Revealed: How insiders' loans fraud sank Chase Bank

Chase Bank on Waberi Street./File
INSIDER HEIST Chase Bank on Waberi Street./File
Image: FILE

Former Chase Bank Kenya chairman Zafrullah Khan awarded himself a three-year consultancy contract for unspecified projects in the bank, 16 months before it collapsed on

April 7, 2016.

A special audit report by Deloitte released a month after the CBK placed the bank into receivership shows the man at the centre of Sh14.9 billion internal bank heist was to earn $50,466 (Sh5.15 million) a month.

When the Star sought to know, from him, the kind of consultancy he was offering, the 62-year-old fumbled then hang up.

‘’Who is on the line? Please allow me to call you later,’’ Khan said in a feeble voice.

A former staff at the bank told the Star the Harvard educated money market honcho generously offered everyone he met, regardless of social economic status, a warm smile partly hidden in his signature moustache.

His low voice, however, took me back. It was uncharacteristic of a man whose voice while speaking at Chase Bank’s financial results attracted multiple echoes to tell the world just how well the lender was performing.

The energy in him must have started fizzling in March 2016 when the bank posted Sh742 million loss for the year ended

December 31, 2015, compared a profit of Sh2.3 billion the previous year.

Khan and the bank’s group managing director were forced to step aside on

April 6, 2016.

This development rekindled memories of Imperial Bank, another lender that had been placed under receivership almost six months earlier after a 13-year-old fraud orchestrated by a director was uncovered.

That evening, social media went berserk with rumours about Chase Bank collapsing, attracting panic withdrawals that saw CBK put the lender under one-year receivership the following day.

What followed was a vigorous forensic audit of the bank’s activities by Deloitte. And after 53 days, the verdict was out in

May 2016: Khan had helped bank’s bosses loot Sh15 billion.

The report zeroed in on seven incidences that depict a bank robbery script from Hollywood only that in Chase Bank’s case, characters spilt no blood.

Cooked Books

For instance, the bank operated two general ledger accounts: CBK Settlement account number 04005459002 worth Sh9, 222,606,805 and Sundry Debtors account number 100004715 worth Sh1, 453,589,511.

Although the two accounts worth Sh10.67 billion were initially classified as other assets in Chase Bank’s accounting records, they were later reclassified as loans and advances during the 2016 statutory audit.

Chase Bank's former general manager Makarios Agumbi and his credit counterpart James Mwaura were responsible for initiating and approving transactions posted in the two accounts.

The two said Sh7.5 billion was used to buy 12 properties for the bank by related entities and Sh3.1 billion as sums unsupported by documentation.

However, a forensic audit revealed that only Sh1.3 billion of Sh7.5 billion spent on 12 properties can be ascertained and that Khan and Duncan Kabui, the Group Managing Director, owned shares in five companies that owned the properties.

The five includes Riverside Mew Limited that acquired Riverside office Block (Sh150 million), One Riverside apartment (Sh61.5 million), English Point Marina apartment (Sh70 million), three plots in Voi (Sh18 million) and Ukunda Mosque plot at Sh32.56 million.

Nine Fifty Limited has three properties in Diani complex in Kwale valued at Sh25 million while Rinascimento Limited associated with Kabui has agricultural plots in Nyandarua valued at Sh40 million.

Other entities owned by Khan and Kabui, but listed as holding investments on behalf of the bank, are Mathatani and Lighthouse Property Limited.

An email dated

November 11, 2015 from Khan asked Daviel Mavindu, who was a senior official at Chase Bank, now chief executive of Rafiki Microfinance to restrict circulation of management accounts of Riverside Mews Limited since they are ‘Personal stuff”.

The email contradicts Khan’s assertion that the related party was set up to hold investments for Chase Bank.

A review of emails also established other properties held by entities indicated as being under Chase Bank that had not been disclosed.

They include PEP Limited where Khan controls 99.9 per cent stake while Kabui and Ali Cheema own a paltry 0.1 per cent.

Musharaka agreements given to auditors as supporting documents to show that those entities were holding investments for the bank were signed a month before the bank

was put under receivership when most of the properties listed were bought in 2010.

