Kenya: Anti Money Laundering Laws and Regulations

On Saturday 1st June 2019, the Central Bank of Kenya announced that it shall be issuing new generation notes, and specifically for the Kshs 1,000 note currently in circulation would cease to be legal tender from 1st October 2019.  See links below

Launch of New Generation Banknotes

Click to access New-Generation-Banknotes-Pamphlet.pdf

Click to access 1727542341_Governor’s%20Remarks%20-%20Launch%20of%20the%20New%20Generation%20Banknotes.pdf

(CBK – Governors full speech)

The Governor of the Central Bank of Kenya in this remarks on the launch said “ Your Excellency, the new banknotes will circulate alongside those previously issued but not withdrawn. However, we have assessed the grave concern that our large banknotes—particularly the older one thousand shillings series—are being used for illicit financial flows in Kenya and also other countries in the region. More recently we have seen the emergence of some counterfeits. These are grave concerns that would jeopardize proper transactions and the conduct of commerce in our currency. To deal conclusively with these concerns, all the older one thousand shillings series shall be withdrawn. By a Gazette Notice dated May 31, 2019, all persons have until October 1, 2019, to exchange those notes, after which the older one thousand shillings banknotes will cease to be legal tender. “

This has created a panic situation as Kshs 1,000/= notes held by individuals and organized crime syndicates are likely to offload these in the economy either by banking into bank accounts, purchasing high-value vehicles from motor dealers, purchasing gold, other precious metals and gemstones from jeweler’s and gemstone traders, purchasing property from property developers and estate agents or even general goods paying in cash which has been hoarded and may be proceeds of physical crime, proceeds of economic crime and corruption, money accumulated but not declared for tax purposes (tax evasion), all this would be covered under the term “money laundering”. Thus businesses should be vigilant to not becoming unknowingly conduits for and accessories to money laundering. Kenya has a PROCEEDS OF CRIME AND ANTI-MONEY LAUNDERING ACT (CHAPTER 59B), which covers these offenses.

Money laundering is defined as: ‘The funneling of cash or other funds generated from illegal activities through legitimate financial institutions and businesses to conceal the source of the funds.’  Anti-Money Laundering, 2nd ed., IFAC, 2004

Key Definition’s 1/2

“Agency Director” means the Director of the Agency appointed under section 53(2);

“authorised officer” means—

(a) a police officer;

(b) an officer of the department of the Kenya Revenue Authority;

(c) Agency Director; or

(d) any person or class of persons designated by the Minister as an authorized officer to perform any function under this Act;

“Board” means the Anti-Money Laundering Advisory Board established under section 49;

“Centre” means the Financial Reporting Centre established under section 21;

“confiscation order” means an order referred to in section 61

“designated non-financial businesses or professions” means—

(a) casinos (including internet casinos);

(b) real estate agencies;

(c) dealing in precious metals;

(d) dealing in precious stones;

(e) accountants, who are sole practitioners or are partners in their professional firms;

(f) non-governmental organizations;

(g) such other business or profession in which the risk of money laundering exists as the Minister may, on the advice of the Centre Director,

“estate agency” in connection with the selling, mortgaging, charging, letting or management of immovable property or of any house, shop or other building forming part thereof, means doing any of the following acts—

(a) bringing together, or taking steps to bring together, a prospective vendor, lessor or lender and a prospective purchaser, lessee or borrower; or

(b) negotiating the terms of sale, mortgage, charge or letting as an intermediary between or on behalf of either of the principals;

“financial institution” means any person or entity, which conducts as a

business, one or more of the following activities or operations—

(a) accepting deposits and other repayable funds from the public;

(b) lending, including consumer credit, mortgage credit, factoring, with or without recourse, and financing of commercial transactions;

(c) financial leasing;

(d) transferring of funds or value, by any means, including both formal and informal channels;

(e) issuing and managing means of payment (such as credit and debit cards, cheques, travelers’ cheques, money orders and bankers’drafts, and electronic money);

