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ILLEGALLY BINDING

THE MISSING ANGLO LEASING SCANDAL

PROMISSORY NOTES

Mars Group Kenya

www.marsgroupkenya.org

GAP Report #2

About the GAP Report

The Mars Group implements a Governance Accountability Project (GAP), which through a series of research reports seeks to encourage Kenyans to call and hold our Government to account. The main focus of our research is grand corruption, a phenomenon that continues to characterize the behaviour of the higher echelons of our society. It is our hope that the projects research resources can provide an evidencebase for citizens participation in the fight against corruption.

The GAP report series attempts to put figures to grand corruption

and abuse of power for private gain. We hope that the push for change will be enhanced by such information, and that the media and civil society will find it useful as a reference source. We would most desire to see citizens use these reports to speak truth to power and demand accountability from their Government and leaders.

Since January 2007, the Mars Group has published the following reports: Report No. KACC # 1 KACC # 2 GAP # 1 GAP # 2 Report Title Kenya Anti Corruption Commission Annual Report 2005-2006 Kenya Anti Corruption Commission 4th Quarterly Report December 2006 VSAT @ Posta - Postal Corporation of Kenya VSAT contracts - March 2007 Illegally Binding - Anglo Leasing and Finance Limited Promissory Notes March 2007 Published January 2007 February 2007 March 2007 March 2007

Every report contains a multimedia database of analysis and information on corruption and governance including television and radio clips, available from the Mars Group on CD-ROM. To order a CD_ROM of a particular report send an email to info@marskenya.org and we will contact you to arrange delivery.

You can download any report, free, from http://www.marskenya.org. Visitors can register online, at no cost, for regular updates.

Mwalimu Mati, Mars Group March 2007

Table of Contents
PART ONE:

Introduction.....................................................................................12

Executive Summary.......................................................................19

Anglo Fleecing: How To Get Away With It .................................. 25

Is The AG Incompetent Or Unconcerned .................................... 38

Specifics About The Promissory Notes ........................................ 45

What Should Be Done: The Challenge .......................................... 51

PART TWO: Media Reports

The Story breaks ...................................................................................... 3 Initial Government Reaction ................................................................. 5 KACC Moves In .......................................................................................8 The Anglo Leasing and Finance Company .........................................12 Public Reaction & Comment .............................................................19 Magara PAC Probe .............................................................................32 Githongo Breaks Silence........................................................................ 37 Government Acts ................................................................................. 39 Claims of Cover-up & Patronage ..........................................................48 Political Fallout ......................................................................................56 French Firm Denies Any Wrong-doing.................................................60 Auditor Generals Reports ......................................................................61 Sh90 Million Refunded ........................................................................ 63 Spotlight falls on Mwiraria .................................................................. 64 Others in Focus in Probe ...................................................................... 68 Probe Moves Overseas ........................................................................... 69 Comment and Reaction from Donors .................................................. 70 VP Awori Under the Microscope........................................................... 72 The Scandal Is Played Down ................................................................... 74 Githongo Steps Down ............................................................................ 76

Over to You, Wako .............................................................................. ..84 Uhuru PAC Probe .................................................................................... 84 The Githongo Dossier ............................................................................ .96 Heads Roll At The Top ......................................................................... .104 KACC Probes Scandal, Redux .............................................................. ..112 AG, KACC At Odds ..................................................................................114 Back In The Fold .................................................................................. ..116 KACC Clears Major Players .................................................................. .119

PART THREE: Supporting Documents

Section 1 Special Audit Report of the Controller and Auditor-General on Financing, Procurement and Implementation of Security Related Projects, April 2006. Public Accounts Committee Report on Special Audit Report on Procurement of Passport Issuing Equipment by the Department of Immigration, Office of the Vice-President and Home Affairs, March 2006. Kenya Anti-Corruption Commission, Annual Report 2005-2006.

Section 2

Section 3

Section 4

Statement of Events by John Githongo, former Permanent Secretary for Ethics and Governance, Office of the President, November 2005. Transcript of Newsline talk-show, Kenya Television Network, aired on Thursday, 1st February, 2007.

Section5

Supporting Documents on Forensic Laboratories Section 6 Letter dated September 5th 2001. Dan Ameyo, Chief State Counsel to Forensic Laboratories Limited. Letter dated August 23rd 2001. J.F.A. Agili, Office of the President to Dan Ameyo, Chief State Counsel. Letter dated August 24th 2001. Dan Ameyo, Chief State Counsel to J.F.A. Agili, Office of the President. Letter Dated September 4th 2001. Dan Ameyo, Chief State Counsel to J.F.A. Agili, Office of the President.

Section 7

Section 8

Section 9

Section 10 Letter dated September 4th 2001. J.F.A. Agili, Office of the President to Dan Ameyo, Chief State Counsel.

Section 11

Letter dated June 15th 2001. Dan Ameyo, Chief State Counsel to J.F.A. Agili, Office of the President. Letter dated May 28th 2001. J.F.A. Agili, Office of the President to Dan Ameyo, Chief State Counsel. Legal Opinion of the Attorney General of Kenya dated September 3rd 2001. Signed by Amos Wako, Attorney General. Legal Opinion of the Attorney General of Kenya dated March 14th 2001. Signed by Dan Ameyo, Chief State Counsel. Addressed to the Permanent Secretary, Provincial Administration and Internal Security, Office of the President. Legal Opinion of the Attorney General of Kenya dated March 16th 2001. Signed by Dan Ameyo, Chief State Counsel. Legal Opinion of the Attorney General of Kenya dated March 19th 2001. Signed by Dan Ameyo, Chief State Counsel directed to J.F.A. Agili, Office of the President.

Section 12

Section 13

Section 14

Section 15

Section 16

Section 17

Letter dated March 19th 2001. J.F.A. Agili, Office of the President to Dan Ameyo, Chief State Counsel. Overview of the Forensic Sciences Laboratory Project (author unknown).

