Patrick Njoroge: The role of banks and the securities markets in curbing
the movement of illicit financial flows
Remarks by Dr Patrick Njoroge, Governor of the Central Bank of Kenya, at the 2nd Annual
General Meeting and Conference of African Organization of Public Account Committees
(AFROPAC), Nairobi, 30 August 2016.
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It is a privilege for me to join this panel to discuss the role of banks and the securities
markets in curbing the movement of illicit financial flows. I would like to take this opportunity
to thank the African Organization for Public Account Committees (AFROPAC) for inviting me
to speak on this topical issue. I would also like to recognize and appreciate AFROPAC's role
in promoting transparency and accountability in the governance of public resources.
It is apt to note that the topic of illicit financial flows was recently highlighted at the 14th
Session of the United Nations Conference on Trade and Development (UNCTAD) that
recently convened in Nairobi about a month ago, a meeting that brought together Heads of
States and Governments, and key stakeholders from the business world and civil society.
The damaging effects of illicit financial flows on the African continent are now
welldocumented and it is only fitting that AFROPAC has brought the issue to the fore.
Stemming illicit financial flows from developing countries has emerged as one of the key
issues shaping the global development agenda. As you are aware, 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"1. 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 US$50 billion annually to illicit financial flows2. Additionally,
According to the Report of the High Level Panel on Illicit Financial Flows, between
1970 and 2008, Africa lost an estimated US$854 billion in illicit financial flows.3 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 cooperation.
• Third, all countries are involved in this fight, and there are no winners if illicit
financial flows are not dealt with.
It is noteworthy that the financial sector is the most common conduit for illicit financial flows.
This is largely attributed to the interconnection between national and international financial
systems, which can thereby provide a wider geographical reach through which illicit financial
assets are moved and laundered. The financial sector, therefore, has to be at the forefront of
the agenda to stem illicit financial flows.
Nevertheless, in order to develop and implement policies that would appropriately address
the issue of illicit financial flows it is important to appreciate the vulnerabilities of African
financial systems. More importantly, to understand how they enable or facilitate the
movement of illicit financial flows.
Most of our economies are characterized by the presence of 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 that financial institutions
are required to implement 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.4 The
implementation of the 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 necessary 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 requisite skills required for tracking illicit financial flows, including the ability to
profile money laundering risks and analyse suspicious transactions, are severely lacking and
in short supply within the continent. New technologies can help but could also facilitate illicit
financial flows.
I cannot overemphasise the need for African countries to develop mechanisms that will
facilitate transparency. Adoption of mechanisms such as the Kimberley Process for
diamonds or the Extractive Industries Transparency Initiative (EITI) would help. 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 wrong doing
and disrupts a key vehicle for illicit financial flows. In this regard, 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.
I would be remiss if I did not mention the Kenyan experience and initiatives that the Central
Bank of Kenya(CBK)has adopted in order to foster transparency within the Kenyan financial
system. In the past year, CBK has adopted the following measures:
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.
• 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.
• Enhanced AML/CFT on-site inspections. CBK is currently developing a risk based
AML/CFT supervisory framework with assistance from the International Monetary
Fund (IMF).
• Required greater transparency on the part of banks to ensure public confidence.
Transparency extends to disclosures by banks on their corporate governance and
risk management structures. In this regard, 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 5percentor more shareholding.
Let me take the few remaining minutes to share with you some of our key lessons relating to
money laundering, particularly with respect to illicit financial flows:
i) 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.
ii) 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.
iii) The perpetrators of money laundering are very smart and sophisticated, ready to
take advantage of any existing loopholes in the law and weaknesses in the internal
controls of financial institutions.
iv) 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.
In conclusion, 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.
I look forward to benefiting from your thoughts and diverse experiences.
Thank you for your attention.