Investigative reporting: 2nd place- Haggai Matsiko and Ian Katusiime, The Independent

8/18/2019 Investigative reporting: 2nd place- Haggai Matsiko and Ian Katusiime, The Independent

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Kshs 200, RwF 1,500, SDP 8Ushs 5,000,Issue No. 359 March 13 - 19, 2015

Inside MTN mobilemoney sagaAccusers explain how MTN createdShs23 billion `fake’ money

Museveni’s PGB guarding witnesses

www.independent.co.ug


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10 March 13 - 19, 2015

COVER STORY

Inside MTN mobile money sagaAccusers explain how MTN created

Shs23 billion `fake’ moneyMuseveni’s PGB guarding witnesses

By Haggai Matsiko and Ian KatusiimeMobile money services in Uganda are coming under scrutiny and what is emerging is troubling. Atthe centre of the saga in which President Yoweri Museveni is personally involved, is Uganda’s big-

gest telecom operator, MTN, which is battling several allegations of fraud, and suits and counter suitsin the courts. Even the Uganda Revenue Authority (URA) says it was kept in the dark but the casesand allegations have exposed some details that have interested it to attempt to recover sales tax onsome Shs14 billion worth of airtime sales. MTN apparently did not pay tax because the transactions

were made on mobile money.

Was in charge:Themba Khumalo

Museveni hasdeployed hiselite Presi-dential GuardBrigade forcesto guard key

gures in some of the cases afterit emerged that there were at-tempts to use assassins to silencethem. One of the targets, Rich-ard Mwami, is a former head of

MTN’s Mobile Money depart-ment.He told The Independent that

on the night of November 26,2014, three hooded aackers jumped the fence of his home

in the upmarket Muyenganeighbourhood with inten-

tion to kill him. One of theaackers, armed with a gun,climbed up to the balcony ofMwami’s bedroom on the sec-ond oor.

Mwami said: “We heard aloud bang and when I went to

check, I saw him on the balcony.I grabbed him and in the scue,his gun fell to the ground. Heed and they all jumped over thefence and got away in a waitingcar”. Mwami says the aackersed when an alarm went o.

Mwami says he blew the whis-tle at MTN after he became sus-picious when several sta fromthe MTN Mobile Money and ITresigned one after the other inNovember 2011. He alerted his

bosses and started ferret-ing around. His

nding

led him to meet with PresidentMuseveni. After hearing hisstory, the president oered himguards, but Mwami rejectedthem.

“Youngman,” Musevenireportedly told him, “You don’tknow what you are dealingwith.”

A few days after would beassassins pounced, Mwami run

back to the President for cover.

Fake money racketMwami says he had uncovered

a racked in which MTN created`ctitious’ money on its MobileMoney platform and transactedin it on its MTN Mobile Moneyshops. In other incidences, stain the Mobile Money and ITdepartment allegedly created the‘ctitious’ money for themselvesand cashed it through theiraccomplice agents and subscrib-ers.

MTN allegedly created anentity called MTN CorporateLiquidity Fund as a super-agenton its platform for the transac-tions which were a form of illegal“overdrawing” of its e-accounts.At the time, Themba Khumalo,a South African, was the CEOof MTN Uganda. He was trans-ferred in April 2012 in whatappeared to be a hurried decisionas his successor was not namedimmediately.

Between May and November2011, the ctitious money; techni-

cally called `negative money’ was


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COVER STORY

about Shs85 billion. That is about threetime the Shs24 billion that was lost inthe Katosi Road saga. But according toexperts, the real danger from the MTNmobile money saga is even bigger.

President Museveni has taken aninterest in it because it raises nationalsecurity issues, aids money laundering,and threatens macro-economic stabilitywhen unauthorised entities like telecomcompanies “create money” on their vir-tual money accounts.

