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A history of state capture in Kenya: The Goldenberg scandal

Thursday November 21 2019

A revolution is the sum of mobs who have taken law and justice into their own hands and reached a critical mass. Revolutionaries dream and desire a better future; a future that cannot be reached in any other way than the destruction of the status quo. Revolutions usually exterminate everything they hate and love without distinction.

The biggest trigger of modern revolutions is the manipulation and perversion of justice systems; law and the courts. Revolutions are brewed in the courts; yes, in courts where systems malfunction and justice becomes inaccessible.

This manipulation is legalised through state capture and only a strong political will and timely professional advice and knowhow can prevent it.

State capture has already featured in previous articles. It is now time to retrace our steps and look into one of the most devastating yet significant landmarks in the institutionalisation of grand corruption in Kenya: The Goldenberg Scandal.

There had been corruption in Kenya before Goldenberg. But Goldenberg weakened and subverted the rule of law in unseen ways. It transformed the nature of corruption politics in the country. It made legal institutions malleable. It subverted permeable institutions that allowed for institutional theft at a magnitude never seen before.

When the powerful are not accountable

In a wonderful paper titled “Abuse of Power and Corruption in Kenya: Will the New Constitution Enhance Government Accountability?” Prof Migai Akech argues that corruption in the Kenyan government is largely an institutional problem, rather than a cultural one. He attributes corruption to the predominance of arbitrary power, especially in the statutory (as opposed to constitutional) order.

Prof Akech finds that the rule of law is often waylaid when the statutory order grants executive, legislative, and judicial actors’ broad powers without establishing effective procedural mechanisms to circumscribe their exercise. In the absence of effective regulation, law then serves as an instrument for the abuse of power and corruption.

A weak and incorrigible rule of law system serves to perpetuate porous institutions that are critical to enabling the type of grand siphoning of national resources that have defined post-1992 Kenyan corruption scandals.

Ever since Goldenberg, mega theft has been facilitated by broad executive powers in the approval process mixed with no accountability and practical impunity.

Goldenberg – The beginnings

The infamous Goldenberg tale begins with the economic conundrum that the country found itself in in 1991 and 1992. The turn of the decade was characterised by fierce calls for multi-party democracy, championed by the opposition and the civil society, in which foreign actors, notably the US Government, played a part.

The government crackdowns, political repression, poor export performance, and donor withdrawal led to an economic downturn that necessitated the government to take measures to alleviate the situation.

The government decided to alleviate the situation by increasing hard currency reserves in the country. This would be done through an export promotion scheme in which exporters who deposited their hard currency earnings would not only receive the Kenyan shilling equivalent of their deposits but also an additional 20 percent ‘export incentive’.

Goldenberg International, owned jointly by Kamlesh Pattni and James Kanyotu, approached the government on October 8, 1990 with three demands, according to the Report of the Judicial Commission of Inquiry into the Goldenberg Affair:

1. Sole rights to export diamond jewellery and gold out of Kenya for a period of five years with the option of an extra five years;

2. A 35 percent Export Compensation on diamond jewellery and gold exports to effectively compete with smugglers of those commodities; and

3. Because it hoped to handle cash transactions of at least Sh200,000 monthly, it needed to own a financial company to reduce security risks and provide an efficient working environment. The financial company would also reduce their operating expenses. The proposed name was Goldenberg Finance Ltd.

All demands were approved. The Minister of Finance denied the request for a creation of a monopoly but the Ministry approved a de facto monopoly through administrative and licensing measures.

Manipulation of law in creation of Goldenberg International Limited (GIL); an arbitrary reinstitution of the Export Compensation scheme

In the budget speech of 1982/1983, the then Minister of Finance Arthur Magugu suspended the Export Compensation Scheme arguing that it had been used as a fraudulent instrument against the government by some exporters. Mr Magugu also said it had had very limited impact on export promotion.

The suspension was for a limited time. On June 7, 1990, the late George Saitoti, then Minister of Finance, reinstituted the defunct scheme and expanded it. His plans added an import duty exemption scheme. He proposed that the export compensation scheme would act as a stimulus for export promotion.

The Report of the Judicial Commission of Inquiry into the Goldenberg Affair noted that there was no explanation given by Mr Saitoti on the change in government policy. The Commission was also unable to find measures the government had taken to address Mr Magugu’s observations in the intervening period.

It is appalling that the making of such government policy in Kenya was an entirely arbitrary process. Parliament did not question the minister’s decision despite the concerns raised seven years earlier. An acquiescing parliament and an all too powerful Finance minister enabled the reinstitution of a grand corruption scheme.

One can properly deduce from Magugu’s observations that if the country was spared from Goldenberg, the Export Scheme would still have served as a conduit for corrupt operations as the loopholes observed almost a decade before had not been addressed.

Gold as eligible goods under the Local Manufacturer’s (Export Compensation Act, Act No. 9 of 1974)

The Act being the statutory vehicle that implemented the export promotion scheme, defined eligible goods as those originating from Kenya. Compensation for gold and precious stones could only be paid when the goods were physically examined and certified prior to exportation.

The additional requirement for precious stones was added because the country had no known gold reserves. Gold and diamond jewellery were on the list of eligible goods but gold, whether wrought or unrefined, was not included.

A blatantly arbitrary and non-procedural approval for Goldenberg

There was blatant disregard for procedure by those approving Goldenberg. Charles Mbindyo, who was then the Permanent Secretary in the Ministry of Finance testified before the Commission of Inquiry that he had at first received an application from Goldenberg International’s directors, Pattni and Kanyotu, misaddressed to him as Permanent Secretary for Treasury.

After informing Mr Saitoti, he referred the application to the Financial Secretary, Mr Ali. [KSA1] However, before Mr Ali had evaluated the earlier application to Mr Mbindyo, the application was approved by the government.

