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FINANCIAL INSTITUTIONS IN KENYA FACE NEW DUE DILIGENCE REQUIREMENTS UNDER FINANCE ACT 2021

Nairobi, Kenya - New Regulations for Financial Institutions

The recently passed Finance Act, 2021 has introduced several changes that financial institutions in Kenya must take note of. Among the key implications is the requirement for financial institutions to conduct due diligence and report accounts in line with Common Reporting Standards (CRS) to the Commissioner.

Compliance with CRS Standards

According to the new regulations, all financial institutions licensed under various Acts including the Banking Act, Insurance Act, Central Bank of Kenya Act, Microfinance Act, Co-operative Societies Act, and others must comply with the CRS standards. Failure to do so will attract penalties, including:

  • A fine of Kshs.100,000 for every omission or untrue statement
  • Imprisonment not exceeding three years
  • Both

Changes to Excise Duty on Fees and Commissions

The Finance Act has also amended the definition of “other fees” to include excise duty on fees and commissions earned from loans. This means that financial institutions must charge 20% excise duty on fees or commissions received from loan transactions, effective July 1st, 2021.

New Requirement for Ultimate Parent Entities

The Act introduces a new requirement for ultimate parent entities (UPEs) of multinational enterprises groups (MNEs) to submit annual reports to the Commissioner detailing their financial activities in Kenya and other countries where they operate. The report must include information such as:

  • Revenue
  • Profit or loss before tax
  • Income tax paid
  • Tangible assets

Exemptions for Financial Institutions

The Finance Act has also exempted financial institutions from being deemed to be in control if they advance a loan facility constituting at least 70% of the total book value of the assets of another company or guarantees 70% of the total debt of the debtor. Additionally, financial institutions have been exempted from:

  • A provision that prohibits payment of gross interest to related parties and third parties exceeding 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) of the borrower
  • The minimum tax exemption for insurance companies registered under the Insurance Act

Impact on Financial Institutions in Kenya

These changes are expected to have a significant impact on financial institutions in Kenya and will require them to adapt their operations to comply with the new regulations. As experts, we advise financial institutions in Kenya to take immediate action to understand and comply with these changes to avoid penalties and ensure smooth operations.

Conclusion

The Finance Act, 2021 has introduced several key changes that financial institutions in Kenya must be aware of. It is essential for financial institutions to take immediate action to comply with the new regulations to avoid penalties and ensure smooth operations.