December 17, 2008: Kenyans transacting their business using bankers’ cheques have a reason to worry.A gang of fraudsters have invaded the national payment system with fake cheques, soiling the integrity of what has been the only trusted instrument of cashless transactions in the country.
The Central Bank of Kenya (CBK) says operators of forex bureaus have paid millions of shillings to fraudsters in exchange for worthless pieces of paper.
The fraudsters have pocketed “colossal” amounts of money by presenting fake bankers cheques to operators of foreign exchange bureaus, according to Ms Rose Detho, the CBK director in charge of banking supervision, in a circular issued last week.
It is the latest blow to a payment system that has remained largely dependent on cash due to frequent slip-ups in cashless transactions. Rampant forgery has limited the use of personal cheques in business transactions locking Kenyans to cash and — until now, banker’s cheques.
In this latest case, fraudsters pretend to be in need of foreign currency but present the fake cheques late in the evening when it is not possible to ascertain their authenticity with the issuing banks.
The recipients part with huge amounts of money only to realise the next morning that they had been left holding worthless papers.
“The Central Bank has received reports from a number of foreign exchange bureaus that have recently fallen victim to fraud and lost colossal amounts of money,” says Ms Detho, in a warning, which though handy for business people, raises pertinent questions over the integrity of a payment system that is riddled with the twin problem of fake currency as well as fraudulent instruments of payment.
Cheques are Kenya’s most widely used means of payment after cash, accounting for more than 80 per cent of total non-cash transactions last year. This is mainly because the banking system has been slow in adopting plastic money and electronic fund transfers.
The CBK annual report shows that in the financial year to June 2007, the daily volume of cheques settled through the central clearing house averaged 46,833 valued at Sh8.51 billion.
Since they are issued by banks and bear the issuing bank’s logo and standard security features, bankers’ cheques are held as a secure mode of payment, almost as acceptable as cash.
The CBK supervises the printing and fitting of security features by authorised printers of cheques, while banks verify availability of funds in the drawer’s account before issuing the cheques.
Most institutions as a result readily accept bankers’ cheques without confirmation with the issuing banks but Ms Detho now warns that it has become necessary to do so.
Bankers’ cheques, just like personal cheques, have to go through the three-day clearing process — causing undue delay in the payment system.
“This circular is issued as an alert that recipients of bankers’ cheques are exposed to fraudsters on the loose. All bureaus are advised to exercise due care and caution by embracing the ‘know your customer’ procedure,” says Ms Detho.
Most forex bureau operators who spoke to Business Daily say that the problem cuts beyond the fraudulent cheques, as most are also confronted with fake currency on a daily basis.
Central Bank of Kenya
Mr Kilonzo said his firm was yet to be hit by the latest wave of fake bankers’ cheques, but admitted that con-artists had infiltrated the foreign exchange to an alarming extent.
An employee at Karen Forex Bureau also said that though bankers’ cheques are supposed to be a secure form of payment there is no longer a guarantee as to their authenticity.
Another employee at Capital Bureau De Change, who also requested anonymity, said fraud in various forms such as fake currency and cheques was a daily occurrence in the business.
Fraudsters continue to undermine the integrity of the payment system despite the tightening of laws that have even criminalised the issuance of bouncing cheques.
Early this year, the banking industry admitted it was grappling with a credibility crisis occasioned by an alarmingly high tally of bounced cheques.
Fraudulent cheques from investors and some stockbrokers threatened to stall allocation of shares in the Safaricom IPO mid this year. Receiving banks for the initial public offering (IPO) reported sorting out fraudulent applications valued at over Sh96 million.
The fraudsters were hoping to get share allocations using either fake printed deposit slips, which they handed in to unsuspecting stockbrokers or fake bankers’ cheques drawn for the Safaricom IPO.
Statistics collected between January and September last year in a first ever survey by the Kenya Bankers Association (KBA) showed that at least 34 of the 41 licensed commercial banks reported incidents of bouncing cheques, with the total value in the nine months estimated at over Sh2.2 billion.
The survey showed that Kenyans cut 148,211 bad cheques within the period. The problem cuts across the board as big and small banks appeared to suffer equally, with the biggest victims being Co-operative Bank, which reported 35,210 dishonoured cheques, KCB 19,064 and Equity Bank 18,886.
KBA chief executive John Wanyela told said early this year the rising prevalence of bouncing cheques had prompted industry players to take action hoping to make cheques a credible and widely acceptable means of payment.
“The government spends billions of shillings minting new currency each year while companies pay similar amounts to cash in transit companies to transport cash,” said Mr Wanyela.
Central Bank’s anti-fraud unit, which is meant to reign in the fraudsters, is however hampered by institutional and capacity constraints.
“The CBK Banking Fraud Investigations Department is already overwhelmed by the number of fraud cases they are currently handling,” said Mr Wanyela.
A city based advocate with Harrison Hamilton and Mathews, Mr Richard Omwela, called on the police to crack down on the fraudsters as a deterrent to safeguard the integrity of the entire payment system.
“The police need to clean up this mess as it goes to the core of our payment system, what means of payment should we trust if not bankers’ cheques?,” he poses, adding that it was possible that some forex bureau operators with insurance policy covers against fraud could be operating in cahoots with the fraudsters to rip-off their insurers.
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