Report Of The Taskforce On Pyramid Schemes

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Report Of The Taskforce On Pyramid Schemes

  1. 1. Report of the Taskforce on Pyramid Schemes REPUBLIC OF KENYA MINISTRY OF CO-OPERATIVE DEVELOPMENT AND MARKETING Report of the TASKFORCE ON PYRAMID SCHEMES CHAIRMAN HON. FRANCIS NYENZE PRESENTED TO: 1
  2. 2. Report of the Taskforce on Pyramid Schemes HON. JOSEPH W. N. NYAGAH, EGH, M.P. MINISTER FOR CO-OPERATIVE DEVELOPMENT AND MARKETING 24TH JUNE, 2009 Report of the Taskforce on Pyramid Schemes 2
  3. 3. Report of the Taskforce on Pyramid Schemes 3
  4. 4. Report of the Taskforce on Pyramid Schemes Taskforce on Pyramid Schemes, NSSF Building, Block ‘B’ 10th floor, P.O. Box 40811-00100 NAIROBI 17th June, 2009 Hon. Joseph W. N. Nyagah, EGH, MP Minister for Co-operative Development and Marketing, P.O. Box 30547, NAIROBI Dear Sir, RE: REPORT OF THE TASKFORCE ON PYRAMID SCHEMES Sir, you appointed us as members of the Taskforce on Pyramid Schemes to investigate the operations of Pyramid Schemes and establish the extent of their impact in the country. We have completed our task in accordance with the terms of reference and now have the honour to submit this report to you. The report contains our unanimous conclusions and recommendations. We take this opportunity to thank you for the honour and trust which you have bestowed on us. Accept the assurances of our highest regard. Yours faithfully, Hon. Francis Nyenze, EGH – Chairman………………………….. Amb. John Mukuriah,EBS – Vice Chairman …………………… 4
  5. 5. Report of the Taskforce on Pyramid Schemes Mr. David Oduol Odhiambo, CPSK, Advocate – Member…..…………………… Mr. Harold Rurigi Mwai – Member……………………………… Mrs. Sakina Adan – Member……………………………… Mrs. Emily Manga Mwachoo – member…………………………… TABLE OF CONTENTS FOREWORD…………………………………………………………………… ix LIST OF ACRONYMS………………………………………………………… xii EXECUTIVE SUMMARY……………………………………………………… xiv PART 1 INTRODUCTION AND HISTORICAL OVERVIEW CHAPTER 1……………………………………………………………………… 3 INTRODUCTION………………………………………………………………. 3 1.1 Background and Introduction…………………………………………………… 4 1.2 Constitution & Appointment of Task force…………………………………. 4 1.3 Terms of Reference…………………………………………………………………. 4 1.4 Methodology…………………………………………………………………………… 6 1.5 Challenges and Limitations………………………………………………………. 10 1.6 Organization of the Report………………………………………………………. 12 CHAPTER 2…………………………………………………………………… 13 HISTORICAL BACKGROUND…………………………………………….. 13 2.1 Introduction ………………………………………………………………………… 13 2.2 Definition and Historical background of Pyramid Schemes………… 13 2.3 Pyramid schemes and Multi-level Marketing…………………………… 14 2.4 The Kenyan Situation……………………………………………………………. 15 2.5 Factors responsible for spread of Pyramid Schemes…………………. 16 2.5.1 Economic factors…………………………………………………………………… 17 2.5.2 Religious factors…………………………………………………………………… 18 2.5.3 Legislative Factors……………………………………………………………….. 19 2.5.4 Social Factors……………………………………………………………………… 20 5
  6. 6. Report of the Taskforce on Pyramid Schemes 2.5.5 Co-operative Factors……………………………………………………………. 20 PART 2 PYRAMID SCHEMES: A DETAILED ANALYSIS OF THE KENYAN PERSPECTIVE CHAPTER 3…………………………………………………………………….. 24 PYRAMID SCHEMES IN KENYA…………………………………………… 24 3.1 Introduction………………………………………………………………………….. 24 3.1.1 Legal Nature…………………………………………………………………………. 24 3.1.2 Operational Nature………………………………………………………………… 25 3.2 Number of Pyramid Schemes in Kenya……………………………………… 29 3.3 Directors of Pyramid Schemes………………………………………………… 29 3.4 Financial Indebtedness to Investors…………………………………………… 32 3.5 Pyramid Schemes Victims Initiatives………………………………………….. 39 CHAPTER 4…………………………………………………………………… 43 PUBLIC HEARINGS…………………………………………………………. 43 4.1 Introduction………………………………………………………………………….. 43 4.2 Issues raised by Provincial Administration………………………………… 44 4.2.1 Nairobi Province……………………………………………………………………. 44 4.2.2 Meru……………………………………………………………………………………. 44 4.2.3 Embu…………………………………………………………………………………... 44 4.2.4 Nyeri…………………………………………………………………………………… 45 4.2.5 Muranga……………………………………………………………………………… 45 4.2.6 Thika………………………………………………………………………………….. 46 4.2.7 Kisii……………………………………………………………………………………. 46 4.2.8 Kakamega…………………………………………………………………………… 46 4.2.9 Bungoma…………………………………………………………………………….. 47 4.2.10 Kisumu……………………………………………………………………………….. 47 4.2.11 Nakuru……………………………………………………………………………….. 47 4.2.12 Eldoret…………………………………………………………………………………. 47 4.2.13 Mombasa……………………………………………………………………………… 48 4.2.14 Malindi…………………………………………………………………………………. 48 4.3 Concerns raised during Public Hearings…………………………………… 48 4.4 Taskforce Observations…………………………………………………………… 49 CHAPTER 5…………………………………………………………………… 52 FUNDS & OTHER ASSETS………………………………………………….. 52 5.1 Introduction…………………………………………………………………………… 52 5.2 Identification of Bank Accounts………………………………………………… 52 5.2.1 Category 1: Bank Accounts in Institution Names………………………… 52 5.2.2 Category 2: Bank Accounts in Personal Names…………………………… 59 5.2.3 Category 3: Frozen Bank Accounts……………………………………………… 61 5.3 Conclusion……………………………………………………………………………… 62 6
  7. 7. Report of the Taskforce on Pyramid Schemes 5.4 Other Assets…………………………………………………………………………. 63 5.4.1 Identification and Status of Other Assets…………………………………… 63 5.5 Constraints…………………………………………………………………………… 65 5.6 Recommendations……………………………………………………………….. 66 CHAPTER 6…………………………………………………………………… 68 EFFECTS OF PYRAMID SCHEMES…………………………………..…… 68 6.1 Introduction………………………………………………………………………….. 68 6.2 Economic effects……………………………………………………………………. 68 6.3 Security effects……………………………………………………………………… 70 6.4 Socio-Economic Effects ………..……………………………………………….. 71 6.5 Religious Effects……………………………………………………………………. 73 CHAPTER 7……………………………………………………………………. 74 ROLE OF GOVERNMENT INSTITUTIONS AND AGENCIES………… 74 7.1 Introduction………………………………………………………………………… 74 7.2 Government Institutions…………………………………………………………… 74 7.2.1 Ministry of Finance………………………………………………………………….. 74 7.2.2 Office of the President, Provincial Administration & Internal Security……………………………………………………………………. 76 7.2.2.1 N.S.I.S…………………………………………………………………………….. 76 7.2.2.2 C.I.D………………………………………………………………………………… 76 7.2.2.3 Banking Fraud investigation Unit…………………………………………… 77 7.2.2.4 Provincial Administration………………………………………………………. 77 7.2.2.5 Attorney General………………………………………………………………… 78 7.2.2.6 Judiciary……………………………………………………………………………. 78 7.2.3 Ministry of Co-operative Development & Marketing …………………… 79 7.2.4 Ministry of Lands …………………………………………………………………… 82 7.2.5 Ministry of Social Services…………………………..…………………………. 82 7.2.6 Government Agencies……………………………………………………………. 82 7.2.7 Recommendations ………………………………………………………………….. 85 PART III THE WAY FORWARD CHAPTER 8……………………………………………………………………… 89 PUBLIC EDUCATION AND AWARENESS………………………………… 89 8.1 Introduction……………………………………………………………………………. 89 8.2 Channels for Awareness Creation………………………………………………. 89 8.2.1 Government Agencies……………………………………………………………… 89 8.2.1.1 Office of Government Spokesman…………………………………. 89 7
  8. 8. Report of the Taskforce on Pyramid Schemes 8.2.1.2 Provincial Administration………………………………………………. 90 8.2.1.3 Regulatory Bodies……………………………………………………….. 90 8.2.1.4 Relevant Government Ministries……………………………………. 90 8.2.2 Churches………………………………………………………………………………. 90 8.2.3 Representative Bodies…………………………………………………………… 91 8.2.4 Electronic and Print Media………………………………………………………… 91 8.2.5 Billboards, Posters and Pamphlets…………………………………………… 91 8.2.6 Mobile Phones………………………………………………………………………… 92 8.2.7 Panel Interviews……………………………………………………………………… 92 8.2.8 Arts……………………………………………………………………………………… 92 8.2.9 Seminars………………………………………………………………………………. 93 8.2.10 Internet………………………………………………………………………………. 93 8.2.11 Others………………………………………………………………………………….. 93 8.3 Conclusion……………………………………………………………………………… 94 8.3.1 Resource Mobilisation…………………………………………………………… 94 8.4 Recommendations…………………………………………………………………….. 95 CHAPTER 9…………………………………………………………………… 96 LEGAL FRAMEWORK IN KENYA………………………………………… 96 9.1 Introduction…………………………………………………………………………… 96 9.2 Analysis of Relevant Existing Legislation……………………………………… 96 9.2.1 Companies Act……………………………………………………………………… 96 9.2.2 Business Names Act………………………………………………………………… 97 9.2.3 Co-operative Societies Act……………………………………………………… 98 9.3 Steps taken by Ministry of Co-operatives & Marketing……………… 98 9.4 Offences under Existing Legislation……………………………………………. 100 9.5 Shortcomings of Existing Legislation………………………………………… 101 9.6 Recommendations ………………………………………………………………….. 102 CHAPTER 10……………………………………………………………………. 104 SUMMARY RECOMMENDATIONS……………………………………. 104 8
