What Kenya stands to lose from its inclusion in financial crimes grey list


The 411 registered real estate agents filed only two suspicious transaction reports (STRs) to the Financial Reporting Centre in the five years to 2021. PHOTO | SHUTTERSTOCK

The Financial Action Task Force (FATF), a global standard-setting body for preventing money laundering and financing of terrorism, included Kenya in its grey list during its fifth plenary meeting in Paris last week.

Being on the grey list means Kenya will work closely with the FATF and regional bodies like the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) to address deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) measures.

Key deficiencies highlighted by the FATF include ineffective measures and strategies to identify and address risks related to terrorism financing, cryptocurrency and other virtual assets, and trust and non-profit organisations. The FATF also noted the overall ineffectiveness of Kenya’s response to money laundering and economic crimes, primarily the failure to prosecute cases effectively.

Featuring on the FATF grey list has several consequences, including the country’s reputation being tainted. Unlike the subsequent consequences that may not outrightly be experienced, the reputational damage has already taken effect as Kenya has made global headlines as a new entrant on the grey list.

Second, grey-listing decreases investor confidence, resulting in decreased capital inflows, mainly from foreign investment and bank transfers. A 2021 study by the International Monetary Fund (IMF) estimated that capital inflows decline on average by 7.6 percent of GDP in grey-listed countries.

Notably, the impact significantly depends on the individual investor and other factors like political environment, ease of doing business, and access to the market that would still make Kenya a competitive investment hub in the region.

Third, financial institutions like banks and other money remittance services will experience increased scrutiny, especially by foreign banks with correspondent banking relationships.

This happens because grey-listing a country signals other countries that there is a high chance that the proceeds of crimes could originate from a grey-listed country. Foreign banks adopt enhanced scrutiny to allay such risks, and where the risk is high, they may de-risk by excluding Kenyan banks from accessing some financial products.

For example, when Malta was grey-listed, a 2022 report by KPMG South Africa established that correspondent banking decreased by 20 percent. Fourth, grey-listing leads to an increase in the cost of doing business. Delays in international transactions, especially those from Kenya will negatively impact the supply chain.

These delays occur when foreign banks delay clearing transactions from Kenya since their due diligence measures will always factor in the increased ML/TF risks of working with local banks.

Also, when Kenyan businesses establish relationships with other firms, especially from the West, their Western counterparts have to remain vigilant in safeguarding their reputation to ensure that proceeds of crime from Kenya do not fund the business or the supply chain.
Fifth, the World Bank, and IMF, among other credit and donor institutions, often restrict access to facilities to countries on the grey list.

Where facilities are granted, they will be pegged on conditions such as increased commitment to address the inadequacies in AML/CFT measures. Credit institutions also consider countries on the grey list as having an increased risk of default and often increasing interest rates as a cushion against default risks.

Similarly, non-profit organisations like NGOs that rely on donor funding will also be subjected to enhanced scrutiny, especially given that the FATF singled them out as one of the sectors not effectively regulated in Kenya. A practice that could result in reduced funding as some may not meet stringed donor requirements.

In conclusion, grey listing is a big blow to Kenya as it comes at a time when the government is working around the clock to steady the economy and stabilise the volatile shilling.

More than ever, Kenya needs foreign currency and increased foreign investment. Therefore, it is a wake-up call for AML regulators such as the Financial Reporting Center (FRC) and all AML/CFT stakeholders to build synergy and address the deficiencies to ensure Kenya gets off the list in subsequent FATF evaluations.

Judging from the past, significant AML/CFT reforms in Kenya, including the establishment of the FRC, took place between 2010 and 2014 when Kenya was greylisted. Therefore, it is hoped that the urgent need to be off the grey list will incentivize the government to initiate comprehensive reforms to prevent runaway corruption and economic crimes derailing Kenya’s economic growth.

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