Regulator puts stock market money cleaners on legal notice

The Capital Markets Authority (CMA) is stepping up the fight against blue collar crime with proposed amendments to the money laundering law that will require stockbrokers and bonds dealers to inform the regulator of large cash transactions.

Market watchers said the move is the clearest signal of the regulator’s admission that criminals may be using the stock exchange to wash dirty money, forcing it to respond with the demand that it be informed of any cash transaction worth more than $10,000 or (Sh770,000).

Cash transactions

The new rules, contained in proposed amendments to the Proceeds of Crime and Anti Money Laundering Act 2009, will also require capital market intermediaries such as investment banks, stock brokers and unit trust managers to keep detailed logs of all their clients and their cash transactions.

Increased piracy off the Somali coast in the past three years has put Kenya on the watch list of the global anti money laundering effort that is driven by the suspected use of such money to finance terrorism.

CMA’s reform effort is however expected to meet stiff opposition from capital market players who argue that a transaction of Sh770,000 is too small to warrant constant monitoring.

“The spirit of the law is good but the amount is too small,” said Mr James Wangunyu, the executive chairman at Standard Investment Bank. “It would mean we will have to report every client who comes through our doors.”

Mr Wangunyu said the threshold should be based on the average value of deals at the bourse which currently stands at Sh5 million.

“At Sh5 million and above a red flag can be raised but vetting transactions below this threshold would be irrational,” he said.

The NSE has reported average daily turnovers of Sh2.8 billion since the beginning of the year which translates to Sh1.5 million per deal.

This means that every other deal at the NSE would have to be flagged off and reported to the CMA.

Money laundering refers to a process in which criminals use legal structures to clean the proceeds of drug trafficking, gun smuggling, terrorism and corruption.

It is done by passing the proceedings through legitimate business channels such as bank deposits, investments, or transfers from one place (or person) to another.

While Kenya’s once chaotic banking system provided the criminals with such a channel, recent reforms have narrowed the space forcing the launders to look for alternative channels.

Weak regulation of capital markets has now turned the spot light on the billions of shillings traded at the bourse every day laying the ground for the reforms push.

More recently, the Nairobi Stock Exchange’s (NSE) prominence as an exciting frontier market has attracted yield-seeking investors from all corners of the world.

In the past two years for instance, the volume of foreign based transactions far outpaced those of locals individuals and institutions catching the attention of global police.

Foreign investors accounted for at least 60 per cent of activity at the NSE in the last one year with local investors accounting for the remaining 40 per cent.

Locally, crime busters have questioned the use of nominee accounts that hide the identity of investors to trade stocks and bonds at the bourse.

With a transaction period of three days, stocks listed at the NSE are highly liquid and can easily be converted into cash.

But with the technological developments at the bourse, market players are skeptic about the NSE as a channel for money laundering.

“I do not believe that the NSE is a Haven for Money Launderers. Reforms around RTGS [Real Time Gross Settlement System] has created clear transaction trails and brought a more robust structure around buying and selling at the bourse,” said Aly Khan-Satchu, an investment advisor at Rich Investments

Market players say that the bonds market with its larger trades should be the focus of any anti money laundering effort.

Turnovers in the bond market have climbed by 55 per cent in the last two months from Sh26.7 billion in January to Sh41.6 billion in February in a mirror of last year’s stellar performance.

Issuers such as KenGen, Safaricom, CfC Stanbic, Shelter Afrique and TPS Serena led the corporate bond market raising Sh34 billion from the domestic market in 2009.

The US Department of State in its 2009 International Narcotics Control Strategy Report (INCSR) on Money Laundering, says Kenya’s financial system may be laundering over Sh7.7 billion ($100 million) each year.

Evading oversight

The report says that criminals have been taking advantage of Kenya’s inadequate anti-money laundering regime for years by evading oversight or reportedly paying off enforcement officials, other government officials, and politicians.

Yet there were not any money laundering–related arrests, prosecutions, or convictions for 2007 or 2008.

Like most countries in the region, Kenya lacks the institutional capacity and investigative skill to conduct complex investigations, the US says.

Such criticism has forced Kenya to move with speed against money launders culminating to the coming into force of The Proceeds of Crime and Anti-Money Laundering Act in January.

The law provides that any person who knows or ought to have reasonably known or suspected that any property is part of the proceeds of crime but conceals or disguises the nature or source of the same commits an offence.

It also provides for the establishment, powers and functions of the Financial Reporting Centre.

Those found guilty of the offence of money laundering will serve a jail term not exceeding seven years, or a fine not exceeding Sh2.5 million, or both.

Among the guidelines introduced by the CBK is the limitation to make telegraphic transfers (TTS) and bank drafts of over $10,000 (Sh777,000) even with the necessary supporting documentation.

Prior to the introduction of this guideline, forex bureaus were allowed to make TTS and bank drafts of over $10,000 with the clients required to provide the necessary documentation