Money Laundry In East Africa-A case of KENYA

The recurring theme of money laundering is acquiring money through illegal means and using the mainstream financial system to legitimize it. In Kenya, criminals that have been found engaging in money laundering are hardly prosecuted. This acts as an enabler of money laundering in that there is hardly any enforcement of money laundering legislation. As a result, money laundering has risen in scale. Additionally, Kenya is also at higher risk of being exploited by money launderers as it is the financial hub of East Africa.

On a macro level, money laundering is a global problem and global measures are in place to resolve it. On a micro level, money laundering is a problem that each country can solve through the implementation of local legislation to create a unified national policy that sets the agenda. Individual organizations can tackle it by following through with already established best practice money laundering prevention strategies. The work of preventing money laundering is the onus for organizations and society at large and should not be left to regulatory environments.

I further posit that the prevention of money laundering is important because the success of organized criminal networks depends on the global financial system. The financial system is crucial for their functioning. There are many reasons that make anti-money laundering necessary. To name a few: Prevention deters, and defeats organized criminal networks, failure to prevent encourages them.

The flagrant disregard for anti-money laundering laws and regulations infringes upon a country’s rule of law and therefore lessens the effectiveness and power of the criminal justice system. Money laundering promotes corruption, the accumulation of wealth through deceitful means by criminals leads to the deterioration of a country’s economy.

The continued prosperity of financial institutions depends on their ability to be of interest for and to harbor justifiable funds. The reputational damage inflicted by being used for money laundering diminishes their profitability and negatively affects their sustenance. To preserve themselves, financial institutions ought to serve their personal interests by exposing money launderers to agencies or authorities responsible and facilitating their prosecution. Preventing crime is good for society, the security that comes with it enables the free movement of people and foreign investment without fear.

One of the reasons why Kenya  and all East African Community States  are vulnerable to money laundering is that it is a cash-based economy. This makes it easier to move cash around. Due to the globalization of financial markets and financial liberalization, money laundering has been made easier by mobile banking which is common in Kenya.

Most transactions are done through mobile money providers. Although there are other mobile money providers, M-Pesa is extensively ubiquitous enjoying a reach of over 26 million users and with transactions totaling 6.8 billion Kenya shillings as of 2017 according to Safaricom’s financials for the year 2016/2017. This makes M-Pesa highly susceptible to being used for both money laundering and terrorist financing. FATF, the international governing agency that provides guidance on money laundering prevention, has out of its 40 recommendations, laid out three recommendations for client due diligence. In these 3 recommendations, it emphasizes that a robust client due diligence procedure is important because this gathering of information allows FIs to know a client’s source of funds so that in case of suspicion of money laundering, the data can be used to trace, investigate and prosecute.

It adds that money laundering can be prevented and identified by conducting due diligence and that it is possible for research to reveal hidden criminal networks and suspicious sources of funds before FIs involve themselves with new clients. Revealing hidden risk before client on-boarding and during a client’s tenure can protect a FI from taking on risky clients that expose it to money laundering, terrorist financing and other forms of financial crime. Due diligence information can be used to know if a client is laundering money through the FI or is acting on behalf of a criminal or money launderer. When conducting due diligence, it is possible to reach a dead end. It is at this point that a FI should decide whether to question the client or not take them on.

A 2012 report by Griffith University, Australia places Kenya second after the US in the ease of setting up a shell company. Due to this ease, shell companies are commonly used for laundering money.

There is no central document repository to verify company and document authenticity. Government legislation should provide provisions for the introduction of a central registry to be made available in the public domain with information on all beneficial owners of companies operating in Kenya.

Shell companies aid money laundering by obscuring identity, purpose, and source of funds. Ending company obscurity is fundamental in fighting money laundering.

