July 17, 2024

What Kenya’s Grey Listing Means For the Economy

What Kenya's Grey Listing Means For the Economy

The Financial Action Task Force’s (FATF) decision to include Kenya in its grey list has sparked concerns about the country’s economic stability and social well-being.

This announcement, made on February 23rd, 2024, has raised alarms both domestically and internationally. 

Grey listing serves as a warning indicating that a jurisdiction’s AML/CFT measures are deficient and pose a risk to the international financial system. 

Being added to the FATF grey list indicates that Kenya is perceived as a jurisdiction with significant shortcomings in its anti-money laundering and counter-financing of terrorism (AML/CFT) framework.

The FATF assessment found that Kenya could not demonstrate any successful investigation and prosecution of any money laundering offences. 

Additionally, no adequate investigations or prosecutions of legal or natural persons for terrorist financing offences were found.

This was despite conducting several investigations related to terrorism, creating a mismatch when considering the risk profile. 

The country has a large sector of Non-Profit Organisations, but the sector is largely unregulated and unsupervised, hence the risk of terrorism financing abuse remains unidentified. 

Kenya has conducted a risk assessment to identify money laundering and terrorism financing risks associated with virtual assets and service providers.

Despite this assessment, Kenya, ranked among the countries with the highest use of virtual assets, has chosen not to prohibit the use of virtual assets.

Kenya is likely to suffer consequences of grey listing in various ways. Loss of Foreign Aid and Investments; being on the Financial Action Task Force’s (FATF) grey list, will certainly have significant implications for Kenya. 

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Kenya’s reputation as a stable and transparent financial environment will also be compromised. It will potentially discourage foreign investment and deterr businesses from operating in the country. 

Research indicates a reduction in foreign direct investment (FDI) to GDP ratio by up to 2% for countries with low FATF scores.

The same research shows that FDI inflows can decline by 3%, portfolio inflows by 2.9%, and other investment inflows by 3.6% of GDP. 

For a country seeking to balance its trade deficit and reduce its debt burden, the reduction of FDIs and investment inflows would be catastrophic to the economy.

Kenyans are globally recognised as key players in the financial sector and exchanges both in trade and other social services like education and health. Many Kenyans seek these services in other countries, and the grey listing will likely hurt them. 

Kenya’s grey listing is also deeply concerning for its banking sector. Kenyan banks now face increased compliance costs.

With the grey listing, regulatory requirements become more stringent, necessitating banks to allocate more resources towards compliance efforts. 

This includes investing in staff training, upgrading technology systems for better monitoring, and conducting more thorough due diligence on customers and transactions. 

Consequently, these heightened compliance costs could strain the profitability of banks, particularly smaller institutions with limited resources.

Furthermore, being on the grey list tarnishes the reputation of Kenyan banks. Trust and credibility are crucial in the financial sector, and grey listing casts doubt on the integrity of the country’s banking system. 

International counterparts and investors may view Kenyan banks with skepticism, fearing potential involvement in illicit financial activities. This may lead to a decrease in foreign investments, correspondent banking relationships, and overall business opportunities for Kenyan banks.

Grey listing may also result in restricted access to international financial markets for Kenyan banks. Global financial institutions are increasingly wary of engaging with entities from grey-listed jurisdictions due to regulatory concerns and compliance risks. 

As a result, Kenyan banks may face limitations in conducting cross-border transactions, accessing foreign currency markets, and participating in international trade finance activities. 

This restricted access hampers the ability of Kenyan banks to facilitate global commerce and impedes the flow of capital into the country.

The root causes of Kenya’s grey listing lie in legislative deficiencies within its AML/CFT frameworks. These deficiencies include inadequate laws and regulations, lack of enforcement mechanisms, and gaps in beneficial ownership transparency. 

Effective AML/CFT measures require robust legal frameworks that enable authorities to identify, investigate, and prosecute money laundering and terrorism financing activities. 

Kenyan banks must also implement robust policies and procedures for customer due diligence, transaction monitoring, and suspicious activity reporting. 

Banks should further invest in advanced technology solutions, such as artificial intelligence and machine learning, to enhance their ability to detect and prevent financial crimes effectively.

Additionally, collaboration with regulatory bodies is essential for ensuring compliance with international standards. Kenyan banks must work closely with supervisory authorities to align their practices with FATF recommendations and best practices. 

Furthermore, Kenyan banks should explore alternative revenue sources to mitigate the economic impact of grey listing. Diversification strategies can help offset revenue losses resulting from regulatory challenges.

These strategies include partnerships with fintech companies, expansion into new markets, and development of innovative products and services.