Enhancing Kenya’s AML/CFT Measures for Virtual Assets

In the face of rapid technological advancements, Kenya finds itself at a crossroads, grappling with the challenges posed by Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs).

Despite the burgeoning growth of digital finance, the country’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) legal and regulatory framework remains ill-equipped to address the unique risks associated with these entities.

This article delves into the current state of Kenya’s AML/CFT framework, highlighting the pressing need for comprehensive regulation to safeguard against Money Laundering (ML) and Terrorism Financing (TF).

Comprehensiveness of AML/CFT Framework

Kenya lacks a specific AML/CFT legal and regulatory framework governing VAs and VASPs. The Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) offers a broad definition of property that could encompass virtual assets as intangible property. However, this interpretation does not provide the clarity or enforcement mechanisms necessary to regulate the VA and VASP sector effectively.

Financial sector regulators have issued circulars to reporting institutions and public warnings against engaging with VAs/VASPs, but these measures fall short of establishing a robust regulatory environment.

Entry Controls: A Gap in the Defense

The absence of entry controls such as licensing, registration, or regulation for VASPs exacerbates Kenya’s vulnerability to ML/TF activities. Unregulated VASPs can easily exploit this regulatory gap, establishing mule companies or operating from foreign jurisdictions to access the Kenyan market.

This lack of oversight significantly hinders the country’s ability to monitor and mitigate the risks posed by these entities.

Adequate Supervision and Monitoring Mechanism

Kenya’s AML/CFT framework currently does not mandate sufficient legal or regulatory requirements for the supervision or monitoring of VASPs.

Without a designated competent authority to regulate and supervise VASP operations, the sector remains largely unchecked, increasing the potential for illicit financial flows and activities.

Regulation for Customer Due Diligence (CDD) and Source of Funds

In alignment with FATF Recommendations 10 and 15, VASPs are expected to undertake comprehensive CDD measures and scrutinize the source of funds to mitigate ML/TF risks effectively. However, under the existing framework, VASPs are not recognized as reporting institutions, thus are not obligated to perform CDD and counterparty VASP due diligence.

This loophole significantly undermines efforts to trace and prevent illicit financial activities.

Financial and Human Resource Capacity of LEAs

While there have been initiatives to enhance the capacity of Law Enforcement Agencies (LEAs) to investigate and manage VAs, challenges persist.

LEAs often lack the necessary skills and tools for forensic investigations into VA transactions and Distributed Ledger Technology (DLT), limiting their effectiveness in combating financial crimes in the digital domain.

A Call to Action

The rapid evolution of the digital finance landscape necessitates a corresponding adaptation in regulatory frameworks. Kenya stands at a pivotal moment, requiring decisive action to develop and implement comprehensive regulations for VAs and VASPs.

By closing the current gaps in the AML/CFT framework, Kenya can protect its financial system from ML/TF risks, fostering a secure and thriving digital finance ecosystem. The journey ahead demands collaboration, innovation, and commitment from all stakeholders to ensure the resilience and integrity of Kenya’s financial sector in the digital age.