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The Troika Laundromat: How Vast Offshore Network Moved Billions With Help From Major Russian Bank

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The Laundromat wasn’t just a money laundering system. It was also a hidden investment vehicle, a slush fund, a tax evasion scheme, and much more.

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The Troika Laundromat: How Vast Offshore Network Moved Billions With Help From Major Russian Bank
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At first blush, Ruben Vardanyan and Armen Ustyan have nothing in common beyond their Armenian roots.

Vardanyan is a wealthy Russian banker who once led Troika Dialog, the country’s largest private investment bank. He’s spoken at the World Economic Forum in Davos and spent tens of millions of dollars on philanthropic projects in his native Armenia. Ustyan is a seasonal construction worker who shares a chilly apartment with his wife and parents in northern Armenia when he isn’t renovating flats in Moscow.

Ustyan’s name and a copy of his passport appear in the bank documents for an offshore shell company that played a role in Troika’s system. The company was one of at least 75 that formed the complex financial web, which functioned from 2006 to early 2013. Over that period, Troika enabled the flow of US$ 4.6 billion into the system and directed the flow of $4.8 billion out. Among the counterparties on these transactions were major Western banks such as Citigroup Inc., Raiffeisen, and Deutsche Bank. The dozens of companies in the system also generated $8.8 billion of internal transactions to obscure the origin of the cash.But Ustyan’s signatures on documents he says he’s never seen draw a direct line to Troika — and to a financial Laundromat that shuffled billions of dollars through offshore companies on behalf of the bank’s clients, many of whom were members of Russia’s elite. The system enabled people to channel money out of Russia, sidestep restrictions in place at the time, hide their assets abroad, and launder money. It also supplied cash to Russian President Vladimir Putin’s friends and powerful oligarchs, and enabled criminals to mask the illicit origins of their cash.

(Citigroup didn’t respond to a request for comment on this story; Raiffeisen declined to comment, citing client confidentiality; and Deutsche Bank said it had “limited access” to information about Troika client transactions and couldn’t comment on specific businesses for legal reasons.)

At the time, Vardanyan was Troika’s president, chief executive officer, and principal partner. He enjoyed a reputation as a Western-friendly representative of Russian capitalism, known for working to improve the country’s business environment and for co-founding the Moscow School of Management Skolko

As with the previous Laundromats, many of the large transactions were made on the back of fictitious trade deals. The bogus deals were invoiced variously as “goods,” “food goods,” “metal goods,” “bills,” and “auto parts.” All the invoices included in the leak were signed by proxies and sent from Troika.ru email addresses. Meanwhile, employees at Troika were setting up the opaque financial system — dubbed here the Troika Laundromat because of its resemblance to previous money laundering schemes uncovered by OCCRP.

This portrait of the operation emerges from a trove of leaked banking transactions and other documents obtained by OCCRP and the Lithuanian news site 15min.lt, and shared with 21 media partners.

As a whole, the data set includes over 1.3 million banking transactions from 238,000 companies and people, as well as thousands of emails, contracts, and company registration forms. This analysis of Troika’s network is based on a subset of the data.

In an interview, Vardanyan said his bank did nothing wrong and that it acted as other investment banks did at the time. He stressed that he couldn’t have known about every deal his enormous bank facilitated for its clients. Reporters found no evidence that he was ever investigated or accused of any wrongdoing by authorities. His signature was found on only one document in the entire scheme, in which he gives a loan to a Troika Laundromat company.

Vardanyan described the system as a private wealth management service.

Referring to the constellation of offshore companies that comprised the Laundromat, he said: “Those are technical service companies of Troika Dialog clients, among them, mine.”

“It could be called a ‘multi-family office,’” he said. “A similar practice still exists at foreign banks. Most of their clients work through international companies. I repeat: We always acted according to the rules of the world financial market of that time … Obviously, rules change, but measuring a market in the past by today’s laws is like applying modern compliance standards to the time of the Great Depression. You’ll agree that this distorts the true situation.”

Asked about the fictitious trade deals, Vardanyan said Troika Dialog’s revenue topped 2 trillion rubles from 2006–2010 ($63–85 billion, depending on currency fluctuations) and that he “couldn’t possibly know about all the deals in a company of this size.”

Though such practices were considered business as usual in Russia at the time, specialists note that systems like the Troika Laundromat can have serious repercussions.

The schemes stunt national economic development, undermine human security, and diminish the quality of life for people left behind, said Louise Shelley, director and founder of George Mason University’s Terrorism, Transnational Crime, and Corruption Center and author of the book “Dark Commerce.”

“Money laundering countries, particularly in the developing world, are losing enormous amounts of capital that are needed for infrastructure development, education, health, [and] the development of new businesses, of entrepreneurship,” Shelley said. “With this much money lying overseas, you can do all sorts of malicious things. You can interfere in electoral processes. You can help pay for fake news.”

Criminal Services

The Laundromat wasn’t just a money laundering system. It was also a hidden investment vehicle, a slush fund, a tax evasion scheme, and much more.

Troika’s clients also used it to buy properties in Great Britain, Spain, and Montenegro; to acquire luxury yachts and artwork; to pay for medical services and World Cup tickets; to cover tuition at prestigious Western schools for their children, and even to make donations to churches.

In addition, the Troika Laundromat enabled organized criminal groups and fraudsters to launder the proceeds of their crimes. OCCRP and partners have identified several high-level frauds perpetrated in Russia that used Laundromat companies to hide the origins of their money.

Troika’s clients also used it to buy properties in Great Britain, Spain, and Montenegro; to acquire luxury yachts and artwork; to pay for medical services and World Cup tickets; to cover tuition at prestigious Western schools for their children, and even to make donations to churches.

