CMA takes Enforcement Action for corporate governance and financial reporting failures and fraudulent schemes at the National Bank of Kenya (NBK)
Nairobi April 4, 2018…The Board of the Capital Markets Authority (CMA) has taken administrative action against the NBK Board members and former Senior Managers who served at the Bank as at December 31, 2015 for the alleged misrepresentation of financial statements and embezzlement of funds at NBK. The Authority has also recommended to the Office of the Director of Public Prosecutions, the prosecution of some of the senior managers and further criminal investigations of additional individuals.
Based on whistleblower information, CMA conducted an inquiry into the affairs of the Bank leading to the commencement of enforcement proceedings against the then NBK Board members and its senior managers namely Mr. Munir Sheikh (Former Managing Director), Mr. George Jaba (Former Chief Credit Officer), Mr. Chris Kisire (Former Chief Finance Officer upto April 2015), Mr. Wycliffe Kivunira (Former Ag. Chief Finance officer), Mr. Solomon Alubala (Former Head of Treasury), Mr. Boniface Biko (Former Director Corporate and Institutional Banking) and Mr. Dennis Chumbe (Former Relationship Manager Business Banking).
The main allegations in the enforcement proceedings were in respect of misrepresentation of financial statements for the periods ended 30th June 2015 and 30th September 2015 where profits were overstated and inquiry into approximately Kshs 1 Billion which was alleged to have been siphoned out of the bank through an embezzlement scheme.
The misrepresentation of financial statements was occasioned by premature recognition of sale of assets amounting to Kshs 800 Million and under provisioning of loan amounts and wrongful recognition of interest income leading to the overstatement of profit in the respective periods. The Bank had published unaudited financial statements reporting profits of Kshs. 1.7 billion for the quarter ended 30 June 2015 and Kshs. 2.2 billion for the quarter ended 30 September 2015 but subsequently reported a loss of Kshs1. 2 Billion in its audited financial statements for the period ended December 31, 2015.
The alleged embezzlement of funds was investigated in connection with a deposit mobilization program where commissions were paid to private agents for deposits placed by Government agencies in the normal course of business. Investigations established that up to ninety percent of the commissions paid to the private agents may have subsequently been transferred back to persons related to NBK.
Following the completion of enforcement proceedings, CMA issued a regulatory caution to the board members who served on the NBK Board in the relevant period for ineffective oversight and failure to put in place a system of internal controls to ensure that the information going to the board for decision making was complete and accurate. CMA has also recommended criminal investigation of additional individuals for alleged involvement in the embezzlement scheme.
CMA has disqualified Mr. Munir from holding a board position in a public issuer of securities or working for a licensed person for a period of 3 years and imposed a financial penalty of Kshs 5 million for his role in the ineffective management of the bank, his failure to ensure the board was furnished with complete and reliable information and for the misrepresentation of the financial statements.
CMA has also disqualified Mr. Alubala and Mr. Kisire for a period of 10 years and 3 years respectively in line with evidence of their active involvement in the embezzlement scheme together with recommending their criminal prosecution to the Director of Public Prosecutions.
Mr. Alubala has been fined Kshs 104.8 Million being 2 times the amounts so far traced into his hands from the embezzled funds. CMA has therefore sought restriction on two properties associated with him which were purchased with the embezzled funds.
Mr. Kisire has been fined Kshs 1 Million for his role in the embezzlement scheme.
Mr. Kivunira and Mr. Jaba were also fined Kshs 1 million each for misrepresentation of financial statements and failure to relay correct information on provisioning to the board respectively.
No enforcement sanctions were imposed on Mr. Biko and Mr. Chumbe following their administrative hearings.
The Authority in reaching its decision against the Board of NBK, noted that the NBK Board had taken several remedial measures including – review of the NBK Risk Management and Credit Policies, escalation of noted fraudulent activities to the Banking Fraud Investigation Unit, dismissing implicated members of senior management, engaging a new Head of Internal Audit at the Bank and increasing the capacity of the NBK Board Audit Committee.
The Authority hereby reinforces the importance of board members and key officers in public issuers of securities exercising their fiduciary responsibilities to protect shareholders investments and investors interests by putting in place internal controls and improving capacity of board audit committees to ensure financial statements published disclose accurate and complete information.
Appreciating the critical role which can be played by whistleblowers in drawing attention to areas of irregular, illegal or unethical conduct, the Authority will continue to explore appropriate measures to encourage persons aware of such matters to make reports. The Authority continues to maintain an anonymous whistleblower portal, easily accessible through it’s website through which tip-offs and reports can be made.
BACKROUND INFORMATION ON THE CAPITAL MARKETS AUTHORITY
The Capital Markets Authority (CMA) was set up in 1989 as a statutory agency under the Capital Markets Act Cap 485A. It is charged with the prime responsibility of both regulating and developing an orderly, fair and efficient capital markets in Kenya with the view to promoting market integrity and investor confidence.