There has been an increase in the loosely regulated cash movement underground banking system of hawala. Underground banking systems have the potential to be used for criminal activity. Hawalas could be owned or used by money launderers to transfer illicit funds disguised as legitimate money. For example, a hawala agent trusts an associate in the relevant country to pay the final recipient and then transfers his own money as money transacted by the client. Hawala agents can send more money than initially transacted, therefore moving illicit funds from one location to another. Money launderers have been known to use hawalas in the placement stage of money laundering. In a process known as smurfing, they deposit different amounts of money in different locations and at different times to multiple individuals who have been recruited. Once these individuals receive the money they can bank it as their own personal or business earnings, making it appear clean. Due to the long-term political instability that has plagued Somalia, the country lacks a formal banking system. This has led to an over-dependence on hawalas for survival by the Somali community in both Kenya and Somalia.

A 2016 report by the International Narcotics Control Strategy Report (INCSR) published by the US Department of state established that hawalas with branches in Kenya have been used to fund Al Shabaab.

As global agencies; The UN, The Council of the EU and FATF; among other bodies, have created anti-money laundering principals and protocols that are to be followed globally. Based on these principals, the agencies adopt joint actions aimed at specific situations where their actions are presumed as mandatory. They adopt common positions which cover general jurisdictions. One of these principals is designating terrorist financing as a predicate offense of money laundering. Terrorist financing is considered a predicate offense because it is a component of money laundering. Recommendation 5 of FATF specifically requires countries to designate terrorist financing as a predicate offense of money laundering. Due to the link between these two crimes, hawalas and to Somalia, the monitoring and regulation of Hawalas ought to be stricter.

The 2016 report by INCSR indicates that the lack of access to a formal banking system in Somalia and more so for its expatriate community has driven demand for Hawalas and have thus quickly evolved into “banks” and their supervision ought to be equivalent to that of mainstream banks.

However, no improved supervision has been documented. Hawalas are favored because there is little due diligence required to transact and fund transfers are rapid, with the approval of transactions occurring in minutes. The data on how much money is moved via hawala in Kenya is not publicly available which makes their use for money laundering and terrorist financing more obscure, harder to monitor therefore impeding prevention. Hawalas present the highest threat when it comes to financing terrorist groups. In its anti-terror efforts, Kenya must remain vigilant of its financial system as vigilance would cut off funding of terrorist cells therefore reducing and preventing terrorism in the region. It is in the interest of broader terrorism prevention goals that financial flows for Hawalas be monitored so as to understand the extent to which the remittance system is abused by terrorists. The banking regulator and the financial intelligence unit must be involved in identifying their suspicious transactions as it is important to understand how the threat of terrorism affects Kenya geopolitically, economically and socially.

There is an influx of Chinese nationals in Kenya who set up companies for various businesses. These companies deal in large cash transactions in foreign currencies which are deposited in banks and then immediately transferred to other countries. This rapid movement of funds, many times and in various countries and accounts raises a money laundering concern. This process resembles both the placement and layering stages of money laundering. Placement involves the initial inception of money into the formal financial system. Placement is a criminal offense and once detected must be reported by a bank’s employees through the filing a suspicious transaction report. An example of the placement technique is where a money launderer deposits money by recruiting multiple individuals using different amounts, locations, and timing. This practice prevents detection because the individuals deposit the money multiple times in diverse bank accounts. Layering involves incorporating complex layers of financial transactions to obscure the money trail. Here, the launderer hides their tracks through an intricate series of techniques that obscure the history of the money.

For example, a criminal might borrow against a cash deposit to get a mortgage, creating a transaction that is one layer away from the original transaction and then eventually buys a house using the mortgage, which puts the money back into the legitimate economy. The purpose of layering is to further distance the funds from their origin and to properly infiltrate the financial system and use the money freely in any legal system. Most of the Chinese companies are cash intensive businesses (CIBs). Currently, the Central Bank of Kenya has warned financial institutions to be wary of cash intensive businesses such as supermarkets, car dealerships, liquor stores, and casinos.

Globally and in general CIBs pose a greater risk of money laundering in that funds from a legitimate business can be mixed with funds from an illegal business. Blending funds from a local personal CIB with funds from an illegal business makes it difficult to determine which funds have been generated by the genuine business.

