CMA working to stamp out fraud

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BY STELLA KILONZO

Over the recent past, Kenya\’s capital markets have registered phenomenal growth and development in virtually all parameters, a situation which can largely be attributed to various reforms initiated towards deepening of the market with particular emphasis on modernisation of market infrastructure, increased awareness, enabling policy framework, fiscal incentives and investor protection initiatives and sensitisation programmes.

This performance has completely changed the landscape of the market and the role it plays as a key driver to economic growth.

This rapid growth has however brought to the fore challenges such as the flexibility of market infrastructure, the availability of financial products and services to cater for the divergent needs of investors and issuers and more importantly the need to increase the level of investor protection to ensure our market integrity in sustained by preventing and eliminating fraudulent cases in our market.

Given that Investor protection is a key mandate in the Authority\’s strategic plan, the Authority established the Capital Markets Fraud Investigation Unit (CMFIU) on May 11, 2009 with an aim to:

"              Fast track fraud cases within the securities industries.
"              Centralize the investigation of securities related frauds.
"              Promote investor confidence.
The functions of the unit are as follows:

"              Apprehension of offenders who breach the laws of the country with emphasis on the securities related fraud.
"              Detection and prevention of frauds in the securities industry.
"              Prosecution of persons who commit fraud on evidence.
"              Investigation of all detected & reported cases of frauds in the security industry by the public.
"              Enforcement of all laws, regulation and guidelines with specific attention to Securities law violation.
"              Attend to all the Victims of securities related fraud promptly and take appropriate actions against suspects involved.
"              Act as a liaison office for the Authority with other investigative agencies.

The unit has adequate number of police officers ranging from the rank of constable to Senior Superintendent of Police. The officer in-charge of the unit reports directly to the Chief Executive but is accountable to the Director Criminal Investigation Department.

The officers have been talent spotted by the Director CID and have the requisite qualification and experience. The Chief Executive of the Authority has created an enabling environment for the unit to effectively handle its functions.

 The various complaints handled by the unit have been received from:

  • Investment banks
  • Brokerage firms
  • Central Depositories & Settlement Corporation
  • Listed Companies
  • General public

The various cases investigated by the unit are investigated expeditiously and the following resultant actions are taken:

  • Matter taken to court for due process of the law
  • The parties involved resolve amicably by settling and the Complainant withdraws pursuing the case with the unit.
  • The unit recommends the matter to the Compliance and Legal Department of the CMA for the necessary administrative action.
  • The file may be forwarded to the Attorney General through the Director CID for advice.

                                
The unit has received a total of 224 cases for the year 2009 and 153 cases for 2010.  Investigations into 68 cases have been concluded whilst 31 cases are pending trials at the law court. In the above cases a total of 50 suspects who are mainly employees of licensees accounting for 80 percent of the cases reported have been identified.

The total recoveries made in the course of investigation are Ksh.21; 255,462.05.CMA licensees affected by the frauds are seven stock brokers, nine Investment Banks, two Investment Advisers and 1 fund manager.

As an example of the effectiveness and continued performance of the unit, the CMFIU has recently has uncovered and intercepted a fraudulent scheme involving the transfer of client shares from one broker to another without authority. The unit swiftly detected the fraudulent transaction, resulting in the arrest and arraignment in Court of two suspects on two counts of fraudulent false accounting and theft.

It should be noted that fraudulent activities in the capital markets are not limited to the Nairobi Stock Exchange, but is prevalent globally and as the market becomes more developed both in size and sophistication, market malfeasance will continue to be practiced by unscrupulous individuals.

While the Authority assures the public that it will continue to carry out its role of protecting investors, the public is also encouraged to be vigilant and continue tracking movements of their shares regularly. We call upon all members of the public to report all suspicious transactions in the capital markets to the CMFIU.

The most prevalent fraud is the theft and encashment of divided/compensation/refund cheques for clients and sell of clients shares without their authority. The trend of the fraud has been that cases affecting the market started to be on the increase from the year 2005 when agents and employees of licensees would fraudulently sell clients securities.

The licensees should step up their fight against fraud by embracing the following guidelines:

  • They should perform thorough background checks on their prospective employees to avoid getting criminal minded staff.
  • Subject all payments to due diligence and ensure proper controls are put in place.
  • They should maintain a detailed database of their clients to prevent impersonation by fraudsters
  •  They should establish and maintain a link with the National Registration Bureau to enable quick verification of IDs provided.
  • They should report any suspicious transaction/staff/clients to the unit even after handling the matter internally to conclusively investigate the matter.

(Stella Kilonzo is the Chief Executive Office, Capital Markets Authority)

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