19th August 2007

_________Launch of the 15th Edition of the State of_________ Corruption Report

‘Of illegally binding Irrevocable Promissory Notes and Judicial Graft’

The Centre for Law and Research International (CLARION), in conjunction with the Mars Group and other members operating under the Name and Shame Corruption Networks (NASCON) Campaign, cordially takes this opportunity to launch Issue No. 15 of the Kenya State of Corruption Report. The report, which is a product of sustained research and investigations, is composed of two parts, the first part addresses the matter of the Anglo-Leasing corruption titled: Illegally Binding: the Missing Anglo-Leasing Promissory Notes while the second part contains CLARION’s perspective and analysis of corruption in the judiciary and the efforts made by the NARC administration to combat judicial corruption. Based on these investigations, CLARION makes the following observations to the Kenyan public.

Of Promissory Notes

First, the NARC administration under President Mwai Kibaki has continued to conduct illegal financial transactions with fictitious and unscrupulous local and international actors to the detriment of the local taxpayer and Kenya’s economy.

Second, the law relating to Bills of Exchange, in this matter Promissory Notes, has invariably been misapplied by corrupt civil servants and political leaders to indebt and deprive Kenya’s hard-earned revenue. In particular, Government officials have negatively exploited at least three aspects of Promissory Notes.

One such characteristic with Promissory Notes is that the valuable consideration is always presumed. Once endorsed and delivered to the payee or bearer, it becomes unconditional. Thus, a Promissory Note is valid even though the consideration or value for which it is issued may not have occurred. In this respect, Promissory Notes provide a useful format for ensuring future payments and guaranteeing that such payments will be forthcoming to the payee or bearer. In the case of Kenya Government, this characteristic has been exploited for corrupt purposes since Government officials have utilized it to transfer value falsely, the prevention of which is almost impossible.

The second nature of Promissory Notes now employed in corruption by Government officials is that Promissory Notes may be transferred from one person to another by endorsement or by delivery thus enabling the transferee to sue thereon in their own name. This averts the erstwhile doctrine of privity of contract. As such, Promissory Notes can be exchanged in the open market. They can be bought or sold as security or indeed transferred for other services. Such transfers do not require the permission of or indeed even notification to the issuer of the Promissory Note. A Promissory Note may, therefore, be presented to the issuer by a third party who is completely unknown to the issuer. There is neither limit on the number of times the Promissory Note may be traded nor to whom it may be traded with. In the case of Kenya Government, Government-issued Promissory Notes have kept changing hands from company to another further concealing the identity of the corrupt partners and complicating the equation further.

A further aspect of Promissory Notes is that a transferee who takes a Promissory Note in good faith and for value obtains a good title to it regardless of any defects in the title of the transferor. Provided that the transferee acquires the Promissory Note in good faith and for valuable consideration, he will get good title regardless of any previous fraud, duress or illegality. It is this aspect of Promissory Notes which makes them such powerful instruments for commercial transactions. The buyer of a Promissory Note on the open market knows that they will get good title and need not investigate the root of the Promissory Note thus providing a highly efficient means of doing business. The Bills of Exchange Act at Section 7(3) provides that a Promissory Note will be treated as being payable to the bearer even if such a bearer is a non-existing or fictitious entity. In other words, the Government having issued such a Promissory Note to a fictitious company will still be liable to pay the value therein to whoever holds the Promissory Note on the date that it falls due. The only way that this may be prevented is by proving that the bearer of the Promissory Note was aware of the fraud or fictitious nature of the original bearer. Any attempt by the Government to unilaterally default on payment will have wide repercussions. Corrupt Government officials have exploited this aspect to guarantee payment to their accomplices even if these are fictitious.

Third, the Government is currently highly indebted and enormous amounts of money have been and continue to be paid for mostly non-existent or incomplete projects. CLARION, in particular, decries the following projects:

Kenya Prisons Telecommunications Project Phase I (1997): The Minister for Finance, Mr. Amos Kimunya, has stated in Parliament that this project was completed and fully paid for.  The Controller and Auditor General reports that it was worth US$ 24.6 million. The question that remains to be answered is whether the Kenya Prisons department has a digital multi-channel security telecommunications network.

