Address deficiencies in the fight against illicit financial activities

The East Africa Community (EAC) economies stand at crossroads as Partner States struggle with strategic deficiencies in the fight against money laundering, terrorism financing and illicit financial flows. Four EAC Partner States — Uganda, Tanzania, South Sudan and the Democratic Republic of the Congo — are on the Financial Action Task Force (FATF) grey list, which comprises countries deemed to have strategic deficiencies in anti-money laundering, counter-terrorism financing, and counter-proliferation financing. This makes up 14.8 per cent of the 27 countries currently on the FATF grey list globally. Kenya underwent a review recently, and a decision on whether it will be added to the grey list is anticipated in the coming months.

FATF is the global money laundering, terrorism financing and proliferation watchdog that sets policies and standards designed to combat illicit financial activities.

In executing its mandate, Eastern and Southern Africa Anti-Money Laundering Group conducts periodic peerreview of its member states to assess compliance with international anti-money laundering, counter-terrorism financing and counter-proliferation standards. This process is typically referred to as a mutual evaluation. The Mutual Evaluation Reports are adopted by FATF, which then informs the decision on whether to add a country to the grey list.

The grey listing of four EAC countries has raised concerns about inadequate safeguards against illicit financial activities in the region. The mutual evaluations undertaken in the region reveal a range of deficiencies that we discuss below.

A key deficiency that cuts across all jurisdictions is the failure to conduct risk assessments. Most countries have not conducted robust national or sectoral risk assessments or have conducted but not implemented them. This would imply that they do not understand money laundering, terrorism financing, and proliferation financing risks at a national or institutional level.

Consequently, the jurisdictions have not embraced a risk-based approach, at the national and institutional levels, in the fight against illicit financial activities.

Inadequate mitigation measures against risks emanating from politically exposed persons have also featured as a key challenge facing East Africa in the fight against financial crime. This mainly applies to financial institutions, which are typically abused as vehicles for money laundering, and associated predicate offenses, such as corruption. Non-governmental organisations have also been called out due to the risk of some of them being abused to facilitate terrorism financing.

Lack of, or inaccurate registers of the beneficial owners of corporate entities has equally contributed to the region receiving unwelcome scrutiny. This hinders transparency of the persons behind these entities, which, in turn, means that their sources of funds remain shrouded in secrecy. Some jurisdictions also lack elaborate laws relating to incorporation of trusts and identification of beneficial owners of funds or assets settled into the trusts. This anonymity hampers efforts aimed at mitigating illicit financial activities and apportioning criminal liability.

Inadequate regulation of virtual assets has also threatened the region's efforts since this provides a haven for criminals and terrorists to carry out their transactions. Virtual currencies such as bitcoins continue to thrive with anonymity and privacy features, making it difficult to monitor the movements of funds. This necessitates regulation of this new sector, just as the wider financial sector is regulated.

Inadequate capacity of law enforcement agencies to investigate and prosecute money laundering, terrorism financing, and proliferation financing offenses, and to confiscate proceeds of crime is a shared deficiency within the region.

Ultimately, it results in no real consequences being levelled against the persons perpetrating these crimes. The implications of grey listing transcend national borders. It impacts trade, investments, and the overall economic stability of the region. It causes reputational damage to the specific countries and the region at large. International financial transactions are impacted since banks that provide correspondent banking services are forced to apply more stringent customer due diligence measures.

- Mr Kariuki and Ms Adipo are Anti-Financial Crimes practioners at PwC East Africa