Wash-wash: Jitters as Kenya set to know its fate on money laundering controls

Kenya faces an acid test in the next two months on the status of reforms to strengthen anti-money laundering controls with the global dirty money watchdog expected to release its scorecard for the country.

The looming report backed by the Financial Action Task Force (FATF) will either place or exclude Kenya in an infamous grey list for its efforts or lack of in fighting money laundering and terrorist financing.

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 which may hurt foreign investment.

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

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

The report is supported by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) of which Kenya is a member of and whose role is to combat money laundering by implementing the FATF Recommendations.

"Kenya has been undergoing a mutual evaluation led by FATF regional partner ESAAMLG, which is in the final stages and assesses the strengths and weaknesses of Kenya's anti-money laundering (AML) and counter financing of terrorist (CFT) system," said the FATF in response to queries by Financial Standard.

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 now 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.

Analysts said this year's 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 the Central Bank of Kenya (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 which supports the AML legal framework in Kenya.

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

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

Dr Njoroge maintained 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.

This came as the FATF which is said to be watching Kenya on its latest plans refused to be drawn into the possible implications of easing rules on large cash transactions.

"The FATF cannot comment on planned legislation or legislative changes outside of the framework of a mutual evaluation or follow-up process," said the global agency in response to questions by The Standard.

A previous report welcomed Kenya's efforts but warned that lawyers and certified public secretaries were not captured as

reporting persons under the POCAMLA obligations.

President Ruto recently asked the CBK to implement the order without further delay citing ongoing hindrances to small businesses.

"In our engagements, traders also complained about the onerous burden involved in cash transactions exceeding Sh1million," he said recently, adding that many traders have reverted to storing money under their mattresses at great risk, which is clearly not the intention of the anti-money laundering regulations.

Chapter 231 of the Constitution says the CBK "shall not be under the direction or control of any person or authority in the exercise of its powers or the performance of its functions."

"While we remain fully committed to mitigating this risk, we believe that there is scope to make compliance less burdensome on genuine business transactions," he said.

"I have been assured by the Central Bank that work on how to ease this burden without compromising the security of the financial system is underway."

Retired President Kenyatta last October issued a directive to raise the limit of suspicious cash transactions commercial lenders are required to report under anti-money laundering laws to facilitate cash deals among traders.

Uhuru had ordered the immediate raise of the reporting limit for both deposits and withdrawals above the current Sh1 million, without saying what the new figure will be.

Lenders earlier said they were waiting for the CBK's nod to raise the threshold for reporting transactions beyond the Sh1 million.

The law mandates financial institutions to keep records of cash transactions of more than Sh1 million and report suspicious deals to the FRC.

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 CBK 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 smooth transactions.

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 the capital 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, 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.