CHAPTER 4: Detecting and investigating money laundering in Kenya
Detecting and Investigating
Money Laundering in Kenya
Money Laundering Experiences, A Survey
Edited by Charles Goredema
Monograph No 124, June 2006
Kenya’s strategic location as the gateway to Eastern Africa and its well-developed connections to the rest of the world makes it an important hub of business, travel and large regional relief operations. This advantage, which has ensured Kenya’s economic survival even in the face of domestic and global hardships, has its serious downside. With the growing link between drug trafficking, money laundering and international terrorism, Kenya has been identified as a vulnerable location especially following the 1998 bombing of the United States (US) embassies in Nairobi, Kenya’s capital, and Dar es Salaam in Tanzania, and the subsequent massive September 2001 attacks in the US.1 Indeed, the US has regularly issued travel advisories on Kenya, restricting US citizens from freely travelling to Kenya on business and tourism. The US categorises Kenya as one of the countries on its regular watch list of money laundering and terrorism financing from drug trafficking and corruption.2
It would be expected that such vulnerability would make the Kenyan authorities quick to plug all possible loopholes for money laundering, not just to curb terrorism financing but also to ensure that funds from criminal networks are not used to cause internal economic and political instability. The international community, spearheaded by the US, has persistently challenged Kenya to implement specific anti-money laundering and terrorism financing legislation with stiff penalties for offenders, but the response of the Kenyan government has been rather lukewarm or undetermined, to say the least.3
Even though the government has put in place a number of anti-money laundering initiatives, including setting up an anti-narcotics police unit and drafting an anti-money laundering bill, neither the government nor Kenyan legislators appears keen to utilise these initiatives. The business community, too, does not support hard measures against money laundering, for fear that a failure to clearly identify which activities constitute money launderingÂ may hurt its activities through restrictions on the free flow of domestic and international capital through the economy.
It might sound strange, but illegal activities in Kenya are so entrenched and pervasive that having tough legislation that curbs money laundering could impose a heavy cost on the Kenyan economy and hurt its growth. Corruption in government and private sector supplies, tax evasion, cross border money transfers and funds from undisclosed sources are so significant in the Kenyan economy that curtailing them would have a definite impact. Some of these activities have been going on for such a long time that the beneficiaries may not even understand why these activities should now be criminalised.4
The latent issue, then, is that it is not too clear which activities should be targeted or who is likely to fall victim in the enactment and implementation of anti-money laundering legislation, particularly where there is no direct relationship between such activities and terrorism financing. These are the frustrations that the authorities face in trying to enforce the current legislation, including prudential anti-money laundering guidelines issued by the Central Bank of Kenya and anti-narcotics legislation, which is used by theÂ police narcotics unit to arrest suspected drug dealers. Attempts by the authorities to trace and freeze corruption funds stashed abroad by members of the former elite also appear to be losing steam. The proposed anti-money laundering and terrorism financing legislation is likely to suffer from the same handicap, especially where it targets established networks which, in the recent past, have viciously resisted attempts by the authorities to prosecute past corruption cases.5
Detecting potential sources of money laundering
In the past few years, the Kenyan authorities have been confronted by three unique cases that illustrate the possible extent of money laundering in Kenya and just how difficult it is to deal with it. The first involves a haul of a tonne of cocaine with an estimated street value of US$ 85 million that was seized at the Kenyan coast town of Malindi in January 2005 by the police narcotics unit. This was reported as the largest haul ever made anywhere in Africa. Even though the suspects were arrested, the matter is still dragging through the Kenyan courts. (There were several other drug trafficking cases at the same time, including one involving narcotics with an estimated value US$ 21 million that was intercepted in Antwerp in a container reported to have originated from Kenya.6)
The second unique case involves a public financial scandal referred to as Anglo Leasing, described as the biggest scandal of President Mwai Kibaki’s administration. Although the publicly reported Anglo Leasing deals involved some US$ 100 million, the potential of the scandal to turn into a massive fraud was so enormous that it has been likened to the Goldenberg financial scam under former president Daniel arap Moi, which is reported to have cost the Kenyan economy an estimated US$ 600 million to US$ 1 billion.7 Though Anglo Leasing transactions and the firms involved were inherited from the Moi regime when Kibaki’s National Rainbow Coalition (NARC) government assumed office in January 2003, following December 2002 elections that ended Moi’s 24 years of political rule, Kibaki’s administration was elected on an anti-corruption and reform platform and the Anglo Leasing scandal has caused a considerable public outcry. Moreover, this was an anti-climax for the government, which had reported tracing over US$1 billion in cash and assets believed to have been obtained corruptly by previous regimes and invested abroad.
