KCB, Equity hardest hit as CBK promises further action over NYS scam

Central Bank of Kenya premises in Nairobi
Central Bank of Kenya premises in Nairobi. FILE PHOTO | NMG 

KCB #ticker:KCB and Equity #ticker:EQTY banks bore the brunt of the Central Bank of Kenya’s (CBK) unprecedented action against five banks for aiding the transfer of billions of shillings siphoned from the National Youth Service (NYS).

The CBK said in a statement released Wednesday that it had fined KCB, Equity, Standard Chartered Bank Kenya #ticker:SCBK, DTB #ticker:DTK and Co-op Bank #ticker:COOP a total of Sh392.5 million for their role in aiding the flow of Sh3.5 billion that flouted anti-money laundering laws among other banking regulations.

Using its discretionary powers, the CBK imposed the severe fines even on banks that handled relatively smaller sums, signalling that the regulator also took into account other factors such as repeat offences and sloppy cultures that allowed the illicit transactions.

“CBK has assessed monetary penalties for each of the five banks in accordance with the extent of the violations that were identified and pursuant to CBK’s powers under the Banking Act and the Central Bank of Kenya Act,” the statement said.

While the fines ranging from Sh20 million to Sh149.5 million are big, they are unlikely to have a significant impact on profitability of the lenders this year.

If similar penalties are to be imposed for such malpractices in future, the cost could turn out to be heavy for banks that have previously paid a few millions for similar violations.

KCB, which is Kenya’s biggest bank, was fined Sh149.5 million, arguably the largest sum that a Kenyan bank has paid for offences committed under the Banking Act. The bank handled Sh639 million of the NYS cash, meaning the fine amounts to 23.3 per cent of the illicit cash.

The penalty is equivalent to three days of KCB’s net profit, based on the bank’s performance in the year ended December 2017.

KCB said in a statement that it was considering the issues raised in the CBK action and promised to respond in 14 days. “We are reviewing the CBK report and will respond to the issues raised conclusively within 14 days,” the bank said.

The other lenders issued similar statements promising to co-operate with the regulator.

Equity, the second largest bank, will pay an Sh89.5 million fine for its role in aiding the transfer of Sh886 million or 10.1 per cent of the NYS flows. The bank earns the fine in about two days.

“We emphasise that at this point no penalty has been imposed by the Central Bank of Kenya,” said the bank, pledging to respond to the issues with CBK.

StanChart will pay Sh77.5 million despite handling the largest sum of Sh1.6 billion, indicating that the lender’s internal control processes and compliance standards may have been strong enough to warrant a lighter punishment. For StanChart, the penalty is equivalent to giving up four days’ worth of profits.

If the regulator’s actions stand unchallenged, DTB will pay Sh56 million or 34.5 per cent of the Sh162 million it handled. The fine amounts to the largest disgorgement rate among the five institutions. DTB earns the penalty in about three days.

Co-op Bank has been hit with the smallest fine of Sh20 million, representing 7.6 per cent of the Sh263 million NYS deposits it received. It needs half a day to pay the fine.

The CBK said the institutions were penalised for breaking banking laws, including failure to report large cash transactions, failure to undertake adequate customer due diligence, lack of supporting documentation for large transactions, and lapses in the reporting of suspicious transaction to the Financial Reporting Centre (FRC).

The CBK said it had imposed the fines upon conclusion of the first phase of investigations, adding that more institutions will be identified and investigated in the near future.

The CBK said it had initially focused on the five banks because they handled the largest amounts in the NYS scam where individuals and companies were paid without delivering goods or services.

The regulator says it has discussed its findings with the boards and senior management of the banks, adding that each has expressed strong commitment to be fully compliant on all aspects of the law and to address the identified lapses through time-bound action plans.

The remedial action plans are to be submitted to CBK within 14 days. CBK says it will work with all other banks to ensure that the findings are also applied to strengthen rules combating financing of terrorism and money laundering.

Besides the financial penalty, the named banks have suffered reputational damage from CBK’s rare name and shame campaign.