Category Archives: Auditors

Chase Bank’s Long Tails

Nearly six years after the collapse of Chase Bank, the Capital Markets Authority has come down with harsh penalties on some of its former senior managers, directors and auditors. This is not over the collapse of the bank, but over misleading statements, failure to disclose material information or conflict of interest in the issue of a bond that the bank  floated in May 2015. Its first tranche raised Kshs 4.8 billion, 10 months before ether bank close. The bond’s Information Memorandum (IM) indicated that the funds raised would be used for branch expansion, IT investments, and new products. 

Penalties Levied:

  • Kshs 10 million against Deloitte, the reporting accountant for the bond note program and its partners will be reported to ICPAK.
  • Kshs 5 million fines each against Duncan Kabui, the former Group Managing Director,  Paul Njaga the former CEO and Ken Obimbo the former Group Finance Director. In addition, Kabui is debarred from being a director or partner in an issuer on the Kenyan capital markets for 10 years, while Obimbo is debarred similarly for 5 years.  
  • Kshs 2.5 million each against the former members of the Audit & Risk Committee – Laurent Demey, Muthoni Kuria and Rafiq Sharrif. The fine also was levied against Anthony Gross, who was Chairman of the Committee and who was ordered to attend corporate governance training.
  • Kshs 1 million, a smaller fine, against Richard Carter, a former director of Chase.  

 The Business Daily (BD) had reported on some findings that the CMA had made unearthed at Chase when it went reviewed its IT systems and which the CMA felt that Deloitte should have flagged such as a Kshs 14 billion hole at Chase, an IT override switch, and a Kshs 1 billion bonus paid to Chase’s former Chairman Zafrullah Khan that was later shared with other directors and executives.  The fines are against 9 of 12 people targeted, and who appeared before an ad hoc committee put together by the CMA but 3 others went to court and halted the CMA probe proceedings against them – and the BD has identified them as Khan, former Finance GM Makarios Agumbi and former Corporate Assets Manager James Mwaura.

In another matter, a judge has ordered SBM Bank which took over the assets of Chase Bank to compensate AfrAsia Bank of Mauritius for a $7.5 million deposit that they had placed at Chase just before the bank was closed in April 2015. The judge said that due process was not followed in notifying depositors about the transfer of the bank assets from Chase to SBM and found that SBM, not the Kenya Deposit Insurance Corporation, is where AfrAsia should have pursued their claims. Will this open the door to other aggrieved depositors in collapsed banks like Chase, Dubai, and Imperial? – Read more in the Business Daily.  

Related:

  • Earlier updates in the Chase and Imperial bank cases 
  • Past CMA actions on company directors on governance matters. 

Kenya Tax Changes in 2022

A few weeks before Kenya’s August 2022 general election, Parliament is to debate and pass the Finance Bill which was published in April. Some measures it proposed will become effective in July 2022 and others in January 2023.

The tax proposals are to meet the country’s 2002/23 budget with a planned expenditure of Kshs 3.4 trillion which includes Kshs 2.14 trillion of ordinary revenue. The Finance Bill will need to be passed along with the Budget Estimates, Appropriations Bill and County Allocation of Revenue Bill. A recurring concern with investing in Kenya is the ever-evolving tax code that changes from year to year, adding, taking away or adjusting taxes and deductions.

Local tax advisory firms such as PWC, KPMG, and Deloitte have published summaries and interpretations of some of the tax proposals,

Excerpts

Agriculture: Removal of an exemption of clearing or planting on agricultural land.

Digital Economy: The digital service tax doubles from 1.5% to 3%. What impact will that have on e-commerce in Kenya?

Energy: Briquettes using sustainable fuel are exempted from VAT

Financial Markets Capital gains tax (CGT) goes up from 5% to 15%. Also, gains by foreign investors trading in derivatives will attract a withholding tax of 15%.

