Short insight – Why you should lend your own money

So you want to help that brother, cousin, friend etc who is struggling financially? Then do it with your own money………..not bank’s money!

Recently I came across an incident on the above lines. It appears that one of the bank clients Paul (not his real name) obtained a loan to purchase a vehicle on behalf of someone else. It is likely that this someone else, let’s call him Jamlick, could not qualify on his own name either because he has no bank account or more likely he has been adversely listed on Credit Reference Bureau (CRB) for being a defaulter and his bank declined his loan application.

Jamlick, having probably approached other financiers who were similarly reluctant to lend him the required amount on account of his CRB listing, it is likely that he then approached his brother, cousin, friend Paul to borrow on his behalf with a side arrangement where Jamlick would be depositing money in Paul’s account to cover loan repayments. Paul having had a good track record and not having been listed as a defaulter on CRB had no problem obtaining an asset finance loan from the bank.

This arrangement seems to have worked quite well until Jamlick defaulted on his commitment and the account is now in arrears. Naturally the party known to the bank is Paul whom we duly followed up and it is only after several follow up calls where he makes several unfulfilled promises to deposit money to cover the overdue instalments no doubt while pleading with Jamlick to do the honorable thing and settle his obligation that he reveals that the vehicle is being used by a friend elsewhere. He now requests the bank to arrange for repossession of the vehicle (that is in arrears anyway) as his friend has reneged on the arrangement that they had made!

If at this point you expect me to feel sorry for Jamlick’s predicament then you’re wrong because he is just a damned idiot! Here’s the reason why!!

From the outset and in the normal course of business between friends this is an arrangement that I am sure happens out there without any issues so long as both the parties adhere to their informal agreements. Whether the borrower gets any other benefit for his name to be used I am not sure but suffice is to say that very few business people would lend their names for free!

It is also almost certain that the initial deposit for the vehicle and insurance premium required and any other incidental expenses have been paid from Jamlick’s pocket and he now feels a sense of entitlement in the ownership of the vehicle because after all isn’t he the one that has been making the loan repayments to date and has he not met the earlier financial obligations towards purchasing the vehicle?

To cut a long story short, right now Paul’s reputation and financial credibility is at stake as the legitimate borrower with the bank and may find himself listed with CRB if the loan remains in arrears. The law also recognizes him as the legal owner of the vehicle given that it is him name on the log book albeit jointly with the bank and as such hiding under the cloak of having assisted someone is neither here nor there. The bank expects the loan to be serviced regularly and it is in Paul's best interest to settle the outstanding obligation and then pursue Jamlick separately to pay him back what he has paid to the bank!

Any side arrangement whether verbal or in writing with a 3rd party are therefore not recognized under any law and it is Paul who is likely to suffer the consequences of his misguided but well intentioned actions.

He should therefore have lent his own money and not involved the bank in his tomfoolery and he is therefore a damn idiot!!

Are banks complicit in corruption?

This corruption thing shall be the bane of many some of whom may not even be immediately obvious which I shall try to explain.

Politicians, state officers, civil servants and business people have all been fingered in the ongoing investigations on high level corruption in Kenya now declared a national tragedy because it takes two to tango – the giver and the receiver. As direct beneficiaries of this vice that is the way it should be.

Wanton theft of public funds and endemic corruption has been going on for many years and has made front page headlines not only within our plentiful borders but even beyond even as President Magufuli next door in Tanzania seems to have made driving the corruption cartels out of town by whatever means possible his only agenda so far in his infancy presidency. If only some of that fresh breeze blowing across Tanzania would waft into Kenya!

However, I fear that some banks will be found guilty and complicit in the ongoing corruption in high places investigations for many reasons. Banks are required under prudential guidelines to have in place a KYC (know your customer) policy requiring them to, in addition to being able to positively and correctly identify their prospective clients, also interrogate the source of funds that a person wishing to open an account shall be depositing. This requirement is not only for individual clients but business and corporate clients too.

Heavy financial penalties are prescribed for those banks which do not file their monitoring reports as required by the law for what may be termed suspicious transactions which is basically transactions that do not fit into the defined profile of their clients. This has happened recently in other jurisdictions outside Kenya with heavy fines being meted out on various banks within the last 12 months.

Where a transaction is out of the ordinary for a particular client, then the bank is under obligation to insist on documents in support of the underlying transaction to ascertain its origin and veracity and allow that transaction to be recorded in their books or else red flag the transaction as a suspicious transaction but still record the transaction in their books but with an accompanying freeze notification preventing the funds from leaving the banks books for the time being until the bank is satisfied that the funds have been genuinely received in the ordinary course of business or personal engagements. This means that one is required to declare their sources of income at the time of opening an account and the bank is then required to monitor the transactions in that account to see if the information given by their client in regards to their expected financial transactions tallies.

