasons why the public knows the  phrase “forensic audit” is because quite a few have been done, or are still ongoing this year, but are already in the news:

  • To investigate the losses, and revenue leakage, at Kenya Airways (The Board requested, and this was done by Deloitte)
  • Chase Bank – the Receiver Manager & Central Bank of Kenya have asked for one look at director borrowings and other factors in the shut down of the bank earlier this year.
  • Kenya’s auditor general has said he will do one to look at the proceeds of the 2015 Eurobond and his teams will travel to the US and UK to question bankers there about the deal, which opposition politicians have made allegations about.
  • Imperial Bank directors asked for one to look into hidden transactions at the bank after their Managing Director died (A report done was done by FTI Consulting)
  •  It’s been reported that all Kenyan banks have been asked to conduct external audits on insider loans.
  • One was done to review management decisions at Mumias Sugar (Report done by KPMG)
  • President Kenyatta has asked for one to look at how funds for Free Primary (and Secondary) Education have been used.
  • At Safaricom to look at recent procurement  (The CEO requested and a report was done by KPMG).
  •  At Uchumi to look at actions of the previous management (The Board requested, and a report was done by Deloitte).

Besides forensic audits, other peculiar Kenyans words & phrases elevated this year include sponsor, covenant, mood, lacuna, slay, blessee,  watershed, and “it is well noted“, “sent as received”, “major key alert”, and “Insert Inspirational quote”.