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Issue No. 359 March 13 - 19, 2015

Ushs 5,000,Kshs 200, RwF 1,500, SDP 8

Inside MTN mobile

money saga
Accusers explain how MTN created
Shs23 billion `fake money
Musevenis PGB guarding witnesses

www.independent.co.ug

Cover story

Inside MTN mobile money saga

Accusers explain how MTN created
Shs23 billion `fake money
Musevenis PGB guarding witnesses
By Haggai Matsiko and Ian Katusiime

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 Ugandas 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.

useveni 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
MTNs 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
Mwamis 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

Was in charge:
Themba Khumalo
10

March 13 - 19, 2015

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 dont
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

Cover story
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
telecoms 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
countrys 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 Ugandas 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 companys Audit
and Risk Committee of the companys
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 MTNs 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 MTNs 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 `whistleblower 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

Money involved

Shs

Billion

Created fictitiously
and withdrawn through
the MTN Corporate
Liquidity Fund

Shs

Negative money
detected at some
point in 2011

85

Billion
Shs

21

Billion

17
Shs

10

Billion
Shs

5.8

Billion
Shs

18.9
Billion

Money created and

cashed between May
2011 to December 2011

Number of fictitious
accounts through
which money was
being withdrawn
Money the five
suspects are accused
of defrauding MTN

Money Mwami
is accused of
stealing

Fictitious money
created on the
Adjustment account
for discrepancies

18

Number of mobile
money users

Million
Shs

18

Trillion

Money transacted
through mobile
money by the end of
December 2014

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 Moneys
equipment from agents and forced MTN
agents to sign exclusivity contracts.
As a result, Easy Money took MTN to
court over unfair competition practices.
March 13 - 19, 2015

11

Cover story
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
12

March 13 - 19, 2015

Accused
Patrick
Sentongo
Former Finance
Administrator

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

Joan
Nabugwawo

Former MTN
cashier

Brian
Okurut
Former MTN employee
whose position is
unclear

Angella
Ayo
Revenue Analyst

Eriya

Baryamwijuka

Revenue Analyst

Richard
Mwami
Senior Manager
Public Access &
Mobile Money

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
companys 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
Ugandas 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

How 'fake' MTN Mobile Money was created

news analysis
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

MTN
e-money
platform

Escrow
account

(Stanbic Bank)

Float
Cash

2
1

Shs 21 bn
Fictitious Mobile
Money created
and cashed

KEY

AGENT

If all depositors asked

for their
money
there would
be a crisis."

Agent buys e-money

Agent liquidates e-money

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 Ugandas 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
FATFs 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 work-

ing 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, Katuntus
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).
March 13 - 19, 2015

13