State tightens noose on money laundering as polls draw near

Regulations introduce new reporting guidelines for financial institutions. [David Gichuru, Standard]

As the General Election draws near and political campaigns heat up, financial experts want State authorities to be on the lookout for a surge in money laundering activities. 

This comes on the back of a renewed push by the government to track and trace proceeds of crime and money laundering through new legislation. 

Last month, the National Treasury closed the window for public participation on the Common Reporting Standards Regulations, 2021 that are part of the government’s efforts to seal loopholes exploited by money launderers. 

According to the new regulations that introduce new reporting guidelines for financial institutions, banks will have to review and report suspicious activity on accounts that hold more than Sh28 million in assets. 

“A pre-existing entity account that has an aggregate account balance or value that exceeds $250,000 (Sh28.4 million) as of June 30, 2022, and a pre-existing entity account that does not exceed $250,000 as of  June 30, 2023, but the aggregate account balance or value of which exceeds $250,000 as of December 31, 2022, or the last day of any subsequent calendar year, must be reviewed,” say the regulations signed by Treasury. 

Financial institutions will in these cases be required to report to the Kenya Revenue Authority (KRA) the name, address, tax identification number, date and place of birth of the account holder. 

They will also be required to aggregate the balance and value in different accounts owned by an individual to determine if they warrant additional scrutiny. 

“A reporting financial institution is also required, in the case of any financial accounts that a relationship manager knows or has reason to know, are directly or indirectly owned by the same person, to aggregate all such accounts,” the regulations say.

The regulations come on the back of high-profile cases where billions of taxpayers funds are suspected of having been embezzled.

Central Bank of Kenya Governor, Patrick Njoroge. October 2020. [David Gichuru, Standard]

Last week, Standard Chartered Bank in Frankfurt, Germany rejected Sh785 million wired into a Central Bank of Kenya (CBK) account by Lake Turkana Wind Power as a refund for excess pay from Kenya Power. 

The lender rejected the payment citing lack of sufficient details of the ultimate beneficiary, as well as supporting documents in compliance with the German anti-money laundering law.      

The 310-megawatt wind power project is currently under a parliamentary probe, where delays in construction and a dispute over the transmission lines cost taxpayers billions of shillings in penalties. 

Pursue tax evaders

Financial experts say the proposed legislation, which was developed by the Organisation for Economic Cooperation and Development, will assist Kenyan authorities to pursue tax evaders and money launderers. 

“Reporting financial institutions are to maintain electronic searchable data with fields as set out in the Common Reporting Standards (CRS) Regulations,” said accounting firm EY in a note to clients. 

“This data is to be maintained for the statutory five-year period.” 

According to EY, the new regulations mean more investments for financial institutions in terms of technology and capacity building, with some expected to outsource the reporting obligations to third parties. 

“Automatic exchange of tax information will enhance tax transparency while at the same time reducing cross-border tax evasion,” said EY.

“Therefore, reportable persons need to ensure accuracy of their tax returns in their tax jurisdictions and disclose their residence status to the financial institutions.”

The CRS regulation comes in the wake of the Proceeds of Crime and Anti-Money Laundering (Amendment) Bill, 2021 currently in Parliament that gives authorities more powers to investigate people suspected of money laundering.

The Bill proposes suspending the right to privacy under Article 31 of the Constitution for people suspected of violating the law to allow authorities to carry out electronic surveillance.

Authorities can also launch investigations on suspects and seize assets suspected to be proceeds from crime and money laundering even before cases go on trial.

KRA Commissioner-General James Mburu at Loresho, March 2021. [Collins Kweyu, Standard]

The law also seeks to have law firms and lawyers classified as reporting entities, a proposal that has drawn opposition from lawyers who claim it poses a threat to advocate-client privilege. 

Titus Kariuki, head of the Financial Crimes Unit at PricewaterhouseCoopers (PwC), says law firms play a central role in facilitating money laundering and should be classified as reporting entities. 

“Individuals engaging in money laundering use law firms to register companies and bank accounts that are then used to move the illicit funds,” he said. 

“Since lawyers enjoy advocate-client privilege, banks cannot question the source of the funds or their intended use.” 

Mr Kariuki said Tanzania and Uganda have already enacted laws requiring law firms to act as reporting agencies and the provision is in line with international best practices. 

John Kamau, an associate director and accounting forensics expert at PwC, says Kenya’s financial regulations are catching up to international practice which is timely given the upcoming polls.

“Most of the campaign spend is done in cash and this means most people will need to withdraw large sums of money,” he said.

“Since banks have to report these large transactions, there will be a lot of good data coming in and the Financial Reporting Centre can invest in analysing this data for tracking and tracing.”  

Kamau says following the money, including funds being repatriated from offshore jurisdictions for campaigning, can help authorities unearth fishy transactions that might have gone under the radar in the past and identify politically exposed persons and their associates.