Barely a week before share allocation details for the Sh50 billion Safaricom IPO are released, reports are out about an unexpectedly high tally of fraudulent cheques from investors and some stockbrokers.

In an exclusive story carried yesterday, this newspaper revealed that receiving banks for the Safaricom IPO have sorted out fraudulent applications close to Sh96 million of the Sh191 billion collected and are now seeking the intervention of transaction advisors.

While this is hampering allocation of shares and the fraudsters were hoping to get share allocations using either fake printed deposit slips or fake bankers' cheques, it highlights the regulatory shortcomings for the country's stockbrokers and investment banks.

The reports have revealed that these firms have inadequate vetting mechanisms to identify fraudulent cheques, although the Central Bank had in December last year warned them in advance of the possibility of increased cases of fraudulent cheques in the IPO.

While this was also evident in previous IPOs, receiving banks had also been asked to be vigilant when verifying investor applications to root out potential fraudsters.

This is so given that the Kenyan banking industry is still grappling with a credibility crisis occasioned by an alarmingly high tally of bouncing cheques, majority of which are dishonoured on the grounds of being fraudulent.

But the receiving banks for the landmark IPO deserve a pat on the back for verifying the applications first before allocations are done, and CBK for sounding an early warning. Its through this that they were able to detect fraud.

The scenario is that 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 are relied upon to write the universal cheque are fraudulent. Such fraud cases were first noted in the 2006 KenGen IPO, and have largely informed the current move to screen all share applications.

CBK rightly warned that the influx of fraudulent cheques during IPOs strains the banking clearing system, while also causing huge losses to paying banks.

The Central Bank has developed guidelines to be followed by commercial banks, among them the Know Your Customer (KYC) requirements, cushioning them from potential cases of fraud.

However, this is absent in the case of stockbrokers, making it possible for money laundering through the stock exchange to thrive as payment for applications through stockbrokers makes it impossible to trace the origin of investors' funds.

With the stock market becoming the first stop for most Kenyans looking for investment opportunities to boost their hard earned income, we cannot afford to tolerate fraudsters who, apart from hurting receiving banks and stockbrokers, also taint the image of the stock market.

When fraudsters are allotted shares, they deny genuine investors opportunities to make more money from the stocks market.

This newspaper believes the Capital Markets Authority (CMA) has some homework to do.

We propose that the regulator drafts guidelines for stockbrokers, similar to those of CBK, especially insisting on KYC requirements. However, CMA should be keen not to over-regulate given that investment banks and stockbrokers are not necessarily deposit-taking institutions, but financial intermediaries and investment advisors. All the receiving banks need to do is to be vigilant while scrutinising applications.

Therefore, to avert losses on the side of banks and save the image of the Kenyan stocks market, the ball lies squarely in the CMA court, it should make practical interventions through guidelines to rid the bourse of fraudsters and money launderers.