MTN ignores warningThe Independent has learnt that

sometime in 2011, MTN Uganda ocialsreceived a stern warning from StanbicBank, which holds several of the gianttelecom’s accounts, including the volu-minous Mobile Money account.

Stanbic Bank was concerned that MTNUganda had not activated a mandatory

Anti-money Laundering System on theMobile Money system to which thisaccount is central.

This situation, the banker warned,risked to expose them to sanctions fromthe Central Bank, the regulator of thecountry’s nancial sector.

Since the telecom pioneered mobilemoney in 2009, some 18 million peoplehad moved about Shs.18 trillion on theplatform by the end of 2014.

Given that MTN controls 80% of themobile money market, some Shs 14.4trillion (Approximately the size of Ugan-da’s entire national budget 2014/15) in

cash deposits from all mobile agentsaround the same time passed throughthis account. This account is called an“escrow account” because the money onit does not belong to MTN. It is for itsMobile Money agents and subscribers.Bank of Uganda wants MTN to guardagainst money laundering which can beexploited by terrorists.

Despite the warning, MTN carried ontransacting. Insiders told The Indepen-dent that unknown to Stanbic, when theissue came up in a meeting, MTN cited“commercial concerns” as the reason ithad not activated the system. Activating

the system would slow down transac-tions.

There was another issue. The systemhad also collapsed under the weight ofthe ever expanding transactions andhad become vulnerable to fraud. Again,despite audits in 2009, 2010, and 2011pointing out the loophole, MTN Ugandanever acted.

Even when it was reported by theinternal auditor to the company’s Auditand Risk Commiee of the company’s

board, it was simply explained away.Genuine business challenges might

have prevented MTN from acting even

after it acquired the required technology,

but evidence produced in the courts sofar shows that top ocials and the com-pany proteered from the loopholes.

MTN Uganda also nds itself caughtup in allegations that some of its stacreated vast amounts of ctitious vir-tual money (e-money) under its mobilemoney platform.

One of the key witnesses, BabraNalukwago who was a Business Ana-lyst in MTN’s Public Access and MobileMoney from 2007 to May 2012, has toldthe Anti-corruption Court in Kampalathat MTN “created money”.

She said although under the rules,the money on the MTN Escrow accountin Stanbic Bank and the MTN MobileMoney platform must balance, there wastampering that led it to sometimes not

balance.“I analysed from May 2011 to Decem-

ber 2011,” she told court, “I found that

(Shs) 21 billion had been created.”She says up to 17 ctitious accountswere created and e-money was fraudu-lently deposited on them and eventu-ally cashed by a well-organised racket.The fraudsters appear to have exploitedtwo loopholes; rst they appear to haveexploited MTN’s lax operating proce-dures. Although the Mobile Money plat-form is designed to operate automati-cally, MTN managers introduced man-ual intervention to move money fromseveral platforms. Secondly, althoughMTN acquired Anti-money launderingtechnology which would have possibly

caught the fraud; it had not been acti-vated. The fraud by MTN staers, there-fore, remained undetected.

“It was abnormal for a particularsubscriber to receive Shs20 million, 40million,” Nalukwago told court, “Thesystem should have automatically sus-pended their accounts but it was strangethey continued receiving. The maximumwas one million for each subscriber.”

Nalukwago was on October 20, 2014testifying in a case in which Patrick sen-tongo; a former Finance Administratorof MTN Mobile Money and ve othersare being sued by MTN for fraud and

embezzlement.In a strange twist to the case, Mwami

who presents himself as a `whistle- blower’ is also being sued by MTN inthe same case.

The other accused are Joan Nabugwa-wo a former MTN cashier, Brian Okuruta former employee MTN whose positionis unclear, Angella Ayo and Eriya Bary-amwijuka, both former Revenue Ana-lysts. MTN is suing them for allegedlydefrauding it of about Shs10 billion.

