On Wednesday, February 11, 2015, a Kenya Airways employee in charge of treasury and controls, received the first of several payments from the collapsed Dubai Bank — $20,000. By the end of June of the same year, in eight other transactions, three of which involved his wife, this official had received a total of $220,000 in “transactions.”
The case points to a complex scheme in which employees of Kenya Airways colluded with bankers, suppliers, ticketing agents and oil companies to steal from the airline through forgery and manipulation of the accounts. This is laid bare in the leaked August 2016 audit report by Deloitte, which The EastAfrican has seen.
Prior to the transfer of money to his personal accounts, the said employee had initiated and negotiated foreign-exchange transactions, an irregularity as only the chief executive, finance director, treasury manager and supervisor of funds management were authorised to do so.
With such “privileges,” this particular employee, other KQ employees and Dubai Bank staff would activate foreign exchange transactions relating to the sale of the UAE dirham (AED) and the South African rand (ZAR), underquoting them, which resulted in a loss to the airline after repatriations. Interestingly, the airline was dealing with Dubai Bank even though it wasn’t one of the officially approved banks.
“We determined that the KQ internal audit department was provided with forged bank statements by this employee. It is likely that the false bank statements were created in an attempt to conceal the various irregular repatriation transactions. Indications are that two named employees may have committed fraud and/or forgery in that they created inauthentic bank statement that they presented to the Internal Audit of KQ with the aim of concealing various irregularities in which they had been involved,” the report states.
The auditors also found two repatriation transactions (one for ZAR3 million and one for AED2 million) in respect of which no payment had been received from Dubai Bank into a KQ Central Bank account. The total value of these transactions was $700,000, with two employees in the finance department found culpable. A loss of $5.2 million was recorded by the airline from these dubious transactions with Dubai Bank.
The scheme was so intricate that Baghel Deeraj of Dubai Bank operated a fake email address with Bank of Africa ([email protected]) when he wasn’t a staff member of the West Africa-based lender.
“We determined that in some of the foreign exchange transactions relating to the sale of AED and ZAR, Dubai Bank would trade with BOA and then trade with KQ when a request to trade came through from KQ. We compared the amount remitted by BOA to Dubai Bank and the amount remitted to KQ by Dubai Bank from these trades and found that there was a shortfall of $1.6 million on the funds remitted to KQ,” the auditors said.
With Kenya Airways in financial distress, it turned to Dubai Bank, at the time a crumbling financial institution that would later go under, for help. On August 18, 2014, the board approved Dubai Bank as one of the banks that KQ could obtain facilities from to a maximum of $5 million.
On April 23, 2015, KQ obtained a bank guarantee of $7 million from Dubai Bank. This facility was $2 million above the approved limit. The bank guarantee facility letter was purportedly signed by Mbuvi Ngunze and Alex Mbugua in their capacities as the chief executive and financial director respectively. However, based on results from a handwriting analysis, it was only Mr Ngunze’s signature that appeared to be genuine, but that of Mr Mbugua was not.
In two weeks, KQ had already paid $350,000 in fees for the bank guarantee that comprised 2 per cent commission fees and 1 per cent appraisal fees. However, the fees had been overstated by $140,000 as the total fees payable was $210,000.
The payment of $350,000 was initiated by one employee, with the first approver being a supervisor, and the second approver a manager in KQ’s treasury.
Theft by employees
These are just a few examples of how employees at KQ colluded to steal from the airline at a time when the national carrier was struggling to stay afloat.
From the ticketing, fuel and accounting to the baggage and cargo departments, the audit trail tells a story of plunder and theft. Most of the KQ ticket prices filed in its system were below the minimum seat cost as per its finance records. KQ issued more than 7 million seats between 2012 and last year at below price, resulting in a loss of $611.6 million.
“Our analysis of the Europe, India and Dubai routes revealed that up to 80 per cent of the seats were sold on promo or low yielding classes. This is a pointer that the revenue management practices at KQ may not be effectively managed to maximise revenue yields,” the auditors said.
The airline was also accused by the auditors of allowing its staff to void, refund and reissue tickets, causing a revenue loss of $12 million.
“Some of the changes included numerous occurrences of overbooked tickets, where staff with access to the Amadeus system would reopen closed fares and enable overbooking of tickets in lower fares,” the report states.
Travel agents were also accused of overcharging the premium on ticket prices to the airline’s corporate clients, making its tickets non-competitive in the market. For example, in 2014 and 2015, travel agents overcharged corporate clients by $312,650.
In the five years to 2015, Kenya Airways is said to have lost more than $42.4 million in foreign exchange due to variances in the prevailing exchange rate and the agreed exchange rate, as the company was repatriating $51.2 million worth of blocked foreign currency from Ethiopia, Sudan, South Sudan, Seychelles and Angola.
The audit reported that $35 million could not be accounted for as no documentation with regard to the repatriation was ever received. These funds were claimed to have been repatriated from Ethiopia, Sudan and South Sudan. In June, Mr Ngunze said the airline was still owed an estimated $25 million in blocked funds across African countries, which it cannot recover due to foreign exchange constraints.
“With regard to an analysis of a sample of withdrawals from the dollar accounts, a KQ treasury accountant was only able to provide supporting documentation for three out of 29 debits for Ethiopia, and nine out of 34 debits for South Sudan. No supporting documentation was provided for the debits from Sudan and Seychelles for the period under review. The total value of these unsupported withdrawals was $24.7 million,” the audit report states.
The airline’s jet fuel procurement also had incidents of theft and conflict of interest by some of the managers heading the department. The audit revealed that the airline has routinely bought jet fuel at higher prices than other airlines, specifically compared with what the African Airlines Association (AFRAA) has negotiated on behalf of its members, resulting in a $32.9 million loss over the past three years. In its 2015 annual report, the airline reported a $51 million loss from fuel hedging.
The airline lost $74 million in the previous year, and made profits of $9.42 million, $6.02 million and $25 million in 2014, 2013 and 2012 respectively on the fuel-hedged contracts.
“The Mean of Platts Arab Gulf (MOPAG) pricing basis is more advantageous for KQ than the Open Tender System (OTS) due to the fixed elements of the freight and price components of jet fuel resulting in the risk of fluctuating freight and price borne solely by the supplier. We also established that KQ paid invoices that were above the contractually agreed amounts without any clear explanation or approvals obtained from senior management,” the auditors reported.
Deloitte also established that KQ’s jet fuel procurement manager owns a filling station that he had not declared to KQ management. This is a conflict of interest and a possible contravention of his contractual obligation to declare any business interests. He was also accused of advising an energy company of their position, and reworking their bid during the fuel bidding process.
The auditors, through forensic data analytics, also established that the jet oil issued from KQ’s stores was significantly higher than the actual consumption.
“Based on the recalculation, we could not account for $393,518 worth of jet oil due to the absence of supporting documentation for the stock issues,” the report states.