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Chasing Banking Criminals To The End

Earlier this month I penned a piece about Iceland and Ireland being the only two known countries that had jailed bankers following the 2008 global financial crisis. As fate would have it, I visited Dublin a few weeks ago and got to chatting with a very friendly driver on my way back to the airport. First things first, the Irish people are as warm as Kenyans, and remarkably welcoming and hospitable. “We are not like the French,” said my driver with his tongue in cheek, “so we don’t go protesting in the streets when we are unhappy about something.” By this time, we were talking about the effect of the global financial crisis and the Irish economy’s painful but steady recovery over the last 9 years following property price crashes and banking failures.

According to my driver, the public was not satisfied with the arrest and subsequent jailing of the three bankers I wrote about a few weeks ago. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. But David Drumm, the CEO of Anglo Irish Bank, fled to Boston in the United States in 2009 when it became clear that the bank was going to collapse and filed for bankruptcy under Massachusetts law in 2010. The Irish public wanted justice. They wanted Drumm to come home and answer for his crimes.

According to Wikipedia, the hearing at the Boston-based court heard from the Irish Bank Resolution Corporation, which fought Drumm’s claims for bankruptcy, as he owed it €9 million. It was alleged during the case that Drumm had transferred money and assets to his wife, so they could not be seized during the bankruptcy proceedings. In early 2015, the court ruled the application inadmissible, ruling that he could be held liable for debts of €10.5m in Ireland.
Subsequently, the Irish Office of the Director of Public Prosecutions (DPP) recommended a number of charges be brought against Drumm. In 2015, the DPP successfully sought the extradition of Drumm who was arrested by US Marshals based in Boston in October and extradited back to Ireland in March 2016. Drumm was charged with 33 counts including forgery, counterfeiting documents, conspiracy to defraud, the unlawful giving of financial assistance in association with the purchase of shares, and disclosing false or misleading information in a management report.
Collective Irish indignation, coupled with dogged determination on the part of the Irish DPP, led to the arrest and extradition of one man who played a part in the collapse of an Irish bank that cost the Irish taxpayer € 29 billion (Kshs 3.3 trillion). He is currently out on bail awaiting trial later this year, with part of his bail terms having him report to his local police station twice daily. “People are angry and they want to see justice,” my driver went on. “No one will ever forget what that Drumm chap and his colleagues did to us.”

We have spent an inordinate amount of time in Kenya focusing on the role of the regulator in the case of Dubai, Chase and Imperial banks. We have waxed lyrical and railed continuously about how the regulator, being the Central Bank, is not doing enough to bring the perpetrators of the malfeasances in the respective banks to book. But the regulator has played a big part, via Kenya Deposit Insurance Corporation, in attempting to get justice by filing civil suits against senior management, directors and shareholders of both Imperial and Chase Bank this year. The buck for criminal charges sits squarely in the office of the Director of Public Prosecution who is supposed to represent the collective Kenyan indignation, anger and thirst for retribution. But given our growing Kenyan apathy to the corruption that bestrides both the public and private sector like a colossus, such righteous indignation may be lacking. And just like that, the fraudulent bankers will walk away into the sunset, having paid a monetary price for their crimes if the civil cases are successful, but free to walk amongst us.

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Iceland’s Breaking Bad

In a hodgepodge of squat low slung single storeyed buildings, which were built more for function than for aesthetics, sit some of Iceland’s finest bankers. According to a March 2016 Bloomberg article titled “This Is Where Bad Bankers Go To Prison” by Edward Robinson and Omar Valdimarsson, Kviabryggja Prison is a converted farmhouse nestled in between the frigid North Atlantic ocean on one side and fields of bare, unyielding lava rock on the other. Sigurdur Einarsson who was the chairman of Kaupthing Bank, Iceland’s largest bank before the 2008 financial crisis, and Hreidar Mar Sigurdsson who was the bank’s former chief executive officer were convicted of market manipulation and fraud leading up to the collapse of the former top bank.

The same article highlights that they are kept in the good company of Magnus Gudmundsoon who was the former CEO of Kaupthing’s Luxembourg unit and Olafur Olafsson who was the second largest shareholder in the bank at the time of its demise. The dream team is serving sentences up to five and a half years, which may be low in criminal conviction terms but huge in a global financial industry that saw not a single individual jailed in the United States or the United Kingdom for misdeeds arising out of the greed derived financial crisis. Starting in 2010, the special prosecutor for the Iceland banking cases had successfully prosecuted 26 banking officials by March 2016.

