A leaked letter from the central bank on suspected irregular trading in National Social Security Fund government bonds could disrupt investigations into the matter amid concerns that suspects may have moved to destroy key evidence.
CMA investigators acknowledged that there was a delay in seizing communication devices such as mobile phones, laptops and computers from suspects to retrieve emails, text messages and WhatsApp messages sent before the irregular trading in Social Security Fund bonds.
The Central Bank of Kenya on August 19 asked the Capital Markets Authority to investigate recent bond deals under the National Social Security Fund among some brokers and market players, describing the trading that took place between May and July as “illegal.”
A fund manager was accused of buying bonds for the National Social Security Fund at prices above the market average and in some cases selling government papers at lower prices and buying the same bonds at higher prices within a few days.
The Competition and Markets Authority has raised doubts about the chances of restoring communications between market players involved in the National Social Security Fund bond transactions after the investigation information was leaked, and may have forced suspects to delete communications and destroy tools, said two sources in the Competition and Markets Authority’s legal affairs and investigations unit, who asked not to be identified due to the sensitivity of the investigation.
In a letter dated August 19 to the CMA, David Loza, Director of the Financial Markets Department at the Central Bank of Kenya, said: “The purpose of this letter is to request the CMA to review the conduct of the above parties and share the actions taken with the Central Bank of Kenya.”
The capital markets regulator also delayed obtaining a court order to search and seize, known as an “Anton Pilar order” in legal parlance, at the suspects’ homes and offices.
The central bank’s letter to the Competition and Markets Authority named Humphrey Wachira Gichuru and a newly licensed investment bank called Pargamon Investment Bank as interested parties in the investigation.
“Let’s say there is a WhatsApp discussion between traders on their phones. With that kind of discussion in the media they (the suspects) will destroy that evidence,” said a senior executive at the Competition and Markets Authority.
“Now the issue is that we need to know what the two traders were discussing if we are to prove collusion. When a bond is bought and sold in the market, we need to know the information before and after the trade; how the money flows.”
He cited as an example the prosecution of insider trading at Kenol Kopel before the company was acquired for Sh35 billion and listed on the Nairobi Stock Exchange.
At the time, the Competition and Markets Authority obtained an order from Anton Pillar before seizing laptops, phones and computers from David Ohana, former CEO of Kenol Copel, Andre De Simone (former CEO of Kestrel Capital) and Ali Khan Satchu in simultaneous raids on their offices.
“In the SSF case, there is a 50:50 chance of getting the communication evidence because the investigation appears to be open,” said George Nyiroj, CEO of East African Data Handlers – which recovered information from emails, computer hard drives and WhatsApp in the successful prosecution of the Kenol Kopel case.
“Criminal investigations of this kind need to be so secret that the suspects should not be aware of it, otherwise they will delete the data and change the devices,” he said.
The use of mobile forensics has been a game changer in the prosecution of financial crimes in the country. Such technology is often used in terrorism and drug trafficking cases.
Technology, particularly wiretapping, has been employed to help regulators in the United States and Europe successfully prosecute insider trading cases and expose the inner workings of the dark web of finance professionals who profit from irregular trading.
The Competition and Markets Authority says its data analysts are studying market data for all trades between May and July, the type of government securities, their prices and the amount of money involved in efforts to resolve the trading of National Social Security Fund bonds.
Purchasing securities at a price higher than the market average creates huge profits for the parties.
When bonds are sold at low prices and bought back at high prices, it generates trading income for someone else and huge profits for the seller.
Central Bank of Kuwait Governor Kamau Thuji and Capital Markets Authority CEO Wycliffe Shamieh have been summoned to parliament over the trading of suspicious Social Security Fund bonds.
The National Assembly’s Finance and National Planning Committee has asked the Central Bank of Kuwait and the Capital Markets Authority, the sector’s two regulatory institutions, to shed light on alleged irregularities in bond transactions involving two accounts at the Securities Depository Center of the National Social Security Fund, and accounts of an individual and a local commercial bank.
Molo MP and finance committee chairman Kimani Kuria said allegations that the social security fund bought the bonds at a much higher price and sold them at a lower price had weight, and warned that those involved would be held accountable if proven true.
“We have started inviting regulatory institutions to come and tell us what they know about questionable transactions,” he said.