CBK loses bid to be removed from Sh4bn pyramid scheme case

The Central Bank of Kenya (CBK) has lost the first round in its bid to be expunged from a case over controversial Sh4billion claim levelled against it by victims of pyramid schemes.

The ruling by the High Court on Friday, declining to remove CBK from the case, has however bolstered the 26,249 victims whose next move will be to fight to convince the court that indeed CBK was liable and should therefore compensate them.

The victims had through lawyer Wanyiri Kihoro defended their decision to enjoin CBK saying their assertions against the regulator were based on the findings made in the Report of the Taskforce on the Pyramid Schemes presented in 2009 to the then Principal Secretary, Ministry of Cooperative Development and Marketing.

While declining the application by CBK which sought to be struck off the pyramid victims’ case, High Court Judge Isaac Lenaola said that at the hearing, the Report of the Taskforce on pyramid schemes will form a central part of the victims’ case.

“If so, the role of CBK in handling the scam will come into sharp scrutiny against its mandate in law. It has denied any mandate in that regard, a point contested by the 26,249 victims and therefore a valid issue to be tried by this court,” said Justice Lenaola.

The judge added that to remove CBK from the case at this point will certainly prejudice the victims’ case without the same being heard on its merit.

“The present case is not one where any party should be allowed to walk away from proceedings, at the interlocutory stage,” Justice Lenaola ruled.

The CBK sought to be removed from the case arguing that the pyramid schemes were neither licensed nor regulated by it and therefore it could not exercise any regulatory mandate over them.

Further, that the 26,249 victims never contacted it on any issue relating to the pyramid schemes and all evidence available points to the fact that they knew that the entities operated outside the mandate of the CBK   .

“No funds from the pyramid schemes were ever transferred to us and the fact that our Banking Fraud Investigation Department (BFID) dealt with some of the complaints received from victims of pyramid scheme scam did not mean that we were in receipt of any monies from Commercial Banks where the victims had made their deposits. The BFID in its investigations indeed confirmed that fact,” explained CBK in its application seeking to have the entire petition against it struck out.

While declining to remove CBK from the case, Mr Justice Lenaola buttressed his findings by stating that the role of the BFID will have to be addressed including its role in executing the mandate of the CBK as well as its specific role in investigations into the pyramid scheme.

“In that regard, the press statement by the CBK dated May 25, 2007 asking members of the public to report any persons soliciting funds in the name of the pyramid scheme, to the Director BFID will also demand scrutiny,” Justice Lenaola said.

The petitioners, who are members of the National Pyramid Scheme Victims Initiative (NPSVI), say most of the 257 outfits which defrauded them a total of Sh4,152,008,342 in 2006 were registered within a very short time after vetting for authenticity by the Attorney General, the Ministry of Co-operative Development and Marketing, or Ministry of Gender, Culture and Social Services.

The schemes were styled as limited liability companies, trusts, sole partnerships, businesses, welfare association, non-governmental organisations, foundations, ventures, investments, micro-finance groups, savings and credit societies among others.

"Armed with this registration, the operators of the funds opened a number of bank accounts under false pretences of paying high returns on deposits made with them. They approached the petitioners, who were misled and deposited various sums of money in a number of accounts opened in banks and financial institutions," lawyer Kihoro submitted.

He said the government officers in the said institutions and ministries, neglected their duties as public servants and exposed the petitioners to losses, when they authorised registration of the outfits, which became defunct after perpetration of the fraud.

Further, that CBK and the other state institutions committed an illegality by failing to protect and supervise the financial market and institutions resulting in massive losses to the victims during the 2005 to 2007 period.

"The fraudulent national operation was brought to an end by an order made by CBK and directed to the banks and other financial institution, that the accounts operated by the outfits be closed. This confirms the responsibility of the government institutions, in preventing what happened from the beginning," lawyer Kihoro said.

According to him, the government had also ordered that the monies held in the various bank accounts, where the victims had deposited it, be transferred to the CBK.

Given the fact that the said companies had a nationwide operation, their victims have ended up being spread in all the counties, apart from Wajir and Garissa.

They have sued the Attorney General, Principal Secretary Ministry of Co-operative Development and Marketing, the Governor Central Bank of Kenya, Principal Secretary Ministry of Finance and Principal Secretary Ministry of Internal Security and Co-Ordination of National Government.

The case will be mentioned on June 10.