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Inside MTN mobile money saga

By Haggai Matsiko and Ian Katusiime

Accusers explain how MTN created Shs23 billion `fake’ money

Museveni’s PGB guarding witnesses       Mobile money services in Uganda are coming under scrutiny and what is emerging is troubling. At the centre of the saga in which President Yoweri Museveni is personally involved, is Uganda’s biggest telecom operator, MTN, which is battling several allegations of fraud, and suits and counter suits in the courts.

Even the Uganda Revenue Authority (URA) says it was kept in the dark but the cases and allegations have exposed some details that have interested it to attempt to recover sales tax on some Shs14 billion worth of airtime sales. MTN apparently did not pay tax because the transactions were made on mobile money.


Museveni has deployed his elite Presidential Guard Brigade forces to guard key figures in some of the cases after it emerged that there were attempts to use assassins to silence them. One of the targets, Richard Mwami, is a former head of MTN’s Mobile Money department.

He told The Independent that on the night of November 26, 2014, three hooded attackers jumped the fence of his home in the upmarket Muyenga neighbourhood with intention to kill him. One of the attackers, armed with a gun, climbed up to the balcony of Mwami’s bedroom on the second floor.

Mwami said: “We heard a loud bang and when I went to check, I saw him on the balcony. I grabbed him and in the scuffle, his gun fell to the ground. He fled and they all jumped over the fence and got away in a waiting car”. Mwami says the attackers fled when an alarm went off.

Mwami says he blew the whistle at MTN after he became suspicious when several staff from the MTN Mobile Money and IT resigned one after the other in November 2011. He alerted his bosses and started ferreting around. His finding led him to meet with President Museveni. After hearing his story, the president offered him guards, but Mwami rejected them.

“Youngman,” Museveni reportedly told him, “You don’t know what you are dealing with.”

A few days after would be assassins pounced, Mwami run back to the President for cover.

Fake money racket

Mwami says he had uncovered a racked in which MTN created `fictitious’ money on its Mobile Money platform and transacted in it on its MTN Mobile Money shops. In other incidences, staff in the Mobile Money and IT department allegedly created the ‘fictitious’ money for themselves and cashed it through their accomplice agents and subscribers.

MTN allegedly created an entity called MTN Corporate Liquidity Fund as a super-agent on its platform for the transactions which were a form of illegal “overdrawing” of its e-accounts. At the time, Themba Khumalo, a South African, was the CEO of MTN Uganda. He was transferred in April 2012 in what appeared to be a hurried decision as his successor was not named immediately.

Between May and November 2011, the fictitious money; technically called `negative money’ was about Shs85 billion. That is about three time the Shs24 billion that was lost in the Katosi Road saga. But according to experts, the real danger from the MTN mobile money saga is even bigger.

President Museveni has taken an interest in it because it raises national security issues, aids money laundering, and threatens macro-economic stability when unauthorised entities like telecom companies “create money” on their virtual money accounts.

MTN ignores warning

The Independent has learnt that sometime in 2011, MTN Uganda officials received a stern warning from Stanbic Bank, which holds several of the giant telecom’s accounts, including the voluminous Mobile Money account.

Stanbic Bank was concerned that MTN Uganda had not activated a mandatory Anti-money Laundering System on the Mobile Money system to which this account is central.

This situation, the banker warned, risked to expose them to sanctions from the Central Bank, the regulator of the country’s financial sector.

Since the telecom pioneered mobile money in 2009, some 18 million people had moved about Shs.18 trillion on the platform by the end of 2014.

Given that MTN controls 80% of the mobile money market, some Shs 14.4 trillion (Approximately the size of Uganda’s entire national budget 2014/15) in cash deposits from all mobile agents around the same time passed through this account. This account is called an “escrow account” because the money on it does not belong to MTN. It is for its Mobile Money agents and subscribers. Bank of Uganda wants MTN to guard against money laundering which can be exploited by terrorists.

Despite the warning, MTN carried on transacting. Insiders told The Independent that unknown to Stanbic, 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.

