US report warned of links between Somali hawala banks and terrorism to Kenya

MOMBASA: A report by the United States' Bureau for International Narcotics and Law Enforcement Affairs published in March 2015, had indicated that Somalia's remittance banks, or hawala which were blacklisted by Kenya after the April 2 terrorist carnage in Garissa were financing terrorism activities.

Meanwhile the report by the US Department of State warns that despite Kenya being a member of the Eastern and Southern Africa Anti-Money Laundering Group, it still has deficiencies in controlling the flow of funds adding that Kenya is also not capable of adequately criminalizing terrorist financing.

And the report alleges that the Kenyan authorities are not able to ensure a fully operational and effectively functioning financial intelligence unit in its midst.

Although many of the hawalas that send money to Somalia have branches in Kenya where a large Somalia diaspora lives the report notes that "Somalia does not have a commercial banking sector, and the Central Bank lacks the capacity to supervise or regulate the hawala" and warns that the warton nation does not belong to any of the regional and continental bodies created to combat money laundering.

"Somalia does not have laws or procedures requiring the collection of data for money transfers or suspicious transaction reports. Somalia did not distribute the UN list of terrorists or terrorist entities to financial services. Somalia lacked the funding and capacity to investigate and prosecute incidents of terrorist financing," says the report.

Even though the report does not mention specific agents which were susceptible to misuse to finance terrorist groups, it expressed concern over the growing number of hawala mostly used by ethnic Somalis in Kenya and East Africa some of which ended in Al Shabaab's coffers.

The State Bureau for International Narcotics and Law Enforcement Affairs in the 233 page document titled "International Narcotics Control Strategy Report Volume II on Money Laundering and Financial Crimes, observes that Kenya's proximity to Somalia makes it an obvious and attractive location for the laundering of certain piracy-related proceeds and a financial facilitation hub for al-Shabaab.

The report further states that trade goods are used to provide counter-valuation by regional hawala networks.

Although banks, wire services, and mobile payment and banking systems are available to increasingly large numbers of Kenyans, there are also thriving, informal, and unregulated networks of hawaladars and other remittance systems that facilitate cash based, unreported transfers that the Government of Kenya cannot track, states the report.

It claimed that foreign nationals, and in particular the large ethnic Somali resident and refugee populations, were primarily using hawalas to send and receive remittances internationally.

The document list Kenya among major countries where money laundering has thrived adding that despite efforts by the Kenya Revenue Authority, department of the public prosecution and police to combat the vice, Kenya remains vulnerable to money laundering and financial fraud states the report.

"Kenya is a transit point for international drug traffickers. Trade-based money laundering is a problem in Kenya, though the Kenya Revenue Authority has made recent strides in improving internal monitoring and collection procedures," states the report.

The report notes that there is a black market for smuggled and grey market goods in Kenya, which serves as a major transit country for Uganda, Somalia, Tanzania, Rwanda, Burundi, eastern Democratic Republic of Congo, and South Sudan.

It further states that goods marked for transit to these northern corridor countries are not subject to Kenyan customs duties, but Kenyan authorities acknowledge that many such goods are often sold in Kenya.

The report observes that money laundering and terrorism financing activity in the country occur in both the formal and informal sectors, and derives from both domestic and foreign criminal activity.

Such activities include transnational organized crime, cybercrime, corruption, smuggling, and trade invoice manipulation, illicit trade in drugs and counterfeit goods, trade in illegal timber and charcoal, and wildlife trafficking.

Kenya's financial sector supports 43 licensed commercial banks, many with branches throughout East Africa; nine deposit taking microfinance institutions in Kenya, with 69 branches; 91 Licensed Forex Bureaus, with Nairobi hosting 75 bureaus and Mombasa nine; and one mortgage Finance company.

Kenya holds more than half of the total bank assets in the region, which has grown to $52 billion in 2013, up from $45.2 billion in 2012 noting that diaspora remittances was growing annually, contributing significantly to the country's foreign exchange inflows.

Remittances in 2013 totaled $1.3 billion and are already at $1.1 billion through September 2014, with North America providing between 45-50 percent of all remittances, and with Europe and the "rest of the world" each providing approximately 25 percent.

There are approximately 121,000 mobile-money agents in Kenya. Through August 2014, $1.7 billion moved through Kenya's mobile-money systems.

The report states while mobile payment and banking systems are increasingly important, the tracking and investigation of suspicious transactions remains difficult, although data on these transactions have the potential to facilitate investigations and tracking, especially compared to transactions executed in cash.

The lack of regulation/supervision of this sector, coupled with a lack of reporting from certain reporting entities, contribute to the risks posed by this sector claim the report.

The CBK's strategy to increase financial integrity through increasing financial inclusion, and its associated regulatory interventions, has led to an increase in formal sector financial inclusion from 41 percent in 2006 to 67 percent in 2013.

To demand bank account records or to seize an account, the police must present evidence linking the deposits to a criminal violation and obtain a court order. The confidentiality of this process is not well maintained, meaning that account holders are often tipped off about such investigations and so are able to move their assets or contest the orders.

"Kenya is overhauling its criminal justice system. The government, and especially the police, must allocate appropriate resources and build sufficient institutional capacity and investigative

Skill to conduct complex financial investigations independently," says the report.