Revealed: CBK managers who cashed in on Imperial Bank heist

Fresh evidence presented in court over the loss of Sh48 billion in depositors’ funds at Imperial Bank of Kenya (IBL) have sucked in more Central Bank of Kenya officials. 

A counterclaim filed against CBK by some Imperial directors lists CBK officials who were irregularly advanced loans at the collapsed bank, so that they could conceal shady loans from their inspection reports. These officials, it is claimed, were part of a scheme to lock out non-executive directors from the bank’s management.

The counter claim filed in court two weeks ago doubles as a defence for the Imaran Ltd, Reynold & Company Ltd, East Africa Motor Industries, Momentum Holdings Ltd, Abdumal Investments Ltd and Kenblest Ltd.

The case No.292 of 2016 filed in the high Court involves 18 directors of the bank who are charged with theft.

The documents filed are also supported by a damning witness statement by Anwar Hajee, a director at the collapsed bank, as the second defendant in the case.  The CBK is yet to respond to the counterclaim, but insiders say it is expected to file its response soon.

The evidence presented include e-mail communication between a senior CBK official and a senior IBL official.  It noted that IBL officers drafted documents to influence the content of CBK’s official responses to Imperial Bank’s board.

The detailed documents also captured incidences where an IBL official threatened fellow conspirators at CBK if the failed to return a favour.

“It is time to pay up and no excuse this time,” a senior Imperial Bank official is quoted telling CBK officials while trying to sell anti-fraud software to the banking regulator.

Witness Hajee said in his statement; “no good could come of such a biased and self-interested web of relationships between staff at the two institutions.”

“The CBK officials who carried out annual on-site inspections of the Imperial Bank’s performance in specific quarters were endemically corrupt. For example, the inspection reports produced reflected an entirely false picture of the bank’s credit risk and ensured that Imperial Bank’s provisioning for bad debt was woefully lacking,” explained Hajee.

The directors say the monumental fraud spanning years could only have escaped CBK’s notice through a miracle.

Over the years, CBK had full visibility of the bank, conducted annual on-site inspections of the bank, was furnished with accurate financial data and lists of borrowers and was given leaks of the shady dealings.

The directors accused current Governor Dr Patrick Njoroge and Deputy Governor Sheila M’Mbijiwe of suppressing investigations on the conduct of the CBK officials adversely mentioned in the Imperial Bank fraud.

However, the irregularities in the bank mostly happened during the reign of former CBK governor, Njuguna Ndung’u.

Schematic diagrams tabled in support of the counterclaim showed that CBK officials colluded with IBL’s senior management—comprising the late Abdulmalek Janmohamed (Group MD), James Kaburu (Chief Finance Officer) and Naeem Shah in — providing false financial records to the board.

According to the counterclaim, the scheme involved IBL officials fully informing CBK the actual state of the bank but  withholding the same information to the board. In essence,  the IBL management shielded themselves from their board.

Officers listed for “improper relationships” with the bank include former CBK Governor at the time Njuguna Ndung’u, manager banking supervision Reuben Cheres and Peter Gatere. Other mentioned are Alex Nandi, Simon Gichuki, Mediline Njeri Kihara and assistant director banking supervision Matu Mugo.

From the evidence presented, Gatere was involved in several inspection activities at the bank which covered the risk exposures.  Hajee claimed that Gatere picked small fights with the bank to give an impression to the board that they were doing their work.

Despite his role in IBL inspections, which ironically missed out the fraud, Gatere later became the receiver manager of the bank.

The documents depicts Gatere  as someone who exchanged favours with IBL CFO Kaburu. In an email dated November 5, 2012, Kaburu demanded a favour from Gatere.

“It is time to pay up and no excuse this time. The attached is a CV from a daughter of a friend of mine who works at KRA. This time you must assist,” Kaburu wrote in a note which would suggest that the expected arms-length relationship between a regulator and one who is being regulated was clearly disregarded.

In yet another email dated May 24, 2013,  Gatere appears to seek Kaburu’s help in the tax affairs of his acquaintance: “We spoke. The issue is to do with owner occupier allowance and tax relief on mortgage for Teresa Ndegwa.”

But the most blatant disregard for operational protocol involves the collusion of CBK officials and IBL officials to veto a board decision to bring on board an external executive director.

According to the counterclaim by directors, the  plan was to whittle down the late Abdulmalek’s tight grip on the bank by appointing an executive director in charge of Information Technology, human resources and marketing.

