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Bankers Duty of Care Just Got Tougher

Earlier this year, my 18 year old daughter received a phone call from a stranger claiming he was calling from Safaricom customer care. He spoke authoritatively but quite rudely, demanding for her Mpesa pin number and other personal details. Being quite fresh out of the school conditioning mental mindset of respect for authority, the young lass fell for the rogue’s demands. Well, he wasn’t quite so successful in his shenanigans as he found the princely sum of Kes 17.40 in her mpesa account and, by good fortune, she had not signed up for the mobile loan program Mshwari and Fuliza of which he also demanded to know what her limits were. She was shaken to the core but managed to get a very understanding genuine Safaricom Care representative who helped her block her account and put in the necessary digital guard rails shortly thereafter. The rogue slithered off to make other calls to her more discerning close relatives whose numbers he, by some dint of nothing other than black magic, had managed to get from her favorites contact list.  

 I was moved to recall this story after receiving a fairly informative newsletter from Anjarwalla & Khanna Advocates, updating clients regarding a landmark ruling against the banking industry that has been given by the Court of Appeal in the United Kingdom.  The newsletter highlights the case  between Fiona Lorraine Phillipp versus Barclays Bank UK PLC. Fiona and her husband fell victim to a fraud in March 2018, transferring their life savings amounting to GBP 700,000, (approximately Kes 105 million) that were held in Barclays Bank, into a foreign account held in the United Arab Emirates (UAE). This was despite a police officer warning Fiona about the potential for fraud but she thought, based on what the fraudster had communicated to her, that she was moving the funds into safety to protect them from fraud. 

 After the funds went into that inglorious sinkhole that is known as “Lord help me what the **** have I done?”, Fiona brought a claim against Barclays Bank for breach of its duty of care in effecting the transfer of funds. Her argument was that there were various features of the payment she made, as well as of her situation, that should have alerted an ordinary prudent bank acting with reasonable skill and care to a possibility of fraudulent activity. The bank should have delayed the transfers and investigated the matter before effecting the transfer. I will save you the legalese behind this argument and fast forward to the fact that the High Court agreed with the bank’s position that it did not owe a duty of care. The bank argued that Fiona and her husband had been so thoroughly deceived that they were lying to the bank about the purpose of the transfers and that even if the bank had exercised reasonable care, she would still have issued instructions for the transfer.   

In other words, this couple were beyond redemption “na shauri yao”! Fiona went to the Court of Appeal, who agreed with her position that an earlier legal precedent called the “Quincecare Duty” applied. The bank had argued that the Quincecare duty was limited to cases in which there is a fraud by an agent acting for the customer as that meant that there was no authorization by the customer for the transfer. Since Fiona had herself authorized the transfer, the duty did not apply. The Court of Appeal disagreed with the lower court, extending the application of the Quincecare duty to find that a relevant duty of care could arise in the case of a customer instructing their bank to make a payment when that customer is the victim of the kind of fraud Fiona had undergone.  

 Should banks in Kenya be worried? Yes, as our legal writers opine that our courts have used UK precedents as “persuasive authority” in Kenyan cases. This makes for a more expensive risk framework for ensuring an even higher transaction monitoring of large value based payments. Furthermore, the Kenyan banking customer needs to be much more amenable to those “annoying calls” from the bank following up to validate of a banking transaction. Your signature on the origination documents is simply not enough. Particularly now that the above mentioned case established that despite receipt of a warning sign from the police, the court still found in her favor. But as bank customers are getting requisite judicial protection, the next battlefront for protection that should give our regulators serious thought is the nefarious group of mobile money transfer fraudsters. That will indeed be a tough nut to crack.  

 [email protected] 

Twitter: @carolmusyoka

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Governance lessons from Kenya Pipeline

[vc_row][vc_column][vc_column_text]Being a director on a company board is not and should never be for the faint hearted. An article in last Wednesday’s edition of the Business Daily caught my corporate governance side eye. The story titled “Ochuodho, 3 others to face charges over Kshs 827m fraud” highlighted a court case that has dragged for years with the protagonists avoiding criminal conviction for what, on the face of it, appears to be an ordinary financing transaction. Kenya Pipeline Company had allegedly paid a third party company a large amount of money to enable the third party company make payments on its behalf to its international creditors. The former managing director Shem Ochuodho, and the third party company’s executive directors were in trouble for getting the Attorney General, finance and energy ministries to approve a transaction, only to execute an entirely different transaction.