Further, it becomes difficult to authenticate the ultimate source of funds because their accounts are majorly funded through cash deposits. The destination of these funds is mostly to Asian countries such as Singapore and Hong Kong. What raises further suspicion is that the purpose of the transfers remains indistinct and not clearly defined. An example of a cash-intensive sector that can be used for money laundering is the real estate sector. Money launderers layer their funds quickly in Kenya through the purchase of highly valued residential property. In Kenya, it is quite easy to buy highly priced real estate using cash and using little known third parties to disguise the ultimate owner. Real estate agents lack frameworks to report suspicion, the sector is loosely regulated, and the banking regulator has not instituted compliance frameworks that address limits of using cash and policies that identify beneficial ownership, which would prevent the use of third parties.

One of the key ways of apprehending money launderers is providing meaningful information to law enforcement that they can act upon.

Kenya’s financial reporting center (FRC) is the dedicated office that seeks to investigate and prosecute money laundering conducted through financial institutions. The general objective of any intelligence unit is to analyze financial transaction data and use it to follow the money trail, investigate and apprehend criminal networks. In recent times, the FRC has been accused of being inefficient because it lacks specially trained staff skilled in compliance principles and technical knowledge to investigate financial crime. Being a government body, there is no demonstrated political will and intentional effort to support capacity building. The center’s methods of reporting suspicious transactions are traditional, and it lacks high-level computing systems to aid in apprehending money launderers quickly.

The Kenya Proceeds of Crime and Anti-Money Laundering Act of 2009 (amended 2017) is the law that criminalizes money laundering. A good provision of the act is the revocation of an institution’s license as deemed fit and barring employment of individuals in specified circumstances. The act mandates that monetary fines should be imposed on individuals and corporates found in breach of money laundering. I recommend that punishment through jail terms would be more effective in curbing the practice. Reason being that in order to fight money laundering properly, its offenders should endure stricter consequences such as being jailed so that money laundering can be seen as a serious crime like any other. This laxity is an enabler and sends the message that FIs /individuals can buy their way out through fines. This makes them obnoxious and more willing to be complicit in aiding money launderers.

The recurring theme of money laundering is acquiring money through illegal means and using the mainstream financial system to legitimize it. In Kenya, criminals that have been found engaging in money laundering are hardly prosecuted. This acts as an enabler of money laundering in that there is hardly any enforcement of money laundering legislation. As a result, money laundering has risen in scale. Additionally, Kenya is also at higher risk of being exploited by money launderers as it is the financial hub of East Africa.

On a macro level, money laundering is a global problem and global measures are in place to resolve it. On a micro level, money laundering is a problem that each country can solve through the implementation of local legislation to create a unified national policy that sets the agenda. Individual organizations can tackle it by following through with already established best practice money laundering prevention strategies. The work of preventing money laundering is the onus for organizations and society at large and should not be left to regulatory environments.

I further posit that the prevention of money laundering is important because the success of organized criminal networks depends on the global financial system. The financial system is crucial for their functioning. There are many reasons that make anti-money laundering necessary. To name a few: Prevention deters, and defeats organized criminal networks, failure to prevent encourages them.

The flagrant disregard for anti-money laundering laws and regulations infringes upon a country’s rule of law and therefore lessens the effectiveness and power of the criminal justice system. Money laundering promotes corruption, the accumulation of wealth through deceitful means by criminals leads to the deterioration of a country’s economy.

The continued prosperity of financial institutions depends on their ability to be of interest for and to harbor justifiable funds. The reputational damage inflicted by being used for money laundering diminishes their profitability and negatively affects their sustenance. To preserve themselves, financial institutions ought to serve their personal interests by exposing money launderers and facilitating their prosecution. Preventing crime is good for society, the security that comes with it enables the free movement of people and foreign investment without fear.

One of the reasons why Kenya is vulnerable to money laundering is that it is a cash-based economy. This makes it easier to move cash around. Due to the globalization of financial markets and financial liberalization, money laundering has been made easier by mobile banking which is common in Kenya.

