The case confirms the breadth and depth of corruption in Kenya and is part of a series of financial and banking scandals that are undermining the Kenyan economy. It has contributed to the collapse in the value of the Kenyan shilling and a crisis in the banking system. It comes at a time when the country is trying to regain a reputation for financial probity and create a free-market economy.
The fraud centres around a Kenyan company called Goldenberg which claimed to export millions of pounds' worth of gold and diamond jewellery to companies in Switzerland and Dubai in order to collect huge export 'compensation' bonuses from the Kenyan government. To encourage exports the Kenyan government has been paying a 20 per cent bonus on Kenyan manufactured exports.
In the case of Goldenberg, Kenya's Vice-President, George Saitoti, agreed to pay 35 per cent on gold and diamonds - even though Kenya does not have diamonds and produces only a tiny amount of gold.
The company filed customs forms to show it had exported millions of pounds' worth of gold and diamond jewellery. It was paid the compensation bonus in Kenyan shillings - at least pounds 18m - which it appears to have used to buy foreign currency on Kenya's recently liberalised foreign currency market. This sent the Kenya shilling plummeting. Banking sources say the fraud has helped to destabilise the country's economy.
The Auditor-General, D G Ngoroge, picked up the scam in his report last year and called it 'illegal' and 'highly irregular'.
According to documents presented to the Central Bank of Kenya, copies of which have been obtained by the Independent, Vice-President Saitoti, who was also then finance minister, gave Goldenberg International the monopoly on gold and diamond exports in 1990.
With the 35 per cent compensation he had agreed, it meant that for every pounds 100 worth of goods exported by the company the Kenya government paid the equivalent of pounds 35 in Kenya shillings. The company promised to raise a minimum of dollars 50m ( pounds 32.5m) in a year.
When it was started, Goldenberg was jointly owned by Kamlesh Pattni, a local businessman, and James Kanyotu, a former head of the Special Branch who now describes himself as a farmer. In a letter Kamlesh Pattni said: 'A huge amount of gold is being smuggled out of Kenya . . . Our company has a capacity to buy diamonds which are in large supplies here in Kenya.'
Mr Pattni also said he had a workshop for manufacturing diamond jewellery 'by skilled artisans' and added: 'The amount of gold we expect to buy and handle monthly will be about 100kg per month in the first month and gradually increase to 400kg. Our company also expects a good supply of diamonds . . . '
The Vice-President agreed to Goldenberg's proposal. On 1 November, C S Mbindyo, the permanent secretary at the Treasury, wrote to Goldenberg: 'Your request touches on the field strongly believed to be operated illegally on a large scale through smuggling. It is also a delicate field. However, since you have undertaken to provide through legal means substantial foreign exchange to the country, H E the Vice-President and Minister for Finance has agreed on experimental basis, to grant your company (your request)'.
Kenya has no diamonds and a tiny amount of gold, panned by hand. It has no jewellery industry beyond local artisans. Gold and diamonds smuggled from neighbouring countries are taken directly to Europe for sale because Kenyan shillings are not an attractive currency. Yet within weeks of being granted the monopoly for five years and being given the 35 per cent compensation by the Vice- President, Goldenberg received some Ksh5bn in export finance and produced documents to show it was exporting millions of pounds worth of diamond jewellery.
Between 29 November 1990 and 27 June 1991 Goldenberg said it exported Ksh854.81m worth of diamond jewellery to companies in Switzerland at an average exchange rate of Ksh49 to the pound. This was worth pounds 17m.
And then between 3 September 1992 and 16 December 1992 Goldenberg said it exported a total of Ksh1,742.95m worth to World Duty Free Ltd in Dubai at an average rate of Ksh54 to the pound. This was worth pounds 32.3m.
But, according to the Swiss Trade Office in Geneva, the companies Goldenberg said it sent the goods to in Switzerland are not registered and they do not appear in the telephone directory. World Duty Free is not registered in the United Arab Emirates' official list of companies. According to its own document it is registered in the Isle of Man. It does have a telephone number, and a spokesman for the company in Dubai said that it had written to the Kenyan government denying that it had bought any goods from Goldenberg.
The Auditor-General, Mr Ngoroge, wrote in his report: 'No evidence has been seen to confirm that the gold and other precious metals claimed to have been exported and for which compensation was paid, originated and were processed in Kenya.'
The customs forms filled in by Goldenberg bear the stamp of the Ministry of Mines and Geology which agreed the evaluations of the 'jewellery'. Even if the jewellery existed the stated values of the gold, diamonds and 'labour' were fantastically inflated. In one letter to Kenyan Customs and Excise, Goldenberg states the total weight of the jewellery to be 287.1 grams valued at Ksh49,333,928 ( pounds 1m), and the gold to represent 30 per cent of the value. This would put the value of the gold at 150 times the world price.
On 8 April last year Goldenberg's bankers, the Delphis Bank, wrote to the Kenya Central Bank asking it to extend an export credit of Ksh185,816,800 on behalf of Goldenberg. The Delphis Bank was formerly the Bank of Credit and Commerce International in Kenya and Mauritius, which was bought by the Dolphin Group in 1991 after the collapse of BCCI.
The Dolphin Group is chaired by Lord Parkinson, former minister and chairman of the Conservative Party. The pounds 120m company is owned and run by another Kenyan, Ketan Somaia, who became a multi-millionaire by the age of 36. He is a close friend of President Daniel arap Moi, Vice-President Saitoti, the former minister for energy, Nicholas Biwot, and Mr Pattni, the chairman of Goldenberg. He also shares an office block in Nairobi with Goldenberg.
The sudden influx of currency into Kenya was part of Ksh24bn pumped into the economy, much of which was used in currency speculation. Some of the currency was fed through the Exchange Bank, a bank owned by Goldenberg. The influx occurred in the lead-up to the election in January this year. The Kenya shilling fell from 54 to the pound at the beginning of 1992 to 112 to the pound now.
Banks such as Citibank and First American Bank of Kenya queried the deposits of foreign curency made by Goldenberg and wrote to the Central Bank of Kenya asking for guidance. The Exports Division of the Kenyan Central Bank queried the arrangement and pointed out in internal memos that Goldenberg's paperwork was procedurally incorrect.
The Central Bank of Kenya wrote to Goldenberg and its bankers demanding that the export procedures be properly followed. Two complaints were that there were no receipts for the foreign exchange earned by the sales and that all the declarations were in Kenya shillings.
On 9 April 1991 Goldenberg's Mr Pattni replied: 'We are currently expeirancy (sic) financial constraints due to our huge volumes. (This will be) of great assistance to us in expiditing our new exports at faster cycler hence earning our country more Foreign Exchange.'
The queries from the Exchange Control Department of the Central Bank were finally overruled at a meeting of senior bank staff on May 7 1991. Exchange Control was told to accept Goldenberg's paperwork.
Within a year Goldenberg had overcome the problem of depositing quantities of foreign exchange with other banks by setting up the Exchange Bank to process its dealings. This bank also broke government guidelines, handling sums of money, some of it lent by other banks, far in excess of the ratio to capital base allowed by the rules of establishment. One of the banks which lent it money was the Delphis Bank. Two of the other banks involved, the Trade Bank and the Post Bank Credit, have since closed their doors pending government investigations.
Documents about the case were leaked and placed on the record in the Kenyan parliament, but the government tried to defend Goldenberg. On 26 March this year the Finance Minister, Musalia Mudavadi, said the export of gold and diamonds had earned the country more than Ksh9bn in foreign exchange. But as more details of Goldenberg's operation emerged in parliament earlier this month, the government quietly announced that the compensation paid for gold and diamonds would be dropped.