CHARTERHOUSE BANK SCANDAL: THE BAD GUYS ARE STRIKING BACK

C O N F I D E N T I A L NAIROBI 000531

SIPDIS

DEPT FOR AF/E, AF/EPS
DEPT FOR EEB/IFD/OMA, INL/C/CP
STATE PASS TO TREASURY FOR VIRGINIA BRANDON
STATE PASS TO COMMERCE FOR BECKY ERKUL
STATE PASS TO JUSTICE AFMLS JACK DEKLUIVER
STATE PASS TO JUSTICE FOR OIA AND OPDAT
STATE PASS TO TREASURY FOR FINCEN JERRY CRAWFORD

SIPDIS

E.O. 12958: DECL: (####)
TAGS: KCRM KCOR EFIN KE
SUBJECT: CHARTERHOUSE BANK SCANDAL: THE BAD GUYS ARE STRIKING BACK

REFS: (A) 07 NAIROBI 3231, (B) 07 NAIROBI 2754, (C) 07 NAIROBI 1185,

(D) 06 NAIROBI 4421

Classified by A/DCM Counselor John Hoover for reasons 1.4 (B) and
(D).


1. (C) Summary: Central Bank of Kenya (CBK) officials believe Chief
Justice Evans Gicheru's sudden decision to give priority to hearing
appeals by the money laundering Charterhouse Bank to remove the
statutory manager, rather than hearing the CBK's appeals, indicates
that Gicheru has been compromised. Behind this activity is
Charterhouse investor and notorious gangster John Haroun Mwau, who
was recently elected to Parliament. These intrigues demonstrate the
weakness of Kenya's judicial system, and could prevent the Ministry
of Finance and CBK from liquidating the bank, or even force its
reopening. In response to these developments, the Ambassador sent
letters to the Attorney General, and the Ministers of Finance and
Justice expressing concern about management of the case. End
summary.

Background
--------------

2. (U) On the basis of strong evidence showing Charterhouse Bank was
engaging in large-scale tax evasion and money laundering over a
period of several years, the CBK and the Ministry of Finance put
Charterhouse under statutory management in June 2006. Charterhouse
proceeded to blitz the CBK and the Ministry with 22 court
applications, four of which are suits against the CBK by alleged
depositors in four courts across Kenya. Judges in smaller cities
were somehow more amenable to ordering that Charterhouse be reopened
for business, but CBK held firm and appealed these decisions. In
December 2006, Finance Minister Amos Kimunya refused to renew
Charterhouse's operating license, leaving it in legal limbo and
unable to re-open. In March 2007, a court in Milimani, Nairobi ruled
unambiguously in the CBK's favor. On June 22, 2007, High Court
Justice Warsame in Nairobi agreed with the CBK that
Charterhouse-inspired legal mischief had made it impossible to
definitively resolve the case and extended the CBK's statutory
management mandate by one year.


3. (U) In early 2006, CBK asked Chief Justice (CJ) Gicheru to
consolidate all the Charterhouse cases and appeals. In December
2006, Attorney General (AG) Amos Wako also sent a letter to CJ
Gicheru noting that "Encouragement was being given to litigants to
file cases on the same issues in different courts with a view to
obtaining favorable and/or different judgments from the courts." He
also criticized the Eldoret High Court's November 2006 ruling
demanding removal of the statutory manager and reopening of the bank
as an infringement of the AG's constitutional mandate. Wako asked CJ
Gicheru to consolidate all the Charterhouse cases and appoint two
judges to hear them. CJ Gicheru waited until July 27, 2007 to issue
an order for the case files from the Court of Appeal and the High
Courts in Milimani, Eldoret, Kitale, and Malindi. He also criticized
AG Wako for suggesting to him how to handle the case, expunged Wako's
letter from the file, and ordered him to pay court costs. However,
Gicheru took no further action, despite CBK's continued requests to
expedite and consolidate the process.


