Rethinking the Legal & Regulatory Framework to curb Real Estate Corporate Fraud in Kenya

Introduction

Without a doubt, Kenya is a country that is beaming with real estate investments. The success

of this industry has similarly been infiltrated by unscrupulous persons who thrive in fraud to

take advantage of the innocent investing public.

Several glittering and hyped real estate investment projects/schemes have ended up being

scams. Thousands of investors have lost their money by buying non existing lands, lands with

disputes, projects that has misrepresented the facts to the buyers and outright theft.

But the question is, why is it that it has become so common for investors to be duped?

I think Kenyans are generally enthusiastic about hyped real estate projects. In investments,

Kenyans generally move as a herd. This investment character makes it easy for conmen to

infiltrate erstwhile honest real estate projects and con the unsuspecting.

There is also a glaring legal framework to protect investors in real estate. A few investors might

have obtained regulatory oversight, or even be subject to regulatory oversight with institutions

like the Capital Market Authority (CMA), Saccos Societies Regulatory Authority (SASRA),

Central Bank of Kenya (CBK), Retirement Benefits Authority (RBA) and other self-regulating

professional bodies. The majority of real estate investment projects by and large remain

unregulated.

It is still perplexing though that even for recently regulatory real estate promoters like Cytonn

which was regulated by CMA, the innocent investing public still lost their money. This points to

grave regulatory gaps that has proofed insufficient to protect the public.

This is why I think we need to rethink the legal and regulatory framework that will govern the

real estate investment space and provide protection to investors from fraudulent

developers/real estate development project promoters.

The recent Court of Appeal decisions in the Cytonn Investment Appeals marks defining moment in Kenya’s fight against financial fraud and regulatory arbitrage. The Cytonn cases exposed deep structural and legal vulnerabilities in the oversight of Private Investment Vehicles, Collective Investment Vehicles, and the public-facing financial products marketed without adequate

investor product/protection safeguards.

History of Financial Fraud in Kenya; Financial Markets and the Real Estate Sector

Kenya has a notable history of financial fraud in the investment market and the real estate

sector. In 2009, a government task force identified over 271 fraudulent schemes operating in

the country an indicator of persistent regulatory weakness.

One of the earliest large-scale schemes was the Desired Success Club International (DECI),

which operated between 2007 and 2008 which lured thousands of Kenyans with promises of

extraordinarily high returns, far above the fixed and regulated rates offered by banks. The

collapse of DECI signaled the beginning of a worrying trend: fraudulent schemes positioning

themselves as “investment opportunities” offering high, fast, and guaranteed returns over

short periods of time.

It is noteworthy that major financial fraud scandals will often provide a unique opportunity for

governments to address unaccepted business practices or regulatory measures. 1 It is common

practice for the Government and accounting officials to typically introduce laws and regulations

as an automatic response. However, these adoptions might not be very effective to curb new

scandals. 2 To some extent, it has resulted in lengthy regulations with little or no response.3

Goldenscape Group and Simple Homes Scandal

The Goldenscape Group and the Simple Homes scandal further illustrates the escalation of

investment fraud that extends to the real estate industry and how weak regulatory framework

can exacerbate the situation.

The Goldenscape group led by Peter Muriithi Wangai lured over 1,000 investors with promises

of lucrative returns form investments in greenhouses operations in Nyandarua and Kajiado

Counties. 4

Investors were asked to pay for a certain number of greenhouses or acres of trees. Goldenscape would then manage the farming, market the produce and pay the investors returns on their investment.5 Investors received little or no actual returns and many found there was no farming activity on the ground. The scheme collapsed, with the company defaulting on payment and its offices closed down.6 The striking similarity between the Goldenscape scandal and the simple homes scandal is an example of how lack of strict regulatory frameworks to protect investors in the financial market and the real estate sector can affect investors financially.

The Simple Homes Investment scandal, lured middle-class Kenyans with a “pay to rent, own a home” model, which promised home ownership without high mortgage rates. A number of

Kenyans paid money to the “investment scheme”. The Company went underground after collecting substantial deposits and investment for clients, leaving many stranded without

homes or their money.7

The firm was later found to be a scam, described by authorities as akin to a Ponzi scheme that used new investor-funds to pay off earlier obligations or enrich the perpetrators. 8

Cyton High Yields Solutions Project

The Cytonn High Yields Solutions scandal and the Cytonn Real Estate Project Notes. The scandal resulted in over 4, 000 investors facing potential losses of more than 14 billion Kenya Shillings.

The core issues were that Cytonn offered high investments of up to 18% annual, returns on

unregulated investment products that were marketed by the public as low risk. While Cytonn was a regulated entity, Cytonn Asset Managers Limited, which offered products like the Cytonn High Yield fund, the problematic CHYS and the CPN products were unregulated private offers. This means they were not subject to oversight of the Capital Markets. 9

The funds were invested in illiquid, long-term real estate projects but were financed by short-term obligations, promising easy withdrawals. When the Covid-19 pandemic hit and investors sought to redeem their funds, Cytonn cited ‘force majeure’ and liquidity challenges, rolling over investments and refusing payments. 10

A court ruling in January 2023 described the structure as ‘akin to fraud’, where investors money was channelled into various Special Purpose Vehicles (SPVs) controlled by the same promoters as the main company. This was seen as an attempt to shield assets from investors in the event of a collapse. 11

The Gakuyo Real Estate & Ekeza Sacco Fraudulent Schemes

The Gakuyo fraudulent scheme masterminded by Bishop David Kariuki Ngari (alias Gakuyo), who, between 2015 and 2018, siphoned over KSh 1.05 billion from roughly 53,000 members through the collapsed Ekeza Sacco and Gakuyo Real Estate. Investors lost their hard-earned money under the guise of lucrative real estate investments and matched savings schemes.

In spite of the criminal and civil investigations, investors have yet to recover their stolen funds.

Fraud by Goshen Acquisitions Limited

Solomon Wangwe fashioned Goshen Acquisitions as a real estate investor which sold only landed it owned. This appealed to many Kenyan who chose to trust him with their hard-earned money in the belief that it is a safe investment.

While Goshen Acquisitions facilitated a few legitimate land transactions, many buyers have reported serious complications, including purchasing land with pre-existing legal disputes or encountering title deed red flags during the conveyancing process. The company has since closed shop with investors not knowing to whom to turn for regulatory intervention.

Conclusion

As a country, I propose that we need to rethink a specific regulatory framework for real estate investment scheme with strict oversight and enforcement.

But here is the big question: Is the real estate industry ready?

This article is for informational purposes only and does not constitute legal advice. For tailored advice, please reach out to us directly at oiboo@mckayadvocates.com .