One of these schemes, known as the Sheremetyevo Airport fuel fraud, took place from 2003 to 2008 and artificially inflated aviation fuel prices while depriving the Russian state of more than $40 million in tax revenue. The scheme led to a hike in plane ticket prices. More than $27 million was sent by companies involved in the fraud to Troika Laundromat accounts. Vardanyan has not been implicated in the scheme and said he had no knowledge of it. In 2010, two years after the fraud ended, Troika Dialog began consulting for the airport along with Credit Suisse.

A second significant criminal inquiry tied to the Laundromat, from which $17 million ended up in the system, involves a tax avoidance scheme allegedly perpetrated by several Russian insurance companies. A man named Sergei Tikhomirov was accused of concluding false service contracts with the insurers as a pretext for having them send him large sums of money, which his accusers say he cycled through several accounts before depositing it abroad or cashing in. A portion of the money ended up in the Laundromat. (Tikhomirov did not respond to phone calls seeking comment.)

Roldugin didn’t respond to an email requesting comment, and Vardanyan said that he knew of the cellist, but was not aware that he had any business dealings with Troika.In a third case, at least $69 million went to companies associated with Sergei Roldugin, a Russian cellist and one of Putin’s best friends, who became famous after his vast unexplained wealth was revealed by OCCRP, the International Consortium of Investigative Journalists, and other media partners in the Panama Papers project. Some of the money that Roldugin’s companies received from the Laundromat originated in a massive Russian tax fraud exposed by Sergei Magnitsky, a Russian lawyer who died in jail after revealing it.

The Troika Laundromat enabled organized criminal groups and fraudsters to launder the proceeds of their crimes. OCCRP and partners have identified several high-level frauds perpetrated in Russia that used Laundromat companies to hide the origins of their money.

Companies involved in the fraud exposed by Magnitsky moved more than $130 million through the Troika Laundromat. In fact, hundreds of millions of dollars went into and out of the Laundromat for unknown purposes.

Vardanyan said he was not aware of any of these transactions.

“Understand, I’m no angel,” he said. “In Russia, you have three paths: Be a revolutionary, leave the country, or be a conformist. So I’m a conformist. But I have my own internal restraints: I never participated in loans-for-shares schemes, I never worked with criminals, I’m not a member of any political party. That’s why, even in the ’90s, I went around with no security guards. … I’m trying to preserve myself and my principles.”

Vardanyan and his family were among those who received money from the Laundromat. More than $3.2 million was used to pay for his American Express card, went to accounts belonging to his wife and family, and paid school fees for his three children in Great Britain.

Asked about these sums, Vardanyan said the offshore companies Troika created serviced his own companies in addition to the bank’s clients.

Troika as Capstone

The Troika Laundromat is unique among the Laundromats that have been uncovered in recent years in that it was created by a prestigious financial institution.

Like all investment banks, Troika handled stock and bond issuance, initial public offerings, and acted as an underwriting agent. It also had a strong relationship with the local office of Citibank Inc., with up to 20 percent of Troika’s new investors coming via the American behemoth. That made New York-based Citibank Troika’s biggest “external agent,” according to a 2006 interview with Troika co-founder Pavel Teplukhin. (Citibank didn’t respond to requests for comment.)Established in the early 1990s, Troika Dialog became Russia’s largest private investment bank. It operated under Vardanyan’s leadership until 2012, when it was purchased by Sberbank, the nation’s largest state-owned lender.

The Troika Laundromat is unique among the Laundromats that have been uncovered in recent years in that it was created by a prestigious financial institution.

Other major international banks, including Credit Suisse and Standard Bank Group, did significant business with Troika as well.

Starting in 2006, Troika employees began putting together the pieces of the Troika Laundromat.

Four essential elements are needed to build a functioning Laundromat: a bank with low anti-money laundering compliance standards; a maze of secretive offshore companies to hold accounts at the bank; proxy directors and shareholders for both the companies and the accounts; and the so-called formation agents that can quickly create, maintain, and dissolve the offshore companies as needed.

The bank orchestrated all of these components of the Troika Laundromat, in addition to directing the money flows and fake trade deals that made up its operations.

The pivotal mechanism was based on trade: Shell companies created bogus invoices for non-existent goods and services to be purchased by other companies in the system. The practice provides a fig leaf of legitimate economic activity that makes the transactions appear less suspicious to regulators.

Al-Qaida founder Osama bin Laden used a similar system to move money around the Middle East, she said.“You’re disguising an illegal payment by pretending that it is linked to a shipment of goods,” said Shelley, the George Mason corruption expert. “The trade-based system is one of the most central parts of money laundering in the world today.”

If Troika was the capstone of the Laundromat, its cornerstones were three British Virgin Islands-based shell companies: Brightwell Capital Inc., Gotland Industrial Inc., and Quantus Division Ltd. Brightwell’s first known transaction was on April 12, 2005. Gotland was established on Feb. 17, 2006, and Quantus followed six months later on Aug. 23.

An analysis of these companies’ banking records reveals how they put the Laundromat together: Starting in 2006, they made numerous small payments to a formation agent called IOS Group Inc. to create the dozens of companies that comprised the complete Laundromat. IOS didn’t respond to requests for comment.

The three cornerstone companies then continued making payments to IOS ranging from 40 to almost 5,000 euros over almost six years to keep the entire network operating. Over that span, the total reached over 143,000 euros.

Quantus, for example, paid formation and maintenance fees for the British Virgin Islands-based Kentway SA. This company was later used, among many others, to send millions of dollars to Sandalwood Continental Ltd., a company connected to Sergei Roldugin, the cellist, and one of Vladimir Putin’s oldest friends.

Quantus’ involvement with Kentway demonstrates the many ways in which the Laundromat companies were interconnected. In this case, after first helping establish Kentway, Quantus then funded it with money that Kentway forwarded to Roldugin’s company.

The Bank

To direct the flow of funds through the Laundromat, Troika needed a commercial bank to host accounts for the companies involved. And it needed that bank to avoid looking too closely at the contracts and trades Laundromat businesses used to justify moving money from one offshore company to another.

