K20 billion ‘Bankgate’

Some banks in the country were defrauded out of at least K20.9 billion after a Pakistani businessperson, who was one of the directors at a local cotton company, obtained loan facilities totalling K20.9 billion and fled the country.

The company, Cotton Ginners Africa Limited, has since applied for bankruptcy at the Commercial Court in Blantyre, an application that the banks are challenging.

The businessperson, Abdul Rehman, believed to be in Pakistan after he disappeared together with his family in April this year, remitted over $5 million (over 3.6 billion at the current exchange rate) in foreign accounts, according to an audit report by Audit Consult Advisory Services Limited dated July 23 2017, which is contained in court documents.

The major victim of the calculated fraud is Standard Bank Limited, which is owed K8 585 177 082, followed by Export Development Fund (K4 092 547 425), Ecobank Malawi Limited (K3 499 481 627), CDH Investment Bank (K4 476 302 691) and National Bank of Malawi (K250 000 000).

The total amount at stake is K20 903 508 825, but it has also been established that the total liabilities for Cotton Ginners Africa Limited is K23 656 808 338, with the company’s total assets pegged at K10 011 666 092.

The company requires K13.2 billion to return to solvency, court documents Nation on Sunday has seen indicate.

The local banks, in a move to recover their money and save their reputations, have teamed up to object a bankruptcy application remaining directors of Cotton Ginners have filed at the High Court’s Commercial Court Division in Blantyre.

Abdul Kader Patel, one of the directors at Cotton Ginners Africa Limited, filed the insolvency application, proposing cooperation of all the banks and appointment of an administrator to manage the company under supervision of the court.

But the banks, with Standard Bank appearing on the court record as 1st Creditor, Ecobank as 2nd Creditor, National Bank 3rd Creditor, CDH Investment Bank 4th Creditor and Export Development Fund as 5th Creditor, are opposing the company’s application for bankruptcy on the basis that they hold securities of Cotton Ginners Africa Limited’s assets and would like to proceed realisation of security as soon as possible.

The audit report , however, recommends criminal investigation of some bank managers who “ knowingly or unknowingly helped Rehman defraud the banks and financially benefited”.

The audit report as contained in the court documents has also pointed at a bank manager, who is alleged to have had building materials, including iron sheets, delivered by the cotton company to a house he was constructing.

The audit report in the court records states that Rehman planned to defraud financial institutions, duped Mahomed Farouk Ibrahim (chairmperson of Cotton Ginners) family and fled Malawi.

“He [Rehman] was corrupt and fraudulent in his dealings. Some bank officials fell into Rehman’s trap by financially benefiting from Rehman’s dealings. He had a team that assisted him in his fraudulent activities. Some were aware of his activities while others were ignorantly used.

“It is in our findings that Rehman has remitted over $5 million in foreign accounts through Hawala [An alternative remittance channel that exists outside of traditional banking systems],” reads the report.

Rehman, the report says, used a middleperson in Dubai, who assisted in the financial malpractice.

“It is in our findings that borrowing from these financial institutions were not approved by the board of CGAL (Cotton Ginners Africa Limited) as per Article 101 of its articles and memorandum of incorporation. “Mr Abdul Kader Patel, who is on wheelchair and never visited any of the financial institutions, his signature has been forged in most of the documents,” the audit report adds.

The audit states it was further ascertained that the quantities of cotton and lint that was held by CGAL to financial institutions was not properly declared.

“The financial institutions, when granting loans, operated on trust, documents and other information presented by Rehman were not properly scrutinised and cross-checked,” the court, being presided of by judge Michael Mtambo was told.

The audit established that not all the money obtained went into business a total K2 952 881 164 went into non-businessrelated business activities.

Patel, in his affidavit in the application for bankruptcy, argues that Rehman incurred debts in the name of the company and caused various security instruments to be entered into without due authorisation.

