- Importantly, however, it is very possible to reverse the decision in a shorter time.
- Kenya will be under increased scrutiny by the FATF, with the country expected to make critical changes to its financial infrastructure to reduce the risk of being a haven for dirty money.
On Friday, the Finance Action Task Force (FATF), the global anti-money laundering watchdog, decided to put Kenya on the grey list in a move that is likely to hurt Nairobi’s standing as the financial centre of the region.
The grey list refers to countries that have deficiencies in dealing with money laundering and terrorist financing.
Kenya will be under increased scrutiny by the FATF, with the country expected to make critical changes to its financial infrastructure to reduce the risk of being a haven for dirty money.
With Uganda removed from the list following recommendations of FATF's fifth plenary meeting, Kenya now joins Tanzania and South Sudan in the grey list.
Other African countries on the list include Nigeria, South Africa, Mali, Mozambique, Burkina Faso, Senegal and Cameroon.
The downgrade means Kenya might be subjected to stricter due diligence when it is dealing with the rest of the world, with far-reaching impacts to the economy including difficulty in securing funding and reputation damage.
How did Kenya get to the Grey List
All was not rosy for the last two years.
The East and Southern Africa Anti-Money Laundering Group (ESAAMLG), the FSRB responsible for AML/CFT/CPF action in Eastern and Southern Africa undertook a Mutual Evaluation process in Kenya in 2021, culminating in a Mutual Evaluation Report, issued in 2022.
The MER identified several strategic deficiencies in Kenya’s AML/CFT/CPF framework, particularly in the financial services and non-profit sectors.
As a result, it has been widely speculated that Kenya is a candidate for the grey list during the February 2024 plenary.
A 2022 mutual assessment report by a regional anti-money laundering watchdog identified several strategic deficiencies in its framework for the fight against dirty cash.
The evaluation by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) found Kenya to be ‘partially compliant’ with the global standards on anti-money laundering and terrorism financing.
To forestall this outcome of being grey-listed cross-industry regulators, lawmakers, law enforcement authorities and individual institutions were to initiate a flurry of activities aimed at remediating the gaps noted.
These efforts included the assenting of the AML/CFT (Amendment) Act, 2023 which made sweeping changes to key laws.
The Central Bank of Kenya, Financial Reporting Centre and regulators also issued a number of new guidelines and stepped up their risk-based supervisory inspections.
This appears not to have worked as Kenya failed to persuade the international watchdogs that it had corrected course.
Regardless of the greylisting, these efforts must continue to also protect the country against money laundering and terrorism.
Between 25-27 October 2023, the global standard-setting body for countering actions against money laundering, terrorism financing and proliferation financing (ML/TF/PF), the Financial Action Taskforce (FATF), held its tri-annual three-day plenary.
During the plenary, FATF discusses emerging typology and jurisdictional issues around ML/TF/PF risks.
The plenaries typically have two key outcomes:
Issuance of new guidelines and an updated list of countries with weak measures to combat ML/TF/PF risks.
The grey list consists of countries with strategic deficiencies in their ability to counteract ML/FT/PF risks but who have made time-bound political commitments to address them.
FATF and the regional FATF-style bodies that support it are then involved in undertaking monitoring to ensure that these gaps are closed.
What it means for Kenya to be in the Grey List
Being on the grey list is an indictment of a country’s ability to identify and effectively remediate ML/FT/PF risks.
It therefore sends a message to the global financial system to exercise caution in dealings with the country.
This raised risk profile has far-reaching economic implications including reduced attractiveness of the country as an investment destination for foreign direct investment and increased cost of doing business for entities domiciled in the country.
This is due to the enhanced due diligence applied by counterparties, and restrictions on cross-jurisdictional transactions particularly to/from countries that have stringent measures against grey-listed countries.
There is also the potential of de-risking by correspondent banks and other key relationships, and increased cost of public international debt from finance and development partners among others.
In a sample of 89 emerging and developing countries grey-listed between the years 2000 and 2017, a working paper published in 2021 by the International Monetary Fund (IMF) found that capital inflows on average declined by 7.6% of GDP, Foreign Direct Investment by 3% while other investments declined by 3.6% following a country’s greylisting.
Based on the grey list issued by FATF, it is noteworthy and concerning, that of the 7 countries under the East African Community (EAC), four (more than half) are currently on the FATF grey list and therefore subject to increased monitoring.
These include Kenya Tanzania, South Sudan and the Democratic Republic of the Congo (DRC).
How can Kenya come off the Grey List?
In terms of having the decision reversed, it all depends on how seriously the recommendations are taken by the jurisdiction in question, and how effectively policy is instituted to address them.
On average, it takes countries on the grey list five to 10 years to get a count removed from it.
Importantly, however, it is very possible to reverse the decision in a shorter time.
Mauritius is a good example, having been removed after less than two years on the grey list. How have other countries fared once grey-listed?
A series of studies conducted between 2009 and 2016 indicated that countries that were grey-listed experienced no significant impact on cross-border flows and that there was a negligible impact on the ability to attract foreign direct investment.
Conversely, studies conducted post-2016 reported a decline of up to 16% in cross-border payments.
A recent International Monetary Fund (IMF) study (Kida and Paetzold, 2021) is perhaps the most relevant, having examined the impact across all financial flow measures, using more recent data and the most exhaustive list of grey-listed countries.
The findings of this study were an average decline in capital flows of 7.6% of gross domestic product (GDP).
Should investors be worried?
Local investors should be aware that being grey-listed may well have a negative impact on capital flows.
This could impact the currency and local bond and equity markets over time.
More importantly, investors should know that much of this impact has likely been priced into our markets already when considering current valuations.
Similar to the impact of a credit rating downgrade, the market and broader economic impact does not occur upon the actual event announcement, but steadily over time when not remedied.
It, therefore, stands to reason that Kenya’s deep capital markets, well-developed financial system, and rational monetary policy could potentially help the country back from greylisting, especially in comparison to the economically and institutionally wayward jurisdictions that have been evaluated previously.