Troika chose Lithuania’s Ukio Bankas for the job. (The Lithuanian lender would later be seized by the country’s National Bank in 2013 for engaging in risky deals and failing to follow regulators’ orders.) Ukio is known to have set up accounts for 35 companies used in the Troika Laundromat, and likely more.

Because Lithuania wasn’t yet using the euro, Ukio needed correspondent accounts at European banks, such as the Austrian Raiffeisen or the German Commerzbank AG, to handle euro-denominated transactions. Those two lenders and many other large European and U.S. financial institutions accepted Laundromat money, though they did sporadically inquire about the nature of some transactions. After prodding by one of the correspondent banks, for example, some Ukio compliance officers made inquiries about Laundromat payments that didn’t make commercial sense.

“What is the essence of this transaction? We have a contract (attached), but to be honest, I don’t really get what’s happening,” one officer wrote, adding an unhappy face, in relation to a payment that went to a company associated with Roldugin.

By this point, the money had already left Ukio’s accounts.

Asked why Ukio was chosen as the banker for the offshore companies Troika created, Vardanyan said it was just one of about 20 banks Troika used around the world.

The Armenian Proxies

A central figure in many of the transactions involving the Laundromat companies was Armen Ustyan. Far from being an investment banker, Ustyan, 34, works seasonally as a construction worker in Moscow.

Ustyan said he had never heard of Dino Capital SA, the Panama-based Laundromat company whose Ukio bank account was registered using his signature. A copy of his passport was attached, but Ustyan insisted he had no idea how it got there. Ustyan’s signature can be found on contracts and banking paperwork in the Troika Laundromat along with those of a few other Armenians. Wearing an old military jacket and hat, he sat down with reporters this January in his cold living room to answer questions about high finance.

At his mother’s request, he wrote his signature on a piece of paper and concluded that the one associated with Dino Capital had probably been forged.

The Armenian said he knew none of this, though he did recall a slim connection to Troika Dialog: While in Moscow looking for work, Ustyan stayed with a Russian Armenian whose brother he said worked for the investment bank and helped him find employment. In addition to having his signature associated with Dino Capital’s bank account, Ustyan is also listed as an attorney authorized to sign contracts on the company’s behalf, and his signature appears on at least $70 million worth of financial agreements.

The Moscow address is indeed that of Nerses Vagradyan, a Russian citizen of Armenian descent. Nerses’ brother, Samvel Vagradyan, is a director of a Russian company that received millions of dollars from Brightwell, a core Laundromat company. A Samvel Vagradyan is also mentioned on Vardanyan’s website as a donor to the banker’s charitable causes. It’s unknown whether Samvel really worked for Troika.

Neither of the Vagradyan brothers could be reached for comment. Ustyan said he doesn’t believe they used his identity.

Another Armenian front man in the Laundromat appears to be Edik Yeritsyan. His identity was used to register an account at Ukio for the Cyprus-based Popat Holdings Ltd. This company was involved in Laundromat transactions worth millions of dollars.

Yeritsyan told OCCRP that he lost his memory three years ago after a car accident and doesn’t remember some parts of his life. However, Ustyan said that he and Yeritsyan lived together in the same flat they were renovating in Moscow.

This article was first published by The Organized Crime and Corruption Reporting Project (OCCRP) a global network of investigative journalists.

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Paul Radu is an investigative reporter with OCCRP

Politics

A Dictator’s Guide: How Museveni Wins Elections and Reproduces Power in Uganda

Caricatures aside, how do President Yoweri Museveni and the National Revolutionary Movement state reproduce power? It’s been 31 years.

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Recent weeks have seen increased global media attention to Uganda following the incidents surrounding the arrest of popular musician and legislator, Bobi Wine; emblematic events that have marked the shrinking democratic space in Uganda and the growing popular struggles for political change in the country.

The spotlight is also informed by wider trends across the continent over the past few years—particularly the unanticipated fall of veteran autocrats Muammar Gaddafi in Libya, Hosni Mubarak in Egypt, Yaya Jammeh in Gambia, and most recently Robert Mugabe in Zimbabwe—which led to speculation about whether Yoweri Museveni, in power in Uganda since 1986, might be the next to exit this shrinking club of Africa’s strongmen.

Yet the Museveni state, and the immense presidential power that is its defining characteristic, has received far less attention, thus obscuring some of the issues at hand. Comprehending its dynamics requires paying attention to at-least three turning points in the National Resistance Movement’s history, which resulted in a gradual weeding-out of Museveni’s contemporaries and potential opponents from the NRM, then the mobilisation of military conflict to shore up regime legitimacy, and the policing of urban spaces to contain the increasingly frequent signals of potential revolution. Together, these dynamics crystallised presidential power in Uganda, run down key state institutions, and set the stage for the recent tensions and likely many more to come.

The purge

From the late 1990s, there has been a gradual weeding out the old guard in the NRM, which through an informal “succession queue,” had posed an internal challenge to the continuity of Museveni’s rule. It all started amidst the heated debates in the late 1990s over the reform of the then decaying Movement system; debates that pitted a younger club of reformists against an older group. The resultant split led to the exit of many critical voices from the NRM’s ranks, and began to bolster Museveni’s grip on power in a manner that was unprecedented. It also opened the lid on official corruption and the abuse of public offices.

Over the years, the purge also got rid of many political and military elites—the so-called “historicals”—many of whom shared Museveni’s sense of entitlement to political office rooted in their contribution to the 1980-1985 liberation war, and some of whom probably had an eye on his seat.

By 2005 the purge was at its peak; that year the constitutional amendment that removed presidential term limits—passed after a bribe to every legislator—saw almost all insiders that were opposed to it, summarily dismissed. As many of them joined the ranks of the opposition, Museveni’s inner circle was left with mainly sycophants whose loyalty was more hinged on patronage than anything else. Questioning the president or harboring presidential ambitions within the NRM had become tantamount to a crime.

