Kenya risks ban from global financial system for laxity in dirty cash reporting

Kenya risks being banished from the global financial system by a global money-laundering watchdog.

The country is on the radar of the Financial Action Task Force (FATF) for failing to prevent money laundering and terrorist financing, in a fresh likely blow to the struggling economy.

This is after a new report said Kenyan authorities, including the Directorate of Criminal Investigation ((DCI), banking regulator the Central Bank of Kenya (CBK) the State anti-illicit cash watchdog, the Financial Reporting Centre (FRC), the Assets Recovery Agency (ARA) and the Judiciary are not doing enough to prevent the two vices.

"Kenya has not investigated, or prosecuted, legal or natural persons for terrorist financing offences in line with its risk profile," says the newly published report that is backed by FATF, which was established by the G7 group of rich nations in 1989 to protect the global financial system.

"The lack of convictions resulting from a large number of parallel TF (terrorist financing) investigations suggests that improvements are required in the ability to investigate and prosecute TF."

The report's findings took months to compile and involved a lengthy visit to the country by officials of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) of which Kenya is a member and whose role is to combat money laundering by implementing the FATF Recommendations.

The report says terrorist financing is not integrated as a component of the wide-ranging efforts to tackle terrorist risks to the country.

Kenya has suffered terrorist attacks in the past in which many Kenyans and foreigners have been killed. The Somalia-based terrorist group Al-Shabab has publicly declared intent to conduct attacks in retaliation for Kenya's counter-terrorism operations in Somalia, which are part of the African Union Mission (Amisom).

Al-Shabaab remains an active threat to Kenya, according to different official reports. In January 2020, the terrorist group attacked a US military base in Lamu and killed one American soldier and two US contractors.

Earlier in January 2019, an attack claimed by Al-Shabaab on the DusitD2 Hotel and business complex in Nairobi killed at least 21 people.

In September 2013, Al-Shabab gunmen entered the Westgate Shopping Mall in the capital, killing 67 people during an 80-hour siege.

Two years later, the militant group carried out its deadliest-ever assault in Kenya yet, shooting dead nearly 150 people at Garissa University.

Despite this dark history of terrorism in the country, the financial watchdog says Kenya has not demonstrated a broader range of investigations into different terrorist groups operating in the country or neighbouring economies, and State agencies do not act in a coordinated manner.

"Whilst all Terrorist Financing convictions are subject to an expectation of imprisonment, Kenya has failed to secure a conviction at this time," it says.

"Kenya has not demonstrated its sustained ability to use available measures to disrupt terrorist financing, such as targeted financial sanctions, asset freezing, seizure, and confiscation, or the removal of legitimate benefits or using orders to restrict activity and movement of funds."

It also says Kenyan authorities are turning a blind eye to non-profit organisations (NPOs) or non-governmental organisations (NGOs), which could be used as conduits for facilitating terrorist financing.

It says CBK has applied a range of remedial actions and sanctions against banks for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) breaches, but the sanctions are "not always proportionate or dissuasive."

It also says CBK's inspections are based on risks only, to a limited extent. "Kenya has a poor understanding of the terrosrim financing risks associated with NPOs and does not apply a targeted risk-based approach," says the report.

"NPOs are supervised by the Financial Reporting Centre and regulated by the NGO Board, both of whom have not been carrying out their respective responsibilities. The NGO Board states they are understaffed. The competent authorities do not have coordinated engagement with the sector or conduct extensive outreach, or issue useful guidance."

The report alleges that Kenyan investigative agencies, including the DCI do not establish proper records on the financing of terrorism or money laundering activities from the offences relating to terrorist cases.

Accordingly, the data presented for analysis focused on criminal investigations and prosecution of terrorist offences rather than TF.

NPOs or NGOs in Kenya are registered under different laws, while some are created as informal associations (registered under the Department of Gender and Social Services).

This non-unified and uncoordinated registration regime negatively impacts the ability of the NGOs Coordination Board to effectively monitor, supervise and perform other regulatory obligations with reporting requirements under POCAMLA (Proceeds of Crime and Anti-Money Laundering) law.

"This enhances the TF risk factor for the activities conducted by the NPOs in the country." "There are no strategic CFT (Combating the Financing of Terrorism) policies or strategies to counter the threat," says the report.

Financial Standard could not immediately obtain responses from the cited agencies on the report findings.

FATF is an inter-governmental body established in 1989 to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system.

Being on its infamous list can severely restrict a country's international borrowing capabilities, including raising money on international bond markets and even development partners.

This would jeopardise the new administration's plan to finance its huge budget deficit from international partners such as the World Bank and the International Monetary Fund (IMF).

Inclusion in a "grey" watchlist by the Paris-based agency, could risk reputational damage to Kenya, which is East Africa's largest economy and business hub, in turn, hurting foreign investment.

Being on the list can also end banking links to the outside world, causing real financial pain to the economy, which is already under strain.

Countries deemed non-compliant with FATF standards are "grey-listed" or blacklisted, a tag currently held just by North Korea and Iran.

The FATF-backed report says Kenya is exposed to money laundering threats from proceeds of crime emanating from within and outside the country through its financial system, legal sector, real estate sector and cross-border trade.

