Tag Archives: sudhir

Mwenda wrong on Crane Bank. Facts speak for themselves – Part 1

“I know of no time in human history where ignorance was better than knowledge,” once stated Neil DeGrasse Tyson, a highly respected American astrophysicist.

Following a trending, emotionally charged writeup on the closure of Crane Bank and allegations of how the Bank of Uganda raped the business, I thought it wise as usual to dig deeper into the facts and find out whether the motor mouthed (or motor fingered) journalist had got his facts right.

We always learn from history hence the need to take a trip into our banking history as a nation to establish how previous incidents of bank closures occured. The most prominent ones that come to mind are those of the International Credit Bank (ICB), Greenland Bank and the Cooperative Bank.

In 1998, when Bank of Uganda detected that something was amiss at Greenland Bank, an agreement was signed in September of that year with the management to undertake corrective measures. However, the financial condition not only worsened but led to a BoU takeover two months later in November. When this intervention occurred, BoU unearthed various assets and liabilities that had not been disclosed on the company’s balance sheet. This led the central bank to put the bank under Statutory Management in January 1999 only to eventually close it by April 1999.

During the same period, the Cooperative bank that had a long history of financial distress was revealed as insolvent after a BoU onsite examination in September 1998. Due to the serious management and governance problems unearthed, the bank was closed by May 1999.

For the case of ICB and Greenland bank, there is evidence that their balance sheet information while they were still operational grossly underestimated their insolvency. Not only were substantial assets and liabilities concealed from auditors and bank regulators by the management, there were also inadequacies in; accounting procedures which were very poor; shortcomings in documentation of loans, loan securities, guarantees among others with some documents entirely missing in some cases andlow value loan securities. (We shall later see the similarity with Crane Bank)

Central bank interventions are some of the trickiest decisions to make. This is largely attributed to the uncertainty about the true financial condition of the distressed bank considering that there are usually cases of deliberate misreporting. One may argue that the distressed bank be given time to sort out its mess but we have already seen that even when the likes of Greenland Bank were given that opportunity, it was a one way drive to hell. Taking on the hat of a regulator, one realises that allowing a distressed bank to continue operating under its very management creates incentives for the owners to take excessive risk with the depositors’ money since they have little or no capital left in the business and are hoping to restore the value of their capital quickly or even opting to deliberately loot what is left of the bank. Crane Bank (CBL), by offering Fixed Deposit accounts at interest rates of 20% is testimony to this. They had reached panic mode and were now morphing into a gambling arrangement or ponzi scheme to put it appropriately. Interest rate offers by banks are guided by among others the Central Bank rate as defined at a given point in time. At 20%, the CBL offer was way above what the average sensible for profit banking institution was offering.

After sanctioning a Price Waterhouse Coopers forensic audit on CBL, BoU was able to smell the coffee. Project Nyonyi (the code name of the study) revealed the following wrongdoings;

Shareholding irregularities.A one Mr Rasiklal Kantaria, a prominent Kenyan banker is said to have owned 47% of the bank through White Sapphire Ltd. The ownership of White Sapphire was eventually traced back to Mr Sudhir Ruparelia and his cohorts. This effectively abrogates some sections of the Financial Institutions Act, 2004.

Section 18(1) states; Except as expressly provided in this Act, no individual or body corporate controlled by one individual; shall own or acquire more than fourty nine percent of the shares of a financial institution.

The audit report recommended that Mr Sudhir Ruparelia be charged for Conspiracy to Defraud under Section 309 of the Penal Code Act that states; Any person who conspires with another by deceit or any fraudulent means to affect the market price of anything publicly sold, or to defraud the public or any person, whether a particular person or not, or to extort any property from any person, commits a misdemeanour and is liable to imprisonment for three years.

Section 324 of the Penal Code act further pins Mr Sudhir Ruparelia when it states; Any person who, being a promoter, director, officer or auditor of a corporation or company, either existing or intended to be formed, makes, circulates or publishes, or concurs in making, circulating or publishing, any written statement or account which, in any material particular, is to his or her knowledge false, with intent thereby to effect any of the following purposes — to deceive or to defraud any member, shareholder or creditor of the corporation or company, whether a particular person or not; to induce any person, whether a particular person or not, to become a member of, or to entrust or advance any property to, the corporation or company, or to enter into any security for its benefit, commits a felony and is liable to imprisonment for seven years.