Anglo Leasing involved a series of dubious international financial transfers relating to government security contracts through several intertwined local and international firms. The firms were linked to several projects under the Office of the President, including one for construction of forensic laboratories for the criminal investigations department and another one referred to as ‘e-cop’ (for ‘electronic cop’) for supply of computers and communications equipment to the police. They were also involved in a contract for the supply of fraud-proof passports under the Vice President’s office. These contracts put the Kibaki administration on the spot primarily because some of the new political elite, who stood to benefit, were involved in them. Some of Kenya’s development partners have threatened to suspend aid unless the beneficiaries of Anglo Leasing are prosecuted. One of President Kibaki’s ministers, who is implicated in the scandal, has been banned from travelling to the United Kingdom (UK) and the US.8
The third case relates to a protracted stand-off in 2001 between the Central Bank of Kenya (CBK) and Charterhouse Bank, a small bank, which received an international transfer of US$ 30 million on account of one of its customers, Crucial Properties. Under the CBK’s prudential regulations, all commercial banks are required to report any single transfer of more than US$ 500,000. Charterhouse Bank notified the CBK of the large transfer, prompting the Banking Fraud Investigations Unit (a criminal investigations wing under the CBK) to make an application to the Kenyan High Court to have the account frozen on suspicion that the funds were linked to drug trafficking and money laundering. However, the Kenyan beneficiaries of the funds fought a successful battle, arguing that the funds were from a foundation in the US which planned to invest US$ 2.5 billion in Kenya. While the authorities were still pursuing a court order to confiscate the funds, the order freezing the account was lifted and the funds were trans-shipped overnight to an undisclosed destination. The authorities were placed in such an awkward position that they lost the incentive to pursue further the drug trafficking allegations.
The first case illustrates just how vulnerable Kenya is to international drug trafficking. Besides this case, there have been numerous other cases of drug consignments that find their way to Kenya through the open sea or through the international airports. The 1999 US Department of State Report described Kenya as a significant transit country (though a minor producer) of narcotics, mostly hashish and heroin from south-west Asia destined for markets in Europe. The report stated that Kenya’s sea and air transportation infrastructure, and the network of commercial and family ties that link some Kenyans to South Asia, make the country a significant transit country for heroin. The more recent and significant drug hauls have increased the spotlight on Kenya as a major drugs trans-shipment point, with possible serious implications for money laundering and terrorism financing.
Even though Kenya may not be a major money-laundering centre, the Charterhouse Bank case pointed to the possibility of the Kenyan financial system being used for cleaning illegal money. In this particular case, the CBK banking fraud unit and police narcotics unit had reason to believe that the money was associated with drugs and applied both anti-narcotics and anti-money laundering legislation to have the funds frozen. However, the case against the Kenyan custodians and the possible beneficiaries fell flat on its face because the authorities were unable to lock the stable before the horse bolted. Indeed, one of the problems the CBK has in trying to apply its prudential regulations on international money transfers is that there is no restriction on Kenyans borrowing from or receiving funds from overseas. It is often claimed that Kenya is an attractive destination for portfolio investors. The problem is compounded by significant remittances from Kenyans living abroad and the ease of currency convertibility through the numerous, officially licensed, forex bureaux especially in Nairobi, Mombasa and other major towns.
