Bankers fault CBK for ‘dodging’ its responsibility on money laundering

Commercial banks in the country have now turned up the heat on the Central Bank of Kenya (CBK), accusing the regulator of dodging the responsibility of stopping money laundering.

In separate interviews, over two dozen top bankers who spoke to the Nation on condition of anonymity, fearing sanctions from their regulator accused CBK of "shirking its responsibility" of ascertaining the authenticity of all State payments before approving them in its role as the government’s “primary banker”.

Mid last month CBK fined five commercial banks a total of Sh392.5 million in connection with the theft of funds at the National Youth Service (NYS).

A day later, Director of Public Prosecutions (DPP) Noordin Haji implicated chief executives and employees of the banks who helped ship out billions of shillings from the NYS, saying they will be arrested and prosecuted.

The law requires all financial institutions including banks, insurance companies and Saccos to file with the Financial Reporting Centre (FRC) daily reports on transactions above Sh1 million and those deemed suspect.

Those penalised were KCB Group (Sh149.5 million), Equity Bank (Sh89.5 million), Standard Chartered Bank-Kenya (Sh77.5 million), Diamond Trust Bank (Sh56 million) and Co-operative Bank of Kenya (Sh20 million).

The historic action by CBK to impose unprecedented punitive action on Kenya’s biggest banks for what CBK governor Patrick Njoroge said was flouting of anti-money laundering guidelines has sent shock waves in the banking sector not only due to the heavy financial penalties but also the requirement that key bank staff responsible for the violations to be sent packing, and face possible criminal prosecution.

Bank executives and people who are convicted for handling illicit cash face a Sh1 million fine and a three-year jail term, while institutions facilitating such deals could be fined up to Sh20 million upon conviction. Banks could also lose their licences.

The statement by the CBK also indicated that no less than the full boards of directors of the stricken banks had been hosted by the regulator — another first — and given the opportunity to respond to the charges.

But now some bank heads are accusing the regulator for whipping banks “for its own failings and mistakes.”

They argue that the regulator “should not punish anyone for receiving and crediting questionable payments into customer banks accounts when the funds have actually been wired from CBK.”

They also pointed out that in its role as remitter, “the CBK is legally obligated, just like any other bank, to verify validity of payments, and cannot by any imagination transfer that responsibility to the receiving bank”.

They maintained that the CBK did remit NYS and related questionable payments to banks and “should therefore take responsibility for originating and initiating the loss of public funds.”

The sanctions on banks have been well received by some quarters which see them as necessary and overdue in order to slay Kenya’s proverbial ‘’sacred cows’’ by bringing to account the high and mighty who always seem to enjoy immunity from common accountability.

Analysts had earlier observed that 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.

“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,” said damning findings of a 2015 global report by campaign group, Global Witness, titled Banks and Dirty Money.

The report stated that banks look the other way, leaving the door wide open for corrupt individuals to launder funds.

But a bank executive complained that while banking guidelines obligate them to report cash transactions in excess of Sh1 million and related suspicious transactions to the Financial Reporting Centre, “no action whatsoever has ever been taken on those reports”, by the CBK.

The 2009 Proceeds of Crime and Anti-Money Laundering Act empowers FRC to receive, analyse and interpret reports of usual or suspicious transactions in Kenya’s banking system.

One banking head said it was “ironical”, that the regulator, who also has a seat in the FRC board, is now “acting surprised that violations exist and is taking on the banks for violations that were long reported to FRC”.

“While CBK constantly reprimands banks publicly, it should with the same gusto take responsibility for any lapses on its part,” said another CEO.

The various CEOs claimed that one significant yet unrecognised consequence of the actions is that the global financial system has now taken note of the actions, and regard Kenya as a “hotspot for reputation and litigation risks”.

“This stigma has real tangible consequences as correspondent banks that deal with Kenyan banks are likely to handle Kenya cautiously, and demand greater indemnities from Kenyan banks,” said one executive.

The executives also claimed they are at a loss to understand the parameters the regulator is applying to define customers as “politically-exposed persons (PEPs)”.

“Hefty fines were exacted on banks for not flagging distant relatives of PEPs, leaving banks confounded how elastic the PEPs definition can get,” said one CEO.

CBK did not respond to the claims of shirking its responsibility in dealing with money laundering despite numerous queries from the Nation.

“I will send you a response as soon as we have one,” Mr Wallace Kantai, Head of Communications said in response to the above queries.