Kenya’s largest financial scam — Goldenberg —has once again raised its ugly head causing a multi-billion shilling claim against the Central Bank of Kenya (CBK).
Oriental Commercial Bank, which is associated with Goldenberg architect Kamlesh Pattni, has sued the Central Bank, seeking Sh122 million it claims the CBK illegally took from it in the 1990s plus penalties and accruing interest running into billions of shillings.
The suit arises from a foreign currency deal that Oriental, then operating as Delphis Bank signed with the CBK but went sour after Mr Pattni’s Exchange Bank allegedly failed to transfer $19 million to the CBK’s New York account after receiving Sh1.1 billion agreed in the April 26, 1993 contract.
The CBK says it deposited the money in Delphis’ account but did not receive the dollars in its New York Federal Reserve Bank account as per the spot contract agreement forcing it to reverse the deposit after 56 days.
The CBK followed the reversal with the imposition of a Sh6.8 million fine on Delphis Bank for forex losses, Sh10.6 million for breach of banking rules and Sh105.6 million in interest at the then prevailing rate of 65 per cent on the principal amount for the 56 days.
Delphis settled the claims amounting to Sh123 million which it now wants to be paid back, including interest accruing from June 1993 until full settlement.
A conservative calculation shows that the bank may be seeking up to Sh5.3 billion from the CBK, assuming an average annual interest rate of 30 per cent. Interest rates stood above 25 per cent in the 1990s but have dropped to an average of 15 per cent in recent years.
The central bank’s purchase of forex from Delphis Bank was part of the government’s initiative to shore up its dwindling forex reserve base after the World Bank, the International Monetary Fund and bilateral donors withheld aid to Kenya in opposition to bad policies and rampant corruption in former President Moi’s regime.
In an affidavit filed in court last year, Delphis Bank argues that it was not liable for the default, which it attributes to Mr Pattni who was then its client and major shareholder.
Mr Pattni is said to have been the originator of the forex deal that went sour costing the bank millions of shillings.
But the CBK insists that the contract was between itself and Delphis, rejecting the bank’s claim that it was Mr Pattni who was to deposit the dollars in the regulator’s New York account.
“The defendant (CBK) knew that indeed the $19 million was to be deposited by the plaintiff’s customer (Mr Pattni) in whose account the defendant had deposited the Kenya Shillings equivalent,” Oriental argues through lawyer Eric Mutua.
But the central bank through its lawyer Phillip Murgor has dismissed Oriental’s claim as “scandalous, frivolous, vexatious and an abuse of the court process.”
Delphis Bank became Oriental Bank after it came out of a receivership in 2001 with Mr Pattni as one of the principal shareholders.
Oriental is the bank at the centre of the raging controversy over the sale by Mr Pattni of the shares the bank holds in lieu of a loan it gave Marshalls Investment, also owned by Mr Pattni.
Oriental launched its claim against the CBK in the late 1990s but gave up after it met stiff resistance from the management team then led by former governor Micah Cheserem.
On August 11, 2009, Oriental appealed to the then Finance minister Uhuru Kenyatta who advised the CBK to conclude the matter.
That response allowed Oriental to reinstate its claim with the current governor Prof Njuguna Ndung’u who responded thereafter dismissing Oriental’s claim.
“Having carefully studied our records on the matter and also taken necessary professional advice, we wish to inform you that we find your client’s claim against the Central Bank to have no legal basis or justification whatsoever,” Prof Ndung’u wrote to Oriental’s lawyer Eric Mutua on October 19, 2010.
“In the premises, do note that any suit or claim filed against the Central Bank in this matter shall be strenuously defended.”
That response prompted Oriental to file a suit against the CBK in March last year, accusing CBK of making irregular transactions after it got back its money.
The bank claims in court documents that the Sh1.1 billion was soon used to buy Treasury Bills that were ultimately wired to the accounts of Goldenberg International – the company at the centre of Kenya’s biggest financial scam and owned by Mr Pattni.
The transaction was made before the minimum 90-day maturity period had elapsed.
This means that Goldenberg benefitted from massive interest paid on government securities that attracted coupon rates of up to 70 per cent at the time.
“The defendant dealt directly and even connived with the plaintiff’s customer by issuing Treasury Bills to the customer (Mr Pattni),” Oriental says adding that the defendant made entries into and out of the said customer account without the instructions, authority or consent of the plaintiff (bank).
Oriental argues that the fines it paid to the central bank caused it financial strain and was one of the reasons it was placed under statutory management on June 21, 2001.
The CBK’s lawyers cite the statute of limitations as a key defence against the claim.
The law confines legal action arising from contractual disputes to within six years from the date of the contract.
Mr Murgor, therefore, argues that the court lacks jurisdiction to adjudicate the suit in the absence of leave to extend the limitation of actions.
The CBK insists that Oriental committed fraud by refusing to meet its part of the bargain after it received the Sh1.1 billion for the purchase of the dollars, earning it a fine for breach of banking regulations.
Oriental had initially argued that it faced logistical problems in remitting the dollars to the CBK’s New York’s Fedeal Reserve Bank account and later said it had deposited the money in American Express’ London branch.
But it later emerged that Oriental never made such a deposit although the Central Bankforeign department had confirmed receipt of the money.
The CBK argues that even if the transaction occurred, the change in receiving bank would in itself amount to a serious breach of contract.
The central bank further argues that the distinction between Mr Pattni and Delphis is beside the point since the businessman at the time owned the bank 100 per cent – a claim that is backed by documents and Mr Pattni’s own evidence at the Goldenberg inquiry.
Mr Pattni was the architect of the Goldenberg scam in which taxpayers lost more than Sh50 billion in fictitious gold export compensation schemes.
The CBK says any liability arising from the contract should be borne by Mr Pattni on whom Delphis relied to meet its obligations. It has emerged that Delphis was at the time acting on behalf of the controversial businessman.
“The contract was undertaken upon your behalf in a banker/customer relationship and therefore the plaintiff (Delphis) claims from you an amount of Sh116 million to enable us settle with the Central Bank,” Delphis wrote to Goldenberg International in a letter dated September 14, 1993.