The Anglo Leasing scandal is an example of the extent and depth of corruption involving public officials, which has plagued Kenya for a long time. Every year, Kenya is ranked among the most corrupt states in Transparency International’s corruption perception index. This is buttressed by the numerous cases of irregularities or mismanagement reported by the Controller and Auditor-General in the use of public funds allocated to government ministries and also incidents of public funds fraud in state corporations reported by the Auditor-General (Corporations). Such cases point to the large amounts of public funds that are laundered by public officials through inflated supply contracts or outright theft. The biggest instances are in the roads sector, where the government is defrauded through collusive arrangements between contractors, public officials and private consultants entrusted to supervise such contracts. Investigations into Anglo Leasing by the Kenya Anti-Corruption Commission (KACC) pointed to three permanent secretaries, who were removed from office and charged with corruption and abuse of office, but their accomplices remain at large.9
These three cases are examples of the numerous activities that may be suspected to involve money laundering but the authorities may never be able to conclusively determine them. The problem lies in the systemic corruption right from the police through the investigators to the judiciary. Police, especially, have been fingered for providing protection to known drug barons and gangs and those who are unlucky enough to be arrested and taken to court can always buy their freedom from police investigators and corrupt officials in the judiciary.10
Drug trafficking is a common problem, especially at the Kenyan coast and in Nairobi. There are numerous cases of suspects being arrested and prosecuted but the level of conviction and recovery of proceeds from such activities remains minimal relative to the size of the problem. Similar difficulties are encountered in efforts to prosecute and confiscate the wealth of beneficiaries of economic crime, including those implicated in public sector corruption. A good indicator of this is the protracted efforts to resolve the Goldenberg frauds, which remain unresolved more than a dozen years since the events took place. A judicial commission on Goldenberg appointed by the President in February 2003 received substantial public submissions but has yet to publish its findings, even though the government said the report would be published by November 2005.11 It remains to be seen what the report will recommend to the government and whether the Goldenberg saga will finally be resolved.
Another serious corruption and money-laundering problem, much more significant than Goldenberg in terms of the financial fraud involved, relates to a huge volume of debts which the NARC administration inherited from the Moi regime. Even though the government has paid billions of dollars to settle outstanding bills over the years, there is a dispute involving more than US$ 1.3 billion between the government and those who claim to have been contracted to supply goods and services to various government ministries.12 A large number of these bills involve corruption in government projects and supply contracts that were used by the political elite to finance elections and their other expenditures, particularly since Kenya adopted a multi-party system of governance in the early 1990s. The biggest bills relate to public projects in roads, water supply, education, security (police), defence (military), health and housing. Such contracts were issued without budgetary approval and, in one of the most blatant abuse of procurement regulations, contracts were issued without competitive bidding and variations were fixed between the contractors and government officials to increase the size of pay-offs to rent seekers.
Although funds were allocated in the budget each year to settle these bills, including some being paid off through a controversial special bond programme issued in 2000/1, the bills have continued to escalate mainly due to interest, idle plant and equipment, idle labour, and damages claimed by the suppliers on outstanding payments or for projects that stalled due to lack of funding or other reasons. This problem is devastating, especially to the government budget and planning, because a proportion of public funds is used to pay for projects that were never implemented or that stalled before being completed, and hence have no economic value. In some cases, the government has paid many times more the original cost of the project, but the vicious cycle of pending bills continues. To illustrate how serious this problem is, consider a case where a contractor who was owed the equivalent of US$ 50,000 when a project stalled now demands payment of US$ 500 million, or another one who now claims US$ 5 million from an original bill of only US$ 3,000.13
In an attempt to end the pending bills circus, which has been subject to various investigations since 1998, President Kibaki appointed a Pending Bills Closing Committee in January 2005 to scrutinise all the pending bills and advise the government on the necessary course of action. The Committee, with a broad membership representing both the public and private sectors, is headed by D G Njoroge, who retired after 40 years as Kenya’s Controller and Auditor-General. Apart from recommending to the government which bills should or should not be paid, the Committee is expected to identify cases that should be investigated by the authorities where public officials and suppliers were involved in corruption aimed at defrauding the government.14
