Banks have a role to play in clean and open procurement

June 18, 2019

Corruption scandals in Kenya have continued to emerge almost on a daily basis with the lingering looting of public funds. Every time Kenyans become accustomed to the constant news of their taxes ending up in the hands of a few; another graft scandal emerges. While the corruption chain in Kenya is intertwined with a narrative of individuals and cartels looting public money in major state institutions – one major financial industry player’s responsibility has only started to emerge: Banks.

A befitting description of a bank in any economy is its role in financial inter-mediation. This role is usually executed by the banks facilitating financial transactions between persons. Healthy financial flows within a country’s economy are necessary for its stability, which is in the jurisdiction of banks as the most important financial intermediaries. Kenya’s corruption scams have largely featured through procurement anomalies that have denied citizens crucial goods and services such as roads, equipped hospitals, clean water, energy and food.  At the heart of these scams are unusual transactions of funds through banks where some individuals have been quick to access money from public coffers.

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Remedies in law and policy still on ‘paper’

The banking industry is guided by key pillars that are meant to guard against illicit financial transactions. The Anti-Money Laundering and Counterfeit Financing of Terrorism (AML/CFT) law mandates banks to perform requisite due diligence checks prior to establishing bank accounts for customers.  This enables banks to monitor customer bank accounts transactions and keep records of their clients’ bank accounts operations.  Any unusual financial transactions that are uncommon to a bank customer’s profile need to be reported to the Financial Crime Reporting Center (FRC) for probing of possible fraud.

With such a seemingly well-structured institutional governance system in place for combating financial crime in the Kenyan banking sector; the question lingers why there are numerous unusual and illicit financial transactions still successfully being processed by Kenyan banks?

Glaringly unusual dealings through the Kenyan banking industry have brought to light a salient truth of willing or unwilling complicity in looting of public funds.  This theft of public funds is actualized through an apparently enabling financial environment that incubates this norm. Questions, demands and warnings from the Central Bank (CBK) through its governor have done little to prevent systemic illicit financial flows within the Kenyan financial institutions despite there being presumably good banking governance institutional systems in place.

Systemic checks are not enough

A report by the Global Witness in 2015 states that while most countries have laws and regulations to ensure that banks carry out appropriate checks to detect proceeds of corruption- a large number of banks do not uphold these rules and are driven by profit making demands without adherence to accountability values.

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In Kenya for instance, the Proceeds of Crime and Anti-Money laundering (POCAMLA) Act 2009 enables the FRC to report unusual transactions within banks. Interestingly, Kenyan legislators recently made changes to the Banking Circular No 1 of 2016 (additional guidelines on Large Cash Transactions) by removing the requirement that all transactions over USD 10,000 need to have additional information on the deal provided to banks before the transaction is processed by the bank.

Solutions: transparency needed in financial flows

Multiple options do exist though to cure these systemic loopholes that aid unusual transactions through the banking system.  The first one is where the  FRC that is mandated to investigate illicit cash flows through the banking system needs to be accountable and update the Kenyan  public on a regular basis the number of reported cases of unusual cash flows in the banking sector, and the outcome of their investigations.  More transparency in this would support efforts against fraud, money laundering and other illegal transactions.

Secondly, banks should further enhance due diligence checks as part of their anti-money laundering mechanisms to not only get information about potential clients but enable high scrutiny of accounts that are held by public officers and politically exposed persons who are charged with executing government budgets. Additionally, the same diligence should be exercised over accounts of private individuals whose main business is transacted with government for provision of public goods and services.

Lastly, the Kenyan banking industry needs to increase monetary sanctions and fines on banking institutions that are found to have allowed illicit public funds to flow through their banking system.  In developed economies, hefty fines are levied on banks that allow illicit cash flows through their banking structure.  Examples include the HSBC bank in the United States that in 2012 was fined $1.9 billion by the U.S. financial institutions oversight authorities in a settlement over money laundering. Such hefty fines that would in most cases form a considerable portion of the bank’s annual profits act as deterrence to banks to allow ill-gotten financial proceeds to flow through their banking systems.  In the Kenyan context, from the infamous National Youth Service (NYS) scandal the CBK governor informed the public that some banks were found culpable of having been complacent and allowed corrupt individuals to use their banking systems to siphon NYS funds. The fines imposed by the CBK to the liable financial institutions were minimal in comparison to the funds lost in the scam, and the reported annual profits by the liable banks.

Desirable changes in the fight against graft can have a huge impact if banks and oversight institutions also adopt smarter and transparent approaches such as the principles of beneficial ownership in ensuring that only legitimate and accountable funds flow through the Kenyan banking system. This will further enable them to strengthen their in-house anti-money laundering policies and contribute to accountable management of public funds.

About author

The writer is Hivos East Africa’s, Regional Finance Manager.