Exclusive: Somalia Central Bank a 'slush fund' for private payments - U.N.

People walk outside Somalia's central Bank in Hamarwayne district, south of capital Mogadishu May 16, 2013. REUTERS/Omar Faruk

By Michelle Nichols and Louis Charbonneau

UNITED NATIONS (Reuters) - Money at the Central Bank of Somalia is not used to run government institutions in the war-torn Horn of Africa country, with an average 80 percent of withdrawals made for private purposes, according to a U.N. report seen by Reuters on Monday.

The confidential report by the U.N. Group of Experts to the Security Council's Somalia and Eritrea sanctions committee blamed a patronage system - dubbed the "khaki envelope" practice after the color of the stationery carried to the Ministry of Finance - for preventing the creation of state institutions.

"In this context, the fiduciary agency managed by PricewaterhouseCoopers was reduced to a transfer agent that could not ensure accountability of funds once they reached the Somali government," the report said.

"Indeed of $16.9 million transferred by PWC to the Central Bank, $12 million could not be traced," it said. "Key to these irregularities has been the current governor of the Central Bank, Abdusalam Omer."

PricewaterhouseCoopers, Omer and the Somalia U.N. mission did not immediately respond to requests for comment.

Omer, 59, is a dual Somali-U.S. national who left Somalia at age 16 and returned in January to become governor of the Central Bank in a country with a shattered economy and broken financial system.

The overthrow of a dictator in 1991 plunged Somalia into two decades of violent turmoil, first at the hands of clan warlords and then Islamist militants, who have steadily lost ground since 2011 under pressure from an African Union military offensive.

Somalia was virtually lawless and unable to assert authority until a Western-leaning government was elected last year.

The U.N. report said all bank decisions were made by Omer because there were no board members in place and the bank does not operate as a government body subject to policy decisions or oversight from integrity institutions and parliament.

"On average, some 80 percent of withdrawals from the Central Bank are made for private purposes and not for the running of government, representing a patronage system and a set of social relations that defy institutionalization of the state," it said.

The experts said Somali Finance Minister Mohamud Hassan Suleiman had tried to reduce the scale of the patronage system, but "it is so pervasive as to be beyond his control without a fundamental restructuring of the system."

CENTRAL BANK A "SLUSH FUND"

Under the patronage system, a person can ask Somali leaders for a private payment "that cannot be resisted for personal or other reasons," the U.N. report said. A senior politician signs a note authorizing the payment, which is honored either directly at the Ministry of Finance or the Central Bank, the report said.

"This custom is also called the 'khaki envelope' procedure on account of the color of the envelopes seen carried to the Ministry of Finance," it said. "Since banks in Somalia, including the Central Bank, cannot make electronic transfers internally or externally, all transactions are made in cash."

The report found that between September, when the new government of President Hassan Sheikh Mohamud came to power, and April, almost three-quarters of withdrawals from the Central Bank were made for private individuals.

"Such statistics indicate that the CBS has effectively functioned as a 'slush fund' for the (patronage) system rather than as a financing mechanism for government expenditures," the U.N. experts said.

The report noted that Mohamud's government "cannot necessarily be faulted for the continuing patterns of corruption per se, but it can be held responsible for the appointment of individuals involved in past or present corruption."

According to Central Bank accounts, a cashier at the Ministry of Finance, Ahir Axmed Jumcaale, was responsible for withdrawing the greatest amount of funds.

The report said that between 2010 and 2013 Jumcaale withdrew $20.5 million in his name, which was then used for individual payments under the patronage system by successive finance ministers or finance officials.

An individual named Colonel Abdiqaadir Moalin Nuur took out $4.7 million between 2010 and 2013, the second largest amount of money, according to the report, which said there was no explanation for his withdrawals.

The International Monetary Fund officially recognized the Somali government in April, ending a 22-year hiatus, and last week offered technical support and advice, a first step in efforts to secure debt relief for the country.

Also last month, the Central Bank of Somalia published its first annual report since civil war erupted in 1991, putting the total debt at $3.2 billion. To win debt relief offered to poor nations, it has to draw up a financial management plan.

(Editing by Christopher Wilson)