There are various other schemes which generate money for organised gangs and other criminals. One of them relates to the substitution of large cheques from the government and the private sector through the banking sector clearing system. Such cases involve diversion of funds from the cheque issuer’s account to a third account, instead of to the payee’s account. Some of the cases identified by the banking fraud unit involved substitution of cheques issued by the large companies for the government to the tax authorities for income tax, value-added tax or customs duties. In such cases, although the account of the firm paying tax is debited, the funds do not reach the account of the tax authorities but are credited to a third account, created specifically by the syndicate. If the fraud is not detected during the cheque clearing process, the funds are often withdrawn as soon as they reach the third account and the account is probably closed, which means that the trail is cold by the time the fraud is discovered and investigations start. This fraud thrived due to loopholes in the cheque clearing system and the laxity of some commercial banks, which operated accounts of ‘fly-by-night’ customers who could make a quick deal, take money out and close accounts in a matter of days or weeks. However, incidents of cheque substitution, which were reported when the banks’ clearinghouse was operating under the CBK, have declined following the introduction of a computerised cheque clearing system, which is managed by the commercial banks.15
Channels for legitimising laundered money
Kenya’s open and largely private-sector business environment creates numerous opportunities for cleaning up the proceeds of crime. The banking sector, especially, has been a prime destination for free cash transactions. The nature of Kenya’s banking sector, which is made up of a highly differentiated range of banks, finance companies and mortgage institutions, makes it difficult for the money authorities to keep a tab on transactions that are likely to involve money laundering.16 Moreover, the supervisory capacity of the CBK has always been a big issue, not just in monitoring money-laundering activities but also in ensuring that the institutions under its jurisdiction operate within the statutory regulations set down by the Banking Act and the Central Bank of Kenya Act. The problem is compounded by the volume of cash business that is transacted outside the banking sector, including through micro finance institutions and between merchants.17
The inability of the CBK effectively to control money-laundering activities through banks is worsened by the other channels that are available in the Kenyan financial system to transfer cash from one source to another. The money market offers such prime opportunities, which include investment in government bonds and Treasury Bills issued by the CBK and fixed bank deposits. These instruments can be used by their holders as security for borrowing loans and advances, which are then invested in legitimate businesses that are used to disguise the source of the funds. Experience has shown that a substantial portion of the Treasury bonds and bills investment portfolio is held by ‘foreign’ investors, some of whom are believed to be the Kenyan elite who have either stashed illegal funds abroad or are paid kick backs abroad for government contracts. The volume of funds held by Kenyans abroad is considered quite substantial and Kroll Associates, an international firm contracted by the Kenyan authorities, claims its investigations since 2003 have traced over US$ 1 billion in bank deposits and assets reportedly owned by only a few of the Kenyan political and business elite.18
Forex bureaux are also particularly attractive in this respect because they do not involve the kind of cumbersome exchange procedures that banks usually require, including the range of questions asked, before converting funds from one currency to another. Moreover, bureaux are preferred because they do not charge commission on currency exchanges and often operate on lower margins than banks.19 These bureaux offer a particularly important conduit for clients who handle large cash transactions and do not wish to leave a trail that may be used by the tax authorities to compute tax due. The value of cash-based transactions, especially in wholesale, retail and import/export businesses, is so substantial that authorities cannot with certainty determine which transactions are for genuine business and which may relate to money-laundering operations.
Some of the businesses that involve huge cash transactions include second-hand motor vehicle imports, spares, accessories, computers, building materials and hardware. These businesses, especially, have flourished since the liberalisation of foreign trade and exchange controls in 1995. Importation of second-hand motor vehicles, mostly from Japan, Singapore and Dubai, has become quite a significant business and it could easily be used for cleaning up illegal money by dealers and buyers alike. A peculiar nature of these businesses is that, because they involve large cash transactions, it is not easy for the authorities to detect which ones may genuinely involve revenue generated from business or funds borrowed from the banks, and which may be financed by money-laundering rings. Since it is not illegal to transact business in cash, it is not unusual to find public officials buying the latest four-wheel drives for upwards of US$30,000â€”US$50,000 in cash, or paying cash for properties in prime locations.
Moreover, just like in the drugs trade, there are a lot of Kenyan firms with family or business links abroad that are used to transfer funds in and out of Kenya through wholesale and retail transactions. For example, a considerable number of Kenyan Asians are involved in transfer pricing through family and business connections with India, the UK, Canada, Pakistan and other countries. They act as agents, wholesale or retail outlets for goods shipped into Kenya and are paid a commission for whatever they sell. As the use of transaction records tends to be minimal, it is difficult for the authorities to determine if such agents or outlets are used as conduits for cleaning up the proceeds of money laundering operations. It is also difficult for the tax authorities to keep a tab on the revenue being generated by such business connections and therefore to determine tax liabilities, which may give them a reliable indicator of whether or not such businesses involve genuine international trade and exchange transactions.
