Banks under probe over link to ‘dirty money’

A string of high profile investigations linking several commercial banks to alleged corruption and tax evasion syndicates has put lenders in a tight spot yet again.

Several banks are under investigations after a major tax evasion ring was busted at a border entry point. The racket, said to cost the government over Sh120 million in unpaid import duties at Namanga border post, comes barely a month after a similar incident was discovered at the Port of Mombasa.

Two Equity Bank staff members and an unnamed number of the Kenya Revenue Authority (KRA) personnel allegedly aided traders at the Namanga border post to import goods without paying duty, depriving the country revenue of more than Sh100 million.

Analysts say this is happening despite Kenya having a fairly advanced — by many global standards — anti-money laundering and counter-terrorism financing regulatory and legal regime.

On Thursday last week it emerged that other banks are under probe for their role in suspected similar syndicates. The Kenya Revenue Authority said it is widening its investigations to include the National Bank of Kenya, Commercial Bank of Africa.

Plans are also underway to expand the investigation to cover several other banks, KRA said.

The investigation came in the wake of high profile corruption cases which show that senior bank managers could be working in cahoots with corrupt elements to hide looted money.

Analysts say while laws and regulations which require banks to conduct checks to detect the proceeds of graft are in place, many lenders are flouting them with no consequences to them.

“Many banks will not take rules designed to prevent corruption and other crimes seriously. Corrupt officials will continue to plunder state assets, tax cheats will carry on evading their taxes, and other serious criminals will continue committing their crimes, knowing that they can use banks to get away with it,” says the damning findings of a 2015 global report by campaign group, Global Witness titled Banks and Dirty Money.

The report states that banks look the other way, leaving the door wide open for corrupt individuals to launder funds. It adds that since the prospect of rogue bankers going to jail for banking malpractices in Kenya has for a long time remained a mirage, there are adequate incentives for lenders at the institutional level to deal with “dirty corruption money on a large scale”.

A 2013 report by the Global Financial Integrity (GFI, a Washington-based non-profit, research and advocacy organisation, captured this dire situation saying global financial regulators tag Kenya as a high-risk place for money laundering and terrorist finance.

More recently, a joint report by the African Union (AU) and the United Nations Economic Commission for Africa, (UNECA) unveiled in September this year, showed that the Kenyan economy is haemorrhaging billions of shillings annually in illicit financial outflows, crucial resources which experts say could be used to invest in struggling sectors such as healthcare, education, and infrastructure.

The monies, the report observed, are lost through tax evasion by individuals and companies, illegal profit expatriation by multinational firms, organised criminal syndicates and also corruption-related activities in the public sector.

The Kenya Bankers Association (KBA) Habil Olaka, however, says banks are not to blame for rampant corruption and other malpractices.

“Banks do their due diligence in reporting suspicious transactions to the Financial Reporting Centre. Banks have also sanctioned any of their employees found culpable in abetting financial crimes. But still these are isolated cases,” said Mr Olaka.

He said beyond the law, relevant agencies have to collaborate more to address corruption: “We all need to work together to end the menace. This should be a joint approach,” he said.

There was a glimmer of hope that rogue financial institutions would be dealt with last November after President Uhuru Kenyatta ordered unprecedented tough new sanctions against individuals and institutions who flout anti-laundering laws. The penalties included loss of licence for banks found culpable.

CBK says it is doing its best to curb the mounting cases of tax evasion, corruption and money laundering involving commercial banks.

“We are aware of the alleged incidents of fraud in the banking sector. In accordance with our oversight mandate, we have investigated many of these incidents and taken the requisite enforcement action in cases of non-compliance. Furthermore, considerable progress has been made to strengthen our bank surveillance processes and procedures over the years,” said the regulator in an email to Smart Company.

It singled out what it termed enhanced anti-money laundering and anti-terrorism finance surveillance, which requires external auditors to provide assurance to the CBK on banks’ information technology systems and ongoing recruitment of additional supervisory staff including IT specialists to enhance supervisory capacity.

“All these are critical components that enhance the protection, safety and soundness of banks as well as the integrity of the financial system,” said the regulator.

Compliance

Economist Robert Shaw said the regulator needs to ensure banks comply with existing regulations without hiding under the customer confidentiality obligations.

Mr Shaw said the key issue is compliance adding that the buck stops with both the commercial banks and the regulators. Enforcement of existing laws, he said would stop lenders from acting as corruption conduits.

“The CBK monitoring process has not been as strong as it should be. It should be made very clear to banks themselves that they must report anything that they regard as potentially irregular. The fact that huge corruption money is hidden in banks means some banks are seeing it,” said Mr Shaw.

He cited the case of Imperial Bank where a probe revealed massive fraud involving the lender’s owner which went unreported for years.

CBK Governor Patrick Njoroge is on record admitting that the regulator fell short in curbing the lender’s almost decade-long rot. “In the case of Imperial Bank, it was clear there was a hole in the bank and that it should have become public sooner,” added Mr Shaw.

Nairobi-based financial analyst Aly Khan Satchu said the recent edict from the Central Bank where customers will need to clearly explain cash deposits and withdrawals of at least Sh1 million  is welcomed. He said if the rules are enforced to the letter, corruption cartels would be dealt a blow.

“It’s clear that banks have a duty of care in this regard.  If this new regulation is implemented without fear or favour then I am sure the deluge of ill-gotten proceeds going through the system will come to an abrupt stop. It seems to me it is no longer a question of rules and regulations, it is now a question of enforcement, pure and simple,” said Mr Satchu.

“Ill-gotten gains are more than willing and able to subvert enforcement. That’s a challenge.”

War on corruption

In his address to the nation from State House Nairobi last October where he outlined unprecedented measures to re-invigorate the war on corruption, President Kenyatta said:
“I have met with the Governor of the Central Bank of Kenya, and with the Head of the Financial Reporting Centre, to discuss and agree with them how we can ensure the banking system is not used to launder the proceeds of theft and fraud.  From today those banks that break our anti-money laundering laws and regulations will, at a minimum, lose their banking licences.”

The President also warned that it would not be business as usual as the rank and file in the banking industry will be forced to pay the penalty in the wake of such malpractices.

“The directors and senior officials of such (rogue) banks are now on notice that they will be pursued relentlessly, individually and collectively, in accordance with the law, should they succumb to the lure of breaking our anti-money laundering laws and regulations,”  Mr Kenyatta said.

“Finally, the Central Bank and the Financial Reporting Centre are, as a matter of urgency, strengthening their supervision capabilities over banks.”
Large cash

Hot on the heels of the directive, CBK early this year wrote to lenders instructing them to have their customers complete forms explaining the nature of any large cash transactions involving Sh1 million or more.

Banks would subsequently rush to comply with the CBK directive as the regulator tightened the screws on money laundering and illicit money transfers.

The questions that Kenyans must now state clearly when transacting in the large cash in banks include the source of the money being deposited/withdrawn over the counter, whether the nature of their business generates substantial amounts of cash to support the large cash transaction, why the large cash deposit or withdrawal is necessary, why the cash deposit or withdrawal cannot be made through electronic means and where the money will be taken to from the bank premises.

Additionally, customers will have to state the use of the money, who are the direct and indirect beneficiaries of the money, and state the full identity of the intended beneficiaries of the cash.