Small businesses face fines and loss of banking services if they fail to disclose their financial accounts and secret shareholders to banks in line with new anti-money laundering rules that became effective in November.
Banks have started asking micro, small and medium enterprises (MSMEs) to provide personal details of their beneficial owners such as names, physical addresses, PINs, source of income, current occupation, and water or electricity bills.
The small traders must also provide their audited accounts or key in expenses and income using a template provided by the banks in a fresh clampdown on suspicious transactions.
Those in breach risk being denied banking services, with the lenders worried of multi-million shilling fines for failing to put in place adequate systems to combat money laundering and failure to know their customers as the law requires.
Micro businesses such as salons, bars and corner shops are also liable for fines of Sh500,000 and a daily penalty of Sh50,000 for the days in breach since November 24, when the new regulations took effect. Top banks are sending e-mails to the traders seeking information on the beneficial owners and books of accounts.
“Please share the copies of the above documentation(s) to our email address within 5-7 working days for closure of the pending Items,” said a notice from a bank to a trading company on January 21 seen by the Business Daily.
Firms generating annual sales of less than Sh50 million, less than Sh20 million in assets and workers not exceeding 25 have been exempted from providing audited accounts.
Instead, they must fill in information such as their actual or expected income for each of their business activities in a template. They are also supposed to provide details of their assets and liabilities.
Other details that the MSMEs are to provide are revenue streams from services and goods as well as expenses such as payroll, advertising, rent, office supplies and profit.
A top executive of the Financial Reporting Centre (FRC), the body mandated to curb the flow of dirty money, says banks are racing to comply with the law and reduce reputational risks attached to money laundering and terrorism financing.
Should a client fail to comply with the request, banks are at liberty to terminate the relationship and deny services.
“There is no law that forces a bank to have a relationship with a client,” said the FRC official who requested not to be named.
The request is likely to affect millions of small businesses, with official data showing that there were close to 7.4 million MSMEs in the country.
CBK data shows that by December 2022, the latest period data is available, there were 1.18 million active MSME loan accounts in the banking industry.
The figure rises when deposit accounts that MSMEs have in commercial banks are included.
The tough anti-money laundering laws have their roots in the National Youth (NYS) scandal of 2015 where briefcase companies were used to steal up to Sh1 billion through fictitious contracts. Dozens of senior government officials and business people were charged in May 2018 with various crimes related to the NYS scam
Top banks KCB Group, Equity, Co-op Bank Kenya, StanChart Kenya and Diamond Trust were fined nearly Sh800 million for failing to report suspicious transactions.
“Not all SMEs will be required to provide beneficial ownership information. This is only for those with business registration,” said the Kenya Bankers Association (KBA).
However, the requirement for all the registered businesses, including MSMEs, to disclose financial and beneficial ownership information has left most of the small enterprises in a catch-22, with some fearing it might be a ploy by the government to illegally access their income for taxation purposes.
The disclosures are expected to open the window for the Kenya Revenue Authority (KRA), security agencies and the FRC to tap the information to track money launderers, corrupt individuals and tax cheats.
In the past, senior government officials have used little-known entities, which they own but are registered under different names, to embezzle cash from the public coffers.
These businesses then try to ‘clean’ this money by introducing it into the banking system under the guise of being revenues of the enterprise, a process that is known as money laundering.
“Money laundering affects all businesses, including MSMEs. They (MSMEs) are likely to be used as fonts for those concerned,” said Bernard Kiragu, managing partner at Scribes Services.
At the beginning of last year, Kenya was put under high watch for not having a string of safeguards against the flow of dirty cash, joining 23 other countries in a list of shame known as the ‘grey list.’
The Finance Action Task Force (FATF), the global anti-money laundering watchdog, decided to put Kenya on the grey list, a move that is likely to hurt Nairobi’s standing as the financial centre of the region.
The grey list refers to countries that have deficiencies in dealing with money laundering and terrorist financing.
By being placed in the grey list Kenya has been under increased scrutiny by the FATF, with the country expected to make critical changes to its financial infrastructure to reduce the risk of being a haven for dirty money.
Kenya, a financial hub in the region, has also been flagged as a regional hub for illicit gold as well as a transit for drug and wildlife traffickers, with law firms, casinos, and real estate agents fingered as some of the enablers of money laundering and terrorist financing.