Section 18

Supporting Documents on Passports Section 19 Letter dated May 28th 2004. J.M. Oyula, Financial Secretary, Ministry of Finance to the Managing Director, Anglo Leasing and Finance Limited.

Section 20 Legal Opinion of the Attorney General of Kenya dated December 15th 2003. Signed by Amos Wako, Attorney General. Section 21 Undated Memorandum by Dr. Chris Murungaru, MP.

Section 22 Undated press release by Kiraitu Murungi, MP. Section 23 Undated response to the Controller and Auditor General by Dave Mwangi, Permanent Secretary, Provincial Administration and National Security.

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Section 24 Press Statement by John Githongo, September 19th 2006. Other Supporting Documents Section 25 Deferred Payment Agreement between the Government of the Republic of Kenya and First Mercantile Securities Corporation. July 11th 2002. Section 26 Transcript of a 3-way conversation between John Githongo, David Mwiraria and Kiraitu Murungi. Recorded on June 11th, 2004. Section 27 Assorted direct correspondence between the Government of Kenya and Anglo Leasing and Finance Limited. Section 28 The External Loans and Credit Act - Chapter 422 of the Laws of Kenya. Section 29 Republic of Kenya vs. Nedermar Technology BV Ltd (Netherlands). Section 30 President Kibakis speech to the nation on his Inauguration as Kenyas 3rd President. December 30th, 2002. Section 31 Extract from Kenya Gazette Notice, 19th January 2007.

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Introduction
The story of the Anglo Leasing Scandal cannot as yet be conclusively told. Too much information still remains hidden by the Government of Kenya from the people of Kenya. This is obviously not acceptable. The time has come, for the people of Kenya to call the Government of Kenya to account, and demand an end to the ceaseless investigations of Anglo Leasing that go nowhere.

In its entirety the Anglo Leasing grand corruption scandal is made up of 18 security related scandals, of which most were either with fictitious companies, or involved committing the government to pay for goods and services that were non-existent or overpriced.

Only two specific contracts were actually given to Anglo Leasing and Finance Limited. The first in 2001 was for the construction of a state of the art forensic science laboratory on Kiambu Road for the Kenya Police Criminal Investigation Department. The second in 2003 was for a state of the art immigration security and documentation control system for the Kenya Department of Immigration. The infamy of these two deals gave a host of other corruption scandals their name Anglo Leasing Type Contracts. It is common ground that there are 18 such contracts.

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It was a condition of the two Anglo Leasing and Finance Limited contracts that payments would be in the form of irrevocable promissory notes issued on the dates the two contracts were signed: to the order of Anglo Leasing and Finance Company Limited. Investigators have confirmed that this was a fatal (perhaps deliberate) mistake as Anglo Leasing and Finance Limited is not registered in any of the countries (Switzerland or United Kingdom) it claims to come from. Neither of the two projects ever got off the ground. Though this is denied by the Government of Kenya, official reports suggest that because of the 18 contracts, the total exposure of the Government of Kenya is over Kenya shillings 56.3 billion. This figure may seem alarming but it has been obtained from official government reports that have never been controverted by any Government official. In his April 2006 special audit of the 18 security related contracts, the Controller and Auditor General, Mr. Evan Mwai wrote that through the eighteen security related supplier/ financier credit contracts/ projects, Government has been committed to spending a total of Ksh 56.33 billion. The commitments were in the form of Irrevocable Promissory Notes which were given to the credit providers on the dates the respective credit agreements were signed.

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Even though over 50 separate irrevocable promissory notes with a total value of Kshs 6.9 billion shillings were issued to Anglo Leasing and Finance Company Limited by the Government of Kenya between August 2001 and December 2003; there is no mention in any official report thereafter, of what happened to these irrevocable promissory notes. This strikes one as odd considering that since May / June 2004, the Government of Kenya has consistently argued that all money paid out has been returned. We believe the Government of Kenya is intentionally misleading the Kenyan people. We publish this report with the intention of generating public discussion on the fate of the irrevocable promissory notes that were

unlawfully issued to various companies between 2001 and 2004. If one is interested in assessing how much money has been lost by the Government of Kenya, because of the 18 contracts, several questions arise. These questions should pose no difficulty if the GOK believes in accountability. Chief among them:

Why is there a determined effort by the GOK to avoid discussion of the irrevocable promissory notes?

What became of these irrevocable promissory notes which, as negotiable instruments of the sovereign kind, are irrevocable and

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therefore cannot be cancelled as simply as the Finance Minister Amos Kimunya claimed on Newsline on February 1, 2007?

Where is the evidence that the Ministry of Finance has issued formal instructions for the cancellation or repudiation of the irrevocable promissory notes?

Where is the evidence that the irrevocable promissory notes have been returned? The only way in which they will not be due for payment is if they have been voluntarily returned by those holding them. There is no mention in

official reports that they have been returned. Why? Further, where is the evidence that GOK has obtained a formal complete discharge and release of its obligations?

If they were returned, by whom, and when were they returned? Why, if they have been returned, have Kenyans not been shown evidence of their return to date?

How did irrevocable promissory notes get issued to a phantom company?

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Who was responsible for handing Anglo Leasing and Finance Limited close to Ksh 6.9 billion?

Who was responsible for exposing the Government of Kenya and therefore the people of Kenya to a loss of Ksh 56.3 billion on 18 Anglo Leasing type contracts?

Why has the Treasury taken no serious action to push the investigation by KACC of this fraud? Why is it disinterested in the fate of the promissory notes?

Why has the Government of Kenya not acted to ensure that the detailed audit reports on each of the 18

contracts are tabled in Parliament as recommended by the PAC in March 2006? What is the AGs legal opinion on the validity of the promissory notes and indeed the 18 contracts? If he believes they are invalid, what action does the Attorney General propose to take to ensure that Kenya does not pay illegitimate debts? Can the AG inform the public of the number and status of all litigation related to these 18 contracts and other security related procurement for the period 1997 to

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date? This was actually the second recommendation of the 2006 PAC report.