  9. 9. Report of the Taskforce on Pyramid Schemes FOREWORD O n 14th January, 2009 the Hon. Minister for Co-operative Development and Marketing appointed a Taskforce to look into the operations of pyramid schemes. The appointment of the Taskforce by the Government was a reaction to the hue and cry from victims of pyramid schemes and other related schemes. The Taskforce held public hearings countrywide where views from the victims were received. A lot of data regarding the particulars of the investors, directors and promoters of pyramid schemes was received during the registration exercise. Interviews were also held to provide opportunities to directors of pyramid schemes, individuals and groups to give information on the role they may have played in the pyramid schemes saga. Our findings therefore, are a reflection of what Kenyans especially the investors think about pyramid schemes. The Taskforce wishes to express their gratitude to Hon. Joseph W. N. Nyagah, EGH, MP Minister for Co-operative Development and Marketing for his commitment, cooperation, advice and unfailing support. The Taskforce recognizes Hon. Uhuru Kenyatta, E.G.H, M.P Deputy Prime Minister, and Minister for Finance for his commitment in dealing with the pyramid schemes menace. The Taskforce would not have accomplished its mandate without the logistical support from the Permanent Secretary, Ministry of Co-operative Development and Marketing Mr. Seno Nyakenyanya, CBS, and his staff. We acknowledge the institutional support from Mr. Fredrick F. Odhiambo, MBS, the Commissioner for Co-operative Development (CCD) and the logistical support provided by the Provincial Co-operative Officers (PCOs), District Co-operative O fficers(DCOs), and their staff who tirelessly coordinated the pyramid victims’ registration exercise. In particular, Taskforce acknowledges Mr. J. Kenduiywa, Mr. S. Ongeti, Mr. P.K.Wanjohi and Mr. P. Koremo of CCDS office for providing information on Cooperative Societies associated with pyramid schemes and ICT Department headed by Mr. Alwanga Mbeche for ICT support. Special mention to Mr. G. Njangombe, R Maseki, F.M. Maina,Ms. D. Ouma, R. Mwithiga, J. 9
  10. 10. Report of the Taskforce on Pyramid Schemes Muchembe, J.K. Maina and J. Kamau for providing information on Cooperative Societies under liquidation and inquiry. We are grateful to Mr. Joseph Kinyua, CBS, Permanent Secretary, Ministry of Finance (MoF) and Dr. Geoffrey Mwau, Economic Secretary for finding time to consult with us. We greatly benefited from their views and proposals. The Taskforce also acknowledges the overwhelming support received from Mr. Francis Kimemia, CBS, Permanent Secretary Provincial Administration and Internal Security, Provincial and District Commissioners (DC) during the public hearings. The Taskforce wishes to express its gratitude to the pyramid schemes victims for turning up in large numbers during the public hearings countrywide and sharing real life experiences with the Taskforce. We also thank them for turning up during the registration exercise. We acknowledge individuals, professional bodies and institutions who offered their views to the Taskforce. In particular, we wish to thank Mr. Apollo Mboya, Deputy Secretary, Law Society of Kenya(LSK) and Morris Kimuli an Advocate of the High Court of Kenya, for providing valuable information on proposed legal reforms which included a draft on Anti-pyramid schemes Legislation. We also acknowledge support given by Mr. J. K. Wanyela, Executive Director, Kenya Bankers Association (KBA). We express our gratitude to Mr. C. Ademba, HSC, Managing Director Kenya Union of Savings and Credit ( Kuscco) ltd, for providing insightful proposals. We wish to acknowledge the fruitful discussions held with Kenya Anti Corruption Commission (KACC) officials namely; Mr. Peter Mwangi, Principal Officer incharge of operations, Mr. Olga Sewe, Principal Attorney, Crime Litigation and Asset Recovery, Mr. Patrick Owiny, Data Collection and Mr. Kennedy Bosire , Principal Forensic Investigator. The Taskforce acknowledges the discussions held with Central Bank of Kenya (CBK) team. Special mention goes to Ms Rose Ndetho, Director Banking Supervision and her team of Mr. Fredrick Pere, Mr. Michael Owour, Mr. Paul 10
  11. 11. Report of the Taskforce on Pyramid Schemes Mugo, Ms Elizabeth Njogu and Mr. Paul Ndambuki of Banking Fraud Investigation Department (BFID). We also benefited from discussions held with Mr. Gedeon M. Kimilu, MBS, Senior Assistant Commissioner, Criminal Investigation Department (CID), and Mr. Henry Otieno Ochido of NGOs Coordinating Board. We wish to acknowledge information provided by Ms Faith Kabata, Assistant Executive Director incharge of complaints and investigations at the Public Complaints Standing Committee (PCSC). We also acknowledge Mr. Kanyangi of Kanyangi and Company Advocates and Onyango Bonyo, lawyer and private consultant who provided valuable information regarding the operations of pyramid schemes. We are grateful to the print and electronic media for highlighting the plight of the pyramid schemes victims, Mrs Wangui Mugo, Public Relations Officer, Ministry of Cooperative Development & Marketing and Ms Eunice Ajwang for offering hansard services to the Taskforce. The Taskforce wishes to thank the following for raising the plight of Kenyans and availing valuable data to the Taskforce. Pastor Samuel Kariuki, Bishop W. Mamboleo, Eliud Thuku, Joseph Kinyua and Bishop Kinyanjui all of National Pyramid Victims Initiative. We also acknowledge valuable information provided by Mr. Benson Kiamba, Rev. Margaret Prem and Bishop Erastus Njoroge of Mt. Kenya pyramid schemes initiative group. The Taskforce wishes to express its gratitude to the Taskforce Secretary, Mr. Philip Gichuki who worked tirelessly to enable the Taskforce complete its task. Special thanks to Mrs. Roselyne Ragama, Mr. Allan Githaiga and Mr. Fredrick Kaduka for their research, technical and logistical support without which the Taskforce would not have completed its task satisfactorily. We also wish to appreciate the secretarial and support staff for their commitment and support. We are grateful to the following; Miss Beatrice Ochieng, Mr. Andrew O. Makokha and Mrs. Edith Mwaniki for secretarial services. Mrs. Anne Marwa for ensuring the Taskforce was comfortable throughout the period. Ms Mercy Muchina for coordinating transport, Mr. James Njoroge and Janet Kamanga 11
  12. 12. Report of the Taskforce on Pyramid Schemes for being able drivers, Cpl. Evans Morara and Cpl. Benson Mariga for the security arrangements. The Taskforce chairman would like to especially acknowledge all the Taskforce members individually for their devotion and resilience during the entire period. The Taskforce members’ commitment to duty especially during the critical phase of report writing is highly acknowledged. The Taskforce is pleased to submit this report to Hon. Minister for Co-operative Development and Marketing with respect and humility. It is the hope of the Taskforce that the recommendations will be found useful in dealing with issues associated with the pyramid schemes saga. ….............................................. Hon. Francis Nyenze Chairman, Taskforce on Pyramid Scheme 12
  13. 13. Report of the Taskforce on Pyramid Schemes LIST OF ACRONYMS A.S.K Agricultural Shows of Kenya ACID African Christian in Development A.G Attorney General AIC African Inland Church BFID Banking Fraud Investigation Department C.C.D Commissioner for Cooperative Development CBK Central Bank CBOs Community Based Organizations CBS Conqueror of the Burning Spear CEO Chief Executive Officers CID Criminal Investigation Department CMA Capital Markets Authority DCOs District Cooperative Officers DCs District Commissioners DECI Deci Capacity Building Entrepreneur DOs District Officers GNLD Golden Neo-Life Diamond HSC Head of State Commendation KBA Kenya Bankers Association KACC Kenya Anti-corruption Commission KBC Kenya Broadcasting Cooperation KUSCCO Kenya Union of Savings and Credit Cooperatives LSK Law Society of Kenya MFI Micro-Finance Institutions MBS Moran of the Burning Spear MLM Multi-Level Marketing MP Member of Parliament MOCD & M Ministry of Cooperative Development and Marketing 13
  14. 14. Report of the Taskforce on Pyramid Schemes MOF Ministry of Finance NACOS National Cooperative Organizations NCCK National Council of Churches of Kenya NGOs Non Governmental Organizations NSIS National Security Intelligence Service OGW Order of the Golden Worrier OP Office of the President PCEA Presbyterian Church of East Africa PC Provincial Commissioner PCO Provincial Co-operative Officer PCSC Public Complaints Standing Committee RBA Retirement Benefits Authority SACCO Savings and Credit Co-operative SDA Seventh Day Adventist SUPKEM Supreme Council of Kenya Muslims T.O.R Terms of Reference 14
  15. 15. Report of the Taskforce on Pyramid Schemes EXECUTIVE SUMMARY A: Background The Taskforce on Pyramid Schemes was appointed by the Hon. Minister of Co-operative Development on the 14th January 2009 and launched on the 9th February 2009 upon which it commenced business. Its mandate was to inquire and investigate into the operations of pyramid schemes and pyramid related schemes. The Pyramid Schemes camouflaged as co-operative societies in the last phase of their operations. This left the Hon. Minister for Co-operative Development with the responsibility of dealing with the crisis as all queries were directed to the ministry. It prompted the minister to appoint a Taskforce to investigate the pyramid schemes saga to help avert a looming crisis and resolve the plight of many Kenyans affected by the schemes. This report is organized into three parts and ten chapters. Part I consisting of two chapters contains the introduction and history of pyramid schemes. Part II has five chapters and looks into the nature and number of pyramid schemes in Kenya, pinpoints the masterminds of these schemes, investigates the funds and other assets held by the schemes, analyses the public hearings, looks at role of Government institutions and Agencies and the effect of pyramid schemes in Kenya. Part III consisting of three chapters addresses the way forward in terms of legal reforms, public awareness and recommendations. This report presents on analysis of the views of the Kenyans especially the victims and other critical stakeholders. The Taskforce believes that these recommendations will initiate the process to address the problems created by the emergence and collapse of pyramid schemes. B: Findings and Conclusions (i) Investors’ data 15