Following deregulation in the early turn of the 21st Century, Iceland’s top 3 banks had accessed European money markets and borrowed €14 billion in 2005 alone, which was double their intake in 2004 and paying 0.2% over benchmark interest rates. The banks lent the funds back out to Icelanders at high interest rates, raking in huge profits. Flush with easy credit, Icelandic households bought flats in London, took shopping trips to Paris and jammed Reykjavik’s streets with Range Rovers. By 2008 the banks’ assets had swollen to ten times the Icelandic $17.5 billion economy. Once the 2008 financial crisis hit, the Icelandic banks lost their short term funding and could no longer service their own debts. The local currency’s value fell, making loans denominated in foreign currencies more expensive and leading to the top 3 banks defaulting on more than $85 billion in debt and households losing more than a fifth of their purchasing power, conclude Robinson and Valdirmasson.

Further south in the Atlantic Ocean, Ireland joined Iceland as the only other country to criminally convict bankers for their pre-financial crisis misdeeds. According to a July 2016 article in the Irish Times by Ruadhan MacCormaic, three former bankers were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent (ILP) were involved in setting up a circular scheme where Anglo moved money to ILP and ILP sent the money ban, via their assurance firm Irish Life Assurance, to Anglo. The article describes further that the scheme was designed so that the deposits came from the assurance company and would be treated as customer deposits, which are considered a better measure of a bank’s strength than inter bank loans. The sham transactions were aimed at demonstrating that “Anglo Irish Bank had €7.2 billion more in corporate deposits than it had.”

Kenya stands head and shoulders with its Icelandic and Irish banking counterparts who have had executives accused of market manipulation and fraud. Some shareholders and executives of Imperial Bank and Chase Bank have been taken to court by the Kenya Deposit Insurance Corporation for corporate malfeasance. However, these are civil suits aimed at recovering the money and levying monetary penalties rather than extracting criminal convictions for actions that have caused manifest pain and suffering to both depositors and genuine borrowers. These cases may drag in court for years as history has shown us, rendering very little present value vindication to those suffering today. But for what it’s worth, it’s a good start and a large prick on the conscience of many Kenyan bank boards today.

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Too Big To Fail-A Lesson From Deutsche Bank

[vc_row][vc_column width=”2/3″][vc_column_text]“We enable our clients’ success by constantly seeking suitable solutions to their problems. We will do what is right—not just what is allowed.” That is the classic statement of values from the Deutsche Bank website. In case you missed it, one of the world’s largest and oldest financial institutions has been lurching from scandal to scandal over the last few years and hammering a rusty nail into the coffin that is the “too big to fail” theory. The scandals have occurred largely in the last ten years of its nearly 150 year history and range from artificially propping up housing prices in the 2007-2008 financial crisis to participating in the notorious Libor scandal, to covert spying and espionage of its critics, to doing dollar denominated business with the US sanctioned countries of Burma, Libya, Sudan, Iran and Syria.

There’s not enough space or regulator imposed penalty dollar signs that can efficiently cover those malfeasances on this page, so I’ll focus on just one that makes short shrift of their statement of values. In the early days of 2015, an internal investigation dubbed Project Square that was looking into Deutsche Bank’s Moscow office trades revealed that a 36-year-old American trader Tim Wiswell had overseen over $10 billion of mirror trades that helped siphon cash out of Russia and mainly into London.

The concept was beautiful in its simplicity. An online article on Bloomberg titled “The Rise and Fall of Deutsche Bank’s ‘Wiz’ Kid” outlines the grab-a-bag-of-popcorn-for-the-drama narrative of how Tim Wiswell – Wiz to his friends – brought down the Moscow investment banking unit of Deutsche Bank. Wiswell’s desk, which never had more than a dozen or so employees, carried out thousands of mirror trades over a four year period. The size of the trades would be not too high as to raise an inordinate amount of eyebrows, somewhere in the range of $10-15 million per transaction.
Wiswell, who was promptly fired once Project Square was released, sued the bank for wrongful dismissal and lost. He claimed that at least 20 of his bossed and colleagues, including two supervisors in London, knew about the trades because they were carried out openly. The counterparties were also taken through “strict vetting” by the sales team using a compliance framework that was reviewed in both Moscow and London if any issues were identified. They all passed muster.
But how long had the compliance teams within Deutsche Bank been sticking their heads in the sand? The August 29, 2016 issue of The New Yorker magazine provides a well-written investigative piece on the $10 billion scandal. According to the article, on one day in 2011, the Russian side of a mirror trade, for about $10 million, could not be completed as the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror trade counterparties, namely Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank, the New Yorker argues. It had paid several million dollars for stocks without receiving a cent from Westminster. The episode should have raised serious suspicions – especially given the revoking of Westminster’s license – but apparently it did not. The failed trade was resolved over a year later in November 2012 when Westminster repaid Deutsche Bank and the mirror trades continued.

