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World Bank unearths massive fraud at RVR

Locomotive engines at the railway yard in Mombasa imported by RVR. PHOTO | FILE
Locomotive engines at the railway yard in Mombasa imported by RVR. PHOTO | FILE 

Top Rift Valley Railway (RVR) managers conspired to defraud lenders and the Kenya Revenue Authority (KRA) millions of shillings and left the company in a worse financial position, the World Bank says in an ethics audit report that warns of possible sanctions on the rail firm.

The governance health check was prompted by a $22 million (Sh2.2 billion) loan that the International Finance Corporation (IFC) – the World Bank Group’s private sector arm – extended to RVR in support of the company’s planned purchase of 20 locomotives for its flagging operations in 2014 and 2015.

The audit found that RVR executives bribed public officials, manipulated accounts and created convoluted ownership and operational structures with the aim of defrauding lenders, including IFC.

The acts were meant to conceal the company’s true financial position, which had deteriorated because of its inability to generate cash even as its
liabilities mounted.

The World Bank’s Integrity Vice President’s (INT) office, which conducted the audit also found that RVR principals impeded the review through delays, failing to avail documents and asking employees not to co-operate with the bank’s staff.

“In the course of INT’s administrative inquiry and inspection, INT found evidence that it believes is sufficient to conclude that it is more likely than not that RVR Group and Messrs Karim Sadek, Hassan Massoud, Carlos Andrade, Bong Yoon, Sammy Gachuhi, Fabio Steffler engaged in corrupt, fraudulent, collusive and obstructive practices in the procurement, financing and import of 20 units GE B23-7 refurbished locomotives,” INT’s Operations Manager David Fielder concluded after the audit.

The ethics audit report, whose contents were first leaked to Ugandan press but has now spilled over to Kenya, shows that the World Bank has since written to RVR and those adversely named asking them to show cause why sanctions should not be imposed against them.

They have also been given an option of settling the matter with the World Bank. Imposition of sanctions means the multilateral lender could bar the railway operator and the individuals from participating in any new World Bank-financed projects.

Other international financial institutions that co-operate with the World Bank, could also adopt similar measures against the parties.

Mr Sadek is a director of RVR and an executive of Qalaa Holdings – the majority shareholder in the railway firm -- which is currently looking for a buyer of its 80 per cent stake in the railway operator.

Mr Massoud is a director of RVR and previously held executive roles at Qalaa, a Cairo-based investment firm, while Mr Andrade, a Brazilian, is a former RVR CEO, who left the company in March last year.

Mr Yoon is RVR’s chief financial officer while Mr Gachuhi is the concession general manager.

Mr Steffler is a former chief operating officer of the company. The World Bank assessment found that the individuals inflated the cost of the locomotives, bribed KRA officials to avoid paying VAT amounting to Sh377.4 million on the engines and misled IFC on the true status of RVR’s operations.

When RVR applied for the $22 million IFC loan, it signed an agreement stating that the funds would be used to buy the 20 locomotives from US-based National Railway Equipment Company (NREC) in a straightforward transaction.

But the World Bank found that by the time the loan was disbursed on July 1, 2014, the executives had created an intricate web of companies that left RVR as a mere lessee of the locomotives having also prepaid some Sh832 million to NREC in its original status as a direct buyer.

The change of plans was prompted by a February 20, 2014 decision by the concession supervisor Kenya Railways to reject RVR’s purchase price of $23.1 million (Sh2.3 billion) for the locomotives.

This meant that the engines could not be carried at that amount in the conceded asset account (CAA), effectively barring it from using IFC’s funds which were pegged on the locomotives being valued at the full amount stated by RVR when it applied for the loan.

With cash from operations in short supply, RVR decided to use a $20 million (Sh2 billion) from South Africa’s Standard Bank that came on August 5, 2014.

To accommodate the lender’s requirements, the railway operator created new subsidiaries to aid in structuring a complex ownership and operational structure that ran afoul of IFC’s credit terms and helped hide the company’s true financial position.

RVR transferred the contract to purchase the engines to Africa Railways Logistics Limited (ARLL), which in turn leased the locomotives to East Africa Rail Handling Logistic (EARHL).

EARHL leased the engines at a rate of $30,000 (Sh3 million) each for the first three months and $25,000 (Sh2.5 million) for the next 81 months.

The situation was made worse by the fact that EARHL, which is not an operating company, on August 6, 2014 “allowed” RVR to operate the locomotives and lease those it was not using at a rate of $35,000 (Sh3.5 million) per month.

On February 9, 2015, EARHL and ARLL amended the lease terms effective January 1, 2015 and raised the rate to $30,000 (Sh3 million) per month for the entire 84 months.

On the same day, EARHL and RVR signed a deal to cut the lower the monthly rate from $35,000 (Sh3.5 million) to $30,000 (Sh3 million) each as the part of the financial obfuscation.

“When making this request, RVR management already knew that the disbursement funds would not be used to purchase the locomotives as the contract had been transferred to ARLL on May 23, 2014,” the World Bank report says.

NREC issued invoices to ARLL and another set of fake invoices to RVR to support the charade that railway operator was the one buying the locomotives.

RVR also paid Freight Collect, a company owned by its former employee Patrick Ondieki, which facilitated bribes to KRA and Treasury officials so that the engines were not taxed VAT amounting to $3.7 million (Sh377.4 million).

When ARLL was having difficulty paying NREC, the principals negotiated for a delayed payment penalty of $2.4 million (Sh244 million) but which the RVR executives padded up to $2.85 million (Sh290 million).

They also sweetened the deal by committing RVR to buy $1 million (Sh102 million) worth of spare parts from NREC without a competitive procurement process.

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