Global financial rules shaping Kenya’s banking landscape

 

The Central Bank of Kenya headquarters in Nairobi. The CBK now requires banks to obtain more information on customers depositing or withdrawing more than Sh1 million. PHOTO | FILE  

By SAMUEL KIRAGU

The Central Bank of Kenya’s recent directive requiring banks to obtain additional information on customers depositing or withdrawing more than $10,000 (Sh1,020,000) may have rattled many ordinary Kenyans.

The guideline, among other things, requires banks to obtain from their customers details of why the cash deposit or withdrawal is being made, the intended beneficiary or what they intend to use the money for.

Customers are also required to disclose the source of the money. Why has the CBK introduced this reporting requirement?

Why is the CBK taking these unique steps and at this point in time? The answer is that this is Kenya’s contribution to the global fight against money laundering.

The reporting threshold of $10,000 that the CBK has set is actually an internationally recognised reporting limit. Most of the regulations that Kenyan financial services regulators are introducing are not homegrown; they have international roots.

The bottom-line is that Kenya’s financial regulatory landscape is being radically shaped by the global forces.

A series of mandatory regulatory changes in international banking has left policy makers and regulators with no choice but to comply.
In reality, it is safer to say that the US is the originator of most of these regulations.

Some of the regulations range from bank capital and liquidity adequacy requirements, which were brought on board through the Dodd Frank Act, and taxation through the FATCA (Foreign Accounts Taxation Compliance Act).

The US law which relates to the CBK’s recent directive is the Patriot Act. The USA Patriot Act stand for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.

This law was passed in response to the September 11, 2001 US terrorist attacks and compels financial institutions such as banks and insurance companies in the United States to help government agencies detect and prevent money laundering through special reporting of large cash transactions.
The Financial Action Task Force (FATF), a global body that sets standards on fighting money laundering and terrorism financing, stipulates suspicious transaction reporting requirements.
It is worth noting that in the US, a Currency Transaction Report (CTR) is automatically generated once an amount holding over $10,000 is processed.
These reports are not just filed to the Financial Crimes Enforcement Network (FinCEN) but also to the tax authority (Internal Revenue Authority).
FinCEN is equivalent to Kenya’s Financial Reporting Centre (FRC). As such, it should not come as a surprise if the Kenya Revenue Authority (KRA) comes knocking at the door of anyone who has made a transaction that is subject to FRC reporting.
This rule is even stricter in countries like Canada. The authorities require a Large Cash Transaction Report (LCTR) to be filed if two or more amounts of less than $10,000, which total $10,000, are received within 24 hours.
Like other banking regulatory bodies, the CBK is introducing a globally recognised regulatory reporting practice to safeguard the integrity of Kenya’s banking sector.

The CBK’s new rule is for the benefit of the entire financial industry.

In the wake of these new rules, banks and other financial institutions in Kenya should brace for an increase in regulatory and compliance costs.

Globally, compliance costs in financial services have increased significantly in the past 20 years.

Some of the regulatory and compliance costs are directed toward fighting money laundering and financing of terrorism in order to protect the international financial system.

International banks have invested heavily in the compliance function after realising that the cost of not complying is so huge. Citibank, for instance, has close to 30,000 staff working in the regulatory and compliance function alone.