But the patterns of suspicious activity were wagging their tails for the average compliance eye to pick up. Clients of the mirror trade scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them and clients had to pay Deutsche Bank a commission for every transaction. The apparent willingness of counterparties to lose money again and again should have sounded an air raid alarm that the true purpose of the trades was to facilitate capital flight. The counterparties for the mirror trades were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and business eager to send their money offshore, the New Yorker reveals further. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. An internal research report by Deutsche Bank titled Dark Matter, and which was totally unrelated to the unraveling scandal in Russia, revealed that Britain had significant unrecorded capital inflows. Since 2010, wrote the research duo of Harvey and Winkler, about a billion and a half dollars arrived in London every month and a good chunk of it was from Russia. “At its most extreme, the unrecorded capital flight from Moscow included criminal activity such as tax evasion and money laundering.” A month after this research report was released to much media debate, the $10 billion scandal broke out, revealing exactly how another department within Deutsche Bank played a big role in that economic anomaly. Of the eighteen billion dollars that the researched had estimated was flowing into the UK each year, about 20% had arrived there as a result of the trades made at their own bank. Deutsche Bank is now facing billions of dollars in penalties, at the last count they were fighting off a $14 billion penalty from the Department of Justice in the United States for mis-selling mortgage securities in the run up to the 2008 financial crisis. This is against a provision that they have made for $5.6 billion for legal costs related to all the scandals they are currently facing. The share price has of course tanked and analysts are concerned about its viability as a going concern if these penalties are exacted, as they’d have to go back to shareholders to raise the cash for making the penalty payments.
I’ve written about Deutsche Bank’s value statements today, and Wells Fargo value statements a few weeks ago. I’m sure if we dug deep within the bowels of Imperial, Chase and Dubai Banks locally, we would find a value statement or two posted proudly at the head office reception. I’m starting to build a healthy cynicism for value statements of any kind. If anything, banks should have a uniform statement globally: “We’re here to take your money, use it, make our money and hopefully give you a return. Someday”

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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How Not To Grow Revenues-A Lesson From Wells Fargo

[vc_row][vc_column width=”2/3″][vc_column_text]In case you missed it, the United States provided yet another wonderful case study in bad corporate governance in the Wells Fargo case this past September.

On September 8th 2016, Wells Fargo Bank was fined $185 million (Kes 18.5 billion) by regulators after it was found that more than 2 million bank accounts and credit cards had been opened or applied for without customers’ knowledge or permission between May 2011 and July 2015. Employees had been opening and funding accounts in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program.” Dice it or slice it, this was a fraud of monumental proportions that had to have been known from the top. Or was it known? Well, John Stumpf was not trying to take one for the team. Following the termination of about 5,300 employees (about 1% of the workforce) in relation to the allegations, the champion stallion appeared on television on September 13th 2016 quite unapologetic. “I think the best thing I could do right now is lead this company, and lead this company forward,” in response to calls for his resignation. Stumpf was acting straight out of the African leadership playbook titled “Id Rather Die Than Resign.”

A week later, Stumpf met the inimitable Massachusetts Senator Elizabeth Warren. Ms. Warren had done her homework extremely well and in 17 short minutes excoriated the bank CEO. I’ve extracted the first painful minutes here:
Warren: Thank you, Mr. Chairman. Mr. Stumpf, Wells Fargo’s vision and values statement, which you frequently cite says: “We believe in values lived not phrases memorized. If you want to find out how strong a company’s ethics are, don’t listen to what its people say, watch what they do.” So, let’s do that. Since this massive years-long scam came to light, you have said repeatedly: “I am accountable.” But what have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?
Stumpf: The board, I serve —
Warren: Have you resigned?
Stumpf: No, I have not.
Warren: Alright. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: Well, first of all, this was by 1 percent of our people.
Warren: That’s not my question. This is about responsibility. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: The board will take care of that.
Warren: Have you returned one nickel of the money you earned while this scam was going on?
Stumpf: And the board will do —
Warren: I will take that as a no, then.

Two things to note here: First of all is how Stumpf was trying to bring in his board of directors as the reason why he was not resigning. We will never know if his board quite frankly wanted him gone by this time but couldn’t get garner the guts to ask him to leave, after all he was both Chairman and CEO. Secondly, he also laid the decision to pay back his past bonuses squarely on the board’s hands. Under Warren’s probing eye, he was not trying to take the flak for not paying back unfairly earned bonuses. On this one, he was going to go down with his board. Having seen how Wall Street executives had walked away with a slap on the wrists following the global financial crisis of 2008, Warren went for the jugular:
Warren: OK, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead evidently your definition of “accountable” is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.

Stumpf, who had probably had the best legal brains prepare him for the Senate hearing, had even been trained on the classic “I don’t recall” technique for any questions whose answers might lead to self incrimination. But Warren was in no mood to take prisoners and gave the classic ultimatum.
“You know, here is what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they probably would be looking at criminal charges for theft.
They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.
You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. This just isn’t right. A cashier who steals a handful of twenties is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top. Until then, it will be business as usual. ”
It is noteworthy that it is not only Kenya that is struggling to get corrupt practices actively prosecuted, especially those perpetuated by “untouchables”. And after that lacerating and very public questioning, the bank’s independent directors announced on September 27th that Stumpf would not be receiving $41 million (Kes 4.1 billion) of promised compensation while they launched an independent investigation. Clearly, being thrown under Stumpf’s bus was not what they had signed up for and necessary action was taken.