  16. 16. Report of the Taskforce on Pyramid Schemes The Taskforce conducted a countrywide registration exercise from the 24th February to 30th April 2009 where data on the number of pyramid schemes, investors and the total amounts invested was compiled. From the above data, 270 pyramid and other related schemes were identified and 148,784 investors registered as having invested a total sum of Kshs. 8,178,737,402. This figure reflects the principal amount invested and does not include the expected returns. While the registration was successful, we observe that our figures are not conclusive since investors were still presenting themselves for registration after the closure of the exercise. The top ten institutions in terms of amounts invested are as follows; NAME OF SCHEME NUMBER OF AMOUNT INVESTORS 1 DECI 93,485 2,405,518,832.00 2 Clip Investments Sacco Ltd 5,846 1,993,866,422.00 3 Kenya Business Community Sacco 921 780,698,218.00 Ltd 4 Sasanet Investment Sacco Ltd 629 739,948,412.00 5 Jitegemee Investment Sacco Ltd 3,828 494,401,600.00 6 Circuit Investment 1,392 348,943,103.00 7 Family In Need Organisation 4,580 157,280,553.00 (FINO) 8 Global Entreprenership 9,206 139,006,632.00 9 Spell Investment 544 120,326,860.00 10 Mont Blanq Afrique 774 82,834,000.00 Totals 121,205 7,262,824,632.00 Source: Registration of claims data (ii) Effects of Pyramid Schemes The collapse of the schemes had adverse effects to the investors. They ranged from loss of earnings, family and matrimonial 16
  17. 17. Report of the Taskforce on Pyramid Schemes breakups, suicides, depression and illnesses like diabetes and high blood pressure. The Taskforce identified reasons that contributed to the spread of the schemes as a desire for economic empowerment, lack of awareness and greed. (iii) Frozen Accounts During the public hearings, it was alleged that a sum of Kshs. 5b was held up by Central Bank of Kenya (CBK) in frozen accounts. According to CBK, the law forbids it from sharing information on bank accounts with 3rd parties. Consequently, the Taskforce could not establish the amounts held in the frozen accounts. (iv) Other Bank Accounts The Taskforce conducted investigations with a view of establishing the identity and status of accounts operated by the schemes. These accounts were held in the names of the schemes or directors and were characterized by numerous deposits and huge withdrawals. It was established that a majority of the accounts were closed with nil balances. Due to the lengthy procedures of establishing the status of accounts and the high number of schemes involved which stood at 270, the Taskforce was not able to establish the current status of all the accounts. (v) Response by Government Agencies (Central Bank of Kenya) The Taskforce noted that the CBK took measures aimed at addressing the issue of pyramid schemes. 17
  18. 18. Report of the Taskforce on Pyramid Schemes a) The CBK issued two press notices in February and May 2007 urging the public against investing in pyramid schemes. These statements were negatively received by the public who viewed them as government interference to otherwise legitimate investments. b) CBK directed commercial banks to conduct due diligence on the accounts exhibiting characteristics of pyramid schemes and not to accept deposits into such accounts and to act decisively in closing them. c) CBK spearheaded the formation of a multi-sectoral team to develop and recommend a strategy for sustained public awareness campaign on pyramid schemes. (vi) Directors The report has documented the identities of individuals who were behind these schemes. In some cases, the directors controlled the schemes by proxy. Due care has been taken to verify the accuracy of these information. The directors were afforded an opportunity to appear before the Taskforce and ascertain the truth regarding the claims made against them but regrettably a majority failed to appear. A sampled list of the masterminds of the major schemes is as follows; (Note: a complete list of the directors is highlighted in chapter 3) INSTITUTION DIRECTORS/PROPRIETORS/OFFICIALS DECI George Odinga Donde Tujibebe Sacco George Odinga Donde - Chairman Godfrey Kamanda Gakure (Bishop) Ann Zawadi - (Advocate) Ambassador Mary Odinga CLIP Investment Peter Ndakwe - Chairman Cooperative Soc. ltd Meshack Gachago - V/C Didycus Shyamwama - Treasurer Festus Kizisa - Secretary Kenya business Francis Omurwa- Chairman community Sacco, Angelo Mung’ri M’inoti - V/Chairman 18
  19. 19. Report of the Taskforce on Pyramid Schemes Ltd. Elias Kathurima Rutere - Treasurer Barnabas Mwangangi - Secretary Sasanet Investment Michael Chege - Chairman cooperative Dorothy Wangui - Hon. Secretary Ronald Ouma - Treasurer Job Nyamao - V/chairman Sasanet ltd. Michael Chege and Sammy Gitau Jitegemee Sacco/ Jackson Kinyoho Mburu - Chairman Mont Blanq Afrique Patrick Nyoike Maina - Member Ltd Florence Wambui Busiega - Vice Chairman James Mate Njeru - Treasurer Elizabeth Ngoiri Mwangi - Secretary Family in Need John Leonard Wanyoike Organization Winfred Gatakaa Kiria (FINO) Rahab Maimutie Wanuoike Global Patrick Ayisi Ingot - Chairman Entrepreneurship Christopher Mweresa Livunda - V/Chairman Florence Nzoeva Mulama - Secretary Edward Murithi Matu - Treasurer Spell investment Boniface Anderson Ngosia - Chairman Faith Ayoti - V/Chairman Consolata Nabwire - Secretary Eunice Negesa - Treasurer Amity Investment Charles Murithi Kirigua Due to shortage of time the taskforce did not invite all parties involved for interviews especially Regional promoters. (vii) Restitution The Taskforce suspects that investors’ funds were diverted by the directors to acquire properties for their own selfish interests. It was observed that some of the properties had been transferred to other parties with a view of defeating justice. Some highlights are as follows; Scheme Director Properties Clip Peter Ndakwe Peter Ndakwe is alleged to have bought plots in Runda Investments worth Kshs.200m and transferred the property to Sacco Ltd Pakinstar Ltd of Sun Jopskin SA Pentinkson, Panama for Kshs.25m each. Transfers effected on 11.7.2006 and 20.4.2007. The L.R are 14970/15, 14970/14, 14970/7 and 14970/6. The transfers were made at the height of complaints by investors 19
  20. 20. Report of the Taskforce on Pyramid Schemes It was alleged that Ndakwe may own a lot of property in Canada Sasanet Michael Chege 30 units of flats worth Kshs.60m in Sunrise estate. Investment 11.5 acres in Nyari Estate, Nairobi. Deposit of Kshs. Ltd 40m paid for the land 4 flats along Chaka road, Milimani 32 flats in Imara Daima.(Swara Flats) each sold for Kshs.2.5m All properties sold through his advocate Ajaa Olubayi of Ajaa & Co. Advocates Spell Boniface Account held in Stanbic Bank with Kshs. 200m Investments Anderson transferred to his mother upon death. Ltd Ngosia Houses formerly belonging to Teleposta Pension (deceased) Scheme worth approx. 11m A 23m property in Lavington (viii) Legal Framework The Taskforce observed that the current legal framework is inadequate. This contributed to the spread of the schemes that exploited the legal loopholes. C. Recommendations The Taskforce notes with concern the negative effects that the pyramid schemes saga has caused on investors and the general public and views it as a matter of national concern. In view of the foregoing, the Taskforce recommends that the Government commits itself to the following; (i) Criminal prosecution The Attorney General (AG), under the existing legal system, institutes immediate criminal prosecution of all directors /proprietors/officials who were engaged in pyramid schemes activities. 20
  21. 21. Report of the Taskforce on Pyramid Schemes (ii) Civil proceedings Institution of civil proceedings against the directors/ proprietors /officials of the pyramid schemes to recover the funds. (iii) Amnesty from prosecution Amnesty from criminal prosecution be considered for directors/ proprietors /officials or other persons willing to refund back investors’ funds within one hundred and twenty (120) days. (iv) Legal Framework Strengthening of the legal framework to provide for; (a) The immediate amendment of the Penal Code (Cap 63) so as to make provisions for the prohibition of promotion or taking part in pyramid schemes. (b) The enactment of an Anti-Pyramid Schemes Act within one year to outlaw all aspects relating to pyramid schemes. (c) Enactment of The Proceeds of Crime and Anti-Money Laundering Bill 2008 within six months. This proposed legislation has good provisions on assets recovery. (v) Investigations/ restitution; a) The CID to undertake and complete investigations on Bank Accounts within six (6) months. b) The CID to undertake and complete tracing of assets acquired from proceeds of pyramid schemes operations within one year with a view of recovery and restitution. 21