‘’We did not obtain any evidence of Shariah Board approval for the Musharaka agreements as required under Section 10 of the bank’s Islamic banking policy,’’ Deloitte said.

It added that the internal auditor responsible for Shariah compliance was not aware of the existence of these agreements; proof the bank owned none of those properties.

The reporting of Sh3.1 billion as interest receivables from customers, the auditor said, was done to conceal the payments and not as a management decision to improve "balance sheet presentation" as indicated by the bank management.

According to the auditor, the amount which was first presented as interests receivables and later as amount unsupported consisted of Sh2.2 billion attributed to payments effected on behalf of Khan.

The audit report indicated that Sh1.153 billion as Khan’s receivables from the sale of shares and Sh1.05 billion as a bonus. The remaining was Sh6872 million was presented as losses from forex exchange.

Even so, the bonus payment which was authorized by the board in

May 2015

to be paid in equal instalments for five years was paid in full in

July 2015

contrary to board approval. The amount was also not taxed.

Irregular loans to bank’s officials

The report further unmasks irregular loans to entities owned by the bank’s top management.

On

December 30, 2015, a day to closing its books for the financial year, the bank disbursed Sh1,023,900,000 to Camelia Investment, Coinbrook Holdings, Cleaopatra Holdings and Golden Azure Investment without adequate documentation or securities.

Those loans were not disclosed as insider despite Mwaura indicating that those firms belonged to Khan, the chairman.

Others who benefited directly from those loans include Mohammed Zasrullah Khan and Claude Wagner Khan, brothers of the bank’s chairman.

Based on official company search, the two owned Golden Azure Investment and Camelia Investment. Camelia was later changed to Riverside Mews Limited jointly owned by Khan and Kabui.

Another Sh3.009 billion to Nine Fifty Limited; Constellation Investment, Anest Africa, Bamburi Rod Partners and Codicote Limited were not disclosed in CBK return for

December 2015

despite those entities being linked to bank directors.

Five term loans with a total balance of Sh1.608 billion were 180 days beyond loan status and no payment had been done. Some of those loans were linked to Rafiq Shariff, former Chase Bank director.

The forged loan facilities were then posted into CBK Settlement account, therefore reducing the outstanding balance by a similar amount in a classic white collar robbery that has become a key subject for case studies into failed banks in Kenya and beyond.

Chase Bank’s financial statement as at

December 31, 2015, reflected overdue interests on loans and advances at Sh5.6 billion. The audit, however, shows the loan book was overstated by Sh3.245 billion in violation of part 3: Section 3.6 (b) of CBK’s regulations.

ResearchGate, in its 2017 study dubbed ‘commercial banking crisis in Kenya’ described insider loan fraud at Chase Bank as ‘supervised theft’

Irregular withdrawals

Besides illegal loans, Chase Bank’s top leadership perpetuated irregular withdrawals that ran into billions.

The report, for instance, shows that Sh1.46 billion was withdrawn irregularly from

January 1

to

April 2016.

Most of the payments were made in favour of related entities, construction firms, law firms and two private companies.

In another incident, the discrepancy was noted in the bank’s external shilling and dollar-denominated secret account.

The balance on the shilling denominated account in De 31 2015 showed it at Sh2,290,347,571 but confirmation from Development Bank showed a balance of Sh997,833,517 hence a deficit of Sh1.292 billion.

The dollar-denominated account, on the other hand, reflected a balance of $2.5 million against a $15,262,379 presented, a difference of $12,762,379.

Auditors found out that the difference related to transactions was withdrawn by Mwaura for payments of properties abroad on behalf of Khan.

There were also irregular withdrawals by shareholders including Sh612, 992,970 from CBK settlement account and Development Bank by Mwaura on behalf of Carlo Van Wageningen and Chris Staubo, his business partner.

Auditors established that only Sh388, 856,636 was released to the account, meaning Sh224,136,335 could not be accounted for.

‘’The use of internal accounts for private individual transactions exposed the bank to money laundering,’’ the auditor said.

The CBK is pursuing Khan and eight other former senior managers and directors at Chase Bank and its related companies to recover Sh14.9 billion in court.