Banks Stopped From Asking Clients Source of Cash Deposits

National Assembly Speaker Moses Wetang’ula declared the rules on large cash transactions, which were introduced by the Central Bank of Kenya (CBK) in 2016, illegal because they were not approved by Parliament.

Moneyed individuals and businesses have for long protested the onerous checks, arguing they have hindered their ability to carry out smooth transactions.

This prompted President William Ruto and his predecessor, Uhuru Kenyatta, to push for the relaxation of the rules amid fears of money laundering and terrorism financing.

Commercial banks started following the rules aggressively in recent years after at least five of them were hit with heavy fines by regulators for being used to transact proceeds of crime in government-related procurement deals.

Kenya passed anti-money laundering legislation in 2009 and enacted several regulations in the following years, including one that requires commercial banks to report all suspicious cash transactions above Sh1.5 million

Under the additional guidelines, which have been struck out, those depositing at least $10,000 are required to disclose the source of the cash and justify why such a transaction could not be made through electronic means.

Customers have also been required to disclose where the money being withdrawn was going, what the money was going to be spent on and who the direct and indirect beneficiaries are.

The rules have been dealt a blow on a technicality, a development that now puts to test how far autonomous institutions can go in issuing directives via circulars without being seen to usurp the Parliament’s powers of law-making.

“Any instrument said to be made pursuant to a power granted by an Act of Parliament must be brought before Parliament for scrutiny,” said Mr Wetang’ula.

“I, therefore, guide as follows — that Article 125 of the Constitution and Standing Order 191(1) of the National Assembly Standing Order allow the Committee on Delegated Legislation to call up for scrutiny of any instrument said to be made in exercise of powers granted under an Act of Parliament.”

The Speaker made the ruling in response to concerns raised by Ainabkoi MP Samuel Chepkonga who sought to know the fate of statutory instruments made by bodies, without first taking them to Parliament for approval.

The Ainabkoi MP said regulation-making bodies had sustained a practice of bypassing Parliament while formulating regulations that they expect to have a force of law.

The Speaker ruled that the regulation was not approved by the House and is therefore contrary to the Statutory Instruments Act, 2013, which provides for the making, scrutiny, publication and operation of the Statutory Instruments Act.

The CBK had in a January 5, 2016 circular told banks that large cash transactions were characterised by “informality and anonymity”, making the banking sector vulnerable to money laundering and terrorism financing.

The regulator, therefore, issued the guidelines to tighten Regulation 31 of the Proceeds of Crime and Anti-money Laundering Regulations, 2013, which require financial institutions to obtain written confirmations from customers that they are engaged in activities that generate money that matches what they are depositing or withdrawing.

Banks are also currently required to keep records of cash transactions of more than $10,000 and report suspicious deals to the Financial Reporting Centre— the agency tasked with identifying and combating money laundering and financing of terrorism.

Pressure has been mounting on CBK Governor Patrick Njoroge to revise the rules that have been blamed for stifling the growth of micro- and small-sized businesses which largely deal in hard currency.

The MPs last year accused the CBK of using the rules to promote anti-business policies.

However, the CBK governor has been unmoved by the rules, insisting on the need to protect the sanctity of the financial sector.

“If you are a petrol dealer and you bank Sh2 million daily, the banks should not have a problem with that. They know you are banking that money daily,” Dr Njoroge said during an induction workshop for new MPs last year.

Dr Njoroge had relied on the rules in 2018 to fine five banks Sh721 million for failing to undertake adequate customer due diligence and therefore leading to the suspicious transactions linked with the theft of funds at the National Youth Service (NYS).

KCB was fined Sh149.5 million, Standard Chartered Bank Sh77.5 million, Equity Bank Sh89.5 million, Cooperative Bank Sh20 million, and DTB Sh56 million.

In 2010 Kenya was placed on a watchdog’s “grey list” of high-risk countries failing to combat money laundering, drug trafficking, corruption and terrorism.

Kenya was taken off the Financial Action Task Force (FATF) in 2014 list of countries at high risk for money laundering and terrorist financing after the country made considerable steps to safeguard financial transactions.