CBK must sustain pressure on banks

Here is my take on this week’s decision by Central Bank of Kenya (CBK) governor Patrick Njoroge to slap fines on five banks found to have aided the transfer of billions of shillings siphoned from the National Youth Service (NYS) by well-connected individuals.

First, this is the first time a financial sector regulator in this country is coming out strongly to slap fines in this manner. We must congratulate the governor for demonstrating this level of boldness. Indeed, and in terms of proper flexing of regulatory power, this is a first for Kenya.

How systemic and widespread is the problem of lapses and poor reporting of anti-money laundering and suspicious transactions in our financial sector? That was the question that was top in my mind as I pondered over the implications of this brave move by Dr Njoroge.

In future, and if the governor really wants to make a big impact in enforcing reporting on anti-money laundering, he should go deeper and punish individuals and directors responsible for reporting on suspicious transactions within specific commercial banks.

After all, the CBK wields approval powers over appointment of top managers of banks. The CBK may also wish - in future -to disclose a little more information and details about the transactions even if names are redacted. According to the statement put out by CBK, Standard Chartered Bank, which processed and paid Sh1.6 billion of the money got away with a fine of Sh77 million, while Kenya Commercial Bank which processed just under a half- was fined Sh 149 million.

The second observation I made as I pondered this latest move was the fact that it affected top rated banks.

If all our top banks can be found to have shown material weaknesses and lapses in reporting suspicious transactions as has been demonstrated by the CBK, what should we expect of smaller banks with less resources to devote to anti-money laundering reporting?

Do banks, really, take the job of reporting suspicious transactions seriously? After all, the companies that were receiving corrupt payments from the NYS should have looked suspicious even to a layman.

Most of them were relatively new outfits, with no internet presence and no turnover to show. And in most cases these were accounts that had zero balances before they received the looted cash from the NYS.

According to a report in the Daily Nation, companies that were receiving billions from the NYS carried names such as JerryCathy Ltd, Calabash Investments, Ngiwako Enterprises, Annwaw Investments and Firstlings Supplies Ltd. Thus, flagging the payments as suspicious should not have been difficult at all.

The picture portrayed is very troubling considering that we are a country battling with the twin problems of terrorism financing and corruption. How can we prevent terrorists from misusing our financial system when our very top rated banks display material lapses in suspicious transactions reporting? Kenya has built an elaborate patch work of anti-money laundering institutions that include the Central Bank itself, the Financial Reporting Centre (FRC) and the Assets Recovery Agency. But it seems that they do not sing from the same hymn book.

In the first place, the FRC remains an underfunded entity. It lacks the resources- staff, money and systems- to be able to respond to the volumes of reports it receives on a daily basis. Despite the fact that it was created under its own act of Parliament, it still operates more or less as an appendage of the CBK.

Granted, the central bank commands overall authority on financial affairs. But when it comes to reporting on suspicious transactions, the FRC is the primary regulator. Yet this critical institution has been made to operate as CBK’s poor cousin. As a matter of fact, most of its employees are seconded from the central bank.

It seems to me that for the FRC to work, it will need an advanced and smart database able to deploy artificial intelligence to interpret the data that banks send it every day.

Once it is well equipped with people, money and systems we can then work on developing the legal capacity and infrastructure to trace, seize, and confiscate the proceeds of illegal payments and suspicious currency transactions.

Looking at the structure of our financial system closely, there is enough to arouse suspicions, and suggest that the vice could be rampant. Dr Njoroge must keep cracking the whip because money laundering is a matter of national security.