Section 47 of the Financial Institutions Act clearly stipulates action that should be taken against anyone falsifying documents and gives a penalty of 5 years and/or a fine.

The transfer of CBL branch ownership to Meera Investment Limited (MIL). MIL is a company directly associated with Mr Sudhir Ruparelia. Not only did he undervalue the land on which the branches are located in order to benefit unfairly as the recipient, but he also took over the assets on that land whose construction had been fully paid for by CBL. MIL went ahead to sign new agreements with CBL that had very unfair terms which saw the bank lose Millions of dollars from the time this transfer was illicitly effected.

Accounting misstatements and the 2014 overstatement of fixed assets. There is evidence of falsification of bank statements to inflate profit going as far back as 2009, the sneaking back of off book liabilities in 2013 as well as a fictitious assets recognised by overstating the balances. A number of actions were identified in this regard. These acts are a grim reminder of what Greenland Bank and ICB did nearly two decades ago. This definitely is a breach of the Anti Corruption Act, 2009 Sections 20 and 23.

Section 20: (1) Any person employed by the Government, a bank, a credit institution, an insurance company or a public body, who in the performance of his or her duties , does any act knowing or having reason to believe that the act or omission will cause financial loss to the Government, bank, credit institution commits an offence and is liable on conviction to a term of imprisonment not exceeding fourteen years or a fine not exceeding three hundred and thirty six currency points or both.

Section 23: Any person, who being a clerk or servant, or being employed or acting in the capacity of a clerk or servant, does any of the following acts with intent to defraud—(a) destroys, alters, mutilates or falsifies any book, document, valuable security or account which belongs to or is in the possession of his or her employer, or has been received by him or her on account of his or her employer, or entry in that book, document or account, or is privy to any such act;(b) makes, or is privy to making, any false entry in any book, document or account; or (c) omits or is privy to omitting, any material particular from any such book, document or account, commits an offense and is liable on conviction to a term of imprisonment not exceeding seven years or a fine not exceeding one hundred and sixty eight currency points or both.

Cash extractions through fraudulent IT payments. CBL made fictitious payments to Technology Associates, a local IT firm purportedly for licenses to acquire Core Banking Software which was never procured in reality. There were inflated payments for annual software license fees where a payment of US$ 37,000 was inflated to US$ 1.7M.

The penal code adequately deals with this and punishes those involved in this kind of falsification under Section 309 on Conspiracy to Defraud.

Loans and Balances. Loans were issued without following proper internal credit policies and insufficient security (Sounds familiar with the Greenland Bank case in the 90s). As of October 2016, UGX 63.1Bn had not been disclosed as insider lending out of the UGX 63.6B identified as having been lent to related companies. 49% of all written off loans were traced to three borrowers and no serious effort was made to recover them. Evidence available links them to Mr. Sudhir Ruparelia.

After reviewing the irregularities exposed by Project Nyonyi, it’s time to assess the financial impact they had on the bank;

The 2012 transfer of branches: There is already a loss of UGX 3.9 Billion in ground rent as well as a recurring UGX 1 Billion annually. The 46 parcels of land transferred to Meera Investments were in most locations far more valuable than the listed cost of UGX 100 Million. A case in point are the parcels on Kampala Road opposite the City Square, Kireka, Ndeeba, Ntinda, Mukono among others. The cost of the buildings constructed onto the land is another big loss to CBL. In this regard, one can comfortably state that the loss cumulatively comes to not less than UGX 50 Billion.

Accounting misstatements. The accounting misstatements dealing with the Nostro account led to a loss of at least UGX 188 Billion.

Cash extraction through fraudulent IT payments in 2013 alone cost UGX 59.6 Billion. One wonders how much was siphoned out this way in previous years.

Loans and advances led to a total combined possible loss of UGX 424 Billion

On Corporate governance, CBL registered a very disappointing performance as indicated in the PWC report. It is even a shame that it took so long for the Central Bank to act upon matters which were already of public knowledge. I mean, who never knew that Mr Sudhir Ruparelia personally approved numerous loan dispensations?

So, who raped Crane Bank?

In Part 2, I share with you a point by point rebuttal of Mwenda’s seemingly unresearched allegations. Read on.

James Wire is a Small Business and Technology Consultant based in Kampala, Uganda

Follow @wirejames on Twitter.

Email lunghabo [at] gmail [dot] com

Additional research source: Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures by Martin Brownbridge

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