The CBK’s move is the strongest signal yet that looters of public coffers and dealers in illicit goods will have limited options to ‘clean’ their dirty cash
BY PETER KIMANI
It is the beginning of a new era for Kenya’s commercial banks as far as the regulatory regime goes. The regulatory environment is changing by day as the regulator – the Central Bank of Kenya – tightens the noose on banks. The latest was on 12 September 2018 when the CBK, in a rare move took drastic action on five top banks in a graft probe that has left the sector shaken. The CBK slapped the banks – KCB, Equity, Standard Chartered, DTB and Cooperative Banks – a total of KSh392 million in penalties over alleged violations, which helped persons to transact billions of shillings lost in the National Youth Service (NYS) scandal. The probe could see dozens of senior bankers hounded to the courts to answer to charges of breaches in the Kenya’s Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) laws and regulations.
The investigations prioritized banks that handled the largest flows. According to the CBK report, Standard Chartered Bank handled the largest amount of the NYS ‘dirty’ cash at KSh1.6 billion, followed by Equity at KSh886 million. The two were slapped penalties worth KSh77.5 million and KSh89.5 million respectively. KCB was accused of having transacted KSh639 million and thereby charged KSh149.5 million in fines. The other two banks, Cooperative and Diamond Trust Bank were each said to have transacted KSh263 million and KSh162 million and thereby charged KSh20 million and KSh56 million in penalties respectively.
Anti-money laundering architecture
All the banks — backed by the industry lobby Kenya Bankers Association — have viciously denied any wrongdoing and have effectively vowed to prove to the regulator that they adhered to the law. The banks had up to September 26 to respond on the identified gaps and show cause why the penalties should not be levied on them. By the time of going to press most of the banks had written back to CBK, defending their operations and castigating the regulator for the decision.
Prior to the announcement, the CBK had discussed the findings with the senior management and Boards of the affected banks where officials and board members in all the banks faulted the findings, arguing that CBK officials handling the matter ‘ignored’ the evidence that the banks had submitted to defend their position in each of the transactions.
The investigations and the eventual action on the banks are significant for Kenya on several data points. First, it has rubbished the banking sector’s anti-money laundering architecture, which has previously been touted as one of the most elaborate in Africa and globally.
Secondly, it has unmasked how well oiled syndicates have been siphoning monies from government agencies through phony supply schemes orchestrated through banks.
Thirdly, this has put banks at an awkward position with the regulator. The accused banks have disparaged the CBK claims. The institutions could move to court to challenge CBK’s actions, should the regulator go ahead to ignore their defence and levy the penalties on them. This would be a first one for Kenya where the regulator is taken to court by its subjects.
Fourthly, the turn of events has left the banks reeling from potential reputational damage. This could complicate the banks’ relationships with their stakeholders, thus compromising trust. For banks, trust is king.
Criminal culpability of officials
Lastly, the AML/CFT laws and regulations assigns culpability to the highest offices in the banks should there be breaches. This means CEOs and senior managers in the adversely mentioned banks could be investigated and if found culpable charged in court.
The second phase of the investigations, the CBK said, will be the use of these findings by other investigators to assess the criminal culpability of the involved bank officials. The main objective of the investigations was to examine the operations of the NYS-related bank accounts and transactions and in each instance assess the bank’s compliance with the requirements of the legislation.
According to CBK, violations were identified principally related to among others failure by the five banks to report large cash transactions and to undertake adequate customer due diligence. The lenders were also found to have erred in not providing supporting documentation for large transactions, and lapses in the reporting of Suspicious Transaction Reports (STRs) to the Financial Reporting Centre (FRC) – an agency formed to tame money laundering
Strong signal
Investigations on the fraudulent transfer of NYS money will soon be extended to other lenders. This will effectively lift the veil on the Kenyan banking sector’s compliance with anti-money laundering regulations, as analysts and independent commentators reckoned, the country needed to tighten its noose on the financial services sector to tame the vice.
“The CBK’s move is the strongest signal yet that looters of public coffers and dealers in illicit goods will have limited options to ‘clean’ their dirty cash. Punishing banks that facilitate theft or are used as laundries for dirty cash is the surest and the least costly method to close the taps of corruption, theft and dirty trade,” said the Business Daily in a hard-hitting editorial on September 13.
The actions taken on the banks, the CBK said, were aimed at safeguarding stakeholders’ interests and maintaining a healthy financial sector.
Peter Kimani is a freelance journalist based in Nairobi. Email: kimwaura@yahoo.com
