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How Kenya lost billions without a fight

Saturday April 11 2009
githongo

Former President Mwai Kibaki’s anti-corruption advisor, John Githongo. Photo/FILE

The handling of Anglo Leasing-type cases by Kenya’s Attorney-General has come under the spotlight in a new inquiry, which reveals that his office ignored expert advice and failed to fight million-dollar claims against the government or discouraged lawyers from citing “criminality” as they challenged some of the security contracts.

Barely a fortnight after a Cabinet Minister accused Amos Wako of failing to pursue corruption cases, The EastAfrican has seen a report by consultants PricewaterhouseCoopers that documents the Attorney-General’s reluctance to pursue Anglo Leasing cases and details how the Kenya government paid for unfulfilled contracts or was overcharged on security equipment by up to five times the market price.

The PwC revelations coincide with media reports that Swiss authorities had frozen accounts in several banks thought carrying upto Ksh12 billion ($150 million) of money from Anglo Leasing-style deals, in which the Kenya government paid out some Ksh56 billion ($700 million) in promissory notes in questionable security contracts, some with bogus companies.

It also comes hot on the heels of the arrest by the United States government of a key suspect in the Anglo-Leasing scandal, 43-year-old American Bradley Birkenfeld, who is believed to be a key lead to the controversial dealings.

The forensic report by PwC, dat-ed August 9 last year, gives a damning account of the handling of Anglo Leasing cases by Kenya’s Attorney General.

The firm was engaged on April 16, 2008 by the Ministry of Finance to assess the management of the 18 security contracts dubbed “Anglo Leasing type contracts” by the media, a year after it had issued another report giving recommendations on how the government could improve its legal position and limit its liability in these cases.

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PwC, in the new report seen by The EastAfrican, says that in conducting the second phase of their investigation they received “far less co-operation and assistance from the government ministries and from state institutions, including the Kenya Anti-Corruption Commission, than [experienced previously].”

The consultants express concern that lawyers defending the government in the arbitration and litigation of Anglo Leasing-type cases overseas were likely not to be in possession of the full information required to defend the Kenya government.

They conclude that in managing the processes aimed at ending the controversial contracts, recovering misappropriated funds and limiting government’s liability, the Kenya government “is not currently managing these processes very well and consequently there is a danger that unless rectified, that ground will be lost and GoK, despite having good fundamental case positions, may be unsuccessful in legal proceedings and in other asset recovery activities.”

The Anglo Leasing scandal is said to have started when the Kenyan government decided to replace its passport printing system in 2002.

The tender was originally quoted at Ksh588 million ($7.35 million) from a French firm, but was awarded to a non-existent British firm, Anglo Leasing Finance, at Ksh2.9 billion ($36.25 million).

Media investigations into this scandal, which resulted in the resignation of the then finance minister David Mwiraria and the dismissal of three top civil servants, uncovered 17 other security contracts in which the government had either paid out billions of shillings to bogus overseas contractors, had been grossly overcharged or had serviced lopsided contracts that left the taxpayer at a disadvantage.

As the government cancelled the contracts, amid a parliamentary inquiry and a public outcry, legal battles arose with some of the contractors suing the government or the Kenyan authorities taking them to court seeking refunds.

PwC’s evaluation of the government’s handling of these cases was carried out together with staff from two UK firms, Atkins Advantage Technical Consulting Ltd, who had helped in one of the controversial security projects dubbed Nexus, and e2E Services Ltd, who helped in yet another of the government’s secret deals, VSAT Aspects.

Together they examined legal evidence gathered with regard to the Anglo Leasing-type cases and the strategies employed by the government to recover assets and limit liability.

PwC says that evidence gathered by the Kenya Anti-Corruption Commission between 2007 and 2008 had not been shared with lawyers representing the government in cases it was defending in Britain, Switzerland and the Netherlands.

One such was the Postal Corporation of Kenya-Universal Satspace case in London, in which the latter, a “company of little substance,” was hired to provide 10 years’ worth of managed bandwidth for internal and external post offices across Kenya at a cost of $28.1 million. It ended up being paid $16 million for providing services valued by PwC at only $3.6 million.

