Identifier
Created
Classification
Origin
06NAIROBI1614
2006-04-12 11:51:00
CONFIDENTIAL
Embassy Nairobi
Cable title:  

CORRUPTION IN KENYA: CENTRAL BANK GOVERNOR BOOTED

Tags:  ECON PGOV EAID EFIN KCOR PREL PINR KE 
pdf how-to read a cable
VZCZCXRO0818
RR RUEHLMC
DE RUEHNR #1614/01 1021151
ZNY CCCCC ZZH
R 121151Z APR 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 0954
RUEHLMC/MILLENNIUM CHALLENGE CORP
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHXR/RWANDA COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 03 NAIROBI 001614 

SIPDIS

SIPDIS

DEPT FOR AF/E, AF/EPS, EB/IFD/OMA
USAID FOR AFR/DP WADE WARREN, AFR/EA JEFF BORNS AND
JULIA ESCALONA
MCC FOR KEVIN SABA AND MALIK CHAKA
TREASURY FOR LUKAS KOHLER
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 2/14/2031
TAGS: ECON PGOV EAID EFIN KCOR PREL PINR KE
SUBJECT: CORRUPTION IN KENYA: CENTRAL BANK GOVERNOR BOOTED
AFTER UNCOVERING MONEY LAUNDERING AND TAX EVASION

Ref: A. Nairobi 607, B. Nairobi 527, C. Nairobi 494, D.

Nairobi 395

Classified by Econ Counselor John Hoover for reasons 1.4
(B) and (D).

C O N F I D E N T I A L SECTION 01 OF 03 NAIROBI 001614

SIPDIS

SIPDIS

DEPT FOR AF/E, AF/EPS, EB/IFD/OMA
USAID FOR AFR/DP WADE WARREN, AFR/EA JEFF BORNS AND
JULIA ESCALONA
MCC FOR KEVIN SABA AND MALIK CHAKA
TREASURY FOR LUKAS KOHLER
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 2/14/2031
TAGS: ECON PGOV EAID EFIN KCOR PREL PINR KE
SUBJECT: CORRUPTION IN KENYA: CENTRAL BANK GOVERNOR BOOTED
AFTER UNCOVERING MONEY LAUNDERING AND TAX EVASION

Ref: A. Nairobi 607, B. Nairobi 527, C. Nairobi 494, D.

Nairobi 395

Classified by Econ Counselor John Hoover for reasons 1.4
(B) and (D).


1. (C) Summary: There is likely much more than meets the
eye in the recent arrest and suspension of the governor of
the Central Bank of Kenya (CBK) for "abuse of office." In
the case, it appears CBK Governor Andrew Mullei erred in
hiring his son to help conduct investigations into
irregularities in Kenya's banking system. But the twist is
that the very results of those investigations appear to
have prompted Mullei to recommend closure of a local bank
based on evidence of a massive money laundering and tax
evasion scam involving a shadowy but influential private
businessman. Two days after making that recommendation to
the Minister of Finance, Mullei was arrested, and then
suspended by the government on dubious legal grounds. If
it turns out Mullei was pushed out for threatening to
expose a major money laundering ring, then the Kibaki
administration may find itself complicit in yet another
mega-scandal. End summary.

--------------
Central Bank Governor Charged and Suspended
--------------


2. (SBU) On March 23, Central Bank of Kenya (CBK) Governor
Andrew Mullei was charged in court on four counts of "abuse
of office" for improperly awarding consultancy contracts to
four individuals, including his son. Mullei pled not
guilty and was released on bond. Two days later, the
Minister of Planning and National Development announced
that Mullei was suspended. Mullei protested on both legal
and substantive grounds and refused to resign. The GOK

nonetheless moved ahead and appointed Deputy CBK Governor
Jecinta Mwatela acting Governor on March 30. The initial
press spin on Mullei's being charged and suspended was
initially positive, with Reuters noting on March 23 that
"the fact that the case has been brought may in fact help
restore some of [President] Kibaki's damaged credibility in
the eyes of Western donors and angry Kenyans."


3. (SBU) As is so often the case in Kenya, however, the
Mullei case is not as simple as it appears on the surface.
That Mullei hired his son and three other contract
consultants is not in dispute, and in this respect alone,
Mullei provided the rope with which to hang him by creating
at the very least the appearance of conflict of interest
and nepotism. He had long been known to be under
investigation by the Kenya Anti-Corruption Commission in
connection with the $36,000 contract provided to his son,
Silla Mullei.

-------------- --
Nepotism, Maybe, But Not Grand-scale Corruption
-------------- --


4. (SBU) However, a series of questions have arisen as to
the true motives of the GOK in pursuing a case against
Mullei, either at all, or in particular, at this time.
First, the abuse of office charge over a $36,000 contract,
while not to be condoned, is almost trivial in the Kenyan
context of large-scale procurement scams and land giveaways
which have cost the country billions of dollars in recent
years -- and which remain largely unresolved. Moreover,
ministries frequently do business with companies owned by
the minister or other ministry officials. While the press
reports on such conflicts of interest occasionally and the
practice is increasingly frowned upon, it is not seen as a
high priority in the war on corruption.

-------------- -
The Legal Argument: Dismissal Appears Improper
-------------- -


5. (SBU) Moreover, the GOK appears to have broken its own
laws in suspending Mullei. Mullei in theory enjoyed
security of tenure through the CBK Act, which says the
governor can only be dismissed if convicted of a crime, or
on the orders of President, who must first appoint an
investigatory tribunal before doing so. But Mullei was

NAIROBI 00001614 002 OF 003


officially suspended not by the President, but by the
Secretary to the Cabinet. In doing so, the GOK used as its

SIPDIS
legal basis the Economic Crimes Act, which says public
officers are to be suspended from their duties when charged
with a crime. In the ensuing legal debate in the media and
in Parliament, the more convincing school of thought has
argued that Mullei was illegally dismissed because the CBK
Act, thanks to its greater specificity, should take
precedence. Mullei has challenged the dismissal on these
grounds, so the issue will eventually be settled in Kenya's
constitutional court.

