End of cash king as traders reject old Sh1,000 notes

Maina did not expect the cigarette seller at one of the smoking zones in Nairobi’s Central Business District to reject his old Sh1,000 note.

To begin with, the trader was an old acquaintance of his, and there were also more than 20 days left before the old currency ceases to be a legal tender. But the trader politely declined the hitherto popular banknote.

The same fate awaits those who intend to pay for their Visas to America using the old banknote. Unlike the rest of the economy, this currency will cease to be a legal tender within the premises of the US embassy in Nairobi much earlier: September 13, 2019, to be specific.

And this is how the US embassy sums up its explanation for the self-imposed deadline on the old Sh1,000 notes.

“This is due to the directive of the Central Bank of Kenya (CBK) that Sh1,000 notes of the old design will no longer be legal tender on October 1, 2019.” Such self-conceitedness can only come from the world’s most powerful nation; you think?

Well, Kenya’s neighbours - Uganda and Tanzania - did not even have to wait as long as the US Embassy. And immediately the CBK Governor Dr Patrick Njoroge made the announcement on June 1, the two countries, working together with CBK, declared the old Sh1,000 notes persona non grata within their jurisdictions.

“The CBK has suspended currency conversion and repatriation of all Kenyan currency to restrict illicit flows into the Republic of Kenya.

Further, the Bank of Tanzania has been advised to freeze CBK currency collection account with immediate effect,” said Bank of Tanzania’s Directorate of Financial Sector Supervision in the notice to banks on June 10.

Of course, the old Sh1,000 banknote is still a legal tender, but the market is rejecting it earlier than anticipated.

Once a much sought after currency, the elephant-bearing banknote is fast turning into a skunk whose putrid odour nobody wants to walk around with. And this is sweet music to the ears of the CBK Governor. His campaign to get Kenyans to exchange, rather than transact with, the old Sh1,000 note has become a permanent feature on the front pages of every local newspaper.

Dr Njoroge’s wish is for every Kenyan to follow the example of the cigarette seller and US Embassy and stop accepting the old notes, just as matatu touts wouldn’t tolerate being paid fare in Sh1 coins. “Don’t forget to give your children pocket money and or school fees only in the new Sh1,000 notes. You don’t want them inconvenienced on closing day, after the deadline,” said CBK in a tweet.

The apex bank also encouraged employers who pay their workers in cash to do so in the new currency.

He wants people to walk up to a Kenyan bank and swap the old notes with new ones. But as the Swahili would put it, the bank is like a mousetrap, it will net both culprit and the innocent.

With close to Sh25 billion worth of currency that was outside of the banking system finding its way into the banks a month after the announcement, critics fear that this might have included dirty money. In June, money in bank accounts increased by Sh50 billion as of this cash combined with the payment of pending bills to shore up liquidity.

The increased liquidity has seen the weakening of the Shilling from about 101 to a peak of 104 against the dollar, as more of the local unit chased fewer greenbacks.

Dr Njoroge does not, however, think that demonetisation will impact inflation, with prices increasing as more Kenyan Shillings chase few goods.

So far, available data has vindicated the apex bank boss as the key indicator of demand-pull inflation - more money chasing fewer goods - non-food, non-fuel inflation, has not picked.

Shilling value

But the weakening of the Shilling means expensive imports such as petroleum, machinery, fertiliser, pesticides, and clothes. This in effect means increased cost of living. The CBK boss insists they are watching every transaction, putting a red marker on suspect deals and forwarding names to investigators.

“We have shared the information we have gathered so far with the Directorate of Criminal Investigations (DCI) for further investigations. Our role as the regulator is to work with the investigating agencies to ensure that we achieve our goal,” Dr Njoroge said during a TV interview.

There are serious loopholes, of course. For example, some women in Maringo Estate, a Nairobi suburb told Financial Standard of a nondescript company that had its operations at Nacico Plaza along Ladhies Road which was giving women groups loans of between Sh400,000 and Sh1 million in the damned notes.

Some Boda Boda operators in Githurai, Kiambu County, have also received loans of Sh60,000 in the old currency. The lenders have given terse instructions that they are paid back the money in new currency after the dust on demonetisation, withdrawal, of Sh1,000 note has settled down.

No wonder CBK Governor has in recent times been hard on unregulated microfinance institutions and mobile lenders, describing them as conduits for money laundering.

CBK has also warned members of the public against dealing with unlicensed and unregulated online foreign exchange dealers, fearing that they could be channels of cleaning dirty money.

A week after Njoroge’s announcement in June, British High Commissioner to Kenya Nic Hailey revealed that investigators from his country are working with their Kenyan counterparts to thwart any attempts to change the old notes, sleazily acquired through corruption or drug trafficking, into Sterling pounds.

“I have spoken with the Treasury. We are keen on those who want to change Kenyan notes into Sterling,” said Mr Hailey.

Kenya’s capital markets regulator - the Capital Markets Authority (CMA), estimates that about 50,000 people, including brokers, dealers and money managers, are in the online forex business and are mainly using offshore platforms that are not overseen by Kenyan regulators to offer the service.

But it is churches, restaurants, bars, night clubs and other entertainment cash-rich businesses that analysts have noted need to be closely monitored due to their frequent banking patterns. The financial regulator, however, insists they have a profile of their transactions so any significant change will be detected.

Dr Njoroge does not think real estate is still the go-to-place for persons itching to hide their ill-gotten money. According to CBK insiders, sleuths have been all over this sector, a situation that has spooked money launderers.

The value of buildings approved by the Nairobi City County has been declining in the past three years. While this has been linked to such macro-economic factors as the capping of interest rates and the general slow-down of the economy, the stringent money-laundering rules might also have had an impact, according to Scholastica Odhiambo, an Economics lecturer from Maseno University.

