Tighten leash on money launderers

After more than 15 years, the Central Bank of Kenya last week put Charterhouse Bank under liquidation. No other bank in Kenya has been under statutory management for so long. Neither is there another that CBK closed for money laundering. But what is the incidence of money laundering and how much risk does the vice pose to the integrity of the financial system?

The evidence may be anecdotal but it appears that the biggest type of money laundering taking place within our financial system is the laundering of proceeds of corruption. That is what we witnessed in the National Youth Service (NYS) scandal in the way agents of corrupt elites were receiving and withdrawing huge sums of illicit cash stuffed in gunny bags.

Today, you hear sensational tales of how some corrupt prominent public officials have been concealing sources of illicit flows by using opaque lawyer-client accounts to remit loan repayment to banks.

Money laundering cannot only create huge liquidity problems for a bank but even precipitate a bank run. 

As we saw with the NYS transactions, huge sums of laundered money may arrive at a financial institution but then disappear in a matter of hours. These sudden withdrawals of huge amounts of laundered money can exert untold pressures on liquidity, especially for small banks.

In the case of Imperial and Dubai banks, we learnt that illicit flows is what sustains the operations of some of these small banks. The trend was that the banks are under the capture of a cabal of elite serial borrowers who hold billions in credit facilities across several of them where they have pledged the same securities.

Given priority

The list of serial defaulters in Imperial, Fidelity and Dubai banks is the same as that of the major borrowers in Charterhouse.

Charterhouse was an integral cog in a veritable nexus of institutions that were part of an expansive money laundering machine whose most prominent players included Nakumatt Supermarkets and the infamous Triton Oil Company.

We have seen how money launderers target businesses that move large cash amounts — expansive supermarkets, the petroleum business and, lately, big energy projects and high-end property firms.

In following the exploits of the money laundering network to which Charterhouse belonged, I find the operations of Triton to be most revealing. In the majority of cases, Triton was also always the one winning the the Ministry of Energy-coordinated OTS tender — meaning that Yagnesh Devani was importing on behalf of all oil marketing companies.

He would be given priority over other oil marketers in the allocation of ullage and space in both government-owned oil tanks in Kipevu and the Kenya Pipeline Company system. It was a perfect environment for money laundering and flow of illicit transactions.

Devani crafted a scheme that allowed him to draw oil belonging to banks and international traders from within the KPC system without anyone’s knowledge. And by the time the whistle was blown on his activities, he had siphoned off 126 million litres of oil products worth Sh7.6 billion from the KPC system behind the back of the bankers.

Proceeds of corruption

Where did Devani take the money? 

Like in the case of Nakumatt, money laundering networks ensure they are asset-light, so that when they are busted there will be little money or assets to recover. Suppliers, banks and pension funds lost billions of shillings in the Nakumatt scandal. In the Trition case, everything — save from a property which Devani had been putting up in Westlands that was eventually sold by KCB Bank — disappeared into thin air.

With Charterhouse gone, CBK and law enforcement agencies must tighten and implement the rules and regulations on preventing money laundering.

Several years ago, in the wake of the Garissa University College terrorist attack, the government moved to suspend the licences of 13 Somali cash transfer companies and announced that it planned to freeze the accounts of a dozen individuals, NGOs and travel agencies suspected to be financing terrorist activities.

Last year, the CBK governor, Dr Patrick Njoroge unprecedentedly slapped fines on a number of banks for failure to detect and prevent proceeds of money laundering from the NYS scandal. What was even more interesting in that episode was the fact that all of our top-rated banks were caught in the dragnet.

The law requires commercial banks to report all transactions above Sh1 million to the Financial Reporting Centre (FRC) on a daily basis. However, FRC does not have a database robust enough to process the information and flag the suspicious on a real-time basis.

Clearly, laundering of the proceeds of corruption poses a big risk to the integrity of our financial system and must be fought.

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