The Nairobi Stock Exchange offers prime opportunities for trading of shares and bonds, with its long history of upswings whenever there is excess cash in the economy. Just like Treasury bills and bonds, securities traded on the Stock Exchange offer opportunities for high returns, through dividends and capital gains, especially when investor confidence is underpinned by political stability, economic recovery and improved profitability of listed companies. Such conditions for high returns were evident following the liberalisation of the Kenyan economy in 1993 and 1994 and, more recently, with the landslide NARC victory in December 2002. Given that the stock exchange is a free market for trading in securities and bonds, it could be used for cleaning up illegal funds without raising suspicions that may prompt the authorities to track the origin of the funds being invested. Indeed, it has been a good destination of ‘hot’ money, which moves to securities and bonds when the returns are high and interest rates are low. In times of low returns, these funds either return to Treasury bills and bonds or are repatriated overseas. This shift is often reflected in the reserves held by the commercial banks and the CBK at any given time.20
The real estate market, especially in Nairobi, Mombasa and the other major cities, also offers some of the best opportunities for cleaning up illegal money, especially where investors are looking for a stable, long-term stream of earnings. In recent years, the growth of medium to large property investments in the range of US$ 1 million and more has been phenomenal, especially in middle-income and up-market residential areas. The significance of the funds being invested in such areas is evident in both the size and quality of the residential or commercial properties being developed, most of them with imported high quality fittings and furnishing. The emerging trend, especially for residential apartments, is to offer attractive common facilities such as swimming pools, health clubs and security with electric fencing. The prime attraction of such investments is the insatiable market for residential housing and the corresponding high rate of return on investment. The rate of return, especially for apartments, is so high that the amount invested in some cases is recoverable in six to 10 years. Such investments provide prime opportunities for money launderers to clean up their illegal funds and also acquire a stable, long-term stream of earnings.
The land and real estate sector was used extensively during the Moi regime to generate election funds and siphon public funds from ministries and state corporations. The common practice was for political aspirants, or election financiers, to be allocated government land, including forests and residential houses, which they then sold to government enterprises at inflated prices to generate election funds. Some of the land was also used as security to siphon funds from banks in which the government had a substantial stakeâ€”the National Bank of Kenya, the Kenya Commercial Bank and the Consolidated Bank of Kenya.
Another area considered to have potential for money launderers is horticulture and floriculture, which, during the past 10 years, has attracted a considerable number and range of investors including senior civil servants and politicians with disposable cash. The investment required for a small- to medium-sized flower farm is at least US$ 1 million and the opportunities for cleaning up illegal funds and developing a regular income are enormous. Some of the largest investors in cut flowers, especially roses and carnations, include the political elite of the Moi regime and their business associates.21 The growth of the sector over the past decade has been so remarkable that Kenya has become the world’s leading exporter of cut flowers. Earnings from Kenyan flower exports in 2004 were reported at more than US$ 400 million and Kenya was reported to have increased its share of the European flower export market to over 30%.22
One of the most common avenues used for cleaning up illegal funds is to deposit them in fixed bank investments, which are protected by bank-client confidentiality, and then to borrow against the funds to develop high-yielding visible investments such as properties, horticulture farming or import/export business.
The emerging legal framework and its limitations in controlling money laundering in Kenya
The fight against corruption and organised crime in Kenya has primarily been in the hands of police and the judiciary. The police, being in charge of investigation and prosecution, are responsible for providing evidence to the judiciary for conviction of the suspects in such crimes. However, corruption became so entrenched in the police force and the judiciary that a large number of criminal cases were scuttled either by shoddy investigations done by police officers compromised by the suspects, or as a result of the corruption of the judges and magistrates handling such cases. In the anti-narcotics war, corruption has been cited as a major setback even when suspects have been arrested. Such corruption includes public officials being involved in the narcotics trade, or using their offices to protect drug barons, or selling narcotics which are meant to be produced in court as exhibits.23 Corruption in the judiciary was so endemic during the Moi regime that when the NARC administration assumed power, most of the judges were suspended and placed under investigation. This followed a report published by a commission appointed by the President to investigate complaints of corruption in the judiciary.
Arising from the failure of the police and the judiciary to deal with corruption and money laundering, the emerging strategy is to have specialised agencies focusing on specific areas such as economic crime, anti-narcotics and public procurement. Some of these initiatives are discussed below.