This report is based on a comprehensive analysis of official reports (inPart Three) by inter alia the Controller and Auditor General, the Parliamentary Accounts Committee, and the Kenya Anti-Corruption Commission. It also contains (in Part Two), a compendium of media reportage on the Anglo Leasing scandal starting from the initial revelation and running through to recent developments. It is instructive that among the unchallenged findings of the Controller and Auditor General and the Public Accounts Committee of Parliament, are

specific findings against the Vice President, the Minister for Finance and the Attorney General all of whom individually approved the Immigration Department supplier/credit agreement with Anglo Leasing Finance Limited between September and December 2003. We have entitled this report Illegally Binding because it focuses on a payment system which has been exploited to assure the escape with public

Part Three of this report contains the Special Audit Report of the Controller and Auditor General on the 18 contracts

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money of the perpetrators of a fraud. A detailed discussion of the effect of Promissory Notes can be found at the very end of Part 1 of this report. The report is meant to be a living document. As the Anglo Leasing investigation unfolds we will update it in the hope and certainty that Kenyans shall know the truth about who embroiled us in this grand corruption scam, who has stolen our money, and who has allowed them to get away with it. The main question is where are the promissory notes?

Mwalimu Mati CEO

Mars Group Kenya

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Executive Summary

etween 2001 and 2003, a non-existent company, Anglo

Leasing and Finance Company Limited entered into 2 separate contracts with the Government of Kenya, under 2 different

administrations (Moi and Kibaki). As a result of these contracts the GOK committed itself to pay Ksh 6,930,209,999.25 (equivalent to US$ 92,402,799.99 or just under 25% of the GOK Health Budget). Had this money not been misused it would have increased per capita spending on the health of Kenyans by US$4 for the year. The value of the 2 contracts is equivalent to a third of the 2005/6 expenditure on health. It is 5 times as much as the annual CDF across the country.

The scandal was exposed in Parliament on April 20, 2004 by Maoka Maore, MP for Ntonyiri and a member of the opposition party KANU, who while contributing to the Government Financial Management Bill of 2004, asked a question that revealed

Maoka Maore, MP exposed the scandal to Parliament

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corruption networks had survived the transition between Moi and Kibaki, unscathed.

Defective Mahindra make jeeps dumped in a junk yard

Mr. Maore tabled a 3 page document which included a payment voucher for Ksh 91.6 million paid as a 3% commitment fee to a United Kingdom based firm called Anglo Leasing & Finance Limited of Alpha House, Liverpool, U.K, to supply the Department of Immigration with immigration security and documents control computer hardware and software, 300,000 passport documents and lamination films for passports. He asked for a response from the Government as to why it had just awarded a 2.7 billion shilling Department of Immigration contract to a company that

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had been blacklisted 6 years previously for supplying the Kenya Police with defective Mahindra make jeeps. Finally, he accused officials in the Ministry for Home Affairs (the parent ministry for the Department of Immigration) of conspiring to inflate the contract price by US$22 million (equivalent to Ksh 1.65 billion at an exchange rate of Ksh 75 for every US$1). This was explosive stuff coming barely 15 months into the life of the Kibaki government, which had been elected in December 2002, primarily on a promise that corruption will cease to be a way

of life. John Githongo, the Permanent Secretary for

Governance and Ethics in the

Former PS, Governance and Ethics, John Githongo

Office of the President was moved

to brief President Kibaki the next day on this development and to write thereafter to the Kenya Anti Corruption Commission requesting an investigation of Mr. Maores claims. According to Mr. Githongos diary of that period (colloquially known as the Githongo Dossier) Mr. Maores claims were not new to him, having first

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heard the same in early March 2004 from sources. Indeed, Githongo had already embarked on an enquiry into the matter which involved regular presidential briefings and consultations with Ministers and the Vice President Moody Awori, who was the substantive minister responsible for the Department of Immigration. At this
Vice President Moody Awori implicated by the PAC

point, it appears Githongo was trying to

establish who had perpetrated this fraud and did not suspect that Anglo Leasing and this passport deal would end his career within the Kibaki government and totally destroy any anti-corruption credentials Kibaki ever possessed. Within 2 weeks of the Maore parliamentary revelation, the Kenya Anti Corruption Commission investigators had established that Anglo Leasing & Finance Limited did not exist in the United Kingdom, and that the Department of Immigration passports contract was a fraud. On May 2, 2004 Githongo records that he briefed the President that senior officials in government were possibly implicated in the unfolding saga. Those mentioned by the investigators at this stage included Hon. Moody Awori,

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Hon. Kiraitu Murungi, Hon. David Mwiraria, Hon. Chris Murungaru, PS Home Affairs, Mr. Sylvester Mwaliko, PS Finance, Mr. Joseph Magari, PS Internal Security Mr. David Mwangi, Mr. Alfred Getonga, Mr. Deepak Kamani and Mr. Jimmy Wanjigi. That was the beginning of the most complex and significant corruption investigation in Kenyan history. A scandal
Deepak Kamani Wanted for questioning by KACC

that revealed the staying power of embedded national and internationally located corruption networks; the fragility

of institutional control systems in the Government of Kenya (assumed to have been strengthened since Kibaki took over); and the extent to which political motives and greed combined to cost the Treasury over Ksh 56.3 billion between 1997 and 2004. What follows is a report that traces the course of this investigation and asks certain questions, which we believe have been largely ignored by the officialdom and the mass media, on the first hand deliberately; while on the other, inadvertently. The report is based on a comprehensive analysis

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of official reports by inter alia the Controller and Auditor General, the Parliamentary Accounts Committee, and the Kenya Anti-Corruption Commission. It also contains a compendium of media reportage on the Anglo Leasing scandal starting from the initial revelation and running through to recent developments. The main question is where are the promissory notes? In his April 2006 special audit of the 18 security related contracts, the Controller and Auditor General, Mr. Evan Mwai wrote that through the eighteen supplier/ security financier related credit
Mr. Evan Mwai Controller & Auditor General

contracts/ projects, Government has been committed to spending a total of Ksh 56.33 billion. The commitments were in the form of Irrevocable Promissory Notes which were given to the credit providers on the dates the respective credit agreements were signed.