John Stumpf threw in the towel and finally resigned on October 12th 2016 from the Wells Fargo Board and also stepped down from Chevron Corp and Target Corp on October 19th 2016 where he served as a non-executive director. An honorable action that was a day long and a dollar short.
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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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British Banking Reforms Make for Tough Directors

[vc_row][vc_column width=”2/3″][vc_column_text]A friend of mine who heads the compliance department of a multinational bank recently drew my attention to the stupefying impact of the United Kingdom’s Financial Services (Banking Reform) Act 2013. Following the impact of the global financial crisis in 2007-2008, in June 2010 the United Kingdom government established the Independent Commission on Banking to inquire into the structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. After slogging through numerous details and nail biting horror stories from members of the public on the favorite whipping boy of human beings: banks, the Commission made its recommendations in September 2011 which resulted in the Financial Services (Banking Reform) Act being published, debated in the UK Parliament and assented to by December 2012.

The fairly righteous indignation of the British public and their parliamentary representatives against “Big Banks” provided the much needed wind assistance for the speedy conclusion of the inquiry and the conversion of their recommendations into law within 15 months. A key outcome of the Act was the creation of a new regulatory framework for financial services which including the abolishment of the Financial Services Authority and creation of the Financial Conduct Authority (FCA).

Please note the nomenclature used in the new entity: “Conduct”. The global financial crisis and the Libor crisis in the United Kingdom a few years later were primarily the result of misconduct on the part of errant bankers. Conduct has become the catchall phrase for addressing the shortcomings and trying to fundamentally shift behavior within the banking fraternity. According to Wikipedia, the FCA mandate includes the power to regulate conduct related to the marketing of financial products and it is able to specify the minimum standards and to place requirements on products. The FCA has the power to investigate organizations and individuals as well as the power to instruct firms to immediately retract or modify promotions that it finds to be misleading and to publish such decisions.

But this is the point that has made many senior bankers as well as banking executive and non-executive directors sit up and take notice. One key objective of the FCA is protect consumers and while the caveat emptor (buyer beware) principle that consumers are responsible for their decisions is maintained, if the consumer’s decision is made as the result of advice then the advisor should be responsible. So in March 2016, a new accountability regime was established called the “Senior Managers Regime” for both the banking and insurance industries. According to the press release on the FCA website, the new regimes will hold individuals working at all levels within relevant firms to appropriate standards of conduct and ensure that senior managers are held to account for misconduct that falls within their area of responsibility.” The thought process behind this regime change is that while there have been numerous occasions of banks being found guilty of flouting conduct rules, there have been very few cases of individuals being held to account.

According to a Deloitte UK publication explaining the Senior Manager Regime, “As there has previously been no requirement to determine who is responsible for what in a bank, it has been possible for individuals to claim that it was someone else’s responsibility, or ‘individuals seeking to protect themselves on a ‘Murder on the Orient Express” defense (It wasn’t me it could have been anyone)’ as noted by Martin Wheatly the former CEO of the FCA.”

Now if I were a senior manager at a UK bank, this is right about the time I would be having a candid chat with my line manager about decisions within my pay grade, with the option of a downgrade in title, but not salary being a viable option. Because the thrust of the new senior manager regime is one: ‘You can delegate tasks but you can’t delegate responsibility.’ The FCA then puts its mouth where its money is and proceeds to produce a lengthy document subjecting its own organogram from the board of directors through to management to demonstrate who has senior management responsibilities as well as prescribed responsibilities and overall responsibilities. The aim of this diagrammatic self exposure is to establish to the public how it expects financial institutions to identify who a senior manager is and where the overall responsibility of their decision flows up the organization’s chart all the way to the chairperson of the board.

It’s a very complicated way to arrive at the conclusion that the buck stops at the chairperson of the financial institution’s board, as one key responsibility that he has been given is quite simply put: “The responsibility for the allocation of all prescribed responsibilities.” In other words: The Big Dog, The Big Cahuna, or He-Who-Shall-Never-Sleep-Well-At-Night.

But all is not lost for chairpersons of financial institutions. The new regime now clearly identifies each senior manager and the scope of his or her responsibilities. In the event of a breach, it’s easy to have that most unfortunate conversation: “One of us has to take one for the team, and it’s certainly not me.” Or in relationship speak: “It’s not me, it’s you who is the problem.” As the Deloitte paper aptly puts it, the increased focus on individual accountability removes the regulators away from the time consuming task of having to determine who is accountable for what, to a position of determining whether the individual(s) responsible took reasonable steps to control their areas effectively and to comply with all relevant regulations.

