How Kenyan banks aided in billion-dollar credit scam against South Sudan

In January 2016, 10 patients died at the Juba Teaching Hospital in South Sudan because there was no diesel to run the generators, so doctors could not perform sergeries.

The family of one woman who needed an emergency C-section delivery was told to bring a “jerry can” (about 20 litres) of fuel for the procedure.

Patients were turned away unless they could provide the supplies needed for their care, including diesel.

The situation was dire, with some four million South Sudanese in need of health services and nearly 20 per cent of health facilities lacking the resources to provide care.

But even before then, from as early as 2012, newborns would die at an alarming rate in the neonatal intensive care unit at the hospital.

Doctors at the hospital would try to manually ventilate the newborns in vain.

Newborns who needed constant oxygen were at the mercy of whether fuel was available to power the hospital’s generator because the equipment at the ICU needed a 24-hour power supply.

“For the day, someone would supply fuel for the generator. It would work for a few hours, but by 8 pm, darkness,” a South Sudanese doctor said.

These tragedies were avoidable, if only …

Crisis phase

Outside the hospital, things were not any better. About 37 per cent of South Sudanese were experiencing food insecurity, and in July 2015, many states were already in the crisis phase, with a smaller number already in a state of emergency.

By 2016, the country was still suffering severe shortages of key commodities, with the situation so dire that some four million South Sudanese needed health services, but nearly 20 per cent of the health facilities lacked the necessary resources to provide care.

Major shortages in pharmaceuticals, fuel, and food had hit South Sudan partly due to an oil production shutdown that took place in 2012 when the major export route through Sudan was blocked due to a dispute between Juba and Khartoum over oil transit fees.

Being a heavily oil-dependent country, half of South Sudan’s gross domestic product was wiped out, plunging the country into a long-term financial crisis.

At this point, the government came up with an ingenious way to prevent the country from sliding further into the abyss.

Faced with dwindling hard currency and shortages in vital imports, the Bank of South Sudan — the country’s central bank — signed several credit facility arrangements to support efforts to import much-needed food, fuel, and medicine to the war-torn and newly independent country.Between 2012 and 2015, the government of South Sudan received a credit line of nearly one billion dollars, $793 million from a Qatari bank and $200 million from a Kenyan bank.

The credit line — issued in US dollars in the form of letters of credit (LCs) — was intended to help local traders pay for these imports, considering the extreme shortage of hard currency and the weakness of the new local pound.

The government was supposed to allocate the LCs to traders, who could exchange South Sudanese pounds (SSP) at the then-official exchange rate of 3.16 SSP per dollar.

In turn, the traders would then use the LCs — essentially a guarantee from the bank — to pay the exporter upon confirmation of delivery of the needed goods.

The goal was to provide South Sudanese traders with access to US dollars to import essential goods with the borrowed funds intended to enable companies to import urgently needed commodities such as fuel, food, and medical supplies to sell in the markets at affordable prices.

Credit lines

The credit lines were supposed to be repaid through the oil production that the country was hoping to resume shortly.

The traders who applied and were chosen by the South Sudanese government for the programme were supposed to deposit SSPs with the issuing banks, who would, in turn, provide the traders with US dollar-denominated letters of credit (LCs).

An LC is a standard financial instrument to mitigate risk in international trade.

But rather than achieve the intended outcome, the programme turned into a mega scandal that left a human tragedy in its wake, a three-year investigation by The Sentry, a US-based investigative and policy institution, can now reveal.

The investigation by The Sentry showed that South Sudanese government officials and regional networks of traders gained access to the majority of the LC-backed contracts, obtaining more than $500 million of the $922 million allocated LCs without showing any proof of delivering the essential goods these millions were meant to buy.

The one-billion-dollar credit scam roped in Kenyan banks where hundreds of millions of dollars were transferred through commercial banks in the country with the Kenyan bank adversely mentioned in the saga.

The movement of the LC to and through Kenyan banks also involved companies registered in the country.

According to the report released on October 7, things went terribly wrong from the beginning. Multimillion-dollar contracts were awarded to foreign-run companies, companies that only existed on paper, and inexperienced middlemen.

Money was wired into bank accounts linked to individuals allocated the LCs, or to their close associates, often with no proof of delivery.

According to the report, businesses with connections to the South Sudanese ruling class — including a top political family, a top official at the banking regulator and multiple military officials — were among those who received contracts collectively worth tens of millions of dollars under the programme.

The Sentry found that at least 65 per cent of LCs, worth $200 million, in petroleum supply deals, went to companies that did not appear as consignees in relevant Kenyan trade data when they were supposed to be exporting urgently needed gas, diesel, and other products to South Sudan.

This is despite the condition being that the funds be transferred to the exporters’ commercial banks only upon documented proof of delivery.

Even worse, the central bank would disburse the funds to those companies directly, and once transferred to the Kenyan or Ugandan account, some of the funds would be withdrawn in cash and exchanged on the black market at a significantly higher rate for as much as five times the official exchange rate.

“Almost $1 billion effectively walked out of the country, and the human cost remains to be calculated. At the peak of the LCs programme, when hundreds of millions of dollars in goods should have arrived in markets, more than two million people went without food, hospitals and clinics had to treat patients without medicine, and fuel shortages resulted in black market price gouging,” states The Sentry report.

In October 2015, just months after the last LC-backed contracts were awarded, the United Nations (UN) reported that 3.9 million South Sudanese faced severe hunger and tens of thousands were on the brink of famine.

Rather than improve, the situation has continued to deteriorate, with nearly seven million people, about 60 per cent of the population, still facing food insecurity, and the country is on the brink of famine.

What went wrong?

The process of allocating the LCs to importers went on well, with different government agencies in charge, with a ministerial committee headed by Mr Kornelio Koriom responsible for the allocations.

