Charterhouse Bank and Money Laundering; Still Waiting for

C O N F I D E N T I A L NAIROBI 004421 SIPDIS SIPDIS DEPT FOR INL/C/CP RINDLER, S/CT NOVIS, AF/EPS HASTINGS, ISN/ECC HARTSHORN TREASURY FOR WHYCHE-SHAW TREASURY PASS TO FINCEN E.O. 12958: DECL: 09/30/2026 TAGS: KCOR KCRM PREF ECON EFIN KE SUBJECT: Charterhouse Bank and Money Laundering; Still Waiting for GOK Action REF: A. NAIROBI 4105 ¶B. NAIROBI 3217 ¶C. NAIROBI 2870 ¶D. NAIROBI 2482 ¶E. NAIROBI 1688 ¶F. NAIROBI 1614 Classified By: CDA John F. Hoover for reasons 1.4 (B) and (D). ¶1. (C) Summary: The Central Bank of Kenya (CBK) is fighting a rearguard legal battle to keep Charterhouse Bank temporarily closed in light of convincing evidence that the bank is little more than a money laundering machine. Beyond this, however, the GOK appears to be doing little to bring the case to decisive closure, which is badly needed as more evidence comes to light that the country is extremely vulnerable to illicit international money flows. Meanwhile, the GOK claims long-awaited anti-money laundering (AML) legislation will be tabled in Parliament shortly. Until Kenya passes and implements an AML law, and finds the political will to complete the Charterhouse investigation, it risks a worsening reputation as an international center for money laundering, narco-trafficking and corruption. End summary. Money Laundering and Tax Evasion at Charterhouse Bank -------------- -------------- ¶2. (C) In August 2004, whistleblowers inside Nairobi-based Charterhouse Bank revealed to the CBK that Charterhouse had helped its clients conceal billions of shillings earned through tax evasion and money laundering over a five-year period. At the request of then-CBK Governor Andrew Mullei, former Finance Minister David Mwiwaria authorized CBK to establish a special Joint Action Team chaired by the Kenya Anti-Corruption Commission (KACC). The Team included members from the CBK and the Kenya Revenue Authority (KRA), and its mandate was to investigate and compile evidence jointly to enable all three to use their various legal authorities to maximum advantage. The Team's November 2004 initial report to the Ministry of Finance on 85 suspect accounts confirmed the whistleblowers' allegations. In March 2006, CBK Governor Mullei wrote to Finance Minister Kimunya outlining the allegations of massive tax evasion and money laundering. The letter recommended the Minister cancel Charterhouse's banking license. Shortly afterwards, Governor Mullei was charged with improper procurement procedures in hiring the very forensic investigators used to examine the Charterhouse accounts. He was suspended and his case remains in court. ¶3. (C) In addition to problems uncovered at Charterhouse, CBK's forensic auditors also found evidence of unrelated money laundering at five other banks in Kenya. Paramount Universal Bank was found to have laundered $32 million in the space of seven months. Melville Smith, the principle forensic auditor hired to unravel the Charterhouse accounts, reported to the USG in June 2006 that money was flowing from the Cook Islands through Kenya to New York and other destinations. One account showed suspicious transfers of $950,000 in March 2005, $760,000 in January 2006 and $400,000 in February 2006 to the Wall Street Banking Corporation in New York. The CBK and Ministry of Finance have not taken any action on this report, which Smith and investigative journalist Robert Shaw believe represent only the tip of a massive money laundering iceberg in Kenya. ¶4. (C) Smith told Emboffs in July 2006 that the flows indicate a thorough knowledge on the part of the perpetrators of Financial Action Task Force (FATF) and national reporting regulations. For example, Charterhouse transferred $500,000 to a temple in India in one day without notice by breaking up the transfer into 36 payments, all below the $10,000 ceiling. Smith also expressed concern about the high number of forex bureaus in Kenya and their likely money laundering role for narcotics revenues. He cited the example of Sterling Forex, which received its license in only a few weeks, instead of the usual long delay, and now moves Ksh 4 million ($14,000) per day. Lack of Action by GOK Agencies -------------- ¶5. (C) KACC stopped calling meetings of the Charterhouse Team after November 2004. The investigation stopped, and neither Mwiraria nor his successor, Amos Kimunya took any action. However, after opposition Member of Parliament Billow Kerrow publicly revealed in June 2006 the findings of the initial investigation, Finance Minister Kimunya temporarily closed the bank and the CBK appointed Rose Ndetho as statutory manager. Kimunya's June 27, 2006 statement to Parliament understated the magnitude of the scandal and claimed (unconvincingly) that Mullei's prosecution was unrelated to his pursuit of Charterhouse. However, investigative journalist Shaw informed the Embassy in September that Statutory Manager Ndetho had obtained access to Charterhouse General Manager Sanjay Shah's computer, which yielded evidence confirming the Team's initial report. Ndetho submitted her report to acting CBK Governor Jacinta Mwatela in the middle of August, and Shaw presumes Mwatela has forwarded the report with recommendations