“Mr Abdul Rehman failed to comply with internal controls such as the requirement to have at least two directors or at least three shareholders issue a resolution and minutes approving a transaction such as the borrowing from the creditors.

“The creditors failed to note the apparent non-compliance with the requirements of a corporate entity constituted in the company prior to lending out the large sums of money leading to the present state of affairs of the company,” Patel complains.

He adds: “In fact, some senior officers from among the creditors benefited from the company for no apparent reason at a time when the company was obtaining loans in circumstances that can now be easily described as fraudulent.”

To prove his point, Patel, being represented by lawyer Patrick Mpaka, says a tax invoice from MacSteel Limited is attached showing payment by the company for iron sheets and a driver’s statement showing that the iron sheets were delivered at one of the bank’s manager.

The driver’s report, also attached, explains how the manager gave him directions to his plot, to deliver the iron sheets.

Patel argues that a letter dated June 9 2017, from the 1st Creditor to the company together with its attachments, shows that although it was a condition precedent for the 1st creditor to make available the facilities to the company that securities should be duly executed, in a form acceptable to the bank and legally binding, it was only on June 6 2017 that the 1st Creditor caused all assets debentures to be registered.

“[There are also] copies of the purported board resolutions to each one of the creditors, which clearly do not comply with either Clause 101 or Clause 54 of the company’s memorandum and articles of association in that none of them is issued by any to directors, let alone three shareholders and that where the sole director signed, the signature is clearly forged apart from some of them being dated earlier than the date of the purported meeting [where] they allegedly produced,” Patel says.

Patel also accuses the creditors of acting negligently and provided a framework for the fraud to flourish although they were bound not only by their contracts, but also directives issued by the Central Bank and the Registrar of Financial Institutions not only to ensure compliance with legal requirements, but also to put in place measures that could curb fraud.

He points out that most of the securities currently held by the main creditors of the company are illegal and invalid because they are tainted with fraud and were obtained by the fraud of both Rehman and some of the officers of the creditors.

“That is why we asked Mr Lowani Munkhondia of Audit Consult if he would be willing to act as administrator should the court make an order of administration and he consented and showed us the approval of his application as an Insolvency Practitioner.

“He has since produced a draft rescue plan, which is yet to be agreed with the creditors and approved by the directors,” Patel suggests.

Lawyer Pempho Likongwe, representing Standard Bank, apart from objecting the application for reorganisation of Cotton Ginners Africa Limited, also objects the proposed appointment of Munkhondia as an administrator, should the court grant the insolvency application.

Likongwe argues in his affidavit that Munkhondia would not be an appropriate administrator because he is of Audit Consult advisory Services, who is an auditor for the Cotton Ginners Africa Limited, and is most likely to act in their favour.

The lawyer says it was clear the insolvency is a result of fraud on the part of directors or officers at the Cotton Ginners, and prays to the court to put an order that would not enable the remaining directors of the company to flee or dispose the company’s assets until all the creditors are paid.

Fanny Kachala, who is National Bank’s account relationship manager, says in her affidavit, the bank offered Cotton Ginners the facility secured by two securities, including a collateral mortgage at the company’s premises in Bangula, Nsanje, where there is a ginnery.

Kachala says her bank granted the loan with full blessings of Cotton Ginners board of directors as evidenced by resolution it made approving the borrowing, arguing that Patel could not come to the court and feign ignorance as attempted in his affidavit.

She says the company ’s problems are self-inflicted as it was clear it did not have proper corporate governance structure and monitoring tools in place and instead everything was left in the hands of one person.

Export Development Fund, a department under Reserve Bank of Malawi, said it loaned Cotton Ginners $5 million (over K3.6 billion at the current exchange rate) on June 20 2017, which the company defaulted.

The Fund’s head of operations, Edward Mtulutsa, says in his affidavit, there is no material disclosed that points to the prospects of restoration of the company to solvency or prevention of its operations as a going concern.