Within the story is a hyperlink to an older story dated January 10th, 2010 where a magistrate’s court issued a summons to the same Shem Ochuodho and the former board chairman Maurice Dantas to come to the anti-corruption court to answer to fraud charges over the same case. There are a number of corporate governance issues that this old Kenya Pipeline Company (KPC) case bring to fore. To begin with, a transaction was approved by the KPC board (since borrowing has to be typically approved by an institution’s board) but the board chairman (who is responsible for oversight and monitoring via the board) was on the fraud hook together with the managing director (who is responsible for execution). The lesson here: a board of directors is never immune from the actions of management. Secondly, the necessary external approvals seem to have been obtained from the relevant government officials, but management went ahead to allegedly execute a completely different transaction. The lesson here: if your mother sends you to the kiosk to buy flour but you choose to buy Patco sweets instead, you’ll be in very deep trouble.

Based on the newspaper articles however, it would appear that the board chairman’s case seems to have dissolved somewhere along the way but should not distract from the fact that sitting on a board, and keeping a keen eye on what management is asking you to approve, is imperative.

But the second issue is of more relevance. What the third party was supposed to do was to pay the external creditors on behalf of KPC and sit on the debt for as long as it would contractually take for KPC to pay the third party back. Why would this deal make sense to the ordinary man sitting in the Rongai matatu? If the deal enabled KPC to postpone its payments to the external creditors past their due date, it would ease the pressure on KPC’s cashflows thereby enabling it to apply that cash to more pressing current commitments. Secondly, if the deal enabled KPC to convert a foreign currency commitment into a long-term local currency one, it would assist KPC to mitigate against future currency depreciation which would come into play if the Kenya shilling slid south against the US dollar making the foreign currency loan that much more expensive to pay off. (Assuming, of course, that KPC’s revenue model was based in shillings, because if its revenues were in US dollars then there would be a natural hedge).

The story begs the question about what transpired at the KPC board meeting that approved the transaction back in the early years of this century. Did they ask the following questions: Does this third party have the capacity to undertake this transaction on its own balance sheet? No? Then where is it getting the money to fund the transaction? From a bank, you say? So why don’t we just go to that bank directly ourselves? At this point a fairly flushed managing director would be waxing lyrical about how the third party company has a better relationship with the bank and can negotiate a far better deal. Director X, who’s known not to suffer fools gladly, should have raised an eyebrow and asked: “But isn’t the bank that is financing this third-party-knight-in-shining-armour…..our very own bank?”Clearly this didn’t happen, leading to the current court cases. Directors on company boards, kaa chonjo (stay alert)!

[email protected]
Twitter:Twitter: @carolmusyoka[/vc_column_text][/vc_column][/vc_row]