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Anglo-Fleecing: How to get away with it

he larger Anglo Leasing grand corruption scandal comprises

18 security related scandals of which most were either with fictitious companies, or involved committing the government

to pay for goods and services that were non-existent or overpriced. The scandal was first exposed in April 2004 by a parliamentary question which triggered a 3 year investigation that has yet to reach a conclusion. A good description of what transpired in the Anglo Leasing scandal goes thus: The modus was clear. The Government of Kenya would enter into a contract with a number of financing entities that did not exist which meant that the Government had no legal recourse. It also implied an effort on the part of financiers to avoid revealing their true identities which flew against common practice by reputable international financiers. Secondly in most of the contracts the GOK started debt repayments before substantive implementation of the projects had begun. The implication of this was that the bogus financing companies used the Governments money to implement the projects and then proceeded to charge interest on what are in truth fictitious loans by the Government to itself. John Githongo, November 22, 2005

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The 2 specific contracts that were actually given to Anglo Leasing and Finance Limited were for the construction of a state of the art forensic science laboratory on Kiambu Road for the Kenya Police Criminal Investigation Department and for a state of the art immigration security and documentation control system for the Kenya Department of Immigration respectively. The infamy of these 2 deals gave a host of other corruption scandals their name Anglo Leasing Type Contracts. It is common ground that there are 18 such contracts.

It was a condition of both contracts that payments to Anglo Leasing and Financing would be in the form of irrevocable promissory notes issued on the dates the 2 contracts were signed to Anglo Leasing and Finance Company Limited. Investigators have confirmed that this was a fatal mistake in that Anglo Leasing and Finance Limited is not registered in any of the countries (Switzerland or United Kingdom) it claims to come from. Neither of the projects ever got off the ground. Though this is denied by the GOK, official reports suggest that under the 18 contracts, the total exposure of the GOK is over Ksh 56.3 billion. This staggering amount would, by way of example cater for the Ksh 1 billion per annum Youth Enterprise Fund announced by the Minister for Finance in

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his budget speech of 2006 for 56 years. It is equivalent to 68% of what the Minister for Finance allocated to physical infrastructure in 2006. It is 37 times more than the Ksh 1.5 billion that was allocated by GOK for water projects in the Arid and Semi Arid Lands of Kenya (comprising 65% of Kenyas land mass) presumably intended to serve more than 10.2 million Kenyans. This figure (Kshs. 56.3 billion) may seem alarming but it has been obtained from official government reports that have never been controverted by any Government official. As recently as April 2006, in a special audit of the 18 security related

contracts, the Controller and Auditor General, Mr. Evan Mwai wrote that through the eighteen security related supplier/ financier credit contracts/ projects, Government has been committed to spending a total of Ksh 56.33 billion. The commitments were in the form of Irrevocable Promissory Notes which were given to the credit providers on the dates the respective credit agreements were signed. Even though over 50 separate irrevocable promissory notes with a total value of Kshs 6.9 billion shillings were issued to Anglo Leasing and Finance

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Limited by the Government of Kenya between August 2001 and December 2003; there is no mention in any official report thereafter that states the fate of the irrevocable promissory notes. This strikes one as odd considering that since May / June 2004, the GOK has consistently argued that all money paid has been returned.

Both the Controller and Auditor Generals 2006 Audit Report and the Parliamentary Accounts Committee (2004 and 2006) found that all the 18 Anglo Leasing type contracts were either unlawful, irregular or have not been performed. Further the PAC in their 2006 Audit Report wrote

Hon.Uhuru Kenyatta, Chairman of the PAC

The Government does not appear to have taken any steps to stop payment against the 18 security related contracts. In his evidence before the Committee, the Governor of the Central Bank of Kenya produced copies of letters that he wrote to Treasury regarding continuation of payment of sums due on contracts with external private creditors that were payable through the Post Master Generals (PMGs) consolidated fund services

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In several of the 18 other cases the GOK has also been locked into long term repayment arrangements through the facility of irrevocable promissory notes, and in at least one case deferred payment agreements.

GOK wanted to use 980 Post Offices to roll out Internet services for the Postal Corporation of Kenya via a scheme called Posta Surf. GOK signed deferred payment agreements.

with maturity/due dates which run into the future, by as much as ten years hence. According to two special audits by the Controller and Auditor General and the Parliamentary Accounts Committee (2004 and 2006) all the 18 Anglo Leasing Type Contracts are either unlawful, irregular or have not been performed.

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 Why is there a determined effort to avoid discussion of the

irrevocable promissory notes?

What became of these irrevocable promissory notes which, as

negotiable instruments of the sovereign kind, are irrevocable and therefore cannot be cancelled as simply as the Finance Minister Amos Kimunya claimed on February 1, 2007?

Where is the evidence that the Ministry of Finance has issued formal
instructions for the cancellation or repudiation of the irrevocable promissory notes?

Where is the evidence that the Irrevocable Promissory Notes have

been returned? The only way in which they will not be due for payment is if they have been voluntarily returned by those holding them. There is no mention in official reports that they have been returned. Even if they have been voluntarily returned the holder would have to give GOK a complete release and discharge of its obligations.

If the Irrevocable Promissory Notes were returned, by whom, and

when, were they returned? Why have Kenyans not been shown evidence of their return to date?

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 How did irrevocable promissory notes get issued to a phantom

company?

Who was responsible for handing Anglo Leasing and Finance Limited
close to Ksh 6.9 billion?

Who was responsible for exposing the GOK to a loss of Ksh 56.3
billion?

Why have the Treasury and the Central Bank of Kenya, taken no
serious action to push the investigation by KACC of this fraud? Why is it disinterested in the fate of the promissory notes?

