The Nairobi Law Monthly (NLM) article tells a story of two Kenyan public officials, Chris Okemo (former finance Minister and Energy Minister) and Samuel Gichuru (former Managing Director of a state electricity company) , who are about to be hauled to a little Island, Jersey, to stand trial for allegedly receiving bribes between 1999-2002, from an international company (Alcatel-CIT) and laundering this money into bank accounts they hold in this Island.
A word about Jersey is important to put the story in context. Jersey is a British crown dependency like Guernsey and the Isle of Man. Together with 7 British Overseas territories (call them surviving colonies) such as Cayman Islands, Gibraltar, British Virgin Islands and Bermuda, Montserrat, and Turks & Caicos these islands are some of the world's most notorious financial secrecy jurisdictions and tax havens. A 2009 study by Christian Aid (the Financial Secrecy Index, 2009) ranked the US state of Delaware as the biggest provider of International Financial Secrecy, the City of London ranked 5th, Jersey, the 11th and Guernsey, the 13th out of 60 countries. They thrive on offering secrecy services or opaqueness, in particular the concealment of the identities of beneficiaries of companies registered there and the actual owners of bank accounts. They are also tax havens. This means that their main attraction to companies to register there is low or zero taxes. The combination of secrecy and low/zero tax services provides a fatal attraction for companies to launder profits away from where they make them (to avoid and evade taxes there) and for those who want to conceal the sources of their wealth and profits from public scrutiny.
The architects of this extradition request is the United States of America who are acting under what is called the Foreign Corrupt Practices Act (FCPA) of 1977. This law requires the Government of the USA to go after any bribery activity abroad which brings injury to the United States or involves companies listed in the United States.
What precipitated this particular action was that Alcatel, a US registered company, felt compelled by the evidence against it in a Florida Court in December 2010, to initiate a plea-bargain in order to reduce its fine and reputational damage. In this plea bargain Alcatel admitted to having bribed foreign officials in a number of countries including Kenya. It claimed to have paid a $20mn bribe to the executives of a cellphone company, Ken-cell to secure a contract to support this cellphone company to roll out its network. Ken-cell at the time was a joint venture of 2 companies: owned 60% by a company registered on the Kenyan Stock Exchange market (therefore a Kenyan Company), the Sameer Investments owned by a local business magnate Naushad Merali and 40% by the French conglomerate, Vivende. The contract negotiations with Alcatel were in fact, according to the NLM, article conducted by Vivende who informed Alcatel that they would win the contract on the condition that they, Alcatel, agree to pay a bribe of $20mn to an "intermediary".
The NLM article suggests that that this bribe may have been paid to facilitate the award of a second mobile network license, Mobitelea, which at some point in time was a shareholder of Safaricom (Kenya's flag-ship mobile telephone company) whose majority shareholder is Britain's Vodafone Company. The real persons behind Mobetelia remain wrapped in secrecy and the company was not even known to the Kenyan parliament for three years after it acquired shares in Safaricom. Mobitelea paid $5mn in cash to take a 5% stake in Safaricom. What we do know is that Safaricom utilized the "advise" of Mobitelea when it was entering the market, a case being investigated somewhat, by the Kenyan and British Authorities, which means that it is more than likely that Safaricom know who are behind Mobitelea.
The world of impenetrable secrecy protecting ill-gotten wealth.
The legal web of concealment of the real persons behind Mobitelea is itself fascinating. Mobitelea was registered in the other British Crown Dependency, Guernsey, as a "shell" company. Like Jersey, Guernsey is a secrecy jurisdiction as well as a tax haven. Mobitelea was registered in Guernsey as owned by 2 other Guernsey registered Nominee companies Mercantor Nominee Ltd and Mercantor Trustees Ltd. The directors of these companies are also companies: Anson Ltd and Cabot Ltd who are registered in Anguilla and Antigua, which are also tax havens and secrecy jurisdictions. Note the web of companies, owned by companies which are in turn owned by companies or trusts all registered in a secrecy jurisdiction. SECRECY is the key driver of dirty money. Many of the major offshore secrecy jurisdictions are British.
Okemo, Gichuru vs Jersey - 2 - Terminology
Before we proceed with the story, we need to explain some terminologies used repeatedly throughout the 3-part article in order to aid understanding.
