Saturday January 5 2013

Audit reveals further rot in Uganda Development Bank

The offices of Uganda Development Bank located on Clement Hill, Kampala.

The offices of Uganda Development Bank located on Clement Hill, Kampala. The bank is faulted for having caused losses in bad loans, more than double the Shs10 billion feared to have been lost earler. Photo by Stephen Otage 

By Eriasa Mukiibi Sserunjogi

The losses suffered by Uganda Development Bank (UDB) as a result of alleged mismanagement and fraud that resulted in bad loans are more than double the Shs10 billion earlier feared, a draft report of a special investigation by the Auditor General (AG) says.

The report, a copy of which the Saturday Monitor has seen, reveals widespread internal rot and collusion by bank officials with borrowers, many of whom failed to pay back money lent to them.

For example, the report notes that some bank officials generated project proposals and financial projections for potential borrowers, wrote replies to them on behalf of the bank and then deleted computer files to destroy evidence.

The fraud, coupled with weaknesses in the management and supervision of the bank, had resulted in non-performing loans – which the bank is unlikely to recover – of Shs21 billion by the end of August 2012, representing 25 per cent of the bank’s total loan book.

SPECIAL REPORT BELOW

Report finds that bank officials wrote proposals for borrowing clients at a fee, replied letters on their behalf, then tried to destroy the evidence.

The losses suffered by Uganda Development Bank (UDB) as a result of alleged mismanagement and fraud that resulted in bad loans are more than double the Shs10 billion earlier feared, a draft report of a special investigation by the Auditor General (AG) has revealed.

The report, a copy the Saturday Monitor has seen, reveals widespread internal rot and collusion by bank officials with borrowers, many of whom failed to pay back money lent to them.

For example, the report notes that some bank officials generated project proposals and financial projections for potential borrowers, wrote replies to them on behalf of the bank and then deleted computer files to destroy evidence.

The fraud, coupled with weaknesses in the management and supervision of the bank, had resulted in non-performing loans – which the bank is unlikely to recover – of Shs21 billion by the end of August 2012, representing 25 per cent of the bank’s total loan book.

The new board and management of UDB requested for the special audit by the Auditor General after an internal audit and another by the audit firm, PricewaterhouseCoopers, expressed a disclaimer of opinion on the bank’s financial statements for the year ended December 31, 2011.

Warning signs
Trouble started when on assuming office in May 2012, the new board headed by Dr Samuel Sejjaaka found no audited accounts of the bank five months after the end of the 2011 financial year.

When PricewaterhouseCoopers gave a disclaimer of opinion and refused to pass the bank’s books citing possible fraud, the board attempted to institute disciplinary proceedings against the members of management cited in the alleged fraud but they went to court and blocked the process.

The board reacted by terminating their employment, prompting the sacked officials to demand for Shs580 million in compensation. Those sacked were chief executive officer Gabriel Etou, head development finance Stephen Opeitum and company secretary Priscilla Mugisha. Others are Anne Muguluma (head of finance), Wilber Naigambi (head of management information systems) and Florence Mirembe (head of human resource).

Audit findings
The report details acts of omission and commission, some bordering on blatant fraud by different individuals. The audit is especially critical of the conduct of Mr Etou, Mr Opeitum and Ms Mugisha on various grounds.

Mr Opeitum, who was senior trade finance officer and later director development finance, is accused of mismanaging a number of loans. For example, the report says, he offered a loan of $445,400 to Karlson Agrovet Ltd without a loan application.
In other cases, loans were allegedly given without application fees being paid under his watch, while in another case he is accused of approving a loan application that was not supported by audited financial statements.

The legal department under Ms Mugisha’s watch, the report notes, was marked by inordinate delays to recover loans. In a number of cases cited, the legal department took over a year, in some cases almost two years, to send demand letters to recover loans that had been consigned to it for recovery.

The report also accuses Ms Mugisha of failing in her duty of ensuring that all securities offered to the bank were genuine and proper for purposes of securing the loans.

In the case of Ms Begumisa Enterprises Limited, it was later discovered that one of the land titles offered as security was forged. Mr Etou, along with Ms Mugisha, is accused of changing the security margin amount that the bank had put as a precondition for providing a letter of Credit for ABA Trade International from $200,000 to $100,000 without consulting the management team.

Mr Etou is accused, along with his predecessor as CEO, Dr Antony Kwani Appiah, of having failed to “properly guide the board, supervise the staff in exercise of their duties and put in place proper credit policies and procedures to safeguard the bank against financial losses”.