The CBK Prudential Regulations
In late 2005, the CBK distributed an update of prudential regulations24 to banks and financial institutions, which includes a chapter on the proceeds of crime and money laundering aimed at “prevention, detection and control of possible money laundering activities”. The regulations, published on 15 November 2005, enhance regulations issued in September 2000, which require banks to identify and report suspicious money transactions to authorities for further investigation. The new regulations stress that banks should ‘know their customers’ and thus they should identify their customers and the sources of funds deposited in their accounts. Banks are required to insist on proper identification for accounts being opened with them and it is the responsibility of the management and directors of the banks to ensure that their staff are ‘adequately’ trained to judge whether the customers are involved in suspicious transactions. Some of the indicators of such suspicions include customers making frequent, large cash transactions or converting funds from Kenya shillings into foreign currency and vice versa.25
However, it remains to be seen whether the banks will vigorously enforce these regulations, particularly among their existing customers, without exposing themselves to the risk of reprisals for breach of bank-client confidentiality. As mentioned in the case involving Charterhouse Bank, the authorities were unable to convince the courts that the money did not rightly belong to the beneficiaries, even though there were substantial grounds to suspect that it was part of a laundering operation. The risk of prosecution is also highlighted in another case involving Standard Chartered Bank, which was found at fault by a Nairobi High Court in 2002 for breach of confidentiality when it reported to the authorities a large cheque deposit from customs, made by one of its customers. The customer sued the bank for Sh600 million. Although the bank won the case at the Court of Appeal in November 2004, it was nevertheless frightening for the banking fraternity because the prospects of the customer being awarded such huge damages was real for the protracted period that the matter was before the courts.
The Proceeds of Crime and Money Laundering (Prevention) Bill, 2004
The most comprehensive and significant attempt to control money laundering and its possible implications, such as terrorism financing, is being made through a proposed piece of legislation, the Crime and Money Laundering (Prevention) Bill, 2004, which has been presented to Parliament for discussion. The bill is the result of the work of a national task force established in 2003, chaired by the Treasury and including 14 government agencies and seeks to meet the 40 recommendations issued by the Financial Action Task Force (FATF) on combating money laundering.26 The bill proposes to enable the authorities to identify, trace, freeze and seize or confiscate funds from the proceeds of all crime, including corruption, drug trafficking and money laundering. It proposes the establishment of a Financial Intelligence Unit (FIU) to collect and collate information on suspicious transactions and report to the relevant law enforcement agencies. Another proposal is to establish a special fund into which all proceeds from money laundering will be credited to support the FIU and anti-money laundering law enforcement agencies.
However, a weakness of the proposed legislation is that the proposed FIU will not be an executive law enforcement agency and its role will be restricted to providing information. The fate of investigations will depend on the efficiency of the law enforcement agencies to whom such information is passed on. It is likely to face similar difficulties between investigation and prosecution to those experienced by the KACC, which investigates economic crimes but has no powers to prosecute. These remain the preserve of the Attorney-General. Moreover, the bill is likely to encounter opposition when it is presented to Parliament for discussion and it is not certain when it will be presented for consideration since Parliament was suspended by the President following the November 2005 referendum on the Constitution. The earliest the bill can be presented again to Parliament is early in 2006, after which it has to go through two readings before it is taken through the third and final reading, following which it is then presented for Presidential assent before becoming law. This process may take some time, especially if the members of Parliament push through amendments that the Attorney-General has to deal with before presenting it again.27
The Anti-Corruption and Economic Crimes Act, 2003
This law was among the first enacted by the NARC administration to fight corruption and economic crime. It is under this law that the KACC was established, with powers to investigate corruption and economic crime and make recommendations to the Attorney-General for prosecution. This law empowers the government to confiscate and seize all proceeds of corruption and economic crime, including bank accounts and properties developed with such proceeds. However, as mentioned above, the law is weak to the extent that it does not empower the KACC to prosecute the crimes it has investigated. A number of cases forwarded to the Attorney-General have not been prosecuted. There are proposed amendments to the Act but they are specifically geared to expanding the jurisdiction of special magistrates to hear corruption and economic crime cases, protect KACC’s assets and bank accounts from being attached in cases where prosecution fails and empowering the High Court to appoint receivers for property suspected to have been obtained through corruption.28
The Public Officer Ethics Act, 2003
Although this law was specifically designed to enforce a code of conduct for all public officials, it nevertheless has provisions that are significant in relation to corruption and money laundering. One of its important provisions is the annual declaration of wealth by all public officials and their families. Although the law applies to all public officials, the main focus of public attention is on the President, members of the Cabinet, senior civil servants, judges and judiciary officials, heads of state corporations, senior police and military officials and the other senior-level public officials in such positions of authority as to be able to influence government contracts and policies for their personal gain. The logic of this focus is quite clear, given that some of Kenya’s wealthiest elite have either been, or are still, in government and the source of their wealth can be traced to their ability to influence government supplies and policy decisions in their favour, or to favour their families and kinsmen. This is true of the Kenyans who served in senior positions (such as chiefs and district administrators) during pre-independence British rule, as well as the public officials who served both the first government, under President Jomo Kenyatta (1964â€”1978) and the second one, under Daniel arap Moi (1978–2002). Such officers enjoyed a host of officially sanctioned opportunities, including allocations of farmlands and urban houses constructed by the government, foreign scholarships for their children and relatives and access to cheap credit from state financial institutions. Moreover, there were numerous cases of their being involved in collecting kick-backs from government contracts and being largely responsible for public fund rip-offs through highly inflated contracts for government supplies.
