Central Bank to investigate MTN

By Haggai Matsiko

Bank of Uganda (BoU) officials are planning a major investigation into MTN Mobile Money dealings following an expose by The Independent.

A source at the central bank has revealed that the Executive Director Supervision, BoU, under whose docket supervising financial institutions falls, has directed Stanbic Bank to furnish the central bank with details of MTN’s escrow account. This is the account that holds all the deposits made by mobile money agents, who transact in mobile money.

The Independent in Issue 359 of March 13-19 reported extensively on details of a case in which MTN is suing six former employees in the Anti-Corruption Court for allegedly defrauding it of Shs16 billion. MTN also accuses the six of electronic fraud, neglect of duty, unauthorised disclosure, and embezzlement.

Under cross-examination, however, witnesses have revealed questionable dealings by MTN and its staff in regards to transactions on its MTN Mobile Money platform. Among the revelations is one that MTN, by over-drawing its electronic-money account deliberately “creates money” on its Mobile Money platform and that at one point this created money amounted to Shs21 billion which MTN and its staff and agents transacted in, cashed, and benefitted from.

At the time of writing, MTN refused to gives it side of the story on the allegations. However, following publication of the story, MTN issued a statement denying the allegations and described as “inaccurate and deliberately false” the story published by The Independent.

“We wish to clarify that Mobile money platforms do not generate money and to that extent no fake money can be created,” MTN said.

Instead, it added: “All Mobile money platforms generate “electronic value” that corresponds to the value of a customer’s deposit with an Operator’ agent”.

But The Independent story was accurate and highly professional, based on the testimony of witnesses in the on-going case. The witnesses have told court that the MTN e-money account is sometimes overdrawn and fails to balance with the customer’s deposits.

One of the key witnesses, Babra Nalukwago, who was a Business Analyst in MTN’s Public Access and Mobile Money for five years, told court that the system is manually manipulated.

She said although under the rules, the money on the MTN Escrow account in Stanbic Bank and the MTN Mobile Money platform must balance, there was tampering that led it to sometimes not balance.

“I analysed from May 2011 to December 2011,” she told court on October 20, 2014, “I found that (Shs) 21 billion had been created.”

She described one case on December 21, 2011.

“Adjustment Account for discrepancies (on the MTN e-money system) had a negative balance of Shs19 billion,” she told court, “This means that money was created on this account when it never existed. Money was then manually sent to subscribers who cashed it. The Finance Administrator would have problems balancing it.

“These subscribers were getting free money from the system by somebody sending money to them,” she said.

She added: “At all times the balance of E-money was supposed to be equal to real cash. MTN does not print notes.”

But then at that point, she said, “The Bank control account had negative 84.820.903.080/=. This is the money the MTN mobile money platform has in Stanbic Bank. Balances on the platform should be equivalent in the bank i.e. the MTN mobile money account in Stanbic.”

MTN mobile money manipulated

She described how MTN staffers were manually interfering with the system to create the fictitious e-money. She also described how, on April 5, 2012, Shs9 billion was created on the MTN e-system and posted on the MTN bank account.

“That money is taken wrongly. This money is a fictitious creature on the Adjustment Account for Discrepancy. It goes to the MTN Corporate Liquidity Fund which does not trade.

“If all depositors asked for their money once there would be a crisis,” she said.

She says up to 17 fictitious accounts were created and e-money was fraudulently deposited on them and eventually cashed by a well-organised racket.

The fraudsters appear to have exploited two loopholes; first they appear to have exploited MTN’s lax operating procedures. Although the Mobile Money platform is designed to operate automatically, MTN managers introduced manual intervention to move money from several platforms. Secondly, although MTN acquired Anti-money laundering technology which would have possibly caught the fraud; it had not been activated. The fraud by MTN staffers, therefore, remained undetected.

“It was abnormal for a particular subscriber to receive Shs20 million, 40 million,” Nalukwago told court, “The system should have automatically suspended their accounts but it was strange they continued receiving. The maximum was one million for each subscriber.”

Such revelations have piqued the interest of the central bank, Uganda’s tax body and attracted the attention of President Yoweri Museveni.

