An Assessment Of The Effectiveness Of The Financial Reporting Centre And Financial Institutions In Prevention Of Money Laundering: A Case Study Of Nairobi County

Abstract

The control of money laundering has not been successful despite the enactment of POCAMLA and other laws. Money laundering damages the stability of financial sectors and places significant costs on the economy leading to erosion of public confidence in the financial system and the legal order. The Financial Reporting Centre is the leading government agency mandated to combat money laundering in collaboration with registered financial institutions, law enforcement agencies and foreign FIUs. This study aimed at examining factors that affect FRC and financial institutions in prevention of money laundering in Kenya. These included causes of Money Laundering, the main actors in Money Laundering, extent to which the FRC and Financial Institutions have succeeded in combating Money Laundering and the underlying obstacles to the prevention of Money Laundering in Kenya. This study utilised Rational Choice Theory, Routine Activity Theory and Deviance Theory (Strain Theory) to explain the relationship between the dependent and independent variables. The site for the study was FRC and financial institutions. Eighty (80) respondents were selected by stratified random sampling from FRC, and financial institutions namely commercial banks, Forex Bureaus and Money Transfer outlets. Seven (7) key informants from FRC, financial institutions and law enforcement agencies were purposefully selected. Questionnaires and a key informant guide were used to collect data from the respondents which were analyzed using SPSS computer package and content analysis. The findings of the study reveal that factors that lead to the prevalence of money laundering are technological innovation, globalization, inadequate training, inefficiencies in coordination among stakeholders, improvements in communications, poor statistics and information imbalance and spread of international banks. The actors in money laundering include criminals of the predicate offences, professional advisors, financial institutions and regulators. Other actors are commercial banks, money remittances providers and insurance companies, law enforcement officers, micro finance institutions and telecommunication companies and mortgage finance companies and investment banks. The study found that FRC has succeeded in combating money laundering due to interventions by FRC and by other institutions. The underlying obstacles to the prevention of money laundering were found to be failure to enforce the money laundering rules and regulations, inefficiencies in coordination and inadequate training in anti-money laundering. Others are poor statistics and information imbalance, poor communications and inferior technological knowledge or skills. The study recommends that Government should strengthen AML legislation by giving clarity in the definition of money laundering under section 3 of POCAMLA. Other sections to be given clarity are section 4 on knowledge of property and section 8 on tipping off and reconsideration of the reporting threshold of USD 10,000. Government should ensure that there are adequate AML controls and encourage courts to impose stiff sentences. Government should also provide enforcement agencies with adequate training in anti money laundering to increase their capacity and put more effort in tackling illicit money flows. The study recommends further research in the role of other law enforcement agencies in order to get a true and broad picture of the issue.