Kenya’s recent addition to a list of countries at risk of money laundering will hurt the credit rating of local banks as they face potential delays in settling transactions and loss of correspondent relationships, global ratings agency Moody’s says.
In a note, the ratings firm says the inclusion on the list, known as a grey list, will typically result in higher transactional, compliance and funding costs for banks as their dealings are subjected to tighter scrutiny hence the risk of losing business.
Global anti-money laundering watchdog Finance Action Task Force (FATF) added Kenya to the list of 21 countries on the grey list last month.
This was after a periodic review that found the country to be non-compliant with 11 of FATF's 40 recommendations on anti-money laundering/combating financing of terrorism (AML/CFT) safeguards, and only largely or fully compliant with three.
Part of the exposure is linked to the rapid adoption of technology by banks, which has opened supervisory and regulatory loopholes in the country’s financial sector.
“Inclusion on the list is credit negative for Kenyan banks because it increases the cost of compliance and can lead to delays in settling transactions, while the potential of losing correspondent relationships would be significant given the economy's high level of dollarisation,” said Christos Theofilou, vice president and senior analyst at Moody’s.
“Kenyan banks including KCB Bank Kenya, Equity Bank (Kenya) Limited and Co-operative Bank of Kenya Limited could face heightened diligence reviews by correspondent banks.”
Kenya was last placed on the grey list in 2010, after the country delayed enacting laws to tackle money laundering, before being removed in 2014 after putting in place a number of laws to tackle illicit cash flows, and operationalising the Financial Reporting Centre in 2012.
Moody’s expects that the new listing will spur similar efforts to close the weak points that have emerged in the financial system over the last decade, which will mitigate the likelihood of a severe effect on correspondent relationships for the banks.
The Treasury has, for instance, stated that Kenya is committed to implementing the FATF Action Plan comprehensively and expeditiously and will allocate enough resources to ensure timely compliance and exit from the grey list, which is typically two years after inclusion.
The Central Bank of Kenya (CBK) recently moved to tighten the framework for penalties for violations of the Banking Act, while the International Monetary Fund and World Bank have also pledged to support Kenya in addressing the deficiencies identified by FATF.
By the time of the next assessment, Kenya expects to have improved the relevant regulatory frameworks and their implementation and enhanced its AML/CFT supervision of financial institutions and other market participants on a risk-based approach.
The country is also expected to have put in place stricter investigations and prosecutions on those violating the rule and established a dedicated authority to collect information and monitor compliance with the enhanced rules.
