by Gregor Pannike

Kenya’s FATF “Grey Listing” – What Kenyan Businesses can do to Mitigate Adverse Effects

On 23 February 2024 the Financial Action Task Force (“FATF”) added Kenya and Namibia to the list of countries subject to increased monitoring which is commonly referred to as “grey list”.

The FATF is the global money laundering and terrorist financing watchdog established as an intergovernmental organization with several member states including two regional organizations. The FATF is mandated to set international standards and come up with policies that aim to prevent money laundering, terrorist financing, and proliferation financing. The FATF identifies and assesses on an on-going basis, jurisdictions that have strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.

The FATF detected in its latest evaluation enduring insufficiencies in Kenya’s AML/CFT legal, institutional and compliance frameworks such as “outstanding strategic gaps in its technical compliance and effectiveness” and “Kenya’s key weaknesses in understanding of risk, related but not limited to different types of Money Laundering, cash and cross-border risks, types of legal persons, TF, PEPs, NPOs, and VASPs among other deficiencies in the assessment, identification and prevention of AML/CFT related risks and the enforcement of compliance regimes and AML/CFT regulations. This led the FATF to place Kenya under increased monitoring.

Status Quo – Implications of the “Grey Listing” for the Kenyan economy and its businesses
When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. Hence, partner states, international organizations, financial institutions, governmental institutions, and compliance platforms will follow up and observe the progress of Kenya’s actions to meet FATF’s recommendations and address its key findings.

FATF’s “grey-listing” often affects a country’s economy and financial system by limiting or complicating cross-border transactions, increased challenges for governments to obtain foreign lending and to issue public bonds and experiencing reduced levels of foreign direct investment (FDI) inflow from governmental and private sector.

In a recent study by the IMF dated May 2021, – “IMF Working Paper, Finance Department, The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning ” – , the paper finds a large, significant negative effect of gray-listing on capital inflows. The empirical results suggest that capital inflows decline on average by 7.6 percent of GDP when the country is gray-listed. The results also suggest that FDI inflows decline on average by −3.0 percent of GDP, portfolio inflows decline on average by −2.9 percent of GDP, and other investment inflows decline on average by −3.6 percent of GDP.

Further, part of the adverse economic impact results from a higher level of due diligence and vetting required for existing business partners, counterparties and new customers located in listed jurisdictions such as Kenya, incurring higher risk management and compliance check related costs, and necessitating additional time commitments and substantial company resources for the conduct of an adequate due diligence procedure from respective foreign organizations and their compliance teams. Such costs are often a contributing factor to the termination of certain types of business relationships, a practice widely known as de-risking. Prolonged and profound vetting processes will also result in decelerated onboarding of new business partners and delays in performance of business arrangements, transactions and contracts.

Effective Measures to mitigate and manage appropriately adverse implications
Due to the increased scrutiny and due diligence requirements of Kenyan businesses by their foreign or international business partners and lenders caused by the “grey listing”, Kenyan businesses are well advised to prop up, re-assess and improve their overall risk management and compliance framework in order to meet increased compliance standards and enhanced compliance checks and KYC questionnaires from their business partners, investors and foreign banks and creditors.
Required compliance framework overhaul does not only include a profound revision of respective company’s AML/CFT policies and procedures, company code of ethics and supplier code of conducts, customer onboarding forms and KYC questionnaires but also an in depth re-assessment of the organizations’ risk management practice, compliance screening of the existing local customer base and new customer business relationships, perusal of existing contractual arrangements with local key partners and customers to ensure that those contracts provide for robust and comprehensive compliance clauses, reporting, compliance audit and disclosure obligations, among others, meeting international AML/CFT and compliance standards.
Since enhanced due diligence, KYC procedures and compliance checks and audits by foreign business partners and creditors can take significant time and bind substantial company resources equally from the foreign partner and the Kenyan business, it is good practice to proactively establish a well-structured and organized data room preferably an advanced cloud-based data room. Such data room should comprise and list in detail the updated company compliance framework, applicable compliance and AML/CFT policies and procedures, KYC and customer onboarding forms and templates and overhauled code of ethics and company compliance screening tools and compliance documentation and systems, among others. The data room should be securely and easily accessible and assessable by relevant international business partners, investors, and lenders to enable an accelerated and efficient review process. This does not only demonstrate the preparedness, professionalism and sophistication of the relevant Kenyan business to respond transparently, comprehensively, timely and efficiently to potential compliance risk concerns but also eases increased due diligence procedures, creates an additional layer of credibility and provides comfort for strategic business partnerships, foreign investors and international suppliers and customer relationships. In the end the Kenyan business should be able to demonstrate to its foreign business partners that it undertook all reasonable possible measures to comply with international AML/CFT and compliance standards and does not pose a risk for its international counterparts.

FATF’s “grey-listing” can have a negative impact on the Kenyan economy and adverse effects on Kenyan businesses while dealing with international business partners, customers or lenders. All the more it is important for Kenyan businesses to address sufficiently and proactively compliance concerns from international counterparts by overhauling their compliance frameworks and systems and introduce tools and procedures permitting foreign business partners and investors to conduct in a timely and seamless manner an enhanced due diligence and KYC procedure to satisfy increased compliance requirements and to accommodate for a risk-based approach by its partners.

How Can We help you
At Pannike + Partners, we have an experienced risk and compliance department that can help to designing a robust, practical relevant and customized compliance framework for your business and advise on international compliance standards, corporate regulatory and compliance requirements when conducting your risk assessment. Additionally, we would be delighted to guide you on the proper requisite compliance documentation, drafting of corporate policies and trainings to ensure a functional and comprehensive compliance framework.

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Gregor Pannike

Managing Partner

E nairobi@pannike-partners.com

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