The Goldenberg conspiracy The game of paper, gold, money and power Peter Warutere

ISS Paper 117 • September 2005 Price: R15.00

INTRODUCTION all court cases related to Goldenberg, paving the way for the commission, which was empowered to hear In February 2003, hardly a month after being sworn evidence about the matter in open court. The com- in, ’s President appointed a Com- mission, chaired by Justice Samuel Bosire, was ap- mission of Inquiry into one of the largest financial pointed in the public interest “to inquire into allega- scandals in Kenya’s history. The fiddle, popularly tions of irregular payment of export compensation to known in Kenya and even in international financial Goldenberg International Limited” and also to look and donor circles simply as ‘Goldenberg’, is estimated into “payments made by the to have cost Kenya some US $600 million in just less (CBK) to Exchange Bank Limited in respect of ficti- than three years. This estimate is considered in some tious foreign exchange claims”.1 circles to be conservative; there are computations which indicate that as much as US $1 billion could The appointment of the commission pulled the rug have directly and indirectly been si- out from under Moi, who had ruled phoned through Goldenberg net- Kenya with an iron grip for 24 works. years. He retired under pressure in Goldenberg tore December 2002, paving the way Goldenberg tore through Kenya’s through Kenya’s for a democratic election in which 2 political, economic and social fab- political, economic NARC was swept to power. It was ric not just during the years when a shocking end to the KANU ad- the actual transactions took place and social fabric ministration, which had governed but also long afterwards. The re- Kenya since independence in corded transactions associated with 1963. Moi had tried to impose Goldenberg were mainly between Uhuru Kenyatta, son of Kenya’s first 1990 and 1993 but the spill-over effects continued to president, the late Mzee , as his suc- be felt for more than a decade thereafter, even until cessor in the leadership of both KANU and the gov- President Kibaki’s election, under the National Rain- ernment. To many observers, Moi’s motivation was to bow Coalition (NARC) party, in December 2002. ensure that the regime he presided over was shielded from prosecution for the economic and political At the peak of the scandal in 1993, transactions asso- crimes it was widely accused of abetting during its ciated with Goldenberg networks together accounted years in office. The Goldenberg scam hung over the for over 10% of Kenya’s Gross Domestic Product regime’s head like the sword of Damocles, but a pro- (GDP). Yet the regime of Kibaki’s predecessor, Daniel Moi administration would possibly have ensured it Arap Moi, and the Kenya National African Union was buried and forgotten with time.3 (KANU) party, was not only reluctant to have the scam investigated but it also interfered with the machinery By all accounts, Goldenberg was a high-level con- of justice to shield the perpetrators of the economic spiracy by senior officials of the Moi administration, crime from being prosecuted and convicted. together with local and international wheeler-dealers who ostensibly capitalised on the government’s des- In appointing the commission, President Kibaki peration for foreign exchange and the greed of Moi’s brought to an end a circus in the courts that had be- cronies. These cronies displayed an insatiable appe- come an all too familiar result of any attempt to pros- tite for plundering the economy even when it was flat ecute the principal suspects in the Goldenberg affair. on its back.4 It was the climax of a series of monu- Kenya’s Attorney General, Amos Wako, terminated mental cases of corruption but it was the most blatant

The Goldenberg Conspiracy • 1 Paper 117 • September 2005 of all that Moi was associated with, which turned one The Export Compensation Act was intended to pro- of ’s most promising economies into a state of vide incentives to Kenyan exporters, particularly if they desperation. Endemic ’s public ventured into the export of non-traditional goods, but, sector, including government ministries, state corpo- like the exchange controls, this was widely abused rations, banks and financial institutions, depressed through corruption. The compensation was paid in Kenya’s economic performance to the lowest level in the form of cash, equivalent to a percentage of the history and the business community, as well as Ken- total value of the goods exported. All that the law ya’s development partners, found it increasingly dif- required to process compensation claims was CD3 ficult to continue operating under an increasingly forms stamped by the necessary authorities and con- hostile economic and political environment.5 firmation that all the foreign exchange relating to the exports had been received and sold to the CBK. The The genesis of financial buccaneering loophole was that the authorities did not require or verify details such as the volume and the true value, It is important to understand the political and eco- including unit prices, of the goods exported. Under nomic environment which prevailed in Kenya before the circumstances, it was possible for an exporter to 1993 to understand how a small financial operation bribe government officials to secure all the stamps was able to get so out of hand that it became a scan- required to show that an export transaction had taken dal of mega proportions. Kenya was a fairly closed place and foreign exchange earned, provided that the economy, with the government controlling prices, in- exporter could organise for a hard currency remit- terest rates and foreign exchange transactions. Two tance for the receiving bank to sell to the CBK as con- laws were of particular significance to Goldenberg: firmation that payments for the exports were received. the Exchange Control Act and the Ex- port Compensation Act. To see just how easy it was to abuse this incentive, a Kenyan student (call him KK) told of how he used Under the Exchange Control Act, all The Export export compensation to support his authority for dealing in hard cur- Compensation Act family when he was studying over- rency was vested with the CBK, seas. He simply arranged with his which then licensed commercial was intended to wife to export a calabash every banks to deal in foreign currency on provide incentives month and, since he was doing part behalf of their customers. However, time jobs overseas, he remitted part the banks were required to sell to the to Kenyan of this money to the wife, who con- CBK all the foreign currency they exporters firmed that she had received export received within a stipulated period earnings and therefore claimed ex- and it was illegal for anyone else, port compensation. The important either individuals or firms, to be in thing here is that the wife had to possession of or trade in foreign cur- declare on the CD3 forms an in- rency. This law stipulated that all exports leaving the flated price for the calabash as what the importer was country had to be certified by the Department of Cus- willing to pay, and the husband did not have to sell toms and Excise. Exporters were required to complete the calabash because he did not have a market for it. customs declaration forms (referred to as CD3 forms) Assume the wife bought a calabash at US $5 equiva- for all exports, declaring the goods being exported lent but on the CD3 forms declared that it was worth and their value. They were then required, through their US $500. As long as her husband could send US $500 banks, to account for all their export earnings and back to Kenya, she could claim US $100 (20% of the convert these proceeds into Kenyan Shillings within export value) as compensation. How much they could a stipulated period. The essential element of these make from the deal would depend entirely on how controls was that no Kenyan individual or firm could much the husband was able or willing to remit back deal in foreign currency or retain any part of the pro- home. Though export compensation supported KK’s ceeds of exports, even if they needed the funds to family in a small way, he could not make a fortune finance their imports or foreign commercial obliga- from it because his earnings overseas were limited. tions. Importers who needed foreign exchange to An exporter with more resources, however, or a good import raw materials, for instance, were required to source of hard currency remittances, could make apply for import licenses from the Ministry of Com- millions of dollars out of this simple process. merce and Industry and then await foreign exchange allocation approval by the Treasury and the CBK. This The architects of the Goldenberg scheme turned KK’s process often took several months and allocations modest idea into a multi-million dollar operation be- even for essential imports were not always assured cause they had several advantages, including finan- because of the abuse and corruption involved in im- cial resources and the right connections in the right port licensing and foreign exchange allocation pro- places. Goldenberg’s roots are traced to August 1990, cedures. when a firm called Goldenberg International Limited

