The Central Bank of Kenya has continued to face a barrage of accusations and criticism over the collapse of pyramid schemes which have fleeced Kenyans of millions of shillings in their wake. It is not entirely right to blame the Central Bank of Kenya (CBK) for the continued operation of these pyramid schemes. For starters, pyramid schemes are essentially fraud scams whose sole intention is to unjustly enrich their originators using deceptive methods by promising handsome financial returns to vulnerable participants. The sad thing is that thousands of Kenyans continued to be deceived by these fraudsters in spite of repeated warnings by the CBK.
The CBK is creation of and operates under the Central Bank of Kenya Act, Chapter 491, of the Laws of Kenya. Its purpose is to regulate commercial banks and financial institutions created or licensed under the Banking Act, Chapter 488, of the Laws of Kenya. The CBK has a Supervision Division which discharges this function to instil and ensure prudence in the management of commercial banks and financial institutions. Section 16 of the Banking Act prohibits the collection of cash deposits by any person or organisation which is not licensed under the Act. The supervisory role of the CBK does not however extend to entities that are not licensed under the Banking Act. The bank said as much when it warned Kenyans against participating in pyramid schemes in February this year.
The proprietors of pyramid are aware of the CBK’s role and limitation in the supervision of the management of banks and financial institutions and they have conveniently chosen to operate outside the ambit of the CBK Act. They have registered their schemes as Co-operatives under the Co-operatives Act, Chapter 490 Laws of Kenya, or as societies under the Societies Act, Chapter 108 of the Laws of Kenya. Those who are bolder have registered the schemes as business associations under the Companies Act, Cap 486 or the Registration of Business Names Act, Cap 499. Past media reports indicate that some are even registered as Non- Governmental Organisations (NGOs) or Community Based Organisations (CBOs). The registration and supervision of these entities falls squarely under other regulatory or registration bodies and not the Supervision Division of the CBK. The proprietors of the pyramid schemes have avoided the provisions of the Betting, Lotteries and Gaming Act, Cap 131 by omitting to define their operations as lotteries or games of chance. They have adopted this clever way to avoid the scrutiny of the law and supervision by the CBK or the Betting Control and Licensing Board.
Kenyans who have invested in these schemes have nobody but themselves to blame. These schemes are essentially fraud scams which are tailored along the same lines as Multi Level Marketing Schemes. Whereas multi level marketing schemes require a participant to do something, i.e. to sell a product after which a determined commission is paid, pyramid schemes promise participants huge returns after investing little or no money at all and putting no effort. Investment in these schemes is driven by sheer greed, naivety and a desire to make a quick buck without any effort. The proprietors prey on a gullible population that has poor ethical values and little knowledge of financial management. A population that glorifies possessions and wealth irrespective of the method used to acquire them is more susceptible to the schemes of financial fraudsters. The activities of the proprietors are fraudulent and criminal. The Kenya police has arrested and correctly charged a few of the schemers with the offence of obtaining by false pretences contrary to section 313 of the Penal Code. Kenyans should be wary of any deal that sounds too good to be true. Any person who promises them that they can make huge amounts of money, with very little investment, and very little work, is almost certainly not telling the fact. Participating in any pyramid scheme or any other scheme which promises that a person will get rich quickly, with little effort is foolish at best. The participant will most likely only lose money to such a scheme, and may even find themselves liable to legal prosecution for fraud. True wealth can only gained through honest work, and honest investment, in enterprises which produce goods and services of value to all. There are no shortcuts, and anyone who tells you otherwise is almost certainly out to deceive you.
The Central Bank can however help the Kenya Police and other registration and regulatory bodies to control the activities of these fraudulent schemes by sharing information that comes to it in the discharge of its statutory mandate. Pyramid schemes conduct their money business through legitimate accounts held in commercial banks and other financial institutions. The schemes have survived by hoodwinking participants through a complex web of financial transactions that involves the process of layering and shifting funds from one region of the country to the other. That is why participants in one region of the country are able to access their money and returns while others in another region cry foul. These activities amount to what is known as forward money laundering by forensic and financial fraud investigators. To defeat the audit trail, the perpetrators avoid receiving direct deposits and issue photocopied receipts as evidence of participation in a scheme.
The CBK can curb the proliferation of the schemes by requiring banks and financial institutions to strictly adhere to the Central Bank of Kenya Prudential Guidelines for Institutions Licensed under the Banking Act. Prudential Guideline No. 8 requires all commercial banks and financial institutions to observe Know Your Customer (KYC) procedures and verify the identity of all the natural and legal persons who hold and operate accounts with them. They are also required to maintain and file with the CBK a record of all suspicious activities and transactions that go through their customer accounts. The multiple deposits, layering and shifting of funds made through the accounts of pyramid schemes are reportable transactional activities under these provisions. The Suspicious Activity Reports (SAR) and Suspicious Transaction Reports (STR) can help the CBK and criminal fraud investigators to detect and identify the operation of pyramid schemes early enough and inform the relevant regulatory authorities. This can also help the CID, police and other fraud investigators to unmask the real faces behind each scam. Pyramid schemes which operate under the guise of legitimate business entities, co-operative societies, NGOs or CBOs can subsequently be dealt with or deregistered by the relevant regulatory or registration authority. The Criminal Investigations Department (CID) of the Kenya Police should also take up this issue with greater vigour and apprehend and prosecute all the perpetrators of pyramid schemes and other financial scams around the country. They can use the STR and SAR reports filed with the CBK to follow the audit trail, track the perpetrators of the schemes and gather and preserve evidence for eventual criminal prosecution.
Twitter: @DeCaptainCFE
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