A RECARP ON THE GOLDENBERG

THE MOTHER OF WHITE COLLAR CRIME

The phrase "white-collar crime" was coined in 1939 during a speech given by Edwin Sutherland[1] to the American Sociological Society. Sutherland defined the term as "crime committed by a person of respectability and high social status in the course of his occupation." Although there has been some debate as to what qualifies as a white-collar crime, the term today generally encompasses a variety of nonviolent crimes usually committed in commercial situations for financial gain. Many white-collar crimes are especially difficult to prosecute because the perpetrators use sophisticated means to conceal their activities through a series of complex transactions. Below is a re-carp of the scandal as I had promised in my previous blog paper. Hope you find this informative and helpful as you go through it. 

ORIGIN, BASICS AND FACTS OF THE GOLDEN BERG SCANDAL

After public hearings characterized by high-drama that riveted the attention of the nation for a period of over 20 months, the Judicial Commission of Inquiry into the ‘Goldenberg Affair’ completed its work and presented its report to the then President, Mwai Kibaki in October 2005. The goal of the taskforce (commission of inquiry) was to unravel the genesis of the Golden berg Scandal, its execution and make recommendations on the way forward. They required evidence which included correspondence, application forms and policy pronouncements by principal officers at the Treasury (Ministry of Finance) including the Minister, Assistant Ministers and the Permanent Secretary. Together with the oral testimonies of the key protagonists, these documents would constitute the best evidence[2].

The Commission made a categorical finding that James Kanyotu and Kamlesh Mansukhlal Pattni registered Golden berg International Ltd (GIL) on July 11 1990, a business was to:

(a) Import and export any or all types of minerals, gold, silver, diamonds, precious and semi-precious stones … In Kenya to all PTA countries, Europe, India and other parts of the word;

(b) Prospect, explore, open and work claims and raise, dig and quad for gold, silver, minerals ores … diamonds, precious and semi-precious stones - In Kenya and in other parts of East Africa”;

Just two months after its incorporation, GIL applied to the Minister for Finance for sole rights to export diamond jewelry and gold for a period of five years, with the option of a five–year extension thereafter, and for 35 percent export compensation for such exports. This would enable the company to compete effectively with smugglers of those commodities. The Ministry of Finance approved de facto monopoly through administrative and licensing measure. In its findings, the Commission found the speedy grant of the application by Golden berg to have been rather curious, bearing in mind that there had been other applications made prior, which were still pending, for instance, In November 1987, Collins Owayo[3], made a case for monopoly and an enhanced rate of export compensation for Aurum Ltd, which was already a significant player in the industry, but the application was still awaiting a decision by the Ministry of Finance.

VARIOUS OFFENCES COMMITTED BY THE ARCHITECTS AND IMPLEMENTERS OF THE GOLDEN BERG SCANDAL.

Irregular Payments of Export Compensation to Golden berg International

Among other things, the commission of inquiry sought to inquire into the propriety and legality of the export compensation claimed and paid as well as the procedures followed (or flouted) in such payments. It had six offences to investigate, which required the examination of records and other documents, oral testimony as well as an analysis of the Local Manufacturers (Export Compensation) Act.[4]

1.      Export of gold and diamond jewelry from Kenya

The Commission made the startling finding that the alleged gold or diamond jewellery exports were nonexistent. Not only does Kenya NOT produce any diamonds at all, but also, GIL’s Chairman made “a clear admission that what was presented as exports were not genuine exports. This was one of the offences as GIL had provided for the export of these non-existent commodities to other countries.

Therefore, the questions of “whether the exported gold and diamond jewelry was processed through Customs as required”, “whether there was a declaration and remittance of the alleged foreign currency earnings” and ”whether the alleged foreign currency earnings were remitted to the Central Bank” were irrelevant. There were no exports, and no earnings made. The Commission of inquiry also found out that all the documents showing exports were false. The figures allegedly earned as foreign exchange from the ghost exports were no more than a fraudulent ploy to earn export compensation out of nothing.

