Kenya’s Financial Institutions Face Crucial Due Diligence Tests

Introduction

The Finance Act of 2021 has ushered in a new era of transparency in Kenya’s financial sector with the implementation of the Common Reporting Standard (CRS) regulations. As of January 1st, 2023, Reporting Financial Institutions (RFIs) are now required to conduct thorough due diligence on their clients and file annual reports with the Kenya Revenue Authority.

CRS Objectives

Developed by the Organisation for Economic Cooperation and Development (OECD), the CRS aims to curb tax evasion by ensuring that financial institutions disclose information about their clients’ accounts held outside of their country of residence. In Kenya, RFIs have been tasked with identifying reportable accounts and filing detailed information on these accounts with the authorities.

Identifying Reportable Accounts

According to Legal Notice No. 8 of 2023, gazetted in February 2023, RFIs must identify pre-existing individual accounts as either lower or high-value accounts based on their aggregate value as of December 31st every year. Lower value accounts are those with a value not exceeding USD 1,000,000, while high-value accounts exceed this threshold.

Due Diligence Requirements

The due diligence requirements for RFIs vary depending on the classification of the account:

• Low-Value Accounts: Indicia such as residence status, address, telephone numbers, and standing instructions can be used to identify the account holder.
• High-Value Accounts: Enhanced procedures apply, including reviewing electronically searchable databases, current customer master files, and other documentation.

Review Requirements

The regulations also require RFIs to review pre-existing high-value accounts by December 31st, 2023, while lower-value individual accounts must be reviewed by December 31st, 2024.

Expert Insights

Experts say that the CRS implementation is a significant step forward in enhancing tax compliance in Kenya. “This regulation will help identify and prevent tax evasion, ensuring that financial institutions are transparent and accountable,” said [Name], a tax expert.

Conclusion

As RFIs navigate this new regulatory landscape, it remains to be seen how effective these measures will be in curbing tax evasion and improving transparency in Kenya’s financial sector. However, the implementation of the CRS regulations marks an important step towards enhancing tax compliance and promoting a more transparent financial environment in Kenya.