By 2011 the process was almost complete, with the dismissal of Vice President Gilbert Bukenya, whose growing popularity among rural farmers was interpreted as a nascent presidential bid, resulting in his firing.

One man remained standing, Museveni’s long-time friend Amama Mbabazi. His friendship with Museveni had long fueled rumors that he would succeed “the big man” at some point. In 2015, however, his attempt to run against Museveni in the ruling party primaries also earned him an expulsion from both the secretary general position of the ruling party as well as the prime ministerial office.

The departure of Mbabazi marked the end of any pretensions to a succession plan within the NRM. He was unpopular, with a record tainted by corruption scandals and complicity in Museveni’s authoritarianism, but his status as a “president-in-waiting” had given the NRM at least the semblance of an institution that could survive beyond Museveni’s tenure, which his firing effectively ended.

What is left now is perhaps only the “Muhoozi project,” a supposed plan by Museveni to have his son Muhoozi Kainerugaba succeed him. Lately it has been given credence by the son’s rapid rise to commanding positions in elite sections of the Ugandan military. But with an increasingly insecure Museveni heavily reliant on familial relationships and patronage networks, even the Muhoozi project appears very unlikely. What is clear, though, is that the over time, the presidency has essentially become Museveni’s property.

Exporting peace?

Fundamental to Museveni’s personalisation of power also has been the role of military conflict, both local and regional. First was the rebellion by Joseph Kony’s Lord’s Resistance Army in northern Uganda, which over its two-decade span enabled a continuation of the military ethos of the NRM. The war’s dynamics were indeed complex, and rooted in a longer history that predated even the NRM government, but undoubtedly it provided a ready excuse for the various shades of authoritarianism that came to define Museveni’s rule.

With war ongoing in the north, any challenge to Museveni’s rule was easily constructed as a threat to the peace already secured in the rest of the country, providing an absurd logic for clamping down on political opposition. More importantly, the emergency state born of it, frequently provided a justification for the president to side-step democratic institutions and processes, while at the same time rationalising the government’s disproportionate expenditure on the military. It also fed into Museveni’s self-perception as a “freedom fighter,” buttressed the personality cult around him, and empowered him to further undermine any checks on his power.

By the late 2000s the LRA war was coming to an end—but another war had taken over its function just in time. From the early 2000s, Uganda’s participation in a regional security project in the context of the War on Terror, particularly in the Somalian conflict, rehabilitated the regime’s international image and provided cover for the narrowing political space at home, as well as facilitating a further entrenchment of Museveni’s rule.

As post-9/11 Western foreign policy began to prioritise stability over political reform, Museveni increasingly postured as the regional peacemaker, endearing himself to donors while further sweeping the calls for democratic change at home under the carpet—and earning big from it.

It is easy to overlook the impact of these military engagements, but the point is that together they accentuated the role of the military in Ugandan politics and further entrenched Museveni’s power to degrees that perhaps even the NRM’s own roots in a guerrilla movement could never have reached.

Policing protest

The expulsion of powerful elites from the ruling circles and the politicisation of military conflict had just started to cement Musevenism, when a new threat emerged on the horizon. It involved not the usual antagonists—gun-toting rebels or ruling party elites—but ordinary protesters. And they were challenging the NRM on an unfamiliar battleground—not in the jungles, but on the streets: the 2011 “Walk-to-Work” protests, rejecting the rising fuel and food prices, were unprecedented.

But there is another reason the protests constituted a new threat. For long the NRM had mastered the art of winning elections. The majority constituencies were rural, and allegedly strongholds of the regime. The electoral commission itself was largely answerable to Museveni. With rural constituencies in one hand and the electoral body in the other, the NRM could safely ignore the minority opposition-dominated urban constituencies. Electoral defeat thus never constituted a threat to the NRM, at least at parliamentary and presidential levels.

But now the protesters had turned the tables, and were challenging the regime immediately after one of its landslide victories. The streets could not be rigged. In a moment, they had shifted the locus of Ugandan politics from the rural to the urban, and from institutional to informal spaces. And they were picking lessons from a strange source: North Africa. There, where Museveni’s old friend Gaddafi, among others, was facing a sudden exit under pressure from similar struggles. Things could quickly get out of hand. A strategic response was urgent.

The regime went into overdrive. The 2011 protests were snuffed out, and from then, the policing of urban spaces became central to the logic and working of the Museveni state. Draconian laws on public assembly and free speech came into effect, enacted by a rubber-stamp parliament that was already firmly in Museveni’s hands. Police partnered with criminal gangs, notably the Boda Boda 2010, to curb what was called “public disorder”—really the official name for peaceful protest. As police’s mandate expanded to include the pursuit of regime critics, its budget ballooned, and its chief, General Kale Kayihura, became the most powerful person after Museveni—before his recent dismissal.

For a while, the regime seemed triumphant. Organising and protest became virtually impossible, as urban areas came under 24/7 surveillance. Moreover, key state institutions—the parliament, electoral commission, judiciary, military and now the police—were all in the service of the NRM, and all voices of dissent had been effectively silenced. In time, the constitution would be amended again, by the NRM-dominated house, this time to remove the presidential age limit—the last obstacle to Museveni’s life presidency—followed by a new tax on social media, to curb “gossip.” Museveni was now truly invincible. Or so it seemed.

But the dreams of “walk-to-work”—the nightmare for the Museveni state—had never really disappeared, and behind the tightly-patrolled streets always lay the simmering quest for change. That is how we arrived at the present moment, with a popstar representing the widespread aspiration for better government, and a seemingly all-powerful president suddenly struggling for legitimacy. Whatever direction the current popular struggles ultimately take, what is certain is that they are learning well from history, and are a harbinger of many more to come.

This post is from a new partnership between Africa Is a Country and The Elephant. We will be publishing a series of posts from their site once a week.

