How real estate put Kenya on dirty cash grey list

The 411 registered real estate agents filed only two suspicious transaction reports (STRs) to the Financial Reporting Centre in the five years to 2021, a deficiency that might be exploited by criminals who want to conceal their dirty cash.

This deficiency is one of the reasons the Financial Action Task Force (FATF), the global anti-money laundering watchdog, put Kenya under high surveillance in what is known as the grey list with 21 other countries.

FATF fears that in the review period the property market might have soaked up dirty cash, including kickbacks from government tenders or cash from piracy at the Indian Ocean.

The damning verdict stems from an assessment of Kenya’s anti-money laundering and counter-terrorism and proliferation financing (AML/CFT) standards, following an assessment that was done by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), an affiliate of FATF. The post-assessment report blamed the low reporting on a lack of supervision by the relevant authorities.

Anyone engaged in the selling and buying of property in Kenya should be licensed by the Estate Registration Board (EARB) to which they are also supposed to file reports on suspicious transactions. Real estate agents are also supposed to file reports on suspicious transactions to FRC.

However, in the case of the Designated Non-Financial Businesses and Professions (DNFBPs)—which includes real estate—only three STRs were filed in the years between 2017 and 2021. The other one STR came from a casino.

“The number of STRs reported by the DNFBP sector is not consistent with the risk profile of the sector,” said ESAAMG in a report that led to Kenya being put under high surveillance.

“The low number of STRs is attributed to lack of or inadequate AML/CFT supervision of the DNFBP sector,” added the report.

Most of the STRs, over 95 percent, came from financial institutions, particularly banks.

Lawyers did not report any STR in the period under review since they were not covered by the time the assessment was done.

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However, beginning this month lawyers will also start filing STRs just as banks, those dealing in precious metals, casinos, accountants as well as trust and company service providers.

Real estate was flagged as a soft target for criminals who want to clean their ill-gotten money mainly due to the high participation of unregistered players that are not regulated and the use of cash.

“The acceptance of cash in purchase/sale transactions takes away the opportunity of having a paper trail of the transactions,” added the report.

Money laundering conceals the source of illegal proceeds so that the money can be used without its criminal source getting detected.

The use of copious amounts of cash in a transaction is the first red flag of a money-laundering scheme. With cash, there is no paper trail.

The mutual report found that because real estate agents are involved in frequent liaison with banks, Saccos, mortgage brokers, surveyors, solicitors and other estate agencies during transactions puts them in a good place to channel dirty cash into the formal financial system.

With real estate, laundering can be completed at two fronts—at the point of buying the house and when paying rent.

Chris Owala, director of the Community Initiative Action Group, reckons that the many buildings which remain unoccupied are being used to launder cash. “These houses are purported to bring money that is banked daily. We have issues of fake tenancy agreements,” said Owala.

There are several cases where Kenyan authorities have gone for properties which they say were acquired using proceeds of crime.

The Assets Recovery Agency (ARA) told the court that Margaret Wanja Muthui, a deputy director at the Kenya Rural Roads Authority (KeRRA), paid Sh264.5 million in cash for 11 apartments in the leafy suburbs of Kileleshwa between May and September 2019 using stolen money.

Part of the cash that the main suspect of the National Youth Service (NYS) scandal, Josephine Kabura, is said to have fraudulently obtained was traced to two houses in Kasarani and Ruiru following transactions that the authorities told the court reeked of “complete schemes of money laundering.”

Also implicated in the Sh791 million NYS scandal was the Ngirita family who are said to have received Sh400 million between the three of them - daughter, mother, and father - from the agency for allegedly supplying cabbages, watermelon, potatoes, onions and green grams.

In both cases, the Government was allowed to seize these properties after the suspects failed to prove the source of their money.

Since 2008 and 2015, Kenya enjoyed a property boom thanks to the Kibaki miracle that saw the economic fortunes of a lot of Kenyans improve.

A lot of middle-class families, having climbed up the social ladder, clamoured for the lavish life in Nairobi’s leafy suburbs. A few of them could afford these houses, where a five-bedroom villa could go for as much as $1 million in cash.

But several studies also showed that there was a marked increase in the flow of illicit cash into the country, a phenomenon that would pick up in momentum as Nairobi turned into a major financial hub.

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Neighboring Kenya was war-torn Somalia with Al-Qaeda-linked terrorist outfit Al Shabaab, raising fear of terrorism cash flowing into the country. Moreover, Kenya turned into a regional hub for illicit gold trade from the Democratic Republic of Congo (DRC) which would then be shipped to China and the UAE.

Even as the Kenyan leaders put in place a plan to turn Kenya into a financial hub, the country did have proper safeguards, including know-your-customer (KYC) regulations, to guard against the dirty cash.

Kenya’s strategic position at the crossroads of East and West, North and South, not only makes it a natural trade and financial hub, but also makes it a prime target for criminals, money launderers, and terrorists.

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