All these extraordinary measures are designed to prevent money laundering of ill-gotten funds and financing of terrorism activities. Monitoring software is now available to assist banks manage this difficult function which has also evolved into full fledged departments whose job is managing this potential risk that may even lead to the withdrawal of their banking license as well as the freezing of their overseas correspondent bank accounts that all banks require to conduct their foreign currency transactions on their own behalf as well as on behelf of their clients.It is therefore incumbent that all banks scrupulously follow the laid down procedures to prevent a catastrophic loss of confidence and business occasioned by the negative publicity of their dangerous business practices as custodians of the public wealth.

All banks in this country are also required as part of the internal due diligence to flag certain categories of persons who may be especially susceptible to activities that may border on corruption or money laundering so that the activities on their accounts are monitored more closely for possible infringements. These people are commonly known as P.E.P’s. In financial regulation, "politically exposed person" (P.E.P) is a term describing someone who has been entrusted with a prominent public function, or a relative or known associate of that person. A P.E.P generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold which brings me to the point why banks may be unwitting (or willing) accomplices of the corrupt and therefore complicit in the ongoing investigations!

In one of the recent cases, the son of a high ranking political figure was the custodian of hundreds of millions of shillings deposited through his bank account which sums a 21 year old would usually not have access to. Being a relative of a prominent public figure the son would also be deemed a P.E.P and therefore be subject to the same high level of monitoring required of P.E.P’s and the bank in this case may have failed in the test of know your customer and therefore be guilty of an offence.

It also follows that should the individuals and businesses currently being investigated be found guilty of corruption by a competent authority, then the banks where these individuals and companies maintain their bank accounts would also be enjoined in the whole mess as being guilty of handling the proceeds of crime and therefore likely to suffer punitive and hefty financial penalties or other administrative sanctions by the licensing authorities and their overseas correspondent banks for their transgressions. This again has happened in other jurisdictions where a person is found guilty of engaging in corrupt practices by a court of law and the bank is thereafter fined for being guilty of not reporting the suspicious transactions. Howvere, where a bank may have filed the suspicious transaction report then the bank is absolved of any blame in future should other forces come into play to reactivate a frozen account whose source of funds was the proceeds of crime.

So you see folks it is not only those directly caught with their hands in the cookie jar that are in trouble under the current circumstances but also those that handled the proceeds of the corruptly obtained funds through their banks and failed to follow the regulations required in making their suspicious transactions reports. I foresee a situation in the not too distant future where heads in certain banks will roll as a direct result of not reporting suspicious transactions which in hindsight stunk to high heaven!!

As a footnote and in answer to my question are banks complicit in corruption, the answer is a resounding YES if they failed to follow the laid down regulations because there is no defense for willful disregard for the rules as the Barings Bank collapse in 1995 reminds us. I would hate to be in the monitoring department of any bank today because the onus of deciding what may or may not construe a suspicious transaction is a difficult and onerous task though prudent banks would always want to err on the side of caution because the consequences of not complying are just too dire!!

Short insight - On the forthcoming FKF elections:

I am not sure what television debates are supposed to accomplish. Recently there was one on a leading TV station that paraded some people vying for the presidency of Football Kenya Federation (FKF) whose elections are slated for this coming weekend. A leading FKF presidential candidate was absent and being the incumbent that has faced a barrage of criticism recently over a seemingly lackadaisical attitude towards the national team the Harambee Stars whenever they are called up for national duty, this was an eye brow raising moment!

The delegates from the various branches of FKF across the country are the only ones that shall be voting in these upcoming elections and this therefore begs the question why the debate had to be televised on live national TV while less than 100 people shall participate in the actual election while the rest of us sit back in blissful ignorance until the results are announced.

Against a backdrop of a mediocre performance by the national team, an ongoing blame game about who is responsible for the mess in Kenyan football and allegations of corruption at high levels in matters football you would have expected that the incumbent would be present to vocally defend his tenure and provide some insights into how he shall manage the football affairs of this country if he were to be voted into his second term of office. His absence however is thought provoking given that he is a seasoned politician who many love to hate for his shenanigans and well known machinations leaving him perennially ahead of the pack to the chagrin of all.

Perhaps he decided that he has no time for a debate with his opponents where skeletons would be exposed to the public, or a pressing matter requiring his personal involvement suddenly and inconveniently came up or maybe he has a trick or two up his sleeve that he needed to use while his opponents were holed up in a debate at Nation Centre studios. We shall probably never know!!

I am not sure if the platform given to the FKF candidates via a live TV debate shall sway any votes their way because knowing the voting psyche in Kenya today, the highest bidder always carries the day and it won’t surprise me if the guy that was absent at the debate recently carries the day!