Another was the PCK-First Mer-cantile case in Switzerland over a contract for the provision of VSAT communication equipment.

A third was the Nexus contract for a crisis management centre complete with surveillance and communication systems and a fourth was the naval vessel arbitration case in the Hague, regarding the agreement with Euromarine Industries of Barcelona, Spain, to supply a vessel for the navy.

Say the consultants: “At the time we ended our phase 1 forensic investigation work in June 2007, three key leads were expected to provide breakthrough evidence:

The involvement of the Serious Fraud Office and other foreign investigation authorities in the United Kingdom and in other foreign jurisdictions; the strong evidence of criminal offences, such as forgery by employees and associates of key suspects that was expected to lead to confessions and full disclosure upon threats of prosecution; the evidence of illicit credits in the accounts of public officers at a small bank in Nairobi and the associated cover-up involving an IT provider; and the evidence of the irregular property transfer scheme administered through the offices of a Nairobi firm of advocates.”

Last Monday, a Zurich newspaper, the Neue Zurcher Zeitung, reported that up to Ksh12 billion of the Anglo Leasing monies had been stashed away in bank accounts in the Swiss city of Geneva.

The newspaper also reported that Swiss authorities had frozen accounts in several banks, including Schroder Bank, HSBC and UBS.

The previous week, the United States had arrested a key suspect in the Anglo-Leasing scandal in which Kenya lost billons of shillings of taxpayers’ money through fraudulent transactions.

The 43-year-old American, Bradley Birkenfeld, may be a key lead to the controversial dealings in which the Kenyan government paid some Ksh56 billion ($700 million) in promissory notes to bogus companies.

Mr Birkenfeld, a banker and a financial advisor, has been working for UBS and is indicted with crafting tax-evasion schemes.

Neue Zurcher Zeitung revealed that Mr Birkenfeld is intimately connected with Anglo Leasing and the Kamani brothers, alleged architects of the scam.

He signed one of the 18 fraudulent Anglo Leasing contracts on behalf of Infotalent Ltd and his private residence, 20 Cours de Rive in Geneva, was listed in a second credit contract as the offices of Midland Finance & Securities Ltd.

Midland Finance successfully sued the Kenya government for repayments of the never-received credit and even succeeded in blocking the Kenya Anti Corruption Commission from using a report by PricewaterhouseCoopers to prove the fraud.

Project Nexus

The €37 million ($28.5 million) Project Nexus that was aimed at providing a crisis management centre complete with surveillance and communication systems was signed in November 2002 with Nedemar Technology BV, an entity registered in Saint Vincent and the Grenadines five months earlier. Anurath Gunawardena signed the contract on behalf of Nedemar.

The total payments made by the government amounted to €14 million ($10.8 million) and many were made before commencement of the works, causing questions by the then permanent secretary for Governance and Ethics John Githongo as to why interest was being charged on a transaction the government was clearly financing itself.

As of November 2006, PwC estimated that a settlement in favour of Nedemar could be negotiated at €8 million ($6.2 million), a figure revised upwards to €9.7 million ($7.5 million) in August 2007 to take account of interest penalties.

In mid-2007, Nedemar and the government met and agreed to suspend arbitration in favour of a negotiated settlement.

On July 28, 2007, during negotiations in London, Nedemar indicated it would settle for €22 million ($16.9 million).

The government side proposed €16 million (12.3 million) — almost double that recommended by its own experts.

It is known that a foreign-based businessman intimately connected to the project, his legal representative and Kenya’s Attorney General were at various times involved in these protracted negotiations that failed by the self-imposed deadline of May last year.

The government’s consultants in the meantime had uncovered a series of irregularities with the delivery of the project, the quality of the works and the overall fairness of the contract to the Kenyan public.

For example, of the 9.35MHz bandwidth believed to have been delivered under Nexus and under another project by the same group C121, only 5.233MHz was being delivered.