  22. 22. Report of the Taskforce on Pyramid Schemes c) The government to enlist the assistance of foreign missions /governments where the perpetrators may have invested proceeds from pyramid schemes activities. d). Parliament to fast-track the enactment of Mutual Legal Assistance Bill that was published on 18th May, 2009, in (c) above. (vi) Standing Committee The immediate setting up of a Standing Committee under the Ministry of Co-operative Development and Marketing comprising of relevant government ministries/agencies and private sector. This committee will be responsible for the following; a) Monitoring the implementation of the necessary legal framework. b) Setting up and administration of the Trust Fund. c) Overseeing the investigation of accounts and tracing of assets. d) To be responsible for the restitution of recovered assets, if any. (vii) Trust Fund A trust fund be set up under the Ministry of Co-operative Development and Marketing to manage funds and properties recovered. The members of the said fund should include other relevant government ministries/agencies and reputable Kenyans. (viii) Judicial Commission Formation of a judicial commission to undertake further investigations aimed at tracing funds and assets for restitution to investors. (ix) Frozen Accounts 22
  23. 23. Report of the Taskforce on Pyramid Schemes The CBK issues a public statement on the current status of all frozen accounts related to pyramid schemes. (x) Anti-Pyramid Schemes Authority An Anti-Pyramid Schemes Authority be created under the proposed Act. The Authority will take up the functions of the proposed Standing Committee once the Act is enacted and operationalised. (xi) Operationalisation of the Sacco Societies Act The SACCO Act which is yet to be operationalised be fast-tracked by the Minister for Co-operative Development and Marketing by gazetting the commencement date and establishing the SACCO Regulatory Authority. This will ensure strict supervision of the SACCOs. This is in recognition of the fact that out of 270 institutions involved, 17 of them were registered under the Cooperative Societies Act. (xii) Public awareness campaign Conduct an aggressive public awareness campaign on the negative effects of pyramid schemes through a multi-sectoral approach involving both public and private sector be conducted. (xiii) Strengthen supervision All government agencies charged with the registration of institutions whose activities were associated with pyramid schemes should institute stringent measures to strengthen their supervision mechanism by being more vigilant in invoking their investigation and supervisory powers to ensure that such institutions operate within their prescribed objects. (xiv) Enforcement Agencies Law enforcement agencies to exercise vigilance in their duty to avert occurrence of pyramid schemes operations in future. 23
  24. 24. Report of the Taskforce on Pyramid Schemes PART 1 INTRODUCTION AND HISTORICAL OVERVIEW 24
  25. 25. Report of the Taskforce on Pyramid Schemes 25
  26. 26. Report of the Taskforce on Pyramid Schemes CHAPTER 1 INTRODUCTION 1.1 Background and Introduction Generally, a pyramid scheme is an unregulated financial scam that relies on a pyramid of investors who contribute money to a fraudulent scheme on the promise of phenomenal returns. The investors are driven by the phenomenal returns more than the understanding of the commercial purpose of the transaction and how the returns are generated. In Kenya, there was a proliferation of these pyramid schemes in the years of 2006 and 2007. However it is instructive to note that some of these schemes emerged before 2006. The schemes purported to offer attractive returns on money ‘invested’ with them. Later they collapsed and sunk with billions worth of investors’ money. Investors in collapsed pyramid schemes suffered huge financial losses. As a result, there were numerous complaints filed with various government agencies. These complaints took the forms of memorandum, filing of suits at the courts and filing complaints. The investors were seeking avenues through which they would be able to recover money lost in the schemes. Most queries were directed to the Minister for Co-operative Development and Marketing as the main institutions that operated pyramid schemes activities registered as Co-operatives in their last phase of operation. Given the nature and complexity of the problem and the huge pecuniary losses suffered by the investors, the Government constituted the Taskforce on pyramid schemes to investigate the operations of the schemes with a view of presenting recommendations which would guide subsequent action. 26
  27. 27. Report of the Taskforce on Pyramid Schemes 1.2 Constitution and Appointment of Taskforce on pyramid schemes. The Government of Kenya through the Minister for Co-operative Development and Marketing Hon. Minister Hon. Joseph W. N. Nyagah, E.G.H, M.P, appointed a Taskforce to investigate pyramid schemes and make recommendations thereon that will guide subsequent action. In a gazette notice dated 16th January 2009 and a subsequent Corrigendum dated 24th April 2009, the Minister for Co-operative Development and Marketing, Hon. Joseph W. N. Nyagah, E.G.H, M.P, appointed a 10 man team as members of the Taskforce. (See Annex 1: Gazette Notice No. 264 & 4068 of 2009) The Taskforce was officially launched by the Hon. Minister on the 9th February 2009 after which it commenced its sittings. During the launch, the Minister noted the herculean task facing the Taskforce. He added that pyramid schemes had affected people from all walks of life and that the socio-economic effects were immense. Further, he addressed the impact of pyramid schemes on the co-operative movement where he noted that co- operatives had lost a lot of money through members who had borrowed loans to invest in the schemes. The Minister highlighted the terms of reference (TOR) for the Taskforce and urged all stakeholders with information that may help in achieving the TOR to submit the same to the Taskforce. He appealed to the directors who may be willing to refund the victims who lost their money, to come forward and do so. 1.3 Terms of Reference. The following were the TORs of the Taskforce; (i) To establish the number and nature of pyramid and other related schemes in existence and the identities of their directors- This involved identification of the number and perpetrators of schemes operating in Kenya. The nature of the schemes involved looking into the legal and operational nature of the schemes with a view of understanding how they were registered and their modes of operation. 27
  28. 28. Report of the Taskforce on Pyramid Schemes (ii) To inquire into and investigate the amount and whereabouts of funds invested into pyramid and other related schemes- the Taskforce was tasked with establishing the total sums of money invested in the schemes. This T.O.R also involved establishing the location of these funds in whatever form that they may be held. (iii) To formulate and recommend strategies to apprehend operators of pyramid and other related schemes with a view of recommending prosecution- This involved a research on the laws applicable and the formulation of means through which the operators of the schemes would be held accountable. (iv) To recommend mechanisms for recovery of funds invested with a view of recommending restitution of money and/or property recovered, if any, to the investors- This term of reference as read together with TOR (ii) requires the Taskforce to provide mechanisms through which money recovered from the pyramid schemes operators can be returned back to the investors. (v) To make recommendations on legal measures that may prohibit illegal deposit taking by pyramid and other related schemes- This involved making proposals on legal measures that may deter the emergence of pyramid schemes in future. (vi) To advise and recommend regulations to guide financial institutions in dealing with pyramid & other related schemes- This term tasked the Taskforce to make recommendations that will guide or enable financial institutions identify pyramid schemes. (vii) To formulate and recommend strategy for public awareness campaigns on pyramid and other similar schemes with a view of sensitizing members of the public on such schemes- The Taskforce was mandated to make proposals with a view of raising the level of awareness amongst the investors. 28
  29. 29. Report of the Taskforce on Pyramid Schemes (viii) To carry out any other exercise that may be necessary to accomplish any matters incidental thereto- the Taskforce was given the liberty to address other issues which may in the opinion of the members be relevant to pyramid schemes. 1.4 Methodology The Taskforce used several methods to collect data in order to compile a comprehensive report. These included Public hearings, review of memoranda and desk research on various legislations which were of relevance to the Taskforce. It consulted and received advice from experts and various stakeholders on various aspects of its terms of reference. 1.4.1 Literature Review This involved analyzing of literature, journals, legislations and research papers which contained information pertaining to pyramid schemes. The information obtained was used to make recommendations on legal measures to prohibit illegal deposit taking, proposals on regulations to guide financial institutions and public awareness strategies. 1.4.2 Interviews. Interviews involved summoning and inviting persons or institutions who may have been linked to pyramid schemes. The idea behind this approach was to enable the Taskforce interrogate these persons with a view of establishing their level of participation in the schemes. These persons or representatives of institutions had been adversely mentioned in the course of the public hearings or identified by the Taskforce in the course of its investigations. All the interviews were done face to face and the questions were structured in a manner to ensure that there was no bias in the way they were asked. 29