4. (C) In a related matter, after former CBK Governor Andrew Mullei
opened and pursued the Charterhouse investigation, he was suspended
in early 2006 on flimsy charges that he had not followed proper
procurement procedures in hiring the forensic auditors. He won
acquittal in May 2007, and called the decision a vindication of his
probe into Charterhouse. However, upon leaving the court, Dr. Mullei
was served with court papers notifying him that businessman John
Haroun Mwau had filed a defamation suit for Mullei's allegations that
Mwau had used Charterhouse to evade taxes and launder money. The
suit does not appear to have been heard yet in court. Mwau is widely
believed to be a silent partner in Charterhouse and to be (or to have
been) a major drug trafficker. In the December 27 Parliamentary
elections, Mwau was elected Member of Parliament.

Chief Justice Gicheru's Action Appear Biased
--------------

5. (SBU) On December 20, 2007, Charterhouse applied to the Court of
Appeal to set aside Justice Warsame's rulings, but CJ Gicheru did not
accept the application. On February 1, 2008, CJ Gicheru suddenly and
without consulting CBK accepted Charterhouse's appeal, and set a
short-fuse hearing date of February 6. Charterhouse's application
challenged the impartiality of two of the three judges on the Court
of Appeal panel who had previously heard the cases and ruled in favor
of CBK. Judges Onyango and Kithinji recused themselves on February

1. Gicheru has not yet named their replacements, but did set April
21-23 for the hearing date. Gicheru, however, did not use the
February 1 or February 6 appearances to set a hearing date for CBK's
appeals, or consolidate them as requested.

Mwau's Lawyers Demand Documents from CBK
--------------

6. (C) CBK statutory manager at Charterhouse, Rose Detho (protect),
told Econ Specialist that lawyers for Pepe Ltd (John Haroun Mwau's
shipping and warehouse firm) have served CBK with letters demanding
CBK provide copies of all reports CBK has on Charterhouse Bank,
Charterhouse's license renewal application, communications between
CBK and Ministry of Finance, and the statutory manager's report on
the bank. Detho said the demands are an effort by Mwau to intimidate
CBK into renewing the bank's license and allowing it to reopen.
(Note: Pepe Ltd is the firm from whose premises a one-ton, Ksh6.2
billion ($1 billion) cocaine shipment in a container was seized in
2005, adding to suspicions that Mwau is a drug smuggler. End note.)

7. (C) Detho is anxious to liquidate Charterhouse, both to stop its
malpractices and money laundering from re-starting, and to preserve
the credibility of the CBK as a regulator. She fears that
Charterhouse's directors, depositors, and owners, including Mwau, may
take advantage of the country's current political crisis to overturn
Justice Warsame's ruling confirming CBK's closure of the bank. She
regards CJ Gicheru's failure to consolidate CBK's appeals and to set
hearing dates, his sudden acceptance of Charterhouse's appeal and its
request for new judges, and setting the short-fuse hearing date all
as evidence the Chief Justice has been compromised. She suspects
that Mwau is using his new position as an MP to pressure the CJ and
the CBK to allow Charterhouse to reopen. Waiting until late April to
hear Charterhouse's appeal may also interfere with extension of the
statutory manager's position in June.

Ambassador's Letters Expressing Concern to Ministers
-------------- --------------


8. (C) On February 14, the Ambassador sent letters to Attorney
General Wako, Finance Minister Kimunya, and Minister of Justice and
Constitutional Affairs Karua expressing U.S. concern about the
management of the Charterhouse Bank case (texts below). The letters
note that expeditious and transparent resolution of the case is
critical to demonstrating Kenya's will to prevent money laundering
and protect both the integrity of Kenya's financial system and the
credibility of Kenya's court system. Wako responded on February 21
by confirming he would soon make public his decision on the
investigation by the Criminal Investigation Division (CID) into
Charterhouse's violations of the Banking Act. But he noted that he
was still waiting for the files from Kenya Revenue Authority (KRA)
and Kenya Anti-Corruption Commission (KACC) regarding their
investigations of tax evasion and proceeds of crime.