Most transactions are done through mobile money providers. Although there are other mobile money providers, M-Pesa is extensively ubiquitous enjoying a reach of over 26 million users and with transactions totaling 6.8 billion Kenya shillings as of 2017 according to Safaricom’s financials for the year 2016/2017. This makes M-Pesa highly susceptible to being used for both money laundering and terrorist financing. FATF, the international governing agency that provides guidance on money laundering prevention, has out of its 40 recommendations, laid out three recommendations for client due diligence. In these 3 recommendations, it emphasizes that a robust client due diligence procedure is important because this gathering of information allows FIs to know a client’s source of funds so that in case of suspicion of money laundering, the data can be used to trace, investigate and prosecute.

It adds that money laundering can be prevented and identified by conducting due diligence and that it is possible for research to reveal hidden criminal networks and suspicious sources of funds before FIs involve themselves with new clients. Revealing hidden risk before client on-boarding and during a client’s tenure can protect a FI from taking on risky clients that expose it to money laundering, terrorist financing and other forms of financial crime. Due diligence information can be used to know if a client is laundering money through the FI or is acting on behalf of a criminal or money launderer. When conducting due diligence, it is possible to reach a dead end. It is at this point that a FI should decide whether to question the client or not take them on.

A 2012 report by Griffith University, Australia places Kenya second after the US in the ease of setting up a shell company. Due to this ease, shell companies are commonly used for laundering money.

There is no central document repository to verify company and document authenticity. Government legislation should provide provisions for the introduction of a central registry to be made available in the public domain with information on all beneficial owners of companies operating in Kenya.

Shell companies aid money laundering by obscuring identity, purpose, and source of funds. Ending company obscurity is fundamental in fighting money laundering.

There has been an increase in the loosely regulated cash movement underground banking system of hawala. Underground banking systems have the potential to be used for criminal activity. Hawalas could be owned or used by money launderers to transfer illicit funds disguised as legitimate money. For example, a hawala agent trusts an associate in the relevant country to pay the final recipient and then transfers his own money as money transacted by the client. Hawala agents can send more money than initially transacted, therefore moving illicit funds from one location to another. Money launderers have been known to use hawalas in the placement stage of money laundering. In a process known as smurfing, they deposit different amounts of money in different locations and at different times to multiple individuals who have been recruited. Once these individuals receive the money they can bank it as their own personal or business earnings, making it appear clean. Due to the long-term political instability that has plagued Somalia, the country lacks a formal banking system. This has led to an over-dependence on hawalas for survival by the Somali community in both Kenya and Somalia.

A 2016 report by the International Narcotics Control Strategy Report (INCSR) published by the US Department of state established that hawalas with branches in Kenya have been used to fund Al Shabaab.

As global agencies; The UN, The Council of the EU and FATF; among other bodies, have created anti-money laundering principals and protocols that are to be followed globally. Based on these principals, the agencies adopt joint actions aimed at specific situations where their actions are presumed as mandatory. They adopt common positions which cover general jurisdictions. One of these principals is designating terrorist financing as a predicate offense of money laundering. Terrorist financing is considered a predicate offense because it is a component of money laundering. Recommendation 5 of FATF specifically requires countries to designate terrorist financing as a predicate offense of money laundering. Due to the link between these two crimes, hawalas and to Somalia, the monitoring and regulation of Hawalas ought to be stricter.

The 2016 report by INCSR indicates that the lack of access to a formal banking system in Somalia and more so for its expatriate community has driven demand for Hawalas and have thus quickly evolved into “banks” and their supervision ought to be equivalent to that of mainstream banks.

However, no improved supervision has been documented. Hawalas are favored because there is little due diligence required to transact and fund transfers are rapid, with the approval of transactions occurring in minutes. The data on how much money is moved via hawala in Kenya is not publicly available which makes their use for money laundering and terrorist financing more obscure, harder to monitor therefore impeding prevention. Hawalas present the highest threat when it comes to financing terrorist groups. In its anti-terror efforts, Kenya must remain vigilant of its financial system as vigilance would cut off funding of terrorist cells therefore reducing and preventing terrorism in the region. It is in the interest of broader terrorism prevention goals that financial flows for Hawalas be monitored so as to understand the extent to which the remittance system is abused by terrorists. The banking regulator and the financial intelligence unit must be involved in identifying their suspicious transactions as it is important to understand how the threat of terrorism affects Kenya geopolitically, economically and socially.