Why has the GOK not acted to ensure that the detailed audit reports
on each of the 18 contracts are tabled in Parliament as promised to, and recommended by the PAC in March 2006?

What is the AGs legal opinion on the validity of the promissory notes
and indeed the 18 contracts?

Can the AG inform the public of the number and status of all litigation
related to these 18 contracts and other security related procurement for the period 1997 to date?

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At its heart, Anglo Leasing concerns 18 security related procurement contracts in which the past and present Government of Kenya, by single sourcing, committed to pay over 56 billion shillings to non-existent companies; or to companies that overpriced the services they purportedly delivered to the Government. The range of services run the gamut from telecommunications systems, security installations, vehicles, document security systems and physical facilities such as the Nexus Communication Facility on Karen Road, Nairobi. The most senior public officers, including the Vice President, the Attorney General, Ministers and Permanent Secretaries have been implicated either as perpetrators or as cover-up actors. As stated earlier, no less than three special audits, into the two best known contracts (the passport and forensic laboratory) by the Public Accounts Committee of Parliament (PAC), and the Kenya National Audit Office, in 2004 and 2006, have made findings at great variance with the GOK position as articulated by some Ministers that no money was lost or that this was a scandal that never was. The findings of the PAC and the Controller & Auditor General (C&AG) have not been challenged by the Government. The most direct finding of the 2006 PAC Report, chaired by Hon. Uhuru

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Kenyatta MP is that the principals behind Anglo Leasing projects were probably a front for persons within President Kibakis administration. Other unchallenged findings from all investigations into this scandal include findings against the Vice President, the Minister for Finance and the Attorney General all of whom individually approved the supplier/ credit agreement with Anglo Leasing and Finance Limited between September and December 2003.

According to the PAC report on the Passport Contract the Vice President, Moody Awori, gave his approval on 8th

Hon. David Mwiraria, approved Anglo Leasing contract

September 2003 and even requested that interest payable (from 5% to 4%) on the fictitious credit be reduced; the Finance Minister, David Mwiraria, approved the agreement on 2nd October 2003 and even instructed his Permanent Secretary, Joseph Magari, to sign the contract and promissory notes on his behalf; the Attorney General, Amos Wako,

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approved the agreement in December 2003 despite the fact that the agreement was prepared without taking into account his comments on it, and further the Attorney General admitted to Parliament that the legal opinion he gave on the deal was designed to give comfort to Anglo Leasing and Finance Limited which turned out to be a phantom company.

Worse still, the PAC states although the

office of the Attorney General eventually cleared the Agreement, subject to Treasurys evaluation and concurrence on the Financial and Technical aspects, a

perusal of the Agreement reveals that it contains many clauses which appear to be disadvantageous to Government. For instance, it is observed that under various AG, Hon. Amos Wako, Signed the Promissory Notes issued. clauses in Article 31 of the Agreement, the

supplier would be entitled to demand the immediate payment of the total sum of the Agreement and the re-payment of all sums outstanding arising from the agreement in the event of default by the buyer

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All investigations into this corruption scandal definitively state that Anglo Leasing and Finance Limited does not exist in any of the jurisdictions in which it purports to be registered. No one in the government has admitted to knowing who Anglo Leasing and Finance Limited is. Yet, a careful reading of official reports demonstrates that at least some of them are not being completely truthful. For example, the Minister for Finance, David Mwiraria, in his own testimony to the PAC stated that he had instructed his PS, J.H.M. Oyula, in June 2004 to make contact with Anglo Leasing and Finance Limited to get the company to pay back money it had received from GOK. He also

said as much to John Githongo, in a conversation that was uploaded onto the internet by Mr. Githongo in January 2007. Curiously, even though Oyula did manage to get some of the money back, he still maintained that he did not know who he was corresponding with. A close reading of his letter addressed to the purported Managing Director of Anglo Leasing and Finance Company Limited suggests that we have not been told the truth. Mr. Oyula is one of two key Permanent Secretaries in this affair who retired quietly in the wake of this scandal. The other is Mr. Dave Mwangi,

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formerly of the Office of the President who, according to the Githongo dossier, prepared a special report for the President entitled Summary: Security Contracts under Special Purpose Financing Vehicles in the Office of the President listing all the contracts in the security sector and their projects, and openly identifying the principals behind Anglo Leasing. This document has not become available, but Mr. Mwangis justification of the project can be read in his response to the audit queries raised by the special audit of 2004. The Treasury broke the law repeatedly and abdicated its duties to assess the desirability of and legality of external loans, as required by the External Loans and Credits Act (Cap 422) that were incurred because of the contracts; by letting its Debt Management Unit

Treasury-abdicated its duties

process payments without checking

that projects were actually being implemented; by failing to report the credit to Parliament; and to date, by failing to take any action to withdraw the authority of accounting officers who flouted the law. To date Treasury has taken no serious action to push the investigation by KACC of this fraud.

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Both the PAC and the C & AG noted that there is no documentary evidence that the contracts were cancelled. The PAC dwelt on this by pointing out that in his evidence before the PAC, the PS Treasury Joseph Kinyua, claimed to have stopped payments on the 18 contracts without showing written proof. The PAC also found that contrary to David Mwirarias testimony to the PAC, the Ministry of Finance made no formal instructions to suspend payments on the contracts. Since then, where is the evidence that the Ministry of Finance has issued such formal instructions?

The GOK has not acted to ensure that the detailed audit reports on each of the 18 contracts are tabled in Parliament. As of March 2006, the PACs position was that although the PS Ministry of Finance received audit reports from the Kenya National Audit Office relating to the 18 contracts as early as October 2005, the PS had not responded and this was the cause of the delay in tabling the contracts before parliament. To date, none of the 18 controversial agreements, amounting to over 56 billion shillings, have been tabled before Parliament as required by section 5 of the External Loans and Credit Act, even though in March 2006 the Government told Parliament that such a report was still being prepared

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for presentation to Parliament. As of April 2006, the Controller and Auditor General was known to have prepared detailed audit reports for each of the 18 scandals none of them has been presented to Parliament to date.

