Banks and Corruption make for strange bedfellows

[vc_row][vc_column width=”2/3″][vc_column_text]On April 13th this year, I opined quite loudly about the role being played by the banking sector in Kenya’s institutionalized corruption culture. In case you missed it, my observations were as follows:

“Picture this scene: Mr X has been banking at Bank Y for the last 10 years. His account turnover is about an average of Kshs 250,000 on a monthly basis. The account suddenly begins receiving deposits and withdrawals ranging from Kshs 20 to 100 million, which moves his average monthly turnover to about Kshs 50 million. The Anti Money Laundering officer, usually a skinny, bespectacled recent university graduate, flags these movements to his boss the Compliance Manager. The Compliance Manager flags it to his boss, the Risk Director. The Risk Director walks over to the Retail Director and shows him the transactions as he’s a smart chap who doesn’t want to put anything in writing, just yet. The Retail Director, who is royally chuffed that his liability targets are constantly met since his team’s successful senior civil servant recruitment drive last year, rubbishes the report and dares the Risk Director to take it higher, “Weeeh, even the Managing Director knows we have these accounts, can’t you see how they are helping our deposits to grow?”

Well, in my typical smug armchair analyst fashion, I have been unequivocally vindicated. Far be it for me to say I told you so, but the Sunday Nation on July 5th reported some interesting court findings. An article titled “Suspended city official deposited Sh 1 bn in two years” written by Andrew Teyie caught my eye. In it tells the story of an extremely industrious public servant who allegedly deposited close to a billion shillings in nine accounts spread in five local banks within two years. This information is sourced from documents tabled in court by his accusers, the Ethics and Anti-Corruption Commission (EACC). First off, I have to doff my hat to the industrious public servant for mitigating concentration risk by opening accounts at five different banks. Baba attended risk assessment 101 and passed with flying colors. It is never advisable to put your eggs in one basket, spreading them to three is wise and to five is brilliant. It also helps to reduce the risk that in case one of the five banks cottons on to what you are up to and reports you, there are four other banks to keep fooling.

According to the court documents, industrious public servant had declared his income at Shs 831,840 (although it doesn’t quite say to whom the declaration was made) yet deposits were being made on at least twice weekly ranging from Sh 1 million to Shs 13 million. Yet the banks are required to have established Anti-Money Laundering (AML) processes to capture abnormal transactions. An abnormal transaction would be anything that goes against the norm for the type of activity a customer has been registered as undertaking. So for example a salaried customer would be expected to have a one major credit into the account, followed by a slew of debits as he withdraws his salary in dribs and drabs over the course of the month. If the salaried customer has multiple credits, especially those that significantly exceed his stated salary, this would typically raise a flag.

A way around this, for the experienced money launderers, is to open a hotel, restaurant or casino. All these businesses deal with cash such that an inordinately high number of deposits would hardly raise anything other than a bored eyebrow over at the compliance team in the bank who never quite get off their cushy behinds and go look at the actual customer turnover within these joints.

Now it is highly likely that an enthusiastic compliance officer raised the flag, drew compliance manager’s attention who drew risk director’s attention who cast a baleful glance at retail director before heroically blowing the whistle to the Central Bank team who then ran pell-mell in the direction of Integrity Centre with the file in hand to knock the sky and our expectations open with the news of this chap’s accounts. Somehow I don’t think you believe that, which is quite funny because neither do I. Truth of the matter is that industrious public servant is one of the small fish that can be pan fried in the rather tepid fight against corruption and he laid himself wide open by not covering his standard gauge tracks when banking his proceeds. He relied, quite safely, on his banks that did not report the suspicious transactions to the regulator. He also unwittingly relied on a regulator that was snored quietly on the sidelines as these AML breaches happened, and continue to happen, on their watch.

A couple of paradoxes that arise from this case are noteworthy. First off, that the Kenya Revenue Authority appeared and decided swoop in for the tax evasion kill is nothing short of comedic. How do you tax corruption proceeds of a public servant? A public servant in many cases is only taking what are public funds hence it beggars belief that one can tax what one has already collected as tax and has been misappropriated by public officials. Is that not taxing the tax that’s been taxed? The second paradox is the sand that is being thrown in the public’s eyes. Industrious public servant is a tiny little goldfish in an enormous fish tank. The EACC has demonstrated publicly that they can get historical data on the banking activities of public servants. So why isn’t the Central Bank’s supervision unit being used to assiduously partner with EACC to hunt down these nefarious characters? EACC knows where all the corruption proceeds are. Our Central Bank knows (or can exercise a tiny bit of supervision to find) where all the corruption proceeds are. You and I are foolish pawns who lap up the piddling little stories of corruption arrests. Meanwhile the big fish don’t do their banking in Kenya: it’s too pedestrian.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Our Banks Are Laundering Corruption Proceeds

A man walked into a Swiss bank and whispered to the manager “I want to open a bank account with 2 million dollars.” The Swiss manager answered, “You can say it louder, after all, in our bank poverty is not a crime.”

