The battle that MPs face in bid to reopen Charterhouse

That decision, he said, is the province of the Central Bank of Kenya, an independent institution as established by law with the mandate to regulate and supervise the financial services sector. Then he dropped the bomb.

Parliament, Mr Kenyatta said, had no business flogging the dead horse that is Charterhouse Bank.

But the MPs missed the minister’s message – which for keen observers of the committee hearings was the day’s most important – making them to conclude that Treasury had no objection to the reopening of the controversial bank.

In referring to Charterhouse Bank as a dead horse, Mr Kenyatta was covertly stating to the committee a strong point of law, whose interpretation many expect to become the subject of a Constitutional Court hearing in the coming months.

That position is rooted in the sweeping powers that the Central Bank of Kenya – as the regulator of the financial services sector – has in determining who can or cannot operate a banking business in Kenya.

Under the Central Bank of Kenya Act, anyone wishing to set up a banking business in Kenya must meet certain basic requirements – including set capitalisation, liquidity and cash ratio targets.

Banks must also meet a set deposit ratio, honour all their financial obligations in the clearing house and file quarterly reports of their overall performance with the regulator.

Mr Kenyatta’s sting however lies in the fact that the law requires commercial banks to apply for trading licences every year and the Minister of Finance must issue or renew such licences on the advise of the Central Bank of Kenya – which must be satisfied that the applicant has met all the regulatory and operational conditions set in the rule book.

Charterhouse has not been issued with a trading licence since it was placed under statutory management four years ago.

Commercial lawyers argue that this particular provision of the Central Bank Act means that Charterhouse cannot conduct a banking business in Kenya merely on the basis of having been cleared by parliament but will have to apply afresh for a trading licence – whose issuance is the prerogative of the Minister of Finance.

Parliament’s quest to have Charterhouse reopened will most likely face an obstacle in the law that requires the minister to issues all banking licences solely on the advise of the Central Bank of Kenya. Under the Act establishing it, the bank cannot be directed by any external force in the execution of its mandate.

Trading licence

This effectively means that parliament cannot direct CBK on the type of advise it must offer Treasury for Charterhouse to get a new trading licence.

Parliament’s decision last month to pass the report of the Finance, Trade and Planning Committee chaired by Nambale MP Chris Okemo recommending the reopening of the bank – far from bringing the Charterhouse Bank controversy to a close – appears to have only opened a new chapter in the saga this time in the form of a face-off between the executive and legislative arms of government.

In recent weeks as the committee interrogated the various State agencies known to have been involved in the decision to close Charterhouse, MPs have walked through a narrow corridor of law with the absence of an anti-money laundering legislation in Kenya at the time of the bank’s closure as their main point of argument.

They have argued that the law does not provide for a bank to be closed on the basis of suspect activities by its clients.

Owners of the bank have also relied on the fact that banking laws do not consider suspicion of involvement in money laundering as enough grounds to close a financial institution.

This argument is supported by the fact that American and European authorities have in recent months launched investigations into two major financial institutions for suspected money laundering but the banks have remained open and in business despite the large amounts of money involved.

HSBC Holdings, the London-based financial services behemoth, announced in August that its US division was under investigation for possible violations of anti-money laundering and bank secrecy rules.

Charterhouse operatives have argued that the fact that US authorities have not found it fitting to close the bank despite its having been served with grand jury subpoenas from the US Attorney General’s office, the office of the Controller of the Currency and the Federal Reserve Bank of Chicago makes the US ambassador Michael Ranneberger’s quest to keep their bank closed ring hollow.

In Europe, Italian authorities have launched investigations into the activities of Vatican bank’s top two officials for suspected money laundering – a move that has seen the police freeze 23 million euros ($30.21 million) of the bank’s funds.

Ettore Gotti Tedeschi, the president of the Vatican Bank – officially known as the Institute of Religious Works (IOR) and director-general Paolo Cipriani are under investigations for alleged violations of European Union money-laundering rules.