The technical subcontracted experts also estimated that Nexus was charging the Kenya government five times the fair value!

Nedemar, Gilat Alldean International Ltd and Alldean Satellite Networks Kenya, who are all involved in the provision of this overpriced bandwidth to Kenya, are believed by PwC to be controlled and probably owned by the foreign-based businessman referred to above.

Ultimately, arbitration proceedings with Nedemar reached the Hague.

Attorney General Amos Wako advised the Cabinet that it could not win this case as, “The available circumstantial pieces of evidence obtained through the KACC and PwC is of disquieting circumstances and connections but there is no direct evidence of bribery... In the counsel’s opinion, in the circumstances the republic has a low chance of successfully demonstrating that the Project Nexus and Euromarine contracts were obtained illegally.” Government lawyers Freshfields seemed to concur.

PwC however, in their report, differed, saying, “We are uncomfortable with this advice and feel that the evidence of illegality is quite strong. Furthermore, the findings recently developed by Atkins and e2E (the government’s technical consultants), that the bandwidth is not being fully delivered and that this has been concealed from the GoK, adds to the arguments which support our view that fraud and illegality underlie this contract with Nedemar.”

The Naval Vessel

The agreement to procure a naval vessel was signed on July 15, 2003, by the Office of the President when it was headed by Chris Murungaru, with Euromarine Industries of Barcelona, Spain. Euromarine were and are not shipbuilders and subcontracted the job to Spanish Astilleros Godan SA via a tendering process that was found to be deeply flawed.

The contract was signed by J.K. Mano of Euromarine, Sammy Kyungu, the Permanent Secretary at the Ministry of Transport and Communications and countersigned by Joseph Magari, Permanent Secretary at the Ministry of Finance.

This outfit had been incorporated in the British Virgin Islands in March 1994 as Curundu Management Incorporated before its name was changed to Euromarine in 1995.

The project was worth over €60 million ($46.2 million), broken into three financing agreements and in its entirety, as in the case of Nexus, again linked to the foreign-based businessman mentioned earlier.

First, an agreement for financing of €10.4 million ($8 million) over three years bearing interest of €503,056 ($387,000) and an “arrangement fee” of €109,024 ($83,900) between the Ministry of Finance and Euromarine signed by J.K. Mano of Euromarine and by Joseph Magari, PS at the Ministry of Finance.

Second, an agreement for financing €15 million ($11.5 million) over seven years with an aggregate interest of €2.8 million ($2.2 million) and an “arrangement fee” of €177,572 ($136,600) between the Ministry of Finance and Empressa de Financias International Ltd signed by Ricardo Harris on behalf of Empressa and Joseph Magari on behalf of the Ministry of Finance. Empressa was incorporated in the British Virgin Islands in November 2002.

Finally, an agreement for financing of €17 million ($13.1 million) over seven years with an aggregate interest of €5 million ($3.85 million) and an “arrangement fee” of €316,115 ($243,200) between the Ministry of Finance and Navigia Capital Corporation signed by Joseph Magari on behalf of the Ministry of Finance.

Navigia Capital was incorporated in the British Virgin Islands in April 2003. No copy of the contract signed by Navigia has been found yet.

The PwC report notes, “The registered place of business of these companies is British Virgin Islands and yet they give addresses in Barcelona, Spain in the case of Euromarine and London in the cases of Empressa and Navigia.

Furthermore, the latter two companies have only recently been incorporated, creating doubts as to their credentials as financiers.” This last issue was another raised by John Githongo.

The initial PwC investigation found that in actual fact Astilleros Godan SA had completed their side of the contract satisfactorily and the vessel was complete save for weapons systems.

PwC, however, estimated that the fair value of the project was €33 million ($25.4 million) given that the Kenya government had already paid out €11 million ($8.5 million). However, Euromarine, Empressa and Navigia were and are claiming €65 million ($50 million).

The current status is uncertain and some close observers indicate that in actual fact the foreign-based businessman implicated in these deals may have reached an accommodation with the Kenya government or may be about to do so.

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