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Joint action needed to stop illicit cash flows
Stemming illicit financial flows from developing countries is one of the key issues shaping the global development agenda.
Goal No. 16 of the Sustainable Development Goals (SDGs) under the United Nations 2030 Agenda for Sustainable Development, commits to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime”.
There are good reasons for this: First, the amounts involved are massive. With assistance from the IMF and the World Bank, the advocacy group Global Financial Integrity (GFI) has estimated that Africa loses about $50 billion annually to illicit financial flows.
Additionally, according to the Report of the High Level Panel on Illicit Financial Flows, between 1970 and 2008, Africa lost an estimated $854 billion in illicit financial flows.
This amount is equivalent to the development assistance received by the continent over the same period.
Second, illicit financial flows have far-reaching effects, particularly on the African continent.
These flows and the activities that support them have been shown to lead to increasing inequality in the source countries, in addition to undermining the economic and social institutions, discouraging transparency, and undermining international development co-operation.
Third, all countries are involved in this fight, and there are no winners if illicit financial flows are not dealt with.
The financial sector is the most common conduit. This is largely due to the interconnection between national and international financial systems, which can provide a wider geographical reach through which illicit financial assets are moved and laundered.
Enable or facilitate
The financial sector, therefore, has to be at the forefront of the agenda to stem the flows. Nevertheless, in order to develop and implement policies that would appropriately address the issue, it is important to appreciate the vulnerabilities of African financial systems. More importantly, to understand how they enable or facilitate the movement of money.
Most of our economieshave informal financial systems that are primarily cash based. However, significant gains have been made in increasing the level of financial inclusion, most notably in sub-Saharan Africa, where countries like Kenya and Tanzania have embraced mobile and financial products and services.
But the overall level of financial inclusion in Africa remains low. Only a small percentage of the population has bank accounts, and the percentage of those owning insurance policies and securities is even lower. This is relevant given that it serves to hamper efforts to trace illicit financial flows from the continent.
Weak banking regulatory and supervisory frameworks has largely hindered the effective implementation of initiatives aimed at reducing illicit financial flows from Africa.
This is reflected at the national level, given that most African countries are yet to fully adopt and implement the 2012 Financial Action Taskforce (FATF) recommendations, the international standards on combating money laundering and the financing of terrorism.
The FATF standards are a comprehensive framework of preventive measures for financial institutions to address threats to the financial system including illicit financial flows.
Recent assessments of several African countries Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regimes conducted by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), a FATF regional body, revealed that most countries generally exhibit a low level of compliance with preventive measures.
The implementation of customer due diligence, in particular the identification and verification of beneficial owners of corporate entities remains a significant challenge. Closer international cooperation is also needed.
The lack of institutional, technical and human capacity also hampers financial sector regulators’ ability to curtail the movement of illicit financial outflows from financial institutions in Africa.
The infrastructure that would support regulators efforts to combat illicit financial flows such as Financial Intelligence Units (FIUs), beneficial ownership registries or asset recovery units are either non-existent or in the early stages of development. As a result, the skills required for tracking illicit financial flows, including the ability to profile money laundering risks and analyse suspicious transactions, are severely lacking in the continent.
New technologies
New technologies can help but could also facilitate illicit financial flows. In addition, lifting the veil of secrecy and determining who ultimately owns and controls corporate entities that have established business relationships with financial institutions exposes wrongdoing and disrupts a key vehicle for illicit financial flows.
I would therefore urge the continent’s legislatures to consider implementing changes to our national laws that would enhance our national registries, particularly as relates to the obtaining and sharing of beneficial ownership information. In the past year, the Central Bank of Kenya (CBK) has adopted several initiatives to foster transparency in the Kenyan financial system.
It has stepped up close collaboration with the Financial Reporting Centre (FRC) – Kenya’s financial intelligence unit (FIU) – to foster a culture of compliance in the banking sector. Emphasis has been placed on the preventive measures outlined in the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), Kenya’s primary anti-money laundering legislation.
It has also provided additional clarity on reporting obligations under POCAMLA including the issuance of guidelines on large transactions in January 2016, intended to provide a clear trail of large cash transactions conducted over the counter in banks.
Further, AML/CFT on-site inspections have been enhanced. CBK is currently developing a risk based AML/CFT supervisory framework with assistance from the International Monetary Fund (IMF). CBK has also required greater transparency on the part of banks to ensure public confidence.
Transparency extends to disclosures on their corporate governance and risk management structures. CBK has enhanced the disclosures by banks on their significant shareholders. Banks are now required to disclose on their websites details of significant shareholders who own five per cent or more shareholding.
Kenya’s financial sector is very vulnerable given its strategic position in the region, facilitated by easy access through sea ports, airports and land. Kenya is a fast growing economy with high potential especially in the financial sector.
It is therefore attractive to both well-intentioned and ill-intentioned investors. Inter-agency cooperation between the financial sector regulators, law enforcement agencies and the financial institutions has had a positive effect in stemming illicit financial flows.
Regular interaction with international bodies tasked with the responsibility of preventing money laundering is key in shaping or improving a country’s institutional, legal and regulatory framework in combating illicit financial flows.
The battle against illicit financial flows in Africa cannot be won singlehandedly. Governments, legislatures, the judiciary and the private sector must come together.
Tackling the underlying sources of illicit financial flows is imperative. For the African financial sector, investment must be made in strengthening preventive measures.
Surveillance, detection and recovery procedures must be enhanced. With this comprehensive approach, Africa will be well armed to combat the scourge of illicit financial flows.
Dr Njoroge is the Governor, Central Bank of Kenya.
