Why Kenyan regulators find it tough to tame some sector bullies

Kenyan regulators have failed to tame rogue firms and individuals due to lenient laws and fines that make impunity reign supreme. They have not been punitive compared to other jurisdictions across the continent.

For example, driving a vehicle without a side mirror in 1984 would have seen one part with Sh100 as a fine instead of an arrest by a traffic police officer.

Touting or hanging outside a moving vehicle would have cost you Sh200 while driving without a number plate cost one Sh400.

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However, when 31-year-old legal mind at the National Transport and Safety Authority (NTSA) Mr Robert Ngugi saw this in 2014, he rooted for stiffer fines. “ I saw the loophole, the solution was a shortcut and a quickly did a paper in 2015,” Mr Ngugi said.

He observed that Kenyans who didn’t like paying bribes were forced to do so by an opaque process that saw several laws impose different fines in addition to the inconveniences of going to court.

NTSA drafted harsh penalties including Sh10,000 for driving without an identification plate and a similar amount for causing obstruction. If you employ an unlicensed PSV driver, you pay Sh10,000 and failure to fit the vehicle with an operational speed governor would attract a similar amount on the spot.

“What we came up with is that if you admit, you pay, sign a form which will be certified by the courts, if you do not agree then you still pay but you sign a different section which will give you a day in court where you can argue your case,” he said.

“This will substantially reduce bribery, payment will be instant preferably on a mobile platform solution or a credit and debit card but no cash is exchanged,” he said. Most of Kenya’s regulatory laws, by-laws and some basic standards remain archaic unable to punish the new and unravelling crimes as effectively.

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Cutting corners

Some regulators exhibit laxity in implementing fines, which makes cutting corners profitable enough to pay off the fines and still make a stack.

The latest of such and which got tongues wagging was Central Bank of Kenya (CBK) slapping five banks - Kenya Commercial, Equity Bank, Standard Chartered, Cooperative Bank and Diamond Trust with a Sh392 million fine for handling Sh3.632 billion from the National Youth Service.

Banks are charged Sh1 million for failing to disclose suspicious transactions, an amount that analysts argue cannot deter lenders from the vice.

KCB was slapped with the highest penalty and is required to pay Sh149.5 million for processing amounts of up to Sh639 million. The higher amount has been despite the bank processing lower amounts than its peers.

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Standard Chartered processed Sh1.62 billion but was fined Sh77.5 million, while Equity Bank processed Sh886 million and was fined Sh89.5 million.

Co-operative Bank was also found culpable for helping divert Sh263 million and will have to pay Sh20 million. Diamond Trust Bank will pay Sh56 million for transferring Sh162.5 million to NYS suspects’ accounts.

In 2016, CBK slapped three banks with Sh1 million fine each for failing to report suspicious transactions relating to the first NYS scandal where nearly Sh2 billion was lost.

Evidence that the CBK has been treating the banks with kid gloves was observed by National Assembly’s Public Accounts Committee (PAC) which said stiffer penalties could deter lenders from handling suspicious cash and when such happens and compel them to report to CBK.

“… Parliament proceeds to immediately review and subsequently amend the Banking Act and other financial laws and regulations… to substantially increase the maximum fine levied by the CBK on non-compliant financial institutions,” recommended PAC in the wake of the first NYS probe.

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Commercial banks

CBK has however published new regulations quadrupling the penalties that commercial banks will pay for failing to disclose the true cost of credit to customers with a maximum penalty of Sh20 million for every violation.

While the proposals are punitive, they are in comparison with other jurisdictions including Kenya’s peers such as Nigeria and South Africa where other than stiffer fines on banks, chief executives and compliance officers are penalised.

The Capital Markets Authority (CMA) recently fined former Kenol Kobil boss Jacob Segman Sh5 million for breaking rules in the book including owning shares secretly through Swiss-based Energy Resources Capital.