President Museveni, as The Independent reported earlier, is interested because the details raise national security issues, damage Uganda’s reputation in as far as money laundering is concerned, and threatens macro-economic stability especially when unauthorised entities like telecom companies “create money” on their virtual money accounts.

The central bank is pursuing Stanbic first, because the bank holds the most critical account also known as the escrow account for MTN Uganda, through which trillions worth of mobile money cash has been transacted. The escrow account is what holds all monies deposited by some 39,000 mobile money agents across the country.

After going through the details, a source intimated, the central bank will launch an investigation into the mobile money operations of the telecom giant. Ordinarily the central bank is supposed to be checking the reconciliations between MTN Uganda and its banker, Stanbic bank every month.

It has emerged that at the time of the saga, the central bank possibly needed to have done more. With these revelations, officials at the central bank are looking to intensify their checks.

The Uganda Revenue Authority (URA) has also picked interest in the case over some sales tax that MTN never paid.

The central bank is also interested in revelations that MTN Uganda was warned by Stanbic Bank, which holds the escrow account over failure to activate a mandatory Anti-money Laundering System on the Mobile Money system to which this account is central.

This, Stanbic warned, risked exposing them to sanctions from the Central Bank, the regulator of the country’s financial sector. Bank of Uganda wants financial institutions to guard against money laundering which can be exploited by terrorists.

MTN ignored warning

Despite the warning, The Independent reported that MTN carried on transacting.  And when the issue came up in a meeting, MTN cited “commercial concerns” as the reason it had not activated the system. Activating the system would slow down transactions.

The system had also collapsed under the weight of the ever expanding transactions and had become vulnerable to fraud. Again, despite audits in 2009, 2010, and 2011 pointing out the loophole, MTN Uganda never acted.

Genuine business challenges might have prevented MTN from acting even after it acquired the required technology, but evidence produced in the courts so far shows that top officials and the company profiteered from the loopholes.

However, the allegations, a window into the dark side of the money transfer medium, and coming at a time Uganda is being called out by the international anti-money laundering body for not having proper checks against money laundering, have raised a lot of concerns.

Uganda is lagging behind in implementing its plan for addressing the deficiencies. This includes creating an effective Financial Intelligence Unit and ensuring the effectiveness of an oversight regime for its financial sector, according to the Financial Action Task Force (FATF), an international body that sets standards for Anti-money laundering and combating terrorist financing.

Uganda’s out-going Finance Minister, Maria Kiwanuka and the Central Banker, Emanuel Tumusiime Mutebile had also in February already expressed fears that despite its potential, mobile money is posing challenges beyond the ambit of traditional financial sector supervision.

Central Bank boss Mutebile said that the current business model of mobile banking in East Africa implies a substitution of cash for bank deposits, and hence a larger money multiplier, because all virtual money sold to customers has to be backed up by deposits in the partner bank of the mobile money provider.

“If so,” the central bank governor noted, “prudential regulation which is focused on ensuring the soundness of the banking system may no longer be sufficient to protect the safety of customers’ savings or the systemic stability of the financial system and the preservation of its critical functions.”

Economist Fred Muhumuza, a former advisor to the finance minister who currently works as the KPMG Senior Manager for the Financial Services Inclusion Programme told The Independent that merely reconciling the Mobile Money Escrow account is not enough regulation.

“That should be sufficient for regulation until the criminals pop up with ideas of generating new money that would not even be reflected on the escrow account of the partnering bank,” said Muhumuza.

“The trouble is that new money is created without the knowledge and authority of the central bank thereby increasing money supply beyond programmed levels,” Muhumuza told The Independent, “The excess money can increase demand and cause inflationary pressures (increase in prices) that is bad for macroeconomic stability.”

Our source intimated that it is these concerns that the central bank wants to deal with.  However, efforts to get an official position from both Stanbic Bank and MTN on the development were futile. Fred Mugisha, the Communications Manager Stanbic Uganda told The Independent that BoU “writes to us almost on a daily basis but for that particular issue, they should be in a better position to confirm.” When The Independent contacted BoU’s communication department, officials said the department’s head, Christine Alupo, would respond by e-mail. By press time, she hadn’t.