Despite the anti-corruption stand professed by the NARC administration, the trend seems to have continued in the sense that, in just two years since Kibaki was elected to power, some of his closest aides have crossed the valley from modest wealth to fabulous riches. This raises public suspicions that some of the senior public officials are involved in money laundering through public supply contracts that benefit them directly or indirectly because of their positions of influence.
The annual wealth declaration forms are supposed to track changes in the wealth of public officials and their families, and under this law KACC is empowered to investigate and determine if a public official has contravened the code of conduct and ethics and, in particular, if such an official has turned public resources into personal gain. If that happens, KACC can invoke the Anti-Corruption and Economic Crimes Act to confiscate and seize the assets considered to have been obtained corruptly or through other irregular means.
The principal weakness of the law is that the declarations made so far remain secret and are not subject to public scrutiny. Indeed, the custodians of the declaration of wealth documents do not even have the right to check what the public officials and their families have declared and it has been reported that in some cases, they submit blank forms in sealed envelopes. There is a proposal to amend the law to provide public access to the forms and to empower KACC to investigate cases where public officials have contravened the law, but, like other pending legislation, this has to wait until Parliament is back in session.29
Kenya has, to some extent, taken steps to establish an enabling environment for combating money laundering to meet the recommendations of the FATF. The legal framework especially may be strengthened when the proposed money-laundering legislation becomes law and the institutions proposed under it become operational. However, experience has shown that even good laws are worth little in the face of powerful criminal networks that have become entrenched over a long period of time. The recent failures of the government to achieve progress in prosecution of economic crimes and the recovery of corruption assets reportedly siphoned out of Kenya are strong pointers to the challenges that the authorities will continue to face, particularly where the criminal networks are deeply integrated in the country’s political and business machinery.
The bombings in Kenya and Tanzania pointed to the presence of al Qaeda and cells of other terrorist organisations in these countries and international investigations have also linked them to the terrorist attacks in the US. The same groups took responsibility for bombing an Israeli-owned hotel in Mombasa and a simultaneous attempt to shoot down an Israeli airliner taking off from the Kenyan coastal town.
In 1999 a US Department of State Report classified Kenya as a significant transit country for south-west Asian heroin and as a minor producer of narcotics. However, it stated that the primary market for such narcotics was in Europe and North America was a secondary destination, hence the drugs were not considered large enough to have a major impact in the US.
The same report says the Kenyan government has still not finalised a long-awaited drug control master plan and despite official strong support for anti-narcotics efforts, the overall programme suffers from lack of resources.
Some of these activities, such as rent seeking in government services, have been prevalent since Kenya’s independence.
The NARC Administration’s attempt in the past three years to prosecute past cases of corruption, abuse of office and other economic crimes has failed. Most of the cases have been scuttled by court procedures, including the right of suspects to lengthy constitutional reference hearings.
The suspects were released for lack of evidence after 11 months in custody.
See Peter Warutere, The Goldenberg Conspiracy: the game of paper gold, money and power, Paper 117, Institute for Security Studies (ISS), Pretoria, September 2005 and George Kegoro, Cap 5: Money laundering patterns in Kenya, ISS Monograph No. 90, ISS, Pretoria, December 2003.
