Goldenberg ghosts return to haunt the Central Bank


The Central Bank of Kenya is entangled in a court case with Oriental Commercial Bank over penalties related to the Goldenberg scandal. PHOTO | FILE |

Kenya’s biggest financial scam, Goldenberg, has returned to haunt the Central Bank of Kenya after a local bank revived a case in which it is demanding over Sh5 billion from the regulator.

In the application, Oriental Commercial Bank has sued the Central Bank of Kenya (CBK) seeking to be refunded the money which comprises the principal amount of Sh122,975,244 and interests accrued since June 23, 1993.

The regulator took the money as penalties after Oriental failed to deliver on a contract it had entered with CBK. The deal, which later became part of what was known as the Goldenberg scandal, was for sale of foreign currency by the bank to the CBK.

The bank, formerly operating as Delphis Bank Ltd, on April 26, 1993 entered into a contract in which it would sell $19 million to CBK at the rate of Sh59.5804 per US Dollar.

The bank however failed to deliver the agreed amount to CBK’s account at the Federal Reserve Bank in New York, saying it had deposited the money at the American Express Bank, in London. This was not what the parties had agreed upon and the money could not be traced.  

In the court papers, the bank claims the regulator was discriminatory because it (Oriental) was charged a higher penalty compared to other banks. The lender says that while others were charged an interest at the rate of 3.35 per cent, the regulator charged it at 65 per cent.

“CBK as a regulator had an obligation to act equitably to all stakeholders in the banking industry, to act in compliance with the law, written contracts and with the constitution. CBK’s actions were in breach of its fiduciary obligations as a regulator of the banking industry, and it has become liable for the breaches as a trustee,” Oriental Bank said in their court papers.

The CBK had asked the court to dismiss the case saying it was time-barred, having been filed over 16 years later.   

“Oriental Bank’s claim is premised on penalties we levied against it in 1993. We informed the bank of the penalties the same year. It had been aware of the same for 17 years as at 2010 when through a letter addressed to CBK, it decided the penalties were wrongful. Oriental Bank was simply indolent,” CBK lawyers had argued.

But Mr Justice Fred Ochieng, in his ruling, allowed the application on certain aspects while dismissing some of the bank’s points of argument.

The judge ruled that Oriental Commercial Bank’s claim based on the alleged violation of the CBK’s fiduciary duty as a trustee was not time-barred.

However, he found that the bank’s claim based on the contract between the parties to the case was time-barred and any claim “which flows directly or by extension, from the said contracts, are equally statute-barred”.

CBK terminated the contract on June 21, 1993 after Delphis Bank failed to honour its side of the bargain and penalised the bank for breaching the agreement.

CBK said it informed Delphis Bank of the penalties on September 13, 1993 and that the bank had no objection. It also noted that Delphis Bank was “intimately involved” with Goldenberg International Ltd and its proprietor, Mr Kamlesh Pattni.

The Judicial Commission of Inquiry into the Goldenberg Affairs which was constituted by President Mwai Kibaki on February 24, 2003 had in its final report found that Delphis Bank was “part and parcel of, and intricately involved in the fraudulent activities” that led to the Government of Kenya and CBK losing approximately Sh37,463,616,294 to Mr Pattni, and his companies, including the bank.

The commission recommended both recovery and prosecution of those involved.

CBK said its action to levy an interest and penalty charges were lawful because the sums acquired by Delphis Bank were through fraudulent utilization of the regulator’s funds.

“On one hand, Oriental Bank enjoyed having its account credited with Sh1,132,027,600 which was equivalent to 19 million US Dollars. This was done on April 26, 1993 and is not disputed by Oriental Bank. CBK on the other hand, had the right to have its foreign currency account at the Federal Reserve Bank in New York, to be credited with 19 million US Dollars. This was not done,” CBK said.

Oriental Bank’s claims of discrimination, the regulator said, can therefore not stand because “the Constitution of Kenya, past and present, does not protect alleged rights to proceeds of fraud”.

However, Oriental Commercial Bank said that based on the findings in the Goldenberg Report made public on February 3, 2006, they discovered that CBK committed illegal, fraudulent and discriminatory acts against them. The acts, Oriental said, amounted to violation of its constitutional rights.

“In the said Goldenberg Report, it was established that though Oriental Commercial Bank was charged penalty interest at the rate of 65 per cent, other banks with similar contracts were arbitrarily charged by CBK interests at the rate of 3.35 per cent. The report further confirmed that CBK charged other banks penalty interest for periods shorter than those expected,” Oriental Bank said in their court papers.