Seal crypto money laundering loophole

By JAINDI KISERO More by this Author

What is the state of regulation of cryptocurrency trading in Kenya? To me, this is the

big issue we must confront in the wake of the ongoing case where the Assets Recovery Agency (ARA) has frozen assets of entities said to have moved Sh25 billion through our banking system here within a spectacularly short time.

How prepared are we in terms of capacity to track suspicious transactions involving cryptocurrency dealings? Cryptocurrency business is big business here.

Indeed, the statistics from the blockchain data platform chainanalysis and entities like statistita will show you that Kenya ranks very high in the world in terms cryptocurrency transactions. We have one of the most active bitcoin trading communities on planet earth.

Yet we also know that it is not possible to legistlate crypto currency trading out of existence. It is foolhardy to imagine that some government bureaucrat can just wake up one day and ban the Internet.

The case between ARA and the Nigerian entities is a wake-up call to regulatory authorities to accept that we have not kept pace with international best practice in anti-money laundering regulation regarding cryptocurrency trading and payment and remittance platforms.

Under the current legal framework, banks and other reporting institutions must alert the Financial Reporting Centre (FRC) about large transactions that look suspicious.

But we still don’t have a proper legal framework for regulating cryptocurrency trading. Crypto trading exchanges and platforms are not obligated to report suspicious transactions to the FRC.

Worried by the risks posed by money laundering to the integrity of their financial system, the Central Bank of Nigeria in February 2021 ordered all regulated institutions to desist from transacting with entities dealing in cryptocurrencies.

Banks were also ordered to close accounts of persons or entities involved in crypto currency transactions within their systems. The upshot is that a commercial bank in that country is not allowed to open accounts to cryptocurrency exchanges.

As amply demonstrated in the ongong case, we are badly exposed. A recent study by the IMF found high crypto use in emerging markets to be correlated with corruption. Does it surprise that Kenya and Nigeria have the largest cryptocurrency markets in Africa?

We live in a country where public life and leadership is dominated by self-absorbed elites engaged in blind pursuit of corruptly acquired wealth that must be kept abroad in tax shelters or invested in cryptocurrency where identity of beneficial owners is hidden.

Worse, our payments infrastructure still has big loopholes. The most popular payment methods for cryptocurrency trading, namely M-Pesa, Internet banking, ATMS and PesaLink remain widely exposed.

This is the stark lesson we learnt from the Dusit terror attack where we were forced to come to terms with how criminals have become adept at exploiting loopholes in payment platforms in our systems.

Even with a modern legal framework and fairly strong and well managed institutions such as the FRC, our banking systems remain exposed.

Two years ago, the Governor of the Central Bank of Kenya, Dr Patrick Njoroge, came out to slap fines on banks for lapses and poor reporting of anti-money laundering and suspicious transactions.

The fines touched on illegal payments laundered out of State coffers by perpetrators of the infamous National Youth Service scandal through the banking system.

Most revealing in that episode was the fact that top-rated banks were all caught in that dragnet. It begs the question: If the top banks were found to have shown such material weaknesses and lapses, what should we expect of smaller lenders with less resources to devote to anti-money laundering reporting?

The reason the Nigerians are moving money through our systems is that many international merchants decline transactions originating or heading into that country. Let us not allow anybody to contaminate our systems.