2.       Foreign Exchange Laws

Goldenberg International Limited flagrantly flouted the existing laws on foreign exchange. The alleged exporter (GIL) remitted the alleged export proceeds, in cash and in several currencies, in contravention of the Exchange Control Notice No. 13. The Notice requires that remittances of export proceeds must be made by the importer’s bank[5]. GIL made some remittances even before any purported exportations had been done. Because of the ensuing false export compensation claims, about over KES1.1B (KES1, 179,612,151), being 20 percent of the alleged exports, was paid to Golden berg. In addition, the company obtained an extra KES254 Million (KES 254,600,650), being 15 percent over and above the allowed statutory rate for the same exports. Total compensation was therefore over KES1.4B (KES1, 433,212,501), about 35 percent of the fictitious exports.

3.      False Export Compensation Claims

Apart from the compensation being for non-existent exports, the Commission of inquiry established that Hon. Saitoti, the then Vice President and Minister for Finance, granted the enhanced rate of compensation at 35 percent while fully aware that the maximum allowed under law was 20 percent. There was no legal or economic basis for the enhanced rate of export compensation. The Commission also found that “[these] extra 15 percent payments were later placed before Parliament in the Supplementary Estimates of 1991/1992, disguised as Customs Refunds, and were approved”.

4.      Alleged Payment of USD210 million by Central Bank of Kenya to Exchange Bank Ltd in Fictitious Foreign Exchange Claims and its Utilization

This task called for an examination of two specific contracts involving a total of USD210 million (KES13.5billion) between the CBK and American Express Bank Ltd, London, in one contract and Banque Indosuez Sogem Aval Ltd, London, in the other. Under the contracts, some previous undelivered foreign exchange contracts were to be replaced with the effect that the two banks would deceptively show that the CBK had about USD210 million in its reserves. After the necessary accounts were opened, Exchange Bank Ltd and CBK entered into contracts for the sale of that amount in dollars through the two foreign Banks. In reality, Exchange Bank had placed no money whatsoever in those banks, yet the CBK had paid KES13.5billion. The Commission found that the contracts were clearly fraudulent. By the time the fraud was discovered and the new Governor of the Central Bank ordered the reversal of the necessary accounting entries, the CBK had lost over KES3.6 billion due to the reduced rate by interest.

The Commission was emphatic that the persons involved in the fraudulent contracts were Mr. M. Wanjihia and Mr. J. Kilach of the Central Bank of Kenya, working in collusion with two foreigners.

5.      Cheque Kiting

Principal players in the ‘Goldenberg Affair’ had exploited the pre-export finance system in order to make huge sums of money. Following its discontinuation, these players faced a cash crunch, with large sums to be repaid, without the benefit of further funds under the halted scheme. The task of the Commission was to find out whether there was a deliberate move to defraud the CBK through a system of cheque kiting perpetrated by GIL and a number of banks.

The Commission found that this system involved a manipulation of credit balances. When a bank credits a customer’s account with a bill of exchange, there is an immediate credit balance in that account even though the instrument clears later. In the meantime, the customer is free to use that credit balance for his own purposes, even if the bill is later dishonored or, as was often the case with Golden berg, replaced with yet another bill. The Commission examined bank records and statements, heard testimonies from the witnesses who were involved in the scheme and perused analytical reports from experts.

Specifically, the Commission found that the banks involved in the cheque kiting, which occurred between March 18 and April 20, 1993 and between April 20 and May 14, 1993, were Pan African Bank Ltd, Delphis Bank Ltd, Transnational Bank Ltd, Trust Bank Ltd and Exchange Bank Ltd. The accounts involved were always those of GIL and its associated companies. This well-calculated scheme of cheque kiting was put in place simultaneously as Mr. Pattni took control of Pan African Bank on March 17, 1993, with his employee, Nadir Akrami, as its Managing Director. This bank was to become a major player at the very centre of the cheque-kiting scheme.

