Kenyan banking system abetting illicit financial outflows

Victims of Imperial Bank’s Sh38 billion fraud

By Nick Thiong’o

Kenya is estimated to be losing an average of Sh4 trillion (US$40 billion) every year through illicit financial flows since 2011, with the Kenyan financial system acting as an enabler of the outflows.

According to a report by the Partnership for African Social and Governance Research (PASGR), aggregated data from WikiLeaks and other sources show that corruption scandals involving more than Sh1.16 trillion (US$11.6 billion) have contributed to illicit financial flows out of Kenya. 

The business community, especially the banking sector, has been complicit, lending little support to the regulators’ attempts to fight money laundering. A weak banking system and a cash-based informal financial system rank high on the list of features that make Kenya’s financial system vulnerable to illicit financial flows.

For three decades, a cabal of politicians and privateers have looted from Kenyans and operated with wanton abandon; often illicitly moving their loot with ease akin to pirates who pillaged merchant ships with state sanctioned letters of marquee.

Mohamed Wehliye, a Kenyan who serves as an advisor at the Saudi Arabia Monetary Authority said the Kenyan Government should put in place measures to strengthen the supervision of the banks. The United States categorises Kenya as one of the countries on its watch list of money laundering and terrorism financing from drug trafficking and corruption.

“Money laundering is best dealt with by the banks themselves. The government can only put in place the necessary legislation. If these rules are broken by the banks, it would be difficult to stop illegal money passing through the banks,” he added.

In the last three decades, about 36 Kenyan banks have collapsed. Most of the larger local bank failures, such as the Continental Bank, Trade Bank and Pan African Bank, involved shadowy money transfers and extensive insider lending, often to politically connected individuals.

“When I joined Central Bank of Kenya, Eurobank had collapsed with millions of funds belonging to state-owned corporations,” says Andrew Mullei, a former Central Bank of Kenya (CBK) Governor. “After careful assessment of extent of exposure bank by bank we decided to wind-down about 11.”

The systematic looting has seen funds siphoned from public coffers through a series of transactions, with a significant part of the loot ending in offshore accounts across the globe. “The individuals behind these money laundering schemes are powerful and I paid a heavy price for fighting to reform the banking sector,” said Mr. Mullei.

Last year, the Central Bank of Kenya (CBK), fined five banks a total of Sh392 million for violating financial transaction rules in banking and transfer of billions stolen from the National Youth Service in a scandal that was exposed this year.

Though the CBK has already penalised banks, Mr. Wehliye said, huge penalties like those imposed by the US, UK and Australia is the way to go. “A few hundred millions will have little financial impact on the banks.”

Former Imperial Bank Group Managing Director Abdulmalek Janmohammed

The Kenyan tax payer is the hardest hit when banks collapse after being stripped clean by politicians and connected privateers. When Eurobank collapsed in the late 90s, it had more than a billion shillings of state-owned corporations’ deposits. Some of the affected institutions included National Social Security Fund, National Hospital Insurance Fund, Kenya Tourism Development Corporation, Kenya Pipeline Company and Kenya Sugar Board among others.

Recently, Kenya Tea Development Agency, the organization entrusted with the processing and sale of tea from 68 factories owned by thousands of small scale farmers, lost Sh2.9 billion and Sh1.9 billion in the Imperial Bank and Chase Bank collapse respectively.

Though three court cases have been filed by the Kenya Deposit Insurance Corporation (KDIC) against shareholders and two former managers of collapsed Imperial Bank, alongside a network of firms and businessmen who have been linked to the looting of $447 million (Sh44.7 billion) from the lender, there have been no convictions yet.

A forensic audit report by FTI Consulting, a global business advisory firm, identified 23 entities that deposited money into a “shadow bank” at Imperial Bank. The counterparties operated in various countries and in different sectors during the period under investigation.

Accounts for a fish exporting firm, W.E Tilley, show the company transacted billions of shillings through 73 accounts at Imperial bank and carted away more than Sh30 billion in dubious transactions. The family behind the fishing business used a complex web of shell companies registered in secrecy jurisdictions to loot the bank.

Before the phony transactions were unearthed, WE Tilley had received Sh15 billion through its accounts at Diamond Trust Bank (DTB) and Fidelity Bank, with the amount accumulating interest of about Ksh34 billion.

