Kenya, FATF and why it matters

11 October 2011

You may not have heard of the Financial Action Task Force (‘FATF’) however this inter-governmental body is part of the Organisation for Economic Cooperation and Development (‘OECD’) and plays a significant role in how regulators, banks and other financial institutions assess risk. This affects us all, as the manner in which institutions manage their risk influences their policies and procedures, which in turn requires compliance by individuals, corporates and trustees.

The purpose of FATF is to set global standards for combating money laundering and terrorist financing. In doing so, FATF develops and promotes national and international policies designed to reduce such crimes, working hard to generate the necessary political will to bring about legislative and regulatory reforms so as to protect the international financial system.

FATF was formed as an initiative of the G7 group of countries in 1989 (see www.fatf-gafi.org) and has been influencing the financial system for over 20 years, so why raise the subject now?

What has changed?

Periodically FATF publishes statements identifying jurisdictions which have strategic deficiencies in their anti-money laundering (‘AML’) and countering the financing of terrorism (‘CFT’) standards. In June this year, FATF updated its guidance, and Kenya was identified as one of eight countries that have not made sufficient progress in addressing such deficiencies. In Kenya’s case, FATF highlighted that despite its high-level political commitment to work with FATF and the Eastern & South African Anti Money Laundering Group, Kenya had not made sufficient progress in implementing its action plan to address its strategic AML/CFT deficiencies. The report concluded Kenya needed do more including implementing AML legislation and activating the new AML Advisory Board.

To put this ‘rating’ into perspective, the highest risk rating is reserved for Iran and North Korea, however Kenya now ranks in the tier immediately below such jurisdictions, and is in the same company as Bolivia, Cuba, Ethiopia, Myanmar, Sri Lanka, Syria, and Turkey.

What does this mean?

FATF calls on its members and associate members to consider the risks arising from the deficiencies associated with each jurisdiction and so Kenya’s elevated status will be of concern to all those businesses and professions that are required to follow FATF standards. These include banks, financial institutions, including trust company businesses like Minerva, and designated non financial businesses and professions such as lawyers, accountants, real estate agents, high value goods dealers and casinos, in both onshore and offshore financial centres.

There will be an expectation on the part of regulators, auditors, compliance professionals and ‘head offices’ that any business with links to Kenya will be designated ‘high risk’, and as a result will be subject to ‘enhanced due diligence’. There is a degree of subjectivity around what constitutes a Kenya link, but typically banks will err on the side of caution; links to Kenya might include the obvious, for example:

• Clients resident in Kenya
• Business interests in Kenya
• Flow of funds from Kenya

…however may also be more tenuous such as:

• Original wealth was generated from businesses in Kenya
• Clients holding Kenyan passport
• Potential trust beneficiary residing in Kenya

What is of more concern is that ‘enhanced due diligence’ is likely to result in:

• More documentary evidence required to support opening accounts, in particular around source of wealth.
• Some institutionally owned trust companies turning their backs on some Kenya linked business.
• Greater transaction monitoring.
• Lower limits triggering requests for information.
• More frequent risk reviews.

…all of which will add to the administrative work necessary to ensure trust and corporate services providers, such as Minerva meet the obligations placed upon us by our regulators, the banks and investment companies we work with, as well as our own internal compliance standards.

It will also impact on our clients and their advisers as we anticipate occasions where we will need to provide documentary evidence in circumstances where previously this was unnecessary.

Minerva's perspective

Our view of Kenya hasn’t changed. We remain totally committed to clients having links with the region, we will continue to visit Kenya, and generally seek to do more business with more clients in the country. Kenya will always be in Minerva’s DNA.

This is not complacency on our part; we strongly support and adhere to the regulatory framework within which we operate and recognise Minerva will also need to evidence enhanced due diligence. However we believe Minerva is better placed than most to manage this in a sensible and practical manner.

How can we make such an assertion?

Minerva is able to exploit the historic advantages it has in East Africa where we operate in a narrow, well defined segment of the market. It is this narrow focus that helps us mitigate some of the risks associated with operating in sub Saharan Africa; risks which some financial institutions find difficult to overcome.

We believe this narrow focus serves us well, allowing us to draw on key strengths which help satisfy the rigours of ‘enhanced due diligence’. Our history (Minerva’s principals can trace some client relationships back over half a century), our network of contacts, and the experience we have gained operating on the ground for over 30 years, equips us well to undertake very effective due diligence, and avoid the risks associated with business coming through uncontrolled channels such as advertising and websites.

So, business as usual as far as Minerva is concerned?

Well yes and no - we are absolutely committed to growing our Kenya connected business and are making significant investment to achieve this. However we also anticipate having to plug some gaps in our background understanding of some clients and their business interests so as to satisfy our own requirements. We are already working with our partner banks, financial institutions, and other professionals who, lacking our more direct exposure to this market, may adopt a more blanket policy approach. We will use the knowledge we have gained over 30 years to work with them so as to help minimise this impact on you.

What do we require from you?

Just your understanding of what is driving any requests we might make for information over the coming months. We appreciate this will be frustrating if our relationship goes back many years but rest assured we will not ask for additional information unless it is essential.

If you have any concerns regarding this issue, then please get in touch with your usual contact at Minerva.

This note is intended to provide a brief rather than a comprehensive guide to the subject under consideration. It does not purport to give legal or financial advice that may be acted or relied upon. Specific professional advice should always be taken in respect of any individual matter.

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