Kenya’s biggest bank by assets says it reported suspicious transactions on the NYS II scandal to the Central Bank two years before it erupted, but no action was taken.
In a 99-page document responding to the show cause letter sent to five banks by CBK, Kenya Commercial Bank (KCB) is turning the tables against its regulator accusing it of sleeping on the job only to wake up from its slumber to slap banks with fines in a public relations exercise.
From 2015 to August this year, the bank had flagged and made 653 reports on suspicious transactions, among them the National Youth Service (NYS) transactions, but it has never received any feedback from the Central Bank of Kenya (CBK).
“KCB has filed Suspicious Transaction Reports (STRs), including the 653 STRS filed since 2015, no feedback has been received and or issue raised by FRC (Financial Reporting Centre) or CBK as to the practice or standard of the STRs reported,” the lender adds in a document that reveals massive gaps in Kenya’s financial system to combat theft of public funds.
To throw the spanner in the works, KCB says the duty of ensuring the genuineness of the NYS transactions lay with the CBK. “It is important to note that all SWIFT inward transfers from NYS were received from the CBK accounts. The duty to ensure genuineness of inward SWIFT payments from NYS to KCB Bank customer accounts through CBK, rested with CBK as the remitter bank. This included primary responsibility for obtaining adequate documentation to support the transfers made,” KCB says in its detailed response to the CBK fighting off the penalty claims.
The report has been shared with various investigating agencies including the Directorate of Criminal Investigations and the task force at the Financial Reporting Centre (FRC).
Existence of a network
In a dramatic twist, KCB suggests CBK failed to do its job and has instead chosen to fine banks despite having received intelligence two years before the fraud became public. “The bank is indeed surprised that the regulator proposes to penalise it in respect of transactions that the bank reported and provided a detailed suspicious transaction report (STR). An STR that not only identified suspicious transactions but went further to carefully detail the existence of a network of related entities doing business with NYS in the sum of Sh258,586,588.70,” KCB notes.
It adds that what is equally surprising is that the report was made on December 6, 2016, almost two years before the NYS II saga broke on May 12, 2018. The lender says CBK, which is the supervisory body, would have been required to report any suspicious payments as it is bound by the law.
“A supervisory body and its staff shall, in accordance with Section 36 of the Act, report to the centre any suspicious transactions that the supervisory body or its staff may encounter within the normal course of its duties in the form prescribed in the schedule,” KCB says.
The response also shows why government agencies fail to act on intelligence that can help stop fraudsters. But more often than not, the respective government agencies either chose to look away, are just negligent or are beneficiaries of fraudulent deals.
CBK wrote to banks asking them to explain why they should not be fined for violations that saw the financial system fail to stop NYS fraud. CBK has announced plans to fine banks Sh1 million for every violation if they don’t provide acceptable defense. KCB has been fined Sh149.5 million, Standard Chartered Bank Sh77.5 million, Equity Bank Sh89.5 million, Cooperative Bank Sh20 million and Diamond Trust Bank Sh56 million.
CBK Governor Dr Patrick Njoroge said on Thursday that the five banks had until Wednesday to submit responses to show cause why the move against them should not be enforced. “As of close of business yesterday, all the five banks had submitted. We are reviewing the responses then we will levy the fines as appropriate,” he said.
Used as conduits
Banks were also required to give time-bound action plans approved by their boards on how to seal the loopholes. “Banks should not be used as conduits for channeling ill-gotten funds. Wanjiku will not trust the system if they see banks’ behaviour and we look the other way,” Njoroge added.
In its inspection report, the CBK noted that the bank filed suspicious transaction reports (STRs) for the NYS-related accounts as early as 2016. But its crime was that it failed to report supplementary suspicious transactions in several accounts associated with the NYS scandal. Suspicious activities included receipt of multiple government payments, numerous cash transactions, transfer amongst related entities and directors, inadequate supporting documentation and split transactions.
KCB says in the NYS related accounts, as the customers continued to receive additional payments, there was noted change in the pattern of application of the funds received manifested by an increase in the amounts and frequency of cash withdrawals and transfers between related accounts. Most of the accounts were related, where companies involved were related having been registered by persons sharing family names and postal addresses.
“The noted change in pattern led to the confirmation of the suspicion and ultimate filing of a STR,” the bank notes.
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