Business Daily (Nairobi)
Washington Gikunju
20 May 2008
Nairobi — An unexpectedly high tally of fraudulent cheques from investors and some stockbrokers is hampering allocation of shares in the ongoing Safaricom IPO, now in its verification and share allotment stage.
Business Daily has established that receiving banks for the Safaricom initial public offering (IPO) have sorted out fraudulent applications close to Sh96 million of Sh191 billion collected and are now seeking the intervention of the transaction advisors.
The fraudsters were hoping to get share allocations using either fake printed deposit slips, which they handed in to unsuspecting stockbrokers or fake bankers' cheques drawn for the Safaricom IPO.
The Central Bank (CBK) had in December last year warned against a growing upsurge in fraudulent cheques during IPOs, and cautioned bankers and stockbrokers to be on the look out for potential fraudsters.
The receiving banks have written to the Kenya Bankers Association (KBA), the Treasury, the Capital Markets Authority and the Nairobi Stock Exchange (NSE), seeking direction on how to deal with the fraudulent investors even as the IPO share allocation date of May 30 approaches.
The letter was written by Citibank, which is the lead receiving bank in a consortium that also includes National Bank, Equity Bank and Post Bank, who won the tender to collect money on behalf of the Treasury in this transaction.
The NSE chief executive, Mr Chris Mwebesa, confirmed having received the letter from Citibank, but said that investigations relating to specific cases were still ongoing.
"The cases are still under investigation and I therefore cannot reveal any more details," said Mr Mwebesa.
Citibank's assistant general manager for global transaction services, Kioko Musyimi, declined to reveal the extent of the fraudulent applications.
Mr Hassan had in an earlier interview said that the fraudulent applications accounted for "less than 0.05 per cent of total applications," which gives a tentative figure of about Sh95.5 million, going by the already confirmed applications amount of Sh191 billion.
Reports of fraudulent cheques by IPO applicants appear to confirm CBK's fears in a letter written to the finance minister Amos Kimunya in December last year and copied to the KBA, CMA and the NSE.
CBK had expressed concern that stockbrokers did not have adequate vetting mechanisms to identify fraudulent cheques, and advised that receiving banks must be vigilant when verifying investor applications.
Most stockbrokers do not handle cash applications, but receive payments for IPOs in form of bank deposit slips or bankers' cheques drawn in their name or in the name of the company floating the IPO.
The brokers then write one universal cheque for all applications received through them and sends it to the receiving bank, exposing themselves to the risk of losing money in cases where cheques or deposit slips relied upon to write the universal cheque are fraudulent.
Such fraud cases were particularly rampant in the 2006 KenGen IPO that realised an estimated Sh26 billion.
"The fraudsters take advantage and present us with fake deposit slips and bankers cheques which we only identify during reconciliations with our banks," says one investment banker who did not wish to be named.
CBK had said in the Safaricom IPO preliminary assessment report that the influx of fraudulent cheques during IPOs tended to strain the banking clearing system, while also causing huge losses to paying banks.
The bankers' regulator also raised concern about the possibility of money laundering during IPOs, saying that payment for applications through stockbrokers made it impossible to trace the origin of investors' funds.
Preventive measures
Money laundering through the stock exchange is made possible by the absence of Know Your Customer (KYC) requirements for stockbrokers, unlike what is the case for commercial banks.
"Certain preventive measures need to be put in place to ensure the protection of all stakeholders against any potential risk of loss that may dent the country's image and the credibility of our financial system," said the letter by Central Bank.
CBK had also expressed concern over past cases where stockbrokers and investing agents converted investors' refund cheques for their own use through irregular endorsements, adding that many investors may not have collected their refund cheques from past IPOs to date.
The Kenyan banking industry is still grappling with a credibility crisis occasioned by an alarmingly high tally of bouncing cheques, majority of which are dishonored on grounds of being fraudulent.
Problem disclosed
The Kenya Bankers Association chief executive, John Wanyela, opened the lid on the problem this year when he disclosed to Business Daily that cheques valued at over Sh2.2 billion issued between January and September last year by at least 34 of the 41 licensed commercial banks had been dishonoured.
Mr Wanyela then said that the problem cuts across the board, with big and small banks appearing to suffer equally.
According to the survey by KBA, which was the first of its kind in Kenya, the biggest victims of the bouncing cheques were Co-operative Bank, which reported 35,210 dishonoured cheques, KCB which recorded 19,064 and Equity Bank with 18,886 reported cases.
Issuance of bouncing cheques is a criminal offence under the Kenyan Banking Act.
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