The Goldenberg conspiracy • 2 Paper 117 • September 2005 was registered by the Registrar of Companies, the tions associated with Goldenberg. The first signal, Kenyan company registry which is under the auspices perhaps, was the registration documents filed at the of the Attorney General. Two months later, Goldenberg office of the Registrar of Companies, which listed offered the government an alternative source of for- Goldenberg’s original subscribers (or proprietors) as eign exchange from what was described on paper as Kamlesh Pattni and James Kanyotu. The latter was at a “pilot scheme” involving gold and diamond jewel- that time the head of Kenya’s dreaded Security Intel- lery exports. The company exploited the fact that the ligence, which was then known as the Special Branch government was experiencing a serious foreign ex- (now called the National Security Intelligence Serv- change crisis due to declining earnings from the ex- ice). Pattni was listed as a director of China Trade Ltd port sector, combined with increasing threats of aid while Kanyotu was listed as a farmer—he did not dis- cuts by development partners who were using aid to close that he was the director of security intelligence.7 press Moi’s regime for political and economic reform.6 Kanyotu was also a director of Firestone East Africa Moreover, Moi and the ruling party, KANU, were (1969) Ltd and First American Bank Ltd. Firestone, a desperate for money to finance national elections at large tyre outfit, and First American the end of 1992—the first time that the president and Bank are part of the Sameer Investments Ltd indus- KANU were being challenged in democratic elec- trial and financial conglomerate, which is substan- tions. The crisis for Moi was that the bilateral donors tially owned by Naushad Merali, a business tycoon who had funded his election campaigns before were widely regarded as Moi’s business proxy and associ- unlikely to do so again as it was apparent that his ate.8 continued stay in power was a key factor in Kenya’s political, economic and social instability. The evidence available also shows that the Office of the President established an inter-ministerial commit- From the outset, it was apparent that Goldenberg was tee to consider Goldenberg’s application for a mo- a neatly packaged conduit designed nopoly export license for gold and to plunder public funds. It started as diamond jewellery and when it was a pilot gold and diamond jewellery finally approved, it was handed export scheme but as more and more The powerful over to the Ministry of Finance for money was made and certainly, as connections with implementation. The responsibility the demand for more and more of pushing this process further be- payoffs from the Goldenberg net- the state elite fell Prof. , the then- works increased, the scheme spread were the single Minister of Finance, who was also like a spider’s web, penetrating the largest factor that Kenya’s Vice-President.9 Pattni, writ- CBK and several commercial banks. ing as the chairman of Goldenberg facilitated the International, made a formal appli- It took a sustained media campaign, Goldenberg cation to the Minister of Finance to public outcry and considerable pres- be given exclusive rights to export sure from Kenya’s development part- transactions diamond jewellery from Kenya for ners to stop the money laundering an initial period of five years, with associated with Goldenberg. The an option of renewing it for another government admitted since 1993 that there was a five years. In his letter dated 8 October 1990, Pattni scandal, but it scuttled every effort to have public of- argued that the gold and diamond trade was control- ficials associated with Goldenberg prosecuted. The led by smugglers and hence Kenya earned very little problem was that Goldenberg was no ordinary busi- from exports, though the potential was considerable. ness; its roots have over the years been traced to the He sought to guarantee the government that he would most powerful people in Moi’s administration, includ- earn and remit to the CBK at least US $50 million a ing Moi’s sons, Gideon and Philip, the former Vice- year, provided he was accorded monopoly status and President, Prof George Saitoti, the then-head of Moi’s was paid an export compensation of 35%, even dreaded Security Intelligence, James Kanyotu, and though the normal compensation to exporters at that former heads of the CBK, the Treasury, and customs, time was 20%.10 Pattni also applied, in the same let- mines and geology departments. Another key figure ter, for a license to operate a finance company under mentioned in the scandals was Hezekiah Oyugi (de- the name of Goldenberg Finance Ltd. ceased), who was the former Permanent Secretary in the President’s office in charge of the powerful portfolio Prof. Saitoti granted the request a few weeks later, of internal security and provincial administration. justifying his action on the basis of the foreign ex- change earnings promised by Goldenberg, but disre- The powerful state connections that garded the fact that his action was illegal under Ken- yan law. In particular, it was against the spirit of the sanctioned Goldenberg Monopolies and Price Control Act, which prohibited concentration of economic power, and the Export The powerful connections with the state elite were Compensation Act, which permitted maximum com- the single largest factor that facilitated the transac-

The Goldenberg conspiracy • 3 Paper 117 • September 2005 pensation of 20% to exporters of stipulated processed Once these formalities were completed, Goldenberg exports. started business in offices at View Park Towers in Nai- robi’s central business district.15 Goldenberg opened Saitoti’s decision was communicated to Pattni in No- its first bank account at the First American Bank—the vember 1990 by Charles Stephen Mbindyo, then Per- bank owned by Sameer Investments and in which manent Secretary in the Ministry of Finance, who Kanyotu (director of Security Intelligence) was a di- stated that the Minister had approved, “on experi- rector. mental basis”, the application by Goldenberg for mo- nopoly rights to export gold and diamond jewellery Paper exports to ghost companies but declined to issue a licence for Goldenberg Fi- nance.11 The letter stipulated that Goldenberg was Suspicions about the nature of Goldenberg’s business bound under the scheme to generate at least US $50 started as soon as the company submitted its first CD3 million a year and that the company was expected to returns, claiming that it had exported gold and dia- comply with all Exchange Control regulations admin- mond jewellery. By April 1991, the company had pre- istered by the CBK, the requirements of the Depart- sented to its bankers (First American Bank) nine CD3 ment of Customs and Excise (under the Ministry of forms. The bank was supposed to confirm that for- Finance) and pre-shipment inspection by the Depart- eign exchange was received and to submit the re- ment of Mines and Geology under the Ministry of turns to the CBK together with the funds remitted by Environment and Natural Resources. Copies of the Goldenberg’s customers overseas. The CBK would then letter was sent to Eric Kotut, then-Governor of the CBK, endorse the forms so that Goldenberg could claim ex- to Francis Cheruiyot, then-Commissioner of Customs port compensation from the Ministry of Finance. and Excise, and to Collins Owayo, then-Commissioner of Mines and Geology, with instruc- However, both the CBK and First tions to ensure that Goldenberg American Bank observed that complied with all the stipulated Goldenberg did not comply with regulations. All precious metal exchange control regulations and dealers were was therefore in breach of the agree- The approval by Prof. Saitoti was ment it had signed with the CBK. particularly significant because it required to sell What triggered the problem was that granted Pattni monopoly rights and, their commodities although Goldenberg claimed to therefore, effective control of the directly to have exported its gold and diamond entire export business of gold, dia- jewellery to two specific firms over- mond and other precious metals Goldenberg or to seas (Servino Securities Inc. and from Kenya. All precious metal deal- export them Solitaire of Switzerland), payments ers were from then on required to were not received through the nor- sell their commodities either directly through the mal inter-bank transfer. Instead, the to Goldenberg or to export them company bankers noted, Goldenberg’s earn- through the company, and indeed, ings were accounted for through Pattni used this clause to harass those numerous direct cash deposit trans- who continued to export directly. actions in various hard currencies, Moreover, the 35% export compensation granted including US dollars, British pounds, Swiss francs, Goldenberg was a subsidy from taxpayers that was French francs, Italian lira and Japanese yen.16 The illegal in law and also much higher than the normal banks widely suspected that Goldenberg completed export compensation of 20% that the government CD3 forms purporting to have exported the products, used to promote non-traditional exports.12 The addi- then bought cash in hard currencies on the black tional 15% was not even provided for in the annual market and deposited it in the Goldenberg account budget for export compensation but was disguised in as ‘payment’ for its ‘exports’. The black market in the Ministry of Finance’s budget as a customs refund. , Mombassa and other major Kenyan cities was thriving because official exchange controls by Based on the approval of the Goldenberg scheme by the government made it particularly difficult for Ken- the Minister of Finance, the CBK drafted an agree- yans to secure foreign exchange for imports and for- ment binding Goldenberg to comply with all ex- eign payments.17 Nonetheless, Goldenberg sometimes change control regulations and account for all ex- had difficulties raising sufficient hard currency to port earnings. The agreement was drafted by Jacinta cover its transactions: it sometimes took several weeks Mwatela, a senior officer in the CBK’s exchange con- before the value of one CD3 form was fully covered, trol department and Pattni signed on behalf of and even then, the cash deposited in the account did Goldenberg.13 This was necessary to show the nature not balance with the figures invoiced. and value of the goods exported, and the same forms were used to account for the hard currency received Although Goldenberg breached the exchange con- by the exporter’s bank.14 trol regulations and the agreement its proprietor signed

