How two laws made biggest financial rip off possible

The Goldenberg scandal saw the Government have subsidised exports of gold far beyond standard arrangements during the 1990s, by paying the company, Goldenberg International, 35 per cent more (in Kenya shillings) for their foreign currency earnings.

Although it notionally appears the scheme was intended to earn hard currency for the country, it is estimated to have cost Kenya the equivalent of more than 10 per cent of the country’s annual Gross Domestic Product and it is possible that no or minimal amounts of gold were actually exported.

The scandal appears to have involved political corruption at the highest levels of the government.

In February 2003, hardly a month after being sworn-in, President Kibaki appointed a Commission of Inquiry into one of the largest financial scandals in Kenya’s history.

Mr Peter Warutere, who was advisor on Governance and Communications in the Office of the President of Kenya wrote a paper on the Goldenberg scandal stipulating how the Government was ripped off.

The fiddle, popularly known in Kenya and international financial and donor circles simply as ‘Goldenberg’, is estimated to have cost Kenya some $600 million in less than three years.

This estimate is considered in some circles to be conservative, as there are computations that indicate as much as $1 billion could have directly and indirectly been siphoned through Goldenberg networks.

Powerful CBK

The political and economic environment in Kenya before 1993 enabled such a small financial operation to get so out of hand that it became a scandal of mega proportions. Kenya was a fairly closed economy, with the Government controlling prices, interest rates and foreign exchange transactions.

Two laws were of particular significance to Goldenberg: the Exchange Control Act and the Export Compensation Act.

Under the Exchange Control Act, all authority for dealing in hard currency was vested with the CBK, which then licensed commercial banks to deal in foreign currency on behalf of their customers.  However, the banks were required to sell to the CBK all the foreign currency they received within a stipulated period and it was illegal for anyone else, either individuals or firms, to be in possession of or trade in foreign currency. This law stipulated that all exports leaving the country had to be certified by the Department of Customs and Excise. Exporters were required to complete customs declaration forms (referred to as CD3 forms) for all exports, declaring the goods being exported and their value.

They were then required, through their banks, to account for all their export earnings and convert these proceeds into Kenya Shillings within a stipulated period.

The essential element of these controls was that no Kenyan individual or firm could deal in foreign currency or retain any part of the proceeds of exports, even if they needed the funds to finance their imports or foreign commercial obligations.