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Money laundering: The tag real estate can’t shake off

By Austine Okande
Updated Thursday, May 21st 2015 at 12:36 GMT +3
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“Recently, a middle-aged man visited my office with €400,000 (Sh43.9 million) all in cash wanting to buy my clients’ property in Kilimani. When i insisted that the payment be made through a bank; the man and his two accomplices stormed out of my office never to come back,” a high-end property agent who only wished to be referred to as James tells Home & Away.

While laundering illicit cash in secret offshore accounts in Switzerland or the Caribbean islands is increasingly becoming unpopular due to stringent laws, corrupt individuals are opting for real estate to hide their loot.

Recent statistics calculated for Thomson Reuters Foundation by Global Financial Integrity, reveals the following:  “The amount of illicit money entering Kenya from faulty trade invoicing, crime, corruption and shady business activities has increased more than five-fold in a decade to equal roughly eight per cent of Kenya’s economy and in recent years the pace of dirty money inflows has been accelerating.”

The report indicated that $16.2 billion (Sh1.55 trillion) flowed into Kenya through trade miss-pricing and money that was not officially counted in its balance of payments reports.

 Regulation gap

Kenneth Okwaroh, director, Policy and Research at Acepis argues that money laundering in the property market occurs mostly in cash-based economies where there is no regulated price market and no specific property acquisition requirements.

Njora Waweru an advocate says: “Making payment through banks means a paper trail and this is what individuals with questionable sources of income strive to avoid.”

“It is evident that the official value of the property market by the Central Bank of Kenya is not a true reflection of this market which is widely a cash buy,” says Waweru.

“Flow of illicit money in real estate has become a relatively safe and prestigious investment. While in other economies individuals prefer to invest their cash in jewellery (gold), in Kenya the property market is much more lucrative,” he adds.

In a past speech at an Anti-Money Laundering National Stakeholders Forum Prof Njuguna Ndung’u, then the governor of the Central Bank of Kenya said: “Kenya like other developing economies is quite vulnerable to money laundering and terrorism financing due to a number of displacement factors; key amongst them being a high volume of cash based transactions, lack of an adequate legal framework and the existence of alternative remittance avenues.”

“Even shady money needs a safe place to reside, and Kenya’s sophisticated financial services, business and legal sectors and relative political stability make it a safe house in a bad neighbourhood,” an article by Thomson Reuters Foundation reads.

Experts attribute the skyrocketing property prices to illicit cash flow.

The World Bank, UN and Interpol 2013 Report that investigated how the $413 million (Sh35.1 billion) that Somali pirates made between 2005 and 2012 from hijacking ships was spent, had a different take.

“The main drivers of the property boom are credit by the banking sector, flows of remittances from the diaspora, and general supply and demand of housing units,” said the report.

 Deliberate move?

With Nairobi being the regional banking centre, Waweru claims the move not to enforce stringent rules to control inflow of illicit cash into the economy is deliberate.

Author Louise Shelley in a chapter titled Money Laundering in Real Estate in a recently released book Convergence: Illicit Networks and National Security in the Age of Globalisation explains that the vice has failed to command the attention it deserves as a criminal activity because this form of money laundering can have significant benefits for the recipient country by contributing to construction, adding jobs, and bringing investment into the economy.

“Global financial policymakers have flagged already Kenya for laxity on the money laundering front and it has shaky legal and regulatory foundations,” wrote Shelley.

The article further read: “Financial regulators are sufficiently concerned about illicit flows in the region, that the East African Association of Anti-Corruption Authorities has asked the World Bank Institute to study how money from crime and corruption washes through Kenya.”

Players in the property market painted a picture of a thriving underworld of illicit cash orchestrated by witty finance and tax experts, property agents, financial institutions and lawyers. They point out that several longstanding factors explain why Kenya is an alluring hub for illicit cash.

Beryl Asiago, doctoral researcher at the University of Eastern Finland observes that weak institutions and to an extent poor implementation of policies and regulation, pose as a major challenge in curbing illicit cash in the property market.

“Corrupt leaders, organised crime groups and terrorist organisations channel large quantities of illicitly obtained funds into real estate daily as a way to disguise the criminal origin of their proceeds and to integrate them into the formal economy,” Shelley writes. Experts observe that reporting institutions such as estate agents, small accounting firms and casinos lack clear guidance on how to comply with the Proceeds of Crime and Anti-Money Laundering Act.

Shelley adds: “These illicit funds are invested in residential and commercial real estate as well as farmlands and tourist properties, often allowing the criminals and corrupt politicians to enjoy the profits of their criminal activities.”

The consequence, she writes, is an economic bubble that leads to ordinary citizens being priced out of distorted markets.

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