The Goldenberg conspiracy • 4 Paper 117 • September 2005 with the CBK, the Ministry of Finance paid export signment on the same day but without documents to compensation to the company after its claim was proc- support the purported exports. Citibank wrote to the essed by Customs and Excise. The Governor of the CBK seeking guidance on whether Goldenberg was CBK (Kotut) was alerted to this by T K Birech-Kuruna, exempted from providing supporting documents as the Exchange Controller, who wrote a memo report- stipulated by law for all exports.21 The response from ing that Goldenberg’s claim for export compensation the CBK was that Citibank had to ensure that all pro- was processed and paid, even though the company ceeds received on account of Goldenberg were prop- had failed to comply with the exchange control regu- erly documented and accounted for, as Goldenberg lations stipulated in the contract signed between the was subject to the general conditions that applied to company and the CBK. Birech-Kuruna also indicated all exporters.22 that Goldenberg was selling foreign currency to its bank to cover its transactions (which was irregular The authorities did nothing to stop Goldenberg’s illegal and illegal under the law) and advised the Governor activities and the company continued to enjoy export that the company should be compelled to comply compensation. In October 1991, Cheruiyot, the Com- fully with the regulations.18 Pattni tried, but failed, to missioner of Customs and Excise, notified the Ministry circumvent the system by applying for Goldenberg of Finance and the CBK that Goldenberg contravened to be exempted from the condition that required the exchange control regulations by invoicing its clients company (like all exporters) to surrender a copy of abroad in Kenyan shillings instead of in foreign currency, each CD3 form to the CBK following receipt of pay- as the exchange control regulations stipulated. Cheruiyot ments for exports. Kotut directed First American Bank instructed Goldenberg to invoice its exports in the speci- to ensure that all earnings from Goldenberg were fied foreign currency and to comply with exchange con- properly accounted for.19 trol regulations.23

Despite the queries raised about The issues raised by the CBK and Goldenberg’s transactions, Golden- Customs about the operations of berg became increasingly powerful The authorities Goldenberg could have prompted and succeeded in manipulating the did nothing to Citibank to stop dealing with the authorities in its favour. For example, company. In 1992, Goldenberg First American Bank took issue with stop Goldenberg’s opened an account with a govern- the manner in which Goldenberg ac- illegal activities ment-controlled bank, Kenya Com- counted for its purported foreign ex- mercial Bank, and also operated change earnings, which was irregu- another account at Delphis Bank— lar and unorthodox. Moreover, a local bank that was established Goldenberg committed an offence because only banks through a scheme brokered by the Kenyan authori- were permitted under the Exchange Control Act to han- ties in 1991 specifically to acquire the Kenyan opera- dle foreign currency. Instead of dealing with this illegal- tions of the Bank of Credit and Commerce Interna- ity, the CBK issued a foreign exchange dealer’s licence tional (BCCI), the Pakistani-based bank which col- to Goldenberg on 18 April 1991. The CBK made history lapsed with debts of over US $10 billion worldwide.24 and breached its own regulations by granting a dealer’s licence to a trading company that was not in the bank- Goldenberg’s transactions expanded exponentially ing business, thus playing a significant role in facilitat- and by early 1992, the company was licensed to open ing Goldenberg’s transactions.20 Even though some of a commercial bank in the name of Exchange Bank, the CBK officers demanded that Goldenberg comply presumably to overcome the difficulties it was expe- with all exchange control regulations, it was becoming riencing at other banks. Banking licenses in Kenya apparent that the Central Bank itself was becoming a are issued by the Minister for Finance on the recom- key player in the Goldenberg fiddle. mendations of the Governor of the CBK, so the deci- sion to allow Goldenberg to venture into banking Goldenberg’s initial transactions were small but they business was sanctioned by Minister George Saitoti quickly multiplied as the company started receiving and Governor Eric Kotut. This confounded bankers export compensation from the government. In May and banking sector analysts because, since 1989 the 1991, the company opened another account at the government had introduced stringent procedures and Nairobi branch of Citibank NA, a subsidiary of requirements for licensing new banks through major Citicorp of the United States, apparently because the amendments to the Central Bank of Kenya Act and company was having difficulties at First American the Banking Act. These measures were designed to Bank. Citibank may have realised soon after that it enhance banking prudence and strengthen the viabil- could not deal with the kind of transactions in which ity of the financial sector, following a series of serious Goldenberg was involved. The bank became alert banking crises between 1986 and 1989.25 when Goldenberg submitted one CD3 form purport- ing to have exported goods worth KSh186 million The establishment of Exchange Bank was a turning (equivalent then to US $6.6 million) in a single con- point in the because it meant

The Goldenberg conspiracy • 5 Paper 117 • September 2005 Goldenberg’s transactions were controlled under one Goldenberg applied to have the facility extended to umbrella and it was more difficult to subject them to July, arguing that the importer (Servino) had requested the kind of scrutiny that had been possible when its that the shipment be delayed because the consign- affairs were reported on by the bankers who previ- ments sent earlier had not all been sold.27 ously dealt with Goldenberg accounts. Indeed, this marked the beginning of new money laundering op- Available records show that there were no exports erations that quickly evolved into one of the biggest arising from this transaction and even though financial scandals ever seen in Kenya and probably Goldenberg failed to pay back the money, no action in the whole of the Eastern Africa region. A signifi- was taken against it or against Delphis Bank, which cant development around this time was that the in- was obliged to ensure that the money advanced to its ternational aid donors had just unanimously agreed, client was recovered. Moreover, in November 1992, during the consultative group meeting for Kenya held the company used the pre-shipment facility to dis- in Paris in November 1991, to suspend all balance of count bills of US $18 million in a period of five days payments aid to the Kenyan government until reform through National Bank of Kenya (a state-controlled and corruption issues were addressed. However, there bank), Delphis Bank and Trust Bank. Although the CBK was no evidence at this time that they knew that there questioned the legality of these transactions, again was a major financial scandal brewing. no action was taken to recover the funds.

