In an era where digital innovation transforms every facet of the financial landscape, Kenya embarked on a pioneering journey in 2023, charting unexplored territories with its inaugural National Risk Assessment on Money Laundering and Terrorism Finance (ML/TF) risks associated with Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs).
This landmark study, designed to scrutinize the burgeoning realm of digital finance, was anchored in the global standards set by the Financial Action Task Force (FATF) Recommendation 15. This directive urges jurisdictions and their financial institutions to rigorously evaluate the ML/TF risks emergent from new products, business practices, and technological advancements.
A Methodological Approach Anchored by Global Standards
Leveraging the World Bank’s VA/VASPs 2022 risk assessment tool, Kenya adopted a comprehensive methodology for identifying ML/TF threats and vulnerabilities within the VA/VASPs ecosystem. This approach facilitated a nuanced understanding of the interactions between various financial system players and the efficacy of proposed mitigation measures in addressing identified risks, thereby gauging the nation’s residual risks accurately.
A multi-disciplinary Technical Working Group (TWG) led the assessment, comprising representatives from the Financial Reporting Centre (FRC), public sector entities such as the Central Bank of Kenya and the Capital Markets Authority, law enforcement agencies, the private financial sector, and VASPs themselves. This collaborative effort harnessed data from a wide array of sources, including open-source intelligence and survey questionnaires distributed across a broad spectrum of stakeholders.
Identifying Gaps and Challenges
A critical finding of the assessment was the absence of a comprehensive legal and regulatory framework in Kenya for the registration, licensing, or supervision of VA-related activities and VASPs. Despite this regulatory vacuum, financial sector regulators have issued circulars since 2015, cautioning the public and barring the regulated financial sector from engaging with VAs.
The assessment categorized VASPs into four major types and identified eleven operational channels within the Kenyan ecosystem. These encompassed Virtual Asset Wallet Providers, Exchanges, Broking/Payment Processing entities, and Investment Providers. This classification underscored the diversity and complexity of the VA/VASP landscape in Kenya.
Risks and Prevalence of Use Among the Youth
The report shed light on the pronounced use of VAs and VASPs, particularly among the younger population aged 18-40, with students emerging as significant participants in this ecosystem. The allure of VAs for investment and speculation, facilitated mainly through peer-to-peer (P2P) mechanisms, underscores the critical intersection of technology and finance that appeals to Kenya’s youth.
However, this trend is not without its challenges. The anonymity-enhanced features of some VAs, coupled with the complex traceability of these assets and their swift transaction speeds, heighten the risk of their exploitation for ML/TF activities. The study noted instances where VAs and VASPs used by Kenyans had been exploited for such illicit purposes in other jurisdictions, although no TF-related cases were reported within Kenya by the time of the assessment.
Towards a Regulated Future
The assessment concluded with a call for regulation, not prohibition, of VAs/VASPs to mitigate identified risks and curb the potential growth of an underground economy driven by the current unregulated use of these digital assets. By instituting a regulatory framework, Kenya can address ML/TF risks, consumer protection, data privacy, and governance concerns, thereby fostering a safer and more transparent virtual asset environment.
This pioneering assessment marks a significant step for Kenya, highlighting the importance of adopting a proactive and informed approach to managing the risks and opportunities presented by the digital finance revolution. As Kenya and other nations navigate these new frontiers, the insights garnered from such assessments will be instrumental in shaping policies that support innovation while safeguarding the integrity of the financial system.
