A Jaded Decade of State Capture

The conclusion to be drawn from a review of the Anti-Corruption and Anti-Fraud frameworks is that the massive frauds committed involving public funds, dubbed Malawi Cashgate, or simply Cashgate were the result of State capture: the systematic political corruption in which private interests significantly influence a State’s decision-making processes to their own advantage[1]. The Corrupt Practices Act criminalises such decision-making where such decision “puts one person or class of persons in a favourable position over”[2] others, especially where public office is used for “any advantage…property, profit or business interest”[3] To prove that public office was used for advantage, it is sufficient to show that a public officer did or directed the “doing, of anything contrary to procedure, law or established practice”[4]. This has been commonplace. Our State capture can be traced from 2010 to date, within which it has also defined a full decade of absentee political and public service leadership.

In its Memorandum on Economic and Financial Policies for the Fifth and Sixth Reviews under the Extended Credit Facility (ECF) arrangement, March 2015 the Malawi Government acknowledged to the International Monetary Fund (IMF) the conclusion in the Baker Tilly report that Cashgate “was not an opportunistic theft but rather a complex system of fraud and money laundering[5]” The genesis of State capture appears to have been problems of exchange rate and inflation as illustrated by the 2013 ‘international reserves…[at] precariously low levels[6]’. Witnesses in Cashgate cases said businesses fully funded supplies to the Malawi Government. “We funded this as Malawi Government had no forex. In all situations we have funded fully and delivered”[7]. This must also have been the foundation for the accumulation of domestic payment arrears which were to wreak havoc on the Malawi economy in the years 2013 – 2018[8]. The payment of domestic arrears itself presented a fertile swamp for fraud and corruption, predicate offences for money laundering.

State capture and the predicate infamy of Cashgate were facilitated by Politically Exposed Persons who stood to benefit personally or their political affiliations, family or friends. Our political leaders and leaders of our public service are all politically exposed persons. In terms of the Financial Crimes Act[9] politically exposed persons include: “…in Mala?i or a foreign country, the President; the Vice-President; persons appointed into public office by the President or other public body or directed officers; elected officers, persons holding management positions in public institutions including state owned corporations; members of governing bodies of political parties; independent politicians; persons entrusted with a prominent function in an international organization and individuals having family, social or business connexions with the aforementioned persons”.

While individual liability might be an issue of ‘innocent until proven guilty’ there can be no dispute that political parties benefitted. Osward Flywell Gedion Lutepo convicted on Cashgate charges of theft and money laundering[10] confessed in several of the statements he made that some of the proceeds from Cashgate went to the ruling People’s Party. The media reported that President Banda and the People’s Party had received a donation of 22 new vehicles from Lutepo[11], and that all the 30 vehicles belonging to People’s Party were registered in the name of President Banda[12] except 11. After the conviction of Lutepo Government had 12 months within which to obtain a pecuniary penalty order to confiscate tainted property that Lutepo gave to the People’s Party but it has not done so. Leonard Karonga[13] and Tressa Senzani[14], both convicted on Cashgate theft and money laundering charges detailed in their statements how proceeds from their crimes were channelled to the ruling People’s Party. Most of the transactions revealed in the Cashgate of 2013 Baker Tilly report started before President Banda and the People’s Party assumed the reins of political and executive power. They started in the time of former President Bingu wa Mutharika and the Democratic Progressive Party. The Democratic Progressive Party returned to power with President Arthur Peter Mutharika who beat President Banda and People’s Party at the Parliamentary and Presidential Elections of May 2014.

While the cases of Karonga and Senzani occurred in 2013, the transactions with Osward Flywell Gedion Lutepo and Government started about 2010/2011. This also applies to many of the Cashgate cases some of which are still in court[15].

That the Democratic Progressive Party and its President Arthur Peter Mutharika received benefits from Cashgate can also not be disputed. The Nation newspaper in its article ‘Karim Still Haunts APM’[16] states:

After he denied personally benefiting from Zameer Karim’s K145 million donation to DPP; we can reveal that President Peter Mutharika accepted five vehicles from the businessperson roughly a year later. Vehicle registration certificates we have seen and independently verified show that the registration of the vehicles, in Mutharika’s name, occurred just a year after Karim, who runs Pioneer Investment—the firm embroiled in the police food rations controversy—deposited K145 million into the ruling DPP bank account held at Standard Bank, for which Mutharika is the sole signatory.