A Kenyan minister has been banned from the UK and US. Although these countries’ authorities did not give details of their action, they nevertheless indicated that such a ban may be imposed for corruption and related crimes.
Such cases involve abuse of procurement regulations under the security operations through practices such as single sourcing, where firms are identified without competitive tendering.
Transparency International’s corruption perception index annually ranks the police and judiciary as some of the most corrupt public offices in Kenya.
The government initially indicated that the report would be published in August 2005 and then moved the date to November 2005.
This amount only relates to contracts issued by ministries and does not include contracts for projects and supplies to State corporations, which are equally substantial but are settled without as much public scrutiny as the bills involving ministries.
Such outrageous claims are common and the unfortunate thing for the government is that where the contractors go to court or seek arbitration, the government has been forced to pay a substantial portion, even if not all, of such claims.
The Pending Bills Closing Committee was appointed by the President through a special issue of the Kenya Gazette, dated 14 January 2005. Besides D G Njoroge, who is the chairman appointed by the President, the other members represent the Ministry of Finance, Ministry of Roads and Public Works, the Attorney-General, the Law Society of Kenya, the Institute of Certified Public Accountants of Kenya, the Institution of Engineers of Kenya, the KACC and procurement experts.
The cheque clearing system was widely abused under the CBK. The Goldenberg paper documents one such case where several banks were involved in kiting in an attempt to cover up a huge overdraft owed to the CBK by the Pan African Bank group. These banks exchanged nominal cheques that were transacted outside the normal cheque clearing hours.
Kenya is often reported to be ‘over-banked’ in terms of the number of banking institutions operating in its small money market. At the end of 2004 there were 44 banks, two non-bank financial institutions, two mortgage firms and three building societies, according to the CBK’s supervision report.
The government has published a bill to have micro finance institutions under formal supervision but the problem of cash-based transactions is bound to persist.
Although these figures have been reported over the past two years, the authorities have not disclosed whose accounts and assets have been identified. Initially, the government reported it would have these funds and assets frozen and returned to Kenya but more recently, the authorities reported that they were considering negotiating with those implicated to return such assets and funds.
Forex bureaux were licensed by the CBK following the liberalisation of exchange controls in 1995. By the end of December 2004 there were 89 bureaux, 70 of them operating in Nairobi and 12 in Mombasa, according to the CBK.
By June 2005, the total reserves held by the CBK and commercial banks amounted to US$ 2.4 billion. In the past, the CBK reported that as much as 20–30% was hot money that was attracted into the country by high interest rates on Treasury bills and bonds, or high returns at the Nairobi Stock Exchange.
The list of Kenyan investors in the flower business reads like ‘who’s who’ of the Moi regime. They include Moi himself, his former Vice-President, two former CBK governors, a former head of civil service and several other former heads of state organisations and banks.
Daily Nation, Flower exports to EU to grow, says official, 15 November 2005: a report quoting the Chairman of the Kenya Flower Council, Mr Erastus Mureithi.
The 1999 US Department of State Report cited corruption as a “significant barrier to effective narcotics enforcement” and mentioned unconfirmed reports of public officials being involved in narcotics trafficking.
Central Bank of Kenya: Guideline on Proceeds of Crime and Money Laundering (Prevention) CBK/PG/08.
CBK Prudential Guidelines for Institutions Licensed Under the Banking Act. See chapter on Guidelines on Proceeds of Crime and Money Laundering (Prevention).
The FATF is an inter-governmental, multidisciplinary body whose task is to develop and provide policies at national and international levels to combat money laundering. It has issued 40 recommendations on money laundering and nine on combating terrorism financing as the minimum standards or best practices that countries should adopt in creating anti-money laundering and combating terrorism financing regime.
The earliest that this bill will be tabled in Parliament is in 2006 since the opening of Parliament, which was scheduled for December 2005, was postponed by President Kibaki after he fired his entire Cabinet following the defeat of the government in a referendum on a proposed Constitution on 21 November 2005.
Proposed amendments to the Anti Corruption and Economic Crimes Act, 2003 in the Statute Law (Miscellaneous Amendments) Bill, 2005, published on 6 April 2005.
Proposed amendments to the Public Officer Ethics Act, 2003, also under the Statute Law Bill above.
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