(f) financial guarantees and commitments;

(g) trading in – (i) money market instruments, including cheques, bills, certificates of deposit and derivatives; (ii) foreign exchange; (iii) exchange, interest rate and index funds; (iv) transferable securities; and (v) commodity futures trading;

(h) participation in securities issues and the provision of financial services related to such issues;

(i) individual and collective portfolio management;

(j) safekeeping and administration of cash or liquid securities on behalf of other persons;

(k) otherwise investing, administering or managing funds or money on behalf of other persons;

(l) underwriting and placement of life insurance and other investment-related insurance; and

(m) money and currency changing;

“money laundering” means an offense under any of the provisions of sections 3, 4 and 7;

“offense” in this Act, means an offense against a provision of any law in Kenya, or an offense against a provision of any law in a foreign state for conduct which, if it occurred in Kenya, would constitute an offense against a provision of any law in Kenya;

“person” means any natural or legal person;

“proceeds of crime” means any property or economic advantage derived or realized, directly or indirectly, as a result of or in connection with an offense irrespective of the identity of the offender and includes, on a proportional basis, property into which any property derived or realized directly from the offense was later successively converted, transformed or intermingled, as well as income, capital or other economic gains or benefits derived or realized from such property from the time the offense was committed;

“property” means all monetary instruments and all other real or personal property of every description, including things in action or other incorporeal or heritable property, whether situated in Kenya or elsewhere, whether tangible or intangible, and includes an interest in any such property and any such legal documents or instruments evidencing title to or interest in such property;  property of every description, including things in action or other incorporeal or heritable property, whether situated in Kenya or elsewhere, whether tangible or intangible and includes an interest in any such property and any such legal documents or instruments evidencing title to or interest in such property;

“reporting institution” means a financial institution and designated nonfinancial business and profession;

Relevant Sections of the Act

Offenses penalized under Section 16 (1)

3. Money laundering

A person who knows or who ought reasonably to have known that property is or forms part of the proceeds of crime and—

(a) enters into any agreement or engages in any arrangement or transaction with anyone in connection with that property, whether that agreement, arrangement or transaction is legally enforceable or not; or

(b) performs any other act in connection with such property, whether it is performed independently or with any other person, whose effect is to—

(i) conceal or disguise the nature, source, location, disposition or movement of the said property or the ownership thereof or any interest which anyone may have in respect thereof; or

(ii) enable or assist any person who has committed or commits an offense, whether in Kenya or elsewhere to avoid prosecution; or

(iii) remove or diminish any property acquired directly, or indirectly, as a result of the commission of an offense, commits an offense.

4. Acquisition, possession or use of proceeds of crime

A person who—

(a) acquires; (b) uses; or (c) has possession of, property and who, at the time of acquisition, use or possession of such property, knows or ought reasonably to have known that it is or forms part of the proceeds of a crime committed by him or by another person, commits an offense.

7. Financial promotion of an offense

A person who, knowingly transports, transmits, transfers or receives or attempts to transport, transmit, transfer or receive a monetary instrument or anything of value to another person, with intent to commit an offense, that person commits an offense.

Offenses penalized under Section 16 (2)

5. Failure to report suspicion regarding proceeds of crime

A person who willfully fails to comply with an obligation contemplated in section 44(2) commits an offense.

8. Tipping off

(1) A person who—

(i) knows or ought reasonably to have known that a report under section 44 is being prepared or has been or is about to be sent to the Centre; and (ii) discloses to another person information or other matters relating to a report made under paragraph (i).

(2) In proceedings for an offense under this section, it is a defense to prove that the person did not know or have reasonable grounds to suspect that the disclosure was likely to prejudice a report made under subsection (1).

11. Failure to comply with the provisions of this Act

(1) A reporting institution that fails to comply with any of the requirements of sections 44, 45 and 46, or of any regulations, commits an offense.

