By PATRICK NJOROGE
In Summary
- Nevertheless, in order to develop and implement policies that would appropriately address the issue, it is important to appreciate the vulnerabilities of African financial systems. More importantly, to understand how they enable or facilitate the movement of money.
- These flows and the activities that support them have been shown to lead to increasing inequality in the source countries, in addition to undermining the economic and social institutions, discouraging transparency, and undermining international development co-operation.
Stemming illicit financial flows from developing
countries is one of the key issues shaping the global development
agenda. Goal No. 16 of the Sustainable Development Goals (SDGs) under
the United Nations 2030 Agenda for Sustainable Development, commits to
“significantly reduce illicit financial and arms flows, strengthen the
recovery and return of stolen assets and combat all forms of organised
crime”
There are good reasons for this: First, the amounts involved
are massive. With assistance from the IMF and the World Bank, the
advocacy group Global Financial Integrity (GFI) has estimated that
Africa loses about $50 billion annually to illicit financial flows.
Additionally, according to the Report of the High
Level Panel on Illicit Financial Flows, between 1970 and 2008, Africa
lost an estimated $854 billion in illicit financial flows.
This amount is equivalent to the development assistance received by the continent over the same period.
Second, illicit financial flows have far-reaching effects, particularly on the African continent.
Second, illicit financial flows have far-reaching effects, particularly on the African continent.
These flows and the activities that support them
have been shown to lead to increasing inequality in the source
countries, in addition to undermining the economic and social
institutions, discouraging transparency, and undermining international
development co-operation.
Third, all countries are involved in this fight, and there are no winners if illicit financial flows are not dealt with.
The financial sector is the most common conduit.
This is largely due to the interconnection between national and
international financial systems, which can provide a wider geographical
reach through which illicit financial assets are moved and laundered.
Enable or facilitate
The financial sector, therefore, has to be at the
forefront of the agenda to stem the flows. Nevertheless, in order to
develop and implement policies that would appropriately address the
issue, it is important to appreciate the vulnerabilities of African
financial systems. More importantly, to understand how they enable or
facilitate the movement of money.
Most of our economieshave informal financial
systems that are primarily cash based. However, significant gains have
been made in increasing the level of financial inclusion, most notably
in sub-Saharan Africa, where countries like Kenya and Tanzania have
embraced mobile and financial products and services.
But the overall level of financial inclusion in
Africa remains low. Only a small percentage of the population has bank
accounts, and the percentage of those owning insurance policies and
securities is even lower. This is relevant given that it serves to
hamper efforts to trace illicit financial flows from the continent.
Weak banking regulatory and supervisory frameworks
has largely hindered the effective implementation of initiatives aimed
at reducing illicit financial flows from Africa.
This is reflected at the national level, given that
most African countries are yet to fully adopt and implement the 2012
Financial Action Taskforce (FATF) recommendations, the international
standards on combating money laundering and the financing of terrorism.
The FATF standards are a comprehensive framework of
preventive measures for financial institutions to address threats to
the financial system including illicit financial flows.
Recent assessments of several African countries
Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
regimes conducted by the Eastern and Southern Africa Anti-Money
Laundering Group (ESAAMLG), a FATF regional body, revealed that most
countries generally exhibit a low level of compliance with preventive
measures.
The implementation of customer due diligence, in
particular the identification and verification of beneficial owners of
corporate entities remains a significant challenge. Closer
international cooperation is also needed.
The lack of institutional, technical and human capacity also
hampers financial sector regulators’ ability to curtail the movement of
illicit financial outflows from financial institutions in Africa.
The infrastructure that would support regulators
efforts to combat illicit financial flows such as Financial Intelligence
Units (FIUs), beneficial ownership registries or asset recovery units
are either non-existent or in the early stages of development. As a
result, the skills required for tracking illicit financial flows,
including the ability to profile money laundering risks and analyse
suspicious transactions, are severely lacking in the continent.
New technologies
New technologies can help but could also facilitate
illicit financial flows. In addition, lifting the veil of secrecy and
determining who ultimately owns and controls corporate entities that
have established business relationships with financial institutions
exposes wrongdoing and disrupts a key vehicle for illicit financial
flows.
I would therefore urge the continent’s legislatures
to consider implementing changes to our national laws that would
enhance our national registries, particularly as relates to the
obtaining and sharing of beneficial ownership information. In the past
year, the Central Bank of Kenya (CBK) has adopted several initiatives to
foster transparency in the Kenyan financial system.
It has stepped up close collaboration with the
Financial Reporting Centre (FRC)—Kenya’s financial intelligence unit
(FIU)—to foster a culture of compliance in the banking sector. Emphasis
has been placed on the preventive measures outlined in the Proceeds of
Crime and Anti-Money Laundering Act (POCAMLA), Kenya’s primary
anti-money laundering legislation.
It has also provided additional clarity on
reporting obligations under POCAMLA including the issuance of guidelines
on large transactions in January 2016, intended to provide a clear
trail of large cash transactions conducted over the counter in banks.
Further, AML/CFT on-site inspections have been
enhanced. CBK is currently developing a risk based AML/CFT supervisory
framework with assistance from the International Monetary Fund (IMF).
CBK has also required greater transparency on the part of banks to
ensure public confidence.
Transparency extends to disclosures on their
corporate governance and risk management structures. CBK has enhanced
the disclosures by banks on their significant shareholders. Banks are
now required to disclose on their websites details of significant
shareholders who own five per cent or more shareholding.
Kenya’s financial sector is very vulnerable given
its strategic position in the region, facilitated by easy access through
sea ports, airports and land. Kenya is a fast growing economy with high
potential especially in the financial sector.
It is therefore attractive to both well-intentioned
and ill-intentioned investors. Inter-agency cooperation between the
financial sector regulators, law enforcement agencies and the financial
institutions has had a positive effect in stemming illicit financial
flows.
Regular interaction with international bodies
tasked with the responsibility of preventing money laundering is key in
shaping or improving a country’s institutional, legal and regulatory
framework in combating illicit financial flows.
The battle against illicit financial flows in
Africa cannot be won singlehandedly. Governments, legislatures, the
judiciary and the private sector must come together.
Tackling the underlying sources of illicit
financial flows is imperative. For the African financial sector,
investment must be made in strengthening preventive measures
Surveillance, detection and recovery procedures must
be enhanced. With this comprehensive approach, Africa will be well armed
to combat the scourge of illicit financial flows.
Dr Njoroge is the Governor, Central Bank of Kenya
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