Avoid mixed signals in war against money laundering, terror financing
What you need to know:
- The first stage is placement, which involves the physical disposal of the initial proceeds derived from illegal activities.
- Layering is the second stage, which encompasses separating illicit proceeds from their source by creating complex layers of financial transactions.
Last weekend I found myself drawn into a golf competition against three gentlemen whom I had not played against before. I enjoy playing with strangers as it presents an opportunity to meet and interact with new people. As usual, we introduced ourselves to each other and teed off.
One of the players, whose card I was marking, upon learning what I do and who from the discussion is a well-travelled man, asked me if I had any worries about the money laundering safeguards in the Kenyan financial system.
Money laundering and terrorism financing are serious global challenges that must be met with elaborate and comprehensive counter-efforts. The Central Bank of Kenya (CBK) Prudential Guidelines spell out three critical stages of money laundering.
The first stage is placement, which involves the physical disposal of the initial proceeds derived from illegal activities. Layering is the second stage, which encompasses separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity.
Then third, is integration, which involves provision of apparent legitimacy to criminally derived wealth.
In light of this, the role of banks – being at the centre of the financial sector – transcends the three stages of placement, layering and (re)integration.
To this end, banks play a pivotal role in the fulfilment of the preventive and prohibitory anti-money laundering/combating the financing of terrorism (AML/CFT) strategies.
Amidst these obligations, there is potential for this role to conflict with the banks’ duty to protect customer information within the confidentiality clauses of the CBK Prudential Guidelines.
Suspicious cash transactions
While the provisions in the AML/CFT regulations are robust in addressing the money laundering risks faced by banks, there are some identifiable gaps in the primary legislations that can leave banks facing litigation from customers for failure to honour their duty of secrecy and customers’ instructions.
While the country has a chance to tighten any loose ends to eliminate any areas of potential conflict with business interests, other emerging related market and policy developments must also be supportive.
Focusing on two recent market developments, it is worth assessing whether as a country we remain on the path to mitigating against money laundering and terrorism financing, or we have detoured to pursue other interests at the expense of AML/CFT obligations.
First, we take note of the strides that the country has made since the enactment of Proceeds of Crime and Anti -Money Laundering Act (Pocamla) law in 2009, which requires commercial banks to report all suspicious cash transactions and cash transactions of value above one million shillings.
However, the recent recommendation to amend this requirement begs for more answers.
In October 2021, the government recommended an upward review of the threshold of cash transaction limit, with the intention of facilitating cash transactions among small enterprises – whose 80 per cent of deals are cash-based.
The long-term effect of this move would be counterproductive. It risks exposing the country to being viewed as a porous jurisdiction on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).
The overall effect of such a view would be reduced direct foreign investment appetite, which would have detrimental effects on the same small enterprises.
War on money laundering
Second, the country recently went through its second Mutual Evaluation as required under the Financial Action Task Force (FATF) practice.
Whilst the outcome of the evaluation is yet to be published, the country is at risk of being referred to the International Cooperation Review Group (ICRG) process by the global financial network.
Concerns arise as to whether the country is well geared in its AML/CFT measures, particularly with the omission of lawyers from the list of reporting entities under the AML/CFT legal framework.
This policy gap remains inconsistent with global best practices, since it created a loophole for money laundering within the country’s financial system.
In my view, therefore, the inclusion of lawyers as reporting entities under the Proceeds of Crime and Anti-Money Laundering (Amendment) Act 2021, is a welcome relief as it will promote compliance to regulations and strengthen the war on money laundering. However, there is a stay on the implementation of this law through the intervention of the court and we await the final determination of the court case.
As we were approaching the Tee Box of hole number 9 to finish the front side, I concluded my thoughts by emphasizing that, to win the war against money laundering, concerted efforts should be directed at ensuring there is a comprehensive coverage of reporting entities and the country’s AML regime is seen to be effective, given that a chain is only as strong as its weakest link.
As we do so, a multisectoral – and multi-professional embrace of the need to fight the vice is equally paramount, to ensure that each link in the chain is strong enough and well positioned to serve the overall goal.
Dr Olaka is the CEO, Kenya Bankers Association