The application was never properly processed though Mr Saitoti stated that he evaluated Goldenberg’s application in pursuance of government policy on the matter.

The extent of discretionary power wielded by Mr Saitoti in this matter is unsettling. The arbitrariness of his decision without the input of Ministry officials illustrates the subversion of the rule of law to appease not only Goldenberg International but also, other unacknowledged interests.

An illegal 15 percent export compensation increase for GIL

By agreeing to Goldenberg’s application, Mr Saitoti granted the company a higher export compensatory percentage than that given under the Local Manufactures (Export Compensation Act, Act No. 9 of 1974). Compensatory payment was at a rate fixed by Parliament but the Finance Minister had power to vary by order.

The 15 percent additional payment yielded two vital effects. It was designed to enshrine Goldenberg as a monopoly for the purpose of dissuading the smugglers from hopping onto the export compensation scheme and also acted as an illegal subsidy (according to GATT rules), as the Judicial Commission was told.

The Department of Customs and Excise found it difficult to accommodate the extra l5 percent of Export Compensation in claims made to it by Goldenberg International pursuant to the Minister's approval of their proposal as the Act only allowed for 20 percent. Customs then proposed an amendment to the first schedule of the Act in order to accommodate the Minister’s proposal.

In response to Customs, the Attorney General, via A.H. Buluma, the Chief Parliamentary Counsel in the Attorney-General's office, advised against payment of the 15 percent additional Export Compensation unless and until Parliament amended the Act on the issue. He also advised against the notion that the additional l5 percent Export Compensation could be paid on "ex gratia" basis while awaiting the amendment of the Local Manufacturer's (Export Compensation) Act. This matter was communicated by a letter from the AG to the Department of Customs and Excise through the Chief Parliamentary Counsel.

To circumvent the apparent illegality, Mr Mbindyo wrote to Mr Saitoti, requesting his approval for the extra 15 percent payment each time Goldenberg produced evidence of exportation of the above two items and full remittance of their Foreign Exchange earned before the 35 percent export compensation was legalised. The Commission of Inquiry had access to all these letters.

A decision was made by Mr Saitoti to allow the additional 15 percent to be voted as public expenditure to be approved and appropriated through Parliament. This was done between 199l/l992 and 1992/1993 financial years when the 15 percent refund was discontinued.

The Judicial Inquiry Report found that Mr Saitoti approved the increase even though he had quite properly sought and obtained a technical evaluation from Prof TCI Ryan to the effect that if implemented the proposal would amount to a devaluation of the Kenya Shilling.

The deliberate actions to grant Goldenberg the additional 15 percent Export Compensation against the advice of experts and the Attorney General through the Chief Parliamentary Counsel illustrates the extent to which the law was ignored, at least, or subverted, at worst, to accommodate GIL.

The creation of a monopoly

The Restrictive Practices Monopolies and Price Control Act (Cap 504) was enacted in 1989. It was brought into force by Mr Saitoti. Its purpose was to encourage competition in the economy by prohibiting restrictive trade practices, controlling monopolies, concentrations of economic power and prices, and for connected purposes.

The Act did not grant the Minister the power to enable monopolies but mandated him to ensure that government policy encouraged competition. A decision was taken to deny licenses to others such as Aurum Limited which had held an export license for gold and diamonds in 1986. Moreover, the additional 15 percent compensation served to subsidise GIL.

The measures taken to enshrine GIL as a monopoly were in direct violation of the Restrictive Practices Act. The relevant parties’ actions were no longer merely ultra vires of legal power granted through broadly drafted statutes, they were downright illegal.

Law abiding grand theft

Mr George Saitoti, in an effort to clear his name filed a Judicial Review matter, Republic v The Judicial Commission of Inquiry into the Goldenberg Affair & 2 others Ex-parte George Saitoti [2006] eKLR, where his name was expunged in various paragraphs of the Report.

His strongest argument was that he had acted within his statutorily granted power. The key question is ‘why did the law grant a minister such broad discretionary powers?’ No wonder the courts could not do much.

The law had been perverted and manipulated to turn grand theft into a legal business with a veneer of genuine concern for economic progress. The Goldenberg scam brought Kenya’s economy to its knees. Without such state capture, the subsequent illegal acts that characterised the process leading to Goldenberg licensing in a most brazen contrivance to defraud the public would probably never have materialised.

Each of the steps in the licensing and approval process of Goldenberg International Limited was marred by irregularity or illegality or both. Goldenberg, understood as a watershed moment in corruption politics in Kenya, would have been unfathomable, had it not been for the deliberate weakening of the rule of law to fashion a porous system that could be used to siphon off vast public resources. The law was bent to favour the pillage of public coffers, to allow law-abiding grand theft.

The total payout by the Central Bank of Kenya during Goldenberg was 13.5 billion shillings (13,525,311,000), according to the Judicial Commission of Inquiry. GIL itself received Sh5.8 billion as part of ‘export compensation’. The rest fell into a few dozen pockets. It was too well orchestrated and distributed for anyone to end in jail.

The whole scandal, at its peak, amounted to over 10 percent of the annual GDP. Considering that Kenya’s GDP in 2018 was around Sh8.9 trillion ($89 billion), ten percent of that would be Sh890 billion. It practically deflated the whole country.

This article is part of a long series of articles on the rule of law in the context of politics and ethics. The series is researched and co-authored by:

• Prof Luis Franceschi, founding dean of Strathmore Law School and Visiting Fellow, University of Oxford
• Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates
• Kasyoka Mutunga, Research Associate at ALN Anjarwalla & Khanna, Advocates
• Wandia Musyimi, Research Associate ALN Anjarwalla & Khanna, Advocates