“The new currency roll-out, stringent money trail on expenditure by individuals suspected to be hoarding corruption money might be causing the chill out on the real estate,” said Dr Odhiambo.

This ‘chill-out’ on the real estate did not begin with the 2019 Madaraka Day pronouncement from the CBK Governor, the fight against money laundering only peaked on this day.

Two months before Dr Njoroge dropped the demonetisation bombshell, Members of Parliament and a ‘prominent’ businessman suddenly started throwing barbs at the CBK boss for instituting what they said were harsh Know-Your-Customer (KYC) regulations.

These regulations, which took effect in 2016, require anyone withdrawing or depositing more than Sh1 million to fill in a special form stating where the money is from or going to, who they are paying or receiving the money from and for what purpose.

They are supposed to guard against money-laundering and terrorism financing schemes. However, those opposed to the rules said they were crippling the economy as money was not leaving and getting into banks in gushes as it used to before. Indeed, cash outside of banks registered its slowest growth in a decade in 2018 after CBK instituted these stringent rules. A lot of this cash might have gone into mobile money wallets instead, but that was okay to CBK as money in M-Pesa is money in the banks.

Cash kings, especially politicians, might have been among the first to be hit with these regulations.

Unlike in the previous elections when the campaign period would be awash with cash, official data paints a different picture in the 2017 polls, the first after the country started implementing the stringent rules on money laundering and terrorism financing.

Currency outside of banks grew at slower - let us just say normal - the pace of 7.2 per cent as of December 2017.

This represented an addition of Sh15.2 billion to the stock of currency outside the banking system, but it was not comparable to the previous election years when currency outside of banks would spike by more than a third in the campaign season.

In the previous polls, including the 2010 referendum, about Sh20.8 billion worth of notes and coins would be pumped into the economy as politicians and financiers went on a spending spree.

But Dr Njoroge came and spoilt the cash-party with the stringent Know-Your-Customer rules. So much that by the end of January 2019, currency outside of banks had slowed to a snail-pace of 1.6 per cent.

This might have partly explained the slowdown in real estate activities as well as the outbursts from a section of the political class in March 2019. Some of the MPs even threatened to veto the renewal of Dr Njoroge’s second term.

“When I received my mortgage, Barclays Bank asked me to explain where the money came from. When you sell your three camels, you are asked where the money is coming from,” said Majority Leader Aden Duale.

Controversial city businessman Paul Kobia was more blatant: “If you deposit one million (Shillings) they ask: ‘Where are you taking money?’ Nobody is taking money to the banks. Now we are putting our money under mattresses.”

The decision by CBK to expunge the old Sh1,000 banknote from circulation could be the last stroke in a series of anti-money laundering measures by President Kenyatta’s administration as part of the war on graft. Of course, there have been glaring misses in this campaign including instances when a suspect reportedly strutted out of banking hall with sacks full of cash.

But generally, CBK believes such a feat is becoming harder to execute.

Satisfied that fewer and fewer dirty cash was leaving or getting into the banking system, the State has now shifted its attention on the over Sh200 billion that is out there. It believes that a good chunk of the cash is dirty.

The result has been an aggressive crackdown on what the Government believes is money laundering cells.

That is why the multi-agency task force comprising of the Ethics and Anti-Corruption Commission, Treasury, KRA, the Assets Recovery Agency, Kenya Bureau of Standards, the Anti-Counterfeit Authority and the DCI, was born in early 2018.

CBK insiders say the recent war against tax evasion is part of the wider anti-money laundering campaign. Betting, an area the State believes is a hotbed of illicit financial flows has been put on the spotlight.

Dr Odhiambo says besides real estate, vehicle assets the other easiest way to clean money was through betting firms. “Currently with disclosure law, that is to deposit a large amount of money you have to declare the source of money, the trail is obvious,” she explained.

Recently, several betting firms lost their licenses with Interior Cabinet Secretary Fred Matiang’i insisting that they pay up their tax dues before they can be allowed back into operation.

Prominent individuals have also found themselves at cross-paths with the with DCI and KRA officials as the net meant to catch tax cheats is cast wider.

There have also been futuristic components of the anti-money laundering campaigns including the constitution of a task force on anti-money laundering and the proposal to amend sections 48 of the Proceeds of Crime and Anti-Money Laundering Act to compel lawyers to report to authorities the cash they handle on behalf of their clients.

The task force is expected to come up with recommendations that would ensure every nook and cranny that could be used to clean dirty cash is sealed tight.

The proposal to designate lawyers, notaries, and other independent legal professions as reporting entities just as banks, forex bureaus and M-Pesa agents, is informed by precedence. According to State officials, law firms have previously been implicated in various scandals and there are cases before the court where they have been used as conduits to hide stolen public funds. Currently, lawyers are protected from disclosing details of transactions or even money held on behalf of their clients. According to Nicholas Abidha, an Advocate of the High Court, the proposal unconstitutional and an affront on the foundation of the legal profession.

“We have Section 134 (1)(a)(b) of the Evidence Act and Section 18 of the Proceeds and Anti Money Laundering Act which qualifies the Advocate Client privilege in instances of aiding crimes,” said Abidha.

Perhaps, the biggest loophole to the anti-money laundering campaign is that it is coming to an end, says XN Iraki, an associate professor at the University of Nairobi.

“More focus should be on prevention,” explains Iraki, noting that the campaign might also net innocent people.

“This will scare away investors and depress the economy. A good example is billions being demanded by the KRA. Where was KRA when the demanded tax was not being paid?”

Dr Odhiambo believes enforcement officers are acting in utmost good faith, noting that lack of accountability may bungle the campaign. “Another issue is that the recovered money may not reach CBK but the accounts of individuals of higher interests,” she says.

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