Kenya Police Airwing I (1998):  In 1998, the Kenya Police bought 4 Russian Helicopters (Mi. 17) from a company called Sound Day Corporation for US$ 36million. The money for this purchase was supposedly advanced to the Government by a financier called Apex Finance Corporation. The tragedy is that both Sound Day Corporation and Apex Finance Corporation are listed by the Controller and Auditor General as non-existent. Each of the helicopters cost US$ 9 million – overpriced according to the Controller and Auditor General. Kenya should have paid no more that US$ 5 million for each helicopter. Scrutiny of the External Public Debt Register (EPDR), where all external loans are recorded shows that the debt of US$ 36 million has been paid in full.  However, what Mr. Kimunya does not tell Kenyans is that the creditor listed in the External Public Debt Register is not Apex Finance. In fact, the debt was owed to a bank called J.S Schroder. The non-existent financier (Sound Day) that allegedly lent Kenya the money to buy these helicopters discounted the debt and handed over the irrevocable Promissory Notes to J.S. Schroder which collected the monies.  

Export Lease Purchase of Leyland Vehicles for the Police (2001):  Mr.  Kimunya says the project was cancelled and the irrevocable Promissory Notes issued were returned together with a refund of the commitment fee of Kshs. 72.8 million.  The Controller and Auditor General’s report highlights something else that is significant: That after looking at all the project and contractual documentation he dryly notes “amount paid not known.” Kenyans would like to find out how much of the US$ 90 million “loan” was actually advanced to Kenya by the stated financier Silverson Establishment, in return for which the Promissory Notes recalled by Mr. Kimunya is were issued.

Forensic Science Laboratory (2001): This is one of the better known fictitious credits and projects. Irrevocable Promissory Notes worth US$ 54.56 million were issued to the Anglo Leasing and Finance Limited in August 2001. The Controller and Auditor General notes that despite no work having been done, the Government dutifully repaid the loan to the tune of Kshs. 375.285 million.  The latter amount is claimed to have been returned in June 2004 and paid into the mysterious Special Miscellaneous Account of the Treasury. 

Kenya Prisons Security and Telecommunications Project II (2002): According to the Controller and Auditor General’s report of April 2006, the lender of money for this project is called LBA Systems. A search of the best known LBA Systems on the internet finds a company in Scotland which specializes in the manufacture of light weight body armour (bullet proof vests). Though it lists the Kenya Police as a client, it does not claim to have worked with the Kenya Prisons. Also unusual is the fact that this particular contract is to be found in the External Public Debt Register as of June 30th 2006, even though Mr. Kimunya claims that there is no exposure. In total, as of the end of June 2006, the Government had repaid Kshs. 572.832 million to LBA Systems. The main question perhaps is: Was there ever a loan? More alarming is the fact that as at the end of June 2006, the External Public Debt Register still recorded that Kenya owed LBA Systems Kshs. 2.556 billion.

Kenya Police Equipment Supply Contract Addendum II (2202): Sound Day Corporation features again as the alleged lender of US$ 30 million to the Government of Kenya to buy “various security equipments.” As noted above, the Controller and Auditor General considers Sound Day Corporation to be a ghost company. Today, Sound Day Corporation has been replaced as the creditor entered into the External Public Debt Register by Midland Bank to whom Kshs. 14,857 million is still owed.  Obviously, the Promissory Notes issued to Sound Day Corporation have been discounted (sold) to Midland Bank, which has now approached the Government as a legitimate creditor. Midland Bank was not privy to the contract between the Government and Sound Day Corporation. Mr. Kimunya has stated that these payments were stopped in 2005. Yet the External Public Debt Register records post suspension payments during the year 2006!

Outstanding as of:

30.06.2003:  Kshs. 1,112,500,500
30.06.2004:  Kshs. 298,173,000
30.06.2005:  Kshs. 15,324,946
30.06.2006:  Kshs.  14,857,268

The question that begs for address is: Is there any proof that Sound Day Corporation actually lent the Government any money to justify continued service of the “loan”?