Given that a large part of our jurisprudence and regulatory frameworks are borrowed from the United Kingdom, it would be interesting to see if this will eventually flow into East Africa in which case bankers should girdle their loins in anticipation.

However, if this regime was in force in the United States, the current refusal of the Wells Fargo CEO John Stumpf to resign for the misconduct of his team in opening fake accounts for purposes of driving up revenues would be difficult to maintain.

[email protected] Twitter:@carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Banking scandals are not unique to Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]In October 2010, I wrote a piece in this newspaper about a lady called Cecilia Ibru, the disgraced former CEO of Oceanic Bank in Nigeria. Prior to August 2009, Mrs. Ibru had been the Chief Executive Officer and Managing Director at Nigeria’s Oceanic Bank International Plc since 1997. Cecilia Ibru, at sixty three years of age, was regarded as the First Lady of banking in Nigeria since she was the first female leader to raise her bank’s equity to N25bn, (approx $203m in 2010), the first female to head the 5th largest bank and the 9th largest company quoted on the Nigerian Stock Exchange and in the year 2000, the first female CEO to post over N1bn profit ($8m in 2010 value terms) in a financial statement.
Her sterling career came to a less than illustrious end in August 2009, when the Nigerian Central Bank Governor Lamido Sanusi fired the CEOs of five of the country’s largest banks, including Mrs Ibru, for massive irregularities in corporate governance and lending. On the 7th of October 2010, a Federal High Court in Lagos sentenced Mrs Ibru to 18 months imprisonment without an option of fine for abuse of office and mismanagement of depositors’ funds. Mrs Ibru was also ordered to forfeit assets worth N191 billion ($1.5bn) comprising of 94 prime properties across the world including the United States of America, Dubai and Nigeria to the Assets Management Corporation of Nigeria.
It’s useful to put context to what was going on in the Nigerian banking sector at the time. In 2005 the Central Bank of Nigeria initiated one of the most ambitious regulatory policies to date: an increase in the capital base of banks from 2 billion Naira (about US$ 12.5 million at the time) to 25 billion Naira (US$156 million) in order to improve their competitiveness in the international market. This led to a consolidation in the banking sector from roughly over 80 banks to just 24 banks. The global financial crisis of 2008 impacted the Nigerian economy hard, as international investors pulled out of the stock exchange to plug in gaps resulting from losses in other developed markets. By pulling out of the markets, local investors in the Nigerian stock market were left holding shares that had significantly lost value due to the fire sale activities of international investors, a fact that exposed the vulnerability of how those local investors bought the shares in the first place: through shaky, unsecured loans from a few unscrupulous banks. Nigeria subsequently suffered from a financial crisis of its own. Governor Lamido Sanusi, in a February 2010 speech at the Convocation Ceremony of the University of Kano, gave a bare knuckled synopsis of what went wrong: “The huge surge in capital availability occurred during the time when corporate governance standards at banks were extremely weak. In fact, failure in corporate governance at banks was indeed a principal factor contributing to the financial crisis. Consolidation created bigger banks but failed to overcome the fundamental weaknesses in corporate governance in many of these banks. It was well known in the industry that since consolidation, some banks were engaging in unethical and potentially fraudulent business practices and the scope and depth of these activities were documented in recent CBN examinations.
Governance malpractice within banks, unchecked at consolidation, became a way of life in large parts of the sector, enriching a few at the expense of many depositors and investors. Corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management. In addition, the audit process at all banks appeared not to have taken fully into account the rapid deterioration of the economy and hence of the need for aggressive provisioning against risk assets.
As banks grew in size and complexity, bank boards often did not fulfil their function and were lulled into a sense of well-being by the apparent year-over- year growth in assets and profits. In hindsight, boards and executive management in some major banks were not equipped to run their institutions. The bank chairman/CEO often had an overbearing influence on the board, and some boards lacked independence; directors often failed to make meaningful contributions to safeguard the growth and development of the bank and had weak ethical standards; the board committees were also often ineffective or dormant.
CEOs set up Special Purpose Vehicles to lend money to themselves for stock price manipulation or the purchase of estates all over the world. One bank borrowed money and purchased private jets which we later discovered were registered in the name of the CEO’s son. 30% of the share capital of Intercontinental bank was purchased with customer deposits. Afribank used depositors’ funds to purchase 80% of its IPO. It paid N25 per share when the shares were trading at N11 on the NSE and these shares later collapsed to under N3. The CEO of Oceanic bank controlled over 35% of the bank through SPVs borrowing customer deposits. The collapse of the capital market wiped out these customer deposits amounting to hundreds of billions of naira. The Central Bank had a process of capital verification at the beginning of consolidation to avoid bubble capital. For some unexplained reason, this process was stopped. As a result, we have now discovered that in many cases consolidation was a sham and the banks never raised the capital they claimed they did.”
Subsequent Central Bank of Nigeria Governors, following Sanusi’s tough stance, have done a lot to restore the confidence in the banking sector. It is both noteworthy and admirable that Sanusi took a view of full disclosure of massive fraud in the industry rather than endorse the cover up tendencies of his predecessors thereby receiving international acclaim for his willingness to drag Nigeria’s financial industry through the mud in order to restore sanity, stability and much needed confidence.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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That used to be a bank over there

