Laws promoting financial integrity must not undermine inclusivity
What you need to know:
- When the G7 introduced the anti-money laundering Financial Action Task Force (FATF), and later added terrorism to its name, they never envisaged it would undermine the economies of member states, especially in the developing world.
- As a result, Kenya enacted two key legislations – the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), in 2009, which created the Financial Reporting Centre (FRC); a government institution whose principal objective is to assist in identifying the proceeds of crime and combating money laundering, and the Prevention of Terrorism Act (POTA), in 2012, mandating FRC to also fight against financing of terrorism.
- Either deliberately or not, investors say, enforcers of these legislations have partly caused a significant flight of investors from the local stock market after they arbitrarily closed down some of their bank accounts.
- It seems as though the current strategies are geared towards merely being seen as working, rather than building solid cases through advanced analytics to arrest those with bad intentions.
When the G7 introduced the anti-money laundering Financial Action Task Force (FATF), and later added terrorism to its name, they never envisaged it would undermine the economies of member states, especially in the developing world.
The organisation, headquartered in Paris, was created in 1989 to develop policies to combat money laundering.
In 2001, its mandate was expanded to include checking terrorism financing, and today it monitors progress in implementing the FATF recommendations through "peer reviews" ("mutual evaluations") of member countries.
By 2017, its membership had increased to 37, including Kenya.
DOMESTICATING FATF
As a result, Kenya enacted two key legislations – the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), in 2009, which created the Financial Reporting Centre (FRC); a government institution whose principal objective is to assist in identifying the proceeds of crime and combating money laundering, and the Prevention of Terrorism Act (POTA), in 2012, the piece of legislation that mandates FRC to fight against financing of terrorism.
Either deliberately or not, investors say, enforcers of these laws have partly caused a significant flight of investors from the local stock market after they arbitrarily closed down some of their bank accounts.
They argue that while no one is opposed to measures that can curb money laundering and terrorism financing, they deserved to be given a chance for public participation on these far-reaching actions.
BETTER OPTIONS
Furthermore, they point out that there are better and civilised mechanisms of dealing with those breaking the law.
For a start, advanced big-data analytics can reveal patterns useful to understanding and eliminating these vices.
Financial institutions also have become unnecessarily suspicious of deposits larger than one million shillings. Yet some kiosks and mitumba dealers in Nairobi collect more than that daily.
Media coverage of the application of these laws borders on threatening the public that ''Big brother is watching.''
In effect, genuine businessmen and women are shying away from banking. People may be on the way to stashing cash at home as used to happen in the past.
In a country where most of the transactions are still cash-based, the economy is likely to suffer as people spend time to find new ways of hiding their wealth, if they have not already done so.
INTEGRITY AND INCLUSIVITY
In my view, the best strategy to understanding money movements in any economy is to leverage ICT, create traceability and ensure inclusivity of the poor.
Indeed, what FATF envisaged was a balance between financial inclusion and financial integrity through the alignment of incentives.
In a 2011 paper, ''Financial Inclusion and Financial Integrity: Aligned Incentives,'' Louis de Koker and Nicola Jentzsch, noted that FATF embraced financial inclusion as complementary to anti-money laundering and counter-terrorist financing because it enhances financial transparency.
Local enforcement agencies should perhaps familiarise themselves with these aspects.
FATF defines financial inclusion as:
''Providing access to an adequate range of safe, convenient and affordable financial services to disadvantaged and other vulnerable groups, including low-income, rural and undocumented persons, who have been underserved or excluded from the formal financial sector. It is also, on the other hand, about making a broader range of financial services available to individuals who currently only have access to basic financial products.''
Even though Kenya is hailed as the birthplace of financial inclusivity through mobile money, the country is yet to realise the dream of inclusivity. Lending through mobile isn’t cheap. Interest on loans range between 144 percent and 3,630 percent per annum.
The inclusivity dream could fizzle out as a result of threatening edicts around financial integrity in a bid to fight money laundering and terrorism financing.
Threats only help in to sustain the prevailing high cost of alternative lending through mobile services, effectively undermining credit to the poor.
The agencies involved in the implementation of FATF, therefore, are engaged in an exercise in futility, considering that its founders envisaged to apply strategies that will bring the offenders into a more transparent space while ensuring financial inclusivity.
It seems as though the current strategies are geared towards merely being seen as working, rather than building solid cases through advanced analytics to arrest those with bad intentions.
The writer is an associate professor at the University of Nairobi’s School of Business. Twitter: @bantigito