Meteorological Department Early Warning System (2002): Again LBA Systems is recorded in this contract as having lent the Government US$ 35 million to set up a radar and nationwide early warning system. The loan is now held, according to the External Public Debt Register, by the reputable Midland HSBC Bank. It is clear from this register that payments on this finance contract have been made during 2005/6. Thus, the amount owed as of June 30th 2006 was Kshs. 1.35 billion down from the previous year’s amount owed of Kshs. 1.4 billion as of June 30th 2005. 

Outstanding as of:

30.06.2003:  Kshs. 1,752,188,288
30.06.2004:  Kshs. 1,461,047,700
30.06.2005:  Kshs. 1,400,277,900
30.06.2006:  Kshs.  1,357,545,000

Kenya Police Equipment Supply Addendum III (2002): Again, Sound Day Corporation (non-existent by all accounts including that of the Controller and Auditor General’s) purportedly lent the Government of Kenya US$ 31.846 million to buy security equipment for the Kenya Police from Sound Day Corporation (presumably the same non-existent company). As of 30th June 2006, the Government of Kenya’s own Expenditure Public Debt Register records show that the debt is held by a bank called J.S. Schroder. Obviously, it has bought the Promissory Notes or debt instruments that were given to Sound Day Corporation by Mr. Kumunya’s predecessors at the Ministry of Finance in May 2002.  Mr. Kimunya says there were no Promissory Notes issued with respect to this project and that it is a carry-over from the previous Government. This does not excuse the Government for making payments as hereunder listed – even after the so called suspension in 2005:

Outstanding as of:

30.06.2003:  Kshs. 1.522,574,436
30.062004:   Kshs.  743,166,385
30.06.2005:  Kshs. 712,255,640
30.06.2006:  Kshs.  690,519,420

Postal Corporation of Kenya (2002): These contracts involved the use of financing through a “deferred payment agreement” and also the cost of the equipment bought was less than half of the cost of installation. Furthermore, a financier, First Mercantile of Switzerland, who allegedly loaned the Government of Kenya US$ 11.8 million to implement this project, does not exist according to the Controller and Auditor General.  Yet the Government had repaid as at June 30th 2005, a principal of Kshs. 533,666,452 and interest of Kshs. 3.9 million.  What Kenyans would like to know is whether a non-existent financier lend the Government any money at all?  Additionally, who is now holding this debt?

Police Helicopters Maintenance Contract (2002): Recalling that 4 Russian Mi. 17 helicopters were bought in 1998, this contract involves the same two non-existent financiers and suppliers (sound Day Corporation and Apex Finance Corporation respectively). This time around Apex Finance purportedly lent the Government US$ 12.8 million (one third the price of the 4 helicopters which were by then grounded). It should also be recalled that the Controller and Auditor General had stated that each helicopter was over-priced by a minimum of US$ 4 million each (Kshs 280 million each)! Put simply, the Government of Kenya borrowed money from a fake financier to buy over-priced helicopters from a fake company and three years later allegedly borrowed money (equivalent to one third of what it borrowed to buy the helicopters) to pay a fictitious company to service and maintain the same Kenya Police helicopters, which reportedly no longer fly. As at June 30th 2006, this debt was held by J.S. Schroder Bank to the tune of Kshs. 346.9 million. In 2003, the outstanding amount to J.S. Schroder was Kshs. 695.68 million.  The Kibaki Government paid about Kshs. 350 million shillings on a bogus contract to a bank that is not a signatory to any of these contracts.

Project Nexus (2002): This contract is in litigation in Europe and has led to the attachment of the Kenya Embassy building and other real property and assets. The debt is held by a French bank, Credit Agricole, and not Nedermar Technologies (a company incorporated in a Caribbean island) which was contracted to build and finance the construction of the Karen Department of Defence Centre.  The litigation in Europe has been brought by Nedermar who was the contractor but no longer holds the debt which still stands due to the tune of Kshs. 2.35 billion as of June 30th 2006.