  30. 30. Report of the Taskforce on Pyramid Schemes In relation to interviews, the report contains the following information; (See Annex 2: Interviewees) i. A list of the institutions invited via newspaper advertisements. ii. List of persons who responded or appeared before the Taskforce. In addition to the Directors/Advocates invited for interviews, the Taskforce contacted the following persons/institutions to appear before it; Name Reasons Comments 1 National Pyramid Victims representatives Representatives appeared Scheme Initiative in person 2 Mt. Kenya Pyramid Victims representatives Representatives appeared Scheme Initiative in person 3 Hon. Njeru Ndwiga Was minister for Failed to appear cooperative during pyramid scheme saga 4 Hon. Andrew Alleged to have Failed to appear Ligale promoted DECI. 5 Bishop Siribaleka Director -ACID Failed to appear 6 Pastor Jamleck DECI-Center Manager Appeared in person Mutheka - EMBU 7 Gideon Mwiti Associated with new Did not appear Akiba Micro Finance personally- represented and Kenya Business by advocate Sacco 8 Esther Bongo DECI- Center Failed to appear Manager- Kisumu 9 Bishop Peter DECI- Center Attended in person Ndegwa Manager- NYERI Due to limitation of time and unreliable contacts provided by the investors during the public hearings, the Taskforce did not manage to invite some promoters/individuals allegedly associated with pyramid scheme activities. (See Annex 22 list of directors/promoters mentioned during the public hearings). 30
  31. 31. Report of the Taskforce on Pyramid Schemes 1.4.3 Media The Taskforce used the media to publicize its activities. This method was used to inform members of the public on public hearing venues and, registration centers for claims and invitations for persons and institutions to appear before the Taskforce. The Taskforce was able to use the print media thrice through the Daily Nation and once in the Standard Newspaper. In addition announcements were made through KBC Radio station and severally through vernacular radio stations. 1.4.4 Public hearings Public hearings were held in various provinces1 where the Taskforce obtained views from affected investors. These were the areas most affected by the pyramid schemes. As will be highlighted elsewhere in this report, North-Eastern province was not visited due to the minimal spread of the schemes in that region. (See Annex 3: Schedule of Public hearings) The main purpose of this hearings was to enable the Taskforce have a first hand appreciation of the socio-economic effects of pyramid schemes in Kenya and gather information for investigation. The public hearings commenced on 24th February 2009 at the Railways Club in Nairobi. In order to guide discussions during the public hearings, the Taskforce presented the public with a checklist that sought to address the following issues; (i) Name of investor and amount of money invested. (ii) Manner of introduction to the schemes and reasons for investing. (iii) How the investor has been affected as a result of investing in the schemes. (iv) The identity of directors and their area of operation. (v) Name of institution invested in. 1 Nairobi, Central, Rift Valley, Western, Nyanza, Eastern and Coast 31
  32. 32. Report of the Taskforce on Pyramid Schemes (vi) The expectations of the investors. (vii) Views from the investors on the recommendations and the way forward. As has been mentioned elsewhere in the report, the members of the public were notified of the public hearings through the media. The Taskforce appreciates the efforts by the Hon. Minister for Co- operative Development who was at the forefront in sensitizing members to turn up for the public hearings. The Taskforce received representations from people of all walks of life; students, civil servants, the clergy, self employed people, entrepreneurs, general members of the public, private pyramid scheme Initiatives, organizations representing the youth and women. The Taskforce was able to meet the local and provincial administration who gave insightful information as to the operations of these schemes. In addition data and information from investors which has been used in the compilation of this report was gathered. 1.4.5 Registration of Claims In order to establish the number of investors affected and amount involved, the Taskforce conducted a registration exercise from the 24th February to 30th April 2009. The investors were required to present themselves at the nearest District Co-operative Offices countrywide. This process of registration involved filling of forms and attaching copies of National Identity Cards and receipts. In some few cases, registration of claims was conducted at the venues of the public hearings. In addition to establishing the number of investors affected, the Taskforce using the information obtained was also able to identify the names of the various schemes involved, and the Directors. 32
  33. 33. Report of the Taskforce on Pyramid Schemes 1.4.6 Written Submissions The Taskforce received written memoranda and briefs from government agencies members of the public, churches, private pyramid initiatives and other related institutions. Written briefs were also submitted by the parties which responded to the summons by the Taskforce. The written submissions contained proposed recommendations on recovery and restitution of funds, the expectations of the investors, lists of investors, names of directors and promoters of schemes, court proceedings and status of court cases and other information that was relevant to the Taskforce. (See Annex 4: List of Written Submissions). 1.4.7 Investigations These were conducted in order to obtain information which could otherwise not be obtained using the aforementioned methods of data collection. This methodology was confined mainly to the investigation of bank accounts and tracing of assets. 1.4.8 Visits and Consultative Meetings The Taskforce held consultations with members of the local and provincial administrations and a host of associations. These were necessary to allow for effective engagement with the Taskforce. Some of the associations and bodies visited include; KACC, CBK, MoF, LSK, CID and National Security Intelligence Services (N.S.I.S). 1.5 Challenges and Limitations (i) The Taskforce experienced challenges as it endeavored to fulfill its mandate. One of the major challenges was the perception by the general public that the recommendations of various Taskforces and Commissions are never implemented. 33
  34. 34. Report of the Taskforce on Pyramid Schemes The general public argued that the Taskforce may be a public relations exercise where the report will be left to gather dust without due consideration of its recommendations. (ii) The other challenge that arose was criticism by some private initiative groups who were dissatisfied with the manner in which the Taskforce was constituted. They argued that the composition of the Taskforce did not include the investors who were the worst affected by the schemes. To this end, they challenged the ability of a government constituted Taskforce to deliver a credible and legitimate report. (iii) The fourth challenge related the limited time within which the Taskforce was to complete its task vis a vis the terms of reference. Most of the TORs were labour intensive and the time needed to comprehensively address all the concerns was not adequate. The sheer magnitude of the task required more time. (iv) The Taskforce faced a huge challenge in trying to fulfill some of the TORs due to the lengthy and complicated legal mechanisms. This situation mainly arose as far as tracing assets and bank accounts was concerned. The limited tenure of the Taskforce could not enable it to conduct thorough investigations in this area. (v) The sixth challenge faced by the Taskforce was that some institutions, private initiatives and persons connected with pyramid schemes were unwilling to volunteer information which may have been beneficial to the Taskforce. (vi) Lack of a collaborative effort from some government agencies due to their failure to appreciate the magnitude of the pyramid schemes. (vii) The Taskforce also faced a challenge due to the perception that it does not have the powers to compel attendance. This may have affected the turnout of the people and institutions summoned. 34
  35. 35. Report of the Taskforce on Pyramid Schemes (viii) Finally, the Taskforce faced logistical problems due to the magnitude of the workload. These included the transportation of various claim forms from the respective District Co-operative Offices countrywide and insufficient staffing at the secretariat level for registration of claims. 1.6 Organization of the Report The report is organized into three parts and ten chapters. Part I consisting of two chapters contains the introduction and a history of pyramid schemes. Part II has five chapters and looks into the nature and number of pyramid schemes in Kenya, pinpoints the masterminds of these schemes, investigates the funds and assets held by the schemes, analyses the public hearings, role of Government agencies and the effect the pyramid schemes in Kenya. Part III consisting of three chapters addresses the way forward in terms of legal reforms, public awareness and recommendations. 35