The directors claim the move in October 2012 could have stopped the fraud as the new appointee would have been report ing directly to the board.

When CBK received the board communication on October 17, 2012, it fired back two letters from different people, but addressing the same matter. In the first letter dated October 24, 2012 from Cheres and addressed to Abdulmalek, the bank required the board to do two things.

One, it proposed that the new director, who is also a shareholder in the bank, to reduces his stake from seven per cent to five per cent in order to hold an executive position. Secondly, he was required to resign from another executive role in another company in accordance with CBK’s guidelines. Abdulmalek was to provide evidence of the resignation and reduction of shareholding.

In the second letter dated December 13, 2012 responding to IBL’s October 17 letter, Mugo, another CBK officer, opposed the move on account of possible conflict of interest and creation of two centre of powers. He warned that the new director would take over some of Abdulmalek’s functions as CEO.  

“The proposed structure is likely to generate two centres of power and potential conflict with probable rival camps within the management to undermine the smooth and seamless operations of the bank,” Mugo wrote.

In another move to discredit the move, Mugo cited the CBK’s prudential guidelines which were expected to take effect the following year and which vested the ultimate management functions of a bank to the CEO. The upshot of it being that the move would cloud the reporting line contrary to good corporate governance principles.

IBL appears to have insisted on the appointed through a letter from the MD on January 29, 2013, although this was not part of the  evidence presented. Again on February 8, 2013, CBK through Mugo wrote to Abdulmalek a brief letter announcing that “we are unable to grant this approval as requested.”

However, evidence presented seems to suggest Abdulmalek was playing both sides.

While he was communicating the board decision pushing the idea, his main foot soldier in the management— Kaburu— was undermining the move through communication to CBK.

On February 1, 2003, a day after Abdulmalek had supposedly written to CBK insisting on appointment of the director, Kaburu wrote a categorical email to Cheres effectively bringing the matter to a close even though he had no authority to do so. Kaburu’s email reads like a CBK response.

“We acknowledge receipt of your letter reference number ED2/01/13/JK/fa dated January 29, 2013 and would reiterate it will not be prudent for Mr Hajee to be appointed to the position of Executive Director. We have closed our file on the matter,” Kaburu wrote to Cheres.

It turns out from the evidence presented that Kaburu’s letter could have been a draft response to his own bank. It looks from February 5 email that upon receipt of Kaburu’s letter, Cheres who was away in India called his boss Mugo and they discussed the content of the letter.

In the email, Cheres told Mugo that the contents of the letter to IBL remains as discussed. He however suggested that he deletes the part reading “and have closed our files” and replace it with ‘we are therefore unable to grant approval for the appointment of the proposed executive director as requested.”

The deleted part is the one which signed out Kaburu’s letter to Cheres. On the same day, Kaburu had written to him asking whether he had arrived in India safely and whether the content of the letter had changed.

The following day, on February 6, Cheres emailed Kaburu informing him that he had called Mugo and emailed him as well.

Kaburu’s response on February 7 was to seek a draft response but Cheres told him he could not because “unfortunately I am not around.” He added: “I would have sent you the draft reply. I do not think it will be possible for you to get a draft because I do not have the benefits of the edits that he has made to the letter.”

“If he does not send this week,” he continued, “then I can work on it and send a draft early next week.” In another email on the same day, Cheres told Kaburu that he believed that in the event the letter was sent before he came back, Mugo would take into consideration the comments he had emailed him.

“Your concerns have been taken care of,” he signed out. Kaburu would hear none of it and would not agree to be left wondering in doubt. He responded: “Please forward me the email of your comments.”

It is at this point that Cheres forwarded to Kaburu his February 5 email to Mugo in which he suggested changes to the letter with a rider to him (Kaburu): “I hope it meets your expectation. We shall refine it if it is not sent by the time I come back.”

On the following day— February 8— Mugo delivered the letter to IBL reflective of the discussed changes and rejecting the appointment of an executive director.

“It is perfectly clear from this correspondence that Mr Kaburu used his influence, and leverage over, Mr Cheres to block my appointment as an Executive Director, in clear abuse of Mr Cheres’ role as a public official. The correspondence also suggests the potential involvement of Mr Mugo in this,” Hajee’s witness statement, now deposited with the court, says.

He says it is “quite shocking” that IBL’s management went against the resolution and will of the board and that it was “disturbing” they conspiracy with CBK officials.