Navy Ship (2003): The Government, in July 2003, entered into an agreement with Euromarine Industries to build and deliver an oceanographic vessel to the Kenya Navy; simultaneously it entered into financing agreements with two Spanish financiers (Navigia Capital International Limited and Impressa de Financas). At present the debt is held by another party namely, Credit Lyonnaise Bank who holds the debt and instruments given to the first three companies that signed contracts with the Government in July 2003. The Government has been repaying these debts as hereunder.

Outstanding as of:

30.06.2003:  Kshs. 0
30.06.2004:  Kshs.  4,057,624,812
30.06.2005:  Kshs.  3,889,071,954
30.06.2006:  Kshs.  3,968,876,331

According to the External Public Debt Register, the terms of the loan which Kenyans will now pay are as follows:  “Loan of euro 51, 997,000 co-financed by Euro Marine Impressa and Navigia repayable commencing July 31st 2003 and ending 31st October 2010.”  Kenyans now owe Kshs. 3,968 billion for this ship.

Kenya Police Law and Order (E-Cops) Contract (2003):  Infotalent, ostensibly from Switzerland, refunded over Kshs. 500 million to the Government in June 2004.  It remains a mystery who is behind this refund as the Controller and Auditor General stated the company was not registered in Switzerland. The refund is said to have come fro J.S. Schroder Bank.

The Passport Contract (2003): The supplier and financier for this contract are both non-existent. The question that begs answers is: Who refunded Kshs. 93 million in June 2004, just as investigations by John Githongo and the Kenya Anti-Corruption Commission were started? There is no evidence that the Government received the stated loan amount of Euro 31.89 million and it is safe to state that the debt was fictitious and was created only to obtain or issue 23 Promissory Notes with fraudulent intent.

Police Equipment Modernization Contract (2003):  Mr. Kimunya told Parliament on May 2nd that this project was cancelled and that no refund was needed. This is, in fact, not true. The Controller and Auditor General clearly states that by June 30th 2005, the Government had paid Kshs. 115,407,160 to non-existent entities namely Sound Day Corporation and Apex Finance Corporation.

Flagstaff NSIS Counter Terrorism Centre (2004): A google internet search does not find any financier called Ciara Systems in Colombus Ohio USA which allegedly lent the Government US$ 41.8million to build a new counter terrorism facility for the National Security Intelligence Service [NSIS]. However, the debt has appeared on Kenya’s External Public Debt Register in the name of Credit Lyonnaise Americas showing the amounts outstanding as follows:

Outstanding as of:

30.06.2003:  Kshs. 0
30.06.2004:  Kshs. 3,323,635,040
30.06.2005:  Kshs.  3,185,394,080
30.06.2006:  Kshs.  3,088,184,000

 

Of the judiciary

Fourth, the jurisdiction of the Ringera Committee to investigate judges was grounded on doubtful legal ground. The provisions of Section 62 Sub-Sections (3) to (5) of the Constitution are clear that investigations into the conduct or otherwise of a judge are only to be conducted by a tribunal appointed by the President in the terms stipulated in sub-Section 5(10).

Fifth, the question of removal of a judge is one to be determined by the President on advice of the tribunal. The Chief Justice or the Attorney General or anybody else had no legal authority whatsoever to bulldoze the judges to resign as it happened during the radical surgery. In any event, having regard to the manner in which the issue was handled, one cannot help but conclude that the fate of these judges had been predetermined and all that was needed was the President’s men to do the footwork. The situation is not made better by the fact that no criminal or other proceedings were preferred on these judges despite the fact that the allegations leveled against them included corruption, obstruction of justice and sexual misconduct all of which are offences known to law.

Sixth, under Section 62(5) of the Constitution, it is solely the Chief Justice who determines whether there is any prima facie case against a particular judge that would warrant the establishment of a tribunal to consider his/her removal.

Seventh, the length of time that these tribunals seem to have taken and the fact that they are yet to find any of the suspended judges guilty reveals a deep structural problem of the whole system that needs to be fixed.