The key dimensions of Goldenberg The other principal beneficiary of the facility was Spiro Voulla Rousalis (SVR), a Greek-owned firm that ap- Goldenberg, with the support of the authorities, ex- plied for and secured US $22 million through Trade ploited several facilities that sounded great on paper Bank to finance fish processing for export. However, when they were introduced by the the company never remitted the for- government to increase Kenya’s for- eign exchange earned from its ex- eign exchange reserves. The first was Goldenberg ports and the directors of the com- a pre-shipment export finance pany eventually ran away from scheme, which was launched by the exploited several Kenya when the authorities moved CBK in 1989 to provide bridging fi- facilities that in to arrest them. The CBK, in exer- nance to Kenyan exporters of non- cise of its authority under the terms traditional goods who did not have sounded great when of the pre-shipment facility, shut sufficient funds to finance the manu- they were down Trade Bank when it failed to facture or preparation of their export repay the funds advanced to Spiro products.26 This was a short-term re- introduced to Voulla Rousalis.28 volving facility under which the ben- increase Kenya’s eficiaries were required to pay back foreign exchange Goldenberg also emerged as a prin- the funds they had borrowed within cipal player in another scheme three months, by which time it was reserves launched by the CBK, also in the presumed they would have been name of dealing with Kenya’s for- paid for their exports. This was ex- eign exchange crisis. In what ap- plained as a timely intervention by peared like partial liberalisation of the government on the premise that exporters of non- the foreign exchange regime, the CBK in 1992 issued traditional exports had the potential to substantially a foreign exchange bearer certificate, popularly re- increase Kenya’s export earnings but were mostly con- ferred to as ‘forex-c’, whose stated objective was to strained by a lack of capital to finance their manufac- give importers access to foreign currency from the turing or processing operations. market to finance their operations. It was also designed to tap hard currency from the black market and there- However, the facility was turned into a money laun- fore it was widely regarded as a deliberate move to dering operation for Goldenberg and a few other pho- converge the black market hard currency exchange ney export firms, which siphoned funds directly from rate with the official exchange rate published by the the CBK through a few banks that were widely re- CBK. It was also the first time that Kenyans were be- garded as enjoying political patronage. In one major ing allowed to handle and trade in foreign currency transaction in January 1992, Goldenberg applied to without the risk of being prosecuted. the CBK for pre-shipment finance of KSh 185.8 mil- lion (US $6 million) supposedly to acquire and proc- The important element of the scheme was that any- ess diamond jewellery for export to Servino Securi- one with foreign currency could buy forex-cs from ties of Geneva, Switzerland. The application was ap- the CBK and trade them at a premium at either at the proved and the money advanced to Goldenberg Nairobi Stock Exchange or at a private auction that through its account at Delphis Bank. The application emerged to create a secondary market for the paper. indicated that the exports would be shipped out by But this facility was so widely abused by Goldenberg, 30 March 1992 but as this date approached, Exchange Bank and a few other players that the CBK

The Goldenberg conspiracy • 6 Paper 117 • September 2005 abolished it in 1993. Available records indicated that Bank, and was designed to cover Pan African Bank, by this time, Goldenberg and Exchange Bank were which was threatened with closure for failing to pay indeed controlling the forex-c market and were ma- a huge overdraft at the CBK. Even though the CBK nipulating the trade in their favour. When the facility recovered half the money, US $265 million went un- was shut down, Exchange Bank was left holding US der with Exchange Bank when it was shut down. In $132.9 million worth of forex-cs on account of this transaction, the CBK breached the law and its Goldenberg and a deal was struck where the CBK own prudence regulations and the gains Exchange redeemed all of them at KSh15/dollar. However, the Bank made increased its financial muscle to influ- proceeds were assigned to cover part of the debts that ence the treasury bills and forex-c markets. Exchange Bank owed to the CBK. A specific agree- ment covering this transaction was drawn up and The second money laundering operation involved US signed by Kamlesh Pattni, in his capacity as chair- $210 million which was siphoned out of the CBK by man of Goldenberg, and by Micah Cheserem, the Goldenberg through Exchange Bank from April to July Governor of the CBK who was appointed in July 1993 1993.30 The process was fairly simple: Exchange Bank when Kotut resigned under pressure.29 declared to the CBK that it had received US $210 million from Goldenberg’s gold and diamond jewel- Analysis of Goldenberg transactions showed that the lery exports. Exchange Bank signed an instrument company used the export compensation payments it called a ‘forward contract’, which was widely used had received irregularly from the government to ma- in genuine foreign currency transactions between nipulate the forex-c market. Morever, Goldenberg also commercial banks and the CBK. In this transaction, featured prominently in investigations relating to Exchange Bank informed the CBK that it had depos- manipulation of the treasury bills market, particularly ited the hard currency earnings from Goldenberg in in 1993, when the CBK offered in- the CBK’s accounts in New York and terest rates of up to 82% to recall ex- London and in return, it was imme- cess liquidity from the money mar- diately credited with the KSh ket, which was causing high growth equivalent of US $210 million (then in money supply and pushing up in- The company used about KSh 13.5 billion), which was flation. Much of this liquidity arose the export credited to the Goldenberg ac- from the money poured into the count. However, an audit of the economy during the December compensations CBK’s accounts later revealed that 1992 general election in which Moi payments from no dollars were deposited in its for- and KANU retained power, despite eign accounts as indicated by Ex- a heavy assault from the budding government to change Bank. It also emerged that opposition. Exchange Bank was fi- manipulate the two senior CBK officials, namely nally closed in September 1993 and forex-c market Job Kilach, the director of the CBK’s records indicated that it was hold- foreign exchange department, and ing treasury bills of US $100 million Michael Wanjihia Onesmus, the on account of Goldenberg. Like the chief dealer in the same depart- forex-cs redeemed by the CBK, these ment, were involved in the execu- treasury bills were also assigned to repay part of Ex- tion of the deal and were also used to develop a cover change Bank’s debts at the CBK and were covered by up scheme when the International Monetary Fund the agreement signed between Pattni and Cheserem (IMF) questioned imbalances in the CBK’s accounts.31 referred to earlier. They arranged with Banque Indosuez Sogem Aval and American Express (Amex) branches in London to open While pressure was mounting on the government to accounts in the name of the CBK and create book take action to stop the money laundering operations entries referred to as ‘notional deposits’ because they associated with Goldenberg, it emerged that the same did not involve real financial transactions. The CBK’s network was used to execute the largest single finan- account at Indosuez Aval was then credited with US cial fraud in a record time of less than three months. $100 million, while the one opened at Amex was The key players, again, were Goldenberg and Ex- credited with US $110 million.32 These balances were change Bank, which transacted some US $900 mil- to remain in the accounts from June to December lion in three highly brokered deals, all involving si- 1993 to balance the books of the CBK. This was par- phoning money directly out of the CBK. ticularly critical because the CBK, under pressure from the IMF and the World Bank, had commissioned spe- In the first deal, Exchange Bank, together with four cial audits of Exchange Bank and the other banks in- other politically connected banks, fraudulently ob- volved in the money laundering schemes. It emerged tained advances of US $530 million from the CBK from the audit (which was conducted by Price through kiting. The deal, which was done in only four Waterhouse though its findings were never made days, from 2-6 April 1993, involved Postbank Credit, public), that Exchange Bank refunded the US $210 Pan African Bank, Delphis Bank and Transnational million it had irregularly secured from the CBK and

