Audit: How unscrupulous officials defrauded AFC

Details have emerged of a troubling pattern of fraud, mismanagement and systemic failures that could see taxpayers and farmers lose millions at the Agricultural Finance Corporation.

AFC, a government entity tasked with providing affordable credit to farmers, has been a lifeline for the agricultural sector, but a recent review by Auditor General Nancy Gathungu reveals it has been left reeling. 

The report, covering the financial year ending June 30, 2024, paints a picture of unscrupulous officials exploiting weak internal controls to siphon public funds, leaving the agency’s millions in unrecovered loans and assets unaccounted for.

At the top of the queries is why AFC was yet to recover Sh11.8 million, which was overdrawn by officials at the Eldoret branch, a discrepancy that was traced to a fraud case reported in 2018. While management claimed the court had ruled in AFC’s favour in May 2024, they failed to provide updates on the recovery of the funds. 

Gathungu noted that the "recoverability of the amount could not be ascertained," suggesting the money may have vanished for good.

But the most telling schemes involved the corporation’s loan portfolio. While AFC’s core mandate is to lend to farmers, the audit uncovered several instances of deceit in the entity’s very function. 

In Kapsabet, 13 farmers had secured loans totalling Sh22.6 million using fraudulent title deeds as collateral. AFC filed seven court cases, won judgements, but did nothing further, as no warrants had been executed to recover the funds at the time of the audit. 

"The recoverability of loans amounting to Sh22.6 million issued on fraudulent titles couldn’t be confirmed," the report reads.

More intriguing is that AFC’s own directors were among the beneficiaries of the faulty loan system. 

Seven directors had outstanding loans worth Sh48.9 million, five of which were in arrears by Sh35.7 million. The said loans would be rendered "non-collectable," yet only Sh4.8 million was provided for bad debts. 

The auditor warned that this shortfall likely meant AFC was overstating its income, covering up the true scope of the problem. 

“In the circumstances, the accuracy and recoverability of the directors’ loan balance of Sh48 million couldn’t be confirmed,” Gathungu said.

Short-term loans fared no better. Of the Sh889 million owed by customers, Sh225 million had been outstanding for over a decade. Despite hiring an external agency to recover the debts, the report reveals that AFC had little to show for it.

The rot extended to payroll, where nearly 250 employees had deductions exceeding the legal limit of two-thirds of their basic salary, violating the Employment Act. 

Two staff members had been in acting roles for over six months, earning Sh1.9 million in allowances despite a policy limiting how long one can hold such positions. 

It also emerged that collective bargaining agreements were backdated, with AFC ignoring salary guidelines from the Salaries and Remuneration Commission. While SRC advised on the basis for negotiation with the trade union, AFC continued to use old rates, contrary to the SRC circular of September 2020.

According to the report, the loan processing system, a critical tool for risk management, was itself a source of risk. 

A loan of Sh9.9 million appeared fully repaid in management’s records but showed an outstanding balance of Sh4.8 million in system reports. Forty loans totalling Sh35.7 million were missing from the portfolio entirely. 

In some cases, loans were disbursed before approval, while others had an outstanding principal higher than the amounts lent, a red flag for possible embezzlement. 

Worse, 27 loans worth Sh18.9 million were incorrectly classified as "normal" despite being unsecured or in arrears, artificially inflating AFC’s financial health.

Gathungu also flagged the mismanagement of property, plant, and equipment, where a balance of Sh1.1 billion was found riddled with irregularities. 

At least 31 developed plots and two undeveloped parcels of land, collectively valued at Sh191 million, lacked proper documentation. 

One plot in Kimilili had no ownership papers at all, while land in Nanyuki and Kerugoya had never been valued. 

Even more disturbing, a parcel in Chogoria had been repossessed by the county government due to AFC’s failure to develop it, yet it remained on the books. 

The auditor noted that five other parcels, acquired for sums as low as Sh4,010, had not been revalued for years, flouting international accounting standards.

"The accuracy, completeness, and ownership of these assets could not be confirmed," the report reads, pointing to properties possibly quietly sold off or misappropriated.