CMC probe uncovers false invoice receipts

ficant mark up in freight cost for the auto dealer’s tractor imports, making it one of the  single biggest overcharge item that cost CMC up to Sh228 million.

“When we compared the amounts invoiced to CMC with the actual freight costs as declared to KRA, we found that the freight costs as declared to CMC were consistently higher by around 100 per cent,” noted PwC in the report released last week.

The audit said that logistics firms such as Andy Forwarders typically charge clients a commission for facilitating importation or long-haul transportation of goods.

The freight charges are declared to the Kenya Revenue Authority (KRA) for taxation purposes and clients are expected to verify with the taxman the charges billed by logistics firms to ensure that they tally with their invoice statements.

In the case of the tractor imports, CMC had agreed to pay the freight costs plus a commission of eight per cent against an industry average of six per cent.

PwC, however, noted a discrepancy between what Andy declared to KRA as freight costs and what it billed CMC. An industry expert consulted by PwC said variations between freight costs asked from clients and declared to KRA go against the industry practice since logistics firms acting as agents are not in control of shipping lines charges.

When PwC asked the acting CMC logistics manager, James Kimani, why the two figures were different, he said the company “did not think it necessary (to check) since there was a set freight rate between Andy and CMC.”

Andy Forwarders CEO, who is also a board member of the motor dealer, Peter Muthoka, told the audit firm that the rates Andy charged CMC had been agreed between the two parties and that there was no such thing as “market rate” for logistics services.

Mr Muthoka added that Andy’s freight rates charged to CMC were not high, a statement PwC refuted based on rates asked by rival logistics firms last year for a tender by CMC.

In the tender for tractor imports from Brazil, Turkey and India, Andy’s freight rates were double and in some cases triple what its competitors; SDV Transami, DHL, DAMCO and Siginon were asking.

In the five-year period under review, Andy declared tractor freight cost to KRA worth Sh142 million against billings to CMC valued at Sh370 million, resulting in the Sh228 million overcharge.

In an interview last week, Mr Muthoka said he did not recognise the PwC report as it was commissioned by management of CMC headed by chief executive Bill Lay, with whom they had differed over the Andy Forwarders logistics contract.

Mr Lay declined to comment on the report, saying it had not been discussed by the company’s board of directors.

A former CEO of the auto dealer, Martin Forster, told PwC investigators that he noted the overcharge in Andy’s invoices for the tractor freight costs when he compared them to charges by Marubeni, a Japanese logistics firm.

Mr Forster said Mr Muthoka pushed for his ouster in March last year after he tried to transfer the tractor freight contract to Marubeni, which was asking for up to 90 per cent less compared to Andy.

PwC also noted that clearing and forwarding (C&F) charges paid by CMC to Andy were double what other service providers would have charged.

The audit firm estimates the loss in this service segment at between Sh595 million and Sh696 million, driven by Andy’s billing method that resulted in higher net costs. For instance, Andy charged an agency fee of one per cent of the cost, insurance, and freight (CIF) for 20 and 40-foot containers.

For a container carrying three vehicles worth Sh12 million, for instance, this could translate into an agency fee of Sh90,000.

In contrast, rivals such as Mitchell Cotts, SDV Transami, and DAMCO quoted a flat rate of between Sh6,000 and Sh10,000 per container.

The report noted that agency fees have fallen from two per cent in mid 1990s to less than one per cent in 2000s. From 2005, most agents had shifted to charging flat rates per container, dropping more cost items in the wake of increasing competition.

PwC says that despite C&F charges trending downwards, Andy’s billings to CMC doubled what the auto dealer would have paid in either last year’s tender process or an earlier one in 2006 when Mr Muthoka joined CMC’s board.

CMC also incurred significant losses through storage charges which PwC says benefited Kenya Airports Authority, container freight stations (CFS) and Transglobal -- a warehousing company in which Andy has a stake.

The audit firm says that most of CMC consignments were not cleared from the ports within the free storage period, leading to a total loss of Sh133 million. In contrast, officials of rival General Motors East Africa (GMEA) told PwC that one of the reasons they prefer Andy’s services is because cargo cleared by the firm does not incur any storage charges.

Andy has contracts with some of the biggest companies in the country such as East African Breweries, Safaricom, Coca Cola, Tata Africa, and GMEA, a fact that Mr Muthoka attributes to quality of service offered by his company and competitive rates.
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