The Goldenberg conspiracy • 7 Paper 117 • September 2005 was charged a penalty interest of 3.0% as stipulated Goldenberg by both the Ministry of Finance and the by the authorities. This penalty was a mere token con- Customs and Excise Department. The report by the sidering that Goldenberg and Exchange Bank made Controller and Auditor General, D.G. Njoroge, ques- millions of shillings by investing the money in treas- tioned why export compensation was paid to ury bills and forex-cs for three months. Goldenberg for exports that could not be verified and fingered the Ministry of Finance and the Customs and The third deal was a direct transfer of US $100 mil- Excise Department for making payments without evi- lion from the CBK to Goldenberg’s account in Kenya dence that the purported exports by Goldenberg ever Commercial Bank. Evidence available shows that the left the country. The report also questioned the legal- transfer was made in three instalments on specific in- ity of the 35% preferential export compensation structions issued by Dr Wilfred Karuga Koinange, who granted to Goldenberg when the law allowed a maxi- was the then-Permanent Secretary at the Treasury. In mum of 20%.37 The matter was taken up in Parlia- each case, he wrote a one-sentence letter directing ment but in defence, Prof Saitoti said Goldenberg was the CBK to transfer the funds from the government entitled to 20% export compensation like any other account to Kenya Commercial Bank (KCB) but did exporter of non-traditional exports and also claimed not specify who the beneficiary was.33 However, the that the additional 15% compensation was actually CBK governor made a submission to the Public Ac- approved by Parliament and was thus legal. counts Committee, a parliamentary watchdog on pub- lic funds expenditure, that the bank had investigated Saitoti also claimed that the exports and foreign ex- the matter and established that the money was cred- change earnings were properly documented by the ited to Goldenberg’s account at KCB.34 authorities who were given the responsibility of en- suring that Goldenberg complied with the terms and The official cover-up the conditions of the agreement ap- proved by the Ministry of Finance. By early 1992, there was circum- Indeed, he stated, the CBK had con- stantial evidence that Goldenberg By early 1992 there firmed receiving the foreign ex- was not a genuine exporter but was was circumstantial change earned from Goldenberg’s simply claiming export compensa- exports and it was on the basis of tion on paper transactions, which evidence that this that export compensation was were backed up by official stamps Goldenberg was not paid. “The entire transactions have from the Commissioner of Mines been conclusively conducted by the and Geology, the customs depart- a genuine exporter three institutions (the CBK, Depart- ment and the CBK. However, the ment of Mines and Geology and deals did not capture public atten- Department of Customs and Excise) tion until April 1992, when the in accordance with the laid down Daily Nation published the first story on Goldenberg’s procedures,” he said.38 There was uproar in Parlia- gold and diamond export activities and the abuse of ment over the matter, particularly when it turned out the pre-shipment export finance scheme.35 that the additional compensation in dispute was dis- guised as a customs refund, which misled Parliament. The article elicited instantaneous reactions from However, the Speaker of the National Assembly at Goldenberg and the authorities who were facilitating the time, Francis ole Kaparo, refused to have the is- its transactions. In separate but similarly worded state- sue debated.39 ments, Goldenberg, the Ministry of Finance and the Commissioner of Mines and Geology, denied that Even though the government made a spirited attempt Goldenberg was involved in dubious export deals and to defend Goldenberg, it became apparent that the claimed that the firm was a genuine exporter of pre- official defence was crumbling under mounting pres- cious metals and had actually earned the country sure from donors and local watchdogs, including the substantial foreign exchange.36 The statement issued press. When President Moi named a new cabinet in by Dr Wilfred Karuga Koinange of the Ministry of Fi- January 1992 following KANU’s victory in the De- nance claimed Goldenberg had earned more than cember 1992 elections, Prof Saitoti was moved from US $50 million since it embarked on a pilot export the Ministry of Finance to the Ministry of Planning scheme and that it undertook to deliver more foreign and National Development, being replaced by exchange. Musalia Mudavadi. Strangely, Mudavadi was quick to adopt the government’s line of defence. He issued Besides these statements, there was an attempt by the a statement that by early 1993 Goldenberg had earned proprietors of Goldenberg and the authorities to sup- and remitted US $145 million. He subsequently con- press further publication of articles on Goldenberg’s tradicted himself when he issued a legal notice with- affairs but this proved a futile exercise when, in May drawing export compensation for gold exports in Feb- 1992, the government’s Controller and Auditor Gen- ruary 1993.40 Shortly thereafter, the entire export com- eral published an audit report questioning the illegal pensation facility was scrapped for all exports. Moreo- payment of US $9 million export compensation to ver, Mudavadi scrapped the pre-shipment export fi-

The Goldenberg conspiracy • 8 Paper 117 • September 2005 nance scheme and ordered all the banks that had se- port compensation without evidence that the goods cured funds under this facility from the CBK to settle exported originated from or were processed in Kenya. their accounts by 30 April 1993. The banks that had There was also no proof that the import content of benefited from this scheme included Exchange Bank, the goods supposed to have been exported did not Pan African Bank and Trade Bank, and it was signifi- exceed 70% of their ex-factory value. The Export Com- cant that they were unable to settle their accounts by pensation Act required evidence that the goods were the due date and collapsed one after another.41 produced in Kenya and evidence that the local con- tent in the value of such goods when processed ex- The government’s defence mechanism finally fell apart ceeded 30%. Goldenberg’s exports did not fulfill these in June 1993 when the Central Bureau of Statistics conditions and the source of gold and diamonds pur- (CBS), under the Ministry of Planning and National ported to have been processed in Kenya was un- Development, published the 1993 Economic Survey.42 known. However, there was speculation that The report, which was ironically released by Prof Goldenberg was trading in gold and diamonds smug- Saitoti in his capacity as Minister for Planning, showed gled from Kenya’s neighbours including Congo, no records of the gold and diamond jewellery that Rwanda and Burundi. Goldenberg claimed to have exported. All the key sections of the survey in which the output and sale of The cookies finally crumble the precious metals would have featured showed no records of any significant activity in gold and dia- mond jewellery. For instance, based on the export The Economic Survey and the Controller and Auditor figures issued by the government, gold and diamond General’s reports fuelled a crisis that was already in jewellery exports should have featured as the second the making for the government, fol- most important source of Kenya’s ex- lowing an audit ordered by the IMF port earnings after tea but export fig- and World Bank in April 1993 of ures did not even record minerals all the banks involved in kiting and among the nearly 20 most important Though there was an in dubious foreign exchange deal- foreign exchange earners. Moreover, uproar in ings. The special audit of Exchange while Goldenberg was supposed to Bank and the five other banks im- have earned Kenya some US $145 Parliament, the plicated in irregular deals was com- million by the end of 1992 (accord- Speaker refused to missioned by the CBK and Price ing to the statement issued by Waterhouse (now Price Waterhouse Mudavadi), the Economic Survey have the issue Coopers), which conducted the showed that the value of all mineral debated audit, had just handed in its report output recorded by the Department to the CBK.45 Although the report of Mines and Geology was only US was not made public, it triggered a $40 million in 1993, and about US series of events that clearly left no $36 million in 1992. doubt that the cookies had finally started crumbling. The first significant move was on 18 July, when The Goldenberg figures also failed the test in terms of Mudavadi ordered the immediate liquidation of Ex- the value of goods exported to the destinations to change Bank by the Deposit Protection Fund, even which the gold and diamond jewellery were alleg- though the proprietors of the bank were later allowed edly sent. Goldenberg claimed its consignments were to appoint their own liquidator. A few days later, Eric shipped to two companies in Switzerland, Servino Kotut, the CBK governor, resigned and was replaced Securities and Solitaire, and one in Dubai, World Duty by Micah Cheserem.46 Free – which was associated with the Kenya Duty Free. However, the trade figures reported by the Economic In due course, investigations by Price Waterhouse Survey showed insignificant values of exports to the revealed that Exchange Bank and Goldenberg were two countries. World Duty Free also denied import- at the centre of extensive money laundering activi- ing gold and diamond jewellery from Goldenberg.43 ties with the other politically connected banks and the CBK. Shortly after being appointed governor, The government also found itself on the spot when, Cheserem requested Simeon Mauncho, a lawyer with in July 1993, the report of the Controller and Auditor close links to the Moi regime, to examine the Price General for 1991/92 questioned further irregular ex- Waterhouse report and give a legal opinion. Mauncho port compensation payments to Goldenberg. This re- handed in a legal opinion in August 1993 which, port stated that Goldenberg was illegally paid export among other issues, stated that Exchange Bank in- compensation of KSh 1.5 billion (US $50 million) by serted missing text over US $12 million in a short March 1992 and, like the previous year, the govern- period from October 1992 to May 1993 through abuse ment auditor said no evidence confirmed that gold of forex-c and foreign exchange regulations. Moreo- and other precious metals were actually exported in ver, Goldenberg was credited with US $8 million order for the firm to claim 35% export compensa- which Exchange Bank had realised from selling hard tion.44 The report also questioned the payment of ex- currency to the CBK on behalf of “certain parties”.

