What “we learn” from the Crane Bank “leaked” forensic audit

Over the weekend, a forensic audit conducted on Crane Bank by PWC leaked to the public. The forensic audit was ordered by Bank of Uganda (BoU), once it took-over operations of Crane Bank on October 20th 2016. The purpose of the audit was to establish why a bank that appeared to have been doing well – ranked number three overall – suddenly started facing liquidity issues and also accounting for 20 percent of all bad loans in the banking sector. The nature of a forensic audit is in part aimed at bringing criminal charges against the shareholders and managers. Additionally, it is also meant to be used to recover money that may have been fraudulently acquired.

  1. The report leaked

It is understood, at least from the contents of the leaked report, that Bank of Uganda (BoU) relied on this document – at least in part – to drag businessman Sudhir Ruparelia to the commercial court in order to recover Shs392bn, alleged to have been extracted from the bank. The audit has been a carefully guarded document but largely presents nothing specifically new from what was seen in the document. There has been a sort of PR battle being waged against BoU, lawyers MMAKS & AF Mpanga together with the New Vision. The “leaked” report comes just in time to indicate the suit by BoU is actually being backed by an actual forensic audit. The leak is timely. It doesn’t change the narrative against BoU but it relieves the pressure on anyone the bank regulator. This report was not meant to leak, considering the confidentiality clause inserted by PWC.

“The contents of this report may not in whole or in part, be copied, be quoted, referred to, disclosed or disseminated to any other party without our prior written consent,” the report reads.

  1. This is not the final report

The forensic audit reads as a “preliminary report.” It is dated 21st December 2016. This is not the final report as there were other findings in April 2017.

“It is imperative that the contents of this report remain strictly confidential until the recommended additional investigative steps are concluded and relevant evidence,” the report adds.

The report also points to several interviews that need to be conducted in order to make conclusions on several of the allegations made in the preliminary audit report.

 

  1. Who does it implicate?

When BoU sold some of the assets and liabilities to dfcu in January 2016, Ms. Justine Bagyenda, the Executive Director Supervision at noted that a forensic audit was being carried out by BoU in order to establish what caused the large NPL exposure and whether there was any wrongdoing. The Daily Monitor did indeed report that the former shareholders and manager would face criminal proceedings. Indeed the forensic audit confirms this.

  • Sudhir Raparelia (concealed the true shareholding of Crane Bank, irregular transfer of Crane Bank branches to Meera Investments & illegal extractions) – Notably the possible criminal charges could be embezzlement, influence peddling & nepotism among others.
  • Rasikalal Kantaria – He owns a bank in Kenya and several properties. He has several friends in the Kenyan media. He was the said majority shareholder in Crane Bank (through White Sapphire). However, the audit established that White Sapphire was actually owned by Sudhir Ruparelia. His criminal sanctions could be money laundering and embezzlement
  • R Kalan – He was MD between 2006 and 2014.
  • The entire board of directors – Joseph Biribonwa, Ajay Kumar, Vivek Sharma, Tom Mugenga, Rakesh Gupta & Jyotsna Ruparelia (for failing to do their job and making false statements). It should be noted that the board prepared the documents on the financial reports that were given to external auditors.

 

  1. AR Kalan holds an important key

In 2014, Mr. AR Kalan, the long serving Managing Director at Crane Bank left the country on extended leave to deal with a personal problem. He was expected to return and perform his duties. To indicate that he would not be returning, Crane Bank then hired the services of Mr. PK Gupta who had been the managing director Bank of Baroda Uganda. Kalan had been a close confidant of Mr. Sudhir Ruperelia, the founder and majority shareholder in Crane Bank. The reasoning that he had left on health grounds continued to elicit debate especially because he stayed away for long. In fact the belief is that his departure was due to a dispute over Shs50bn – the total none-performing loan (NPL) portfolio that the bank held in 2013 and 2014 combined.

 

Bank insiders at the time noted that some bogus companies had been created by top level management in the bank. These companies were able to access loans from the commercial bank but because they were not real with no known activity, they defaulted on the loans. The loans were written off. The insiders at the time also pointed out that it is where Kalan and the top shareholder fell-out. BoU did not come-out to state whether this was true. It only after they took-over Crane Bank operations and management in October 2016 that they seem to have seen the fraudulent activities.

 

Kalan was the architect of several of these transactions, at least according to the forensic audit. Crane Bank’s problems started to emerge once he walked away from the Crane Bank. If he can corporate with the regulators – if found – then he holds all the vital information about several transactions.

 

  1. Don’t play for too long

The forensic audit indicates that at some point Crane Bank needed to clean-up – the contents are actually true. The ongoing fraudulent activities appear to have started way back but the bank did not clean-up its act. The clean-up and improving corporate governance of the bank would have steadied the ship and eventually provide the true picture of the bank. This clean-up is noted to have started in 2013 when several loans were written off but before this could continue, AR Kalan left the bank. It is believed that he had ambitions of listing Crane Bank on the Uganda Securities Exchange.

The alleged fraudulent activities went on for too long that even if the bank was enjoying some level of “protection”, it could not go on for too long.

 

  1. Amina Hersi Moghe

She is the proprietor of Oasis Mall and Laburnum Courts. She is perhaps the most specific borrower in Crane Bank the preliminary audit appears to “implicate.” According to the report, her companies had borrowed from Crane Bank about Shs79.4bn, about 20 percent of the total capital of the bank at the time. No red flags were raised. The audit points at least six companies where she is either a director or signatory. According to the audit, Ms. Moghe was using the same securities to secure different loans in the bank and no red-flags were raised. Two companies were also able to secure loans after only less than 10 days of incorporation. The transactions of Ms. Moghe were in violation of the Financial Institutions Act (FIA) and Crane Bank officials knew about this. Considering that this is preliminary report, it points to “possible irregularities relating to Ms. Moghe’s accounts that require further investigation.

 

Recently the government is reported to have “bailed” her out by acquiring a stake worth Shs49bn from Atiak Sugar, which she owns. No due diligence report has been seen to support the government investment in the sugar factory that is even yet to start production.

 

  1. Banking sector confidence derailed

No matter how much BoU reassures on the confidence of the banking sector, the actions by the proprietors of Crane Bank – as per the report – derail that. BoU carries out stress tests of banks and approves the financial statements provided, yet somehow, all this was missed.

 

Categories: Uncategorized