Photographer: Trevor Snapp/Bloomberg

Kenya Central Bank Staff Cited in Alleged $439 Million Fraud

  • Court documents identify at least seven central bank officials
  • Scandal may be Kenya banking industry’s biggest, analyst says

Central Bank of Kenya officials were allegedly at the heart of fraud at the failed Imperial Bank Ltd., described by one analyst as perhaps the industry’s largest scandal in the East African nation.

Imperial Bank staff for years gave central bank officials loans and even school fees in exchange for helping to hide unauthorized debt, according to a court filing by defendants. In one instance, a senior Imperial Bank employee sent an e-mail seeking a central bank job for a friend’s relative. “Good morning. It is time to pay up and no excuse this time...,” according to the filing.

“This appears to be the biggest scandal in the banking industry in Kenya,” Maurice Oduor, investment manager at Nairobi-based Cytonn Investments Management Ltd., said by phone. “If it’s true, it indicates a lot remains to be done for us to have a thorough, diligent and independent supervision of banks.”

The allegations were contained in defense and counterclaim documents filed in the High Court by bank shareholders in the capital, Nairobi. The filing was in response to a Sept. 30 central bank lawsuit against the lender’s directors and shareholders in which the regulator is trying to recover as much as 44.9 billion shillings ($439 million), the central bank’s lawyer, Philip Murgor, said by phone.

Both the central bank and Capital Markets Authority have said Kenya’s banking industry remains safe and stable.

‘Pay Up’

The commercial lender, in its suit filed Dec. 9, said the central bank’s alleged failure to “exercise its supervisory functions in respect of IBL caused the fraud to remain hidden for years to the detriment of not only the shareholders, but the bank’s depositors, shareholders and other creditors.”

In another, a central bank official wrote to an Imperial Bank employee saying the lender’s founder promised him that his “children shall never lack school fees as long as his bank was in operation. This was more or less an oath between two friends.”

Murgor, the central bank’s lawyer, said the bank would pursue investigations into any new allegations against its officials.

“Of interest is the fact that they haven’t defended themselves on the accusations of negligence and breach of fiduciary of responsibility as directors and shareholders of the bank,” he said in reference to Imperial Bank.

Official Collusion

Imperial shareholders’ lawyer, Andrew Wandabwa, said the central bank’s supervision department colluded with the lender’s senior management “to understate the extent and true state of facilities granted to certain bank customers, with the effect that the said amounts were neither brought to the attention of the board, nor correctly captured in IBL’s books.”

In May 2012, for example, the central bank’s inspection team staff approved a report that showed 5.34 billion shillings in loans to the top 50 borrowers, a third of the actual 14.3 billion-shilling figure, he said. At the end of the same year, officials rubber-stamped a report of 7.4 billion shillings, half of the real amount granted.

Imperial, a mid-sized lender in East Africa’s biggest economy, was placed in receivership in October 2015, less than a month after former Managing Director Abdulmalek Janmohamed died. Two other banks, Chase Bank Kenya Ltd. and Dubai Bank Kenya Ltd., have also been taken over. The central bank has said it placed Imperial under management after the lender’s directors alerted it to inappropriate practices.

In its suit, the central bank asserts that Imperial directors reported the fraud and loss of 38 billion shillings 27 days after Janmohamed’s death. They had been made aware of fraudulent schemes as early as 2012 through a whistle-blower, it said, and took time to report the losses while engaging in a “cleansing and cover-up exercise to attempt to remove all material incriminating them.”

The alleged fraud was earlier reported by the Financial Times.

The case is HCCC No. 392 of 2016, High Court of Kenya at Milimani-Nairobi Commercial & Admiralty Division.

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