The Goldenberg conspiracy • 9 Paper 117 • September 2005 The report also mentioned the pre-shipment export fi- such funds were used, but it was apparent that even nance and the kiting between Exchange Bank and the as the Goldenberg operations were being shut down, other four banks.47 Records also show that the CBK con- its spin-offs had spread like the proverbial spider’s fiscated Treasury Bills and bearer forex-cs worth more web. Besides the circumstantial evidence that part of than US $125 million when it shut down Exchange Bank. the money was used to finance the 1992 elections and pay off debts (in 1993) spilling over from the elec- This series of revelations was the turning point in the tions, it transpired that the Goldenberg proceeds were Goldenberg saga, but the government failed to pros- used to acquire one of the large commercial banks ecute those involved. Amos Wako, the Attorney Gen- associated with the Moi regime. The proprietors of eral, faced considerable pressure to start prosecution Goldenberg acquired the assets of the Pan African but he always scuttled the matter, saying the police Bank (one of the banks involved in kiting with the were still investigating and there was insufficient evi- CBK), together with its subsidiaries, Pan African Credit dence to sustain a prosecution. The Law Society of and Finance, Pan African Building Society, Uhuru Kenya (LSK) took up the matter and gave Wako until Highway Development and Safariland Lodge. Presi- 31 August 31 1993 to prosecute those associated with dent Moi, through a firm called Hedam (an acronym Goldenberg and, when he failed to do so, the society for His Excellency ), had a beneficial filed a private prosecution in the Kenyan High Court.48 interest in the bank. The Pan African Bank group fell However, the Attorney General used his constitutional into trouble following the death in 1991 of its founder powers to sabotage the prosecution by taking it over chairman, Mohamed Aslam (then popularly known and thereafter terminating it.49 as the President’s banker), who died a few days be- fore he was due to testify at the commission appointed By the time the curtain fell on Goldenberg’s operations, to investigate the murder of Dr . the company had filed more than 160 CD3 forms with the CBK, claiming to An agreement for the takeover of the have exported gold and diamond jew- bank and its assets was signed in ellery worth US $375 million, includ- The money January 1993 between representa- ing US $250 million worth to World tives of the Aslam family and a new Duty Free and US $30 million worth irregularly paid investment firm, Pan African Salvage to the two phony Swiss firms named to Goldenberg (Pansal) Investment. Pansal took over in the gold and diamond jewellery ex- was reported the bank and its subsidiaries for US port transactions. $14 million but the Aslam family to have caused successfully negotiated to retain The money irregularly paid to considerable ownership of Corporate Insurance Goldenberg, combined with the Company, which was the insurance funds poured into the economy dur- damage to the arm of the group.51 It was significant ing the 1992 elections, was reported economy that, although the agreement was to have caused considerable dam- made in 1992, it was not until 8 age to the economy including caus- March 1993 that Pansal Investment ing rapid growth in money supply was officially registered by the Ken- and inflationary pressure. Kenya was on the verge of yan authorities.52 One of the signatories to the trans- an economic crisis that was only averted when the action was Abraham Kiptanui, the then-Comptroller CBK subjected Kenyans to a shock therapy that in- of State House, but it was not clear in what capacity cluded mopping up excess money supply from the he participated in the deal. money market and painful reforms that left the ma- jority of poor Kenyans poorer. The measures imple- The takeover of the Pan African Bank was a disguised mented late in 1993, aimed at curbing rapid growth scheme aimed at protecting it from liquidation by the in money supply and inflation, caused interest rates CBK over an overdraft of US $125 million. The bank on commercial bank lending and Treasury Bills to rise was suffering liquidity problems due to non-perform- from around 20% to as much as 70-80%, further fuel- ing debts owed by H Z group of companies.53 The ling inflation. Many businesses collapsed as they were bank was also reported to have diverted substantial unable to service debts. The value of the Kenya shil- public funds to the construction of a grandiose five- ling depreciated substantially and the level of abso- star hotel in Nairobi, which initially started as Hotel lute poverty increased.50 However, the economy Meridien but was renamed the Grand Regency Hotel started showing signs of recovery in 1994. when it was finally completed. The debt was never paid; instead, Pan African Bank tried to cover it The spider’s web through the June 1993 kiting transactions mentioned earlier in this paper. It is difficult to get comprehensive records of how much Goldenberg actually made from the irregular The Grand Regency was developed by Uhuru High- transactions sanctioned by the authorities and how way Development, the property arm of the Pan Afri-

The Goldenberg conspiracy • 10 Paper 117 • September 2005 can Bank, and, by acquiring the property business, the International Court at The Hague in Netherlands, the beneficiaries of Goldenberg also acquired the claiming that it was facilitating the forceful takeover Grand Regency. Although the hotel is an impressive of his investment through Pattni. Moreover, Pattni is landmark in the heart of Nairobi, it could well have involved in another dispute over the ownership of been an extension of the money laundering transac- businesses associated with Ketan Somaia, which in- tions associated with Goldenberg and Exchange Bank. clude Marshalls East Africa (the French Peugeot fran- Such a possibility is apparent from the funds pumped chise motor dealer), Block Hotels, Tourist Paradise In- into the construction and refurbishment of the hotel. vestment (which operates casinos in Nairobi and When construction started in 1989, the estimated cost Mombasa cities), United Touring Company and A of the development was US $30-40 million but by Baumann. The courts are yet to determine who the 1992, the cost had escalated to US $75 million. By rightful owners of these investments are and whether the time it was completed in 1993, the cost had over- Pattni indeed acquired them from their previous own- run to over US $100 million. ers. Presently, the businesses are being run by receiver managers appointed by the courts. Investigations by the Kenyan authorities into the fi- nancing of the hotel pointed to massive cost increases The intrigues and controversy that never end associated with overpricing by suppliers.54 The cost comparisons drawn by the investigators showed that When President Kibaki appointed the Commission of the average cost of developing the Grand Regency, Inquiry to investigate the Goldenberg affair, it was which is a 220 room facility, was estimated at widely assumed that the matter would be brought to US $340,000, which was nearly three times the inter- finality. But after calling more than a hundred wit- national average cost of US $120,000 for compara- nesses and spending an estimated US $20 million of ble facilities. This could well mean that money was taxpayers’ funds, the Goldenberg Commission turned laundered through construction and supply contracts. into a sort of circus where most of the witnesses, in- cluding the prime suspects in the corruption, claimed Indeed, the cost of the hotel was an issue between whatever they did was done expressly under instruc- Pattni and the CBK, which has been claiming owner- tions from Moi. Moi refused to testify. The Commis- ship of the Grand Regency on the grounds that all the sion has yet to publish its findings and guide the gov- funds used in its development were siphoned from ernment on what action should be taken against the the CBK.55 While the CBK put the hotel’s real value at perpetrators of the corruption. Kiraitu Murungi, the US $40 million, Pattni claimed that the hotel was Minister for Justice and Constitutional Affairs, initially worth double that amount, presumably based on the stated that the report would be published by August actual cost paid to the contractors and suppliers. 2005 but more recently, he said it will be completed in November 2005. Considering the high stakes in- The Grand Regency is not the only prime investment volved, and the intrigues that were evident during the that Pattni claimed to have acquired at the height of Commission’s public hearings, it remains to be seen the Goldenberg scandal. Pattni is embroiled in a dis- whether the Goldenberg chapter will be finally closed, pute over the ownership of Kenya Duty Free with the or the findings will open up fresh controversy that owner, Nassir Ibrahim Ali, who was deported by the will take years to put to rest. Whatever the outcome, Kenya government while the dispute was going on in Goldenberg remains a serious and complex scandal the Kenyan courts. Ali has taken the government to that simply refuses to go away.

