Introduction
Money laundering is a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity. Terrorist financing involves the raising and processing of assets to supply terrorists with resources to pursue their activities. While these two phenomena differ in many ways, they often exploit the same vulnerabilities in financial systems that allow for an inappropriate level of anonymity and non-transparency in the execution of financial transactions.
In 2000, the IMF responded to calls from the international community to expand its work in anti-money laundering (AML). After the tragic events of September 11, 2001, the IMF intensified its AML activities and extended them to include combating the financing of terrorism (CFT).
Money-laundering and the Law
Money laundering has probably been in existence for as long as money itself has been in existence. It is however a relatively new crime or offence in the world because in the past, no one looked at it as a crime as such. The law tended to focus on the underlying crime rather than what was done with the proceeds of that crime.
One example of an underlying crime is drug-trafficking. The ever-increasing production, trade and subsequent use of narcotics have led to an ever-increasing stream of drugs money, not to mention that the constantly improving ease of transferring large sums of money electronically enables criminals to transfer money from one corner of the globe to the other in a split second, but concurrently it helps the regulators to check and monitor international money movements and detect unusual patterns of money movements. The focus in anti-money laundering is now no longer on only the underlying crime of drug-trafficking, but on what is done with the huge sums of money which are the proceeds of that crime.
Establishment of the Financial Action Task Force
Recognising the immense threat of these developments, the G7 at its summit in 1987 decided that international action was needed to combat the increasing misuse of the worldwide financial system by criminals laundering drugs money. It was then decided to establish an inter-governmental body to set worldwide standards to fight money laundering. This body is known as the Financial Action Taskforce (FATF).
The Financial Action Taskforce (FATF) is an inter-governmental, policy-making body established by the G-7 summit held in Paris in July 1989, in response to mounting concerns of the international community over the risks of money laundering .Its aim is to generate the necessary political will to bring about national legislative and regulatory reforms in this area.
The purpose of the FATF is, therefore, the development and promotion of policies, at both national and international levels, to combat money laundering and terrorist financing. It sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing and other related threats to the international financial system.
To this end, the FATF has developed a series of Recommendations that are recognised as the international standard for combating money laundering, the financing of terrorism and proliferation of weapons of mass destruction.
These Recommendations were first issued in 1990 and they form the basis of a co-ordinated response to these threats to the integrity of the financial system. These Recommendations are intended for universal application since the FATF has become the recognized world standard -setter in the fight against money – laundering. The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and countermeasures and promotes the adoption and implementation of appropriate measures globally.
Importantly, in collaboration with other international stakeholders such as the United Nations Security Council and the Egmont Group, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
In 2000, the IMF responded to calls from the international community to expand its work in the area of anti-money laundering (AML). After the tragic events of September 11, 2001, the IMF intensified its AML activities and extended them to include combating the financing of terrorism (CFT).
Money laundering and the law in Kenya
Being the major financial and trade hub in East Africa, Kenya has been particularly vulnerable to money laundering and terrorist financing activities.
Consequently, Kenya has not been left behind in the worldwide fight against money laundering: she has signed and ratified all the UN Conventions on combating money laundering and terrorism financing, and is also a member of a regional body known as the Eastern and Sothern Africa Money Laundering Group (ESAAMLG). The ESAAMLG is an 18-member body subscribing to global standards to combat money laundering and financing of terrorism. The ESAAMLG is an Associate Member of the global FATF. The other members of this regional body are Angola, Botswana, Eswatini, Ethiopia, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, South Africa, Tanzania, Uganda, Zambia, and Zimbabwe.
The main objectives of ESAAMLG are to:
- Adopt and implement the 40 Recommendations of the FATF
- Apply anti-money laundering measures to all serious crime
- Implement measures to combat the financing of terrorism, and
- Implement any other measures to combat the financing of terrorism
As a member of the ESAAMLG, Kenya has implemented this global anti-money laundering framework.
In 2009, Kenya enacted the Proceeds of Crime and Anti-Money Laundering Act, which is the most comprehensive piece of anti-money laundering (AML) legislation in Kenya. It provides necessary details for reporting requirements, penalties, and money laundering offense, establishes the Financial Reporting Centre (FRC) which is charged with receiving Suspicious Transaction Reports, and stipulates requirements for the tracing, freezing and seizing of criminal proceeds.
Kenya has also criminalized money laundering under the Narcotic Drugs and Psychotropic substances (Control) Act, 1994. This Act provides for the forfeiture of property derived from or used in drug trafficking. Section 36 of this Act specifically provides for a mandatory forfeiture to the Government of Kenya of all property owned by a person on the date of commission of an offence under the Act, or which has been acquired by the person after the date of the commission of the offence. Offences under the Act include unlicensed possession of narcotic drugs and psychotropic substances (S. 3), trafficking in narcotic drugs (s. 4) and smoking or inhaling narcotic drugs (s. 5).