But in 2013, the central bank withdrew from the process in response to threats from influential individuals aiming to access funds via the LCs programme.

Influential elites got involved and they pushed their friends, relatives and cronies to be included in the list.

The allocation process was then taken up by the Sudan People’s Liberation Movement (SPLM) economic task force, chaired by then-Deputy Minister of Finance and Economic Planning Mary Jarvis Yak.

By early 2014, the process was assigned to a Joint Technical Committee (JTC) formed by the government before the committee was replaced by a decentralised process in which five ministries and 10 states handled the approval of who should receive LCs.

Formed to ensure transparency and try to cut off the middlemen, JTC failed to properly vet the companies or ensure that they had the business logistics and experience to import goods from abroad.

The rigorous vetting that was to be applied to companies that were to receive the LCs was thrown out of the window.

Thereafter, the obtaining criteria of eligibility to obtain LCs included nothing more than a few registrations and licensing documents, which could be easily obtained without necessarily demonstrating capacity or expertise in importing goods.

Members of the JTC would call on friends and relatives with no expertise — essentially middlemen — to apply for the LCs, and their LCs would be approved and distributed by the central bank before they deposited the required equivalent amount in SPP into the designated accounts with the Kenyan or Qatari banks or the Bank of South Sudan.

Additionally, contracts intended for local South Sudanese traders were awarded to companies owned by inexperienced middlemen, foreign-owned companies, and companies that existed only on paper.

Unqualified companies

Unqualified companies applied for, and in many cases received, LC-backed contracts with the criteria set up by the JTC for the allocation of LCs frequently ignored, easily manipulated, and awarded based on pressure from political and military elites.

For example, the requirement of a signed sales contract between the applicant (importer) and the beneficiary (exporter) was often ignored, and the consignee and consignor were the same person or entity.

This resulted in LCs being awarded to non-vetted companies, firms owned by friends and family members of the ruling class, and “briefcase companies” with no ability to deliver goods.

The fragmented approval process, coupled with weak oversight measures, opened the door for politically exposed persons (PEPs) to access the LCs programme.

The Sentry found that at least $125 million of the $993 million in contracts awarded from mid-2012 to mid-2015 were granted to companies owned — through complex networks — by powerful politicians and their relatives.

Because the relatives, friends and cronies did not have the capacity to perform; they simply sold the approvals to the highest-bidding third parties.

In many instances, documents required to apply for an LC were easily or falsely obtained and were not vetted with fraudulent invoices and false customs documents easily obtained and submitted as proof of delivery.

“…applicants were sent by JTC (the joint technical committee) directly to the Bank of South Sudan, which in turn released to them the funds in cash dollars. The cash went straight to the black market,” a former senior official told The Sentry.

There was more.

The briefcase companies that received LC allocations to deliver goods, either directly or as contracted exporters, were formed on paper months — and sometimes even weeks or days — before receiving their LCs.

Royal International Enterprises Ltd

Royal International Enterprises Ltd, owned by family members of two politically exposed persons, was one such company.

Six weeks after its incorporation on March 10, 2015, the company received a $1 million LC from the Ministry of Health to import pharmaceuticals.

Another one was Shekun General Trading in Uganda. Despite not being licensed by the Ugandan National Drug Authority to buy, sell, or export pharmaceuticals; has no physical address in Uganda; is not registered with the Ugandan Revenue Authority and does not appear in Ugandan export data between 2013 and 2015, the company was one of the 13 Ugandan companies that were contracted to export $20 million in pharmaceuticals to South Sudan.

Interestingly, all the companies did not have physical locations or licences issued by the National Drug Authority, which are required for pharmaceutical exporters under the Ugandan National Drug Regulations of 2014.

“…these companies often lacked the background or infrastructure needed to complete business transactions, failed to register with tax revenue authorities, did not have licences to export commodities, and sometimes did not even have a physical office,” read in part a report by South Sudan auditor-general.

Contracts for petroleum products, which accounted for one-third of the total LC allocations, amounting to at least $300 million, were awarded by Nilepet, a government-owned oil company, or the Ministry of Petroleum and Mining.

The Sentry found that at least 65 per cent of the LCs, worth $200 million, went to companies that did not appear as consignees in relevant Kenyan trade data during the time they were supposed to be exporting urgently needed gas, diesel, and other products to South Sudan.

Nilepet awarded about $191 million in contracts to private companies paid via LCs, but the AG reported that after his review of documentation and delivery reports, he “could not confirm delivery of fuel by private companies who received letters of credit from Nilepet”.

In another example, Sharty for Trade and Investment Co, a South Sudan-registered company, was allocated numerous LC-backed contracts.

Three contracts awarded in 2014 totalled $1.1 million, and for all three contracts, Sharty appeared to enter into contracts with the Uganda-based export firm Denkel General Trading Company Ltd, majority-owned by South Sudan-based Eritrean trader Ghebremeskel Tesfamariam Ghidey.

Sharty sold its contracts to Denkel for 180,000 SSP (roughly $56,962 in 2014) walking away with the cash for doing nothing, and importing no products.

The aftermath?

The value of goods imported turned out to be at the black or open market rates, thereby defeating the objective of providing goods to consumers at affordable rates.

Had the programme operated as planned, markets would have been stocked with food and other essential goods. Instead, drug, food, and fuel shortages remained, and prices skyrocketed.

The government failed to repay the borrowed money and entered arbitration proceedings initiated by the Qatari bank at the International Center for Settlement of Investment Disputes.

By July 2020, the matter remained unresolved, and the government reached a debt-restructuring agreement with the Qatari bank.

“The failure of the LCs programme and the subsequent corruption scandal resulted in shortages that would affect the country for years to come.”

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