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The Enduring Blind Spots of America’s Africa Policy

America should move way from making the military the face of its engagement with Africa and instead invest in deepening democracy as a principled approach rather than a convenient choice.

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The Enduring Blind Spots of America's Africa Policy
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While Donald Trump’s administration completely neglected America-Africa relations, the blind spots bedeviling America’s Africa policy preceded his 2016 election. Correcting the systemic flaws of the past 30 years will require a complete rethink after the controversial President’s departure.

To remedy America’s Africa policy, President Joseph Biden’s administration should pivot away from counterterrorism to supporting democratic governance as a principal rather than as mere convenience, and cooperate with China on climate change, peace, and security on the continent.

America’s Africa policy 

America’s post-Cold War Africa policy has had three distinct and discernible phases. The first phase was an expansionist outlook undergirded by humanitarian intervention. The second was nonintervention, a stance triggered by the experience of the first phase. The third is the use of “smart” military interventions using military allies.  

The turning point for the first phase was in 1989 when a victorious America pursued an expansive foreign policy approach predicated on humanitarian intervention. Somalia became the first African test case of this policy when, in 1992, America sent almost 30,000 troops to support Operation Restore Hope’s humanitarian mission which took place against the background of the collapse of the Somalia government in 1991.

On 3-4 October 1993, during the Battle of Mogadishu, 18 US servicemen were killed in a fight with warlords who controlled Mogadishu then, and the bodies of the marines dragged through the streets of Mogadishu. The media coverage increased pressure on the politicians and six months later America withdrew from Somalia — a case of the New World Order meeting the harsh reality of civil conflict.

The chastening experience resulted in America scaling back its involvement in internal conflicts in far-flung places. The result was the emergence of the second phase — non-engagement when Rwanda’s Genocide erupted in 1994 and almost a million people died in 100 days revealed the limitations of over-correcting the Somalia experience. This “non-interference” phase lasted until the twin Nairobi and Dar es Salaam US embassy bombings by Al Qaeda in 1998.

This gave way to the third phase with the realisation that the new threat to America was no longer primarily from state actors, but from transnational non-state actors using failing states as safe havens. The 2002 National Security Strategy states: “the events of September 11, 2001, taught us that weak states . . . can pose as a great danger to our national interests as strong states.”

Counterterrorism training and equipping of African militaries is the central plank of this new security policy. As a result, counterterrorism funding has skyrocketed as has America’s military footprint in Africa. As a result, Africa has become the theatre in which the Global forever War on Terror is fought.

The counterterrorism traps 

The reflexive reaction to the events of September 11 2001 spawned an interlocking web of covert and overt military and non-military operations. These efforts, initially deemed necessary and temporary, have since morphed into a self-sustaining system complete with agencies, institutions and a specialised lingo that pervades every realm of America’s engagement with Africa.

The United States Africa Command (Africom) is the vehicle of America’s engagement with the continent. Counterterrorism blurred the line between security, development, and humanitarian assistance with a host of implications including unrelenting militarisation which America’s policy establishment embraced uncritically as the sine qua non of America’s diplomacy, their obvious flaws notwithstanding. The securitisation of problems became self-fulfilling and self-sustaining.

The embrace of counterterrorism could not have come at a worse time for Africa’s efforts at democratization. In many African countries, political and military elites have now developed a predictable rule-based compact governing accession to power via elections rather than the coups of the past.

“Smart” African leaders exploited the securitised approach in two main ways: closing the political space and criminalising dissent as “terrorism” and as a source of free money. In Ethiopia, Yonatan Tesfaye, a former spokesman of the Semayawi (Blue) Party, was detained in December 2015 on charges under Article 4 of Ethiopia’s Anti-Terrorism Proclamation ((EATP), arguably one of the the country’s most severe pieces of legislation. But Ethiopia has received millions of dollars from the United States.

The Department of Defense hardly says anything in public but gives out plenty of money without asking questions about human rights and good governance. Being a counterterrorism hub has become insurance policy against any form of criticism regardless of state malfeasance.

Egypt is one such hub. According to the Congressional Research Service, for the 2021 financial year, the Trump Administration has requested a total of US$1.4 billion in bilateral assistance for Egypt, which Congress approved in 2018 and 2019. Nearly all US funding for Egypt comes from the Foreign Military Finance (FMF) account and is in turn used to purchase military equipment of US origin, spare parts, training, and maintenance from US firms.

Another country that is a counterterrorism hub in the Horn of Africa is Ethiopia. For the few months they were in charge, the Union of Islamic Courts (ICU) brought order and stability to the country.  Although they were linked to only a few of Mogadishu’s local courts, on 24 December 2006, Ethiopia’s military intervened in Somalia to contain the rise of Al Shabaab’s political and military influence.

The ouster of the ICU by Ethiopia aggravated the deep historical enmity between Somalia and Ethiopia, something Al Shabaab — initially the youth wing of the ICU — subsequently exploited through a mix of Somali nationalism, Islamist ideology, and Western anti-imperialism. Al Shabaab presented themselves as the vanguard against Ethiopia and other external aggressors, providing the group with an opportunity to translate their rhetoric into action.

Ethiopia’s intervention in Somalia could not have taken place without America’s blessing. The intervention took place three weeks after General John Abizaid, the commander of US forces from the Middle East to Afghanistan, met with the then Ethiopian Prime Minister Meles Zenawi.  The intervention generated a vicious self-sustaining loop. Ethiopians are in Somalia because of Al Shabaab, and Al Shabaab says they will continue fighting as long as foreign troops are inside Somalia.

America has rewarded Ethiopia handsomely for its role as the Horn of Africa’s policeman. In both Ethiopia’s and Egypt’s case, on the score of human rights and good governance, the net losers are the citizens.

Drone attacks 

In keeping with the War on Terror being for forever, and despite departing Somalia in 1993, America outsourced a massive chunk of the fight against Al Shabaab to Ethiopia primarily, and later, to AMISOM. America is still engaged in Somalia where it has approximately 800 troops, including special forces that help train Somalia’s army to fight against Al Shabaab.

