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CMA: How Chase Bank chiefs siphoned billions

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Chase Bank customers mill around the closed bank along Mama Ngina Street in Nairobi on April 7, 2016. PHOTO | EVANS HABIL | NMG

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Summary

  • Chase Bank auditors Deloitte did not inspect the failed lender’s IT system in annual audits, creating a loophole used by the bank’s management to hide details of billions of shillings siphoned from the bank.
  • The revelations expose the fraud risk in the banking sector where lack of oversight on lenders’ IT systems may be used by management to hide outright theft.
  • Deloitte reported Sh14 billion interest receivables after a specialist IT team conducted work in response to the CBK directive during 2015.

Chase Bank auditors Deloitte did not inspect the failed lender’s IT system in annual audits, creating a loophole used by the bank’s management to hide details of billions of shillings siphoned from the bank.

A Capital Markets Authority (CMA) investigation report exclusively obtained by the Business Daily shows that a Sh14 billion hole was only discovered in 2015 after the Central Bank of Kenya (CBK) ordered an IT audit.

The markets regulator noted that bank IT system audits are not usually conducted as part of the annual audit of financial statements which would have brought to light the billions of outstanding interest in 2014.

The revelations expose the fraud risk in the banking sector where lack of oversight on lenders’ IT systems may be used by management to hide outright theft.

"Most of the issues surrounding the reporting of interest receivable were discovered during the IT Systems audit during the audit of 2015 financial statements which was conducted in line with CBK’s directive," the CMA committee set up to investigate Chase Bank said.

"We note that IT systems audits are not usually conducted as part of the annual audit of financial statements the same audit procedures seem not to have been undertaken in the year 2014 which would have brought to light the overstatement in the year 2014 financial statements," CMA said.

Deloitte reported Sh14 billion interest receivables after a specialist IT team conducted work in response to the CBK directive during 2015.

This was odd given that banks' interest receivable should be no more than a month‘s worth of interest.

Chase Bank’s monthly interest was Sh1.2 billion which indicated that the huge receivable was from legacy problems, overstated and could represent bank balances that were invalid and unsupported.

The former chairman of Chase Bank, Zafrullah Khan, informed Deloitte on Sunday 3 April 2016 that Sh3.1 billion which had previously been disclosed as Interest receivable had been allegedly misappropriated by the former CFO.

"Deloitte’s specialist IT team reported to the general audit team that in the course of testing the application system supporting interest receivable, the Flexcube system, a manual override had been identified in instances where client accounts did not have sufficient funds. This resulted in a significant unsupported interest receivable balance," the CMA said.

Deloitte argued that it could not have spotted the fraud since it had been committed at the highest level of management and concealed from the auditors by journalising these amounts into smaller individual accounts by two Chase Base Kenya staff members so as to avoid detection.

Muthoni Kuria, a former board member, however, blames Deloitte for errors that sank the bank, saying the auditors omitted interest when communicating directly with the customers to seek direct confirmation of the amounts outstanding for confirming debtor balances.

She said a dispute then arose on how to treat the error and Deloitte demanded the bank either provide for the interest receivable or they would qualify the accounts.

"During the course of the audit, the auditors normally circularize loan customers for verification of outstanding balances. For the 2015 audit, the auditors erroneously sent out letters with only the principle [sic] figure, omitting the interest element. As a result of such a grave mistake, the audit process and attempts to resolve it became incredibly difficult and acrimonious," Ms Kuria said in the CMA investigations.

The CMA probe has also revealed how Mr Khan paid himself a Sh1 billion bonus, part of which was shared among top directors, a clear indication of conflict of interest.

The board had awarded Mr Khan the Sh1 billion bonus following his 18 years at the helm when he stepped down from the role of Group CEO in 2014 and was later appointed chairman of the bank.

However, this bonus was to be paid over five years in tranches of Sh200 million, subject to the lenders' profitability.

Mr Khan, however, accessed it in a lump sum in June 2016, contrary to the board resolution and used the proceeds to buy Chase Bank shares for some directors who were in the Chase Bank committee that approved the bonus.

Balst Holding Limited, related to former board member Rafiq Sharif, received Sh174 million from Mr Khan's bonus and used it to buy shares in Chase Bank and some were used to buy shares for his related companies where former group finance director Ken Obimbo was a beneficial owner.

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