Is The AG Incompetent or Unconcerned?

The Attorney General, Amos Wako came in for especially strong criticism. The AG was not involved in negotiations for the contracts as required by the Financial Regulations2; neither did he make any efforts to demand his involvement as the chief legal government advisor3. The PAC noted the

AGs assertion that in the 2 specific contracts given to Anglo Leasing and Finance Limited. The legal opinions he gave were meant to assure the investor or the person giving rights under the contract that the agreement has complied with the provisions of Kenyan Law. A legal opinion therefore is a statement of comfort to the investor that the contract is legally enforcable under Kenyan law.

Government Financial Regulations & Procedures chapter 9 on Borrowing by Government: the office of the AG shall be involved at all times during negotiations for loans, drafting or execution of ensuing legal documents. Section 26(2) of the Constitution states: The AG shall be the principal legal advisor to the Government of Kenya.

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The Attorney General had completely dropped the ball! The PAC actually
accused the AG, of abdicating his responsibilities, wryly commenting that
The Attorney General has taken an unbalanced and partisan view of his role in Government contracts. He feels obliged to protect the interests of the foreign investors but not those of the Government for which he is the advisor.

The Attorney General gave two legal opinions that are now available. In the first dated 15 , June 2001, the AG through his Chief State Counsel Dan Ameyo, gave the go ahead to the Forensic Laboratory contract (together with a vehicles contract for Silverson Establishment), in such terms as to

ensure that the contract was shielded from parliamentary scrutiny. The AGs legal opinion was that the GOK was in some form of rental agreement and that his office did not consider this as a loan or credit within the meaning of the External Loans and Credits Act (Cap. 422).

In the other legal opinion he gave with respect to the Passports contract, the Attorney General on 15, December 2003 wrote: in my opinion each Promissory Note constitutes an unconditional promise made by the Government of Kenya, engaging to pay on demand, at a fixed

39

and determinable future time the sum stated in each Promissory Note to the order of Anglo Leasing and Finance Limited. Each Promissory Note is valid binding and enforceable in accordance with its specific terms.

It is apparent, and was so to the PAC, that the Attorney General Amos Wako, saw his function in these transactions as merely to provide a pro forma legal opinion to satisfy those contracting with the government in accordance with international norms. The PAC was concerned that the AG did not in the contracts under scrutiny analyse the contract terms in order to protect the government from possible abuse. Furthermore, the PAC accepted the AGs testimony that his office did not have the capacity to undertake a statutory verification of entities transacting with the Government, and no effort seems forthcoming to save the situation, and as resignation of Mr. Wako or his dismissal does not appear to be on the cards, it falls on Kenyans to ask Mr. Wako a question or two. What is the AGs legal opinion on the validity of the promissory notes and indeed the 18 contracts? This is germane as the GOK is currently in litigation in Kenya and abroad with inter alia Universal Satspace and Nedemar Technologies BVI.

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Since June 2004, there has been a determined effort to avoid discussion of the irrevocable promissory notes. indeed, there has been no official comment on their fate, until Hon. Amos Kimunya, Minister for Finance discussed them perfunctorily on the Newsline Television talkshow on February 1, 2007. The entire affair has also seen cover up allegations, chiefly made by now exiled PS for Governance and Ethics, John Githongo. John Githongos dossier details a series of attempts to stall his enquiry and cover-up the Anglo Leasing scandal. He states that

he was counseled to go slow, by the Minister for Justice and Constitutional

Hon. Kiraitu Murungi Counseled Githongo to go slow

Affairs, Kiraitu Murungi, the Minister for

Finance, David Mwiraria, and the Director of the Kenya Anti Corruption Commission, Justice Aaron Ringera. They have each denied this, but the PAC believed the evidence of John Githongo (exiled PS for Governance & Ethics) and disbelieved that of Kiraitu Murungi who was dropped as Minister for Justice and Constitutional Affairs after the government defeat at the constitutional referendum of 22 nd November

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2005, the date of Githongos dossier. He served as Minister for Energy for a couple of months until February 2006 when the President accepted his resignation because of the Githongo complaint. Mr. Murungi rejoined the cabinet on November 16, 2006, a week after KACC recommended closure of the file containing Githongos complaint against him; and two months before the Attorney General accepted KACCs recommendation, on January 15, 2007. In another twist, it has become apparent that the contracts entered into by the government may not be as easily disavowed as the Government claims. At present at least two of the

contracts are the subject of litigation. In the Project Nexus litigation Kenya government assets in Holland are exposed to attachment by Nedemar Technologies BVI (incorporated in St. Vincent and the Grenadines Islands); while Universal Satspace(North America) briefly shut down Internet access to nearly 400 Post Offices around the country, before a new provider (Safaricom) was contracted. The position of these claimants against the GOK is that they have valid and enforceable contractual rights, partly because the AG and other high level GOK officials bound the

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government to pay for their services. More cases are likely to be instigated against the GOK. All of them should be very closely watched, to ensure they are not knobbled by the devious minds that seem to populate our justice and law and order sector. At the risk of being repetitive, the commitment by Government was made by way of issuing irrevocable promissory notes. On the passport contract alone, the Government is committed to spend Euros 31.89

million equivalent to Ksh 2.8 billion

Hon. Amos Kimunya, Minister for Finance Claimed GOK would not pay the Promissory Notes when presented for payment

shillings (exchange rates Euro 1 to Ksh

89). The commitment is in the form of irrevocable promissory notes which were given to Anglo Leasing and Finance Limited on 4th December 2003. The Promissory Notes were signed by the PS Finance. The Attorney General signed each of the promissory notes and gave a legal opinion on December 15, 2003, confirming their binding nature on the Government of Kenya.

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President Mwai Kibaki promised Kenyans zero tolerance to corruption

The fact is that the irrevocable promissory notes are sovereign paper, and because they have been signed by GOK officials, they cannot be disavowed as easily as the new Minister for Finance recently claimed on Kenyan television. It is not beyond the realm of possibility that at some point someone will come knocking demanding payment on the strength of these securities. What will the Government tell us then?

