The M-PESA grand heist

Under the banner “M-Pesa Comes Home”, propaganda was generated suggesting that Safaricom was migrating its platform from Germany to Kenya. In actual fact, it was purchasing a new system (at an undisclosed sum) and re-writing the intellectual property rights over M-Pesa, completely delinking M-Pesa from its Kenyan roots and moving all profits from M-Pesa to a tax haven and out of reach of the country’s revenue authorities

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TNLM team

That quintessential Kenyan product with immense international recognition is now turning out to be a bitter pill for Kenyan investors in Safaricom, and a flagrant case of Kenyan directors at Safaricom being guilty of violating the professional standards established under the Companies Act, 2015. The “thieving” of M-Pesa mirrors the colonial plunder of Kenya’s resources. It is more than transfer pricing; it is a blatant manipulation of what was invented right here in Kenya and is, therefore, archetypal Kenyan but appropriated by a rapacious overseas multinational.

Let us set aside the debate on what happened to the inventor of M-Pesa; recent copyright cases against Safaricom will no doubt guide your conclusions on that scandal. For argument’s sake, let us assume that M-Pesa was “discovered” by an enthusiastic Vodafone researcher who, at a very early stage, understood Kenya’s “peculiar habits” of money transfer and figured that this would be a great way to transfer money. It is difficult to conceive such a reality but this article invites you to persevere through such a delusion.

M-Pesa was launched in Kenya in 2007 by Safaricom. The intellectual property rights were registered under Vodafone Sales and Services Limited (VSSL) which now purports to own these rights and purportedly licences these rights to Safaricom for a fee and under terms that will shock even the most unsophisticated commercial mind.

Now, it is important to note the character of inventions and the protection of intellectual property. When Apple invented the iPad, it mesmerised the world. But intellectual property rights could not mean that other manufactures could not, in quick order, enter the iPad market with iPad-like brands of their own.  Similarly, when Samsung pioneered the smart watch in 1999 it did not mean that Apple could not launch its own version of a smart watch.

In the end, it means that first-mover advantage in technological inventions merely allows you to corner the market first and to maximise on profits before your competition is able to come up with variants of its own. It does not mean that you lock other users from your invention.

How does this logic apply to Safaricom?  

Mobile money transfer via mobile networks was not pioneered, but was popularised, by Safaricom. It captured the imagination of Kenya’s “peculiar” population and in short order catapulted Safaricom and M-Pesa into an international brand with regard to this mobile money functionality.

M-Pesa has been the mainstay of Safaricom. It has allowed Safaricom to offer incredibly poor service without the fear of losing market share because the tie-up of mobile telephony and mobile money has become characteristically a Kenyan phenomenon. This tie-up has, up to now, frustrated the efficacy of number portability which would otherwise have allowed users to migrate to other networks that offer better or cheaper telephony services, although it a truism that Kenya’s youth only keep a Safaricom line for M-Pesa but increasingly use Airtel or Orange for their voice and data needs.

Platform shift

This will, however, change in the next few months when the market radically shifts to the Bitpesa money transfer platform, where one’s mobile money account will be carrier neutral. Other countries in Africa are enjoying this functionality, and Central Bank of Kenya’s contrived decision to block the entry of Bitpesa into Kenya is as ridiculous as traditional taxi drivers setting uber taxis on fire as a means of preserving their market dominance, or even as outlandish as banks moving to stop M-Pesa when it was first launched!

The eventuality of carrier-neutral mobile service provision is already here with us and 2016 will mark the end of the first phase of mobile telephony, where first-mover advantage was applied with a monopolistic guard. Telkom Kenya will lead in this revolution and offer interesting mobile choices through a vibrant and chic network of young entrepreneurs.

This background is important.

M-Pesa, as a mobile service, is no different from YU Money, Airtel Money, Equitel Money, or even “Thika Road Mobile Money” for that matter.  Mobile money transfer does not possess any proprietary information different from information available to other mobile money networks. Safaricom can adopt or buy the YU money platform and run with it under a different name and this will not affect in any way its functionality, efficiency or profitability.

It is possible in one swoop to rebrand all M-Pesa outlets with different colours and with a different name: this is what happens all the time when organisations merge or are taken over. This analysis will inform the narrative to follow.

A secret document was last year presented to the board of directors of Safaricom, and board members asked to quickly ratify and sign it. At the time, several Kenyan Board members refused to approve the document but sufficient inducements were offered; the rest is history.

The document is titled “M-Pesa Licensing and Services Agreement” (hereinafter the “Agreement”). It amounts to a massive fraud on Safaricom as a company and its shareholders in general.