America carried out its first drone strike in Somalia in 2011 during President Barack Obama’s tenure. Under the Trump administration, however, the US has dramatically increased the frequency of drone attacks and loosened the oversight required to approve strike targets in Somalia. In March 2017, President Trump secretly designated parts of Somalia “areas of active hostilities”, meaning that the high-level inter-agency vetting of proposed strikes and the need to demonstrate with near certainty that civilians would not be injured or killed no longer applied. Last year, the US acknowledged conducting 63 airstrikes in the country, and in late August last year, the US admitted that it had carried out 46 strikes in 2020.

A lack of transparency regarding civilian casualties and the absence of empirical evidence that the strikes lead to a reduction in terrorism in Somalia suggest that expanding to Kenya would be ill-advised. The US has only acknowledged having caused civilian casualties in Somalia three times. Between 2016 and 2019, AFRICOM failed to conduct a single interview with civilian witnesses of its airstrikes in Somalia.

Despite this level of engagement, defeating Al Shabaab remains a remote possibility.

Containing the Chinese takeover 

The Trump Administration did not have an Africa policy. The closest approximation of a policy during Trump’s tenure was stated in a speech delivered by John Bolton at a Conservative think tank decrying  China’s nefarious activities in Africa.  Even with a policy, where the counterterrorism framework views Africa as a problem to be solved by military means, the containing China policy views African countries as lacking the agency to act in their own interests. The problem with this argument is that it is patronising; Africans cannot decide what is right for them.

Over the last decades, while America was busy creating the interlocking counterterrorism infrastructure in Africa, China was building large-scale infrastructure across the continent. Where America sees Africa as a problem to be solved, China sees Africa as an opportunity to be seized.

Almost two years into the Trump administration, there were no US ambassadors deployed in 20 of Africa’s 54 countries even while America was maintaining a network of 29 military bases.  By comparison China, has 50 embassies spread across Africa.

For three consecutive years America’s administration has proposed deep and disproportionate cuts to diplomacy and development while China has doubled its foreign affairs budget since 2011. In 2018, China increased its funding for diplomacy by nearly 16 per cent and its funding for foreign aid by almost 7 per cent.

As a show of how engagement with Africa is low on the list of US priorities, Trump appointed a luxury handbag designer as America’s ambassador to South Africa on 14 November 2018. Kenya’s ambassador is a political appointee who, when he is not sparring with Kenyans on Twitter, is supporting a discredited coal mining project.

The US anti-China arguments emphasize that China does not believe in human rights and good governance, and that China’s funding of large infrastructure projects is essentially debt-trap diplomacy. The anti-China rhetoric coming from American officials is not driven by altruism but by the realisation that they have fallen behind China in Africa.

By the middle of this century Africa’s population is expected to double to roughly two billion. Nigeria will become the second most populous country globally by 2100, behind only India. The 24-country African Continental Free Trade Agreement (AfCFTA) entered into force on 30 May 2019. AfCFTA will ultimately bring together all 55 member states of the African Union covering a market of more than 1.2 billion people — including a growing middle class — and a combined gross domestic product (GDP) of more than US$3.4 trillion.

While Chinese infrastructure projects grab the headlines, China has moved into diversifying its engagement with Africa. The country has increased its investments in Africa by more than 520 per cent over the last 15 years, surpassing the US as the largest trading partner for Africa in 2009 and becoming the top exporter to 19 out of 48 countries in sub-Saharan Africa.

Some of the legacy Chinese investments have come at a steep environmental price and with an unsustainable debt. Kenya’s Standard Gauge Railway is bleeding money and is economically unviable.

A fresh start

Supporting democratic governance and learning to cooperate with China are two areas that will make America part of Africa’s future rather than its past.

America should pivot way from making the military the most visible face of its engagement with Africa and instead invest in deepening democracy as a principled approach rather than a convenient choice.

Despite the elegy about its retreat in Africa, democracy enjoys tremendous support. According to an Afro barometer poll, almost 70 per cent of Africans say democracy is their preferred form of government. Large majorities also reject alternative authoritarian regimes such as presidential dictatorships, military rule, and one-party governments. Democracy, while still fledgling, remains a positive trend; since 2015, there have been 34 peaceful transfers of power.

However, such positive metrics go hand in hand with a worrying inclination by presidents to change constitutions to extend their terms in office. Since 2015, leaders of 13 countries have evaded or overseen the weakening of term limit restrictions that had been in place. Democracy might be less sexy, but ignoring it is perilous. There are no apps or switches to flip to arrest this slide. It requires hard work that America is well equipped to support but has chosen not to in a range of countries in recent years There is a difference between interfering in the internal affairs of a country and complete abdication or (in some cases) supporting leaders who engage in activities that are inimical to deepening democracy.

The damage wrought by the Trump presidency and neo-liberal counterterrorism policies will take time to undo, but symbolic efforts can go a long way to bridging the gap.

America must also contend with China being an indispensable player in Africa and learn to cooperate rather than compete in order to achieve optimal outcomes.

China has 2,458 military and police personnel serving in eight missions around the globe, far more than the combined contribution of personnel by the other four permanent members of the UN Security Council, Russia, the US, France and Britain. China had more than 2,400 Chinese troops take part in seven UN peacekeeping missions across the continent — most notably in Mali and South Sudan. Of the 14 current UN peacekeeping missions, seven are in Africa, consuming two-thirds of the budget.

Climate change and conflict resolution provide opportunities for cooperation. Disproportionate reliance on rain-fed agriculture and low adaptation to the adverse impact of climate change make Africa vulnerable to the damaging effects of climate change, the consequences of which will transcend Africa. Through a combination of research, development, technological transfer and multilateral investment, America and China could stave off the impact of climate change in Africa.