13. Misuse of information

(1) A person who knows or ought reasonably to have known—

(a) that information has been disclosed under the provisions of Part II; or

(b) that an investigation is being, or maybe, conducted as a result of such a disclosure, and directly or indirectly alerts, or brings information to the attention of another person who will or is likely to prejudice such an investigation, commits an offense.

Offenses penalized under Section 16 (3)

12. Conveyance of monetary instruments to or from Kenya

(3) A person who willfully fails to report the conveyance of monetary instruments into or out of Kenya, or materially misrepresents the number of monetary instruments reported in accordance with the requirements of subsection (1) commits an offense.

Offenses penalized under Section 16 (4)

9. Misrepresentation

A person who knowingly makes a false, fictitious or fraudulent statement or representation, or makes, or provides, any false document, knowing the same to contain any false, fictitious or fraudulent statement or entry, to a reporting institution, or to a supervisory body or to the Centre, commits an offense.

10. Malicious reporting

Any person who willfully gives any information to the Centre or an authorized officer knowing such information to be false commits an offense.

14. Failure to comply with the order of the court

A person who intentionally refuses or fails to comply with an order of a court made under this Act commits an offense.

16. Penalties

(1) A person who contravenes any of the provisions of sections 3, 4 or 7 is on

conviction liable—

(a) in the case of a natural person, to imprisonment, for a term not exceeding fourteen years, or a fine not exceeding five million shillings or the amount of the value of the property involved in the offense, whichever is the higher, or to both the fine and imprisonment; and

(b) in the case of a body corporate, to a fine not exceeding twenty-five million shillings, or the amount of the value of the property involved in the offense, whichever is the higher.

(2) A person who contravenes any of the provisions of sections 5, 8, 11(1) or 13 is on conviction liable—

(a) in the case of a natural person, to imprisonment for a term not exceeding seven years, or a fine not exceeding two million, five hundred thousand shillings, or to both and

(b) in the case of a body corporate, to a fine not exceeding ten million shillings or the amount of the value of the property involved in the offense, whichever is the higher.

(3) A person who contravenes any of the provisions of section 12(3) is on conviction, liable to a fine not exceeding ten percent of the amount of the monetary instruments involved in the offense.

(4) A person who contravenes the provisions of section 9, 10 or 14 is on conviction liable—

(a) in the case of a natural person, to imprisonment for a term not exceeding two years, or a fine not exceeding one million shillings, or to both and

(b) in the case of a body corporate, to a fine not exceeding five million shillings or the amount of the value of the property involved in the offense, whichever is the higher.

(5) Deleted by Act No. 51 of 2012, s. 6.

(6) Where any offense under this Part is committed by a body corporate with the consent or connivance of any director, manager, secretary or any other officer of the body corporate, or any person purporting to act in such capacity, that person, as well as the body corporate, shall be prosecuted in accordance with the provisions of this Act.

17. Secrecy obligations overridden

(1) The provisions of this Act shall override any obligation as to secrecy or other restriction on disclosure of information imposed by any other law or otherwise.

(2) No liability based on a breach of an obligation as to secrecy or any restriction on the disclosure of information, whether imposed by any law, the common law or any agreement, shall arise from disclosure of any information in compliance with any obligation imposed by this Act.

Why tax evasion is also considered part of money laundering?

Businesses cannot hide under the pretext I know the person, he is a business person and not a criminal, by accepting payments in Kshs 1,000 notes for major capital assets purchases like vehicles, real estate properties, jewelry, and gemstones, because the person may be a genuine business person but has evaded tax.

Tax evasion

Tax evasion must be addressed effectively for a number of reasons. At first, it deprives states from raising sufficient revenues, therefore, preventing them from implementing social, economic, environmental, cultural and other policies. Tax evasion undermines the efforts of the government to promote the welfare and social cohesion; it prevents it from performing its social function. Moreover, it erodes the credibility of democratic institutions, while injuring the trust of citizens in the means and ends of a legitimate, democratic government. In a nutshell, it can brew feelings that might evolve into anti-social, anti-democratic mentalities.