We shall now proceed to take a closer look at POCAMLA (the Act).
The particulars of the offence of money-laundering are contained in sections 3, 4 and 7 of the Act. Section 3 casts a very wide net and states that anyone who knows or even ought to reasonably have known that property has been obtained from crime and enters into any transaction or arrangement with anybody regarding that property, or helps to conceal or disguise the nature, source, location, movement or ownership of the property, or deals with the property in a way that helps a person who has committed an offence to avoid prosecution, or removes or diminishes any property acquired as a result of commission of an offence, commits the offence of money-laundering.
Section 4 further states that the offence of money laundering is also committed when a person acquires, uses, or possesses property that one knows or ought to have reasonably known that it has been acquired through a crime committed by another person.
Finally, section 7 states that financial promotion of an offence also constitutes the offence of money laundering, that is when a person, with the intent to commit an offence, knowingly transports, transmits, transfers, receives, or even attempts to transfer or receive, a monetary instrument or anything of value to another person.
Hence, under POCAMLA money laundering is a civil offence. This means also that the Limitation of Actions Act does not apply and therefore there is no time limitation period within which authorities must institute enforcement actions.
The Act has established three bodies charged with responsibility for ensuring compliance and enforcement of Anti-money laundering requirements imposed by the Act. These are the Financial Reporting Centre (section 21), the Assets recovery Agency (section 53(1)), and the Anti-Money Laundering Advisory Board (section 49). Of these, the first two are the most active.
The Financial Reporting Centre (FRC) is empowered by the Act to impose civil penal penalties for non-compliance with the Act. Criminal sanctions are administered by the relevant law enforcement agencies.
The FRC is the Government of Kenya Financial Intelligence Unit. Its role is the compiling of statistics and records arising out of information received and it also creates and maintains a database of suspicious transactions. The database helps it detect money laundering and also liaise with money laundering intelligence agencies outside Kenya.
The POCAMLA Regulations require reporting institutions to submit to the FRC a report indicating the institutions’ level of compliance with the Act and the Regulations, among others. The reports must be submitted by 31st January of the following year unless the date is varied in writing by the FRC.
The Centre then circulates an Annual Compliance Report towards the end of the year which institutions use for reporting compliance in the year that is ending.
A reporting institution may fall in a business sector with or without a regulator. Where a sector is regulated, the FRC works with the regulator to ensure that the regulated institutions properly implement their AML obligations. Otherwise, the FRC engages the reporting institutions directly. Examples of regulators and the reporting institutions they regulate are:
- The Central Bank of Kenya – regulates institutions such as commercial banks and Mortgage Finance Institutions; Foreign Exchange Bureaus; and Money Remittance Service Providers
- The Capital Markets Authority – regulates stockbrokers, Investment Banks, and Fund Managers
- The Retirement Benefits Authority – regulates Administrators, Fund Managers, and custodians.
- The Estate Agents Registration Board – regulates estate agents.
Under the POCAMLA, reporting institutions are required to obtain full particulars of a customer’s identity and to have a sound knowledge of the purpose for which the customer is seeking to establish a relationship with the reporting institution ( “Know Your Customer”). This is applicable to natural and juridical persons, and Government departments too.
The supervisory bodies and reporting institutions report to the FRC any suspicious activity and the FRC takes appropriate action by, for example, forwarding the information to law enforcement authorities.
In addition, after POCAMLA came into force, reporting institutions were required to conduct due diligence on existing customers. Under the Regulations, the reporting institutions are required to conduct diligence on existing customers.
Furthermore, the Regulations require reporting institutions to formulate and operationalize internal procedures for determining high risk persons or transactions. Customer records shall be kept by the reporting institution for a period of at least seven years or such longer period as the FRC may prescribe.
Reporting institutions are required to file reports of all cash transactions exceeding US $10,000 or its equivalent within 7 days of the transaction, whether they appear suspicious or not. Some of the particulars that the reports filed should include are the name, physical and postal address, and occupation ( or where appropriate business or principal activity) of each person conducting the transaction or on whose behalf the transaction is being conducted, as well as the method used by the reporting institution to verify the identity of that person; the nature, time and date of the transaction; the type and amount of currency involved; the type and identifying number of any account with the reporting institution involved in the transaction; if the transaction involves a negotiable instrument other than currency, the name of the drawer of the instrument, the name of the institution on which it was drawn, the name of the payee (if any), the amount and date of the instrument, the number (if any) of the instrument and details any endorsements appearing on the instrument; and the name and address of the reporting institution and of the officer, employee or agent of the reporting institution who prepared the record ( Section 46( 3) ).
