How Kenya can fight money laundering menace

Opinion and Analysis

President Uhuru Kenyatta last month warned commercial banks involved in money laundering that they risk losing their licenses. PHOTO | FILE 

By SAMUEL KIRAGU

A few days ago, as I watched President Uhuru Kenyatta informing the nation of measures his government was taking to crack down on corrupt banks and government officials, it reminded me of the first day I reported for a new job as banker in one of the international banks in the Americas.

Before I was ushered in to my new desk, I was politely informed that the first order of business I needed to urgently address was to attend a whole day’s training on anti-money laundering and detection of proceeds from criminal activities.

After that very terrifying training, I was made to sign a code of conduct confirming that I have gone through the anti-money laundering training and I commit to all its policies and laws.

This legal document further indicated that I would be criminally and personally held liable if I didn’t detect and disclose any potential laundering activities and proceeds from crime.

I came to understand later that it was a rite of passage for new bankers meant to impart a strong risk management culture into the organisation.

One of the areas that the bank really emphasized was the know-your-customer procedures, also commonly referred to as KYC. The bank had a very strict customer acceptance policy.

No client would be accepted unless adequate customer due diligence had been done. It was common to reject some customers if the bank felt they were potentially risky to its operations.

Integrity and soundness of a banking system relied heavily on strict due diligence and KYC programmes.

In performing customers’ due diligence, the client would be identified on the basis of documents reliably obtained from an independent source like utility companies and government agencies.

In some cases, call back procedures would be performed. This   literally involved making a phone call to the document’s issuing agencies to verify the authenticity of the identification documents.

In some instances, if the bank had any reason to believe that the customer was high risk, enhanced due diligence would be conducted.

High-net worth politically exposed persons, their family members and business associates were among high risk customers. Their access to state accounts and funds makes them very risky. They are also potential targets for bribes.

In case of corporate clients, a risk based approach was taken to unmask the beneficial owners of the entity. Know-your-client business (KYCB) would be conducted by gathering information on the nature of the business that was being conducted by the entity.

Business transactions would be monitored regularly to ensure the amount and frequency of funds being deposited into the bank account were consistent with the expected amounts and source of funds.

If for instance, KYCB documents indicates that the business’s main activity in pig rearing and the expected cash inflows per month is Sh100,000, a red flag would be raised if Sh50 million is deposited in that bank account from a government bank account.

Suspicion activity report should be submitted to the relevant government agency by the bank’s chief anti-money laundering officer.

The expectation is that the government agency would right away kick off investigations into possible money laundering activities by the client.

Customer acceptance policies also looked at customers’ citizenship. I was reminded that as a Kenyan, my financial risk profile is higher and enhanced due diligence would be conducted before I opened a bank account.

This was due to the fact that Kenya is globally perceived as having weak anti-money laundering programmes thus higher potential risk of dirty money being laundered.

Bank Secrecy Act (BSA) commonly referred to as anti-money laundering law is causing wakeful nights to big international banks in the US due to hefty penalties resulting from anti-money laundering and terrorism financing lapses.

JP Morgan has been the biggest casualty due to violation of BSA. In 2014, it was slapped with a penalty of more than $2 billion (Sh204 billion) due to Madoff connected anti-money laundering lapses.

HSBC parted with a $1.9 billion (Sh194 billion) penalty for allowing its subsidiary in Mexico to wire more than $800 million (Sh81.75 billion) proceeds from drugs cartels.

The penalties not only harm the banks reputation but also drain their profitability. That is why these international banks have taken tough steps to control such lapses.

Implementing these anti money laundering programmes is costly. But as the banks have realised the cost of not complying in form of penalties and in some cases losing banking licences outweighs the implementation expenses.

After Citibank US was slapped with $140 million (Sh14.3 billion) fine for breaching the Bank Secrecy Act, it made promise that it would hire more than 30,000 employees to work in their compliance department.

Some of the roles of those employees would be to ensure that the bank has effective anti-money laundering programmes. These costs are justified since the associated measures would curb potential for high penalties costs resulting from lapses in anti-money laundering controls.

In addition to intense screenings of their customers, some lenders in the US are also ending banking relationships with customers they deem risky notably the high-net worth and politically exposed persons or entities.

This is in an effort to avoid potentially heavy fines from the government authorities for not complying with anti-money laundering regulations and the damaged reputation that is associated with this negative publicity.

Corresponding banking is also under threat. US Banks are not willing to risk losing their licences and heavy fines from the federal government regulators as a result of foreign banks that have inadequate anti-money laundering programmes.

US-based banks are terminating the corresponding banking relationships with lenders that don’t have sound and concrete anti-money laundering controls in place.