Under the banner “M-Pesa Comes Home”, propaganda was generated suggesting that Safaricom was migrating its platform from Germany to Kenya. In actual fact, Safaricom was purchasing a new system (at an undisclosed sum) and re-writing the intellectual property rights over M-Pesa, completely delinking M-Pesa from its Kenyan roots and moving all profits from to a tax haven and out of reach of the revenue authorities of Kenya.

Under the Agreement the intellectual rights over M-Pesa are alleged to be owned by VSSL and contracted to Safaricom under a managed services agreement.  Safaricom purported to issue notice of its intention to terminate that managed services agreement.

But, coincidentally, VSSL is stated to have developed an enhanced new mobile money platform supplied by a “G2 Platform Supplier.”  So Safaricom terminates its M-Pesa original contract and enters into a new contract through VSSL, supplied by this so-called “G2 Platform Supplier.”

Huawei suffices, again

Who is this “G2 Platform Supplier”?
The Agreement defines the “G2 Platform Supplier” as “Huawei International PTE, a subsidiary of Huawei International PTE or one of its Group companies.”

Readers of this magazine will recall that in our March issue, Huawei was the same company that was contracted by Safaricom to perform the single-sourced Sh45 Billion Police Security Communication System, from which a massive Sh30 billion is to disappear into the pockets of some well-connected individuals. It is no coincidence that Huawei is the company of choice for Safaricom whenever Safaricom wants to “cream” out money from the company.

Under the Agreement, Safaricom has recently migrated its M-Pesa platform from its current G1 platform to the new “G2 Platform” which, under the Agreement, “means the M-Pesa software platform, which has been developed by the G2 Platform Supplier, incorporating Background Intellectual Property Rights of VSSL for implementation of M-Pesa, and which Safaricom licences from the G2 Platform Supplier.”

The G2 Platform agreement is not a direct agreement but is “the agreement made between Safaricom and the G2 Platform Supplier under the VPC (Vodafone Procurement Company) Procurement Agreement, under which Safaricom procures the licence to use the G2 Platform for the delivery of the M-Pesa Service in the Territory.” This VPC Company is registered in the Grand Duchy of Luxembourg.  As will be demonstrated below, the whole M-Pesa licensing regime is a scheme to siphon monies out of the Company through Chinese companies and foreign entities registered in tax havens. At play are the self-same machinations that brought down Kenya Airways.

Does Safaricom need any propriety licences in order to effect its mobile money business? The answer is a simple no. The notice to terminate the service management agreement with VSSL should simply have ended this contrived and alleged innovation by VSSL.

Taxpayer and investor rights

Is it at all difficult for Safaricom to procure software from Kenyan manufactures? Where have Airtel, Bitpesa, Yu and Equitel procured their mobile money software from? Competing mobile money software is now ubiquitous and can be developed internally within Safaricom or sourced competitively from any open source system. It is clear that the only reason why a convoluted contracting system (through Huawei and through Luxembourg) is a desire by Vodafone to erode taxpayer and shareholder value.

To contract for a false licence agreement for an indefinite term is clearly and definitely fraud. It is a fraud particularly when massive licence fees are taken into account.

In addition, the trademark M-Pesa has been appropriated by VSSL and Safaricom has been forbidden from registering any trade mark that uses or mimics the M-Pesa trade mark.

To think that the M-Pesa trademark does not belong to Safaricom any longer emphasises the lack of good faith in the Vodafone-Safaricom relationship. Vodafone has carved out all profitable elements of Safaricom and boxed these in foreign tax havens and then purported to resell the rights over these elements back to Safaricom at exorbitant rates.  This is a clear erosion of the rights of the other shareholders of the Safaricom.

The minority shareholders of Safaricom are entitled to challenge these self-serving devices by the majority shareholder, and to move away from any trademarks that do not add value to the company. Vodafone cannot derive any value from the trade mark “M-Pesa” if it is dropped by Safaricom.  It is not a trademark that can be used elsewhere as it is by nomenclature only applicable in the Kiswahili environment of Kenya.

In actual fact, the Agreement provides that the M-Pesa licence will terminate if “any member of the Vodafone Group ceases to hold, directly or indirectly, more than thirty (30) per cent of the issued share capital in Safaricom.” In short, Safaricom as a Kenyan Company will lose all its branded assets and services should the overseas shareholder become diluted to less than 30pc. There is no gainsaying the fact that Safaricom is building a business for its overseas shareholders, and not for the benefit of the Safaricom as a going concern.

The honourable thing would be for Safaricom to either cancel all these licence agreements relating to these false economies under trademark payments or alternatively re-brand its mobile money services under a new trademark which is owned by the telco. Safaricom is the only company that creates trademarks and other intellectual rights not for itself but for the benefit of a shareholder of the company.