Dr Appiah is also accused of “personally” carrying out the sourcing, appraisal and management of some loans like in the case of Ms Karlson Agrovet Concerns Ltd.
In this case, the report says, he wrote to the client several times requesting for the proper documentation for the loan application and in other instances committed the bank to issue loans even without consulting the management team. He is also accused of overriding the decisions of the management team.

Advice questioned
Ms Charlotte Mucunguzi, a principal projects analyst, is accused of advising a company that wanted to borrow from UDB to use the documents of a sister company.
“In an interview held with the company director of Ms Jomayi Stones and Concrete Products Ltd,” the report says, “We were told that Charlotte Mucunguzi had advised them to use financial information of Jomayi Property Ltd in its application for a loan from the bank.”

The report says the same director told them that with Ms Mucunguzi’s knowledge, the company diverted Shs360m of the money issued to them from its approved purposes. “She did not notify the bank of the diversion of the said money,” the report notes.

Collusion
Ms Susan Nangwale, a principal project analyst, is accused of originating letters on behalf of clients and replying to them on behalf of the bank. In the case of one client, Hotloaf Bakery Kabale, the report notes: “There is evidence that Ms Nangwale drafted a demand letter from the bank to the client and on the same date drafted a reply to the same letter for the client.”

She allegedly did a similar thing for another client, West Meridian Hotel Ltd: “This letter was drafted on behalf of the company and sought an explanation from the bank about the unexplained accrual rates to the company loan account,” says the report.
She is accused of having written similar letters for other clients including Lake Magogo, in which the client was responding to a demand notice from the bank, “in which she states that the client has made some payment of Shs5 million and anticipates to make further payments.”

Family Holdings Ltd, E&M General Enterprises Ltd and Ms Deo and Sons Ltd are the other companies that the report says benefitted from letters generated by Ms Nangwale.
Mr Moses Kayembye, then manager development finance, is also accused of drafting documents for clients, particularly loan applications and business plans for Elgon Flyer Bakery Mbale Limited, Astra Pharma (U) Ltd, Ringa Enterprises, Tilda Fruits and Vegetables Ltd.

The investigations team says it found email correspondence between Mr Kayembye and clients including Tilda Fruits and Vegetables Ltd, Layz Agrico Ltd, GBK Wheat Mills Ltd, Hotloaf Bakery Kabale, Java, Base International Uganda Ltd and MK Publishers Ltd that showed that he had been generating financial projections for them.

Another email exchange with a one John Mukasa, whose email address the report gives, shows, according to the AG, that the correspondents were preparing client applications, financial projections and management accounts for a fee. “The emails indicate that the two persons had already received an advance payment for their services from the client,” says the report.

Destroying evidence?
The report accuses Mr Bosco Olweny, who worked for the bank as a consultant on trade finance between 2008 and 2011, of using his computer for suspicious deals and later deleting it.

“All the data on the desktop computer assigned to Mr Olweny by the bank had been erased nine times through disc formatting,” the report says. It adds: “During the data recovery procedure, we established that the formatting had been undertaken during the period Mr Olweny was still employed by the bank and the computer was still in his official custody.”

The investigators also allege that Mr Olweny generated a proposal for Aba Trade International Limited, a bank client, using a desktop computer issued by the bank.
The AG also found a memo written by Mr Charles Orwothum, another bank employee, indicating that prior to Mr Olweny’s departure, “he failed, refused or neglected to prepare and submit a hand over report of the files he was handling.”

Mr Orwothum, who formerly worked as a senior trade finance officer and was at the time of this investigation acting director, development finance, is himself accused in the report of originating letters on behalf of clients to the bank and in other instances drafting responses to the clients’ letters he originated.

Accused tight-lipped
Most members of the sacked management team the Saturday Monitor attempted to talk to were reluctant to discuss the matter, saying they preferred to wait for the final report. One of them said in a meeting between the AG and the management of UDB, it was decided that the accused would be invited to defend themselves before the final report was issued.

Another official, who requested not to be named, admitted that mistakes were made in the area of trade finance, but argued that it is because it was a new product and they were in a period of trial-and-error.

The sacked official accused the new UDB board of “disregarding” the role played by the old board, which she said was led by “very competent people of integrity”.
The old board was chaired by Mr James Kahooza, a former Auditor General himself, and at some point had Finance Minister Maria Kiwanuka as a member.

Former board faulted
But the report also faults the former board, particularly with regard to the absence of policies and guidelines required for the management of the bank’s loan portfolio.
Whereas the board was supposed to put in place a Know Your Customer (KYC) policy, the report notes that it was not in place, affecting the ability of the management team to do sufficient due diligence about potential borrowers.

“In the absence of a KYC policy the bank may deal with individuals having a poor credit history hence exposing the bank to losses,” the report notes.

emukiibi@ug.nationmedia.com

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