The Goldenberg conspiracy • 11 Paper 117 • September 2005 Endnotes 11 Letter from Charles Stephen Mbindyo, the Permanent 1 A Judicial Commission of Inquiry is open to receive all Secretary in the Ministry of Finance, dated November – possible evidence on the subject of its inquiry, unlike a 1990, advising Pattni that Saitoti had, in principle, ap- court which is restricted to the charges preferred against proved Goldenberg’s application for monopoly rights the suspects. The specific terms of the Commission of to export gold and diamond jewellery from Kenya and Inquiry into Goldenberg are detailed in the Kenya Ga- draw an export compensation of 35% from the govern- zette published by the Government on February 24, ment. 2003. 12 Export subsidies were granted under the Export Com- 2 NARC is a coalition made up of two main political pensation Act. Under this Act, the government granted forces, the National Alliance Party of Kenya (itself a coali- export compensation of 20% to promote exports of non- tion of several former opposition parties) and the Lib- traditional products with the aim of diversifying Ken- eral Democratic Party, which is made up of powerful ya’s export base away from traditional commodities, politicians who disagreed with Moi’s choice of his po- mainly coffee and tea. The Act was specific about the litical successor in KANU. goods that qualified for export compensation and the 3 During his rule Moi was accused of a number of sig- conditions that applied, including substantial local con- nificant economic and political crimes, including tent and value added. The Act was scrapped early in Goldenberg, corruption in state enterprises, human 1993 and all export subsidies were abolished due to rights violations, the murder of a former foreign affairs widespread abuse, especially through Goldenberg. minister (Dr Robert John Ouko) and many others. 13 Agreement drafted by the CBK and signed by Pattni bind- Kibaki’s government has appointed commissions to in- ing Goldenberg to comply with all exchange control vestigate some of these matters, including the murder regulations in force at the time. Exchange controls were of Ouko. abolished in 1993 and CBK consequently disbanded 4 The Commission of Inquiry was told by former perma- its exchange control department. Jacinta Mwatela, who nent secretaries Joseph Magari (now Permanent Secre- was later promoted to director of CBK’s financial mar- tary in the Ministry of Finance) and Dr Wilfred Karuga kets, became a key witness in the Goldenberg inquiry. Koinange that Moi personally ordered them to pay 14 One copy of the CD3 forms was left with the Depart- Goldenberg International, even though they knew it was ment of Customs and Excise, another was sent to CBK, illegal, as the payments were not supported by genuine the third was kept by the exporter’s bank and the fourth export transactions. was retained by the exporter. On receipt of payments 5 Kenya’s economic performance. for the exports, the exporter’s bank sent the copy it re- 6 Political repression was high as pro-democracy forces tained together with all the proceeds received to CBK, campaigned against Moi, demanding constitutional and only after this was done was the export transaction changes to make Kenya a multi-party state. deemed to have been completed. 7 Kanyotu, as dreaded himself as the security intelligence 15 View Park Towers is itself a symbol of grand corruption he headed, admitted having been one of the original during Moi’s reign. The 21-storey building was con- subscribers to Goldenberg but claimed that he had re- structed by Harbans Singh, a contractor who was well signed soon after the company was formed. connected with Moi and Prof. Saitoti, and later sold at 8 Merali took over several large enterprises from Ameri- a considerable profit to the National Social Security can investors in the late 1980s in high-powered deals Fund, which is the workers’ pension fund. that raised more questions than answers as to how he 16 See a sample copy of Goldenberg’s CD3 form showing financed them and also how he secured foreign cur- how the company accounted for export earnings in rency to pay for them when Kenya was under strict for- various currencies paid directly into its bank account eign exchange controls. Merali, a former accountant at at First American Bank. Ryce Motors, which he later acquired, bought out 17 The exchange control regime made it difficult for genu- American investors First National Bank of Chicago ine users of foreign exchange (for imports and payment (which was renamed First American Bank), then later of other foreign obligations) to secure their needs be- bought majority shares in Firestone East Africa, then cause of endemic red tape in the system and its wide bought Union Carbide (which was renamed Eveready abuse by government officials and their cronies. The Batteries). His Sameer group also owns Sameer Indus- processing of import applications by the import man- trial Park, Equatorial Commercial Bank, Sasini Tea and agement committee of the Ministry of Commerce and Coffee, Aristocrats Concrete and First Assurance (also Industry and foreign exchange allocations by the for- previously owned by American investors). eign exchange allocation committee of the Ministry of 9 Saitoti, a professor of Mathematics, was drafted by Moi Finance was a laborious procedure that took eight from the and made Minister of months to a year, or even more in some cases. Finance in 1983. During the 1988 elections, Philip 18 Letter from T K Birech-Kuruna, the CBK’s exchange con- Odupoy, the Member of Parliament for Kajiado North, troller, to Governor Eric Kotut, quoted in the Economic was forced to step down to make way for Saitoti to be Review, 3 May 1993. elected unopposed. Saitoti was thereafter appointed Vice 19 Letter from Eric Kotut, the Governor of the CBK, to First President and Minister of Finance. He served a trou- American Bank, quoted in the same issue above. bled term as Vice President, often being openly humili- 20 Only banks were licensed to handle foreign exchange ated by Moi and his cronies. He is one of the politicians and they were required to sell all proceeds from ex- who resigned from KANU to join LDP when Moi anointed ports, tourism and other foreign remittances to the CBK Uhuru Kenyatta as his political successor. Saitoti is now within a stipulated time. Minister of Education, Science and Technology. 21 Citibank letter to the CBK enquiring if Goldenberg was 10 Letter of application by Goldenberg International signed exempted from providing the required documentation by Kamlesh Pattni to the Vice President and Minister of supporting its exports as stipulated by law for all ex- Finance, Prof. George Saitoti, dated 8 October 1990. porters.

