How Uganda Development Bank lost Shs10 billion to internal company fraud

Top managers of Uganda Development Bank (UDB), who have been sacked and are now demanding for Shs580m in terminal benefits, were implicated by two separate audits over incompetence and fraud.

In one of the audits, an internal investigation found that the bank had lost Shs10b and that the figure could rise to Shs30b out of an estimated capitalisation of Shs80b.

Daily Monitor broke the story yesterday that as the Auditor General probes the “true extent of the loss” suffered by the bank, the former top managers, who the new Board of Directors sacked over the loss, are pursuing a Shs580m compensation package.

Mr Gabriel Ekou, the former chief executive officer, who is among those sacked, simply hung up once he found out that the call was from Daily Monitor.

Mr Stephen Opeitum, the former head development finance, when contacted, said he needed to first meet his lawyer before deciding on the way forward.

The other officials, who were sacked are, Ms Priscilla Mugisha (company secretary), Ms Anne Muguluma (head of finance), Ms Wilber Naigambi (head of management information systems) and Ms Florence Mirembe (head of human resource).

The investigations
In 2010, the final books of UDB had a provision for a net loss of Shs5.756b, meaning that the bank was at risk of not recovering all this money that had been lent out. To make matters worse, the Shs5.756b net loss provision was on only one component of the bank’s activities - trade finance.

Given that UDB also deals in other areas like development finance, cash management, investment activity and procurement, it is safe to conclude that the loss could be much bigger.

UDB was founded in 1972, first to provide trade finance to Ugandan businessmen, who were trying to fill the void left by the expelled Indians. The bank later expanded into long term financing in such areas like agriculture and tourism. It is fully government owned.

In light of the loss, the Board of Directors ordered an internal investigation into the trade finance component, which submitted its report in January this year. The findings indicted members of the top management, whom they accused of complicity with some of the companies to which money was lent

Some top managers were accused of collusion with borrowers to give out bad loans which were unsecured and sometimes not recoverable.

Mr Etou, who was the then CEO, was accused of “single-handedly” approving variations in loan terms and conditions after the loans had been approved by management.

“He did not have any approval authority and did not have any mandate to approve loan variations,” the report said.

Mr Etou was also accused of committing the bank to the tune of Shs5bn in excess loans to Karlson without the approval of management.

Along with Mr Opeitum, Mr Ekou is accused of approving a request in which the former challenged a proposal that was assessed by the current senior trade finance officer, Mr Charles Orwothun. Mr Orwothun had objected to selling off 210 drums of bitumen at $119 each instead of $148, arguing that if it were done, the bank would not fully recover its money.

Fraud cited
A later audit by an international firm, Price waterhouseCoopers (PwC), gave a disclaimer of opinion, refusing to pass the bank’s books as okay, citing possible fraud.

The PwC audit indicated that almost 30 per cent of UDB’s loan portfolio is non-performing, “implying that a significant portion of the bank’s portfolio possesses various indicators of impairment including default.”

The internal audit cited an example of what it called negligence or fraud. One company that borrowed from the bank, Abba Trade International, the report noted, had submitted forged invoices to support its debt application.

The investigators wrote that they discussed the matter of the invoices with Mr Opeitum, and he said they met suppliers from Germany who had issued the original invoice.

“However, the final suppliers, who ended up being fraudulent, were from UK,” the report says.

In all the cases the investigation covered, it was found that the bank officers approved loans based on “speculated markets and unconfirmed contracts ... contrary to trade finance principles.”

Jamie Fire Company, which borrowed more than Shs260m, is an example. It listed its potential customers as “all schools, hospitals and district administration blocks in the country”. The investigators found this too speculative for the bank officers to have found it safe to lend that company money.

It was also found out that the financial ability and capacity of the borrowing companies was not properly evaluated. Some of the companies to which money was lent, the report says, did not even have the financial ability to meet appraisal fees.

Again, Abba Trade International was also cited. The report noted that the company did not have money to meet appraisal funds and instead “got advance payment for a truck from its potential customer and the bank received the payment as appraisal fees from Abba Trade International.”

Malicious claims?
But Mr Richard Tibaleka Babbu, the director of Abba Trade International, says the charge that his company did not have money to meet appraisal funds was a malicious claim made by an estranged former employee. Mr Babbu says the employee had been fired for attempting to steal a truck from the company and sell it at below cost price.

As regards the difficulty in repaying the loan, Mr Babbu said his company was conned of Euros 250,000 by a “British company called Buy a Truck”, which, he said, sent them used tires from China instead of brand new Firestone truck tires. He says they have since gone to court as a result.

Energy Minister Irene Muloni, whose company, Linknet Agencies, also has a non-performing loan with UDB, said they have asked for more time to clear the loan. Ms Muloni said the company, which she co-owns with her husband Felix Muloni, still has its collateral held by the bank and “there is no reason to worry.”

Mr Andrew Babigumira, a director in Wavenets Communications, another company listed as having a non-performing trade loan with UDB, declined to comment about the matter. After listening to the allegations by our reporter on phone, he hung up and did not pick our calls later.

The new Board of Directors chaired by Dr Samuel Ssejjaaka was stopped by court from subjecting the sacked managers to an internal disciplinary process. They now hope the police will take interest in the matter.

UDB’s nonperforming loans trade finance accounts (Dec. 2010) in Uganda Shillings

Source: Investigation Report on Non Performing Trade Finance Loans (UDB) 2012

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