Mwami was initially not among theaccused. MTN had initially just redhim from his job. Mwami run into

trouble with MTN when he and other

employees who were close to the fraudcase and had been sacked, challenged aninternal dispute tribunal. Other workersquit. Mwami sued MTN. He also starteda rival company to MTN Mobile Moneycalled Easy Money Ltd.

Relationships soured when MTNconscating some of Easy Money’sequipment from agents and forced MTNagents to sign exclusivity contracts.

As a result, Easy Money took MTN to

court over unfair competition practices.

Created fictitiously

and withdrawn through

the MTN Corporate

Liquidity Fund

Negative money

detected at some

point in 2011

Money created and

cashed between May

2011 to December 2011

Number of fictitious

accounts through

which money was

being withdrawn

Money the five

suspects are accused

of defrauding MTN

Money Mwami

is accused of

stealing

Fictitious money

created on the

Adjustment account

for discrepancies

Shs

9

Shs

85

Shs

21

Shs

10

Shs

5.8

Shs

18.9

17

Money involved

Billion

Billion

Billion

Number of mobile

money users

Money transacted

through mobile

money by the end of

December 2014

18

Shs

18

Million

Trillion

Billion

Billion

Billion


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COVER STORY

Former Finance

Administrator

Former MTN

cashier

Former MTN employee

whose position is

unclear

Revenue Analyst

Revenue Analyst

Senior Manager

Public Access &

Mobile Money

Patrick

Sentongo

Joan

Nabugwawo

Brian

Okurut

Angella

Ayo

EriyaBaryamwijuka

Richard

Mwami

It also launched a complaint before theUganda Communications Commission(UCC). Both cases are pending.

At this point in 2013, MTN nowdecided to slap charges againstMwami. He faces two counts of fraud,neglect of duty and conspiracy involv-ing over Shs5.8 billion.

How alleged fraud happenedMTN Uganda maintains an escrow

account in Stanbic Bank and a bankcontrol account. All MTN MobileMoney agents deposit an opening

balance of Shs1 million on the escrowaccount and use it as a sort of clear-ing house to either withdraw cash ordeposit. The agents deposit cash to gete-mobile money or what is technicallycalled a “oat” and withdraw cashwhen they trade-in e-mobile money.Most of this process is automatic. Inthe same way that Mobile Money sub-

scribers can withdraw or deposit withthe agents.Trouble started when MTN sta

started manually transferring e-moneyfrom accounts during a process called“liquidation”. This is when an agenttrades in e-money or oat for cash.Witnessed have told court that someMTN sta (perhaps following howMTN was allegedly moving ctitiousmoney to some of its shops), startedcreating fake subscribers and givingthem fake e-money.

Nalukwago, the former MTN work-er told court: “These subscribers were

geing free money from the system by somebody sending money to them.They were not buying from an agent.”

She described one case on December21, 2011.

“Adjustment Account for discrepan-cies (on the MTN e-money system)had a negative balance of Shs19 bil-lion,” she told court, “This means thatmoney was created on this accountwhen it never existed. Money wasthen manually sent to subscribers whocashed it. The Finance Administratorwould have problems balancing it.”

She added: “At all times the bal-

ance of E-money was supposed to beequal to real cash. MTN does not printnotes.”

But then at that point, she said, “TheBank control account had negative84.820.903.080/=. This is the moneythe MTN mobile money platform hasin Stanbic Bank. Balances on the plat-form should be equivalent in the banki.e. the MTN mobile money account inStanbic.”

She described how MTN staerswere manually interfering with thesystem to create the ctitious e-mon-ey. She also described how, on April 5,

2012, Shs9 billion was created on the

MTN e-system and posted onthe MTN bank account.

She told court: “Thatmoney is taken wrongly. Thismoney is a ctitious creatureon the Adjustment accountfor discrepancy. It goes to theMTN Corporate LiquidityFund which does not trade.

“If all depositors asked fortheir money once there would

be a crisis.”