"Shell companies" are Trusts formed to hold the wealth/assets of their clients in off-shore financial centers (OFC). An OFC hosts a functional financial services centre with branches or subsidiaries of major international banks. Banks prefer to call these centers, International Financial Centres (IFCs). They tend to offer a range of secrecy services for their non-resident clients and may provide massive tax incentives. In the latter case, they will also be called tax havens. Tax havens do not require banks to publicly disclose accounts of its clients and it is exceedingly hard for small countries to obtain tax information from tax havens. Most of the big international banks are registered in these OFCs to facilitate business for their clients. It is reported that at least 270 of the world's biggest banks have presence in Cayman Island alone and may be exist in different forms and more than one.
In OFCs "shell entities" hold offshore accounts for their clients. Bankers any where open accounts in the name of off-shore entities which often impede monitoring and tracing of client activities which can facilitate illicit activities. By off-shore is meant both geographic spaces that specialize in providing financial services to non-resident clients or even the conceptual space i.e. the idea of designing rules and regulations aimed at benefitting non-resident asset holders.
Most OFCs are "secrecy jurisdictions". This term refers to countries or territories that satisfy 2 characteristics: (i) they create regulations for the primary benefit of non-residents, (ii) they create regulations preventing the identification of those who These regulations are designed to undermine the legislation or regulation of other jurisdictions. For example, regulations promoting secrecy will undermine the requirement for transparency held dear by other countries. Secrecy jurisdictions benefit by
A trust is one such "Shell entity" and is formed whenever a person (the settlor) gives legal ownership of an asset (the trust property) to another person (the trustee) on condition that they apply the income and gains arising from that asset for the benefit of a third person (the beneficiary). Trusts can be established verbally but typically take written form. Trustees are frequently professional people or firms charging fees. In secrecy jurisdictions, the settler, the trustee and the beneficiary may all be other shell companies.
Nominee (Trust) accounts are accounts in which the owners may be companies or other entities (such as trusts) rather than natural persons and which disguise the real beneficiaries or donors. These anonymous trust accounts are the bread and butter of the offshore secrecy jurisdictions such as Jersey.
Banks may also open special name or numbered accounts. These are code names rather the names of natural persons. The purpose is to conceal the true identity of the beneficiary persons and can impede
How payments are facilitated: It takes the complicity of banks, lawyers, shadowy entities and colluding states to sustain the flow of dirty money.
How did Alcatel pay the bribe and how were the monies transferred abroad? To accommodate the bribery, Alcatel simply inflated the contract price by $20mn. To pay it out, the "intermediary" (read, the fake company fronting for the corrupt politicians and other beneficiaries of the bribe) formed a company called "Company T'. You cannot does not reveal which natural human beings own it or benefit from it. Instead Company T was represented in the financial transactions by a Mauritius-based shell company. A 'shell company" is one which is used for a business transaction but which doesn't have significant assets. A related term is a "special purpose vehicle" which is a company or Trust, or partnership or any form of legal entity set up for a particular purpose in the course of completing a transaction, or series of transactions, typically with the principal or sole intent of obtaining a tax advantage. Some of the money was paid directly to Company T, through a German (Swiss?) Bank in Mauritius, the Deutsche Bank. The payment to the Mauritius agent was paid into one of Britain's biggest banks, HSBC. There was a 3rd payment which the "intermediaries" directed to be paid to yet another company, called "Company Z" to an account in Dubai. It turns out that Company Z is an offshore holding company of Sameer Investments, the same Kenyan Company owned by Merali, that held the majority share in Ken-Cell in partnership with Vivende, and which awarded the contract to Alcatel in the first place. I may be thick in the head but is it far fetched to suggest that the payment to Company Z may have been the kick-back to Sameer company possibly for arranging the bribery deal successfully.
Okemo, Gichuru vs Jersey - 3 - Okemo, Gichuru and others?
If Okemo and Gichuru must be punished, how about the others?
I ask myself, if Okemo and Gichuru are in the dock (and perhaps rightly so) what happens to Merali of Sameer Investments or the directors of Vivende who in the story appear to be complicit in facilitating and channeling the bribes and may even have benefitted financially? What about HSBC and Deutsche Bank who received, channeled and cleaned the illicit money?. How about the banks in Jersey and Guernsey who harboured the corrupt money, benefitted from client fees and provided the legal web of secrecy upon which the entire sorry story is based? The NLM article goes to much length to show how the Kenyan politicians abused their power not only in demanding and allegedly receiving bribes but also by prevailing on parliament to pass laws that were friendly to secrecy and money laundering by for example removing clauses that required that financial institution name the natural human individual beneficiaries of companies transacting business with them rather than hiding behind nominee accounts. Okemo and Gichuru could not have succeeded in moving their alleged corruptly acquired loot to Jersey but for the welcoming conditions provided by Jersey.