In the evidence produced to support the theory of CBK’s complicity in the fraud, late payments for loans advanced to CBK officials were tolerated.     Irregular promises of credit was also common. The officers cited in this category are Simeon K. Rono, R. G Lang’at and Juliana Migunde.

In Rono’s case, he wrote a letter to Naeem Shah which brought out the nature of relationship between him and Abdulmalek.

“Bro, we agreed with Mzee sometimes in 2004 that my children shall never lack school fees as long as his bank was in operation. This was more or less an oath between two friends.

“We agreed also that I shall always endeavour to pay my loans as agreed and to the best of my ability. Each has kept his word to date. Please pass my highest regards and consideration to him.”

For Migunde, email communication titled “loan rebate request” has been tabled before the court. For Lang’at email correspondence headlined “Loan of Sh1.6 million” is part of the evidence produced.

The evidence presented  includes the much written about exotic privileges accorded to former CBK Governor Ndung’u and his wife Nancy in Thailand in 2011. The couple were booked at Chiva-Som Health resort, the self-declared “haven of life” complete with invigorating or relaxing body massage  sessions every night.

The resort does not accept children under the age of 16 years, forbids the use of mobile phones in public areas and limits alcoholic drinks to champagne and choice wine.

The evidence tabled bring out Abdulmalek’s attempt to sell CBK anti-fraud software. In one of the emails, Abdulmalek liaises with Mugo regarding the contents of a proposed MOU between CBK and the company that was to provide the technology.

“It is clear from the documents we have identified that AJ (Abdulmalek Janmohamed) acted as a broker for access to the Governor of CBK and was seen by Lime Technologies as wielding influence over the Governor,” Hajee says in support of the counterclaim.

The directors of CBK were fully aware of the fact that Abdulmalek Janmohamed was himself engaged in a systematic fraud and embezzlement on a massive scale, and were actively colluding with him to suppress it.

They are demanding Sh1 billion, Sh8.3 million being their total deposits held at the bank and Sh14.4 billion being the value of their shares in the bank.

They have also demanded general damages for misfeasance (wrongful performance of a normally lawful act), breach of statutory duties, negligence, deceit, negligent misstatement, aggravated damages, punitive and exemplary damages and costs of the suit.

They have named the CBK as the first defendant, Kenya Deposit Insurance Corporation as second and CBK officials Reuben Cheres, Peter Gatere, Alex Nandi, Simon Gichuhi, Mediline Njeri Kihara and Matu Mugo as the 3rd to 8th defendants.

Schematic evidence adduced to support Imperial Bank’s directors Sh15 billion counterclaim shows that Central Bank of Kenya inspectors doctored exit reports to cover the ongoing fraud.

According to the evidence, CBK inspectors would check in at the bank, be presented with accurate financial position, factor it in their initial reports to the management but black out the controversial and overshot finances the briefing meant for the board.

Huge and underperforming credit facilities were extended to companies of the late bank MD Abdulmalek Janmohamed with knowledge of CBK inspectors. The management also unilaterally extended loans in excess of Sh50 million but gave the board papers showing lower amounts, claimed the documents filed.

“CBK was not only aware that the Bank’s balance sheet did not reflect multiple and high value loans for which no proper provision had been made, but it had in fact colluded with IBL’s management team to suppress them from the company’s books,”

Anwar Hajee further claims in his evidence that the directors have tabled sample documents served to both IBL board and CBK which ought to have been identical. Analysis of the two documents also tabled shows that IBL board got a document which did not include illegal financial transactions, while CBK document captured the illegal one.

The directors say there is no way they would have approved those loans because they were dealing had  dubious records.

In total, 23 companies were removed from the IBL board document taking away Sh9 billion worth of borrowings seen by CBK but not known to the bank’s board. In other words, the board only saw an exposure of Sh5.3 billion.

Apart from these monthly filings, CBK also conducted annual on-site inspections at the bank whose reports did not reflect these issues. The directors claim CBK inspectors colluded with the management to suppress the irregularities from appearing in the final report to the board.

CBK inspectors named for complicit in this include Medline Kihara, Daniel Thogo, and Caroline Mwobiba, Cheres and Simon Gichuki.

In his witness statement on behalf of the directors, Hajee says the CBK inspectors were complicit  in choosing the accounts to be sampled, refusing to classify non-performing loans and concealing borrowers who had overshot their overdraft limits.