Comment
--------------

9. (C) The poor management and delays in the Charterhouse case
clearly illustrate why Kenya's judicial system has so little
credibility in or outside the country. The tenacity of
Charterhouse's owners and managers and their skillful manipulation
and corruption of the judicial system also indicate they have much to
hide and much to gain from recapturing control of the bank. Failure
to liquidate Charterhouse and prosecute the colluding managers and
depositors would be a major defeat for Kenya's financial regulators,
its legal system, and its international standing in the struggle to
fight drug and weapons trafficking, corruption, terrorist finance,
and tax evasion. Although political reform initiatives to resolve
the current political crisis will likely dominate Kenyan politics for
the next year or two, we will look for every opportunity to press for
passage of the anti-money laundering bill that died in Parliament in

2007.


10. (SBU) Begin text of letters:

February 14, 2008

Dear Honorable Wako:

I am writing to express urgent concern about the status and future
handling of the Charterhouse Bank case.

I commend your efforts to bring the case to appropriate closure in
the courts, and hope you will continue to press for the various
appeals filed by alleged customers of Charterhouse to be consolidated
by the Chief Justice and given a hearing date.

We do not have any information that is not already available to your
office or to the Central Bank of Kenya (CBK). But the information we
have indicates clearly that Charterhouse Bank management conspired
with depositors to evade import duties and taxes and launder the
proceeds of these crimes in a total estimated at approximately $500
million from 1999 to 2006. Charterhouse Bank also likely violated
the Banking Act, the CBK's Prudential Guidelines for recording
foreign currency transactions, and the CBK's know-your-customer
procedures.

As you know, how the case is resolved is critical to Kenya's
international standing and to the integrity of its financial system.
Any backsliding on the issue will seriously undermine our joint
efforts to combat money laundering and all of its associated evils,
including drug and people trafficking, weapons proliferation,
corruption, terrorist finance, and tax evasion. The credibility of
Kenya's court system is also on the line with this case.

I urge that the Charterhouse case be handled in an expeditious and
transparent manner that will build local and foreign confidence in
Kenya's dedication to enforcing its laws and protecting its financial
system from abuse and money laundering. If the United States can be
of any assistance in this matter, please do not hesitate to contact
me.

Sincerely,
Michael E. Ranneberger
Ambassador

The Honorable
Amos Wako
Attorney General
Nairobi

February 14, 2008

Dear Ministers:

I am writing to express urgent concern about the status and future
handling of the Charterhouse Bank case.

We understand that Chief Justice Evans Gicheru recently rejected a
letter from Attorney General Wako asking that several Central Bank of
Kenya (CBK) challenges to cases lodged against it by alleged
Charterhouse customers be consolidated and given a hearing date. In
fact, we understand that these appeals have been pending with the
Chief Justice for over two years. We also understand that while
refusing to take action on CBK's appeals, the Chief Justice is moving
forward to set a hearing date for the Charterhouse appeal seeking to
remove CBK as the bank's statutory manager.

We do not have any information that is not already available to your
ministries and to the CBK. But the information we have indicates
clearly that Charterhouse Bank management conspired with depositors
to evade import duties and taxes and launder the proceeds of these
crimes in a total estimated at approximately $500 million from 1999
to 2006. Charterhouse Bank also likely violated the Banking Act, the
CBK's Prudential Guidelines for recording foreign currency
transactions, and the CBK's know-your-customer procedures.

I realize the issue is now before the courts and thus outside of your
direct jurisdiction. However, how the case is resolved is critical
to Kenya's international standing and to the integrity of its
financial system. Any backsliding on the issue will seriously
undermine our joint efforts to combat money laundering and all of its
associated evils, including drug and people trafficking, weapons
proliferation, corruption, terrorist finance, and tax evasion. The
credibility of Kenya's court system is also on the line with this
case.

I urge that the Charterhouse case be handled in an expeditious and
transparent manner that will build local and foreign confidence in
Kenya's dedication to enforcing its laws and protecting its financial
system from abuse and money laundering. If the United States can be
of any assistance in this matter, please do not hesitate to contact
me.


Sincerely,
Michael E. Ranneberger
Ambassador

The Honorable
Martha Karua,
Minister of Justice and Constitutional Affairs,
Nairobi.

The Honorable
Amos Kimunya
Minister of Finance
Nairobi.

End texts.
RANNEBERGER