That Jersey is seeking to prosecute its clients who merely utilize the services they provide is rich irony!!! Who is prosecuting the British Crown Dependent territory of Jersey? They probably could not have moved the money without the participation of the banks. The NLM article says "the British, in spite of their zeal to go after Okemo and Gichuru have been seen to be reluctant to investigate a local firm and the matter has been in a lull". Shouldn't Britain be prosecuting HSBC in the manner that the Americans prosecuted ??? or at least name and shame it as the US General Accounting Office did in the Case of Citi Bank handling of General Auguste Pinochet's loot. Truth is, according to Christian Aid, a charitable organization of the protestant churches of Britain and Ireland, the United Kingdom has a poor record of acting effectively to curb or return illicit money brought into its land. Very little has been heard, in terms of prosecution or repatriation of the estimated $1.3bn that the late General Abacha (of Nigeria) channeled through the 23 London Banks, including Barclays. Okemo and Gichuru may be greedy and bad, if they are guilty. But they will, by no means be the greediest and the baddest of them all, let alone the most criminal.
But Jersey is not doing this by choice is it? Jersey is doing the minimum necessary to save its own scalp. It is compelled to action by the United States lest it is black-listed for promoting money laundering and by the OECD bilateral information exchange agreement compelling it to provide tax and savings related information to its member countries upon request. We shall explain this bilateral information exchange later.
The Curious case of Mauritius
Before we turn our attention to drawing from the specific issue of Okemo and Gichuru vrs the British Crown Dependent Territory of the Island of Jersey to demonstrate how the world of dirty money works generally, let's give some time to the curious case of Mauritius, the African island state embroiled in the case. Mauritius is a small Island of not more than 1.3 million people, lying in the Indian Ocean in Southern Africa. By most measures, Mauritius is one of Africa's better governed and successful countries. It is one of Africa's most diversified economies, starting off as a sugar plantation literally fed by slave labour. It scores highly in all manner of social wellbeing indicators including education, life expectancy and per capita income where it compares favourably with the best in the developing world. Its system of social protection compares with any other and as a result, desperate poverty, destitution and hunger are low. Stunningly, like Switzerland, Mauritius has no standing army and yet it is as peaceful as any. Corruption is perceived by citizens and experts alike to be relatively low across the board and in both public and private sectors. Mauritius banking sector is one of the most sophisticated with most people holding their money held in bank deposits rather than as currency.
However, Mauritius is an African leader in a different type of corruption. It provides the conditions favourable for the laundering of money, wealth and profits. In this process it facilitates not just corruption but massive tax evasion and avoidance. Money laundering is the process of 'cleaning' illicitly gained money to give it the appearance of originating from a legitimate source. Profit laundering is the process whereby companies use mechanisms such as transfer pricing, mis-invoicing, licensing and others, to conceal and transfer profits from a high tax paying jurisdiction to one in which taxes are low or non-existent. How does Mauritius do this?
Mauritius provides off-shore secrecy services. A secrecy jurisdiction, as defined earlier must satisfy 2 conditions (i)It designs its financial regulations partly to benefit non residents; (2)it puts regulations in place to ensure that the identities of those who use these regulations and are concealed. Mauritius followed the path of other Islands to make itself attractive to attract global banks and earn fees and other benefits from facilitating the easy incorporation of companies and offering secrecy and low tax services as attraction to non-residents. It designed its regulations to attract secrecy service providers. These are banks, lawyers, accountants, trust companies and others who make money by assisting clients to access the services of the secrecy jurisdiction. Richard Murphy of the Tax Justice Network calls the combined result of secrecy jurisdictions and the secrecy services providers is the "secrecy world" . Mauritius is a vibrant secrecy world. This world promotes money laundering. For money laundering to occur, 3 steps are needed: (i) the entry point where the illicit money enters the legitimate financial system (ii) a series of opaque layers where money moves through the international financial system across borders, (iii) the integration of the illicit money into the legitimate economy once its origins have been effectively concealed.
