Kenya Added to the Global Money Laundering List, Uganda Exits

On Friday, the Finance Action Task Force (FATF), the international authority on combating money laundering, decided to place Kenya on the grey list. This decision is likely to damage Nairobi's position as the primary financial hub in the region.

Kenya joins a list of 23 other countries put on the grey list for not having stringent measures to curb flow of dirty cash. Kenya now joins several other African countries on the list including Tanzania, South Sudan, Nigeria, South Africa, Mali, Burkina Faso, Cameroon Mozambique and Senegal. Uganda was removed from the list of shame following recommendations of FATF's fifth plenary meeting.

The grey list refers to countries that have inadequacies in dealing with money laundering and terrorist financing. 

Kenya will face heightened monitoring from the FATF, and it is anticipated that the nation will need to implement significant modifications to its financial framework to lower the likelihood of being a sanctuary for illicit funds.

Additionally, Kenya, recognized as a financial epicenter in the region, has been identified not only as a key regional hub for illegal gold activities but also as a transit point for drug and wildlife trafficking. Various entities such as law firms, casinos, and real estate agents have been singled out as facilitators of money laundering.

The demotion implies that Kenya could face more rigorous scrutiny in its transactions with the rest of the world, potentially leading to significant economic repercussions such as challenges in obtaining funding and harm to its reputation.

But how did Kenya get into the grey list. It started two years ago.

The East and Southern Africa Anti-Money Laundering Group (ESAAMLG), responsible for overseeing Anti-Money Laundering/Countering the Financing of Terrorism/Countering Proliferation Financing (AML/CFT/CPF) actions in Eastern and Southern Africa, conducted a Mutual Evaluation process in Kenya during 2021, resulting in the issuance of a Mutual Evaluation Report in 2022.

This report identified numerous strategic deficiencies within Kenya's AML/CFT/CPF framework, particularly within the financial services and non-profit sectors. Consequently, there was widespread speculation that Kenya might be placed on the grey list during the February 2024 plenary.

A regional anti-money laundering watchdog's mutual assessment report in 2022 similarly highlighted strategic deficiencies within Kenya's framework for combating illicit funds. The evaluation by ESAAMLG categorized Kenya as 'partially compliant' with global standards on anti-money laundering and terrorism financing.

To mitigate the risk of being grey-listed, regulators across various industries, lawmakers, law enforcement agencies, and individual institutions embarked on a series of initiatives aimed at addressing identified shortcomings. These efforts included the enactment of the AML/CFT (Amendment) Act, 2023, which introduced significant changes to key laws.

Additionally, the Central Bank of Kenya, Financial Reporting Centre, and other regulators issued new guidelines and intensified risk-based supervisory inspections. However, these measures did not persuade international watchdogs that Kenya had rectified its course.

Regardless of being grey listed, it is imperative for these efforts to persist to safeguard the country against money laundering and terrorism.

Between October 25-27, 2023, the Financial Action Task Force (FATF), the global standard-setting body for countering money laundering, terrorism financing, and proliferation financing (ML/TF/PF), held its tri-annual three-day plenary. During this event, FATF deliberated on emerging typology and jurisdictional issues related to ML/TF/PF risks.

The outcomes of FATF plenaries typically involve the issuance of new guidelines and an updated list of countries with inadequate measures to combat ML/TF/PF risks. The grey list comprises countries with strategic deficiencies in addressing ML/FT/PF risks but have committed to addressing them within a specified timeframe.

Subsequently, FATF and regional FATF-style bodies engage in monitoring efforts to ensure these deficiencies are addressed effectively.

A photo of money recovered during a raid in Ngara on August 15

Being on the grey list is an inculpation of a country's ability to identify and effectively remediate ML/FT/PF risks. As a result, it signals a warning to the global financial system to approach transactions with the country with heightened caution.

This heightened risk status carries significant economic consequences, including a diminished appeal for the country as an investment destination for foreign direct investment and increased operational expenses for businesses based in the country.

This is primarily due to intensified scrutiny from counterparties and limitations on cross-border transactions, especially to and from nations with stringent regulations regarding dealings with grey-listed countries.

Moreover, there's a possibility of correspondent banks and other crucial relationships opting for de-risking measures, as well as elevated costs associated with securing public international debt from financial and developmental partners, among other factors.

A paper published by the IMF indicated that grey listing of a country negatively impacts capital inflows. This could mean the currency and local bond and equity market could also be affected over time.  

This setback is particularly disheartening for the government, which had implemented several revisions in an effort to prevent such a detrimental rating.

The National Treasury, in a statement affirming Kenya's placement on the 'grey list,' clarified that it had enacted various changes to legislation targeting money laundering and terrorism financing, notably the AML/CFT (Amendment) Act of 2023.

We wish to address the recent development concerning Kenya's status with the Finance Action Task Force (FATF). Kenya has officially been placed on 'grey list,' indicating enhanced monitoring to ensure compliance with international Anti-Money Laundering, Countering the Financing of Terrorism, and proliferation of Weapons of Mass Destruction (AML/CFT/CPF)," said Treasury CS Prof Njuguna Ndung'u. 

The evaluation by the ESAAMLG found Kenya to be 'partially compliant' with the global standards on anti-money laundering and terrorism financing. 

Prof Ndung'u however remained optimistic that the rating would not affect the economy negatively, stating that the government would review the progress made to date and develop a comprehensive strategy to address remaining deficiencies. He added that adequate resources would be allocated to ensure timely compliance and exit from the grey list.

FATF placed Kenya on a list of high-risk countries for delays in enacting laws to tackle criminal financial activity as well as a failure to track money laundering. in 2010. It was removed from the list four years later.