CBK moves to ban shell banks in fresh money laundering crackdown

Central Bank of Kenya[File, Standard]

The Central Bank of Kenya (CBK) has proposed a sweeping ban on shell banks, closing a regulatory loophole that officials say has allowed paper-only entities to facilitate money laundering and terrorism financing in the country.

The newly published draft guidelines released last week by the regulator for public comment and reviewed by Financial Standard decree that, going forward, the "CBK shall not licence shell banks."

The prohibition marks one of the most significant bans on such entities by a major African regulator.

A shell bank is defined in the CBK as "a company which exists only on paper with no physical presence and does not apparently trade or operate."

The ban would block them from obtaining banking licences and prohibit existing institutions from dealing with them.

The CBK's move comes as Kenya remains on the Financial Action Task Force (FATF) grey list, a designation imposed in February 2024 over deficiencies in combating illicit financial flows.

Kenya's financial system has been repeatedly flagged for weakness in regulating opaque corporate structures.

Kenya's anti-money laundering law targets real estate transactions, shell companies, and virtual asset platforms, which have increasingly become conduits for illicit financial flows.

But Kenya also has a significant presence of foreign banking representative offices.

According to CBK data, nine authorised representative offices operate in Nairobi, established by lenders from the Netherlands, France, China, Pakistan, Egypt, India, South Africa, and Mauritius.

These offices facilitated transactions valued at Sh413.3 billion ($3.2 billion) in 2023, a 13 per cent increase from the previous year, underscoring their growing influence.

While representative offices are barred from deposit-taking, their liaison and research roles can inadvertently serve as conduits for opaque cross-border transactions, regulators reckon, a gap the new guidelines aim to close.

For correspondent banking relationships, the guidelines now mandate that existing institutions "shall not establish or continue correspondent banking relationships with shell banks" and must "implement reasonable measures to ensure that respondent institutions do not permit their accounts to be used by shell banks."

Any suspicion of shell bank exposure must be "immediately escalated to the MLRO (Money Laundering Reporting Officer) and senior management for review and potential relationship termination."

Foreign banks seeking to operate in Kenya must also provide "confirmation from the home country supervisor that the promoters of the foreign incorporated bank do not operate a shell bank."

The FATF, which sets global anti-money laundering standards, has long recommended that countries prohibit financial institutions from entering into or continuing correspondent banking relationships with shell banks.

The CBK's draft guidelines extend well beyond shell banks.

Financial institutions "shall not open an account or conduct ongoing business with a customer who insists on anonymity or who gives an obviously fictitious name," the draft states.

It further clarifies that "confidential numbered accounts should not be treated as anonymous accounts" and remain subject to the same customer due diligence procedures as all other accounts.

The guidelines also impose enhanced due diligence on politically exposed persons, requiring screening against "commercially available PEP databases, domestic and international lists, adverse media sources, and government registers" at onboarding and on an ongoing basis.

The shell bank ban is embedded in a broader overhaul of Kenya's bank licensing framework.

The CBK lifted a decade-long moratorium on new bank licenses in July 2025, ending a freeze imposed in November 2015 following the collapses of Chase Bank, Imperial Bank, and Dubai Bank.

New applicants face significantly higher capital requirements. Banks must hold a minimum core capital of Sh5 billion ($39 million) by December 2026, rising to Sh7 billion by 2027, Sh8 billion by 2028, and Sh10 billion by 2029.

The licensing process involves multiple stages.

Applicants must first seek approval of the proposed institution's name from the CBK, then incorporate the company and submit a formal application with fit-and-proper forms for all proposed directors, the CEO, and significant shareholders.

The CBK will issue an approval-in-principle within 90 days of receiving a complete application, after which applicants may establish operating facilities and recruit staff but may not commence operations.

An on-site inspection of premises, systems, and policy manuals follows, covering areas including capital planning, liquidity management, AML/CFT, cybersecurity, and consumer protection. Only after all conditions are met, including verification of the source of funds and ownership structure, will the CBK issue a final license.

The guidelines also introduce a formal framework for "hive-down" transactions and group restructurings, requiring pre-application consultations with the CBK and comprehensive business transfer plans.

Stakeholders have until November 7, 2026, to submit comments on the draft guidelines. The final rules are expected to take effect on January 1, 2027.

Kenya joins a growing list of jurisdictions that have moved to prohibit shell banks.

The United States, through Section 313 of the US PATRIOT Act, prohibits covered financial institutions from maintaining correspondent accounts for foreign shell banks.

FinCEN regulations require financial institutions to "take reasonable steps to ensure that any correspondent account that it establishes... is not used by the foreign bank to indirectly provide banking services to a foreign shell bank".

In the United Arab Emirates, the local central bank's rulebook mandates that financial institutions refrain "from dealing with shell banks in any manner whatsoever, including opening bank accounts therefor or accepting funds or deposits therefrom". The UAE's Article 15 also bars anonymous accounts and accounts held under fictitious names.

Nigeria's Central Bank called for the abolition of shell banks as early as 2018, stating they "serve as institutions for money laundering".

The Central Bank of Nigeria argued that shell banks, "apart from being used for money laundering, distort the banking system and might pose a problem" for financial stability.

Kazakhstan's Senate adopted legislation in 2025 introducing "a direct ban on the establishment of 'front' (shell) banks".

Such banks, its laws said, "are fictitious or front banks that exist formally but do not engage in actual banking activities" and are "often used to conceal illegal transactions, launder money, or finance prohibited activities, such as the proliferation of weapons of mass destruction".