How ‘regulatory gap’ allows crooks to siphon billions from Kenyans
Published on: July 09, 2021 04:00 (EAT)
A gaping hole in the regulation of investment schemes has allowed crooks and scammers to easy swindle billions of shillings from Kenyans. This is while regulators’ hands are tied behind their backs with no substantive regulations to back interventions. For instance, private investment placements are not subject to the Public Issue and Disclosure Regulations meaning any one person can launch a private product without both the scrutiny and approval of the Capital Markets Authority (CMA). The loophole in regulation was widely established during the grilling of CMA officials by the National Assembly Finance and National Planning Committee on Thursday afternoon. Cytonn While investigations on the legitimacy of the Cytonn High Yield Solutions (CYHS) fund continue, the firm easily mobilized nearly Ksh.14 billion from an estimated 4000 investors with a mouth-watering advertised return of up to 18 per cent. This offer was privately issued to select individuals and away from the prying eyes of the markets regulator. When the company (Cytonn Investment) failed to payback investors as required in their private deeds, a handful of the investors sought reprieve from the CMA and the courts opening up the scheme to the public limelight for the first time. Tens of other investments that go burst have largely followed a similar trajectory with their ‘scam-like’ aspects only coming into the view of the regulator and the rest of the public long after the damage has been done. According to the CMA, regulation and enforcement can only come into play for regulated products or when the schemes publicly advertise their solutions after which it is assumed they are raising money from the public. CMA Chief Executive Officer Wycliffe Shamiah admitted that probing this privately placed investment issuance has been a nightmare for the regulator. “If we intervene in a company that is giving unregulated products, we have been sued. Sometimes we have had investors getting mad over our interventions. On the other side, if we don’t intervene, then it is seen that we are not doing our work and yet this products are not regulated,” he said. In the case of Cytonn’s CYHS, CMA says it approached the company after being in knowledge of the fund in a bid to manage its exposure to real estate projects. However, the regulator says the firm disagreed with advisory to convert the fund into a real-estate investment trust (REIT). “They seem to agree but later changed their mind after investors in CYHS expected too much in returns than those yielding from a REIT. It was not possible for them to transition the product. We insisted but we did not agree,” added Shamiah. In November last year, the CMA referred the matter for investigations by the Directorate of Criminal Investigations (DCI) after Cytonn refused to effect the conversion despite earning a REIT manager license. Nakumatt In another instance mirroring the ease of privately raising funds, the now defunct Nakumatt holdings raised Ksh.4 billion from commercial papers before going under. As is the case with private placed issues, there was no interaction between the CMA and Nakumatt during the issuance of the papers. As such, when the retailer finally crumbled, investors were left ruing their choices with no regulatory protection. Fund managers such as Amana Capital who had invested part of their monies in the papers meanwhile bled from fall out as clients withdrew deposits in flight to risk. Despite the ‘helplessness’ of the CMA, members of the Finance Committee slammed the markets regulator for doing too little to change the state of play including recommending amendments to the CMA Act. Top CMA officials faced a tough time responding to queries from the Committee members as its role was sharply put into focus. “The regulatory has clearly failed in its role of protecting investors,” said Garissa Town Member of Parliament Adan Duale. “What we are truing to investigate here is whether we really have a CMA that’s up to the task,” posed Chairperson to the Finance Committee Gladys Wanga. “You are not proactive, you can’t shy away from doing your work. You are only trying to catch up with fraudsters in the market. You must be ahead of this madness,” said Laikipia County women representative Catherine Waruguru. The CMA was also put on the spot over the loss of bond investor funds in the now defunct Chase Bank and Imperial Bank (in receivership). The markets regulator said it has only gotten wind of fraudulent schemes through market surveillance and whistle-blower reports. So far, CMA says it has probed over 500 ‘doubtful’ schemes with a holding of Ksh.1 billion in public funds.