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Hijacking Kenya’s Health Spending: Companies Linked to Powerful MP Received Suspicious Procurement Contracts

Two obscure companies linked to Kitui South MP Rachael Kaki Nyamai were paid at least KSh24.2 million to deliver medical supplies under single-source agreements at the time the MP was chair of the National Assembly’s Health Committee.

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Hijacking Kenya’s Health Spending: Companies Linked to Powerful MP Received Suspicious Procurement Contracts
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Two obscure companies linked to Kitui South MP Rachael Kaki Nyamai were paid at least KSh24.2 million to deliver medical supplies under single-source agreements at the time the MP was chair of the National Assembly’s Health Committee, an investigation by Africa Uncensored and The Elephant has uncovered.

One of the companies was also awarded a mysterious Ksh 4.3 billion agreement to supply 8 million bottles of hand sanitizer, according to the government’s procurement system.

The contracts were awarded in 2015 as authorities moved to contain the threat from the Ebola outbreak that was ravaging West Africa and threatening to spread across the continent as well as from flooding related to the El-Nino weather phenomenon.

The investigation found that between 2014 and 2016, the Ministry of Health handed out hundreds of questionable non-compete tenders related to impending disasters, with a total value of KSh176 billion including three no-bid contracts to two firms, Tira Southshore Holdings Limited and Ameken Minewest Company Limited, linked to Mrs Nyamai, whose committee oversaw the ministry’s funding – a clear conflict of interest.

Number of Suppliers Allocated BPAAlthough authorities have since scrutinized some of the suspicious contracts and misappropriated health funds, the investigation revealed a handful of contracts that were not made public, nor questioned by the health committee.

Mrs Nyamai declined to comment for the story.

Nyamai has been accused by fellow members of parliament of thwarting an investigation of a separate alleged fraud. In 2016, a leaked internal audit report accused the Ministry of Health — colloquially referred to for its location at Afya House — of misappropriating funds in excess of nearly $60 million during the 2015/2016 financial year. Media stories described unauthorized suppliers, fraudulent transactions, and duplicate payments, citing the leaked document.

Members of the National Assembly’s Health Committee threatened to investigate by bringing the suppliers in for questioning, and then accused Nyamai, the committee chairperson, of blocking their probe. Members of the committee signed a petition calling for the removal of Nyamai and her deputy, but the petition reportedly went missing. Nyamai now heads the National Assembly’s Committee on Lands.

Transactions for companies owned by Mrs Nyamai’s relatives were among 25,727 leaked procurement records reviewed by reporters from Africa Uncensored, Finance Uncovered, The Elephant, and OCCRP. The data includes transactions by eight government agencies between August 2014 and January 2018, and reveals both questionable contracts as well as problems that continue to plague the government’s accounting tool, IFMIS.

The Integrated Financial Management Information System was adopted to improve efficiency and accountability. Instead, it has been used to fast-track corruption.

Hand sanitizer was an important tool in fighting transmission of Ebola, according to a WHO health expert. In one transaction, the Ministry of Health paid Sh5.4 million for “the supply of Ebola reagents for hand sanitizer” to a company owned by a niece of the MP who chaired the parliamentary health committee. However, it’s unclear what Ebola reagents, which are meant for Ebola testing, have to do with hand sanitizer. Kenya’s Ministry of Health made 84 other transactions to various vendors during this period, earmarked specifically for Ebola-related spending. These included:

  • Public awareness campaigns and adverts paid to print, radio and tv media platforms, totalling at least KSh122 million.
  • Printed materials totalling at least KSh214 million for Ebola prevention and information posters, contact tracing forms, technical guideline and point-of-entry forms, brochures and decision charts, etc. Most of the payments were made to six obscure companies.
  • Ebola-related pharmaceutical and non-pharmaceutical supplies, including hand sanitizer
  • Ebola-related conferences, catering, and travel expenses
  • At least KSh15 millions paid to a single vendor for isolation beds

Hacking the System

Tira Southshore Holdings Limited and Ameken Minewest Company Limited, appear to have no history of dealing in hygiene or medical supplies. Yet they were awarded three blanket purchase agreements, which are usually reserved for trusted vendors who provide recurring supplies such as newspapers and tea, or services such as office cleaning.

“A blanket agreement is something which should be exceptional, in my view,” says former Auditor-General, Edward Ouko.

But the leaked data show more than 2,000 such agreements, marked as approved by the heads of procurement in various ministries. About KSh176 billion (about $1.7 billion) was committed under such contracts over 42 months.

“Any other method of procurement, there must be competition. And in this one there is no competition,” explained a procurement officer, who spoke generally about blanket purchase agreements on background. “You have avoided sourcing.”

The Ministry of Health did not respond to detailed questions, while Mrs Nyamai declined to comment on the contracts in question.

Procurement experts say blanket purchase agreements are used in Kenya to short-circuit the competitive process. A ministry’s head of procurement can request authority from the National Treasury to create blanket agreements for certain vendors. Those companies can then be asked by procurement employees to deliver supplies and services without competing for a tender.

Once in the system, these single-source contracts are prone to corruption, as orders and payments can simply be made without the detailed documentation required under standard procurements. With limited time and resources, government auditors say they struggle especially with reconciling purchases made under blanket agreements.

The agreements were almost always followed by standard purchase orders that indicated the same vendor and the same amount which is unusual and raises fears of duplication. Some of these transactions were generated days or weeks after the blanket agreements, many with missing or mismatched explanations. It’s unclear whether any of these actually constituted duplicate payments.

For example, the leaked data show two transactions for Ameken Minewest for Sh6.9 million each — a blanket purchase order for El Nino mitigation supplies and a standard order for the supply of chlorine tablets eight days later. Tira Southshore also had two transactions of Sh12 million each — a blanket purchase for the “supply of lab reagents for cholera,” and six days later a standard order for the supply of chlorine powder.

