Yes, thieves hide in fake debts

A top National Treasury official working in the debt department called me the other day to respond to a piece I did in these columns recently under the headline “Hunt for thieves in the debt register”.

He argued that I had missed the point by suggesting that the standards of public disclosure and transparency on external loans were dismally low. He maintained that the Treasury always obliged to the relevant laws on public debt reporting, pointing out that, as stipulated in the Public Fnancial Management Act, they reported details of every borrowing — the credit terms and purpose of the loans — to Parliament every four months after signature.

He said that the Speaker of the National Assembly had always acknowledged receipt of every submission in this regard.

But while what the official said may be true, that level of disclosure does not meet the standard for accuracy and completeness of public debt reporting. If anything, the latest external debt register on the Treasury website is for 2018.

The responsibility for reporting accurate debt data does not end with merely exchanging information with Parliament on new loans, especially under circumstances where that information is not shared with the public. The taxpayer must have access to up-to-date information on interest and principal payments on every loan.

Our external debt register is cluttered with commercial debts. It seems these types of debt have become popular in recent years as they provide cash-hungry public officials access to almost unlimited funding for their pet projects. We have been on a spending spree, pouring hundreds of millions —even billions — of dollars and yuan into everything from buying equipment to the National Youth Service, drilling geothermal wells, buying surveillance cameras and dam construction project, many of which are incomplete.

The bigger risk is that most of the loans we take today are of the type where the proceeds are transferred to contractors even before the money sets foot in Kenya.

Our external debt register is ripe for a comprehensive and independent audit. Indeed, the external debt service area has emerged as the new locus where corrupt and politically powerful elites of Africa reap the billions they need to capture and retain power.

We must all hope that the International Monetary Fund (IMF) will demand a forensic audit before it gives the government any more money. I know that an audit like I propose will be met with stiff resistance by power-broking elites.

Audit thwarted

I remember how, during the time of Mwangazi Mwachofi as the permanent secretary to the Treasury, an attempt at auditing the external debt register was thwarted by senior officials of the regime of former President Daniel arap Moi on grounds of secrecy and national security.

Under pressure from the IMF, the government had engaged an international independent auditor in the name of Lazard Brothers to do a forensic audit of the register in a bid to investigate whether there were fraudulent transactions hidden in it.

Lazard Brothers was required to urgently convene a London Club meeting of all holders of Kenya’s commercial debt and get them to agree on a rescheduling plan.

Kenya had just emerged from a successful Paris Club debt rescheduling and was, therefore, obliged by the so-called rule of comparability of treatment to convince its commercial creditors to reschedule theirs.

The story goes that, hardly weeks after Lazard Brothers embarked on the task, it met a roadblock: The Office of the President flatly refused to release documents for loans taken out for security projects.

Many years after Moi left the scene, an independent audit of the external audit register is what unearthed what became known as the Anglo Leasing scandal.

Fake loans

Crafty businessmen and their allies in government colluded to siphon money from the external debt account to their overseas bank accounts by creating fake loans and disguising the payments as debt service. For many years, Parliament could not detect some of these fraudulent transactions because external debt service is a direct charge on the Consolidated Fund. 

When you are servicing debt, you don’t need an appropriation by Parliament to make the payments. This is the loophole scammers exploit.

In 2007, an audit of the external debt register in neighbouring Tanzania unearthed multi-billion-shilling shady dealings. 

The then-Finance minister, Mrs Zakia Mehgji, had ordered an independent audit of the external debt register after preliminary investigations revealed irregular payments from the external debt account to service fake foreign commercial loans.

Some of the companies sued in the fraud were of shelf entities hurriedly registered to specifically facilitate the channelling of money out of the external debt account.

The headline of the recent article I did on the subject couldn’t have been more apt. Let’s hunt for thieves in the debt register.

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