Kenya was placed on the Financial Action Task Force (FATF) grey list in February 2024 after an evaluation of the country’s adherence to global standards for combatting money laundering and related financial crimes found weaknesses.

FATF, the Paris-based global watchdog for anti-money laundering and counter-terrorism financing standards, identified weaknesses in Kenya’s systems, which make country vulnerable to misuse by criminals, enabling them to process proceeds of crime.

The FATF cited Kenya’s failure to prosecute money laundering and terrorism financing crimes, the lack of regulations for cryptocurrencies and non-profit organisations, and the absence of a robust risk-based approach towards anti-money laundering and countering terrorist financing among the reasons for grey listing.

Despite Kenya upscaling its business registration services through the Business Registration Service (BRS) portal, FATF noted that gaps remain in setting up ultimate beneficial owners. Lack of transparency in ultimate beneficial ownership registries indicates a country’s money laundering vulnerabilities.

The good news is that Kenyan regulators are taking a proactive approach. In the last few weeks, banks have notified their customers that all real-time gross Settlement transactions will require customers to enter a purpose of payment (POP) code when making a transaction.

To ensure effective AML/CFT compliance, capacity-building initiatives for car dealers, real estate agents, betting companies, and law firms are essential. Regulators should prioritise sensitisation and awareness programmes, particularly for new reporting entities, to foster an understanding of the regulatory framework and anti-financial crime efforts in Kenya.

A combination of all these activities will go a long way in having Kenya removed from the grey list and prevent the aforementioned challenges. And it can be done. After rigorous compliance and enforcement, Mauritius was removed from the FATF grey list in October 2021, within one and a half years of being put on the infamous list.

Beyond these areas, other areas where there is a need for better regulation include the non-financial Businesses and Professions (DNFBPs) which include real estate agents, casinos and betting companies, dealers in precious metals, precious stones, cars, accountants, trust and company service providers, advocates, and independent legal professionals.

The gaps the FATF identified in these sectors include the absence of robust Anti-Money Laundering (AML)/Combating the Financing of Terrorism (CFT) frameworks, the failure to carry out risk-based assessments, and inconsistent inspections. The lack of strong regulation and oversight for DNFBPs is particularly concerning because of the substantial transactions these organisations handle.

For example, the Kenya Revenue Authority (KRA) collected KES 24.2 Billion in the 2023-2024 fiscal year in betting taxes implying that the industry is worth tens of billions while an earlier report (2022) by the UN Trade and Development (UNCTAD) found that over 4 million Kenyans owned cryptocurrencies.

Not to belabor the point, anecdotal evidence from the mushrooming of real estate developments and car yards, shows that there is a need for more scrutiny due to the heavy investments in these sectors.

In light of the above, Kenya’s grey listing sent alarm bells because of the serious implications for all, be it for countries, companies, and individuals.

One of the immediate consequences of greylisting on an economy is the potential for slowed Foreign Direct Investments (FDI) inflows because companies may review business terms with greylisted countries.

Uganda and Pakistan are examples of countries that have seen a slow in FDI inflows as a result of being put on the FATF’s grey list.

Companies and individuals on the other hand may also face challenges in moving funds across and seuring business in other jurisdictions which inevitably increases the cost of doing business.

Investors are also cautious when investing in greylisted countries because should the rating slip further to the blacklisted category, it can result in international sanctions. Investors would then face increased compliance costs or might even lose access to their assets.
So what to do?

The POP is a regulatory requirement by the Central Bank of Kenya (CBK) that identifies the reason for an RTGS transaction. For example is the payment for salaries, payment for services, etc.

The investigative and law enforcement agencies including the Directorate for Criminal Investigations (DCI), Financial Reporting Council (FRC), Office of the Director of Public Prosecution (ODPP), the Ethics and Anti-Corruption Commission (EACC), and other key players should work together to prevent, monitor, and successfully prosecute financial crimes in Kenya.

These are some of the ideas we will exchange when Kenya hosts the Inaugural Kenya Anti-Financial Crime Summit set to take place between October 25 and 26. We are confident in coming up with long-term sustainable approaches that will secure our financial system.