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
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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