  36. 36. Report of the Taskforce on Pyramid Schemes CHAPTER 2 HISTORICAL BACKGROUND 2.1 Introduction This chapter attempts to provide a more detailed definition of the term ‘pyramid schemes’. The definition will include the concept of pyramid schemes and the key identifiers of the schemes. The chapter also documents a brief history to facilitate a wider understanding of pyramid schemes. The chapter also seeks to distinguish pyramid schemes and Multi-level Marketing (MLM) or Network Marketing. As will be discussed later in the chapter, some pyramid schemes attempted to present themselves as MLMs. To remove this confusion, the chapter analyses the salient features of pyramid schemes and MLMs. It also advises potential investors on how to read between the lines and distinguish between the two. Finally, the chapter traces the emergence of pyramid schemes in Kenya. A discussion into this issue cannot be complete before analyzing the factors that contributed to the emergence and spread of these schemes in Kenya. 2.2 Definition and Historical Background of Pyramid Schemes. Pyramid schemes are unregulated financial investments that involve an operation whereby a person or institution holds out a promise to another person that upon payment of a specific sum of money, that person shall become entitled to receive a sum of money or an amount of valuable security which, given all commercial considerations, is greater than the money or valuable security invested. The schemes are linked to Charles Ponzi an Italian who was born in Italy in 1882 but later immigrated to the United States in 1903. Pyramid schemes are dependent on attracting a growing number of new entrants whose funds are used to pay attractive returns to previous investors. 36
  37. 37. Report of the Taskforce on Pyramid Schemes These are schemes in which a hierarchy is created by new entrants joining under those who joined previously. Pyramid schemes rely on the continual recruitment of fresh or new investors in order to continue operating. The idea behind pyramid schemes is that the investor makes one payment but is promised to somehow receive exponential benefits. Success of the scheme rests solely on the exponential growth of new members hence the name ‘Pyramid’ indicating the increasing population at each successive layer. The Taskforce also noted that pyramid schemes may distinguish themselves in the form of chain letters. A chain letter is merely a letter, an e-mail message or some other communication which asks the recipient to send copies of it to several other people. Chain letters are not illegal per se but can be very annoying and wasteful of whatever medium is used to carry them. However, when a chain letter asks the recipient to send money to people through whom the letter passed before, with the promise that the recipient will receive money from those that the letter reaches after he sends it, then it becomes a form of a pyramid schemes. 2.3 Pyramid and Multi-Level Marketing. Multi-level Marketing (MLM) also known as Network Marketing is a method of selling products directly to consumers. Products are sold through a network of distributors or salespersons set up to resemble a pyramid Because of this pyramidal structure, MLM companies may sometimes be mistaken for pyramid schemes. The Taskforce has identified features to distinguish pyramid schemes and MLMs as follows; (i) The emphasis of pyramid schemes is on recruitment of members while MLMs focus on the sale of products and services that have some inherent value. 37
  38. 38. Report of the Taskforce on Pyramid Schemes (ii) The commissions earned from MLMs are based on the sales of products and services. Pyramid schemes participators are paid primarily using money received from new investors. (iii) MLMs are sustainable as they are based on the continued sale of goods or services to consumers. Recruitment of new members is secondary. Pyramid schemes are doomed to collapse once recruitment of new members ceases. The Taskforce established that there are a number of MLMs which operate in Kenya. These include Forever Living Products, which specializes in skincare products and supplements, GNLD International and Tianshi Health products which deal with health products, Angel Fashion Accessories that stocks jewellery, bags, watches and wallets and Oriflame. These companies have been in operation for a long time and have a huge client base 2.4 The Kenyan Situation. The Kenyan landscape was not spared from the emergence of pyramid schemes. In an attempt to attract investors, the schemes operated under the guise of registered legal entities or MLMs. The Kenya Winners Circle Inc. Co. Ltd2 was a pyramid scheme which hit Kenya in 1998. The nature of its business was to purportedly sell products such as cruise ship tickets and holiday and tour packages at discounted prices. Each package promised a rewarding financial return. As a marketing strategy, some early investors were paid but barely one year after it was launched, the company wound up resulting in huge losses to the investors. In 2005, a company called Kenya Akiba Micro Finance Ltd was the subject of complaints from members of the public who were enticed into depositing money with the institution in the pretext that they would be advanced loans. 2 The Kenya Winners Circle Inc. Ltd was registered as a Kenyan subsidiary of the Winners Circle Inc. which had its headquarters in the U.S.A. The company was launched in Nakuru on the 30th March 1998. 38
  39. 39. Report of the Taskforce on Pyramid Schemes The company was receiving deposits from members of the public in contravention of the Banking Act.3 The company was only licensed to conduct Hire Purchase business but it proceeded to take deposits from members of the public in contravention of the said Act. In 2006 and 2007 there was a proliferation of schemes in the country. This may have been attributed to the boom in the stock market and a multiplicity of other factors discussed later in this chapter. In the stock market, investors were making huge profits through high share prices and Initial Public Offers. The promoters of the schemes took advantage to mislead victims that the returns were being obtained from the stock market and off-shore investments. There are cases where pyramid schemes had disguised themselves as MLMs. One instance involved a company called Better Life where members would pay Kshs. 2,500 as registration fee and were required to recruit other members who would pay a similar amount for purposes of sales of fictitious or non existent products. Most of the schemes collapsed in the last quarter of 2007. This led to losses running into billions of shillings and other impacts as has been discussed elsewhere in the report. 2.5 Factors responsible for the spread of pyramid schemes in Kenya Pyramid schemes gained a lot of popularity and quickly spread amongst the populace who could not resist the allure of quick returns. The euphoria was further fuelled by the success stories of investors who had ‘harvested’ which spread quickly and acted as a marketing tool for the schemers. 3 Section 16 (cap 488) prohibits any unauthorized persons from soliciting deposits from the general public. 39
  40. 40. Report of the Taskforce on Pyramid Schemes The reasons for the spread of the schemes have been categorized as follows; 2.5.1 Economic Factors. The Taskforce noted that investors were keen to take advantage of opportunities that promise quick economic gain. With the increase in the poverty levels across the country more and more Kenyans were willing to take a chance with these schemes either out of desperation or as a means of accumulating more wealth. As Sophie Kiwelu pointed out4; “As poverty levels continue to surge in Kenya where the majority is living on less than a dollar per day, many are tempted to join schemes that will help them achieve financial freedom. On the other hand, Kenyans frustrated with long queues in banks and peanut interest rates have been withdrawing their savings in banks and even going further to sell their shares in order to invest in what is known as pyramid and merry-go-round schemes. These schemes promise very high interest rates of up to 10 to 20 per cent a month compared to bank savings whose returns is 5 per cent or less per year. Moreover, others offer twice the principal amount invested within five weeks. These deals being too good to resist, many people took the risk hoping to make money and improve their lifestyles.” During the Taskforce public hearings held in various venues5 between 24th February 2009 and 2nd April 2009, revelations were made by investors on how they deposited their money in the schemes with the belief that they would be financially endowed within a short period of time. The investors recounted how the allure of the schemes was irresistible due to their desire to improve their lives economically. 4 Sophie Kiwelu: Kenyan Politics and the Pyramid Saga. 5 Nairobi, Meru, Embu, Nyeri, Muranga, Thika, Kisii, Kakamega, Bungoma, Kisumu, Nakuru, Eldoret, Mombasa and Malindi. 40
