Tech and financial companies operating in grey listed countries like Kenya have started strengthening their verification processes to counter chances of flow of dirty cash through their systems.
In mid February this year, Kenya was grey listed by the Financial Action Task Force (FATF) over its weak measures against money laundering and terrorism financing. Being on the grey list shows a country is unable to identify and effectively address financial crimes, and asks investors to be cautious while dealing with the particular country.
The FATF listed the following as some of the reasons why Kenya was grey-listed:
- Lack of a clear strategy on the prosecution of money laundering offences. Kenya did not demonstrate any successful investigation and prosecution of any money laundering offences.
- No adequate investigations, or prosecutions of persons for terrorist financing offences despite conducting several investigations related to terrorism.
- The country’s Non-Profit Organisations sector is largely unregulated and unsupervised thus at the risk of terrorism financing abuse.
- According to Global Financial Integrity, the National Risk Assessment (NRA) conducted by Kenya indicated that fraud, forgery and drug-related offences form the greatest risk to the country, but recovery from the said crimes was quite low as compared to recoveries made for misuse of resources and corruption.
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Impact of Grey Listing on Kenyan Businesses
Grey listing has a negative economic impact on affected countries, with some of the negative impacts likely to last even after the countries are delisted.
Here are the main impacts on businesses:
Decline in Investments and Foreign Aid: Kenya’s reputation as a stable and transparent financial environment will be compromised, potentially discouraging foreign investment and deterring businesses from operating in the country. Research indicates a reduction in foreign direct investment (FDI) to GDP ratio by up to 2% for countries with low FATF scores. The same research shows that FDI inflows can decline by 3%, portfolio inflows by 2.9%, and other investment inflows by 3.6% of GDP.
Increase in Transaction Costs: Grey listing requires stricter adherence to anti-money laundering (AML) and countering terrorist financing (CFT) regulations, resulting in higher compliance costs for individuals, businesses, and even financial institutions. Most countries in the White List, that have complied with the FATF recommendations, usually impose harsher requirements when transacting with countries that have been grey listed to reduce the risk of handling dirty money.
Delays in International Payments and Trade: The need for increased scrutiny and enhanced due diligence from foreign banks and financial institutions may result in delays, higher transaction costs, and possible restrictions on cross-border trade and payments.
How Does Kenya Get Off the Grey List?
Private sector should push other private companies that they work with to start adopting AML compliance procedures.
There is a need to foster collaboration between Law Society of Kenya (LSK) & Financial Reporting Centre (FRC) to develop regulations and guidelines for reporting institutions, raising awareness within the legal profession on Anti-Money Laundering (AML) and Terrorism Financing.
“Solving the problem can happen a lot faster if the private sector is really advancing the solutions and sharing best AML practices that have worked for them.” said Mark Straub, Founder of Smile ID in a recent Webinar.
Smile ID’s Role in AML
According to Mark Straub, there are additional checks that need to be done now, not necessarily on every single customer or every single transaction, but there is now a subset of transactions that customers now need to run through additional checks in order to the AML compliant.
Smile ID has historically provided KYC onboarding, ID verification solutions for customers, and now they also need to do Anti Money Laundering Checks. Which means they need to check individuals against all global lists that exist.
There are more than 1000 different global sanctions, politically exposed persons, enforcement actions, that exist in the world. Some of those lists come from the UN, Interpol, the US, the US Treasury Department, global Central Banks, including African Central Banks.
“We already had a product that enabled us to check a name against all those lists, but what we have recently added is just making the search parameters a little more flexible. So you can have a wider or a narrower search depending on the pressure under which you are on from regulators.” He added.
Smile ID has also added the capability to have an ongoing monitoring, so that if a customer onboards somebody but then a couple of months later they show up on these lists, they are able to know. These capabilities make it easier for customers to comply.
For further AML compliance, the product has been turned into a sort of pay as you go, which means you only pay for the product when you have the number of customers you want to check. In the long run, the product is quite robust, quite flexible from both the querying and payment sides.
Regarding the use of AI by fraudsters, Mark says that over the years, Smile ID has witnessed various attempts, from using cardboard cutouts and holding up videos on phones to manipulating images and creating deep fakes. The technologies to create these are becoming increasingly accessible and inexpensive.
“However, it is an arms race, and we currently have more capabilities than the bad actors. We actively update our systems on a daily or weekly basis to detect, capture, and mitigate these attacks.”
Detecting and addressing such threats requires a combination of machine learning and human review. Smile ID’s systems flag unusual or new patterns, which are then immediately reviewed by its Human Review Team across different locations. When fraudulent patterns are identified, the information is sent to their computer vision teams, who then upgrade systems to automatically reject such attempts in the future.
4G Capital’s AML Steps
Roseane Maila, Chief Operations Officer at 4G Capital, says the company has a number of internal frameworks to ensure they are constantly compliant too AML. This includes the KYC process while onboarding customers, partners, distributors, investors, vendors, and employees (Checking documentation to ensure a customer is who they say they are).
Other measures include:
- Customer Due Diligence (CDD), i.e verifying the customer’s identity, financial profile, risk levels,
- Enhanced Due Diligence (EDD) for high risk customers who have suspicious transactions based on specific repayment behaviors.
- Internal monitoring of customers transactions; the loan values they take, repayment patterns,
- Risk-based approach, where they analyse risk factors including customer’s profile, geographical location in line with their products and services using the national Risk Assessment (NRA).
- Availability of active mechanisms and processes that guide the company on monitoring and reporting any suspicious activities, and if identified, reported to the Financial Reporting Centre (FRC).
- Appointment of a Money Laundering Reporting Officer who constantly monitors the AML program to ensure full compliance.
Conclusion
The FRC has been in place since 2012, and they have recently enhanced their reporting requirements. There is an annual compliance report that entities must submit, covering aspects such as customer due diligence (CDD), enhanced due diligence, training, record-keeping, and screening.
Additionally, there is a mandatory requirement to report any suspicious transactions. These reports are submitted through the FRC’s online portal, GoAML. Individuals responsible for making these reports, such as the Money Laundering Reporting Officer (MLRO) in a casino, are registered in the GoAML system, and their reports are associated with their individual identification number.
For the legal sector and other designated non-financial businesses and professions (DNFBPs), the reports are first submitted to the relevant professional body, such as the Law Society, which then forwards them to the FRC within a short timeframe.
Globally, there are 21 countries on the grey list. In East Africa, Kenya joined Tanzania, South Sudan and the Democratic Republic of Congo. This means that more than half of the countries of the East African Community are on the watchdog’s grey list.
Other African countries on the grey list are Nigeria, South Africa, Mali, Mozambique, Burkina Faso, Senegal, and Cameroon.
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