Banks on the spot over Sh3.5BN NYS funds Probe

The turn of events has left the lenders reeling from potential reputational damage following the adverse mentions. This could complicate their relationships with key stakeholders, like investors, correspondent banks and customers, while, at the same time, injuring one of the most critical element in banking: trust

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BY GILBERT NG’ANG’A

On September 12, Kenya’s banking sector was hit by a rare regulatory storm that will redefine the future of the financial services sector in Kenya.

The Central Bank of Kenya slapped five top banks— KCB, Equity, Standard Chartered, DTB and Cooperative Bank—a total of Ksh392 million in penalties over alleged violations, which helped persons to transact the billions of shillings lost in the National Youth Service (NYS) scandal.

The probe could see dozens of senior bankers hounded to the courts to answer to charges of breaches in the Kenya’s Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) laws and regulations.

The investigations prioritized banks that handled the largest flows. According to the CBK report, Standard Chartered Bank handled the largest amount of the NYS ‘dirty’ cash at Sh1.6 billion, followed by Equity at Sh886 million. The two were slapped penalties worth Sh7.5 million and Sh89.5 million respectively.

KCB Kenya, the largest lender in Kenya by assets and profitability was accused by the regulator of having received Sh639 million and thereby charged Sh149.5 million in fines. The other two banks, Cooperative and Diamond Trust Bank were each said to have transacted Sh263 million and Sh162 million and thereby charged Sh20 million and Sh56 million in penalties respectively.

All the banks — backed by the industry lobby, Kenya Bankers Association —have steadfastly denied any wrong doing and have effectively vowed to prove to the regulator that they did their part as provided for by the law. The banks had up to September 26 to respond on the identified gaps and show cause why the penalties should not be levied on them. By the time of going to press, it is understood most of the banks had written back to the CBK, defending their operations.

Prior to the announcement, the CBK had discussed the findings with the senior management and Boards of the affected banks. It is understood that the officials and board members in all the banks faulted the findings. Bank officials who spoke to this writer in confidence said the CBK bank supervision officials handling the matter ‘ignored’ the evidence that the banks had submitted to defend their position in each of the transactions. 

The investigations and the eventual action on the banks are significant for Kenya on several data points. First, it has rubbished the banking sector’s anti-money laundering architecture, which has previously been touted as one of the most elaborate in Africa and globally.

Secondly, it has unmasked how well oiled syndicates that have been siphoning monies from government agencies through phony supply schemes orchestrated through banks.

Thirdly, this has put banks at an awkward position with the regulator. The accused banks have disparaged the CBK claims. It is understood that the institutions could move to court to challenge the CBK actions, should the regulator go ahead to ignore their defenses and effect the penalties saying they followed the law to the letter. This would be a first one for Kenya where the regulator is taken to court by its subjects.

Fourthly, the turn of events has left the banks reeling from potential reputational damage following the adverse mentions. This could complicate the banks’ relationships with their key stakeholders like investors, correspondent banks and customers while compromising one of the most critical element in banking – trust. For banks, trust is king.

Lastly, the AML/CFT laws and regulations assigns culpability to the highest offices in the banks should there be breaches. This means CEOs and senior managers in the adversely mentioned banks could be investigated and if found culpable charged in court.

The second phase of the investigations, the CBK said, will be the use of these findings by other investigators to assess the criminal culpability of the involved bank officials.

The main objective of the investigations was to examine the operations of the NYS-related bank accounts and transactions and in each instance assess the bank’s compliance with the requirements of the legislation.

According to the CBK, violations were identified principally related to, among others, failure by the five banks to report large cash transactions and to undertake adequate customer due diligence. The lenders were also found to have erred in not providing supporting documentation for large transactions, and lapses in the reporting of Suspicious Transaction Reports (STRs) to the Financial Reporting Centre (FRC)—an agency formed to tame money laundering.

The Directorate of Criminal Investigations (DCI) and the Office of the Director of Public Prosecution (ODPP) are said to have already picked up the cases after CBK shared the findings with the two offices, which have over the past months been on overdrive in the fight against corruption. This has seen tens of senior government officials and businessmen charged in court over graft allegations, largely touching on the NYS, the Kenya Revenue Authority, Kenya Power and the Kenya Bureau of Standards.

It is understood these findings were on banks that handled the largest volumes of the NYS money and would soon be extended to other lenders. This will effectively lift the veil on the Kenyan banking sector’s compliance with anti-money laundering regulations, as analysts and independent commentators reckoned the country needed to tighten its noose on the financial services sector to tame the vice.

“The CBK’s move is the strongest signal yet that looters of public coffers and dealers in illicit goods will have limited options to ‘clean’ their dirty cash. Punishing banks that facilitate theft or are used as laundries for dirty cash is the surest and the least costly method to close the taps of corruption, theft and dirty trade,” said the Business Daily in a hard-hitting editorial on September 13.

“The action is also one that if sustained over time has the potential to preserve the integrity of Kenya’s economy. For too long corrupt officials in both the public and private sectors have used banks to game the system for personal enrichment. The next frontier in regulating movement of dirty cash should now involve curtailing flow of money between countries as corrupt officials will likely be forced to either stuff notes under their beds or take it to neighbouring jurisdictions with lax rules,” the paper said.

The actions taken on the banks, the CBK said, were aimed at safeguarding stakeholders’ interests and maintaining a healthy financial sector. “CBK will continue to ensure that the banking sector’s legal and regulatory framework, including for AML/CFT is aligned to best practices. We will also continue to enforce strict adherence to the applicable laws and regulations, as the interests of the public, investors and other stakeholders will be protected only in any environment that is governed by the rule of law” said the CBK governor Dr Patrick Njoroge.

Billions of shillings are said to have been lost at the NYS for the past five years, channeled through banks by fraudulent suppliers working with corrupt government officials. It is also believed that some bank officials knowingly facilitated these transactions.

“If all our top banks can be found to have shown material weaknesses and lapses in reporting suspicious transactions as has been demonstrated by the CBK, what should we expect of smaller banks with less resources to devote to anti-money laundering reporting? Do banks, really, take the job of reporting suspicious transactions seriously? After all, the companies that were receiving corrupt payments from the NYS should have looked suspicious even to a layman” said columnist Jaindi Kisero in an opinion piece in a local newspaper on September 20.

“The picture portrayed is very troubling considering that we are a country battling with the twin problems of terrorism financing and corruption. Looking at the structure of our financial system closely, there is enough to arouse suspicions, and suggest that the vice could be rampant,” said the former Nation Media Group editor.

As to how far this will go, only time will tell.