Kenya on Wash Wash Grey List: What it Means For You

Kenya has recently been added to the Financial Action Task Force (FATF) greylist. The FATF is the global watchdog for money laundering and terrorist financing. Hence, Kenya is now seen as a country rife for wash-wash.

But how does a country get on the greylist? 

First, there are three lists. The blacklist, the whitelist, and the greylist. 

The FATF provides guidelines that countries have to adhere to to protect themselves against money laundering and terrorism financing. Countries on the blacklist do not adhere to the provided guidelines and do not show interest in doing so. Such countries include the Democratic Republic of North Korea, Iran, and Myanmar.

Countries on the whitelist have adhered to the guidelines, thereby mitigating their exposure to money laundering and terrorism financing. The greylist includes countries that acknowledge the guidelines provided by FATF and are making efforts to actualise the guidelines but have fallen short. They need to put in place the recommended measures to level up.

This is the second time Kenya has been on the greylist. The last time it was on the list was in 2010 and it stayed until 2014. The current greylisting comes when the country is under financial strain. 

How, then, is Kenya being on the wash wash greylist going to affect you?

Increased Cost of Doing Business

In the world of business and finance, reputation plays a big role. People, businesses, and countries want to do business with entities they can trust. Therefore, being put on the greylist is a big stain on Kenya’s reputation. 

With a tainted reputation, Kenya is seen as a big risk. Its partners will need to adjust interests and other costs to reflect the higher risk exposure while trading with Kenya. The upward revisions will increase the cost of doing business across the board.

The cost of doing business will also go up due to delays or slower supply chains. This is because the amount of due diligence increases significantly to ensure that our trading partners are not exposed to laundered or terrorism financing. 

Strain in Accessing Financing

With inclusion in the greylist comes strain in accessing financing. Kenyan banks will now be exposed to higher transaction costs, funding costs, and compliance costs as the dealings are closely monitored and subjected to tighter scrutiny. These stringent measures on Kenyan financial institutions increase strain on access to financing, which might result in a loss of business.

The greylisting also leads to a loss of correspondent (other international banks) relationships. For instance, when Malta was greylisted, they experienced a 20% reduction in their correspondent banking, according to a report by KPMG South Africa.

Furthermore, greylisting can result in decreased capital inflows. Part of the foreign inflows that have helped stabilise the Kenyan shilling has been inflows from foreign investment and international institutions such as the IMF and the World Bank. A study by the International Monetary Fund (IMF) showed that capital inflows to a country reduce by 7.6% once it is put on the greylist.

More Scrutiny on Kenyan Companies

Kenyan companies, especially those in the importing and exporting business, will also experience more scrutiny.

Countries transacting with Kenyan companies will want to protect themselves from exposure to laundered or terrorism money; hence, they will increase their scrutiny of the companies.

The scrutiny might slow down business, increase the cost of doing business, or lead to severed business relationships.

Higher Interest in Loans—Both for Government and Individuals

The IMF and the World Bank enjoy observer status at the FATF. Greylisting will also trigger them to employ more stringent conditions when it comes to the concessional loans they extend to Kenya. Some of the stringent conditions might include increased interest rates.

When the government accesses loans at high-interest rates, they pass on the burden to the citizens. Recently, the Central Bank of Kenya raised the base interest rates, which saw some banks raise their interest rates upwards of 26%.

In extreme situations, some countries are denied access to some facilities by the IMF and World Bank due to greylisting. The positive uptake of the listing in Kenya and the willingness to address the highlighted issues by the Treasury and Central Bank might save Kenya from being cut off from some facilities.

Increased Monitoring in Some Industries

Money laundering and terrorism financing do not happen in a vacuum. These illegal transactions are disguised as legitimate business transactions. There are several industries where these transactions are prone to taking place.

NGOs

The greylisting report highlighted non-governmental organisations and not-for-profit organisations as industries that are not sufficiently regulated. The reduced regulations leave room for abuse by criminals laundering money. 

Highlighting the NGO sector is likely to scare donors, as they exercise caution while giving their funds. This apprehension could affect the social impact of these NGOs

Legal Sector

Another sector that has been highlighted is the legal sector. Kenya had started putting in place laws to mitigate laundering and terrorism financing in this sector prior to the greylisting. Lawyers were designated as reporting institutions; hence, if a lawyer noticed fraudulent transactions, they ought to report through the Law Society of Kenya.

The designation of lawyers as reporting agents increases investor confidence in being protected against illegal transactions.

Trusts

There has also been an advisory to put in place regulations that shed more light on the ownership behind trusts. The ambiguity behind who owns them, who runs them, and where the money is coming from is a high-risk exposure to terrorism financing and money laundering.

This has been a difficult sector to regulate since many involved in the sector are politicians or politically affiliated and are wary of their relationship with some trusts and companies being outed.

There has also been a call to effectively regulate the cryptocurrency and digital asset sectors. If not well regulated, these sectors can also be misused to launder money.

Other industries that have been highlighted include real estate, precious metals, casinos, and accounting.

Wrapping Up

The greylisting of Kenya by the FATF is bad news for the country. Its effects start at the top-most institutions and trickle down to the grassroots. Although the government has shown a willingness to make the necessary improvements to get the country off the list, this might take some time. The last time we were on the greylist, it took four years. For however long Kenya is on the list, the Mwananchi will be left to bear the brunt of the greylisting.