Kenya’s Economy Under International Scrutiny: The Impact of FATF Grey Listing

The Financial Action Task Force (FATF), an international organization dedicated to combating money laundering and terrorism financing, has included Kenya on its grey list. This designation, made during the FATF’s fifth plenary meeting in Paris, puts the East African country under enhanced scrutiny for its deficiencies in anti-money laundering and countering the financing of terrorism (AML/CFT) measures.

Concerns Identified by the FATF

• Ineffective strategies to address risks related to terrorism financing: The FATF identified weaknesses in Kenya’s approach to addressing the risks of terrorism financing.
• Cryptocurrency and other virtual assets: The FATF noted a lack of regulation and supervision in the use of cryptocurrency and other virtual assets, which could be exploited for illicit activities.
• Non-profit organizations: The FATF pointed to the overall ineffectiveness of Kenya’s response to money laundering and economic crimes, with specific attention given to the non-profit sector.

Consequences of Grey Listing

Reputational Damage

Kenya’s inclusion on the FATF grey list has resulted in international media coverage, causing reputational damage to the country.

Decreased Investor Confidence and Capital Inflows

The International Monetary Fund (IMF) estimates a potential 7.6% decline in a grey-listed country’s GDP, although the actual impact may vary depending on factors such as political stability, ease of doing business, and market access.

Increased Scrutiny for Financial Institutions

Financial institutions like banks and money remittance services may face increased scrutiny from foreign counterparts, potentially leading to exclusion from certain financial products and services. Malta experienced a 20% decrease in correspondent banking when it was grey-listed.

Increased Transaction Costs and Delays

International businesses may be reluctant to deal with Kenyan counterparts, leading to increased transaction costs and delays. Non-profit organizations, which were also highlighted by the FATF as a sector in need of improvement in Kenya, may face increased scrutiny from donors, potentially limiting funding.

The Path Forward

The Kenyan government must address the FATF’s concerns as a matter of urgency. In the past, Kenya has implemented AML/CFT reforms following grey listings, including the establishment of the Financial Reporting Center and progress between 2010 and 2014. To prevent corruption and economic crimes from hindering Kenya’s economic growth, comprehensive reforms will be necessary.