Corporate News
By VICTOR JUMA, vjuma@ke.nationmedia.com
In Summary
- World Bank audit found that RVR executives bribed public officials, manipulated accounts and created convoluted ownership and operational structures with the aim of defrauding lenders, including IFC.
- The bank has written to RVR and those adversely named asking them to show cause why sanctions should not be imposed against them.
Top Rift Valley Railway (RVR) managers conspired to
defraud lenders and the Kenya Revenue Authority (KRA) millions of
shillings and left the company in a worse financial position, the World
Bank says in an ethics audit report that warns of possible sanctions on
the rail firm.
ownership and operational structures with the aim of defrauding lenders, including IFC.
The acts were meant to conceal the company’s true
financial position, which had deteriorated because of its inability to
generate cash even as its
liabilities mounted.
liabilities mounted.
The World Bank’s Integrity Vice President’s (INT)
office, which conducted the audit also found that RVR principals impeded
the review through delays, failing to avail documents and asking
employees not to co-operate with the bank’s staff.
“In the course of INT’s administrative inquiry
and inspection, INT found evidence that it believes is sufficient to
conclude that it is more likely than not that RVR Group and Messrs
Karim Sadek, Hassan Massoud, Carlos Andrade, Bong Yoon, Sammy Gachuhi,
Fabio Steffler engaged in corrupt, fraudulent, collusive and
obstructive practices in the procurement, financing and import of 20
units GE B23-7 refurbished locomotives,” INT’s Operations Manager David
Fielder concluded after the audit.
The ethics audit report, whose contents were first
leaked to Ugandan press but has now spilled over to Kenya, shows that
the World Bank has since written to RVR and those adversely named asking
them to show cause why sanctions should not be imposed against them.
They have also been given an option of settling the
matter with the World Bank. Imposition of sanctions means the
multilateral lender could bar the railway operator and the individuals
from participating in any new World Bank-financed projects.
Other international financial institutions that
co-operate with the World Bank, could also adopt similar measures
against the parties.
Mr Sadek is a director of RVR and an executive of
Qalaa Holdings – the majority shareholder in the railway firm -- which
is currently looking for a buyer of its 80 per cent stake in the
railway operator.
Mr Massoud is a director of RVR and previously held
executive roles at Qalaa, a Cairo-based investment firm, while Mr
Andrade, a Brazilian, is a former RVR CEO, who left the company in March
last year.
Mr Yoon is RVR’s chief financial officer while Mr Gachuhi is the concession general manager.
Mr Steffler is a former chief operating officer of
the company. The World Bank assessment found that the individuals
inflated the cost of the locomotives, bribed KRA officials to avoid
paying VAT amounting to Sh377.4 million on the engines and misled IFC on
the true status of RVR’s operations.
When RVR applied for the $22 million IFC loan, it
signed an agreement stating that the funds would be used to buy the 20
locomotives from US-based National Railway Equipment Company (NREC) in a
straightforward transaction.
But the World Bank found that by the time the loan
was disbursed on July 1, 2014, the executives had created an intricate
web of companies that left RVR as a mere lessee of the locomotives
having also prepaid some Sh832 million to NREC in its original status
as a direct buyer.
The change of plans was prompted by a February 20, 2014
decision by the concession supervisor Kenya Railways to reject RVR’s
purchase price of $23.1 million (Sh2.3 billion) for the locomotives.
This meant that the engines could not be carried at
that amount in the conceded asset account (CAA), effectively barring it
from using IFC’s funds which were pegged on the locomotives being
valued at the full amount stated by RVR when it applied for the loan.
With cash from operations in short supply, RVR
decided to use a $20 million (Sh2 billion) from South Africa’s Standard
Bank that came on August 5, 2014.
To accommodate the lender’s requirements, the
railway operator created new subsidiaries to aid in structuring a
complex ownership and operational structure that ran afoul of IFC’s
credit terms and helped hide the company’s true financial position.
RVR transferred the contract to purchase the
engines to Africa Railways Logistics Limited (ARLL), which in turn
leased the locomotives to East Africa Rail Handling Logistic (EARHL).
EARHL leased the engines at a rate of $30,000 (Sh3
million) each for the first three months and $25,000 (Sh2.5 million) for
the next 81 months.
The situation was made worse by the fact that
EARHL, which is not an operating company, on August 6, 2014 “allowed”
RVR to operate the locomotives and lease those it was not using at a
rate of $35,000 (Sh3.5 million) per month.
On February 9, 2015, EARHL and ARLL amended the
lease terms effective January 1, 2015 and raised the rate to $30,000
(Sh3 million) per month for the entire 84 months.
On the same day, EARHL and RVR signed a deal to cut
the lower the monthly rate from $35,000 (Sh3.5 million) to $30,000 (Sh3
million) each as the part of the financial obfuscation.
“When making this request, RVR management already
knew that the disbursement funds would not be used to purchase the
locomotives as the contract had been transferred to ARLL on May 23,
2014,” the World Bank report says.
NREC issued invoices to ARLL and another set of
fake invoices to RVR to support the charade that railway operator was
the one buying the locomotives.
RVR also paid Freight Collect, a company owned by
its former employee Patrick Ondieki, which facilitated bribes to KRA and
Treasury officials so that the engines were not taxed VAT amounting to
$3.7 million (Sh377.4 million).
When ARLL was having difficulty paying NREC, the
principals negotiated for a delayed payment penalty of $2.4 million
(Sh244 million) but which the RVR executives padded up to $2.85 million
(Sh290 million).
They also sweetened the deal by committing RVR to buy $1 million (Sh102 million) worth of spare parts from NREC without a competitive procurement process
They also sweetened the deal by committing RVR to buy $1 million (Sh102 million) worth of spare parts from NREC without a competitive procurement process
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