The Anti-Corruption Bureau Investigation report into the contract between the Malawi Police Service and Zameer Karim trading as Pioneer Investments was leaked. It showed that Government had paid Zameer Karim K2,793,087,500.00 on the contract but that the contract was tainted by fraud. Zameer Karim deposited the (Government) Reserve Bank of Malawi cheque in his account at National Bank of Malawi on 12 April 2016 and the next day 13 April 2016 he drew his own cheque in the sum of K145 million against the K2,793,087,500.00 in favour of President Mutharika and the Democratic Progressive Party. There was media and civil society uproar about this. The President claimed that he had personally not benefitted from the K145 million, the Democratic Progressive Party offered to pay back the money to Zameer Karim. The repayment was made to Zameer Karim through his bank account at First Merchant Bank. Immediately the Financial Intelligence Authority froze the account and Zameer Karim was denied access to the repaid money.

The Financial Intelligence Authority asserted that First Merchant Bank had committed an offence because the K145 million should have raised suspicion and the bank should have filed a suspicious transaction report with the Financial Intelligence Unit. Zameer Karim went to court; first in Blantyre[17] and then in Lilongwe[18]. The Court ordered that the money should be released to Zameer Karim. National Bank of Malawi and Standard Bank had both handled the K145 million but had not been charged with any offence, yet there was no evidence that they had filed suspicious transaction reports. This led the Court to conclude that there was no breach of the Financial Crimes Act for which First Merchant Bank was charged. The Commercial Court made several observations. First, on the Public Finance Management Framework, including that:

In Malawi the difference between a ruling party and the State has become obscure. In fact, ruling political parties are often referred to as “Boma” literally meaning government. Thus, members of ruling parties as well as their families must, for all intents and purposes be deemed to be politically exposed persons. I would also add that because of the obscurity even the ruling party itself should be deemed a legally politically exposed entity or person[19].

And that:

This case raises quite a number of issues but first of all let me state that we are a nation of laws and we should always act like that. In terms of the issues let me state that the National Budget is called an Appropriation Bill, once passed that becomes law. This clearly implies or should imply that government expenditure should be restricted to what has been appropriated. That has not been the case. We have laws that are supposed to be ensuring that there should not be over expenditure which are not being followed. The end result is that we have government ministries, departments and agencies (MDAs) getting into some serious debts[20].

Next week we shall look at circumstances and Government actions that support the case theory for State Capture.

[1] https://en.wikipedia.org

[2] Corrupt Practices Act, section 3

[3] Ibid, section 25B

[4] Ibid, section 25B(4)

[5] IMF Country Report No. 15/83, March 2015 at page 61

[6] Ibid, Report No. 13/119, May 2013 at page 4

[7] Disclosures in Republic v Osward Flywell Gedion Lutepo, Criminal Case No. 2 of 2013, High Court, Zomba Registry

[8] IMF Country Reports No.: 13/119 May 2013; 13/131 May 2013; 14/37 February 2014; 15/83 March 2015; 16/182 June 2016; 17/183 July 2017; and 18/336 November 2018

[9] Section 2

[10] Republic v Osward Flywell Gedion Lutepo, Criminal Case No. 2 of 2014, High Court, Zomba Registry [2015] 490; [2015] 491; and [2015] 492

[11] Several newspapers carried the story but see Nyasa Times “Malawi Police Urged to Impound Vehicles Lutepo Donated to PP”, 21 November 2013

[12] This story appeared in Weekend Nation but was repeated in Nyasa Times 23 November 2013

[13] R v Karonga, (Criminal Case No. 68 of 2014, Lilongwe District Registry) [2018] MWHC 1

[14] Republic v Tressa Namathanga Senzani, Criminal Case No. 62 of 2013, (HC) (Unreported)

[15] Republic v Odillo, Kafuwa, Alexander Banda and Others, Criminal Case No. 23 of 2015, High Court, Lilongwe District Registry (still in trial); Republic v Odillo, Kafuwa, Makondi and others, Criminal Case No. 351 of 2016, Chief Resident Magistrate Court, Blantyre (still in trial); Republic v Gerald Gwalawala Sibande, Criminal Case No. 517 of 2013, Chief Resident Magistrate Court, Lilongwe (still in trial); and Republic v Victor Sithole, Criminal Case No. 908 of 2013, Chief Resident Magistrate Court, Lilongwe (unreported), the accused convicted and sentenced for theft and money laundering.

[16] The Nation, ‘Karim Still haunts APM’, 20 October 2018

[17] Zameer Karim trading as Pioneer Investment v Financial Intelligence Authority and First Merchant Bank [2018] MWHC 887

[18] Zameer Karim v Financial Intelligence Authority and First Merchant Bank, Judicial Review Case No. 1 of 2018, HC (Comm), Lilongwe District Registry (unreported)

[19] Ibid, P.7

[20] Ibid, P.3