The Act and Regulations also require that cash declarations be made at any port of entry for any amounts equivalent to or amounting to US $ 10,000. The declarations are to be made to the customs officer who then makes a report to the FRC.
The Central Bank of Kenya has also put in place Prudential Guidelines on Anti-Money Laundering and Combating the Financing of Terrorism. These Guidelines guide financial institutions when undertaking risk assessment. Failure to follow these guidelines could lead to CBK applying sanctions on the financial institution, such as ordering the institution to stop foreign exchange dealing for a specified period because of a failure by the reporting institution to satisfactorily make “Know Your Customer” checks in the trades.
The Act does not specify the criteria which reporting institutions can use for determining suspicious activity. However, reporting institutions are required to continually monitor all complex, unusual, suspicious, large or such other transactions as may be specified in the Regulations.
In particular, they are required to pay attention to all unusual patterns of transactions, and to insignificant but periodic patterns of transactions which have no apparent economic or lawful purpose.
The Assets Recovery Agency, established under section 53(1) of POCAMLA, is the body responsible for investigating and implementing sanctions against persons who contravene the Act. The Agency has been given wide powers to investigate and apply to the courts for orders for confiscation, forfeiture, restraint, and preservation. An interested party affected by such court orders may apply for rescission.
As per section 97, the orders of the court remain in force until the outcome of any appeal against the decision.
Penalties for failure to comply with anti-money laundering requirements
- Identification, freezing, tracing, seizure and confiscation of proceeds of crime.
- In addition, a person who fails to comply with the provisions of the Act is liable to a fine not exceeding Kenya Shillings five million. For a corporate body, the penalty is a maximum of Kenya Shillings twenty-five million.
- For continued flouting of the Act, the person or reporting institution shall be liable to an additional penalty of Kenya Shillings ten thousand per day for a maximum of 180 days.
- The Act also empowers the FRC to take administrative action, for example seeking revocation of licences for financial or real estate institutions that are used as conduits for money laundering activities; issuing warnings and directions to reporting institutions; barring persons from employment in reporting institutions; and issuing an order to a competent supervising authority requesting suspension or revocation of a licence or registration of a specified reporting institution ( section 24 C (1) ).
The POCAMLA imposes anti-money laundering obligations on financial institutions and some categories of the designated non-financial businesses and professions. Under section 2, any person or entity which conducts as a business one of the following activities is a financial institution: accepting deposits and other repayable funds from the public; lending, including consumer credit , mortgage credit, factoring, with or without recourse, and financing of commercial transactions; financial leasing; transferring of funds or value, by any means, including both formal and informal channels; issuing and managing means of payment e.g. credit and debit cards, electronic money and travellers’ cheques; financial guarantees and commitments; trading in money market instruments; etc.
Designated non-financial businesses and professions include real estate agencies, accountants, NGOs, casinos (including internet casinos), precious metals and stones dealers, or any other business in which the risk of money laundering exists as the Minister, on the advice of the FRC, may declare.
In conclusion, the international community, Kenya included, has made the fight against money laundering and terrorist financing a priority. The IMF is especially concerned about the possible consequences money laundering, terrorist financing, and related crimes have on the integrity and stability of the financial sector and the broader economy.
These activities can undermine the integrity and stability of financial institutions and systems, discourage foreign investment, and distort international capital flows. They may have negative consequences for a country’s financial stability and macroeconomic performance, resulting in welfare losses, draining resources from more productive economic activities, and even have destabilizing spill over effects on the economies of other countries.
In an increasingly interconnected world, the negative effects of these activities are global, and their impact on the financial integrity and stability of countries is widely recognized. Hence AML and ATF measures can only benefit the global economy if individual countries implement AML and CTF measures both in earnest and in tandem.
Money launderers and terrorist financiers exploit both the complexity inherent in the global financial system as well as differences between national AML/CFT laws and systems, and they are especially attracted to jurisdictions with weak or ineffective controls where they can more easily move their funds without detection. Moreover, problems in one country can quickly spread to other countries in the region or in other parts of the world. Needless to say these problems are more acutely felt in developing countries like Kenya, which already have a plethora of socio-economic issues to deal with.
Strong AML/CFT regimes enhance financial sector integrity and stability, which in turn facilitate countries’ integration into the global financial system. They also strengthen governance and fiscal administration. The integrity of national financial systems is essential to financial sector and macroeconomic stability both at the national and international levels.
Needless to say, then, the fight against money laundering in Kenya is here to stay.
For further information on money laundering and related laws in Kenya, please contact
Catherine Nyiha
Email: [email protected]