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Banking Crisis in Africa

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago, I quoted extensively from a speech given by the former Nigerian Central Bank Governor, Lamido Sanusi, in February 2010 where he was explaining, with painful honesty what had gone wrong in the Nigerian banking industry following the global financial crisis which impacted the Nigerian economy hard. He could have been describing the Kenyan industry in many ways. Do we have a problem in Africa? Do we have a problem distinguishing customer deposits, from revenue? And further, distinguishing revenue from profits? The fact is that banks have only one product: cold, hard cash. That’s all that they deal with, and therefore a great responsibility is placed upon them as that cash, with the exception of the capital that shareholders put in, is largely from our pockets. Our sweat, blood and tears in the form of salaries, business revenues and savings is what we place in the hands of total strangers, believing with every fibre of our native beings that they will make it available to us as and when we need it. We trust that the management of these banks will make the distinction between what belongs to us and what belongs to them. A distinction that is clearly difficult to make once a rogue management crosses to the dark side. Sanusi explains the Nigerian experience thus:
“The original title of this paper was “Transformative Disruption: Relocating theNigerian Banking Crisis from the Economic to the Social.” The choice of title
was informed by a strong desire to articulate a correct narrative, in an
environment in which we are confronted by a multi-vocal opportunism
determined to subvert history through the fabrication of false narratives.
Among these, is the assertion that the actions taken by the Central bank are
part of a grandiose “northern” agenda against southern Nigeria. Or that
perhaps it is an “Islamic” agenda being pushed by a Muslim fundamentalist.
There are also other subtler and more sophisticated-albeit just as
opportunistic-narratives. For example the new claim by public officers and
politicians that there is really no corruption in the public service, that
politicians are not corrupt, and that the real corruption is only in banks.
What we have done in the Central bank, is to fire the opening salvo in what could potentially be a revolutionary battle against the nexus of money and influence that has held this country to ransom for decades. This would not be the first time banks
collapse nor are brought to the brink in our national history. And it will certainly
not be the last. But this time there is a difference.
In previous crises we said some banks had failed a passive and complicit
phrase that masked a gross irresponsibility and crass insensitivity. “The bankhas failed”.

……And that is exactly what happens when we refer to “failed banks” as if the
bank itself, some impersonal structure made up of branches and computers,
somehow collapsed on its own. By using-or abusing- the term “failed bank” we
are able to mask what is almost always a monumental fraud. But it is a
deliberate act of prestidigitation. Thousands of poor people, who have kept their life savings in the bank, lose it. Children’s school fees, savings for retirement, medical bills, gone into thin air. And who is to blame? No one really. Or maybe the poor people who were foolish enough to keep their money in a bank that “failed”.
How many people have died of heart attacks due to this tragedy? How many
honest businessmen have been rendered bankrupt? How many people have
committed suicide? How many have died because they were unable to pay
medical bills as their monies were trapped in these institutions? How many
children have dropped out of school? We do not know. Because we live in a
society in which they do not matter. They are anonymous. They are poor.
What we do know is that we have today, among those parading themselves
as role models in society, people who profited from failed banks. Owners and
managers who go on to become governors and senators. Bad debtors who
are multi- billionaires, having taken the money belonging to those poor dead
souls and not paid back.
So here is the reality. The owners and managers of banks, the rich borrowers
and their clients in the political establishment are one and the same class of
people protecting their interest, and trampling underneath their feet the
interest of the poor with impunity.
So this time we turned the tables and said “enough is enough”. The banks did
not fail. They were destroyed and brought to their knees by acts committed by
identifiable people. Do not say that government money has been
stolen. Name the thief. And so, in keeping with that tradition, we did not say
that banks had failed. We named human beings-the management that stole
money in the name of borrowing, the gamblers that took depositors funds to
speculate on the stock market and manipulate share prices, the billionaires
and captains of industry whose wealth actually was money belonging to the
poor which they “borrowed” and refused to pay back.
Fortunately, the President, Umaru Musa Yar’Adua, understood from the first
day that this was an ideological choice we had to make. We could side with
the rich and powerful, and say the banks had failed. Or we could side with the
poor and save the banks but go after the criminals. And we chose the latter.”

That KCB has swung in to provide much needed stability in the wake of the Chase Bank fiasco is nothing short of a miracle pill engineered by Kenya’s Central Bank Governor. But this is not the time to exhale from a dodged bullet. There’s blood in the water and significant public goodwill to see the elite “financial accounting wizards” get what they deserve. A nice room with enough light that will allow them far more time to sit and reflect on the distinction between deposits, revenues and profits.