Secondly, those who are in a better position to avoid taxation are the people who can siphon their income into foreign banks or jurisdictions, which usually means that they are better off. In avoiding their duties and responsibility vis-á-vis society and the state, the tax evaders are in effect placing a greater burden on those who eventually pay off the effective costs of taxation, who are in their majority, members of the lower and middle parts of the income distribution. As such tax evasion fosters or widens social inequality while it produces a de facto division of citizens between privileged and non-privileged.

Thirdly, tax evasion provides incentives to established financial institutions as well as authorities or politicians to engage in corrupt activities, in quest of their own enrichment or other benefits. Financial institutions/banks are interested in increasing their profits by making use of this stream of funds, even if that implies circumventing the existing rules5. Authorities may be enticed to turn a blind eye in this process, so that their own position in power may be consolidated.

What Processes should you have to have in Place

Customer due diligence

Suitable customer due diligence measures is the bedrock of anti-money laundering requirements and the first line of defense for any business. This means:-

1) identifying and verifying the customer’s identity using documents, data or information obtained from a reliable and independent source where applicable, identifying the beneficial owner and taking risk-based and adequate measures to verify their identity using government-issued identity document and tax record (PIN)

2) obtaining information on the purpose and intended nature of the business relationship conducting ongoing monitoring of the business relationship.

This ongoing monitoring should include:

Scrutiny of transactions undertaken throughout the business relationship. This is to ensure that transactions are consistent with the accountant’s knowledge of the client, the business and risk profile.

Ensuring that documentation, data or information held is kept up to date, and carefully filed in hard copy.

Stages of CDD

Information gathering -Verification, Risk assessment and Identification

Verification

• Who is the client? • Who owns them?  • What do they do?  • What is their source of funds?
• Can you describe their activities? •  What will you be doing for them? • What is its legal structure?

Risk Assesment

• Client risk
• Service risk
• Geographic risk
• Sector risk
• Delivery channel risk

Identification

• What documents or other information do you need to demonstrate what you have been told is true?
• What steps do you need to take or what information do you need to obtain to mitigate any specific risks that you have identified?

The identification phase requires the gathering of information about a client’s identity and the purpose of the intended business relationship. Appropriate identification information for an individual would include full name, date of birth and residential address. This can be collected from a range of sources, including the client. In the case of corporates and other organisations, identification also extends to establishing the identity of anyone who ultimately owns or controls the client. These people are the ‘ultimate beneficial owners’ (UBOs), and further guidance on how to deal with them can be found in paragraph 5.1.14.

The next stage of CDD is risk assessment. This should be performed in accordance with and must reflect the purpose, regularity, and duration of the business relationship, as well as the size of transactions.

Conclusion: Money laundering is a serious offense, hence vigilance is important,  where you bank or invest your money, you will most likely have to disclose the source of the cash, so be careful as you transact with any person, who you have the slightest doubt. Do not accept to help a friend, in disguising source of funds, you would be personally liable.

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Contacts

CPA Ahmed Salyani –Managing Partner asalyani@acegroup.co.ke

CPA Mohamed Ebrahim—Partner mebrahim@acegroup.co.ke

Muhamed Salyani (ACCA) —Consulting director, msalyani@acegroup.co.ke

Bilal Musani, (ACCA) – Tax Director bmusani@acegroup.co.ke

CPA Mohamed Afzal Mamdani—Nairobi Office  mamamdani@acegroup.co.ke

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Caveat

The content of this bulletin is for informational purposes only. The content is not intended in any way to be a substitute for legal advice, in making decisions, and the authors and the entities affiliated with them are not responsible for any loss, resulting from acting on this information. This information is driven by announcement by the Central Bank of Kenya on the new currency notes and the ceasing of the current Kshs 1,000 note as legal tender by 1st October 2019 and the  PROCEEDS OF CRIME AND ANTI-MONEYLAUNDERING ACT (CHAPTER 59B)