In a report to the Commission by Price Waterhouse Coopers dated July 16, 1993, the estimated interest lost or foregone by CBK by through the cheque-kiting scheme was KES588million.

6.      Special Issue Treasury Bills

Another facet of the ‘Goldenberg Affair’ revolved around shady and preferential dealings in Treasury Bills issued in 1992 and 1993. Treasury Bills[6] are short-term government debt paper, with maturity dates not exceeding one year, sold by the Central Bank of Kenya on behalf of the Government. They may be ordinary for purposes of raising short-term money to meet a budgetary deficit or Open Market Operation (OMO) bills for monetary policy operations[7]. The Commission examined certain OMO bills that were issued from April 1993, not by advertisement, as was the usual practice, but by discreet sale to a select group of commercial banks, consisting mainly of Exchange Bank Ltd, Delphis Bank and Pan Africa Bank. These bills, valued at KES4.248billion, were redeemed at full value before their respective maturity dates. What was unusual was that no penalties were imposed and as a result, the CBK lost an estimated KES 216million to GIL.

The Commission found that the special issue Treasury Bill was initiated and then later rolled over several times to meet the illegal payment of KES 5.8 billion to Golden berg from the Postmaster-General’s account. This was part of a mopping up operation. Interest rates would sometimes be as high as 82 percent to encourage purchase of the Bills and reduce excess liquidity in the market.

IS THE LEGAL AND INSTITUTIONAL FRAMEWORK IN KENYA ADEQUATE TO PREVENT, PROSECUTE AND PUNISH GOLDEN BERG TYPE OFFENDERS.

It is noteworthy that the first case relating to the Golden berg Scandal was filed not by the Attorney General but by the Law Society of Kenya. At the time, there was a public outcry for the prosecution of the Golden berg suspects. The Law Society of Kenya launched private prosecutions No, 1 of 1994 - L.S.K. - vs- Eric Kotut, Charles Mbindyo, Collins Owayo, Dr. Wilfred Koinange, Francis Cheruiyot and Kamlesh Pattni. As noted in the Commission’s Report, the Attorney-General moved swiftly to join himself in this prosecution as ‘amicus curiae’ and later objected to the prosecution on the ground that he was to undertake his own prosecution. The Court upheld the submission and the private prosecution was dismissed. Among others, these are the reasons why I believe the legal and institutional framework is not adequate to prevent, prosecute and punish Golden berg type offenders.

Failed prosecutions

In addition to the above, more cases followed suit and ended up in the same fete: for example:-

Criminal Case No. 2271 of 1994: Republic - vs- Kamlesh Pattni, Eliphaz Riungu and Lazarus Wanjohi

The latter two were charged with theft by persons employed in Public Service. The case was later withdrawn and consolidated with Criminal Case Number 4053 of 1994, which continued until February 24, 2003 when a nolle prosequi was mentered by Horace Okumu, State Counsel on behalf of the AG.

Republic - vs- Job Kilach & Michael Wanjihia

This case was withdrawn and consolidated with Criminal Case No. 4052 of 1994.

 Republic - vs- Kamlesh Pattni & Charles Mbindyo

This case was withdrawn and consolidated with Criminal Case No. 2208 of 1995.

Republic - vs- Kamlesh Pattni, Wilfred Koinange, Eliphas Riungu, Michael Wanjihia & MS Golden berg International Ltd

The case was withdrawn on July 16, 1997 following a prohibition order made by the High Court in High Court Miscellaneous Civil Application No. 322 of 1999.

The only case which proceeded, but was later stopped following a High Court prohibition order and eventually a nolle prosequi was entered on February 24, 2003 was Republic of Kenya – vs - Kamlesh Pattni, Wilfred Koinange, Eliphas Riungu, Michael Wanjihia & MS Goldenberg International Ltd (1997).

Perceptual Attitudes

Perception is everything. As long as people cling to the mistaken belief that they are immune from being scammed they will harbor the notion that victims must deserve their fate[8]. White collar crimes invoke non-threatening images of guys in suits, not thugs in balaclavas. And naturally we treat such individuals with respect and courtesy rather than fear and severity.

