Sentry Report: Kenya Illicit Finance Risks and Assessment

New Report from The Sentry:

Kenya’s Financial System Faces Historic Opportunities to Counter Illicit Finance and Money Laundering

October 27, 2021 (London / Washington, DC) – A new report by The Sentry details critical steps that Kenya can take to support financial transparency and integrity as it prepares for a series of major reviews and international engagements to counter illicit finance and money laundering in its financial system and across the region.

The report, “Kenya Illicit Finance Risks and Assessment,” authored by Denisse Rudich, Senior Advisor at The Sentry, focuses on areas the Eastern and Southern Africa Anti-Money Laundering Group should consider in preparation for its upcoming onsite visit, as well as areas the government of Kenya may wish to assess in finalizing its National Risk Assessment and as it prepares for the Financial Action Task Force’s (FATF) mutual evaluation review (MER).

Denisse Rudich, Senior Advisor at The Sentry and report author, said: “The mutual evaluation review presents a critical opportunity for Kenya to enhance its anti-money laundering and counter-terrorist financing laws and regulations. Moving towards its Vision 2030 and the launch of the Nairobi International Financial Centre, Kenya can now step up and become a true leader in the fight against illicit finance, promoting transparency and integrity as it grows as a regional finance hub.”

Justyna Gudzowska, Director of Illicit Finance Policy at The Sentry, said: “By introducing urgently needed reforms, Kenya can show the world that it isn’t open for business to those seeking to launder the proceeds of foreign corruption, including its neighbors in South Sudan.”

As Kenya continues to evolve into a regional financial powerhouse and fintech hub, how the government responds to illicit finance risks will play a key role in its ability to attract business and investment from overseas. Despite Kenya’s reasonably documented anti-money laundering and countering the financing of terrorism (AML/CFT) framework, gaps remain and there are legal, operational, political, and knowledge barriers to effective implementation.

The report is set out in three sections:

1. Illicit finance risks and typologies—many linked to South Sudan—to be considered and addressed as the government seeks to establish Kenya as a financial hub in Africa through its Vision 2030 and the development of the Nairobi International Financial Centre.
2. A high-level assessment of Kenya’s AML/CFT regime, informed by the FATF’s 40 Recommendations.
3. Recommendations to the MER team, the government of Kenya, and international partners, including an overview of steps that Kenya should prioritize to protect the banking sector, the real estate sector, and other areas at risk of abuse by illicit actors.

In an array of investigative reports since 2016, The Sentry has exposed a number of illicit financial activities in Kenya connected to regional corruption and conflict. The Sentry’s reporting and policy analysis emphasize the important role of the Kenyan financial system as a regional hub for South Sudanese elites to bank and purchase property.

The Sentry’s new report highlights how Kenyan authorities are beginning to take action against foreign corruption, as evidenced by a recent asset-freezing action against a United States-sanctioned South Sudanese official, although his account has subsequently been unfrozen.

Key report findings:

• Weaknesses in Kenya’s finance and real estate sectors have been exploited to contribute to South Sudan’s conflict. South Sudanese politically exposed persons (PEPs) responsible for the conflict have infiltrated Kenyan banking, real estate, trade, defense, and corporate enterprises with their ill-gotten gains. Kenya is a destination country for illicit South Sudanese funds, which have been moved into Kenya using Kenyan corporate structures, luxury properties, and banks. Arms and munitions have also transited through Kenya into South Sudan.
• Kenya faces severe money laundering risks. Kenya faces numerous illicit finance risks that expose its society to crime and deprive it of public services. These risks include domestic corruption, terrorist financing, environmental crimes, illegal trafficking, tax evasion, and the misuse of digital finance such as mobile banking and cryptocurrency. If Kenya has the political will, it has the ability to respond to existing threats, but tech-enabled and cyber risks require additional training and technology resources for an effective response.
• Kenya’s AML/CFT framework requires improvement. While Kenya has reasonably documented AML/CFT laws and regulations, gaps remain around full documentation into law and effective implementation by both the public and private sectors. Areas identified that require enhancement include the risk-based approach; proliferation financing; sanctions adherence; financial secrecy; resourcing available for AML/CFT compliance; PEPs; wire transfers and new technology; designated non-financial businesses and professionals (DNFBPs), particularly notaries and legal practitioners; public beneficial ownership registries; transparency on the roles and responsibilities of competent authorities; and domestic barriers to international cooperation.
• Kenya’s AML/CFT efforts are more effective when linked to countering domestic corruption. Effective implementation remains a challenge in several areas, and AML/CFT action by government and regulators seems to be more robust when linked to the domestic war on graft. This makes Kenya an attractive destination for corrupt foreign officials and their enablers to launder illicit financial flows from across Kenya’s borders.