[vc_row][vc_column width=”2/3″][vc_column_text]A woman visits a fortuneteller who tells her, “Prepare yourself to be a widow. Your husband will die a violent and horrible death this year.”

Visibly shaken, the woman takes a few deep breaths, steadies her voice and asks, “Will I be acquitted?”

In the last couple of weeks, I’ve been focusing my column on disruption and its effect on society. This is for no other reason than I have been assailed with data, real and anecdotal, on the same. So it is with great interest that I continue to write about the death of banking, as we know it. This is not because I am a sadistic fortuneteller, but because of the fact that banks are caught between heavy financial regulation on the one side and nimble fintech innovation, bereft of legacy issues plus clunky physical infrastructure on the other. Charity (not her real name) is a specialist, providing specialized advice to a wide range of clients since 2013. Her clients pay her using cash or Mpesa. Due to the runaway success of her product, she began to consider expanding her business. Coincidentally, KopoKopo approached her early 2015 to advance her funds based on her Mpesa payment receipts. A little about KopoKopo first: This fintech acts as an intermediary to help streamline payment collection for businesses using the Mpesa platform. It works for SMEs that have got multiple sales points as it consolidates the payments and gives a platform to enable the business to bank their collections. It provides data analytics to help the business owner identify sale trends, peaks and troughs and average transaction sizes. It also provides the client a web based, secure interface that permits not only the monitoring of customer payment collections, but enables payments to suppliers using EFT or Mpesa as well. To quote Charity: “In mid 2014, KopoKopo launched “Grow Cash Advance” for their clients. When I clicked on it, it said I qualified for an advance of a certain amount. They had prequalified me based on my till turnover. Several clicks later and I had my first advance. You choose the amount you want and what percentage of till inflows then can take to pay themselves back – up to a maximum of 50% of inflows, which matches the highest amount you are eligible for. A commission is worked into the total amount payable.” By this time, Charity had my rapt attention as I mulled over the intelligent use of data analytics to anticipate and pre qualify client needs. She continued. “Terms and conditions are just one click and then a day later you receive the advance in your till and can then transfer the funds to your main bank account. No other requirements. This year, they introduced a new requirement for a board resolution and ID copies of the company directors.” Alright then, Know Your Customer documentation check as well as legal appropriateness for borrowing done. Tick! She went on. “Once you have drawn down you can choose to repay the loan from the balance in your till or repay faster by upping the percentage they retain from 50% all the way to 99%. Once you pay back, they refresh your new limit based on the turnover in your repayment period. And so on and so forth.” Charity has accessed Kshs 5 million since the product started, an amount she says that her bank “scoffed at” following her request. Charity’s needs have been met, without her ever asking. Someone (or something) analyzed her turnover and predicted her needs for borrowing and her capacity to repay, for a business that had been in existence for two years!

Which is why I was tickled pink when I received my weekly article that I subscribe to from the McKinsey & Company website. The article, dated February 2016, is titled “The Future of Bank Risk Management” and articulates 5 future proof initiatives for banks to build the essential components of a high performing risk function in the year 2025. I won’t highlight all of them, just the first two that say: “1. Digitize core processes. By 2025, the risk function will have minimized manual interventions. Modeling, simplification, standardization and automation will take their place, reducing non-financial risk and lowering operating expenses. To that end, the function should push to digitize core risk processes such as credit application and underwriting by approaching business lines with suggestions rather than waiting for the businesses to come to them.” Cough, cough. Charity’s example above is dated 2015. Not 2025. Just in case you missed it. The second McKinsey future proof initiative states thus: “2. Experiment with advanced analytics and machine learning. Risk functions should experiment more with analytics, and particularly machine learning to enhance the accuracy of their predictive models.” Again, Charity’s example above refers. Data analytics helped to provide the pre-qualification for her loan. In 2015, not 2025. Remember I did start by saying that banks do have legacy systems and clunky infrastructure. As do their advisers. If banks wait until 2025 to do this, they will be dead in the water and cremated in the kiln.

