Ex Chase Bank Chair hit with heavy fines in dual landmark rulings

Former Chase Bank Chairman Mohaamed Zafrullah Khan in the dock at a milimani court where he was charge with conspiracy to defraund Chase bank by falsely pretending the disbursement of 1,683,000,000.[FILE/Standard]

Former Chase Bank Chairman Zafrullah Khan and two senior managers have been fined Sh11 million by the Capital Markets Authority (CMA), bringing to a close a legal dispute that has lasted nearly a decade in one of Kenya's most notable corporate governance scandals.

The three were also barred from serving as directors or holding any key position within any issuer or licensed or approved entity in the capital markets for periods ranging from two to ten years.

Analysts say the landmark ruling against Khan, a wealthy businessman who presided over the bank's collapse, alongside former General Manager for Finance Makarios Agumbi and former General Manager for Corporate Assets James Mwaura, sets a crucial precedent and shifts scrutiny to governance standards in other listed firms.

The bank's failure occurred during Khan's tenure as the chairman, a period now defined by false financial statements and governance failures.

CMA found the trio guilty of overseeing the publication of false financial statements for a 2015 Sh4.8 billion bond issue, with Khan receiving the heaviest penalty, a Sh5 million fine and a 10-year ban from holding any directorship or key role in capital markets.

"The CMA Board Ad Hoc Committee established that Khan, being a Chase Bank Kenya Limited(CBKL) Board Chairperson, failed to exercise effective oversight over the management of CBKL, leading to preparation and publication of false and misleading financial statements," the regulator said in its judgement.

In a striking incident of poor governance, Khan was also found by CMA to have been "conflicted in approving his own undisclosed bonus" - a payment that became symbolic of the bank's management failures.

Agumbi was fined Sh3.5 million and barred for five years, while Mwaura was fined Sh2.5 million and barred for two years for facilitating the false statements and the improper payment of Khan's bonus.

The ruling concludes a protracted legal battle that saw the trio attempt to stop CMA proceedings through an appeal at the Capital Markets Tribunal. The Tribunal ultimately ordered them in February 2024, to face the committee, leading to yesterday's decisive action.

The enforcement action revisits the 2016 collapse of Chase Bank that sent shockwaves through Kenya's financial sector. On April 7, 2016, the Central Bank of Kenya under former CBK boss Patrick Njoroge placed the bank under receivership following a devastating bank run triggered by liquidity concerns.

Khan was the Chairman of the bank when it failed and eventually placed on receivership on April 7, 2016.

The collapse exposed massive governance failures, with the CMA's investigation revealing that false statements and non-disclosure of material information, including related-party loans, had misled investors in the 2015 bond.

The three executives were also directed to undergo corporate governance training before being eligible for future roles in capital markets, a requirement that set precedence on improving governance standards across the sector.

Analysts say the resolution of this landmark case places new pressure on regulators and listed companies to demonstrate effective oversight and ethical leadership, signaling that even the most powerful executives will face consequences for governance failures.

In another landmark ruling by CMA, the Authority imposed a Sh10 million fine on Ernst & Young LLP over its involvement with the troubled Uchumi Supermarkets Limited, marking a first time a big four accounting firm, has been sanctioned by the Kenyan regulator.

This decision concludes a nine-year legal battle surrounding EY's role as reporting accountant for Uchumi's 2014 rights issue, with the regulator finding that the firm failed to ensure accurate disclosure of material facts in the retailer's financial statements.

"The Authority has imposed a financial penalty of Sh10 million against EY," the CMA said in a statement, adding that the firm must ensure all employees involved in auditing of listed companies undergo remedial training for the next three years.

CMA directed that the training programme be supervised by another EY member firm, and the reports should be submitted to both the CMA and the Institute of Certified Public Accountants of Kenya (ICPAK).

Failure to comply with the training mandate could result in EY being barred from providing professional services to companies listed on the Nairobi Securities Exchange and other CMA licensees.

The regulator also recommended that ICPAK take disciplinary action against EY engagement audit partners Michael Kimoni and Joseph Cheborbor for their roles in the 2010 to 2014 audits.

The CMA investigation revealed a "serious misrepresentations" in Uchumi's financial statements that were included in the Information Memorandum for the 2014 rights issue. The regulator initiated proceedings against the accounting firm in August 2016, but the firm mounted a lengthy legal challenge that reached the Court of Appeal.

EY's attempt to stop the enforcement proceedings through a 2016 High Court petition was ultimately dismissed by the Court of Appeal in February 2022, clearing the way for the CMA's determination.

Uchumi, once Kenya's largest retailer, collapsed in the years following the 2014 rights issue despite raising capital from investors. The CMA's investigation into the company's affairs began in 2015, revealing various regulatory violations related to the rights issue and use of proceeds.

The sanction against EY represents the latest chapter in the long-running Uchumi saga, which has seen multiple former board members and senior executives face regulatory action over the company's dramatic failure.

CMA's decision on both EY and CBKL represents a significant escalation in the CMA's enforcement actions against professional service firms, having previously targeted board members and senior management of listed companies.