An overview of The Sentry’s recommendations (Read complete recommendations in the full report)

To the MER team

• Widen stakeholder engagement.
• Consider documents issued outside of the Kenyan government and identify nontraditional sources of intelligence.
• Consult with civil society on the NRA process.
• Hold a roundtable with international experts.
• Focus on areas identified as requiring enhancement by public reporting.

To the government of Kenya

Managing illicit finance risks

• Finalize the NRA and assess against specific risks identified in this report.
• Provide clearer communications on how Kenya complies with UN Security Council resolutions relating to the prevention and suppression of terrorism, terrorist financing, and nuclear proliferation.
• Enact and enforce sanctions through a central body responsible for the coordination and enforcement of all UN sanctions programs, including against South Sudanese profiteers and their international collaborators.
• Make Kenya hostile to South Sudanese illicit financial flows.
• Escalate financial pressure on South Sudan or risk damage to financial systems.
• Investigate and sound the alarm on corrupt real estate acquisitions from foreign PEPs without political interference and reach out to foreign counterparts to coordinate on joint cases.
• Implement National Action Plan components related to corruption and human rights.
• Strengthen customs controls to guard against the shipment of illicit arms, gold, wildlife, and timber through Kenyan ports.
• Invest in training and technology to address emerging threats.
• Adopt a multifaceted response that combines political will with community engagement.
• Interrogate the Kenyan corporate registry to identify companies controlled by South Sudanese political elite.
• Ensure adequate resourcing is available to tackle illicit financial flows.

Enhancing AML/CFT framework

• Create a body responsible for the development, implementation, enforcement, and issuing of guidance on all UN sanctions.
• Update POCAMLA to address identified deficiencies and issues supporting guidance for industry.
• Strengthen regulatory bodies to track money and issue effective financial deterrents to dissuade financial institutions from laundering funds.
• Promote transparency through public reporting.
• Focus on supporting the repatriation of assets linked to corrupt public officials.

To Kenya’s international partners

• Kenya’s overseas partners and international financial institutions should continue to provide technical assistance in AML/CFT.
• Members of the UN Security Council should encourage Kenya to implement all UN sanctions.
• The African Union should work with Kenya to tackle illicit financial flows and proceeds of corruption.
• The UK and the US should support Kenya in issuing a warning on the money laundering risks associated with South Sudanese political corruption.
• International donors should prioritize support to anti-money laundering efforts in Kenya.
• International partners should encourage Kenya to join the Egmont Group.
• International partners should encourage local banks to adopt the Wolfsberg Group’s correspondent banking due diligence questionnaire (CBDDQ).

Read the full report and recommendations: https://thesentry.org/reports/kenya-illicit-finance/

For media inquiries or interview requests, please contact: Greg Hittelman, Director of Communications, +1 310 717 0606, [email protected]

About The Sentry

The Sentry is an investigative and policy team that follows the dirty money connected to African war criminals and transnational war profiteers and seeks to shut those benefiting from violence out of the international financial system. By disrupting the cost-benefit calculations of those who hijack governments for self-enrichment, we seek to counter the main drivers of conflict and create new leverage for peace, human rights, and good governance. The Sentry is composed of financial investigators, international human rights lawyers, and regional experts, as well as former law enforcement agents, intelligence officers, policymakers, investigative journalists, and banking professionals. Co-founded by George Clooney and John Prendergast, The Sentry is a strategic partner of the Clooney Foundation for Justice.