In February 2024, the republic of Kenya was placed on the infamous grey list by the Financial Action Task Force (FATF), because of deficiencies in combatting Money Laundering (ML), Terrorist Financing (TF) and Proliferation Financing (PF). The FATF is the global watchdog for anti-money laundering and counter terrorism financing standards. The Taskforce recently conducted an evaluation of Kenya’s adherence to global standards and recommendations set in place for countries to follow in combatting money laundering and related financial crimes. Kenya’s evaluation revealed several compliance shortcomings which led to the country’s grey listing and subsequent global scrutiny.

Some of the reasons resulting to Kenya’s grey listing included the failure to prosecute money laundering and terrorism financing crimes, lack of regulations for crypto currencies, also known as virtual assets, non-profit organizations, and the absence of a robust risk-based approach towards anti-money laundering and countering terrorist financing. Additionally, despite Kenya upscaling its business registration services through the Business Registration Service (BRS) portal, gaps still remain in establishing ultimate beneficial ownership of business entities. The lack of transparency in ultimate beneficial ownership is indicative of money laundering vulnerabilities in a country. 

Whilst there has been on-going regulation of commercial banks and microfinance banks, there were significant weaknesses in the supervision of other financial institutions and designated non-financial Businesses and Professions (DNFBPs). The sectors that fall within the DNFBPs are real estate agents, Casinos, dealers in precious metals, dealers in precious stones, accountants, trust and company service providers, advocates, and independent legal professionals. The gaps identified in these sectors span across the lack of sound AML/CFT frameworks, failure to conduct risk-based reviews and inconsistent inspections. The cases of weak regulation and supervision for the DNFBPs is worrying because these organizations process significant transactions. 

According to Chainalysis 2023 Global Crypto Adoption Index, Kenya ranks second in Africa and number 21 globally. Anecdotal evidence postulates that about 10% of Kenyans are said to have cryptocurrency accounts. With such numbers, growing by the day, driven by increased financial inclusion and internet access, Kenya is now falling behind in enacting regulation for this evolving sector. Reassuringly, the national treasury has now set up a multi-agency technical working group to develop cryptocurrency regulations and monitoring frameworks. Further, with technological evolution and innovation, and Kenya being a regional financial hub, it behoves the relevant bodies to develop legislation and regulatory frameworks for supervision and licensing of cryptocurrency businesses and service providers.

Whilst a variety of opinion pieces have articulated the reasons and events leading to Kenya’s grey listing, the question we now need to answer is what Kenya should do to get off the grey list. Having been grey listed before in 2011 and taking 4 years to get off the grey list, can Kenya be more effective at meeting the compliance requirements this time round to achieve delisting more expeditiously?

Kenya must ensure that all the reporting entities are adequately resourced to effectively remedy the compliance deficiencies. Banks have been robustly regulated over the years, and majority have the requisite knowledge and structures to prevent, monitor and report money laundering, proliferation, and terrorism financing. However, majority of the newly designated reporting entities like SACCOs, and Designated Non-Financial Businesses and Professions have inherent gaps in the deployment of measures to combat financial crimes. As financial inclusion and literacy increases amongst Kenyans, interesting trends are beginning to emerge, for instance, the SACCO movement now commands a whooping KES 1 Trillion, according to date from the State Departments of Cooperatives. That notwithstanding, little is heard of curbing money laundering the in the SACCO sector, in fact, most would think that there lies no risk for financial crimes within the cooperative movement, but that is far from true. 

Kenya must build capacity not only amongst regulators and law enforcement but also across industry actors as they form the first line of defence against money laundering, terrorist financing and proliferation financing. 

It is incumbent upon the industry stakeholders to join forces to ensure efficacy of programs, laws and regulations that have been put in place to combat money laundering, terrorism, and proliferation financing. The Directorate for Criminal Investigations (DCI), Financial Reporting council (FRC), Office of the Director of Public Prosecution (ODPP) and Ethics and Anti-Corruption Commission (EACC) and other key players should work together to prevent, monitor, and successfully prosecute financial crimes in Kenya. Collaborative effort will drive evidence-based policy and yield a robust regulatory environment which will be a springboard towards achieving compliance and getting off the grey list. 

The regulators should conduct more sensitization and awareness programs in the various sectors and especially among the new reporting entities to ensure there is knowledge transfer and a good understanding of the regulatory framework and anti-financial crime initiatives in the country. In addition, reporting entities need a platform where they can speak to each other, collaborate, and share information on emerging trends to foster a homogenous approach. Additionally, through the financial intelligence unit, reporting entities should be put on the spotlight to ensure that they do not offer safe havens for criminals. 

There is a substantial amount of work required to get Kenya off the grey list. Mauritius was able to get off the grey list within one and a half years. One of the key success factors was the collaboration and the cooperation of the AML/CFT supervisory agencies which came together to share knowledge, best practice and lessons learnt to enhance compliance. The cooperation spanned across policy, information exchange, sensitization, capacity building all the way to guiding the implementation principles of robust AML/CFT frameworks. 

On the other hand, the delisting process could also take time depending on how quickly the deficiencies identified by FATF are addressed. Uganda was grey listed in early 2020 following gaps in its AML/CFT enforcement regime. It took about 4 years to get off the grey list which they did in February 2024. During this period, Uganda experienced a significant decline in capital inflows thus negatively affecting the overall investment in the country. 

The onus is on Kenya to give this matter the attention it deserves so as to ensure delisting within the shortest time possible. However, it is important to note that the fight against money laundering is not just about getting of the grey list but promoting the integrity and stability of the country’s financial system.

Dr. Andrew Njiraini is a Director at Flywheel Advisory.