THE EXPLAINER: Why Kenya was grey listed, what it means, and how to get out of it

On the 23rd of February this year, Kenya was grey listed. The conversation quickly shifted to what this means for us as a country. But let’s break it down; who does this grey listing, what does it mean, what was Kenya flagged for and what steps can we take to get the country off this list?

Let’s start with who does this listing. The organisation is known as the Financial Action Task Force (FATF). It is the global money laundering and terrorist financing watchdog. It is an intergovernmental body that was formed in 1989 by the G7 countries, that seeks to set the global standards to counter money laundering.

It later expanded its mandate to include measures to combat financing terrorism following the 9/11 attacks in the US. The Financial Action Task Force has 39 members, this includes regional bodies like the European Commission and the Gulf Co-operation Council. There are also associate members and those with observer status such as World Bank and IMF and UN law enforcement bodies.

Kenya is a member through one of the regional bodies called the Eastern and Southern Africa Anti Money Laundering Group. Incidentally, Kenya took the helm of this group in September last year.

The organisation works to ensure the integrity of the international financial system. They set a list of recommendations that touch on a country’s legal, regulatory and operational measures to protect them from the threat of money laundering and terrorism financing.

They hold three meetings every year to evaluate how countries are effectively implementing the laws and regulations. This is by the countries adopting the FATF’s standards into their local, national laws and regulations. Now, this is evaluated through what is known as a mutual evaluation process.

This mutual evaluation process is actually some type of peer review mechanism. Where countries evaluate each other on how well they are implementing the standards. It is a continuous process. They are looking at two key areas. One is the technical. So does the country have the right institutions, laws and procedures to fight money laundering? The second is the effectiveness. Are those laws and institutions in fact effective in countering those financial crimes? Do they have any impact on the ground?

It is on this basis that they list countries depending on their level of compliance. The countries on the blacklist are those that do not meet the standards and are not making any efforts to meeting the benchmarks set. Countries like North Korea and Myanmar are on the blacklist.

Then we have the white list; these are compliant with the standards set and are continuously working to keep it that way.

Finally, we have the grey list; these are countries that have fallen short of the standards, or been found to be deficient in some ways, but the task force also acknowledges that there are efforts towards better action. Countries on this list are put under increased economic supervision and regulation. Now it is important to note that FATF does not have enforcement mechanisms. And just how many countries are on the grey list?

Globally, there are 21 countries on the grey list. In East Africa, Kenya joins Tanzania, South Sudan and the Democratic Republic of Congo. This means that more than half of the countries of the East African Community are on the watchdog’s grey list. Uganda, which has been on the grey list, was actually taken off the list on the very same day that Kenya was put on the list. The task force noted some substantial improvements in their efforts towards compliance.

So, why was Kenya grey listed? Firstly, Kenya has been grey listed before - in 2011. It took us 4 years to get off the list, which happened later in 2014. But back to present day, Kenya was grey listed at the FATF meeting that was held in Paris on the 23rd of February this year. It followed a long process that actually began with a mutual evaluation process that started in 2022. This time, Kenya has been asked to pay special attention to a few areas.

Among them is to increase the investigations and prosecutions of those involved in money laundering and financing terrorism. The country has also been asked to ensure that the financial intelligence information gathered in the country of suspicious activity is used more effectively. Kenya may also need to take a closer look at the work of NGO’s and not-for-profit organisations to ensure that they do legit work and are not used as conduits to transfer proceeds of crime.

The beneficial ownership of trusts is also something to take a closer look at. Who owns, runs or is behind those trusts and where is their money coming from? Other non-financial professions that require stricter supervision and regulation are law, real estate, accounting as well as the area of cryptocurrency. These are some of the areas that have been flagged by the task force.

This grey listing was part of a process that started in 2022. And since then, when some of the issues were raised in the mutual evaluation report, Kenya’s National Treasury says it has made some efforts to address the issues. Among them make amendments to the law including 17 amendments to the Anti Money Laundering Act, 2023 to address the deficiencies that were pointed out by the report.

Notably, on the issue of the legal profession, one of the noted deficiencies was the failure to designate lawyers as reporting institutions. This means that they would need to flag any suspicious activity in their work and with clients. This was addressed by the Proceeds of Crime and Anti Money Laundering Amendment Act, 2023. It was followed by the signing of an MoU with the Law Society of Kenya (LSK). The amendment to the law allows lawyers to report money laundering, or suspicious activity through the LSK.

Another major deficiency was Kenya's failure to effectively address economic crimes and in particular corruption to the extent of failing to prioritize corruption as a high risk area in Kenya's national risk assessment. The National Treasury in response to the grey listing notes the strategic deficiencies that were pointed out but also notes that more work continues to be done to ensure compliance.

So what does this all mean for us as a country, for businesses? As mentioned before, the Financial Action Task Force does not have enforcement mechanisms per se, but this is more of a reputational issue. Reputation in the world of finance and economy is everything. In practical terms, being on the grey list means that we are seen as a country through which money is laundered. Or a ‘wash-wash’ country.

So what does this signal trigger? Well, IMF and World Bank which enjoy observer status at FATF, would add some more stringent conditions aligned to the concessional loans they give us, to ensure that we are countering this vice. Sometimes, some countries are denied access to some facilities based on this listing. International banks would increase their due diligence when doing work with Kenyan companies or Kenyan banks because they wouldn’t want to be flagged either, that means more stringent terms for companies in export, for instance, or even some higher interests in loans and facilities to cater for the risk. That means the cost of doing business goes up.

This could also affect funding for NGOs as donors exercise more caution in giving them funds, and that could affect their social impact. So imagine all the sectors that are heavily dependent on not for profit organisations in this country. Reduced, delayed funding could affect those citizens who depend on their work.