It appears at times that our justice system does not place adequate emphasis on fraud and other white collar crimes especially when it is considered a non-violent victimless crime. One disturbing fact is how the offence is perceived, not as a criminal offence at all, but as simple bad judgement on the part of victims, by both the general public and by the victims themselves. This is the situation in Kenya, and unless this perception changes, then I believe we cannot efficiently prevent and prosecute these crimes.

Inadequate Police Resources

While few laws are enforced 100%, white collar crime has a much lower margin of non-enforcement. Fraud and other white collar crime is not a priority for police departments in Kenya. They are required to devote their resources to crimes of violence and, due to lack of trained personnel and financial resources, are not always able to investigate and prosecute suspected fraud and other white collar crime cases in time. The police department has to be equipped better to be able to tackle intelligence on white collar.

Leniency

Many law-makers and judges are of the mind that, with an already overloaded justice system, jails should be used for violent offenders only, so fraudsters are given what are perceived as lenient sentences, or an absurdly low penalty in comparison to the crime committed, such as alternative sentencing (e.g. warnings, probation etc.) or by "buying their way out" of prison by paying a fine or restitution.

Sanctions

Studies have revealed that even though white collar criminals do get charged for criminal offences, the sanctions imposed are usually in terms of fines. Even then such fines are usually a slap on the wrist. These offenders simply pay and provide for such fines as a business expense. This defeats the whole essence of deterrence as a justification for punishing criminal offenders. I would therefore recommend for an upward review of sanctions on corporate and white collar criminals In Kenya to make them relatively high as to maintain deterrence and foster desirable behaviour.

Prosecutorial Empowerment

In Kenya, until the Constitution is fully implemented, the prosecution of offences will continue to be conducted by the police department. Yet, this term paper has established that corporate and white collar crime is perhaps one of the most technical crimes of modern times. Offenders at fault will probably hire highly skilled and experienced advocates to represent them before a court of law thus this calls for an efficient prosecutorial system.

The police in their intellectual capacity are no match in such a situation. I therefore recommend for the empowerment of the prosecutorial arm of the justice system in Kenya. In this regard, it is hereby recommended for the speedy implementation of the Constitution so that such prosecution is conducted by the state counsel as opposed to the current practice. Even upon the implementation of the constitution, a further recommendation is hereby advanced thus that there be a specific department within the office of the Director of Public prosecutions to specifically handle white collar crimes. This will go a long way to ensure fairness in the criminal justice system in Kenya.

The Judiciary Expertise

This study has since established that corporate criminal liability developed through the courts of the common law. It has further established that in Kenya the doctrine has yet to be fully implemented. This study thus makes a recommendation to the judiciary to rise to the occasion and interpret the incomplete aspect of the doctrine; to decide on the question upon a careful and deliberate attention to the facts as weighed against the goals of the doctrine. It is high time that the Kenyan judiciary sought to advance rules of criminal law in a consistent manner as to propound a distinctive Kenyan approach towards the doctrine.

Conclusion

It is therefore my view that even though Kenya has tried to curb and prosecute Golden berg type offences, the legal and institutional frameworks need to do more, to not only effectively and efficiently prosecute these crimes, but also involve the public in the process. I thus feel that more should be done before we can comfortably say we can handle this and other types of white collar crime.

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[1] American criminologist, best known for his development of the differential association theory of crime. In recognition of his influence, the most important annual award of the American Society of Criminology is given in his name.

[2] An appraisal of the Golden berg report

[3] The then Commissioner of Mines and Geology

[4] Cap. 485 of Laws of Kenya

[5] Exchange Control Notice No. 13

[6] A treasury bill is a paperless short-term borrowing instrument issued by the Government through the Central Bank of Kenya (as a fiscal agent) to raise money on short term basis – for a period of up to 1 year. Treasury bills are issued in maturities of 91, 182 and 364 days.

[7] Ibid

[8] http://www.crimes-of-persuasion.com/laws/problems.htm