"In view of its geographical position and economic development as a regional hub, the country is also a transit route for drug and illegal wildlife trafficking. Based on the NRA (National Risk Assessment) report and the risk profile of the country, Kenya faces TF risk arising from the neighbouring countries with active terrorist groups," says the report.

"The vulnerabilities associated with Hawala activities (traditional cash transfer methods), cross border currency movements, weak NPO risk-based regulation and inadequate analysis of cross-border remittances heighten the terrorist financing risks."

Despite recent progress, the report casts doubts about Nairobi's ability to combat the financing of terrorism.

"Kenya has made strides in strengthening its Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) system. It has registered good results in the confiscation of proceeds of crime, access and use of financial intelligence, designation of persons or entities suspected to be involved in terrorism," says the report.

"However, fundamental improvements are needed in relation to understanding of TF risks, risk-based supervision and implementation of preventive measures (especially for Designated Non-Financial Businesses and Professions (DNFBPs), money laundering and terrorist financing investigations and prosecution..." DNFBPs are defined by FATF as real estate agents, dealers in precious metals or precious stones, dealers in any saleable item of a price equal to or greater than $15,000 (Sh1.8 million) or lawyers, notaries and other independent legal professionals and accountants.

The watchdog hails the establishment by Kenya of the Asset Recovery Agency and the introduction of beneficial ownership requirements, the criminalisation of terrorist financing as well as extending the scope of suspicious transaction report requirements to the latter vice.

It, however, warns the scope of the provision is inadequate, adding that there are "outstanding strategic gaps in its technical compliance and effectiveness which need to be addressed."

For instance, it notes the obligations cover financial institutions only and apply to a terrorist act only.

As such, it says, there is a need for introducing requirements for money or value transfer services operators such as M-Pesa and Airtel Money and implementation of cross-border currency requirements.

"There are still moderate and major shortcomings in relation to enhanced measures for correspondent banking relationships, new technologies, powers of supervisors, due diligence for DNFBPs, targeted financial sanctions related to Terrorist Financing and requirements in relation to non-profit organisations at terrorist financing risk," says the report.

Its adverse findings risk paving way for Kenya to either be placed on an infamous grey list for its failings in fighting money laundering and terrorist financing, if it does not urgently address the cited failings.

The agency's regular reports and assessments usually group countries from the United States to China based on their responses to tackle financial crime.

Being on the list keeps a country under close monitoring, potentially unnerving its foreign investors and complicating its overseas banking relationships.

The assessments usually highlight a series of failings or successes, including lack of or adequate control of those who handle large sums of money.

Broadly, the result of being added to the grey list is that it will increase the cost of doing business for local companies with foreign trading partners.

For instance, a Kenyan multinational doing business in European or American markets would have to provide detailed information on its activities to banks there and its procedures to mitigate possible money laundering and terrorist financing.

The specific implications of this are that global correspondent banks and other intermediary financial institutions involved in transactions with Kenyan entities are likely to demand a higher level of due diligence.

The assessment is crucial at a time Kenya is clamouring to ease decade-old rules for transacting in large cash, risking the wrath of the global dirty money watchdog.

President William Ruto has said that he wants CBK to relax the rules for reporting transactions beyond Sh1 million. The rules fall under the Proceeds Of Crime And Anti-Money Laundering Act (the POCAMLA), which is the key enactment supporting the AML legal framework in Kenya.

CBK has been hesitant to implement a similar order given by retired President Uhuru Kenyatta, citing money laundering concerns and a breach of international obligations.

CBK Governor Dr Patrick Njoroge recently reiterated that any fresh review would not lose sight of Kenya's international obligations, adding that the country is committed to meeting international standards on anti-money laundering.

But banks have quietly relaxed the requirements, a spot check by Financial Standard showed.

Dr Njoroge maintained earlier that banks should refer to a history of regular cash transactions in flagging suspicious deals so that they do not subject customers to questions on the source and use of the cash every time they visit banking halls.

Insiders say banks would benefit from the increase in the threshold for reporting, but the regulator is hesitant as it would breach some international obligations.

The regulator issued a circular in 2016 reminding banks not to relent on prudential disclosures. Business people have complained that the cash limit has hindered their ability to carry out transactions smoothly.

The law requires financial institutions to keep records of cash transactions of more than Sh1 million and report suspicious deals to the Financial Reporting Centre (FRC) - the agency operationalised in April 2012 and tasked with identifying and combating money laundering and financing of terrorism.

Businesses and individuals transacting more than Sh1 million are required to declare to their bankers why the money cannot be deposited or withdrawn through electronic means under the Kenya Electronic Payments and Settlement System and Real-Time Gross Payment System (KEPSS/RTGS).

The disclosures include the source of the cash, how it will be spent, who are direct and indirect beneficiaries as well as the full identity of the intended beneficiaries.

The global dirty money watchdog evaluates countries on 40 recommendations that should be in place to combat illicit financial flows.

Kenya recently launched its international financial centre in Nairobi after years of preparation to attract large foreign firms and boost capital flows.

The Kenyan hub is expected to model Nairobi as a financial district in line with existing financial centres in European, the Middle East and the Far East capitals such as London, Dubai and Hong Kong.

Despite Kenya's relatively developed capital markets, 75 per cent of all business financing in the economy was from the banking sector, while the balance came from the capital markets, the Treasury said earlier, adding that the situation was not ideal.