W.E Tilley, a massive network of businesses running into billions of shillings in investments, also has a bank account at Banco General Panama, whose inwards and outwards transactions are traceable to Switzerland. WE Tilley also had its snout in the trough of Charterhouse Bank, another bank that was closed in 2006 amidst money laundering investigations. 

Charterhouse, received an international transfer of US$ 30 million (Sh3 billion) on account of one of its customers, Crucial Properties. CBK’s regulations required that all commercial banks to report any single transfer of more than US$ 500,000 (Sh50 million). The bank alerted the CBK of the large transfer, leading an application by the Banking Fraud Investigations Unit at the High Court for account to be frozen on suspicion that the money was linked to money laundering and drug trafficking.

The recipients of the money managed to have the high court lift the freeze, saying that the large transfer was from a foundation in the US which planned to invest US$ 2.5 billion (Sh250 billion) in Kenya. The funds were transferred in a matter of hours to an unidentified destination. Almost all the investigators hired to investigate the banks sought asylum or were moved from the case.

Charterhouse Bank

One of the accounts that were investigated at Charterhouse was, W.E. Tilley; which at the time of the bank’s closure had received Sh5.89 billion in its accounts while its books showed it had only made sales of Sh1.35 billion. By the time of going to press, our efforts to reach W.E Tilley proved futile.

Separately, the CBK is still pursuing some of Chase Bank directors and managers, and its related companies to recover Sh14.9 billion the regulator says was lost through irregular insider loans and property acquisitions.

The CBK also placed Dubai Bank under receivership after finding that it was insolvent to the tune of Sh1.3 billion, its loan portfolio stood at a staggering Sh4.1 billion and the lender was in default of several banking laws. It only had three directors on its board rather than the required five.

Kenya’s financial sector remains vulnerable because of its position as a gateway to the East African region; the regulators have also been accused of laxity in law enforcement. Early last year, the Ethics and Anti-Corruption Commission (EACC) revealed that it was investigating former and current CBK officials for their role in the multi-billion shilling scandal that ran down Imperial Bank.

The forensic investigations revealed that fraud at Imperial Bank thrived due to lack of adequate internal and external audit, collusion of senior executives and doctored and false financial reporting systems.

Former directors of Imperial Bank claimed in court papers that the former Group Managing Director of the bank, Abdulmalek Janmohamed had “inappropriate” relationship with a former senior official at the CBK. The wife of the former high ranking CBK official is named as having received inducements from Mr Janmohamed in a bid to co-opt the banking sector regulator into abetting a colossal fraud that sunk Imperial Bank.

With billion at stake and zero successful prosecutions in cases involving collapsed banks, Mr Wehliye suggests that the government should put in place more stringent measures to improve the supervision of banks. “Fighting money laundering and illicit financial flows requires a lot of political goodwill” observed Mr Mullei.

Mr Mullei noted that recapitalising one of the leading banks, which at the time had a high debt exposure through loans extended to politically connected individuals, and the establishment of the Financial Reporting Centre (an institution charged with identifying proceeds of crime and fighting money laundering) would not have been possible without the support of the former President, Mwai Kibaki.  

He observed that the establishment of The Financial Reporting Centre, a government institution which is instrumental in the identification of the proceeds of crime and combating money laundering, was also possible at the time owing to political goodwill.

Though the global community, led by the US, successfully pressed Kenya Government to enact the Kenya’s Proceeds of Crime and Anti-Money Laundering (AML) Act, in 2010; enforcement to curb financial outflows from the proceeds of economic crimes is still wanting. 

Financial pundits agree that illicit financial flows through theft in government, dubious bank transactions and tax evasion are rampant. However, there are fears that the vice is so entrenched and that fighting the vice aggressively would have a resounding impact on the flow of domestic and international capital through the economy.

Nikhil Hira, a Tax Director at Bowmans, a Pan-African law firm, is optimistic that the anti-money laundering laws that have been introduced in the recent past will help curtail illicit financial flows.  “Enforcement by the fiscal and tax authority is also increasing and this will help curtail the vice. At the end of the day there must also be the political will to stop these illicit activities.”

This story was produced by Money & Markets. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.

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