Court records reveal how for more than three years KPMG Botswana overstated Kingdom Bank Africa Limited (KBAL) financial position obscuring huge debts stashed off its balance sheet. Once these were revealed, the company imploded, wiping out close to P200 million of shareholder funds, creditors investment and jobs. The bank, owned by Zimbabwean multi-millionaire Nigel Chanakira was placed under liquidation by Bank of Botswana in 2015 after it emerged that its liabilities exceeded its assets by US$ 17 million.
Kingdom bank had managed to build this huge debt over years, because its auditor had failed to identify that the bank was insolvent. Chanakira remained invested in Kingdom Bank Africa Limited after he sold his 30 percent stake in a Zimbabwean financial institution Afrasia Bank Zimbabwe Limited (ABZL), also placed under liquidation, in September 2013. The cash and equity deal resulted in Chanakira, through family vehicle Crustmoon Investment, exiting AfrAsia. Afrasia Bank Zimbabwe Limited (ABZL) then sold its 35, 7 percent in KBAL to Chanakira.
The transaction was completed late 2014. This complicated web of companies related to KBAL for many years obscured the extent to which the Botswana based bank was insolvent. Local accounting and auditing firm KPMG failed to identify KBAL’s deepening financial distress and continued to sign off its books as a true reflection of the bank’s financial health. KPMG falsely reported that the bank was liquid and solvent. Afrasia Bank Zimbabwe Limited (ABZL), founded by Chanakira also suffered liquidity problems and in February 2015, surrendered its banking licence and was subsequently placed under liquidation
It emerges in court records that KBAL’s solvency and liquidity were dependent on the existence and recoverability of negotiable certificate of deposits (NCDs) all issued by Kingdom Finance Holding Limited (KFH), a public company incorporated in Zimbabwe. A negotiable certificate of deposit (NCD) is a certificate of deposit with a minimum face value of $100,000, and they are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed in before maturity. KFH was the parent company to KBAL and did not hold a banking licence until October 2010. KFH subsequently changed its name to Afrasia Bank Zimbabwe Limited (ABZL).
By 31 December 2013 and until approximately the end of August 2014, the majority of NCDs held by KBAL were issued by ABZL. ABZL was a related company to KBAL. A minority of NCDs held by KBAL were issued by Alfa Asset Management, Afriasia Capital Management and Mauritius Commercial Bank. They were all related companies to ABZL. Early September 2014, the NCDs issued by KBAL were exchanged by KBAL for a loan book and certain telecommunications equipment controlled by a company called Crustmoon Investment (Pty) Limited. Crustmoon was a related company to KBAL. The NCDs increased from US$ 4, 8 million in 2011 to US$ 12, 9 million in 2012 to US$13, 4 million in 2013 to US $ 18, 3 million in 2014.
Throughout this period many banks in Zimbabwe and in particular ABZL were suffering a liquidity crisis caused by a deficiency in money and other readily accessible assets. It was extremely difficult, if not impossible, to transfer money from Zimbabwe. The liquidator censors KPMG Botswana for failing to undertake “substantive procedures that were specifically responsive to this risk.” “The NCDs constituted a material asset and in conducting its audit, KPMG ought reasonably to have made proper investigations into both the existence and value of the NCDs.”
The liquidator argues that KPMG “aught reasonably in these circumstances to have assessed this as a material risk; contacted the auditors of related entities in order to confirm the existence and value of the NCDs; impaired the values of the NCDs by no less than 50% but negligently failed to do so.” The liquidator further states: “having determined that an assessed risk of material misstatement at the assertion level was a significant risk, KPMG was obliged to perform substantive procedures that were specifically responsive to that risk.
KPMG negligently failed to do so. In particular, in conducting the audit for the year ended 31 December 2010, KPMG failed to recognise that as KFH was not a licensed bank and was a related entity, the NCDs ought to have been treated as unsecured loans from a related entity. KPMG failed to contact the auditors of KFH. KPMG failed to take into account the fact that KFH was severely financially stressed and accordingly unlikely to be able to meet its obligations in terms of the NCDs.”
It further emerges that in conducting its audit for the year ended 31 December 2013, KPMG failed to confirm the existence of the NCDs issued by ABZL but relied on a letter from Ms Mukonoweshuro to Crustmoon dated 4th March 2014 as evidence of the existence and value of the NCDs. The letter purported to confirm the values of certain loans and telecommunications assets which would be ceded to KBAL through three special purpose vehicles. The letter neither mentions the NCDs nor confirms that as at 31 December 2013 same were held by KBAL.
The liquidator argues that the letter from Ms Mukonoweshuro should have alerted KPMG to the fact that the NCDs did not exist and should have enquired to confirm that the NCDs did exist and to their purported value, alternatively that the ceded assets existed and to their purported value. KPMG failed to ascertain that ABZL was financially distressed as at 31st December 2013 and that the NCDs could accordingly not be assumed to be recoverable.