How weak enforcement hamper's fight against financial crime

Kenya remains under scrutiny following its grey-listing by the Financial Action Task Force (FATF) in February this year for being a risky jurisdiction on money laundering and terrorism financing. 

The listing is despite the enactment of the Anti-Money Laundering and Combating of Terrorism Financing Laws (AML/CFT) (Amendment) Act, 2023.

This raises a critical question on whether the law is as effective as intended, or it only adds to Kenya’s legislative framework without tackling systemic enforcement challenges.

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Experts now argue that Kenya’s financial integrity problems run deeper than legislation. 

According to Flywheel Advisory executive director Grace Mburu, Kenya’s problems did not start in February 2024, when FATF placed the country on the grey list. 

“In fact, the grey list only lifted the lid on existential problems that had been simmering until the evaluators knocked on our doors and told us what we already knew – Kenya’s financial integrity was compromised,” she told Financial Standard.

With statistics showing that an estimated Sh6.5 trillion - half Kenya’s GDP - is lost annually to illicit financial flows, this undermines efforts toward economic growth and achieving sustainable development goals.

“Financial crime has ravaged our economies, communities and societies, compromising the delivery of sustainable development goals such as healthcare, education, infrastructure, water, electricity for all, and eradicating poverty,” Mburu said.

“Financial crime is evolving and we need to develop appropriate strategies to counter money laundering, terrorism financing, and proliferation financing if we are to remove Kenya from the FATF grey list.”

Additionally, Mburu said, there is need to establish measures to detect and prevent illicit funds from being cleared through the Designated Non-Financial Businesses and Professions (DNFBPs) which include real estate agents, casinos, betting companies, dealers in precious metals, precious stones, cars sales, accountants, trust and company service providers, advocates, and independent legal professionals. 

In February 2024, FATF flagged Kenya for lacking a clear strategy for prosecuting money laundering and terrorism financing offences, with inadequate investigations and enforcement mechanisms cited as major deficiencies.

The immediate economic consequences are likely to be felt in reduced foreign direct investments and strained global partnerships as investors shy away from grey-listed countries.

A key issue lies in the ineffective implementation of laws such as the Proceeds of Crime and Anti-Money Laundering Act.

Lawyer Charles Kanjama said that while Kenya has made legal strides, enforcement lags due to political interference and a lack of institutional will.

“Politically exposed individuals are often implicated, creating a significant conflict of interest,” he told Financial Standard.

He said lack of political commitment is one of the challenges facing the implementation of the anti-money laundering laws that have seen Kenya land on the grey list again. 

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“Basically, they have come up with the law, but they are likely to be the first people to look for ways around the law when they are involved in their transactions,” Kanjama said. 

The informal sector also presents unique challenges. With its substantial contribution to the economy, the sector is a fertile ground for money laundering, making it difficult to enforce formal anti-money laundering mechanisms.

Compounding this issue, legal professionals and other DNFBPs are inadequately monitored, creating gaps in the system.

“The growing informal sector makes it hard to address the aspects of money laundering with formal structures,” Kanjama said.

Moreover, while suspicious transaction reports have increased—rising from 5,100 between 2017 and 2022 to 6,631 in 2023 — the effectiveness of these reports in curbing financial crime remains questionable, according to a 2023 report by the Financial Reporting Centre. 

The bulk of these reports was filed by commercial banks or mortgage institutions, accounting for with 5,848 of the total suspicious transaction reports. 

The report also showed that the number of reporting institutions had increased to 990 as of 2023 but despite this, money crime remains high in the country impairing the economy.

The Central Bank of Kenya’s National Risk Assessment report revealed that only 19 per cent of fraud-related investigations led to prosecutions, with a conviction rate of just 17 per cent.

The recurring inclusion on the grey list underscores systemic failures in addressing financial crimes effectively.

Financial Standard reached out to The National Treasury through its official communication team on what the government is doing to get the country off the grey list.

At the time of publishing this story, there was no substantive feedback from the National Treasury.

Financial market experts such as former Kenya Bankers Association CEO Habil Olaka, emphasise the need for political commitment, citing past successes when political will led to the establishment of the Financial Reporting Centre and consequently Kenya’s removal from the grey list.

“For a financial reporting centre to be put in place, it required purely political will. When it became critical and Kenya was being threatened to be put on the blacklist, political will was there,” Olaka said.

The blacklist was going to have a significant impact on the banking industry, as they were not going to be able to transact with corresponding banks.

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“It became a crisis, and within no time, political will was there, the centre was put in place, the Asset Recovery Agency was put in place, and Kenya was removed from the consequences of the blacklist and removed from the grey list,” said Olaka.

“We are now back where we were years back. It is a very tedious and painful exercise of going there every so often to defend and explain what you have done on each of the deficiencies.”

He said this is normally done at a high level; sometimes the team is led by the Central Bank governor or the cabinet secretary for the National Treasury, noting that it is a costly exercise. 

Additionally, he said, lawyers were not reporting suspicious entities and were one of the weakest links in the anti-money laundering framework.

To restore financial credibility, experts say that Kenya must bridge the gap between legislative intent and enforcement.

This includes investing in capacity building, enhancing cross-sector collaboration, and addressing political interference in financial crime cases.

Without measurable results, the AML/CFT framework risks becoming a toothless instrument in the fight against financial crime.

[The Thomson Reuters Foundation provided support for this article as part of its global work aiming to strengthen free, fair and informed societies. Any financial assistance or support provided to the journalist has no editorial influence and the content is not endorsed by or associated with the Thomson Reuters Foundation, Thomson Reuters, Reuters, nor any other affiliates]