As the sun set on the month of March 2015, there was cause for much reflection by the various civil servants who found themselves on the “List of Shame” that read like a who’s who in Kenya’s enterprising and highly lucrative public service. I can only imagine how many folks in the civil service girdled their loins in preparation for battle as they poured over the list with bleary eyes that were bloodshot with the previous night’s spiritual indulgence, fervent in the hope that their names didn’t appear.

Well, there were no public gasps of shock or righteous indignation; Kenyans have truly become immune to lists of shame. As a Nigerian friend recently told me, it only makes news in Nigeria when a public official has stolen over $100 million – Kshs 91 billion . Anything beneath that is deemed verily normal. However, there seemed be a lot of skepticism as to what the definition of “stepping aside” truly meant and whether it would conform to the Kenyan precedent of lying low like an envelope for three to four months followed by a quiet slinking back into office under the cover of media darkness.

Good people, we are talking about hundreds, nay, billions of shillings that have been corruptly acquired. This is not an amount that can fit into your Little Red suit pocket, or tied into the corner knot of Mama Mboga’s khanga. These funds have to be moving within and around the Kenyan banking sector. Yes, the banking sector that has remained grossly silent and unapologetically mum about the billions in liability windfalls that have dropped miraculously from the sky. Picture this scene: Mr X has been banking at Bank Y for the last 10 years. His account turnover is about an average of Kshs 250,000 on a monthly basis. The account suddenly begins receiving deposits and withdrawals ranging from Kshs 20 to 100 million, which moves his average monthly turnover to about Kshs 50 million. The Anti Money Laundering officer, usually a skinny, bespectacled recent university graduate, flags these movements to his boss the Compliance Manager. The Compliance Manager flags it to his boss, the Risk Director. The Risk Director walks over to the Retail Director and shows him the transactions as he’s a smart chap who doesn’t want to put anything in writing, just yet. The Retail Director, who is royally chuffed that his liability targets are constantly met since his team’s successful senior civil servant recruitment drive last year, rubbishes the report and dares the Risk Director to take it higher, “Weeeh, even the Managing Director knows we have these accounts, can’t you see how they are helping our deposits to grow?” The Retail Director has been considering opening a branch for High Net Worth Individuals on the 10th floor of a new building in Westlands with a dedicated high speed lift from the basement, primarily to enable senior civil servants come and go easily without being noticed.

This scene is quite likely replicated across some of Kenya’s banks today that have “flexible” anti-money laundering (AML) rules and ill defined Know Your Customer (KYC) policies. Because if you Know Your Customer as per the Central Bank of Kenya guidelines, you should know your customer’s source of funds and be in a position to flag suspicious inordinate account activity on a real time basis; technically. The Central Bank inspectors who come round every so often, should also be able to pick up on this activity since they have access to the exception reports on account turnovers; technically. But does this happen? Let’s take a look at how developed markets penalize offending banks. In July 2013, Europe’s largest bank HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US dollars from HSBC Mexico, American prosecutors said. The bank was criminally charged with failing to maintain an effective anti-money laundering program, failing to conduct due diligence amongst other charges. Bloomberg Business reported that court filings by the US government indicated that lack of proper controls allowed the Sinaloa drug cartel in Mexico and the Norte del Valle cartel in Colombia to move more than $881 million through HSBC’s American unit from 2006 to 2010. HSBC was fined over $1.8 billion in penalties as a result.

Along more familiar bank territory, Standard Chartered agreed to pay $300 million to New York’s top banking regulator for failing to improve its money laundering controls, reported the BBC in August 2014. The Bank was also banned from accepting new dollar clearing accounts without the state’s approval. The penalty arose from a clear lack of learning as the bank had its AML problems identified in 2012 which had still not been fixed by 2014. The 2012 problems had led to the bank being penalized $340 million for allegedly hiding $250 billion worth of transactions with the highly sanctioned country of Iran. The banking regulator required that an independent monitor be installed at the bank and the monitor discovered that Standard Chartered had failed to detect a large number of potentially high-risk transactions.

At the risk of sounding judgmental, it’s quite likely that the banks in Kenya operating under international jurisdictions are applying their KYC and AML screws very tightly on what are termed as Politically Exposed Persons (PEPs) for no other reason than to avoid international notoriety of “chicken-gate” proportions. Actually, the corruption proceeds are more likely to be found in some of our local banks, mingling merrily amongst the hard earned proceeds of sweat generating wananchi.

Poor senior civil servants don’t exist in Kenya. They bank alongside the wealthy, productive citizens of this beloved country. Our banking industry knows them quite well.

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Twitter: @carolmusyoka