CBK rules outlaw ‘hawala’ money transfer system

Central Bank of Kenya in Nairobi. The banking regulator has issued new tough rules to monitor cash transfer services in the informal sector in an effort to rein in money laundering activities. file
Central Bank of Kenya in Nairobi. The banking regulator has issued new tough rules to monitor cash transfer services in the informal sector in an effort to rein in money laundering activities. file  Nation Media Group

The Central Bank of Kenya has outlawed money remittance businesses that operate without licence, in a raft of new regulations that could drive out of business hundreds of informal operators in the sector.

The new rules, seen as part of the regulator’s effort to curb money laundering, require operators of cash remittance firms to register with CBK and pay a Sh5 million licensing fee in addition to maintaining a minimum core capital of Sh20 million.

Financial sector experts said the rules are targeted at Hawala, a system of money remittance that involves transfer of cash without any records of parties involved in the transactions.

Hawala, which is widely popular in the Middle East and parts of Asia, has been gaining popularity in Kenya particularly as a money remittance system for residents of Eastleigh Estate in Nairobi who mostly receive money from friends and relatives mainly in Somalia and further across the globe.

Its informal nature has, however, raised fears that it could be used for money laundering and financing of terrorist activities.

“We are trying to tighten regulation around outflow and inflows in the country. Services like the Hawala which are totally unlicensed and unformalised are the ones we are seeking to control so that we have information on who is transacting and how much,” said Financial Reporting Centre advisory board chairman John Wanyela.

The new rules were published last week by the financial sector regulator through a gazette notice.   

Kenya has committed to tighten money laundering regulations to avoid being put on a global blacklist of countries whose financial systems have loopholes for manipulation by criminals and terrorists intent on cleaning dirty cash.

Kenya risked being blacklisted by the international community owing to its lax anti-money laundering laws, which made it a fertile ground for criminals, especially Somali pirates, to launder their cash.

The new rules do not, however, apply to operators of other CBK licensees such as banks, Post Bank and deposit taking microfinance institutions and forex bureaus — which are already subject to tight regulations that require maintenance of records for customers remitting significant amounts of cash.

“They are targeting institutions that they do not have control over,” said a source who did not want to be mentioned owing to his close links with the CBK. “They may not have an issue with the Western Union, Moneygram and such, but more concerned with the Hawala.”

Money remittance firms are also banned from dealing in gold which is used to launder money through its trading due to its global acceptability as a store of value.

“Those are avenues which people launder money so this is to ensure that people do not bring in the commodity then convert it to money or the other way round using the operators,” said Mr Wanyela.

In a Hawala transaction the sender of the money gives the cash to the remitting agent who notifies a corresponding counterpart in the country or location of the recipient, giving them instructions to release an equivalent sum of money to the intended recipient. The transaction cannot be traced back as Hawala operators do not keep any records.

Under the new regulations all money remittance operators will be required to have an information system that provides an audit trail of all transactions and the data to be held for a period of seven years.

Further the operators are to furnish CBK with details of any person who transacts more than Sh800,000 ($10,000) in a day and a weekly report of all its transactions.

The new rules require remitting companies whose shareholders will be vetted by the Central Bank to have an external auditor who will report to the regulator on the operator’s procedures.

The money remittance companies will also notify CBK of where their branches are located, and the branches are not to conduct any other business or sublet space to any other business.

The rules, however, open the door for the money remittance operators to operate stand alone businesses unlike currently where they have to use agents, which are mainly banks.