20 January 2014
US banks have turned the heat on their Kenyan counterparts by refusing to cash cheques for local lenders that they consider to have weak systems to fight money laundering and terrorism financing.
Some US banks are refusing to honour transactions such as processing of cheques for Kenyan counterparts for fear that they will be fined heavily by the American government, the Business Daily has established.
The local banks are feeling the effect of Kenya still being on the list of countries that have not fully complied with international anti-money laundering (AML) and know-your-customer (KYC) best practices, according to industry insiders.
The Business Daily could not, however, establish the extent of the problem, as bank executives declined to respond to our queries fearing regulatory reprisals.
“The issue of correspondent banks refusing to honour US dollar cheques drawn on American banks has to do with concerns around know-your-customer and Anti-Money Laundering procedures of the originating banks,” said Richard Njoroge, a partner at advisory and audit firm PricewaterhouseCoopers (PwC).
International banks, especially in the US and the UK, have become stricter after some were recently fined in their home countries for breach of some KYC and anti-AML rules.
Police and auditor reports in Kenya have shown that fraud especially by tech-savvy employees has increased in financial institutions. Internationally, a US dollar cheque drawn on an American bank, but presented to a bank in Kenya, may end up being returned rather than cashed.
Correspondent banking involves prior arrangements between Kenyan banks and foreign ones to receive or accept deposits or ensure payments for transactions on behalf of each other when they are located in different jurisdictions and is critical in export and import trade.
Before renewing the correspondent banking relationship, Mr Njoroge said, some international banks were asking Kenyan lenders to provide certification from their auditors showing the status of their KYC and anti-AML procedures.
“Different international banks approach the issue of KYC and AML differently and some have for some time now been requiring local banks to obtain certification on their AML procedures before renewing correspondent banking relationships,” said Mr Njoroge.
For Kenya banks, the situation is being made even more difficult given the recently enacted US Foreign Account Tax Compliance Act (FATCA) that requires foreign banks to submit details of American citizens who hold accounts with them. Some western countries have complied, but none so far in Africa.
John Wanyela, the chairman of the Financial Reporting Centre that monitors AML and KYC developments in banks, said local banks had put a lot of effort to comply with international best practices in KYC and AML, but added that his centre could only know about suspicious transactions that are reported to them.
“Our banks have put in place strong AML procedures. We know some international banks have been asking for the certification but I wouldn’t say it is such a new thing. In any case, we are doing everything to comply with international best practices,” said Mr Wanyela.
Mr Wanyela, however, said that FRC was handling aspects of fraud in banks that relate to illicit flows, but he added that he could only talk about what was reported by banks.
“We only deal with what is reported to us. If a bank chooses not to report, we have no way of knowing about it,” said Mr Wanyela.
The Kenya Bankers Association (KBA) said it was not aware that some US dollar cheques had difficulty being cashed because they were not recognised and returned unpaid.
KBA chief executive Habil Olaka said there could be isolated cases but this did not represent the norm in the industry.
“You could have a particular case, but I am not aware of massive rejection of US dollar cheques drawn on American bank. Someone may have an issue, but this does not apply to the whole industry,” said Mr Olaka.
Mr Njoroge said international banks had intensified the scrutiny following heavy fines imposed on them when they were found to have less-than-satisfactory KYC and AML procedures.
“A year ago, HSBC was fined $1.9 billion by the US authorities for failing to comply with AML regulations. In the light of this, many international banks are reviewing their AML procedures, including relationships with foreign entities,” said Mr Njoroge.
Around the world banks and building societies are being brought under greater surveillance as way to forestall another global financial crisis.
Source: Business Daily
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