Let's take the Okemo and Gichuru case to demonstrate how the regulations in Mauritius facilitated or at least favoured the illicit transfer of corruptly acquired Kenyan money into banks domiciled in its territory. Recall that two payments were made into accounts in Mauritius; one directly to Company T into as bank account held in Deutche Bank, Mauritius. This means that Mauritius permitted Company T to hold a bank account without the necessity to reveal who the beneficiaries of Company T are. A second part was paid to an Agent Company registered in Mauritius and acting for the alleged bribery perpetrators into an account held by a high street British bank, HSBC. This company, as we observed is a "shell" company, a fictional entity more or less existing for no other worthwhile reason than to facilitate scummy transactions. These types of companies abound in offshore secrecy jurisdictions. Mauritius, like other offshore secrecy jurisdictions provide a place for illicit money to hide and be later cleaned up and integrated into the legitimate financial system
Mauritius found itself also embroiled with tax matters involving another of the companies remotely linked to the web of illicit finance discussed above. I am talking about Vodafone and the Indian Government's pursuit of them for capital gains taxes. The story dates back to 2007 and is told by a publication of Christian Aid as follows. Mauritius and India have a Double Taxation Avoidance agreement. One of the implications of this agreement is that if a company considers itself resident in Mauritius (meaning it pays taxes in Mauritius) and if this company does not have permanent establishment in India, then if such a company owns shares in an Indian company, the sale of these shares will not attract capital gains tax in India. This allows companies registered as Mauritian companies to avoid paying capital gains taxes of between 10% and 40% in India which will be payable under Indian law . This means that Indian companies or other companies can register in Mauritius as tax residents simply by paying a small fee and receiving a certificate. To obtain this certificate, such a company merely needs to ensure that at least 2 Directors are Mauritian, that they maintain a bank account in Mauritius and appoint an auditor. if not require of t of the briber.
Here is where Vodafone comes in. Vodafone acquires (buys up) an Indian telephone company Hutchison Essar Ltd (HEL) which was owned by a Hong Kong based company, Hutchison for $11bn. Vodafone and Hutchison then incorporates companies in Mauritius and Cayman Island to hold the shares of HEL and to conduct the transaction. By so doing they both sought to avoid capital gains tax estimated by lawyers to be in the neigbourhood of $2bn. Vodafone argued that the transaction was between two off-shore entities and was outside India's jurisdiction, it was by a non-resident, with another non-resident in respect of the transfer of a shares of a company which was also non-resident. India on the other hand, argued that as the assets were in India the deal was liable to capital gains tax and in any case according to Indian law the buyer had the obligation to deduct and withhold capital gains tax.
This story of the exploitation of off-shore tax havens jurisdictions by companies to avoid tax is a microcosm of the bigger picture of illicit flows. The exploitation of Mauritius' off-shore status is not only by international companies but crucially by Indian companies and rich individuals who set up shell companies such as the one owned by Sameer Investments, basically to shift money out of India (and this case, Kenya) and to take advantage of the Double Taxation avoidance Act avoid paying taxes or to clean out dirty money. Bizarrely, these same players then return these monies to India as foreign investors in order to benefit from tax concessions. This is called "round-tripping". This is why the tiny Palm beach Island of Mauritius is the biggest foreign investor in India. It accounts for nearly 50% of all FDI inflows into India. FDI inflows from Mauritius to India amounted to $20bn cumulatively between2000-2007. This is Indians, concealing money in Mauritius and taking it back as investors and doubling cheating the Indian poor and those who pay their fair share of taxes. Maybe if we look carefully into the data we might find a significant volume of Mauritian FDI coming into Kenya. Who knows whether some of it isn't the alleged bribery monies round-tripping.
Okemo, Gichuru vs Jersey - 4 - The world of illicit capital flows – the permissible conditions
I intend to draw out in greater detail the role of the key players that drive, sustain and thrive from illicit capital flows. In the concluding part I merely want to draw out briefly, some of the dynamics underpinning the world of dirty money flows.
1. Politicians, "bunga bunga" parties and the people. It comes down to the motivation of people in politics and their ethics. If all you care for is being rich and powerful, even when the people you are supposed to be serving languish in poverty and suffering you will identify with Papi Silvio who, when confronted with a bribery case proclaimed that "If I, in taking care of everyone's interests, also take care of my own, you can't talk about a conflict of interest".