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Specifics About Promissory Notes

PASSPORT CONTRACT: According to the Kenya National Audit Office Report April 2006 on the Passport Contract, the Government issued irrevocable promissory notes worth Euros 31,890,000 equivalent to Kshs 2,838,210,000(exchange rates Euro 1.00 to Kshs 89.00). At least 29 Promissory Notes which were given to Anglo Leasing and Finance Ltd., soon after the contract No. Kenya/GOK/ HA0305/01 was signed. The commitment was made outside the Government budgetary process and unlawfully without the approval of Parliament.

The Attorney General gave a legal opinion on December 15, 2003 approving both the agreement dated December 4, 2003 and the promissory notes issued and payable to Anglo Leasing And Finance Ltd. The promissory notes were numbered 1 to 29 all issued to Anglo Leasing and Finance Limited. The AGs legal opinion references a copy of the agreement dated December 4, 2003 between the GOK as the buyer and Anglo Leasing and Finance Limited as the supplier financier of the passport equipment and contract services. He also references a letter of special authorization dated October 3, 2003

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signed by David Mwiraria, Minister for Finance, authorizing his Permanent Secretary Joseph Magari to sign the passport contract and any document thereof in connection with the said agreement on behalf of the Republic of Kenya. The irrevocable promissory notes were signed by Joseph Magari pursuant to the External Loans and Credit Act (Cap. 422) which empowers the GOK under agreements or other instruments to obtain credit from any person or other Government upon such terms of interest repayment as the Minister for Finance may determine.

The AG states in his legal opinion of December 15, 2003 that, in my opinion, each of the Promissory Notes constitutes an unconditional promise made by the Government to pay on demand at fixed and determinable future time the sum stated in each Promissory Note to the order of Anglo Leasing and Finance Limited. Each Promissory Note is valid binding and enforceable in accordance with its specific terms. An unconditional promise to pay cannot be withdrawn.

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How Kshs. 2.8 billion was to be paid

ANGLO LEASING & FINANCE LIMITED PASSPORTS CONTRACT NO. KENYA/GOK/HAO305/01 Promissory Notes Issued by GOK PROMISSORY NOTE
GOK/IMM/2003/01 GOK/IMM/2003/02 GOK/IMM/2003/03 GOK/IMM/2003/04 GOK/IMM/2003/04 GOK/IMM/2003/05 GOK/IMM/2003/06 GOK/IMM/2003/07 GOK/IMM/2003/08 GOK/IMM/2003/09 GOK/IMM/2003/10 GOK/IMM/2003/11 GOK/IMM/2003/12 GOK/IMM/2003/13 GOK/IMM/2003/14 GOK/IMM/2003/15 GOK/IMM/2003/16 GOK/IMM/2003/17 GOK/IMM/2003/18 GOK/IMM/2003/19 GOK/IMM/2003/20 GOK/IMM/2003/21 GOK/IMM/2003/22 GOK/IMM/2003/23 GOK/IMM/2003/24 GOK/IMM/2003/25 GOK/IMM/2003/26 GOK/IMM/2003/27 GOK/IMM/2003/28 GOK/IMM/2003/29

MATURITY DATE Mars Group has been unable to obtain these details

AMOUNT Mars Group has been unable to obtain these details

Total (Kshs)

2,838,210,000 47

CID FORENSIC LABORATORIES CONTRACT: The Attorney General as the Chief Legal Advisor also issued a legal opinion on the Forensic Laboratories Contract in 2001. The agreement and the promissory notes were all signed by Hon. Chris Okemo, Minister for Finance on behalf of the GOK. The AG approved the agreement and the promissory notes on September 3, 2001 thus: the Lessee has duly obtained all approvals consents and authorizations and has the necessary declarations, filings or registrations which are required or appropriate in connection with the execution, delivery and performance of this Agreement within Kenya I have also examined instructions described as promissory notes marked Anglo-Leasing/Kenya/ OP/FSL/01 to 23 dated 17th August 2001 signed for the Lessee by Hon. Chris Okemo, the Minister for Finance in the Government of the Lessee In my opinion the Promissory Notes are legal financial instruments of the Lessee evidence the Lessees debt to the Lessor and are adequate for the purpose for which they are intended and are enforceable with their terms. Dated this 3rd day of August 2001.

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How over Kshs. 4 billion was to be paid out to Anglo Leasing and Finance Limited.
ANGLO-LEASING &FINANCE LIMITED - FORENSIC LABORATORY CONTRACT NO.KENYA/OP/FSL/2001/01 Promissory Notes Issued by GOK AMOUNT MATURITY DATE PROMISSORY NOTE (US $) (Quarterly)
KENYA/OP/FSL/2001/01:001 KENYA/OP/FSL/2001/01:002 KENYA/OP/FSL/2001/01:003 KENYA/OP/FSL/2001/01:004 KENYA/OP/FSL/2001/01:005 KENYA/OP/FSL/2001/01:006 KENYA/OP/FSL/2001/01:007 KENYA/OP/FSL/2001/01:008 KENYA/OP/FSL/2001/01:009 KENYA/OP/FSL/2001/01:010 KENYA/OP/FSL/2001/01:011 KENYA/OP/FSL/2001/01:012 KENYA/OP/FSL/2001/01:013 KENYA/OP/FSL/2001/01:014 KENYA/OP/FSL/2001/01:015 KENYA/OP/FSL/2001/01:016 KENYA/OP/FSL/2001/01:017 KENYA/OP/FSL/2001/01:018 KENYA/OP/FSL/2001/01:019 KENYA/OP/FSL/2001/01:020 KENYA/OP/FSL/2001/01:021 KENYA/OP/FSL/2001/01:022 KENYA/OP/FSL/2001/01:023