  41. 41. Report of the Taskforce on Pyramid Schemes The promoters of these schemes were made to believe that the schemes were established in an effort to assist the poor. The appetite for investments is proof of a strong desire by the low income earners to participate in financial markets with appropriate products. However it should be noted that the continued engagement with unregulated informal schemes may lead to loss of savings and earnings. 2.5.2 Religious Factors Kenya is a religious country which is predominantly Christian. The Presbyterian Church of East Africa (PCEA), Anglican Church, Roman Catholic Church, African Inland Church (AIC) and the Seventh Day Adventists (SDA) constitute the mainstream Christian churches in Kenya. In addition there are a number of other evangelical and Pentecostal churches. The Taskforce notes that the religious approach by the schemes targeted Christians. This is attributed to the fact that the Muslim faith does not allow the faithful to profit by way of ‘earning interest’ on money. Documented cases were recorded during the public hearings where religious leaders were used to recruit investors. As an incentive some were promised commissions based on the number of investors recruited. Biblical teachings and Christian literature were used as a tool of convincing the religious leaders that the schemes would benefit members both economically and in their Christian faith. The Taskforce wishes to highlight that the schemes took advantage of the ‘prosperity gospel’ by the Pentecostal/Evangelical churches. Many investors were duped into joining the schemes after being convinced by their religious leaders that they would prosper. Examples of schemes that used the religious approach were CLIP through sale of Christian literature and DECI where investors were convinced that they were planting a ‘seed.’ 41
  42. 42. Report of the Taskforce on Pyramid Schemes It is worth noting that although the religious leaders were mostly from Pentecostal/evangelical churches, the investors were drawn from both mainstream and Pentecostal churches. 2.5.3 Legislative Factors Kenya does not have a legal regime expressly outlawing pyramid schemes. This vacuum provided a forum which led to a proliferation of these schemes. In comparison, other jurisdictions outlaw these schemes. These include United States of America, the United Kingdom, France, Germany, Canada, Romania, Colombia, Malaysia, Norway, Bulgaria, Australia, New Zealand, Japan, Italy, Nepal, Philippines, South Africa, Singapore, Sri Lanka, Thailand, Iran, China and Mexico. It is notable that most of these countries which have enacted laws against pyramid schemes have had incidences of pyramid schemes related activities in the past. The schemes were presented to the investors as legal entities. Certificates were conspicuously displayed to the unsuspecting investors. In the course of the public hearings, many pastors and investors argued that they were persuaded to invest by the presence of registration certificates. The presence of government security agents and the local administration during functions organized by the schemes gave the reassurance that the schemes were operating with the knowledge of the Government. The effect of lack of a legal regime was compounded by inadequate supervision of the schemes which had been registered under different legal regimes. However it is noted that lack of adequate capacity and resources may have contributed to the inadequate supervision. 42
  43. 43. Report of the Taskforce on Pyramid Schemes 2.5.4 Social Factors Social factors contributing to the spread of the schemes were diverse and ranged from greed, lack of awareness to trust. The majority of persons who participated out of greed were aware that the returns were beyond what can be achieved through traditional investments but were nevertheless attracted by the quick money. They participated hoping that the scams will last long enough for them to make a profit. However the end result is that a few people walked away with a lot of money while the majority of investors suffered losses. Pyramid schemes were presented attractively as “investment clubs” or “gift programs.” The investors were duped that the schemes were savings plans, multi level marketing, merry-go-rounds and revolving funds investments. The investors flocked to these informal investment schemes without the knowledge that they were falling prey to pyramids. The pyramid schemes targeted close knit groups such as religious and social groups, retirees and retrenchees. There is a lot of trust and an idea introduced by a member will be easily adopted by the rest. The members in these groups are also under pressure to participate in any activity adopted by the members so that the group may remain united. The element of trust was also evidenced by investors who joined the schemes on the basis of personal relationships like relatives, friends and religious leaders. These investors relied more on emotion than reason. 2.5.5 Co-operative Factors A number of institutions that were carrying out pyramid scheme related activities transformed into Cooperative Societies on realizing that they were not sustainable and were facing apparent collapse. 43
  44. 44. Report of the Taskforce on Pyramid Schemes Upon registration as Cooperative Societies these institutions acquired a legal status which they used to lure unsuspecting Kenyans to invest with them. This change of status from pyramid schemes to cooperative societies registered under the Cooperative Societies Act gave the public the assurance that they were dealing with legitimate organizations but the business carried out by the new outfits was in contravention of the Cooperative principles. 44
  45. 45. Report of the Taskforce on Pyramid Schemes PART 2 PYRAMID SCHEMES: A DETAILED ANALYSIS OF THE KENYAN PERSPECTIVE 45
  46. 46. Report of the Taskforce on Pyramid Schemes 46
  47. 47. Report of the Taskforce on Pyramid Schemes CHAPTER 3 THE NATURE OF PYRAMID SCHEMES IN KENYA 3.1 Introduction The information contained in this chapter in regard to the number of pyramid schemes and their financial indebtedness to investors was obtained via registration of claims. Using this method, registration centers were opened in all operational District Co-operative Offices (DCOs) countrywide where an elaborate data recording format was designed to capture the particulars of the investor, amounts invested and in which scheme and the particulars of directors. The chapter further analyses the modes of operation of the schemes. It also contains information on the particulars of directors who were the masterminds of the schemes. Finally, it seeks to look into the role of Private Scheme Victims Initiatives. 3.1.1 Legal Nature It will be appreciated that in order to operate the schemes attempted to disguise themselves as legal entities to avoid arousing suspicion. To the public they were genuine outfits out to promote the economic and social wellbeing of the investors. The Taskforce was able to classify the legal nature as follows; (i) Savings and Credit Societies- these are institutions registered under the Co-operative Societies Act (ii) Non Governmental Organizations (NGOs) (iii) Companies- registered under the Companies Act (iv) Sole Proprietorship- these are business names registered under the Registration of Business Names Act. (v) Welfare Organizations- these organizations are registered under the Ministry for Gender and Social Services. 47
  48. 48. Report of the Taskforce on Pyramid Schemes Some of the schemes were registered under different legal regimes but operated by the same people. These schemes that were concurrently registered as Saccos and Companies include; (i) CLIP Investment Sacco Society Ltd and Kings Script Publishers Ltd. (ii) DECI and Tujibebe Sacco Society Ltd (iii) Jitegemee Entrepreneurs Sacco Ltd and Mont Blanc Afrique Ltd (iv) Kenya Business Community Sacco and Kenya Multipurpose Business Ltd (v) Sasanet Investment Sacco Society and Sasanet Investment Ltd. 3.1.2 Operational Nature The operational nature of the schemes varied. The distinguishing feature of their operational methods is that they focused on the recruitment of members. This was because the higher the numbers, the more successful the scheme was perceived to be. 3.1.2.1. Branch Networks The major pyramid schemes started their operations in Nairobi and later established branch networks in other towns. Depending on the magnitude of investors and projected patronage, some pyramid schemes opened branches as far down as District and Divisional offices. Branches were operated to cater for the ever growing number of investors. Mostly the branches were manned by center managers who were assisted by a network of promoters in recruiting more investors. 48