There was another issue. 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.

Even when it was reported by the internal auditor to the company’s Audit and Risk Committee of the company’s board, it was simply explained away.

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.

MTN Uganda also finds itself caught up in allegations that some of its staff created vast amounts of fictitious virtual money (e-money) under its mobile money platform.

One of the key witnesses, Babra Nalukwago who was a Business Analyst in MTN’s Public Access and Mobile Money from 2007 to May 2012, has told the Anti-corruption Court in Kampala that MTN “created money”.

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, “I found that (Shs) 21 billion had been created.”

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.”

Nalukwago was on October 20, 2014 testifying in a case in which Patrick sentongo; a former Finance Administrator of MTN Mobile Money and five others are being sued by MTN for fraud and embezzlement.

In a strange twist to the case, Mwami who presents himself as a `whistle-blower’ is also being sued by MTN in the same case.

The other accused are Joan Nabugwawo a former MTN cashier, Brian Okurut a former employee MTN whose position is unclear, Angella Ayo and Eriya Baryamwijuka, both former Revenue Analysts. MTN is suing them for allegedly defrauding it of about Shs10 billion.

Mwami was initially not among the accused. MTN had initially just fired him from his job. Mwami run into trouble with MTN when he and other employees who were close to the fraud case and had been sacked, challenged an internal dispute tribunal. Other workers quit. Mwami sued MTN. He also started a rival company to MTN Mobile Money called Easy Money Ltd.

Relationships soured when MTN confiscating some of Easy Money’s equipment from agents and forced MTN agents to sign exclusivity contracts.

As a result, Easy Money took MTN to court over unfair competition practices. It also launched a complaint before the Uganda Communications Commission (UCC). Both cases are pending.

At this point in 2013, MTN now decided to slap charges against Mwami. He faces two counts of fraud, neglect of duty and conspiracy involving over Shs5.8 billion.

How alleged fraud happened

MTN Uganda maintains an escrow account in Stanbic Bank and a bank control account. All MTN Mobile Money agents deposit an opening balance of Shs1 million on the escrow account and use it as a sort of clearing house to either withdraw cash or deposit. The agents deposit cash to get e-mobile money or what is technically called a “float” and withdraw cash when they trade-in e-mobile money. Most of this process is automatic. In the same way that Mobile Money subscribers can withdraw or deposit with the agents.

Trouble started when MTN staff started manually transferring e-money from accounts during a process called “liquidation”.  This is when an agent trades in e-money or float for cash. Witnessed have told court that some MTN staff (perhaps following how MTN was allegedly moving fictitious money to some of its shops), started creating fake subscribers and giving them fake e-money.

Nalukwago, the former MTN worker told court: “These subscribers were getting free money from the system by somebody sending money to them. They were not buying from an agent.”

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.”

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.”

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.

She told court: “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.”

MTN remain tight-lipped

When contacted, MTN Uganda, refused to give their side of this story. Normally this would be expected for any business seeking to be transparent and accountable to the public.

Justina Ntabgoba, the company’s Corporate Affairs Manager told The Independent; “I am not aware of that. And if those claims are part of the on-going case, we cannot comment.”

She asked The Independent send questions on email to enable her contact managers responsible for a clear position. Four days after the mail was sent, she had not responded. The Independent has, therefore, relied on correspondences amongst management, being used as evidence in court.

The Independent has learnt that MTN has spent Shs.14 billion to fix the mobile money system. While the system previously run on Fundamo, it was replaced with the Ericsson mobile money system.

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

They also come at a time when MTN has been slapped with a Shs 5 billion fine by UCC, this time for violating the SMS guidelines.

The allegations also come at the heels of revelations by Uganda’s out-going Finance Minister, Maria Kiwanuka and the Central Banker, Emanuel Tumusiime Mutebile that despite its potential, mobile money is posing challenges beyond the ambit of traditional financial sector supervision.

The Independent has discovered that despite the present checks by the central bank, the mobile money platforms remain a dominion of the telecom operators.

