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How to issue fake bonds and make millions without breaking a sweat

Tuesday January 1 2013



I had never heard about a case of fake bonds being sold in the market since the government reintroduced bond auctions in May 2002.

How does someone get to steal government bonds? In the first place, the process and conditions for opening what is known as a CDS account at the Central Bank of Kenya, without which you cannot deal in bonds, is quite onerous.

To do so, you have to physically present yourself at the Central Bank with all the directors of your company. These people will almost ask you to physically present your mother and grandfather there.

How did these crooks hope to get away with issuing fake bonds and selling them in the market knowing that at the end of the day, what is recorded in the register at the Central Bank must reconcile with details of actual receipt of cash from bond issues at the Treasury?

Before I continue ranting away, here is the background to this sensational story.

A few months ago, a very short story in this newspaper reported that a manager at the Central Bank’s National Debt Department, one Moses Wambugu Muregi, had been charged in court with stealing Sh105 million worth of government bonds.

The gravity of the matter did not register in the public domain because the reports did not give details of how the bonds were stolen. We have to wait for the full hearing of the case to appreciate what happened.

Personally, this is a case I want to follow closely because I wish to understand how somebody can actually create fake government bonds and proceed to sell them in the marketplace.

If someone can create bonds worth Sh105 million and proceed to sell them, where is the assurance that bigger amounts are not being stolen from the taxpayer in this manner?

Since most of the Anglo-Leasing scandal was about manipulating the external debt register, can we deduce from this incident that corrupt merchants have discovered how to manipulate the internal debt register to make billions of shillings?

So far, what I have gathered from anecdotal evidence and from insiders who have spoken to me under conditions of confidentiality, is that these fake bonds were created and issued through abuse of computer access rights by Central Bank insiders.

I gather that some unscrupulous staffers at the National Debt Department stole passwords belonging to their superiors to create fake government bonds worth millions of shillings. 

Apparently, at the time, the Central Bank was in the middle of migrating to a new computer system.

There had been murmurs from bond traders that the new systems were too slow in turning around and reconciling transactions.

Once the crooks created the fake bonds, they issued them and deposited them in CDS accounts belonging to third parties, who then went ahead and sold them through stockbrokers in the Nairobi Stock Exchange.

A month later, when the Central Bank was calculating and paying interest on its bond portfolio, the numbers could not reconcile. A forensic audit revealed that Sh105 million worth of bonds had been issued and sold in the market.

Fortunately, the systems for issuing and trading bonds are such that it was not going to be difficult to follow the transactions.

From the anecdotal evidence I have gathered, the Central Bank moved and froze the accounts of all intermediaries who handled the fake bonds, including the brokers, agents and commercial banks.

Nearly Sh65.5 million of the money was traced to accounts belonging to an aspiring politician who is also said to be a relative of a Central Bank staffer.

Sh40 million was traced to a CDS account of a leading bond trader who has since been blacklisted by the Capital Markets Authority.

What are the broader policy implications? We must not allow crooks to mess about with the integrity of the government bond programme. Indeed, government bonds are what built the Thika superhighway.

Perhaps it’s time we started debating whether or not to shift the responsibility of managing public debt from the Central Bank to the Treasury.