MTN remain tight-lippedWhen contacted, MTN

Uganda, refused to give theirside of this story. Normallythis would be expected forany business seeking to betransparent and accountableto the public.

Justina Ntabgoba, the

company’s Corporate AairsManager told The Indepen-dent; “I am not aware of that.And if those claims are part ofthe on-going case, we cannotcomment.”

She asked The Independentsend questions on email toenable her contact manag-ers responsible for a clearposition. Four days after themail was sent, she had notresponded. The Independenthas, therefore, relied on corre-spondences amongst manage-

ment, being used as evidencein court.The Independent has learnt

that MTN has spent Shs.14 billion to x the mobile mon-ey system. While the systempreviously run on Fundamo,it was replaced with the Erics-son mobile money system.

However, the allegations, awindow into the dark side ofthe money transfer medium,come at a time Uganda is

being called out by the inter-national anti-money laun-

dering body for not havingproper checks against moneylaundering.

They also come at a timewhen MTN has been slappedwith a Shs 5 billion ne byUCC, this time for violatingthe SMS guidelines.

The allegations also comeat the heels of revelations byUganda’s out-going FinanceMinister, Maria Kiwanukaand the Central Banker,Emanuel Tumusiime Mute-

bile that despite its potential,

mobile money is posing

challenges beyond the ambit oftraditional nancial sector super-vision.

The Independent has discov-ered that despite the presentchecks by the central bank, themobile money platforms remaina dominion of the telecom opera-tors.

Other mobile money operatorsinclude Airtel money of Airtel,M-Sente of Uganda Telecom,MTN Mobile Money, and EasyMoney of Easy Money Ltd. Oth-ers are cross-border operatorslike M-Pesa of Vodafone.

Lack of regulationEconomist Fred Muhumuza,

a former advisor to the nanceminister who currently works asthe KPMG Senior Manager for

the Financial Services InclusionProgramme told The Indepen-dent that merely reconciling theMobile Money Escrow account isnot enough regulation.

“That should be sucient forregulation until the criminalspop up with ideas of generat-ing new money that would noteven be reected on the escrowaccount of the partnering bank,”said Muhumuza.

“The trouble is that new mon-ey is created without the knowl-edge and authority of the central

bank thereby increasing moneysupply beyond programmedlevels,” Muhumuza told TheIndependent, “The excess moneycan increase demand and causeinationary pressures (increasein prices) that is bad for macro-economic stability.”

Already, Muhumuza added,mobile money has increasedthe velocity of money (numberof times a given unit of moneychanges hands) which in itselfcan cause ination.

“Boom line,” Muhumuza

said, “apart from theft andcriminality associated with thefraud, the act causes macroeco-nomic stability challenges byway of increasing inationarypressures.”

Another senior economist,Lawrence Bategeka, aributesthe allegations surroundingMTN Uganda to lack of regula-tion.

“Mobile money is money incirculation,” Bategeka explained,“sometimes this money is invery large quantity and can eas-

ily be abused because of low

Accused


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NEWS ANALYSIS

regulation.”This situation has far reaching conse-

quences and Bategeka gave a hint.“Imagine a scenario where MTN

defaults and just goes away,” he toldThe Independent, “the risks are extreme-ly high and there is no insurance.”

Hardly a month ago, on Feb.12 boththe outgoing nance minister and cen-tral bank governor hinted on the chal-lenges posed by mobile money.

Maria Kiwanuka noted at a MobileMoney conference: “…It is indeed theopportune time for us to understandhow, for instance, central banks willconduct monetary policy and prudentialregulation if commercial banks cededominance of the nancial system tomobile banking; a change that may aectthe transmission mechanism of mon-etary policy as well as the reach of tradi-tional supervision.”

Central Bank boss Mutebile was moreconcise.He said that the current business

model of mobile banking in East Africaimplies a substitution of cash for bankdeposits, and hence a larger money mul-tiplier, because all virtual money sold tocustomers has to be backed up by depos-its in the partner bank of the mobilemoney provider.