Italian police acted against the bank after it bumped on to two suspect transfers from an IOR account in an Italian bank to a German and another Italian bank – but there has been no suggestion that closure of the bank is among the many options on the table for crime busters dealing with the matter.

It is however believed that Mr Kenyatta’s demeanour when he appeared before the Okemo committee was a well calculated move hinged on the fact that neither Treasury nor the CBK had a strong legal position to back up the decision they made five years ago to shut down Charterhouse – the glaring signs of suspect dealings notwithstanding.

It was a tactical retreat that the MPs appear to have misread and misinterpreted as surrender to their quest to have Charterhouse reopened.

Signs that the executive is preparing for a grand battle with parliament on Charterhouse became clear when six Cabinet ministers, including the vice president, who were in the house as Mr Okemo tabled his committee’s report for debate, walked out of the chamber leaving the back bench to pass it without executive participation.

Then there is also the very deep and active involvement of the United States of America in the matter through Ambassador Michael Ranneberger that rose to a crescendo last week with alleged imposition by the US government of travel bans on members of the Okemo committee over their handling of the Charterhouse affair.

Past audits

In strict legal terms, the Central Bank of Kenya or any other institution that participated in the 2005 closure of Charterhouse Bank had very little room to take on a hostile parliamentary committee, whose line of questioning had a running thread clearly in favour of reopening the bank.

Charterhouse was closed at a time when Kenya did not have an anti-money laundering law and could therefore not have been closed on that basis.

Other charges such as suspected tax-evasion activities of the bank’s customers though criminal do not constitute grounds for the closure of a commercial bank as provided for in the Banking Act.

But it has not been lost on keen observers that past audits have found Charterhouse in violation of a number of fiduciary obligations and related laws, including the know-your-customer rules that demand of banks to ascertain the identity of their customers by requiring them to file copies of personal identification documents and the nature of their business during the opening of bank accounts.

CBK inspections in the two years preceding the 2005 closure had also found that apart from failing the test of regulatory compliance, Charterhouse customers – with the help of bank staff – engaged in suspect transactions that pointed to possible use of the bank to commit economic crime – making the case for the Kenya Anti Corruption Commission’s involvement.

Former deputy Central Bank governor Jacinta Mwatela is on record as having once told parliament’s Finance, Planning and Trade committee that routine inspection had found Charterhouse in gross violation of the Banking Act.

These violations included lending to entities in which its directors had interest in excess of the 25 per cent limit that commercial banks are legally allowed to lend to a single borrower.

Beneficiaries of the said loans included Nakumatt Holdings — the company that runs Kenya’s top retail chain — and Triton Petroleum the oil firm that rattled the market with its ability to keep large amounts of petroleum products at the shared Kipevu storage tanks contrary to the operational formula that demands that the storage be proportional to each company’s marketshare.

Triton, collapsed three years later in December 2008 with Sh8 billion worth of fuel that the Kenya Pipeline Company held in trust for a group of local and foreign financiers.

CBK inspections had also found Charterhouse in breach of the regulations on insider lending.

Its directors including Sanjay Shah, Manoj Shah, Nitin Shah, Kamal Shah, Hamad and Mehraz Ehsani had advanced themselves loans worth Sh593 million without security and above the 20 per cent of core capital threshold set by the Banking Act.

Enough grounds

The bank’s provision for bad debts was also found to have been inadequate and its staff had regularly failed to obtain account opening documentation for some customers making their activities suspect.

Legal experts say that in both letter and spirit, these are enough grounds for the Central Bank to recommend to Treasury not to issue the bank with a trading licence – an action whose impact is the same us shutting it down.

This and the United States’ very open involvement in the affair are expected to keep the Charterhouse drama playing in the coming months – most likely in the courts – offering the possibility that the bank will remain closed much longer than its backers have imagined.