More than a dozen related companies and businessmen used Charterhouse Bank as a conduit for money laundering, a new report by a corruption watchdog says, even as lawyers warned that failure to prosecute the perpetrators could undermine Kenya’s sovereign rating.
The report, which pieces together the complex network that the bank’s clients used to clean money, says Charterhouse deliberately let its customers open accounts without critical details like names, addresses or signatures – flouting the Know Your Customer regulations under which all commercial banks operate.
But the report by the Africa Centre for Open Governance also hits out at the Central Bank of Kenya, the financial services sector regulator, for failing to detect Charterhouse’s dubious operations for more than seven years.
The report, which has borrowed heavily from another one that forensic auditors prepared six years ago for the Central Bank, says incredibly huge sums of money were being deposited into some accounts in cash – enough to have caught the attention of any regulator, but the CBK turned a blind eye to it.
It gives the example of an account belonging to a businessman based in Butere, Western Kenya, that had a debit of Sh554 million and credit of Sh566 million over a 10 month period in 2006, clearly indicating that it was merely acting as a conduit for the money.
Even more telling is the fact that the money was being deposited in cash and there was no evidence of a business in Butere that could generate that kind of money in such a short period. The account had no details of what kind of business the holder dealt in.
Further evidence that the bank was being used for illegal financial transactions lay in the fact that one account holder, Paolo Sattanino was paid from another account in the same bank $10,000 every day for 12 days. The transfers have been interpreted to mean the amount was kept low to escape having to account to the Central Bank on the source of the money. CBK requires that any foreign currency transfers of more than 10,000 dollars must be accompanied by an explanation of the source.
“Failure to prosecute those responsible means the government is rewarding crime and this affects our sovereign risk rating,” said constitutional lawyer Wachira Maina. The report also shows how two big retail chains used their accounts at Charterhouse Bank to launder money and evade taxes. It gives the example of a retail chain that was opened in 2001 and operated an account with a balance of Sh4.3 billion, but was not disclosed until 2003 in a suspected tax evasion scheme.
The supermarket’s estimated under declared sales to the tax man totalled Sh911 million, according to an audit report by PricewaterhouseCoopers.
Another retail chain had several transactions involving huge amounts of money that were not supported by any documents. The management told auditors that some of the documents were accidentally burnt.
The report faults the government for failure to prosecute people involved in what appears to have been a financial institution operating on the fringes of the law. CBK placed Charterhouse Bank under statutory management on June 23, 2006 after a run on the bank caused by an enquiry in Parliament.
The Parliamentary Committee on Finance, Planning and Trade, government and even Kenya Anti Corruption Commission (Kacc) officials have in the past given the bank a clean bill of health.
Kenya Revenue Authority Commissioner General Michael Waweru told the committee that the KRA had no objection to Charterhouse reopening, as did CBK Governor Njuguna Ndung’u and Kacc Deputy Director John Mutonyi.
Dr Mutonyi told the parliamentary committee that money laundering was not a crime by the time the transactions took place at Charterhouse Bank and therefore the perpetrators could not be prosecuted. But Mr Maina said the argument does not make sense because those involved should have been charged with other crimes like tax evasion.
“Charthouse’s is a classic example of failure of our governance system that gives an incentive to criminals with similar motives,” said Gladwell Otieno of Africa Centre for Open Governance.
Money laundering is now a crime under the Proceeds of Crime and Anti-Money Laundering Act that became active in June 2010 although some sections of it like the Financial Reporting Centre (FRC) that co-ordinates intelligence on suspicious transactions are yet to be operationalised.