Wash wash: Kenya's dirty cash haven tag sparks jitters across the business world

FATF placed Kenya in its grey list citing inadequate measures in fighting money laundering. [iStockphoto]

The government is racing against time to avoid the country’s permanent ban by the global dirty money watchdog.

This is after lax anti-money laundering controls earned Kenya a dirty money haven tag following a poor scorecard last week.

The Paris-headquartered Financial Action Task Force (FATF) placed Nairobi in its infamous grey list, citing inadequate measures by the government in fighting money laundering and terrorist financing.

The damaging assessment came soon after the International Monetary Fund (IMF) warned recently Kenya risks a permanent ban by the global watchdog if it does not put its house in order.

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.

This may, in turn, hurt President William Ruto’s plan to attract foreign capital into the country and grow jobs and incomes in an expanded economy.

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.

Kenya was last week placed on the grey list or under jurisdictions “under increased monitoring.” 

These are countries that are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. 

“When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring,” said FATF.

“This list is often externally referred to as the 'grey list'.” The list puts Kenya’s key regulators and agencies such as the Financial Reporting Centre (FRC) and the Central Bank of Kenya (CBK) in the spotlight for their role in addressing the deficiencies by the global watchdog.

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.

This is because firms will face increased due diligence. 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 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.

Despite making progress, Kenya was fingered for lapses in some conditions. Consequently, to avoid a permanent ban, Kenya will be required to beef up and update its national Anti-Money Laundering and Counter Financing of Terrorism strategies.

It is also expected to improve “risk-based AML/CFT (anti-money laundering and combating the financing of terrorism) supervision of FIs (financial institutions) and DNFBPs (Designated Non-Financial Businesses and Professions).

At the same time, the agency wants Kenya to monitor and supervise crypto deals.

This will see the government adopt a legal framework for the licensing and supervision of virtual asset service providers (VASPs).

Kenya’s Financial Reporting Centre, which is headed by Saitoti Maika, has also come under scrutiny after the agency called for tighter scrutiny of suspicious transactions among banks and individuals.

But Maika said the country is making some gains in levelling up its legislative capacity to meet the international best practices. 

“We currently have a working group that is developing legislation on the reporting of crypto-assets because Kenya is recognised as second globally in the trade of digital currency and this has been identified as one of the emerging risk areas,” he said. 

“Through the work we have done with the Law Society of Kenya (LSK) we anticipate to have law firms join the list of reporting entities in the coming weeks which has been high on the agenda for some time now.”  

He said Savings and co-operative societies, SACCOs are also emerging as one hotspot in the tracking and tracing of illicit financial flows in the country.

DNFBP refers to specific sectors and professions that, while not financial institutions, are recognised as being susceptible to being exploited for money laundering and terrorist financing purposes.

DNFBPs are not primarily engaged in financial activities but deal with money and assets that could potentially be used to launder money or finance terrorism.

They include Casinos or entities that engage in gaming and gambling activities, which involve significant cash transactions.

The global watchdog also wants Kenya to designate authority for the regulation of trusts and collection of accurate and up-to-date beneficial ownership information and implementing remedial actions for breaches of compliance with transparency requirements for legal persons and arrangements.

It also wants Kenya to improve the use and quality of financial intelligence products and increase Money Laundering and Terrorism Financing investigations and prosecutions in line with risks.

At the same time, it wants Kenya to revise the framework for NPO (Non-Profit Organisations) regulation and oversight. This will see Non-Governmental Organisations soon come under the radar of the government for their conduct.

Last week the National Treasury said it was committed to addressing the gaps identified by the global watchdog despite the harsh assessment.

“While there are still strategic deficiencies that require urgent attention, Kenya remains fully committed to implementing the FATF Action Plan comprehensively and expeditiously,” said Treasury Cabinet Secretary Prof Njuguna Ndung'u.