Foods: Excise duty of 15% on imported potatoes, excise duty goes up slightly on fruit juices, beer, other alcohol, wines, imported sugar, and white chocolate. Also, excise tax is added on electronic cigarettes, ice cream not containing cocoa, and liquid nicotine.

Local medicine manufacturing: in the recovery from covid-19, plants aiming to manufacture pharmaceutical products will be exempt from paying import declaration fee (3.5%) and railway development levy (2%). Also while a 25% excise duty on imported glass is imposed, it excludes those for pharmaceuticals.

Media: 15% excise tax added on advertisements by betting firms and alcohol companies.

NGOs: Trusts must now use taxpayer PINs to transact.

Sports Betting: Excise duty goes up from 7.5% to 20%.

Big Stick Enforcement: To appeal against a tax claim, someone must deposit 50% of the amount upfront in a special account at the CBK. Also, ships, planes, and motor vehicles can have a payment claim registered against their ownership by KRA, in case their owners have not paid other taxes. The law currently only applies to land & buildings. Also, multinationals with a turnover of Kshs 95 billion ($750 million) will be required to file Kenya-specific reports within a year of their financial year-ends.

Also, see a KPMG analysis in 2021.

KPMG on Kenya Taxes in 2021

KPMG East Africa has a summary of some tax proposals in the Finance Bill that will be used to plug the country’s ambitious Kshs 3.6 trillion 2021/22 budget.

Here are some excerpts

For investors

  • Depositories are to enhance the identity of investors i.e buyers and sellers of securities.
  • Creation of post-retirement medical funds in retirement benefits schemes.
  • Clarifies the definition of an infrastructure bond.
  • A capital markets tribunal shall deal with matters before it within 90 days.
  • Moving from 16% to exempt after July 1, 2021, are the transfer of assets into real estate investment trust (REIT’s) and asset-backed securities.

Competition

  • Opens up reinsurance to players other than Kenya Re to certify reinsurance contracts.
  • Opens the door to private electricity companies; no longer required to offer their supply to the national grid and they are eligible for investment deductions. Also, if government licenses them, they can compete with KPLC.

Prosecutions

  • Tax cases will not stop where there is an ongoing criminal or civil case.
  • Abolishes the amnesty on rental income tax before 2013 (which had since expired).
  • Rewards for informing on tax dodgers; The Kenya Revenue Authority (KRA) can reward up to Kshs 500,000 (up from 100,000) for information and up to 5% or Kshs 5 million of taxes recovered.
  • Taxpayers are to keep records for 7 years and KRA can assess claims of up to 7 years from the date of a taxpayer’s last return.

Digital Taxes and market

  • PIN’s required for digital marketplace transactions.
  • Digital service tax is removed from residents (only applies to non-residents).
  • Non-resident businesses can maintain records in convertible currencies (not necessarily Kenya shillings).

Large investors

  • To stop base erosion and profit shifting, multinationals / ultimate parent companies are required to file a report on their activities (revenue, profit, taxes paid, employees, assets, cash) in Kenya within 12 months of their financial year-end.
  • Ends group VAT registration for groups of companies; each entity will report its own VAT on transactions.
  • To encourage large investments, there is an exemption for import declaration fee (IDF) and railway development levy (RDL) for investments over Kshs 5 billion or with the approval of the Treasury Cabinet Secretary.

Value Added Tax

  • Introduces VAT on bread.
  • Several items move from 16% to exempt, which means the Treasury CS can exempt them on request. These include infants foods, medical ventilators, lab reagents, gas masks, x-ray equipment, anti-malaria kits and doses, and artificial body parts.
  • Also moving from 16% to exempt, are vehicles for oil & mining companies, and equipment for solar & wind generation.

Other

  • A 20% betting tax returns after being briefly for a year.
  • Bank loan fees no longer incur excise duty.
  • Remove a requirement for VAT regulations to be approved ahead by Parliament; instead they will be shared with legislators under the statutory instruments Act.
  • Withholding tax in oil and mining sectors will be 10%
  • Removes the 10 year limit on carrying tax losses
  • Excise tax goes up on motorcycles and is introduced on jewellery and nicotine substitutes.
  • Reintroduces excise duty on locally-manufactured sugar confectionery and white chocolate that was removed in 2019.