The Goldenberg conspiracy • 12 Paper 117 • September 2005 22 Letter from the CBK to Citibank responding to the query 32 Indosuez Laval letter and agreement about Goldenberg failing to provide supporting docu- 33 Koinange’s instructions ments for its exports. 34 Public Accounts Committee’s deliberations on 23 Letter from Francis Cheruiyot, Commissioner of Cus- Goldenberg and the banking frauds. toms and Excise, notifying the Ministry of Finance and 35 Peter Warutere, Goldenberg’s Sh186 million pre-ship- the CBK that Goldenberg continued to contravene ex- ment scheme, Daily Nation, 21 April 1992. change control regulations and was invoicing its cli- 36 Press statements by Goldenberg International, Ministry ents in Kenya shillings instead of using hard currency. of Finance and the Commissioner of Mines and Geol- 24 Delphis Bank was born out of a scheme hushed up by ogy reacting to the Daily Nation article on Goldenberg’s the government, through George Saitoti and Eric Kotut, export activities. to take over all the Kenyan assets and liabilities of BCCI. 37 The Report of the Controller and Auditor General To- Bankers suspected the move was aimed at shielding the gether With the Appropriation Accounts, Other Public Kenyan business from scrutiny by international investi- Accounts and the Accounts of the Fund for the Year gators. The registered owner of the new bank was Ketan 1990/91. Somaia, another controversial tycoon of Indian extrac- 38 Statement in Parliament by Prof George Saitoti, Minis- tion, who, just two years earlier at the age of 29, caused ter for Planning and National Development, who was ripples in Nairobi business circles when he took over Minister for Finance when the Goldenberg scheme was several established and profitable businesses including approved, 15 June 1993. Marshalls East Africa (the local franchise for Peugeot 39 The Economic Review, 21 June 1993. vehicles) and Tourist Paradise Investment, a firm run- 40 Press statement on Goldenberg by Musalia Mudavadi, ning the largest casinos in Nairobi and Mombassa. He Minister for Finance, 27 March 1993. later acquired Block Hotels and Miwani Sugar Com- 41 Trade Bank was the first to collapse in April 1993 when pany. Somaia’s acquisition of the Casino was the most it was unable to settle its preshipment finance account interesting: the President ordered casinos to stop gam- with the CBK. It was followed in May by Postbank Credit bling in Kenyan shillings at a time when Kenyans did and then Pan African Bank. In July 1993, the Ministry of not have access to foreign currency due to exchange Finance also shut down Exchange Bank. controls. After Somaia bought out the casinos, the Presi- 42 The Economic Survey is the official government annual dent lifted this sanction on the casinos. It was also sig- report on all economic transactions including rate of nificant that Somaia was a close associate with of Oyugi, growth, production and exports for all sectors in any and he was also implicated in irregular deals including given year. It is published just before the annual Budget supply to the Fourth All Africa Games held in Nairobi in June. in 1987, supply of security equipment to the Kenya Ad- 43 Investigations with Swiss authorities indicated that the ministration Police and supply of London lookalike taxis two firms supposed to have been receiving Goldenberg’s in a GBP 10 million deal transacted through National exports were not registered in Switzerland, hence were Bank of Kenya. Since Somaia relocated from Kenya to non-existent. The proprietor of World Duty Free, Nizar Dubai he has been involved in a number of controver- Ali Ibrahim, was deported by the Kenyan authorities at sial deals, including the establishment of Delphis Bank the height of a dispute in the Kenyan high court with in Mauritius and the acquisition of Mpumalanga Park Kamlesh Pattni over the ownership of Kenya Duty Free. in South Africa. 44 The Report of the Controller and Auditor General To- 25 The Banking Act and the Central Bank of Kenya Act gether With the Appropriation Accounts, Other Public were amended extensively in 1988 and 1989 to pre- Accounts and the Accounts of the Fund for the Year vent future crises. In 1989, the Consolidated Bank of 1991/92. Kenya was established to take over the assets and li- 45 The other banks were Postbank Credit, Pan African Bank, abilities of 10 small indigenous-owned banking institu- Transnational Bank, Trade Bank and Delphis Bank. tions that collapsed between 1986 and 1989 due to 46 A statement on Kotut’s departure said he had resigned what the government said was poor management. The and President Moi had accepted his resignation. Deposit Protection Fund was also established to pro- Cheserem, who was a director of Unilever Malawi, was tect small depositors. also a director of the CBK before being appointed gov- 26 The incentive was designed to diversify Kenya’s export ernor. base away from coffee and tea, the principal export 47 Legal opinion by Simeon Mauncho, advocate, to Micah commodities, which were vulnerable to unfavourable Cheserem, governor, CBK on special audit of Exchange terms of trade. The targeted exports included textiles, Bank by Price Waterhouse. handicrafts and fish. 48 The Law Society of Kenya filed a private prosecution 27 Application by Goldenberg for pre-shipment export fi- against the then-Vice President, Prof George Saitoti, nance and subsequent letter requesting the shipment permanent secretaries Charles Mbindyo and Wilfred period to be extended to July 1992. Karuga Koinange, the Commissioner of Mines and Ge- 28 The Economic Review, 19 April 1993. ology, Collins Owayo, and the others implicated in the 29 Kamlesh Pattni, the chairman of Goldenberg, and Micah Goldenberg scandal. Cheserem, the governor of the CBK, made an agree- 49 The Attorney General is the chief government prosecu- ment under which Exchange Bank was credited withK tor and legal adviser and has powers under the Kenyan Sh15 per dollar for the forex-cs it was holding. The agree- Constitution to take over any prosecution in the Ken- ment was intended to resolve the indebtedness of Ex- yan courts. change Bank to the CBK. 50 To curb growth in money supply and inflation, the CBK 30 The shilling depreciated so fast after March 1993 that offered high yielding Treasury Bills during weekly auc- by July, the rate was US $1=KSh.64. tions and the impact of this was felt in terms of high 31 The two were later charged in court with the offence, commercial bank interest rates, high prices, inflation together with Pattni and Goldenberg. and increased poverty levels.

The Goldenberg conspiracy • 13 Paper 117 • September 2005 51 Sale agreement between Pan African Bank and Pansal 54 Investigations report by the Criminal Investigations Investment dated 25 January 1993. Department, a branch of the Kenyan Police, published 52 Copy of Pansal Investment registration certificate dated in the Economic Review, 21-27 March 1994. 8 March 1993 and issued on 10 March 1993 by the 55 When the CBK shut down Exchange Bank, it took out a Registrar of Companies. security charge of US $40 million on the Grand Re- 53 The H Z group of construction companies were associ- gency to cover part of the debt it was claiming from Pan ated with former minister , then re- African Bank. The hotel was first placed in receivership garded as President Moi’s most powerful aide. Biwott by the CBK on 15 April 1994. was mentioned by Scotland Yard detectives as one of the prime suspects in the murder of Dr Robert Ouko but later sued for defamation.

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About this paper

Goldenberg was a high level conspiracy by senior officials of the Moi administration in Kenya, to- gether with local and international wheeler dealers, who capitalised on the government’s desperation for foreign exchange and the greed of the administration’s cronies. It was the most blatant case of corruption associated with the Moi government. This paper shows how these corrupt activities, which had a devastating impact on one of Africa’s most promising economies, were crafted and carried out. The political and economic environment in Kenya in the early 1990s probably mirrors that of other countries in the region and for that reason, this paper holds useful lessons for the region.

About the author

An economist by profession, Peter Warutere has been an advisor on Governance and Communica- tions in the Office of the since July 2004. He has also rendered his professional expertise in the investigation of corruption in general and to the commission of enquiry into the Goldenberg corruption cases in August 2003. He holds a B Ed from the University of Nairobi, Kenya and an MA in Development Economics from the University of Manchester, UK.

Funders

The general study on corruption and elite criminal networks in Kenya on which this paper is based was sponsored by the IDRC. The publication of the paper was funded by the Royal Norwegian government.

© 2005, Institute for Security Studies • ISSN: 1026-0404 The opinions expressed in this paper do not necessarily reflect those of the Institute, its Trustees, members of the Council or donors. Authors contribute to ISS publications in their personal capacity. Published by the Institute for Security Studies • P O Box 1787 • Brooklyn Square • 0075 • Pretoria • SOUTH AFRICA Tel: +27-12-346-9500/2 • Fax: +27-12-460-0998 Email: [email protected] • http://www.issafrica.org 67 Roeland Square • Drury Lane • Gardens • Cape Town • 8001 • SOUTH AFRICA Tel: +27-21-461-7211 • Fax: +27-21-461-7213 Email: [email protected]

The Goldenberg conspiracy • 16 Paper 117 • September 2005