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Threats by the investigative authorities to institute criminal proceedings against the CEOs of five top commercial banks for failing to report suspicious transactions relating to the National Youth Service scandal have sent shock waves across the banking sector.
Indeed, the prospect of the CEOs facing criminal charges was least expected, considering that the primary regulator of the banking sector, the Central Bank of Kenya (CBK), had already taken action by slapping fines on the banks.
In the majority of cases, the best practice by regulators internationally is to punish breaches to anti-money laundering regulations or failure to report suspicious transactions by slapping huge fines that are mostly calculated as percentage of pre-tax profits.
And, there are cases where regulators target “persons most responsible” for ignoring red flags and failing to report suspicious transactions on time. In such circumstances, central banks tend to punish anti-money laundering teams and committees, which banks must set up under guidelines of the central bank.
Clearly, the threats by the authorities to criminally pursue bankers have very few parallels in the rest of the world.
A recent example occurred in Australia when the Australian Transactions Reporting and Analysis Centre (Autrac), the country’s equivalent of our Financial Reporting Centre (FRC), accused the largest bank in that country, The Commonwealth Bank of Australia, of failing to report suspiciously large transactions across its networks in Sydney.
Investigations by Autrac had revealed that a group of customers of the bank had been involved in widespread smurfing — the money laundering technique that involves using multiple people to make small deposits in ATMS across a network in order to circumvent existing suspicious reporting systems.
As it turned out, 11 customers were jailed for money laundering offences and for transferring money to organised criminal syndicates. In the ensuing public furore, a group of senators suggested that bank CEOs and directors found complicit in money laundering be sent to prison.
At the end of it all, the bank was fined $700 million.
It remains to be seen how the threats by the Kenyan authorities will proceed. But should they call their bluff, we must stand by for negative sentiments in the banking sector with reverberations likely to be felt across international correspondence banking networks.
Granted, the buck stops with the banks’ CEOs. Yet, if the investigators insist that the buck in the NYS case must stop at the desks of the bankers, then the investigators must answer why they have not targeted the top public officials, including Cabinet secretaries in ministries involved in the NYS scam.
For if culpability is to be apportioned, the National Treasury-based Integrated Financial Management Information Systems Department (Ifmis) will have to take its full share.
We must not forget that all these suppliers who were paid by the said commercial banks originated from the government’s financial system, which approved the transactions as genuine.
Indeed, a special investigation into the NYS by the Auditor-General found that unscrupulous public officials with powerful access rights into Ifmis created ghost suppliers in the system, forced in fake LPOs, originated goods received notes, processed invoices and then flagged the transactions for payment. Yes, the banks were clearly complicit in the scam.
However, let’s not forget that payment is but the last part of a process that runs through very many stages.
Finally, this is the time for the government to put substantial money into the FRC. We blame banks for not promptly reporting all transactions yet FRC remains an underfunded entity. It lacks the resources — staff, money and systems — to respond to the volumes of reports it receives on a daily basis.
Despite the fact that it was created under its own Act of Parliament, the FRC still operates more or less as an appendage of the CBK. This important institution has been turned into CBK’s poor cousin. In fact, most of its employees are seconded from the CBK.
For the FRC to work efficiently, it will need an advanced and smart database that can deploy artificial intelligence to interpret the data that banks send to it every day.
Once it is well-equipped with people, money and systems, we can then develop the legal capacity and infrastructure to trace, and confiscate the proceeds of illegal payments and suspicious currency transactions.
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