Auditors say both the amounts and the timing of such payments are suspicious because blanket agreements should be paid in installments.

“It could well be a duplicate, using the same information, to get through the process. Because you make a blanket [agreement], then the intention is to do duplicates, so that it can pass through the cash payee phase several times without delivering more,” said Ouko upon reviewing some of the transactions for Tira Southshore. This weakness makes the IFMIS system prone to abuse, he added.

In addition, a KSh4 billion contract for hand sanitizer between the Health Ministry’s Preventive and Promotive Health Department and Tira Southshore was approved as a blanket purchase agreement in April 2015. The following month, a standard purchase order was generated for the same amount but without a description of services — this transaction is marked in the system as incomplete. A third transaction — this one for 0 shillings — was generated 10 days later by the same procurement employee, using the original order description: “please supply hand sanitizers 5oomls as per contract Moh/dpphs/dsru/008/14-15-MTC/17/14-15(min.no.6).

Reporters were unable to confirm whether KSh4 billion was paid by the ministry. The leaked data doesn’t include payment disbursement details, and the MOH has not responded to requests for information.

“I can assure you there’s no 4 billion, not even 1 billion. Not even 10 million that I have ever done, that has ever gone through Tira’s account, through that bank account,” said the co-owner of the company, Abigael Mukeli. She insisted that Tira Southshore never had a contract to deliver hand sanitizer, but declined to answer specific questions. It is unclear how a company without a contract would appear as a vendor in IFMIS, alongside contract details.

It is possible that payments could end up in bank accounts other than the ones associated with the supplier. That is because IFMIS also allowed for the creation of duplicate suppliers, according to a 2016 audit of the procurement system. That audit found almost 50 cases of duplication of the same vendor.

“Presence of active duplicate supplier master records increases the possibility of potential duplicate payments, misuse of bank account information, [and] reconciliation issues,” the auditors warned.

They also found such blatant security vulnerabilities as ghost and duplicate login IDs, deactivated requirements for password resets, and remote access for some procurement employees.

Credit: Edin Pasovic/OCCRP

Credit: Edin Pasovic/OCCRP

IFMIS was promoted as a solution for a faster procurement process and more transparent management of public funds. But the way the system was installed and used in Kenya compromised its extolled safeguards, according to auditors.

“There is a human element in the system,” said Ouko. “So if the human element is also not working as expected then the system cannot be perfect.”

The former head of the internal audit unit at the health ministry, Bernard Muchere, confirmed in an interview that IFMIS can be manipulated.

Masking the Setup

Ms Mukeli, the co-owner of Tira Southshore and Ameken Minewest, is the niece of Mrs Nyamai, according to local sources and social media investigation, although she denied the relationship to reporters. According to her LinkedIn profile, Ms Mukeli works at Kenya Medical Supplies Agency, a medical logistics agency under the Ministry of Health, now embroiled in a COVID procurement scandal.

Ms Mukeli’s mother, who is the MP’s elder sister, co-owns Icpher Consultants Company Ltd., which shares a post office box with Tira Southshore and Mematira Holdings Limited, which was opened in 2018, is co-owned by Mrs Nyamai’s husband and daughter, and is currently the majority shareholder of Ameken Minewest. Documents also show that a company called Icpher Consultants was originally registered to the MP, who was listed as the beneficial owner.

Co-owner of Tira Southshore Holdings Limited, Abigael Mukeli, described the company to reporters as a health consulting firm. However Tira Southshore also holds an active exploration license for the industrial mining in a 27-square-kilometer area in Kitui County, including in the restricted South Kitui National Reserve. According to government records, the application for mining limestone in Mutomo sub-county — Nyamai’s hometown — was initiated in 2015 and granted in 2018.

Mukeli is also a minority owner of Ameken Minewest Company Limited, which also holds an active mining license in Mutomo sub-county of Kitui, in an area covering 135.5 square kilometers. Government records show that the application for the mining of limestone, magnesite, and manganese was initiated in 2015 and granted in 2018. Two weeks after the license was granted, Mematira Holdings Limited was incorporated, with Nyamai’s husband and daughter as directors. Today, Mematira Holdings is the majority shareholder of Ameken Minewest, which is now in the process of obtaining another mining license in Kitui County.

According to public documents, Ameken also dabbles in road works and the transport of liquefied petroleum gas. And it’s been named by the Directorate of Criminal Investigations in a fuel fraud scheme.

Yet another company, Wet Blue Proprietors Logistics Ltd., shares a phone number with Tira Southshore and another post office box with Icpher Consultants Company Ltd., according to a Kenya National Highway Authority list of pre-qualified vendors.

Family LinksMrs Nyamai and her husband co-own Wet Blue. The consulting company was opened in 2010, the same year that the lawmaker completed her PhD work in HIV/AIDS education in Denmark.

Wet Blue was licenced in 2014 as a dam contractor and supplier of water, sewerage, irrigation and electromechanical works. It’s also listed by KENHA as a vetted consultant for HIV/AIDS mitigation services, together with Icpher Consultants.

It is unclear why these companies are qualified to deliver all these services simultaneously.

“Shell companies receiving contracts in the public sector in Kenya have enabled corruption, fraud and tax evasion in the country. They are literally special purpose vehicles to conduct ‘heists’ and with no track record to deliver the public goods, works or services procured,” said Sheila Masinde, executive director of Transparency International-Kenya.

Both MOH and Ms Mukeli refused to confirm whether the ordered supplies were delivered.

Mrs Nyamai also co-owns Ameken Petroleum Limited together with Alfred Agoi Masadia and Allan Sila Kithome.

Mr Agoi is an ANC Party MP for Sabatia Constituency in Vihiga County, and was on the same Health Committee as Mrs Nyamai, a Jubilee Party legislator. Mr Sila is a philanthropist who is campaigning for the Kitui County senate seat in the 2022 election.

Juliet Atellah at The Elephant and Finance Uncovered in the UK contributed reporting.

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