Kenya and Uganda have failed to stop the flow of illicit money through their economies and are now facing the risk of blacklisting by global financial regulators, a new report says.
The report by Kenya’s Institute of Economic Affairs says Nairobi and Kampala have become East Africa’s illicit financial flow (IFFs) capitals that receive or process billions of dollars in stolen funds from South Sudan, fuelling inflation at home and financing civil war in the world’s youngest nation.
The loot, which comes from South Sudanese government officials and military top brass, is deepening Juba’s political and humanitarian crises, IEA says.
Well-connected Kenyan and Ugandan businessmen have kept South Sudan’s money laundering machine alive with a regular supply of US dollars to the black market and by moving the proceeds to home countries for investment in other sectors of the economy, the brief says, adding that “some of the money made from manipulation of foreign currency controls is ultimately reinvested in the two countries.”
IEA warns that this inability or unwillingness to stop the flow of illicit finance through their economies has now put Kenya and Uganda at the risk of entering the watch list of risky money-laundering jurisdictions.
A listing by the Financial Action Task Force (FATF), a global inter-governmental body established in 1989 to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and related threats to the integrity of the international financial system, usually proves to be disastrous for subject economies—making it impossible for local banks to deal with global counterparts and slowing down investment inflows.
Top South Sudanese military and government officials have invested and continue to invest in both Uganda and Kenya without deterrence, the IEA report says.
The UN Security Council said as much last year when it implicated Paul Malong, the former head of South Sudan’s army, in torture, abductions and killings of fellow citizens.
Looted money often leaves South Sudan in dollars, making currency trading one of the most lucrative businesses in the country.
IEA reckons that the huge difference between official Bank of South Sudan exchange rates and those on the black market has created a sizeable vector for illicit currency speculation and a financial flows channel that is mostly run by Kenyan and Ugandan businessmen.
For example, while the Bank of South Sudan has fixed $1 for 147 South Sudan Pounds, the dollar is traded on the black market at nearly 400 per cent more.
Kenya’s comparatively more advanced financial markets have opened multiple access points for money launders, increasing the country’s susceptibility to illicit financial flows, the IEA says.
In Uganda, the commercial banking sector remains the single largest segment of the financial services sector, making tight surveillance critical to protecting its integrity and stopping illicit financial flows.
The IEA says Kenya, which was initially on the list of countries with weak financial controls and was only removed after it passed anti-money laundering laws and established a Financial Reporting Centre to help deter money laundering and terrorism financing, still has many loopholes to seal in order to improve its standing in the list of ‘‘clean economies.’’
These include a tightening of legal requirements on disclosure of beneficial ownership, effectiveness of the Financial Reporting Centre and greater care when dealing with countries that do not apply FATF regulations.
“National institutions must be strengthened in order to provide the necessary checks and balances to deter illicit financial flow,” the brief says.
Kenya’s creation of the FRC in 2012 helped the country to exit the list of countries facing sanctions for non-compliance by the FATF but did not clear the country of underlying exposure to illicit financial flows.
IEA says Uganda has served as a channel of illicit financial flows from South Sudan due to its geographic proximity, official closeness with the South Sudanese elite and the huge gaps in the country’s Anti-Money Laundering Act 2013 and Financial Institutions Act.
“Uganda’s legal framework does not require information on beneficial ownership to be obtained and retained by the competent authorities for purposes of illicit financial flows,” the brief says.
South Sudan is estimated to have lost $6.8 billion in illicit financial flows in the past seven years largely because of regulatory failure, weak state institutions and impunity by high ranking military officers.
There is also the rush to transfer resources to safer jurisdictions, the need to pay militia as well as purchase arms and other supplies used in the civil dispute.
It has not helped that South Sudan’s military officers and political leadership have large stakes and investments in the country’s main banking institutions, m