If all that matters is to manipulate political institutions and law to serve your greedy interest, then you could also do no better than Papi Silvio. Confronted by a group of "Clean hands" prosecutors determined to nail him for fraud and tax evasion and unearth the hundreds of millions of dollars he stashed away in tax havens and off-shore secrecy jurisdictions, Papi Silvio, responded by putting his legal team incharge of re-writing the laws, installed a number as the head of the Justice Commission, made his own personal tax lawyer the minister of economy and finance and his 3 henchmen in legal trouble he made them parliamentarians to enjoy immunity. Not surprisingly, Parliament decriminalised the type of accounting he was accused of using to channel bribes; tax evaders suddenly had amnesty. Faced with a charge of bribing a judge, Papi Silvio had a new law passed granting immunity from prosecution to Italy's highest ranking leaders. There is lot more juice in Vanity Fair's "Dolce Viagra" story if you are interested – including of course the story of the string of sexy babes. I am sure that Papi Silvio's behavior resonate with the experiences of our countries, part of which have been highlighted in the NLM article on how parliament was leaned upon to make laws favourable to the concealment of wealth.
The point is this, whether it is in poor or rich countries, integrity in public service is necessary to minimize bribery and dirty money. Institutions ad rules help but individuals bear moral responsibility. So Okemo and Gichuru have personal moral responsibility that no legal argument can make good. But of course institutions help and public scrutiny essential. We shall revert to this issue in the concluding part of this article.
2. Rent-seeking private sector and enabling domestic environment of corruption and dirty money flows. The mantra that "the private sector is the engine for growth" is not true of all who operate in the private sector. There are those who making profit by adding value to goods and services, and then consume, reinvest and pay tax on these profits. These are the engine for growth and transformation. There are criminal elements in the private sector and there are those who merely become wealthy through productive rent-seeking activities such as speculative activities, corrupt activities, and aggressive tax avoidance behavior. This lot are prone to colluding with equally rent-seeking politicians to break or exploit loopholes in the law. These are the ones that aggressively seek channels to conceal wealth generated from activities which are illegal or bordering on the illegal. They turn to invest heavily in mutually corrupting relationships with the biggest political actors in the country and warrant the term, 'politically exposed persons". These strong personally and mutually corrupting relations are necessary for dirty money to be accumulated, concealed and transferred. The Oremo and Gichiru case demonstrate this clearly. The key here is transparency in all dealings. This requires rules, but more importantly a vigilant society.
3. A global network of legally acceptable but morally repugnant providers of secrecy and tax avoidance and evasion services. Democracy is impossible without transparency and with it, accountability. To permit jurisdictions to thrive by depriving other jurisdictions their share of wealth and revenues simply by enacting and enforcing laws designed to undermine their regulations and deny them a legitimate share of revenues is morally reprehensible. This is the reality of tax havens and secrecy jurisdiction, without which the movement of dirty money across boundaries will be severely constrained. A democratic society must not permit this. This can be defeated by collective rage of citizens, effective campaigning and simple rule changes.
4. The banking, accountancy, legal and international finance professions are designers, the implementers, the major beneficiaries and the judges and juries of the system that facilitates the movement of dirty money. These professions need not thrive from doing harm to the poorest people but the system is too lucrative for self-regulation. Given their influence, formal regulation is unlikely to succeed without organized citizen pressure and a strong and effective judiciary. We shall return to this.
5. A dormant civil society and blinkered press. Secrecy damages society. There is no doubt about that. Yet there is not enough outrage about the fact that the law in Kenya and many other places) permit companies to register and make money without having to identify who are the persons behind them. This is the one rule in the registration of companies laws that must changed and changed urgently if the fight against corruption to be meaningful. The media should be screening "murder" if they are interested in democracy and they should look beyond the reprehensible behavior of individual politicians and public servants to the system that perpetuates the harboring and movement of dirty moment or clean money illicitly.
Whilst this first part has concentrated on technicalities we need to keep in mind the implications of the illicit money. It thrives on inequality and perpetuates inequality; it enriches a few and keep the majority in desperate poverty and without jobs; it kills.
I am a Ghanaian development economist, who has been active in international development for over 20 years; as a researcher and lecturer, as an NGO activist and development professional in several parts of the world. Working with others, I co-founded several development organisations around the world, including the Third World Network, ISODEC and the Centre for Public Interest Law in Ghana. Heading the United Nations Millennium Campaign in Africa, till December 2014. I currently head Savannah Accelerated Development Authority (SADA), Ghana.