The Central Bank of Kenya’s recent directive requiring banks to obtain additional information on customers depositing or withdrawing more than $10,000 (Sh1,020,000) may have rattled many ordinary Kenyans.
The guideline, among other things, requires banks to obtain from their customers details of why the cash deposit or withdrawal is being made, the intended beneficiary or what they intend to use the money for.
Customers are also required to disclose the source of the money. Why has the CBK introduced this reporting requirement?
Why is the CBK taking these unique steps and at this point in time? The answer is that this is Kenya’s contribution to the global fight against money laundering.
The reporting threshold of $10,000 that the CBK has set is actually an internationally recognised reporting limit. Most of the regulations that Kenyan financial services regulators are introducing are not homegrown; they have international roots.
The bottom-line is that Kenya’s financial regulatory landscape is being radically shaped by the global forces.
A series of mandatory regulatory changes in international banking has left policy makers and regulators with no choice but to comply.
In reality, it is safer to say that the US is the originator of most of these regulations.
Some of the regulations range from bank capital and liquidity adequacy requirements, which were brought on board through the Dodd Frank Act, and taxation through the FATCA (Foreign Accounts Taxation Compliance Act).
The US law which relates to the CBK’s recent directive is the Patriot Act. The USA Patriot Act stand for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.
This law was passed in response to the September 11, 2001 US terrorist attacks and compels financial institutions such as banks and insurance companies in the United States to help government agencies detect and prevent money laundering through special reporting of large cash transactions.
The Financial Action Task Force (FATF), a global body that sets standards on fighting money laundering and terrorism financing, stipulates suspicious transaction reporting requirements.
It is worth noting that in the US, a Currency Transaction Report (CTR) is automatically generated once an amount holding over $10,000 is processed.
These reports are not just filed to the Financial Crimes Enforcement Network (FinCEN) but also to the tax authority (Internal Revenue Authority).
FinCEN is equivalent to Kenya’s Financial Reporting Centre (FRC). As such, it should not come as a surprise if the Kenya Revenue Authority (KRA) comes knocking at the door of anyone who has made a transaction that is subject to FRC reporting.
This rule is even stricter in countries like Canada. The authorities require a Large Cash Transaction Report (LCTR) to be filed if two or more amounts of less than $10,000, which total $10,000, are received within 24 hours.
Like other banking regulatory bodies, the CBK is introducing a globally recognised regulatory reporting practice to safeguard the integrity of Kenya’s banking sector.
The CBK’s new rule is for the benefit of the entire financial industry.
In the wake of these new rules, banks and other financial institutions in Kenya should brace for an increase in regulatory and compliance costs.
Globally, compliance costs in financial services have increased significantly in the past 20 years.
Some of the regulatory and compliance costs are directed toward fighting money laundering and financing of terrorism in order to protect the international financial system.
International banks have invested heavily in the compliance function after realising that the cost of not complying is so huge. Citibank, for instance, has close to 30,000 staff working in the regulatory and compliance function alone.
A bank riddled with anti-money laundering related scandals stands to lose one of its greatest assets — reputation.
This is in addition to the penalties that may be levied by the regulators for non-compliance. In the recent past, some US based banks have paid as high as $2 billion (Sh404 billion) due to lapses in implementing anti-money laundering regulations.
It is therefore important for banks to educate their customers on dangers of making large cash deposits or withdrawals.
One of the paramount questions banks are supposed to ask their customers is why the deposit or withdrawal cannot be made through electronic transfer.
In Kenya, it beats reason for someone to carry Sh1 million in a bag, what with all the technologically advanced modes of payments such as debit and credit cards and wire transfers.
In addition, we have mobile money transfer services such as world renowned M-Pesa which remove the need to carry Sh1 million for purposes of paying construction workers.
If you are an auto dealer, would it be safe and less cumbersome for you to receive a wire transfer of Sh1m or Sh1 million in cash? The risk of receiving Sh1m in cash is much higher. The list of risks includes being paid in fake notes and falling victim to thieves and robbers.
Besides, a bank with a reputable anti-money laundering programme may not accept the cash unless you provide documents showing the source of funds.
While the CBK is acting in good faith, one of the lenders’ genuine concerns is that implementation of the reporting directive is immediate.
The CBK should consider giving banks more time to put in place mechanisms of complying with the directive.
This will prepare the banks to acquire the right reporting platforms. For local banks that have international affiliations, complying with such a rule is easy because all they need to import is the technology and skills from mother companies abroad.
The truth is that, their international affiliates are already doing this type of reporting.
The CBK should also consider exempting some businesses from the rule. For instance, supermarkets can be exempted since they can reasonably generate Sh1 million in cash sales per day.
Besides, use of technology could help reduce the burden of compliance. Most countries which implemented this rule require banks to electronically file large cash transaction reports within 15 calendar days after the transaction.
The CBK should therefore invest in a platform that will help banks to file the reports electronically.
Still customers can go around this rule by breaking $10,000 into small amounts.
They then deposit the amounts in bits hoping the banks will not notice. This practice is called structuring or “smurfing”.
This act is actually a money laundering crime and is punishable. Both the customer and bank employee found smurfing can be charged.
As a matter of fact, a banker should file a Suspicious Activity Report with the relevant authority if a customer breaks the above amount below the reportable threshold.
In practice, a customer who is either depositing or withdrawing money is not supposed to be told about the reporting requirement.
This can be considered “tipping off’’ and it is also considered a criminal offence. An example of tipping off is when a banker informs a customer that he has made a Suspicious Transaction Report.