-------------- --------------
The Plot Thickens: Money Laundering and Tax Evasion
-------------- --------------


6. (C) A far more disturbing development emerged the week
after Mullei's arrest and suspension when Econ/C met with
Terry Ryan, one of the four consultants allegedly
improperly hired by Mullei. Ryan, an elderly white Kenyan
macro-economist who appears to have no political axes to
grind, said that Mullei's dismissal came two days after
Mullei had written to Minister of Finance Amos Kimunya
reporting on the results of an investigation the four
consultants had conducted over a two-year period. The
letter recommended closure of one or more "entities" due to
evidence of a massive money laundering operation -
operations that at times involved transfers of a billion
Kenyan Shillings ($13 million) per day through certain
unnamed accounts. Ryan stated that the two events --
delivery of the letter and Mullei's arrest and dismissal --
fell only two days apart and that one sprang directly from
the other. Mullei, in short, was arrested and suspended to
get him out of the way and stifle action against a major
money laundering ring.


7. (C) Ryan was unwilling to disclose specifics about the
money laundering investigation, but revealed that Mullei
assembled and hired the four-man investigative team after
he was appointed in 2003 because he suspected there were a
series of undiscovered instances of money laundering and
other improprieties in the banking system. Mullei, said
Ryan, did not trust his own Bank Supervision Department to
do the job well or honestly, and given the secretive nature
of the proposed work, was unwilling to advertise the tender
publicly. Ryan acknowledges the poor optics of Mullei
having hired his son, but noted that the younger Mullei,
with a strong financial background, was "eminently
qualified" to do the work. All but one of the four
contracts, Ryan said, had expired well before the charges
were brought against Mullei. Mullei himself has also
claimed publicly that the contracts for the four
consultants, including the one for his son, had been vetted
with and approved by the CBK Board.


8. (C) As if on cue, a copy of the March 20 Mullei-Kimunya
letter leaked to the press and then to members of
Parliament in early April, confirming and adding detail to
the insider's account offered by Ryan. According to press
reports beginning April 3, the four-man consultancy team in
question had been spun off a much a larger interagency
investigative body, dubbed the Joint Action Team. That
team, which had been looking at irregularities in the
banking system for several years, included investigators
from the Kenya Anti-Corruption Commission, the Kenya
Revenue Authority (KRA),and a forensic auditor from the
Office of Governance and Ethics, at the time headed by anti-
corruption czar John Githongo. The forensic auditor from
Githongo's office stayed on as a contractor at the CBK,
continued working with Mullei's son and Ryan, and was
responsible for amassing the detailed accounting data which
pointed towards the money laundering operation, according
to Ryan.

--------------
Tantalizing Details of Money Laundering Ring
--------------


9. (SBU) In extracts quoted in the press from the March 20
Mullei-Kimunya letter, it emerges that:

-- "organizations" colluded with "the bank" to evade taxes
worth between $25-40 million per year. Penalties on top of

NAIROBI 00001614 003 OF 003


this tax evasion would double the amount owed to the KRA.

-- The account of one company showed evasion of value added
tax (VAT) of $3.5 million per year.

-- Other individual bank accounts, which lacked any
documentation as to ownership, showed unexplained turnover
of tens of millions of dollars per year.

-- "There is every reason to believe" these tax evasion and
money laundering operations have been going on for six
years, according to the letter.


10. (SBU) Mullei's letter, as quoted in the press, notes
that the bank handling these illicit transactions had
become "a liability to the probity of the financial sector
and I would recommend that you consider withdrawing its
license." On April 4, opposition MPs in Parliament shed a
bit more light on the scandal, naming the bank in question
as the Charter House Bank. They also linked the bank to
businessman John Harun Mwau and to Nakumatt Holdings, the
owner of Kenya's largest supermarket chain. This tracks
closely with what consultant Ryan had earlier told Econ/C,
and also jibes with more conjectural (but consistent)
hearsay reports linking Mwau to Nakumatt through Mwau's
large illicit import operations at Mombasa port. Mwau has
long been rumored to have been a major narco-trafficker in
the 1990s, and as a sidelight is said to still bring in
legitimate imports through his container terminal business
at Mombasa, but does so illegally by not paying import
duties. The cheaper goods and laundered proceeds, so the
story goes, find their way into Nakumatt supermarkets, in
which he owns shares, where they can undersell the
competition.

-------------- --
Comment: Petty Corruption or the Next Big Scam?
-------------- --


11. (C) The details of the Mullei case remain just fuzzy
enough for now that it's not clear if this is simply a case
of petty corruption on Mullei's part, or on the contrary,
of grand-scale corruption, the attempted exposure of which
led to Mullei's demise. For the moment, the outline of
what is known points towards Mullei more as a victim than a
perpetrator of wrongdoing, but there may be an element of
both in this case. That said, if the money laundering and
tax evasion scam is as large as reported, it would be on a
par with the other mega-scandals of the day. And if it is
confirmed that elements of the GOK are complicit in any
way, it would further damage what's left of the Kibaki
administration's credibility and stability. As such, the
GOK's response to Mullei's March 20 letter may constitute
both a test and yet another opportunity for the GOK (and in
particular for new Finance Minister Amos Kimunya) to make
actions speak louder than words in the war on graft.
Donors like the World Bank, the IMF, and ourselves need to
push the GOK for a full, transparent explanation of the
money laundering/tax evasion allegations and of how the GOK
plans to deal with them.
Bellamy