More than half of the 10,733 private companies reported for money laundering in Kenya are in the construction sector, confirming fears that the unexplained growth in the capital-intensive real estate sector could be fuelled by dirty cash.
The National Risk Assessment On Money Laundering and Terrorism Financing of Legal Persons and Legal Arrangements – Kenya report published by the Business Registration Service (BRS) shows that 10,733 registered private firms were reported for money laundering in 2022.
More than half (56.5 percent) of these firms were involved in the construction sector, signalling the rapidly growing sector as a preferred conduit for money launderers.
This was followed by real estate (8.07 percent), manufacturing (7.17 percent), money transfer agents (5.83 percent), consultancy (4.48 percent), textiles (4.04 percent) and retailers (3.14 percent).
“The legal structures that had been abused for money laundering purposes were mostly involved in construction, real estate, manufacturing and financial services,” says the report.
The construction sector is one of the fastest growing in Kenya and contributed about 7.1 percent of the country’s Gross Domestic Product (GDP) in 2022, according to the Kenya National Bureau of Statistics (KNBS).
This has been fuelled by major construction projects in recent years like the Nairobi Expressway, the Standard Gauge Railway (SGR), the Lamu Port, construction and rehabilitation of roads as well as thousands of commercial and residential buildings.
Failure to impose money laundering reporting obligations on several cash-rich sectors such as the property industry has made the sector attractive for money launderers, who can hide their ill-gotten wealth here.
"With the over-regulated financial system, smart money launderers move to the underregulated real estate sector with many unregulated actors," Ssekubwa Rogers Githinji says in his thesis submitted in partial fulfilment of the requirements of the Degree of Master of Laws at Strathmore University.
"Laundering money through real estate has led to negative consequences such as increased prices, destabilisation of the property market, and, most importantly, providing a safe investment for criminals," he says, adding that the legal regime on anti-money laundering and land laws does not explicitly address money laundering through real estate.
The report has revealed that legal entities are being used by individuals for corruption, tax evasion, sanctions evasion, shielding assets from confiscation, money laundering, terrorist and proliferation financing and other crimes.
It shows that trusts and private companies in particular are the most used legal entities for money laundering compared to public companies, foreign companies, partnerships, unlimited companies and companies limited by guarantee.
“Review of the enforcement data shows that Private Limited Companies were the most frequently abused legal structure for money laundering purposes in Kenya in comparison to other legal structures,” said the report.
According to BRS, there were 690,222 private companies registered in Kenya by December 2022, out of which 395 were reported in relation to terrorism financing incidents and a total of 10,733 reported for money laundering.
“The responses indicated that private limited companies (98.09 percent) were the highest legal structures associated with money laundering. Further, out of the 98.09 percent cases involving private limited companies 43.51 percent of the cases involved abuse by directors of the company, employees were also involved to a great extent,” said the report.
This has placed Kenya under high surveillance in what is known as the ‘grey list’ alongside 21 other countries by the global anti-money laundering watchdog Financial Action Task Force (FATF).
According to the FATF, being grey-listed or black-listed means the country is not effectively implementing measures to combat money laundering and terrorist financing according to its standards, including the management of an efficient, up-to-date, and accurate register of beneficial ownership.
This could lead to a decline in confidence by global financiers in Kenya’s financial system, which could lead to capital flight as investors, both domestic and international, may withdraw their funds due to concerns about the integrity of the financial system, say analysts.
“Based on the findings of this report it is recommended that the country reviews the laws governing the trust regime in Kenya and put in place measures to mitigate or deter their use for money laundering and terrorism financing purposes,” states the report.