At the danger of repeating what I wrote last week, banking compliance is horrendously expensive. And the Basel 3 rules only seek to tighten capital and liquidity based ratios following the basket case of bank balance sheet inadequacies that surfaced after the global financial crisis of 2008. Granted that the implementation of Basel 3 has been pushed 3 times from 2013, to 2018 to 2019, it only gives rise to fintechs to increase their scope of lending beyond just small businesses to medium and large corporates. The cost and administration of borrowing will significantly grow globally in line with the increased capital and liquidity requirements that will accrue for banks once Basel 3 is implemented. Can banking truly survive this regulatory and fintech onslaught? Fintechs may be the black widow that kill it.

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Banks are the new slaves of technology

[vc_row][vc_column width=”2/3″][vc_column_text]$300 billion. Let me translate that into Kenya Shillings. Roughly, Kshs 30 trillion. Now let me put that into perspective. The Kenyan Government budget for the current financial year 2015/2016 is Kshs 2.1 trillion. So about 15 times that number. What is this $300 billion I’m going on and on about? That is the size of penalties that had been levied since 2010 to global financial institutions by June 2015 as reported by the Financial Times. These included fines, settlements and provisions for various levels of misconduct some of which is related to the global financial crisis of 2008. The culprits read like a who’s who on the red carpet to punitive pain: Bank of America, JP Morgan Chase, Standard Chartered, Citigroup, Barclays, Deutsche Bank, HSBC, BNP Paribas and on and on.

And the natural reaction for all these institutions is to tighten controls, seal loopholes, grow the compliance function and generally create enough bottlenecks internally to ensure regulatory compliance. The winners: audit and compliance teams who rule the roost over every single non-compliant new customer onboarding and new product approval process. The losers: the concept of the big, global monstrosity bank that straddles continents like a financial ash cloud. Compliance is expensive. Non-compliance is astronomically expensive. So it was with great interest that I listened to a talk by a renowned futurist called Neil Jacobson last week.

Neil paints a bleak future for the traditional global bank citing six reasons why there is a perfect storm in the global financial industry. First off, there is trust crisis. Even with pedigree board members, highly experienced (and paid) executives in management as well as world class operating systems and processes, many banks clearly can’t get the back end right. The chase for profit trumped controls many times. Secondly he cites the security and regulatory firestorm. I don’t need to harp on it as the number is clear: $300 billion and counting. Regulators are licking their chomps at the highly lucrative knuckle rapping that they have been undertaking. If nothing else, it’s a back alley way to raising more taxes. Thirdly is a technology tsunami. You don’t have to throw a stone very far today before it lands on a code writer, developing one app or the other as there are so many financial technology companies (fintechs) willing to throw money to anyone who comes up with the best app to help provide access to credit or money transfer. The classic thing is this: with the Internet, it doesn’t matter if that developer is sitting in a bedsitter in Kayole or a one bedroom flat in Silicon Valley. The one with the best solution wins. Visit iHub on Ngong road and see what I’m talking about. Facebook, as a matter of fact, is already running app competitions in Kenya. The demonetization of transactions such as matatu fare, paying for food at a restaurant, receiving payment for supplying milk or vegetables is very quickly democratizing the role of money movement beyond the traditional banking space. And banks are too clunky and too heavily regulated to make the quick changes that fintechs are able to exploit. Which brings me to the fourth reason for the perfect storm: an explosion of new, different and rude competitors who are not members of the “old boys club” (which requires academic and professional pedigree) and are alternative thinkers. At this point Neil introduced the audience to the acronym GAFA -which acronym derisively originates from French media – that stands for Google, Apple, Facebook and Amazon. None of which, with the exception of Apple, existed twenty five years ago and together virtually own the technology space. Three of these powerhouses got together in November 2015 under the auspices of “Financial Innovation Now”. Together with Intuit and PayPal, the other three giants Amazon, Apple and Google put together the coalition to act as a lobby that would help policy makers in Washington D.C. to understand the role of financial innovation in creating a modern financial system that is more secure, accessible and affordable. This is where it gets interesting as they twist the knife into the back of traditional banks, “Financial Innovation Now wants policymakers to understand how new technologies can help solve today’s policy challenges.” In other words, we need lawmakers not to be bottlenecks as we help sort out critical voter issues like access to financial tools and services as well as helping voters to save money and lower costs. Win-win for everyone, except the banks.

Once lawmakers start to understand the benefits of low cost, secure financial solutions that do not require deposit taking mechanisms, it is likely that they will apply a much lower prism of regulatory restrictions that are currently straitjacketing the financial industry. You don’t have to go far: look at the Mpesa functionality and the strict segregation of Mpesa funds from Safaricom deposits which was the regulatory compromise for accepting the service in the first place. Neil’s fifth reason for the financial perfect storm is that pressure from customers, staff, regulators and all stakeholders is growing. And his final reason was the ultimate challenge for all businesses beyond the financial industry: Customers are changing. A study presented at Europe’s Finovate 2015 showed that 30% of today’s workforce is made up of millenials, 85% of who want banking to be disrupted. Have you seen those young people whose eyes are constantly glued to their devices and would rather starve than not have data bundles? The solution is hand held and your solution had better dovetail into their solution.

