How Chase Bank paid chair Sh1bn bonus from bond proceeds

Mohamed Zafrullah Khan when he appeared in a Nairobi court. FILE PHOTO | PAUL WAWERU | NMG

Former chairman of the collapsed lender Chase Bank Ltd, Zafrullah Khan was paid a Sh1.052 billion bonus from cash the lender had raised from investors through a corporate bond.

Documents filed in court reveal that the money was paid four days after the lender raised Sh4.8 billion through the bond on June 10, 2015.

This was in breach of regulatory agreements that demanded proceeds from the bond be used to support the lender’s expansion plans and strengthen its capital base.

The bonus payment was also never disclosed to the investors via the information memorandum that guided the bond, exposing the former directors of the collapsed bank to criminal prosecution.

The Sh1.052 billion bonus was staggered into four tranches between June 15, 2015, and June 25, 2015, in breach of the board resolution that directed the payout to be paid in five years.

Chase Bank went into receivership in April 2016 after failing to meet its financial obligations. Mr Khan was later charged with conspiring to defraud depositors of Sh1.7 billion.

Mauritius’s SBM Holdings, in 2018, agreed to buy some of the assets and liabilities of Chase Bank in a deal that saw the bondholders lose Sh4.8 billion.

“Immediately after receipt of MTN (bond) money, a bonus of Sh1 billion was paid,” the Capital Markets Regulator says in a letter to the former Chase Bank directors attached to court documents.

“This bonus payment ought to have been disclosed in the information memorandum. Further, it was paid contrary to the Chase Bank board resolutions.”

The CMA revelations were made following a petition filed by Laurent Demey, a former non-executive director of the lender, who is challenging fines and punishments from the regulator for breach of board oversight requirements.

“You breached your disclosure obligations owed to MTN investors contrary to the provisions of Section 34 (b) of the Capital Markets Act as read together with regulation 12(1) of the Capital Markets (securities) (public offers, listing and disclosures) Regulations, 2002,” the Capital Markets Regulator says in a letter to the former Chase Bank directors attached to court documents.

Mr Demey revealed that the ad hoc remuneration committee of Chase Bank approved Mr Khan’s bonus for his 18-year term as CEO of the bank and was to be paid over a period of five years in equal instalments.

The instalment payments hinged on the lender’s liquidity and profitability.

The regulator says the bank paid Mr Khan 21.5 percent of the Sh4.8 billion raised from the bond.

Read: CMA: How Chase Bank chiefs siphoned billions

The Central Bank of Kenya (CBK) has been seeking a strategic investor for Chase, which has been under receivership since April 2016 after failing to meet its financial obligations.

The court documents show that four days after the receipt of the bond billions, a bonus of Sh1 billion was paid to four firms including Ava Trade Ltd- Sh252.7 million, on June 15, Rinascimento Global Ltd (Sh238.8 million) which was paid on June 15, Rinascimento Global Ltd – Sh236.3 million on June 16, Balst Investment Holdings Sh174 million on June 25 and Van Wageningen Adriana & Carlo Sh101.6 million.

The regulator said as a member of the audit and risk committee, Mr Demey should have ensured the bonus was disclosed to the bond investors.

Mr Demey and Rafiq Shariff were fined Sh2.5 million each for their role in the issuance and use of the bond and Ken Obimbo, the former finance director was handed a Sh5 million fine.

Mr Demey rushed to the High Court to challenge the regulator’s decision claiming that the move to pay the retirement bonus to Mr Khan was made by an ad hoc committee of the board, through a resolution made on May 14, 2015.

The former director says the committee was formed specifically to consider and recommend the payment of a retirement bonus to Mr Khan after his exit as CEO on May 14, 2014.

The board had awarded Mr Khan the Sh1 billion bonus following his 18 years at the helm when he stepped down from the role of Group CEO in 2014 and was later appointed chairman of the bank.

Mr Demey, who resided in France, further said contrary to the resolution passed, and in which he was not present, the bonus was paid in full in June 2015 without the knowledge or approval of the board or the committee.

He said the payment was made directly to various beneficiaries including Balst Investment Holding Ltd, which is owned by Mr Sharif, a director and former board member.

“The applicant was not aware of any of these payments or that any of the directors were among the beneficiaries before these facts were presented to me by the CMA from the CBK forensic report,” he said.

He says the payments were cancelled after discovering that they were made contrary to the agreement, and directed the bonus be converted into a loan for Mr Khan.

He further said the decision by audit firm Deloitte to restate financial statements was made unilaterally without the approval and concurrence of the board.

“Consequently, the accounts republished on April 4, 2016, were not signed or approved by the board and neither were they presented to the ARC (Audit risk committee) for discussion. The applicant did not approve and still does not approve those statements,” he said.

Mr Demey says the regulator failed to consider evidence on record and arrived at the erroneous conclusion that he failed in his oversight of the management of Chase Bank, leading to the preparation and publication of false and misleading financial statements.

He says he was a non-executive director and not a resident in Kenya and was not involved in the day-to-day running of the affairs of Chase bank.

Further, he relied on executive directors and management of the lender and financial statements audited by Deloitte and the oversight by CBK to monitor the performance of the bank.

He is the managing partner of Amethis Finance Luxembourg, a private equity fund and an investor at Chase Bank Kenya Ltd from January 2013 to April 2016, which held 10.55 percent of the share capital at Chase Bank.

Read: Deloitte fined for Sh2.1bn hidden hole in Chase Bank

The former director says the audit reports by CBK for the 2015 financial year did not flag issues related to accusations including publication of false and misleading accounts and only suggested improvements be made on additional provisions on some of the regular credit files and emphasized the need for the lender to raise more capital.

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