Eight, the radical surgery violated the principle of due process guaranteed by the Constitution as well as other established international standards. The implicated judicial officers were not afforded an opportunity to respond to the allegations of corruption.  Furthermore, the publication of their names in the media and the issuance of ultimatums by both the Chief Justice and the Attorney General were grossly un-procedural and violated basic procedural guarantees laid down for such a process. The Constitution guarantees the right to a fair trial and in particular the right to be presumed innocent until proved guilty by a competent court, the right to be informed of the allegations within a reasonable time as well as the right to defend oneself against such allegations.

Ninth, the radical surgery violated the principle that judges should enjoy a security of tenure. In deed, in cases like Kenya where the Executive has the exclusive control over the appointment of judges; judges should be protected form manipulation by ensuring that their term is secured. In the case of the radical surgery, the security of tenure of judges was violated and the independence of the entire judiciary was undermined. This violation of the security of tenure for the judges engendered a low sense of morale and insecurity and would definitely affect the manner in which judges perform their judicial functions.

Tenth, during the currency of the radical surgery (that is the period between June and December 2003), the President appointed a total of twenty six (26) new judges, twenty (20) of them in an acting capacity. Although these judges were later confirmed, it does not negate the fact that their appointment was so suspiciously coincidental with the radical surgery that one cannot help but feel that the whole process was stage managed to give advantage to a group of people. This fact is made worse by the fact that one of the members of the tribunal investigating the Court of Appeal judges was also appointed an acting judge, thereby presenting a possibility of conflict of interest. 

Eleventh, effective consultations with the legal fraternity as well as other interest groups did not take place prior to the appointment of these judges. In the end, the names of the persons to be appointed seemed to have emanated and been decided upon by the Chief Justice and the then Minister for Justice. Further, the role the Judicial Service Commission seemed to have been obscured during the process.

Twelfth, judicial systems and processes in Kenya are outdated and largely mechanical in nature. This creates opportunities for rent seeking in the corridors of justice.

 

Recommendations

Following the above observations, CLARION recommends that the measures mentioned below be implemented:

1. First and foremost, there is need for the creation of an enabling environment which makes it difficult for corruption to thrive. This could be done by facilitating access to information and a general culture of transparency. Secrecy of procurement contracts should be kept to the absolute minimum necessary for national security to reduce opportunities for malfeasance.

 

1. There is need for Parliament to take a greater role in the budgeting process to try and stem out corruption by the Executive.

1. The Fiscal Management Bill presently before Parliament and which contains measures that are certain to radically strengthen parliamentary oversight and scrutiny and increase Executive accountability should be passed as a matter of urgency. 

 

1. A primary step in addressing corruption in the Judiciary would be to establish a transparent and effective public complaints system. In this way, members of the public would have opportunity to have their complaints noted and redressed on a continuous basis. The public complaints system should be backed by an appropriate disciplinary mechanism for judges and other judicial officers. 

1. There is need for strengthening of the Judicial Service Commission.

 

1. Efforts ought to be made to ensure the implementation of the various reports of Judicial Integrity Committees

1. There is need to augment the role of the media and civil society in judicial accountability.

 

1. There is need to establish performance evaluation systems.

1. There is need for the establishment and enforcement of ethical judicial standards.

 

1. In addition to embracing administrative reforms as suggested by various integrity committees, the Kenya Judiciary should link this up with meritocracy. New laws, ethical codes, training, improved court administration and automation can contribute to an affective and clean system that completely eliminates opportunities for rent seeking behaviour.

1. Finally, judicial anti-corruption reforms cannot succeed unless they are undertaken in the context of the wider political reforms. There is need to step up the fight against corruption in other areas of the society including the private sector. A zero tolerance to corruption culture would be the most effective tool for anticorruption reforms in the Judiciary.

 

 

Signed by

 

Geoffrey Birundu
Coordinator
Name and Shame Corruption Networks (NASCON) Campaign

On Behalf of

The Center for Law and Research International (CLARION)