to Finance Minister Kimunya. Kimunya has yet to take any additional action. Smith and Shaw speculate that Ringera, Kimunya and others are afraid of John Haroun Mwau, the reknowned narcotics kingpin and owner of both Charterhouse Bank and the Nakumatt supermarket chain. According to Smith, Shaw and other contacts, Mwau has a reputation for extreme violence when his interests are threatened. Smith and Shaw theorize that Mwau, through connections to First Lady Lucy Kibaki, was also responsible for Mullei's dismissal. ¶6. (C) Kenya Anti-Corruption Commission (KACC) Chairman Justice Aaron Ringera testified in private about Charterhouse on August 17 before Parliament's Finance, Planning and Trade Committee. Unconfirmed Committee sources claim Ringera revealed that a local supermarket chain had evaded paying taxes amounting to Sh800 million ($11 million). Ringera announced on September 13 that KACC had obtained warrants to seize 78 bank accounts, but it is unclear if KACC has taken follow-up action. Parliament returned to session on October 2, but no MPs have announced plans to focus on Charterhouse. Courts Order Charterhouse Re-opened -------------- ¶7. (C) Meanwhile, Charterhouse management filed a suit claiming the CBK's actions were illegal under Kenya's Banking Act, and that the CBK-appointed statutory manager should be removed and the bank allowed to reopen. Courts in Nairobi consistently ruled against Charterhouse until September 22, when a judge ruled in favor of unnamed businessmen in Eldoret and ordered CBK to reopen Charterhouse. Statutory Manager Ndetho took advantage of the court's failure to serve her directly, and has not allowed transactions to restart. CBK Chief Bank Examiner Gerald Nyaoma told acting Econ Counselor Charterhouse could not pass any real examination and that the CBK would defy any court order to reopen it or give customers access to their accounts. He claimed the judge in Eldoret had ordered CBK not to pass any reports on Charterhouse to the Ministry of Finance, such as a request to close the bank permanently, and that CBK is appealing this too. Nyaoma referred to AML and bank examiner training he had recently taken in the U.S. and Canada, and said it had helped him better understand the high risks Charterhouse represented. He is working on amendments to the Banking Act that will strengthen Kenya's know-your-customer regulations, and transfer authority to close a bank from the Ministry of Finance to the CBK. Where is the AML Bill When You Need It? -------------- ¶8. (C) Without a law against money laundering, Kenya's financial sector remains completely vulnerable and out of compliance with Kenya's UN obligations and FATF commitments. Attorney General Wako recently told the Ambassador that his office had almost completed the anti-money laundering (AML) bill and implementing regulations which have been under consideration for over two years. (Ref A) Wako said he would send the new law and implementing regulations to the Ministry of Finance for transmission to Parliament in October. Vice President Awori told the Ambassador the AML bill is one of the GOK's top priorities for passage in 2006. Ministry of Finance AML Task Force Chairman Barack Amollo told Econoff that the GOK had removed all references to terrorism from the bill. The GOK will portray it as anti-crime, anti-corruption, and based on UN obligations in order to improve its chances of being approved. Visiting World Bank Financial Market Integrity Program Director Latifah Cheong subsequently told Econoff the Bank is ready to provide, together with UNODC, technical assistance to help the GOK establish a Financial Investigation Unit (FIU) and implement the AML law. The AML Task Force likewise has a longstanding offer from the U.S. Mission to assist with a familiarization seminar for MPs prior to passage of the bill. Comment -------------- ¶9. (C) The revelations of the laundering of billions of shillings (tens or hundreds of millions USD) at Charterhouse, Paramount, and four other banks, the capture of over a ton of cocaine in Kenya in December 2004, the arrest of Kenyan drug couriers in Europe, and allegations of large-scale smuggling and tax evasion all paint an alarming picture of Kenya as a financial nexus for international and domestic crime and corruption. Two parallel actions are needed. First, the Minister of Finance, with backing from the President if necessary, needs to gather the political will to achieve decisive closure on the Charterhouse case. He should begin by keeping the bank temporarily closed while re-starting and completing the forensic audit exercise begun two years ago. If the evidence of money laundering and tax evasion is confirmed (a virtual certainty),the Ministry and other agencies as needed then should take appropriate action against the bank in the form of fines, criminal prosecutions, and/or permanent revocation of the bank's license. Second, the GOK needs to get going on the longer-term effort to build the legal and institutional framework necessary to prevent and prosecute money laundering. A crucial first step is delivering on the repeated assurances that AML legislation will be a priority for passage during the current session of Parliament. Hoover