“Mobile money may also aect thevelocity of circulation of money: inprinciple one might expect velocity torise if mobile money makes retail pay-ments transactions easier for customers,”

Mutebile said, “However, if more radi-cal mobile banking business models areeventually developed in which mobilemoney becomes a substitute for demanddeposits in banks, the ability of central

banks to control interest rates could beundermined.”

This is because, Mutebile explained,central banks control short term inter-est rates by varying the liquidity avail-able for commercial banks to meet theirreserve requirements. He added;

“But if mobile money eventuallyleads to a diminution of the role whichcommercial banks play in the nancial

system, the interest rate transmissionmechanism, which relies on movementsin short term inter-bank rates beingtransmied along the yield curve toall other interest rates in the economy,will be weakened, which in turn willweaken the transmission mechanismof monetary policy. Central banks will,therefore, need to develop alternativetools for inuencing interest rates in theeconomy.”

As I have already noted, Mutebileadded, mobile banking is already pro-viding a partial substitute for the retailpayments services of banks and could

eventually challenge the dominance of

banks in the provision of other types ofservices, including deposits.

“If so,” the central bank governornoted, “prudential regulation which isfocused on ensuring the soundness ofthe banking system may no longer besucient to protect the safety of custom-

ers’ savings or the systemic stability ofthe nancial system and the preservationof its critical functions.”

Critics say failure to act by the Min-istry of Finance and Bank of Ugandathreatens Uganda’s economy.

Uganda is lagging behind in imple-menting its plan for addressing thedeciencies. This includes creating aneective Financial Intelligence Unitand ensuring the eectiveness of anoversight regime for its nancial sector,according to the Financial Action TaskForce (FATF), an international body thatsets standards for Anti-money launder-

ing and combating terrorist nancing.Countries that fail to implement

FATF’s standards, experts say, run therisk of being labeled as high-risk oruncooperative jurisdictions, makingit more costly and dicult for thosenations to transact with the banking sys-tems of FATF member states.

Threat exaggeratedBut some economists say the role of

mobile money on monetary policy is being over-played.

“It only aects the security of depos-its and general payment system,” says

Bategeka, “In Uganda, we use a work-

ing payment system and part of that iseected through use of mobile money.”

Bategeka says if cases like that involv-ing MTN are to be avoided; all thoseinvolved in mobile money should besubjected to the same rules like thosethat govern banking.

“Anyone dealing in nancial instru-ments should have adequate capital,”Bategeka says, “a high level of assets,good management, and a good level ofearnings”

Operating in the absence proper regu-lation sparked another court case againstMTN three years back. The BugweriCounty MP Abdul Katuntu sued thecompany for running its mobile moneysystem outside the realms of its license.

In a suit led at the Commercial Courtmore than three years ago, Katuntu’slawyers argued that MTN had accumu-lated a lot of money as oat yet they

had not put in place any strict measuresto ensure that customers’ funds areprotected safely or insured against anyother liability. On this oat according tothe case, MTN had amassed more than atrillion shillings in spite of the insecurityhovering over customer deposits.

There is need to “strengthen that (cur-rent) regulation and include UCC in themonitoring along with BoU to ensurethat the telecoms are submiing match-ing information with reconciliationsfrom the banks,” says Muhumuza. Inhis view, it is time to introduce joint and

binding regulation between BoU and

UCC (read Government).

AGENT

(Stanbic Bank)

MTNe-money

platform

If all depos-

itors asked

for their

money

there would

be a crisis."

FloatCash

How 'fake' MTN Mobile Money was created

1

1

2

22

Shs 21 bn

1

Escrow

account

Fictitious Mobile

Money created

and cashed

KEYAgent buys e-money

Agent liquidates e-money

Investigative reporting: 2nd place- Haggai Matsiko and Ian Katusiime, The Independent

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