Through his offshore outfit, Mr Segman received dividends and helped raise capital without appropriate disclosures.

His fine seemed less. CMA also beat its own records when it fined former National Bank of Kenya (NBK) Head of Treasury Solomon Alubala Sh104.8 million and disqualified him from practising in listed firms for 10 years.

This was part of the fines on half the former executive team at NBK for cooking books, and syphoning money from the lender that has never recovered since the 2015 fiasco.

CMA said the penalty was twice the amounts so far traced to him from the embezzled funds. CMA has also sought restriction on two properties associated with Mr Alubala, which it believes were purchased with the stolen funds.

Former NBK boss Munir Ahmed was slapped with a penalty of Sh5 million and barred from holding a board position in any publicly listed company or working for a licensed person for a period of three years.

Former NBK Chief Finance Officer Chris Kisire was fined Sh1 million while former Chief Credit Officer George Jaba and Wycliffe Kivunira, who served as acting chief finance officers were fined Sh1 million each.

But most of CMA’s punishments have been challenged in court including Ernst and Young, Uchumi managers and the NBK bosses accusing the regulator of being judge, jury, and executioner.

CMA now says it has amended the Capital Markets Act to address key capital markets malpractices including corporate governance, embezzlement of investor funds, front-running, and provision of misleading information amongst others. It is also incentivizing whistleblowers by giving them a cut when they give credible information that leads to unearthing. “Additionally, it will incentivise whistle-blowers to provide information because reward mechanisms will be in place,” said.

CMA’s Regulatory Policy and Strategy Director Luke Ombara during the launch of the Soundness Report for the second quarter. “We benchmark using other jurisdictions especially those whose markets are more developed than ours. They may appear to have stiffer penalties but you also to consider their size, they are fairly big. We believe the penalties we impose are both stiff and deterrent,” said a CMA official.

Communications Authority of Kenya (CA) also appears lenient when dealing with industry players. While it has consistently fined mobile network operators for poor services, the fines do not deter the telcos.

According to CA’s latest report, the operators continue to post poor quality of service(QoS).

Last year’s scores were lower than what was posted in 2016, putting to question the effectiveness of the regulator’s penalties in deterring the players from continuously offering a raw deal to subscribers. CA last year penalised the three operators – Safaricom, Airtel and Telkom Kenya Sh311 million for the poor quality of service.

The regulator, however, acknowledges that the penalties are light and that operators do not ‘feel the pinch’. CA Director General Francis Wangusi recently said the regulator will review of QoS performance regulations.

Areas of interest include an increase in penalties for telcos that post poor scores. The operators have also ignored CA’s call to switch off unregistered Sim cards as well as streamline their SIM card registration processes.

The regulator has severally warned top executives of the three operators that they will face arrest if they continued allowing unregistered cards continue running on their networks.

This, however, appears to fall on deaf ears. Recently, Mr Wangusi said the firms had until Friday to rid their network off unregistered SIM cards. The SIM registration regulations came into place in 2015 and three years on, operators together with their agents continue to activate SIM cards without requiring their new customers to provide valid identification documents.

All along, CA has not penalised any of them despite undertaking audits that reveal blatant abuse of the law. CA has also been selective in its surveillance of the operators with a focus on the three major mobile network operators.

This leaves out others including recent licensees such Equitel and Jamii Telecom’s Faiba.

“We have started by cleaning the registration processes for MNOs then we can have a look at the other providers,” said Wangusi last week.  CAK also appears laid back when dealing with issues of anti-competitive practices and consumer protection.

There have been instances where the Authority has investigated firms, and found them culpable but act softly. Such cases include a shopper bought a faulty ‘Hotpoint gas cooker from Nakumatt Supermarkets, Nyali.

CAK found the claims by the shopper true after which “Nakumatt offered to replace the cooker. She was compensated with a Sh10,000 gift voucher.”

National Transport and Safety AuthorityCentral Bank of KenyaNational Youth Service