  49. 49. Report of the Taskforce on Pyramid Schemes 3.1.2.2 Return on Investment The major reason why pyramid schemes were unique and why many Kenyan invested in them was the abnormally high return on investment over a very short period. To lure investors, the following approaches were used; (i) Guaranteed returns of between 2.5 times and 3 times of the principal invested within a period of a few weeks. (ii) Payment of monthly interest at the rates of 10-20% and thereafter refund of the principal investment after expiry of the contractual period. (iii) Incentives which included offers to pay school fees and advances of loan on attractive terms to purchase vehicles. 3.1.2.3 Promotion strategy Most pyramid schemes especially the major ones had a well structured marketing/promotion strategy. Policy decisions were made by the directors while the execution was done by the managers and marketers. In the context of the major pyramid schemes, marketing which basically meant recruitment of investors was done through an elaborate network of promoters. 3.1.2.4. Legal Contract A number of pyramid schemes engaged lawyers to draw contract agreements between the investor and the pyramid scheme. The agreement provided an assurance on the promised returns thus making the whole transactions look legitimate. (See Annex 23-Sample of Contract Agreements) 49
  50. 50. Report of the Taskforce on Pyramid Schemes 3.1.2.5. Organizational Structure The organizational structure of the various schemes may have varied depending on the size and coverage of the particular scheme. However the Taskforce noted that most of the scheme had a standard organizational structure which guided their operations. The following is an expression of this structure; DIRECTORS C.E.O CENTRE CENTRE MANAGER MANAGER PROMOTERS PROMOTERS PROMOTERS PROMOTERS The Directors were the policy makers. The Chief Executive Officers (CEO) issued directives on the day to day running of the schemes. The Director and the CEOs were the main signatories of the bank accounts. The Centre managers were in charge of the day to day running of the branches and remitting the funds received to the head offices. The promoters were in charge of the recruitment of new investors and were paid on a commission basis. 50
  51. 51. Report of the Taskforce on Pyramid Schemes The examples below express the mode of operation of selected pyramid schemes. (i) Kenya Business Community Co-operative Society a) Registration- Sacco Society and affiliate Company (Kenya Multipurpose Ltd) b) Membership- local investors c) Recruitment- through a marketing team d) Coverage- countrywide e) Network- Headquarter in Nairobi with 14 branches spread in Nairobi, Coast, Rift Valley, Eastern, Nyanza and Coast. (ii) CLIP Investment Co-operative Society a) Registration- Sacco Society and affiliate company (Kings Script Publishers Ltd) b) Membership- open to investors c) Objects- to promote the economic welfare of members d) Coverage- countrywide but mostly in Nairobi and environs e) Returns- Investment amount attracted interest at the rate of 10% p.m for five months. On the 6th month principal amount is returned. (iii) DECI a) Registration- Limited liability company b) Later registered as Tujibebe Sacco c) Membership- targeted low income people d) Recruitment- through the church and a network of promoters e) Coverage- countrywide with headquarters in Nairobi. f) Returns- investors contribute to a ‘revolving fund’. Investors are classified into groups of 8 to make a series of 64. The 64 ‘members’ are put in a revolving system that facilitates the payment of all members of that group. 51
  52. 52. Report of the Taskforce on Pyramid Schemes 3.2 Number of Pyramid Schemes in Kenya At the close of the registration exercise 270 institutions were identified as pyramid schemes or pyramid related schemes. The list was drawn from investors’ data captured all over the country. (See Annex 5: List of Pyramid Schemes in Kenya and Amount invested) A sampled list of the top twelve institutions in terms of amount invested were; NAME OF SCHEME NUMBER OF AMOUNT INVESTORS 1 DECI 93,485 2,405,518,832.00 2 Clip Investments Sacco Ltd 5,846 1,993,866,422.00 3 Kenya Business Community Sacco Ltd 921 780,698,218.00 4 Sasanet Investment Sacco Ltd 629 739,948,412.00 5 Jitegemee Investment Sacco Ltd 3,828 494,401,600.00 6 Circuit Investment 1,392 348,943,103.00 7 Family In Need Organisation (FINO) 4,580 157,280,553.00 8 Global Entreprenership 9,206 139,006,632.00 9 Spell Investment 544 120,326,860.00 10 Mont Blanq Afrique 774 82,834,000.00 11 Amity Investment 979 81,838,656.00 12 Smart Welfare 1,125 68,903,070.00 Totals 123,309 7,413,566,358.00 3.3 Directors of Pyramid Schemes These were the executive administrators of the schemes. They were in charge of policy matters and the day to day running of the schemes. The directors were the major benefactors of the scheme and signatories to the bank accounts. The list of directors is based on searches conducted by the Taskforce at the Ministry of Co-operative Development and Marketing MoCD&M, NGO Coordination Board and the Registrar of Companies. It is not conclusive as the Taskforce only relied on authenticated searches obtained from the three institutions. (See Annex 6: List of directors). 52
  53. 53. Report of the Taskforce on Pyramid Schemes In some cases, the Taskforce could not establish from the information availed by the victims under which legal regime a scheme was registered to enable it make a search at the appropriate government office. The search conducted revealed the following; Mode of Registration Number Companies 19 Co-operative Societies 17 Businesses 19 NGOs 3 Total 58 The searches had not been finalized since not all files had been traced by the time the tenure of the Taskforce ended. 53
  54. 54. Report of the Taskforce on Pyramid Schemes The key directors/proprietors/officials of top twelve pyramid schemes were; INSTITUTION DIRECTORS/PROPRIETORS/OFFICIALS DECI George Odinga Donde Tujibebe Sacco George Odinga Donde - Chairman Godfrey Kamanda Gakure (Bishop) Ann Zawadi - (Advocate) Ambassador Mary Odinga CLIP Investment Peter Ndakwe - Chairman Cooperative Soc. ltd Meshack Gachago - V/C Didycus Shyamwama - Treasurer Festus Kizisa - Secretary Kenya business Francis Omurwa- Chairman community Sacco, Angelo Mung’ri M’inoti - V/Chairman Ltd. Elias Kathurima Rutere - Treasurer Barnabas Mwangangi - Secretary Sasanet Investment Michael Chege - Chairman cooperative Dorothy Wangui - Hon. Secretary Ronald Ouma - Treasurer Job Nyamao - V/chairman Sasanet ltd. Michael Chege and Sammy Gitau Jitegemee Sacco/ Jackson Kinyoho Mburu - Chairman Mont Blanq Afrique Patrick Nyoike Maina - Member Ltd Florence Wambui Busiega - Vice Chairman James Mate Njeru - Treasurer Elizabeth Ngoiri Mwangi - Secretary Family in Need John Leonard Wanyoike Organization Winfred Gatakaa Kiria (FINO) Rahab Maimutie Wanuoike Global Patrick Ayisi Ingot - Chairman Entrepreneurship Christopher Mweresa Livunda - V/Chairman Florence Nzoeva Mulama - Secretary Edward Murithi Matu - Treasurer Spell investment Boniface Anderson Ngosia - Chairman Faith Ayoti - V/Chairman Consolata Nabwire - Secretary Eunice Negesa - Treasurer Amity Investment Charles Murithi Kirigua 54
  55. 55. Report of the Taskforce on Pyramid Schemes 3.4 Financial Indebtedness to Investors. The financial indebtedness of the schemes to investors compiled at the close of the registration exercise was Kshs. Kshs.8,178,737,402, from 148,784 investors. (See Annex 5: list of pyramid schemes and amount invested) Although the exercise was largely successful the figures expressed above are not conclusive due to the following reasons; (i) At the close of registration exercise, many investors were still streaming to the various registration centers (ii) Some investors failed to register as they had already registered with Private Pyramid Initiatives. In addition some initiatives advised investors not to register with the Taskforce. (iii) Related to the above, there were investors under the misconception that previous registration with the Private Pyramid Initiatives was sufficient, despite the Taskforce advising and encouraging all victims to register with it. (iv) Prominent personalities who participated in the schemes may have failed to register because of their social status in society. (v) Some investors were unable to register due to loss of documents during the 2008 post election violence. (vi) Despite the publicity by the Taskforce, some investors were not aware of the registration processes. (vii) Some victims appeared after close of registration exercise claiming the period given was too short. 55
  56. 56. Report of the Taskforce on Pyramid Schemes Recommendation A Pyramid Scheme Information Center be set up where victims who have not registered their claims can get opportunity to do so, to enable them be considered should recovery be made from the property of directors/proprietors’. The Pie-charts below present a graphical representation of the data gathered during the registration exercise. 56
  57. 57. Report of the Taskforce on Pyramid Schemes Figure 1: Number of pyramid schemes per province Source: Registration of claims data. Notes (i) Nairobi province recorded the highest number of schemes with North Eastern being the least affected. (ii) The figures represented in the chart indicate the number of schemes in a particular province. It is to be noted that some of the schemes operated in more than one province. 57
  58. 58. Report of the Taskforce on Pyramid Schemes Figure 2: Number of Investors per province Source: Registration of Claims data Notes: (i) Pyramid schemes recruited investors from all parts of the country but the epicenter was Nairobi province. (ii) Nairobi province with the highest number of schemes also experienced the highest number of investors. (iii) North Eastern province was the least affected by the schemes recording 15 investors in one scheme. 58

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