The effect of anti money laundering risk assessment on the financial performance of commercial banks in Kenya

Abstract

Financial institutions are faced with the cost of AML compliance. This is due to their extensive regulation. It is very difficult to quantify the incremental cost impact of implementing the set regulations. The board and management of the commercial banks have the overall responsibility in ensuring that their respective banks are AML compliant through undertaking an AML Risk Assessment. This is a cost that directly affects their profit which then reduces their return on Assets. This problem becomes more pronounced as a good number of commercial banks are engrossed with profit maximization and as such they tend to neglect the importance of AML Risk management. Towards this end, the research sought to establish the effect of AML Risk Assessment on the financial performance of commercial banks. The study adopted descriptive research design where secondary data was retrieved from the financial statements of 43 commercial banks for the period 2014. A multi linear regression model was developed to determine the relationship between the financial performance and independent variables including bank reporting, AML staff costs and AML cost of monitoring transactions. Pearson’s correlation and regression analysis were used for the analysis. The results indicated that the relationship between AML Risk Assessment and financial performance is weak with an adjusted R2 of 21.24%. The results further show that there is a negative relationship between the commercial banks AML risk assessment and ROA. This might be explained with the view that with AML compliance brings an additional operational cost to these banks, which reduce the net income of the banks and consequently, a lower ROA. The study concluded that AML Risk Assessment is not a contributor alone of the firm’s financial performance and there exist other variable that influenced ROA. The study recommends that the banks’ board and senior management should put in place policies to address AML risk assessment that will guide training for staff, monitoring of transactions and reporting of suspicious transactions. Furthermore, the banks should work with the regulator to ensure that they align their policies with the CBK’s guidelines on AML risk assessment.