There is an influx of Chinese nationals in Kenya who set up companies for various businesses. These companies deal in large cash transactions in foreign currencies which are deposited in banks and then immediately transferred to other countries. This rapid movement of funds, many times and in various countries and accounts raises a money laundering concern. This process resembles both the placement and layering stages of money laundering. Placement involves the initial inception of money into the formal financial system. Placement is a criminal offense and once detected must be reported by a bank’s employees through the filing a suspicious transaction report. An example of the placement technique is where a money launderer deposits money by recruiting multiple individuals using different amounts, locations, and timing. This practice prevents detection because the individuals deposit the money multiple times in diverse bank accounts. Layering involves incorporating complex layers of financial transactions to obscure the money trail. Here, the launderer hides their tracks through an intricate series of techniques that obscure the history of the money.

For example, a criminal might borrow against a cash deposit to get a mortgage, creating a transaction that is one layer away from the original transaction and then eventually buys a house using the mortgage, which puts the money back into the legitimate economy. The purpose of layering is to further distance the funds from their origin and to properly infiltrate the financial system and use the money freely in any legal system. Most of the Chinese companies are cash intensive businesses (CIBs). Currently, the Central Bank of Kenya has warned financial institutions to be wary of cash intensive businesses such as supermarkets, car dealerships, liquor stores, and casinos.

Globally and in general CIBs pose a greater risk of money laundering in that funds from a legitimate business can be mixed with funds from an illegal business. Blending funds from a local personal CIB with funds from an illegal business makes it difficult to determine which funds have been generated by the genuine business.

Further, it becomes difficult to authenticate the ultimate source of funds because their accounts are majorly funded through cash deposits. The destination of these funds is mostly to Asian countries such as Singapore and Hong Kong. What raises further suspicion is that the purpose of the transfers remains indistinct and not clearly defined. An example of a cash-intensive sector that can be used for money laundering is the real estate sector. Money launderers layer their funds quickly in Kenya through the purchase of highly valued residential property. In Kenya, it is quite easy to buy highly priced real estate using cash and using little known third parties to disguise the ultimate owner. Real estate agents lack frameworks to report suspicion, the sector is loosely regulated, and the banking regulator has not instituted compliance frameworks that address limits of using cash and policies that identify beneficial ownership, which would prevent the use of third parties.

One of the key ways of apprehending money launderers is providing meaningful information to law enforcement that they can act upon.

Kenya’s financial reporting center (FRC) is the dedicated office that seeks to investigate and prosecute money laundering conducted through financial institutions. The general objective of any intelligence unit is to analyze financial transaction data and use it to follow the money trail, investigate and apprehend criminal networks. In recent times, the FRC has been accused of being inefficient because it lacks specially trained staff skilled in compliance principles and technical knowledge to investigate financial crime. Being a government body, there is no demonstrated political will and intentional effort to support capacity building. The center’s methods of reporting suspicious transactions are traditional, and it lacks high-level computing systems to aid in apprehending money launderers quickly.

The Kenya Proceeds of Crime and Anti-Money Laundering Act of 2009 (amended 2017) is the law that criminalizes money laundering. A good provision of the act is the revocation of an institution’s license as deemed fit and barring the employment of individuals in specified circumstances. The act mandates that monetary fines should be imposed on individuals and corporate bodies found in breach of money laundering. 

We recommend that punishment through jail terms would be more effective in curbing the practice. Reason being that in order to fight money laundering properly, its offenders should endure stricter consequences such as being jailed so that money laundering can be seen as a serious crime like any other. This laxity is an enabler and sends the message that FIs /individuals can buy their way out through fines. This makes them obnoxious and more willing to be complicit in aiding money launderers.


https://www.europol.europa.eu/newsroom/news/19-arrested-in-france-and-italy-in-multi-million-gold-laundering-operation

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