17 AUGUST 2002 17 FEBRUARY 2003 17 AUGUST 2003 17 FEBRUARY 2004 17 AUGUST 2004 17 FEBRUARY 2005 17 AUGUST 2005 17 FEBRUARY 2006 17 AUGUST 2006 17 FEBRUARY 2007 17 AUGUST 2007 17 FEBRUARY 2008 17 AUGUST 2008 17 FEBRUARY 2009 17 AUGUST 2009 17 FEBRUARY 2010 17 AUGUST 2010 17 FEBRUARY 2011 17 AUGUST 2011 17 FEBRUARY 2012 17 AUGUST 2012 17 FEBRUARY 2013 17 AUGUST 2013

1,922,222.22 967,777.77 954,444.44 2,926,888.89 2,878,000.00 2,845,111.11 2,793,555.56 2,763,333.33 2,713,111.11 2,681,555.56 2,632,666.67 2,599,777.78 2,554,444.44 2,518,000.00 2,471,777.78 2,436,222.22 2,391,333.33 2,354,444.44 2,310,888.89 2,272,666.67 2,230,888.89 2,190,888.89 2,150,000.00 54,559,999.99

Total (US $)

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In both contracts, Anglo Leasing and Finance Limited was provided with 2 fold security.

1.

Signed, Irrevocable Promissory Notes which are as good as cash, and

2.

Legal Opinions by the Attorney General of the Republic of Kenya , for the avoidance of any doubt, as to the validity of the contracts and

the promissory notes guaranteeing payments under the contracts.

A perfect arrangement.

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What should be done: The Challenge

There is no reason to take the Minister for Finance at his word when he says that the promissory notes were voluntarily returned by unknown entities and cancelled upon their return by the CBK. Primarily because, it is unlikely to be the case. If it were, then surely the Auditor General would have mentioned it in his report of April 2006. Even the PAC report of March 2006, does not mention the return of the promissory notes. To to prove that the Promissory Notes have been returned nothing could be easier than to publish the holders formal and complete discharge of the GOK from its obligations to pay. It is our conclusion that what is more likely is that all mentions of money returned relates to commitment payments and interest payments. Not the principal amounts that were secured by Irrevocable Promissory Notes.

Could it be that there has been an amazing oversight by all official reports by the GOK, by the Treasury and CBK since the scandal was exposed in April 2004? Or is it more prudent to conclude that the promissory notes

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issued to Anglo Leasing and Finance Company Limited are still out in circulation awaiting redemption and then take the remedial action?. If one chooses to be prudent then the question becomes: How do Promissory Notes issued by Governments work?

Promissory notes issued by any government, including the Government of Kenya are sovereign paper. They are especially so, unless it can be demonstrated that all officials involved in issuing the promissory notes acted without authority. As such, except in proven circumstances of fraud (or even forgery) they are binding on the government. They cannot be disavowed without affecting the credit worthiness of the GOK. They are negotiable on the international financial markets and have face value.

Routinely, such instruments are bought and sold, usually at a discount before their due dates. Once issued they have cash convertibility. In the

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case of the Anglo Leasing promissory notes, each was accompanied by a legal opinion by the governments chief legal adviser, the Attorney General. It will be next to impossible for the GOK to simply refuse to pay them as the Minsiter of Finance suggests.

However , if it is the GOK position that these promissory notes are not valid then it has to overcome several hurdles . Among them : -The legal opinions of the AG . -The fact that no single GOK official or businessman has been convicted of a criminal offence related to the contracts and the irrevocable promissory notes .

From a reasonable assessment of official records, it is a virtual certainty that not all the promissory notes issued by the GOK to Anglo Leasing and Finance Ltd., and other entities, are in GOKs possession. This means that we, as a nation are still exposed to the prospect of paying for what we have not received. This is unacceptable. The silence of the GOK on the fate of the promissory notes irreparably damages its own position (taken by two successive Ministers of Finance), that it will refuse to pay the

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amounts due, on presentation, and defend litigation against it for doing so.

The gaping hole in this defence is the inevitable legal argument that GOK, by its silence, and total failure to punish those responsible for the irregular issuance of the PromissoryNotes to Anglo Leasing and Finance Limited, has in effect ratified the transaction involving the promissory notes after their issuance or is estopped from denying agency by its failure to take reasonable steps to notify others or to cancel the promissory notes. To clear the air on this matter, the only logical thing to do is for the GOK to publicly and repeatedly declare the notes invalid. This should be done through Central Bank of Kenya circulars which conform to the CBKs customary practices. This should be globally publicised. But thats not all that needs to be done.

To disavow these irrevocable promissory notes will also require that there be prosecutions of those responsible for issuing them in the first place, this is not restricted to those who have been charged in court to date, namely:

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Zakayo Cheruyiot (former PS in Office of the President) John Agili (finance officer in Office of the President), Sylvester Mwaliko (former PS in Office of the Vice President) Joseph Magari (former PS in the Ministry of Finance) Wilson Sitonik (former director of Government Information Technology Services at the Treasury

David Onyonka (former finance official at the Treasury Department)

The trials are still at the preliminary stages. Their ostensible coconspirators in Anglo Leasing and Finance Company Limited are supposedly fugitives from Kenyan law enforcement. International attempts to trace their whereabouts have been reportedly unfruitful, although Deepak Kamani did seek judicial orders in a Kenyan court to allow him to return to Kenya.

KACC has issued preservation orders against property associated with the Kamani family, alleged to be the beneficial owners of Anglo Leasing, but has made no headway in the international aspects of the investigation.

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Kenyans are yet to feel the impact of the 1 billion per annum used to fund KACC from their taxes as far as resolving the Anglo Leasing Scandal

No politicians or their associates have been arrested or charged for their role in the Anglo-Leasing affairs. Among the public officials who

should bear responsibility are the Vice President, the former Minister for Finance and the Attorney General. The network responsible for conjuring up this scam is most likely still embedded in the Government of Kenya, and if nothing is done, Anglo Leasing will happen again; and Kenyans, will yet again, be illegally bound to pay illegitimate debts based on fraud.

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