Anti-money laundering laws expose our financial sector’s soft underbelly

Central Bank of Kenya building in Nairobi. FILE photo | nmg

For the last two years, the financial sector has endured turbulence both from regulation and political confront.

The recent collapse of two banks made it rough for the Central Bank of Kenya (CBK) to restore market confidence and ensure an industry that thrived with minimum close scrutiny has managed to wither the storm.

CBK governor Patrick Njoroge’s regime did a paradigm shift of ensuring that banks strictly operated within the regulatory framework, upheld standards and best practices as well as strengthened their corporate governance.

This was a shift from his predecessor who was concerned more about financial inclusion and bank managed to escape with their sins. However, the collapse of Imperial and Dubai banks exposed the ugly side of corporate governance which for the longest time was a no-go zone.

Chapter 2 of CBK prudential guidelines 2013 has also assisted in rooting out rogue senior managers from the industry as well as address the critical mess of conflict of interests between management and oversight teams as well as criminal malpractices by senior managers who had the latitude of jumping to the next bank and repeat the crime.

Currently, the financial sector has been confronted with another bout of regulations to adhere to, Proceeds of Crime and Antimoney Laundering Act and Counter-Terrorism Financing Act. Implementation of the laws has been gradual but it seems they have come of age with the establishment of Financial Reporting Centre (FRC).

As Kenya positions itself as a regional financial hub, there is counter pressure to ensure there are strict and effective regulations to curb laundering of illicit funds and terrorism finances from our porous borders and unstable neighbours.

The scope of FRC is wide and all financial players from banks, saccos, casinos, mortgage firms, investment banks to professional firms are required to report suspected money laundering cases to the centre. For banks, this is an ongoing process. However, for the microfinance institutions (MFIs) and saccos, it will expose the soft side of both internal management structure and operations.

A reporting institution is required to hire a money laundering officer who is at the level of management. The person who is supposed to be independent of the CEO and auditor with full independence to report as well as identify, analyse and report to the centre. For this to be achieved effectively, the institutions must have proper systems which have the capability.

This presents the biggest challenge. Most of our saccos, MFIs and mortgage/real estate institutions have had a deficiency on this front. They are either one-man shows or close business partners where the managers are relatives or associates and requiring them to report will be a self-indictment. Second, most do not have proper operating systems where data is structured and managed.

Third, the deficiency in the regulation of these institutions still poses a challenge.

The management of non-deposit taking saccos, which are not under the Sacco Societies Regulatory Authority and MFIs not under Association for Micro-finance Institutions still remains a challenge. For the last decade, saccos, MFIs and land buying companies have sprung up in every town and their operations and regulations still remain a pipe dream.

Introduction of standard anti-money laundering measures will force them either to restructure or exit through natural attrition.

In several cases, money launderers target amorphous institutions that have entered the market with get-rich-quick schemes, swindled the public and melted into the thin air with billions leaving their customers in anguish. Enforcement of anti-money laundering laws will assist in curbing such but if only, all target institutions are looped in.

Irungu Thiongo, Anti-money laundering officer at a local bank.

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