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

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Board Directors Do Not Have X-Ray Vision

[vc_row][vc_column width=”2/3″][vc_column_text]Have you visited ABC Place on Waiyaki Way? If you happen to be driving there you first arrive at a poorly designed ticketing booth, maneuvering your car to an impossible angle that will enable the driver’s window to align with the knob you need to press in order for a parking ticket to emerge. Having just missed scraping the ticketing booth with the front bumper, you lurch forward and find polite but firm security guards who do a car search. These astute and fairly discerning gentlemen request you to open your door, open all the passenger doors, throw a bleary eye into the glove compartment and subject the boot of your car to a physical search. Once done, they will cheerily wave you off. Wait. If you have a handbag, or any other bag in your car, they will not subject it to an internal search since handbags in cars purportedly do not present clear and present danger. So the other day I take a taxi to ABC Place and as we are approaching the vehicular entrance via the deceleration lane, the taxi driver politely asks if I can disembark before he drives in. Why, I ask? He says that if he drives me inside he will have to pay for parking even for the 2 minutes it would take for me to haul myself out. Being of reasonable extraction, I obliged him and stepped out and watched him fishtail out of there in relief. I walked in as if to enter and those usually polite-because-I’m-in-a-car security guards stopped short of baring their teeth at me. I was informed in no uncertain terms that pedestrians have their own entrance, round the back towards the parking exit. I tottered all the way back towards said entrance and had to go through a turnstile, handbag search and security black magic wand over my body. I learnt a valuable lesson that day. Security threats via individuals are to be found more from pedestrians with handbags than occupants of motor vehicles.

Why do I narrate this long and unnecessary soliloquy? Boards of Directors are often managed in a similar manner. I have avoided commenting on the Imperial Bank saga largely because it is difficult to fathom and erroneous to paint a broad brush of culpability on the entire board of directors. It is always an enormous reputational risk that individuals assume when agreeing to join any governance board as they are lending their name to the purported governance mechanisms that the organization subscribes to. To the outsider, a board denotes oversight and accountability and a safe pair of hands that stakeholders have entrusted to protect the organization from unfettered management excesses. But the directors as a collective are in exactly the same position as the security guards at ABC Place. They open doors and check the boot and glove compartment, seeing as much as is physically possible with the naked eye.

The pedestrian body search is done at board committee meetings. Greater detail is discussed and more time is spent with management in understanding the scope of financial and operational issues that the organization encounters. But it is critical to note that the operating system of any institution, just like the engine of a car, can be compromised and it would take a forensic investigation or Oketch your car mechanic to open it up and figure out why that catalytic converter light keeps coming on when your driving at 87 km/h. The management of any organization is the actual owner of the business while shareholders are just owners of capital. The management can deliver or destroy value. Management can aim to execute with integrity but still have a few bad apples that sing from a fraudulent hymn sheet against which tight internal controls and compliance should ideally act as a gatekeeper.

Board directors see what the owners (read management) of the car want them to see. A clean boot, an empty glove compartment and a sparkling interior. The engine may be compromised but the car is running smoothly, or so they think. No smoking gun, no grenades. As a director, you only see what management wants you to see. You can ask questions – very hard questions- but if a (manipulated) system generates legitimate reports that are used to guide board oversight then raking directors over hot coals for poor oversight is placing them in a difficult position. Directors spend less than 3 days a quarter providing oversight on a company’s operations. They do not have access to any of the operating systems, nor should they have. They do not have signing powers over any of the bank accounts, nor should they have. But they do carry a heavy responsibility to ask the right questions and demand audits or deeper external investigation where they get a sense that something is not right.

Now if those that are charged with undertaking those external audits are themselves compromised, then the board’s goose is collectively cooked. I have had the pleasure to professionally engage with audit firms during various board assignments. The role of the auditor is to review the processes with which the financial accounts have been generated, to test the assumptions being made by management as well as to interrogate the inputs into the system and the outputs therefrom. If that system has been compromised at the highest level, you’d need the x-ray vision that our security guards are purported to have to assess handbags in cars. A lot of responsibility is placed on audit firms to be all seeing and all knowing. Collectively heaping blame on auditors whose mandate cannot cover running end-to-end tests of all transactions passed is a flawed abrogation of duty. Whose duty is it then? Is it the board, which only comes in four times a year to provide oversight? Is it the shareholders, who have delegated oversight authority to the board and only come together during the annual general meeting? Or is it management who, in actual truth, are the true owners of the business?

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