Violate shareholders rights

The directors of Safaricom are in clear violation of their obligations to the company and to its shareholders. The directors clearly appear to be only interested in serving the interest of a particular shareholder. And these directors are well-remunerated. The Nairobi Law Monthly has established that most of the Kenyan directors have been given lucrative contracts to supply or provide services to Safaricom. One local director has three multi-billion contracts with Safaricom. It is no wonder that there is hardly any care for the interests of Safaricom as a company or the Kenyan shareholder.

The Agreement at every clause burdens Safaricom with all obligation and no rights.  For instance, Safaricom is obligated to procure from Huawei all “hardware, system integration, support and maintenance services as Safaricom may require for the provision of M-Pesa services in Kenya.”  Further, that “Safaricom shall be responsible for all costs payable to the G2 Platform Supplier (Huawei) for provision of the Platform, and any support, development and maintenance services.” Literally, Safaricom has been compelled to cede all rights over M-Pesa to Huawei and to allow Huawei to milk Safaricom in perpetuity.

Siphoning off profits

Yet, the same Agreement categorically provides that “VSSL shall have no obligation or responsibility under the terms of any arrangements with the G2 Platform Supplier (Huawei).” Safaricom is made responsible for all payments and liabilities but the entities deriving the profits (Vodafone, Huawei and the Luxembourg entity) shoulder no responsibility at all.

But, perhaps, the greatest thieving is in the siphoning off of M-Pesa revenues. The Agreement provides that Safaricom shall pay “2pc of the M-Pesa revenue towards a sum owed by Safaricom to VSSL arising from the losses VSSL incurred between the inception of M-Pesa in the Territory and June 2015, and calculated by subtracting VSSL’s OPEX and Capex costs from the net revenues (i.e. gross revenues less withholding tax) received by VSSL from Safaricom.

A self-styled bona fide licence to use a trademark is then turned after the fact into an agreement to pay for the alleged losses incurred by the developer of the trade mark.  Only in Kenya can such accounting fraud happen. If Safaricom is paying for the costs associated with development of M-Pesa, how can the M-Pesa trade mark be wholly owned by VSSL?

It is evident that the Agreement has qualitatively changed the character of the relationship between the Kenyan shareholding of Safaricom and that of Vodafone.  The alleged migration of the M-Pesa platform from Germany to Kenya was not a migration but was a device to take money out of Safaricom. The amount paid to Huawei has never been disclosed.

 

Safaricom technicians confirm that all the logistical undertakings in the transfer from the old system to the new system were undertaken by local staff. Huawei had no clue how to do this despite the billions that were paid under the contract.

The new platform, when installed, could not retrieve customer names and a new system was again ordered from Huawei. It is clear that Huawei serves as a convenient conduit to take money from Safaricom.

That Huawei now controls the M-Pesa platform and therefore 43pc of Kenya’s GDP that flows through M-Pesa annually, coupled with the fact that Huawei, through the Sh45 Billion single-sourced Police Security communication network, controls the security communication of the country, would be a scandal in any other country. Not so in Kenya.

KPMG Audit Report

Recent reports of huge amounts locked in distressed banks by current and former employees of Safaricom are just but the tip of the iceberg. Safaricom’s largesse has created many billionaires in Kenya and one particular company constantly appears as the vehicle of choice in the siphoning off of Safaricom’s or government monies. This thievery must quickly come to an end. It must!Screen Shot 2016-05-31 at 8.07.05 PMScreen Shot

The above matters have been a source of great concern for the independent directors. In 2015, the Audit Committee of the Safaricom Board of directors commissioned a forensic audit of the myriad corruption cases at Safaricom conceived and perpetuated by the Management. Audit firm KPMG was instructed by the audit committee and in a shocking report (that easily outdoes comparable Kroll reports on corruptions cartels in government dealings) pointed out the rot perpetuated against the shareholders of Safaricom. The gravity of the audit findings require us to quote verbatim the report which speaks in high decibels about the extent of the fraud in this project. Below is what the auditors have said at pages 110‒111 of the report.

Under the new Companies Act, and from the contents of the report, there is direct responsibility for the directors of Safaricom to be charged with this fraud. It is evident that they knew about it, perpetrated it, and allowed it to happen, with the net effect being that shareholders have lost value, government has lost profits from its shareholding, and KKRA has lost tax. Everybody who was involved in this ought to take personal liability and be held to account.

 

1 COMMENT

  1. Instead of forcing us to buy a physical copy, allow us to subscribe for Kes 150 which we can pay by card or Mpesa. Using a digital platform to sell a physical magazine is oxymoronic.

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