Closer home, the impact may be less harsh. For now. But our homegrown financial institutions are morphing into regional powerhouses and it won’t be long before a few float to the top of the pan-African heap. The successful ones will be the ones that grow their customer base on the back of technological innovation rather than bricks and mortar. To quote Larry Page, one of the founders of Google: Companies fail because they miss the future.

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Greek Crisis Explained

Once upon a time, there lived a government that ruled a country called Kulahappy. Kulahappy’s government had no problem spending money, actually lots of it. You see, in the government’s mind, the people had to be taken care of and it instituted a fairly generous public pension and healthcare system. The public pension system was open to all working citizens of the country and productive citizens were allowed to take early retirement and jump into the merry pension bandwagon. The people were very happy, especially since the government of Kulahappy was not in the habit of taxing them very much. Everything was humming along very well until a global financial crisis occurred.

Suddenly Kulahappy and other countries had difficulties borrowing money in the international markets as everyone turned off the lending taps while trying to assess who was a good or bad credit. Kulahappy’s government then decided to let out a secret that it had been hiding for several years: they had a massive budget deficit and were spending way faster than they were able to collect in taxes. It was so large that they couldn’t possibly fund it by issuing more government bonds in the domestic market. They needed external help. But international private lenders had had enough of Kulahappy’s antics and were struggling to sell off the existing government bonds faster than you could say Athens. With no takers, Kulahappy had to turn to the Union of neighboring countries with its hat in hand and ask for help.

The Union rapped Kulahappy’s delinquent knuckles very hard and said they would only lend if Kulahappy started taxing its citizens more and cut down on its public spending. What? Kulahappy was being asked to act like a grown up and it didn’t like this one bit. Its back was against a wall and, with its piddling options, started making pension and healthcare cuts while slowly trying to increase the tax brackets. The Union released the funds, 107 billion units of relief, which was the biggest debt-restructuring program in the history of the world and life went on. But the citizens were not a happy lot at all. Pension cuts led to social unrest while the underlying economic factors of production were not improving, in fact the economy contracted by 25% over the next four years. Youth unemployment began to rise, there were more poor people on the streets and before you could say Tsipras is your daddy, the government was thrown out and a new one was voted in.

The new government was made up bad boys. These boys were so tough that they told the Union exactly where it could go and stuff its face with German sausage. You see, the new boys had managed to convince the electorate that the Union-inspired austerity measures were bringing the Kulahappyians to their non-taxpaying knees and that the Union was the cause of all their problems. The new government told the Union that, quite frankly, it wanted a 50% debt write off and it wanted any discussions about budget cuts thrown into the pit latrine of history. Did I mention that the debt that was being requested to be written off was the biggest emergency loan given to a country in the history of mankind? These boys were gamblers par excellence, taking a bet that it would be suicidal for other Union members to try and force a Kulahappy exit. In their rose tinted glasses view, they were all joined at the hip for better or for worse, in richness and in poverty and only a communal seppuku ceremony would separate all parties concerned. The disgraced Kulahappyians and their thoroughly annoyed Union cousins lived unhappily ever after.

The Greeks are having a tad bit of “kula happy” fever. They have the European Union members over a barrel as everyone probably wants them out but the legal process for exiting the monetary union was not put in place as it was never envisaged that a free-wheeling, sun kissed, tax avoiding member would fall into the kind of trouble that Greece has done. The Greeks are better suited as African Union members since we can totally relate to their habits of runaway spending and tough talking governments.

But their mastery of political doublespeak is what should make them card carrying members of Africa’s political elite. Prime Minister Tsipras and his team have some serious gumption to stand in front of its lenders, the International Monetary Fund and flip them a proverbial finger by saying they have to go to the people and get their mandate as to whether to implement the austerity program. Tsipras has put the monkey on the back of his austerity weary citizens: “Say no to the austerity, so that we can bring the lenders back to the negotiating table on the basis that the people have spoken. Say yes, and we’re up the creek without a paddle. Chaos panic and disorder will become our mainstay and, by the way, I’m out of here because I can’t see a way out of the quandary this government is in.”

Good people, we need to keep a careful watch over what’s going on in Greece. We can’t shrug our shoulders every time the media highlights yet another profligate abuse of financial discretion by the Senate or the National Assembly. Each and every penny of government spending comes from us, at least that which is not funded by borrowing. If ever the music stops, and the government is unable to finance its budget deficit externally for whatever reason (political turmoil, default of existing debt etc.) the trickle down effect of a government that stops spending are too frightening to dream about. The economic contagion of a broke government inevitably leads to social unrest in an already fragmented country. But I guess no one wants to hear doomsday news like that. Neither did the Greeks five years ago.

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Twitter: @carolmusyoka