The Finance Action Task Force (FATF), the global anti-money laundering watchdog, on February 23, 2024, placed Kenya on what it calls ‘grey list.’
The Treasury confirmed the development the same evening, saying the move “underscores the imperative for swift and comprehensive action to bolster our compliance efforts.”
FATF is the global money laundering and terrorist financing watchdog founded in 1989. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.
FATF usually holds plenary sessions to discuss emerging typology and jurisdictional issues around money laundering, terrorism financial and proliferation financing (ML/TF/PF) risks.
The plenaries typically have two key outcomes: issuance of new guidelines and an updated list of countries with weak measures to combat ML/TF/PF risks. Such countries are categorised into two: ‘high risk jurisdictions’ popularly known as the blacklist and ‘jurisdictions under increased monitoring’ popularly known as a grey list.
Kenya is a member of the East and Southern Africa Anti-Money Laundering Group (ESAAMLG), the associate body of FATF that is responsible for AML/CFT/CPF action in Eastern and Southern Africa. ESAAMLG has 19 members.
What does FATF grey-listing refer to?
FATF grey list countries refers to jurisdictions under increased monitoring. Such countries are actively working with the FATF to address strategic deficiencies in their regimes to counter ML/TF/PF risks.
When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often referred to as the “grey list”.
“Black and grey lists show the level of diligence when it comes to combating these illicit financial transactions,” said Riva Jibali, a tax and human rights advisor at Amnesty International.
What are the implications for Kenya’s grey-listing?
Grey-listing usually brings different implications to different countries. The extent of the implications also varies. However, one of the obvious impacts is the reputational damage to the country’s standing in the global financial system, even as it pushes in positioning Nairobi International Finance Centre as a gateway for investors and businesses to the African market.
“Grey-listing is a huge indictment on the ‘health’ of our financial systems,” says Mr Leonard Wanyama, the regional coordinator of the East African Tax and Governance Network.
“It means that there is reduced confidence in the ability of our system to handle risks occasioned by financial transactions.” he added.
Grey-listing could impact Kenya’s international trade since some countries may shun it for fear of money laundering and terrorism financing.
Kenya could also experience reduced foreign direct investment during this period should some investors choose to shun markets under grey list. There could also be restricted correspondent banking.
“There is a concept of derisking where countries can be cut off completely from financial systems to reduce passing on risks to other jurisdictions,” said Ms Jibali.
The listing could also pose difficulties for the country in securing funding or trigger downgrades in sovereign and businesses rating—a development that could mean higher borrowing costs.
There is also the risk that Kenya may in the process attract people who may want to ride on the identified loopholes to carry out criminal activities.
How did Kenya get here?
“The financial institutions have themselves put us in trouble. One of the reasons we are in hot soup is the lack of proper systems for filing, analysis and follow-up of Suspicious Transactions Reports (STRs),” said Mr Wanyama.
Kenya’s financial sector has seen a heightened pace of sophistication with developments such as mobile money banking, online betting, digital credit, online foreign exchange trading and the use of cryptocurrencies all rendering the traditional financial sector regulations inadequate in safeguarding the integrity of financial transactions.
ESAAMLG completed its assessment of Kenya’s anti-money laundering and counter-terrorist and proliferation financing (AML/CFT) system and published a mutual evaluation report in September 2022, highlighting the level of compliance with the FATF recommendations.
FATF prescribed a number of actions based on the deficiencies and gave Kenya 12 months to address them. The country exited the observation period in October last year and filed a post-observation report in November. The body is convinced that there are remaining strategic gaps that Kenya needs to address.
What is the way forward?
Kenya has been asked to complete a terrorism financing risk assessment and present its results. It will also be required to update its national strategies for anti-money laundering and combating terrorism financing (AML/CFT), as well as improve its risk-based AML/CFT supervision of Designated Non-Financial Businesses and Professions (DNFBPs) such as real estate agents and dealers in precious metals or precious stones.
The country will also be required to adopt a legal framework for the licensing and supervision of virtual asset service providers such as cryptocurrency dealers.
Kenya has been tasked to enhance the understanding of DNFBPs, including to increase filing suspicious transactions.
It will also have to designate an authority for the regulation of trusts and collection of accurate and up-to-date beneficial ownership information and implementing remedial actions for breaches of compliance with transparency requirements for legal persons and arrangements.
Kenya will also have to increasing ML and TF investigations and prosecutions in line with risks, among other things if it is to exit the grey list.