Other mobile money operators include Airtel money of Airtel, M-Sente of Uganda Telecom, MTN Mobile Money, and Easy Money of Easy Money Ltd. Others are cross-border operators like M-Pesa of Vodafone.

Lack of regulation

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.”

Already, Muhumuza added, mobile money has increased the velocity of money (number of times a given unit of money changes hands) which in itself can cause inflation.

“Bottom line,” Muhumuza said, “apart from theft and criminality associated with the fraud, the act causes macroeconomic stability challenges by way of increasing inflationary pressures.”

Another senior economist, Lawrence Bategeka, attributes the allegations surrounding MTN Uganda to lack of regulation.

“Mobile money is money in circulation,” Bategeka explained, “sometimes this money is in very large quantity and can easily be abused because of low regulation.”

This situation has far reaching consequences and Bategeka gave a hint.

“Imagine a scenario where MTN defaults and just goes away,” he told The Independent, “the risks are extremely high and there is no insurance.”

Hardly a month ago, on Feb.12 both the outgoing finance minister and central bank governor hinted on the challenges posed by mobile money.

Maria Kiwanuka noted at a Mobile Money conference: “…It is indeed the opportune time for us to understand how, for instance, central banks will conduct monetary policy and prudential regulation if commercial banks cede dominance of the financial system to mobile banking; a change that may affect the transmission mechanism of monetary policy as well as the reach of traditional supervision.”

Central Bank boss Mutebile was more concise.

He 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.

“Mobile money may also affect the velocity of circulation of money: in principle one might expect velocity to rise if mobile money makes retail payments transactions easier for customers,” Mutebile said, “However, if more radical mobile banking business models are eventually developed in which mobile money becomes a substitute for demand deposits in banks, the ability of central banks to control interest rates could be undermined.”

This is because, Mutebile explained, central banks control short term interest rates by varying the liquidity available for commercial banks to meet their reserve requirements. He added;

“But if mobile money eventually leads to a diminution of the role which commercial banks play in the financial system, the interest rate transmission mechanism, which relies on movements in short term inter-bank rates being transmitted along the yield curve to all other interest rates in the economy, will be weakened, which in turn will weaken the transmission mechanism of monetary policy. Central banks will, therefore, need to develop alternative tools for influencing interest rates in the economy.”

As I have already noted, Mutebile added, mobile banking is already providing a partial substitute for the retail payments services of banks and could eventually challenge the dominance of banks in the provision of other types of services, including deposits.

“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.”

Critics say failure to act by the Ministry of Finance and Bank of Uganda threatens Uganda’s economy.

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.

Countries that fail to implement FATF’s standards, experts say, run the risk of being labeled as high-risk or uncooperative jurisdictions, making it more costly and difficult for those nations to transact with the banking systems of FATF member states.

Threat exaggerated

But some economists say the role of mobile money on monetary policy is being over-played.

“It only affects the security of deposits and general payment system,” says Bategeka, “In Uganda, we use a working payment system and part of that is effected through use of mobile money.”

Bategeka says if cases like that involving MTN are to be avoided; all those involved in mobile money should be subjected to the same rules like those that govern banking.

“Anyone dealing in financial instruments should have adequate capital,” Bategeka says, “a high level of assets, good management, and a good level of earnings”

Operating in the absence proper regulation sparked another court case against MTN three years back. The Bugweri County MP Abdul Katuntu sued the company for running its mobile money system outside the realms of its license.

In a suit filed at the Commercial Court more than three years ago, Katuntu’s lawyers argued that MTN had accumulated a lot of money as float yet they had not put in place any strict measures to ensure that customers’ funds are protected safely or insured against any other liability. On this float according to the case, MTN had amassed more than a trillion shillings in spite of the insecurity hovering over customer deposits.

There is need to “strengthen that (current) regulation and include UCC in the monitoring along with BoU to ensure that the telecoms are submitting matching information with reconciliations from the banks,” says Muhumuza. In his view, it is time to introduce joint and binding regulation between BoU and UCC (read Government).

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