Sportpesa return flames out

Last Friday, there was a bold tweet by the CEO of Sportpesa announcing the return of the company to full business, with partnerships for sports development to follow.

This comes after a crackdown last year crackdown on gambling companies through a moral push, taxation claims and difficulties renewing licenses, which all led many of the top betting companies to scale back their sponsorships and operations.

But the announcement, just as the English and European soccer leagues that are popular with betting punters get into gear, was followed by a surprising turn of events.

The following morning, the Chairman of the Betting Control and Licensing Board had a press conference and issued a statement about information that Sportpesa Global had granted to Milestone Games permission to operate as ‘Sportpesa’. It went on to say that had licensed Milestone to operate in the country, but asserted that Sportpesa is owned by Pevans East Africa and that no other company can use its name brand, domains and mobile phone shortcodes – asked directed Milestone to use its own website.

https://twitter.com/Kenyafootball/status/1322443008504139777

Then over the weekend, one of the other Sportpesa shareholders, Paul Wanderi Ndung’u also released a statement on behalf of Kenyan shareholders of Sportpesa and said he had been unaware of the developments with Milestone. He also made some serious claims about the company:

  • Said the problems of the company started in 2017 when its executive directors allied with its foreign shareholders and started running the company without reference to the board. 
  • Said that another director, Asenath Maina, had requested a forensic audit in 2019 on the firm, but that the foreign shareholders, who had been since been deported from Kenya, continue to frustrate the audit.
  • In three years Pevans East Africa (Sportpesa) has transferred $250 million to the Isle of Man, Dubai, the Canary Islands and the UK. Then, after the company closed, it transferred another $17.5 million to Sportpesa Tanzania and $0.5 million to Sportpesa South Africa.
  • KPMG and Deloitte &Touche have resigned as auditors and tax advisers respectively of Sportpesa Global in the UK, while PricewaterhouseCoopers resigned as the auditor of the Kenyan business.
  • Officers from the UK’s Serious Fraud Office (SFO) have visited Sportpesa’s Nairobi office – and this was linked to negative media and parliamentary coverage in the UK.

EDIT May 2022: In a case pitting Asenath Maina, a shareholder of Pevans East Africa Limited against former Sportpesa CEO, Ronald Karauri, a high court judge granted a temporary order restraining the transfer of “Sportpesa” trademark and brands to Milestone Games and Sportpesa Global Holdings. Also, did Sportpesa make a profit of Kshs 12.9 billion in five years? More here.

To be continued . .

Absa Kenya absorbs Covid hit

Absa Kenya reported their June financial results, continuing the thread of banks taking being impacted by the reduced business activity and increased credit risks occasioned by COVID-19.

Kenya’s fifth-largest bank with Kshs 392 billion ($3.62 billion) in assets saw its deposits and loans higher than 8% last June and a pre-provision profit of Kshs 8.6 billion for the half-year.

However, the bank increased its provisions for bad loans threefold due to COVID-19 impacts and IFRS9 guidelines from Kshs 1.6 billion to 5.3 billion. This resulted in a net profit before tax and exceptional items of Kshs 3 billion, down from Kshs 6 billion last June, with a further one-time charge of Kshs 1.7 billion as the cost of completing the transformation from Barclays to Absa in the first half of the year.

During COVID, the bank had focused on helping its customers manage their livelihoods and has restructured 56,000 loan accounts, worth Kshs 57 billion, 28% of the loan book. COVID-19 has hit across the sector and commercial banks in Kenya have restructured a combined Kshs 844 billion of loans, 29% of the industry’s total. Absa’s bad loans are now at 8% compared to 13.1% average for the banking sector in June 2020.