Regulatory deficiencies impacting on Anti Money Laundering measures
By Charles Wanguhu
Kenya currently risks being black listed by the OECD Financial Action Task Force (FATF) as a jurisdiction with key deficiencies in the control against money laundering. The other two countries on the list: the People’s Republic of North Korea and Iran.
The Financial Action Task Force (FATF) is an inter-governmental body tasked with the development and promotion of policies, to combat money laundering and terrorist financing. The FATF develops policies that propose improvements in national legislative, regulatory regimes to combat money laundering and the financing of terrorism. It has established a series of Recommendations commonly referred to as the 40+ Recommendations, they set out the basic framework for anti-money laundering efforts and are intended to be of universal application.
The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. The Task Force is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
In its report of February 2012 the task force mentions Kenya as a jurisdiction with strategic anti money laundering deficiencies and has not made sufficient progress in addressing them as part of its commitment under its Memorandum of Understanding(MOU). Kenya signed an MOU in 2008 under The Eastern and Southern Africa Anti-Money Laundering group (ESAAMLG) committing to adopt and implement the 40 recommendations and other special recommendations of the Financial Action Task Force (FATF). The purpose of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) is to combat money laundering by implementing the FATF Forty Recommendations
The sanctions for non-conformity with FATF include the possibility of non-correspondence by banks in other countries, which includes the telegraphic or electronic transfers of money which facilitates transactions for businesses as foreign banks carry out transactions on behalf of another bank’s customers. The impact on the export industry including the all important horticultural and tourism business cannot be gainsaid. While a lower standard of compliance of the FATF recommendations’ may be accepted prior to the blacklisting, Kenya would have to implement enhanced measures to be removed from the list.
The enactment of the Proceeds of Crime and Anti-Money Laundering Act in 2009 (the POCAMLA) was viewed as government commitment to effect the recommendations of the financial action taskforce. The act imposes anti-money laundering obligations on financial institutions as well as non-financial institutions such as casinos, real estate agencies, dealers of precious stones and metals, and non-governmental organisations.
The Act also provides for the establishment of a Financial Intelligence Unit named the Financial Reporting Centre which will assist in the identification of the proceeds of crime and The principal function of the Centre shall be to disseminate information collected by it pursuant to the provisions of the Act, to investigating authorities and other bodies and to ensure compliance with international standards in anti-money laundering measures. However, the implementation of the act is severely impacted by the failure to establish a financial reporting Centre. It remains a significant hindrance to implementing the act and fulfilling obligations under the FATF recommendations. Additionally the act is yet to be used to prosecute any crimes, and as such it is relatively unproven in its ability to curb money laundering.
As kenya enters an election year and a possibility of laundered funds being diverted to subvert the democratic process the need for a regulatory authority is increased. The lack of enhanced due diligence measures for politically exposed persons as exist in other jurisdictions exercising FATF recommendations may leave the electoral system exposed to illicit funds. In 2010 for example the balance of payment statistics of the central bank of Kenya showed a large foreign currency injection, of approximately $2 billion dollars in hard currency, which was unaccounted for.
Developing countries have increased efforts to curb money laundering including in offshore havens and these efforts have led to a shifting of money laundering activities to emerging markets. The weaker or less effective enforcement the more attractive a financial system will appear to money launderers further compromising their financial system. In some instances laundered money may be used to buy influence in regulators and security apparatus and may inch the country closer towards becoming a criminalized state.
Overall, money laundering has serious social and political costs, if left unchecked it causes economic distortion and instability. Additionally it may have an effect on a country’s competitiveness as the setting up of front businesses can place legitimate businesses at a disadvantage by unrealistic pricing as the primary aim is the laundering of the illicit gains rather than profit taking. Laundered money may target segments of markets like the property markets causing fake booms which may lead to collapse of entire sections of the economy, as rather than being driven by demand and supply forces the aim is the laundering of funds.
To demonstrate seriousness and commitment in prosecuting money laundering, the Kenyan government must prioritise key actions. Prior to the FATF meeting in June the immediate set up of a Financial Reporting Centre would seem a crucial first step in averting the blacklisting of the country.
UPDATE 16/04/2012: The kenya government has now set up a financial reporting centre. More details to follow
The Financial Action Task Force (FATF) is a good step in the fight against illegal business activity and money laundering. Private enterprise cannot, however, rely on regulatory agencies to verify and ensure everyone in a given industry is legit and honest. Only a thorough and comprehensive due diligence can ensure business leaders that a potential supplier and partner is what it claims to be, and that is engaged in only legal activity with a positive reputation. As always, do your homework, verify and then decide. Due diligence is smart insurance.
II it is true that business cannot rely on the regulator. However, in some high risk jurisdictions especially in emerging economies information is not easily accessible with a company registry still largely reliant on paper. This would entail a significant increase in transaction costs on their part.