Economy

New rules to curb use of shell companies in tender frauds

GITHU

Attorney General Githu Muigai. PHOTO | FILE

Kenyan companies applying for registration are now required to provide detailed information of their location and number of employees as part of a renewed effort to weed out shell companies behind multi-billion shilling theft of public funds.

The rules, contained in fresh amendments to the company registration form, now make it mandatory for a firm to disclose its physical location down to the specific room and floor of a building as opposed to the current provisions that left the disclosure of such details to a company’s discretion.

Attorney-General Githu Muigai gazetted the new rules that also require companies applying for registration to disclose the number of employees in a business on the launch date.

Shell companies are usually formed as vehicles for specific financial operations and in most cases do not have a physical location or a list of employees but only exist on paper.

This has made them ideal for illicit financial operations, including money laundering, bribery, tax evasion and terrorism financing.

Dozens of such companies have been recently named in the National Youth Service (NYS) and the Youth Enterprise Development Fund (YEDF) scandals where they were used as vehicles to receive and move hundreds of millions of shillings.

READ: Suspended Youth Fund executive links board to Sh180m loss

Daphine Kemunto, the legal manager at Deloitte East Africa, said that the new provisions seek to enhance good governance through adequate disclosures.

“It should be easy to locate and act against shell companies used in illegal or scandalous practices with the introduction of these requirements,” said Ms Kemunto, adding that the disclosures will also make it easy for third parties to serve any notices on a company.

The list of details that the registrar of companies will now require those registering companies to provide includes the county, town and district where the company is located; the name of building and plot number where the offices of the company are; the street or road; and the floor or room number.

The companies are expected to provide a post office contact, an office and mobile telephone number as well as an email address.

Previously, some companies would just provide a postal address and in some cases these were their lawyers’ address, leaving no hint as to their physical location.

The design of the new regulations appears intended to ease the process of tracking down firms with suspect operations in order to facilitate quick visits to their premises and to verify that they have the capacity to undertake the businesses they claim to be doing.

The provision on the number of employees offers an additional parameter of authenticity check and is hinged on the expectation that companies doing business or receiving millions of shillings would reasonably be expected to have several employees working for them.

Ms Kemunto said employee information may also be necessary to establish whether a company is qualified to be grouped under the small companies’ regime.

The company registration form under the Companies Act 2015 was gazetted in November last year.

The coming into force of the changes three months later points to a response to the recent back-to-back scams that have seen the taxpayers lose millions of shillings.

Prof Muigai had not responded to our queries on the issue by the time of going to press.

Josephine Kabura, who has been at the centre of the Sh791 million NYS scam, recently claimed that former Devolution and Planning secretary Anne Waiguru helped her form seven companies at a go to undertake business with the youth agency.

READ: NYS scam suspects fail to stop money laundering charges

ALSO READ: Anti-money laundering agency ignored youth fund scam signal

These were the companies that would be given dubious tenders issued under a flawed procurement system and paid inflated sums of money to be later divided among the actors.

She claims that the payments were for genuine supplies made to the NYS but investigations by the Banking Fraud Investigation Unit (BFIU) indicate that the local purchase orders (LPOs) used to transfer the amount to Ms Kabura’s accounts were forged.

The BFIU said that investigations revealed the Sh791 million was transferred to three companies- Form Home Builders, Roof and All Trading Ltd and Reinforced Concrete Ltd- all belonging to Ms Kabura.

In another case, a company by the name Quorandum Limited is accused of having received Sh180 million from the YEDF for offering fictitious ICT services to the fund.

Chase Bank flagged the transaction as the firm had never received such huge payments before and had during the lifetime of the account only received Sh3,000.

In the Imperial Bank scandal that saw the collapse of the bank, its chief executive Abdulmalek Janmohamed, since deceased, is said to have operated a network of 20 companies which he used to swindle customers of billions of shillings.

At the centre of the scam is W.E Tilley Limited that used to receive bulk payments in a US dollar account on instruction from Mr Janmohammed.

This money would then be transferred to the accounts of other companies linked to Mr Janmohammed and W.E. Tilley and its directors in instalments of between Sh10 million and Sh100 million every week.

Changes made by Prof Muigai in the company form include those on the ownership structure, with companies required to disclose if they are subsidiaries or holding companies. Subsidiary companies will be required to disclose if the holding company is in Kenya or not.

“An express disclosure of this information is immaterial because one is able to tell whether a company is a subsidiary of another by looking at the shareholding structure,” Ms Kemunto said.

“However, a disclosure of the ultimate holding company helps to identify the ultimate parent if different from the majority shareholder as listed in the structure of the company. Our take is that this will help in investigations where needed.”