Shareholders of the troubled Imperial Bank tried to sell it to a tier-1 Kenyan bank, but the deal fell through at the last minute when the prospective buyer suddenly cooled off following its own investigation of the bank’s viability.

The EastAfrican has learnt that the tier-1 Kenyan bank, which has subsidiaries in the region, appointed one of the country’s top law firms to conduct a due diligence — a legal term referring to the process by which a person interested in acquiring a business or a security in a business or corporation undertakes a fact-finding audit of the processes, undertakings and other procedures and policies of the business it intends to take an interest in, so as to determine its value, assess risks and ascertain compliance with the law and all regulations to which the business is subject.

This inspection is multi-pronged and involves accountants (for the financial aspects — lawyers (for the legal dimensions and may have a technical aspect where the target business is engaged in technological undertakings such as patents and technology transfers.

After the various categories of inspection are undertaken, the report is then delivered to the interested party to determine whether to proceed with the transaction at all and if so, at what value and in what manner.

The tier-1 bank is said to have appointed a leading law firm that is owned by a member of the Asian community. After the due diligence, the Imperial bank shareholders never heard from the prospective buyer, the insider said.

The law firm would not comment on its findings, citing client confidentiality, while the bank declined to discuss the matter with The EastAfrican.

READ: The intricate web of ‘smelly’ deals: A tale of four banks and a fish company

However, revelations from court documents last week that $350 million had been irregularly lent to businesses by Imperial Bank’s former managing director Abdulmalek Janmohamed (now deceased) are an indication of what the law firm may have found in its probe, which prevented the Kenyan bank from making a bad investment decision.

Apparently, Imperial Bank shareholders were banking on the fast-expanding Kenyan bank’s expressed desire to attract businesses owned mainly by members of the Asian community, which formed the bulk of Imperial’s clientele.

“The owners of the leading bank have been keen to get the Asian community on board and this presented a perfect opportunity,” an insider in the transaction told The EastAfrican.

Clearly, what may not have been disclosed to the leading bank was that the shareholders were suspecting “unexplained losses” of as much as $400 million as a result of “parallel banking” practices, which are illegal.

“It had been discovered that the previous managing director Abdulmalek Janmohammed had been lending large amounts of money outside the banking systems,” the insider revealed, before Imperial bank went to court early this week with the same revelations.

“One of the debtors was called and he confirmed having tens of millions of dollars, which he promised to pay back in not less than three months. Here was an individual admitting to owing money to the bank just like that. What if he owed more?” asked the source.

This sent the shareholders into a panic and their initial investigations revealed that up to $450 million could have been lent out. Our source, however, said that after further investigations, the amounts that could not be accounted for ranged between $200 million and $350 million.

But even as Imperial Bank directors awaited a response from the tier-1 bank, a complication was arising over what the sale of the bank would mean for the Ugandan subsidiary.

Imperial Bank Uganda is owned by Imperial Bank Kenya and the famous Mukwano Group. At that point, it wasn’t clear whether the Ugandan partner would be interested in having the Kenyan top tier bank as a partner. The issue is said to have resolved itself when the deal collapsed.

Mid last week, the Imperial Bank fraud started unravelling, showing how the bank’s senior management colluded to defraud the institution of more than $350 million through manipulated software, dummy accounts and parallel banking systems.

The bank has already filed two suits seeking to attach properties of more than 20 firms and individuals believed to have profited from the fraud, which spanned 13 years, and now threatens to wipe out more than three-quarters of the bank’s depositors’ cash of $580 million.

In the court papers, George Oraro, acting for the bank’s receiver manager Peter Gatere, accused the now deceased former managing director of using shell companies to defraud the institution. High Court judge Fred Ochieng issued the conservatory orders freezing the assets until an inter-party hearing set for November 5.

“The bond holders, whose monies were taken as recently as August 2015, and the depositors’ holdings amounting to about $870 million, will lose all their money for a long time to come unless the same can be traced forth,” Imperial Bank argues in the suit.

The bank also said that a speedy recovery of the fraudulently acquired money will be key in its future because the receiver’s decision to reopen or liquidate it will ultimately depend on whether the bank manages to trace and recover the amounts that have been illegally and fraudulently obtained from it by the deceased and his associates.

The central bank has also indicated that the bank could be reopened next month after its shareholders were presented with a proposal that will require the injection of new capital, conversion of some of the large deposits to equity, recovery and collateralisation of the fraudulent loans, as well as a change of board of directors and senior management.

Access to small deposits

“The proposal will allow for full access to small deposits, and a structured schedule of repayment to large depositors,” the Central Bank said in a statement.

The court papers show that the fraudulent monies siphoned out of the bank were used in purchasing real estate and shares in some of the firms.

The fraud is said to have been perpetrated by Mr Janmohammed in collusion with other senior managers of the bank. It involved the opening of accounts at Imperial Bank, where monies were deposited before being moved out of the bank. The accounts were then closed and their records deleted from the system.

It also emerged that one of the companies listed as defendants, W.E. Tilley (Muthaiga) Ltd, has admitted receiving $100 million from the bank and has offered to have a second charge created over its properties.

The court papers also reveal that it was the current acting managing director Naeem Shah (formerly the bank’s head of credit) and James Kaburu (former chief finance officer and current deputy managing director) who exposed the rot at the bank.

“The deceased [Janmohammed] had for some time instructed them to carry out certain false, fraudulent, unlawful and illegal activities in the bank,” the bank said it the suit.

The senior management is said to have permitted the shell companies, among other customers of the bank, to withdraw vast sums of money from their accounts without having any loan facilities or accommodation.

They are also accused of manipulating the bank’s books so as to allow the fraudulent transaction not be reflected in the bank’s accounts and instead be suppressed by being contained in accounts that would not be exposed in the bank’s financial statements.

The suit seeks to recover the monies from Mr Janmohammed’s accounts and companies. Companies the former executive had invested in include a five per cent stake in Butali Sugar Mills and another five per cent of Imperial Bank.

Other companies he had a stake in are Old Mutual, Sandview Properties, Plymouth Holdings, Nature Stone Queries and Apex Securities.

The CBK has already hired FTI Consulting, an American consulting firm, in a bid to unmasking the perpetrators of the fraud and reveal how it happened.

Already the Bank of Uganda (BoU) has put its shareholding in the Ugandan subsidiary up for sale as it seeks to ensure its banking market is not affected by the Kenya’s unit tribulations.

“Our interest is to see that shares held by Imperial Bank Kenya, the majority shareholder in Imperial Bank Uganda are sold to a deep pocketed solid financial institution that will be responsible for appointing a new board of directors that will take on the duty of controlling the affairs of bank,” said Christine Alupo, BoU director of communication.