Foreign donors should halt aid to Kenya to protest money laundering-experts

by Stella Dawson and Katy Migiro
Wednesday, 18 December 2013 22:43 GMT

A stockbroker transacts shares during a trading session at the Nairobi Securities Exchange in Kenya's capital Nairobi January 11, 2012. REUTERS/Thomas Mukoya

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Foreign donors should consider halting development assistance to Kenya unless it enforces its anti-money laundering laws and stems the flow of dirty money, experts in corruption and illicit finance say.

WASHINGTON (Thomson Reuters Foundation) – Foreign donors should consider halting development assistance to Kenya unless it enforces its anti-money laundering laws and stems the flow of dirty money, experts in corruption and illicit finance said on Wednesday.

       In an online discussion with Thomson Reuters Foundation, three experts said that the government’s plans to build an international financial centre in Nairobi before it has a well-functioning financial regulatory system in place risks turning the east African hub into a major haven for laundering corrupt money.

      “Being a haven for dirty money and asking for foreign aid shouldn't go together. And it's up to the donor nations to make this point clearly,” said Raymond Baker, president of Global Financial Integrity, which estimates that the rate of illicit money flowing into Kenya has increased five fold in the decade ended 2011.

       John Githongo, an anti-corruption expert who exposed massive fraud and bribery in  former President Mwai Kibaki’s government, said Kenya has a sophisticated financial services sector but no political will to enforce global rules against money laundering.  

       “Kenya has what it takes to become a key financial hub and profit handsomely from it for all. We don't have the culture yet though. It would criminalise almost immediately. It would be like a financial crime aircraft carrier, self contained and able to cause considerable damage,” he said.

         Following is an edited transcript of the online discussion, which is part of  Thomson Reuters Foundation’s reporting on the challenges Kenya faces in controlling money laundering and illicit finance while pursuing its development plans. Thomson Reuters Foundation journalists Stella Dawson, Chief Correspondent for Governance and Corruption, and Katy Migiro, East Africa correspondent organised the debate, and the  discussants were:

  • John Githongo, an anti-corruption expert in Kenya well known for exposing fraud and bribery under former President Mwai Kibaki.  He has founded grassroots advocacy groups in Kenya to fight corruption and injustice
  •  Alex Cobham, a research fellow based in London at the Center for Global Development, specializing in illicit financial flows, effective taxation for development, and inequality
  •  Raymond Baker, president of Global Financial Integrity, the advocacy group based in Washington D.C., which has helped put the debate on illicit financial flows at the centre of development policy discussions.  

 Q – (From Stella Dawson)  Katy, our reporting on the Kenya Dirty Money story began when you remarked that after 10 years living in Nairobi, that you were shocked by the explosion in conspicuous wealth and you were hearing rumblings of concern about a new international financial center. Tell us more about what you are observing in Nairobi.

MIGIRO - What I've seen is that Nairobi has turned into a gigantic building site. There are new houses and apartments going up everywhere. Property prices are going through the roof. Prices for apartments in my area have tripled in less than 10 years. Estate agents told me they are easily selling houses for $1million, and the buyers pay in cash. Kenya’s mortgage market is tiny because interest rates have hit 20 percent. So how do they afford it? Nairobi gossip was that money earned by Somali pirate hijackings was being brought into Kenya and fuelling the property boom.

     So I started digging but I found that the sums involved were not large enough.  On the roads, you see so many flashy cars – the latest models of Prado, BMW X5s, Range Rover, Lexus. They cost anything from $60,000 to $200,000. In the supermarket in Westgate, they were selling TVs for $15,000. There are lots of flashy new bars. In Sankara, the champagne bar menu is on an Ipad. It has 20 champagnes costing up to $800, 50 single malt whiskies and all sorts of cocktails. Tribe and Hemingways have their own helipads. A friend who works in Tribe told me about a Nigerian regular who would spend $1000s on drinks, then take limos full of girls clubbing in Westlands.

      Then you step outside and find mothers and children begging on the streets in the cold. And the watchman’s asking for a coin to buy a cup of tea. It’s like two separate worlds.  How do you explain it?

Q – (From Stella Dawson) - Raymond, we reached out to GFI and you crunched some data for Thomson Reuters Foundation and found a 20 fold surge in illicit flows into Kenya in the decade to 2010, or five fold in the 2002-2011 period since 2001 was such a low level. That flagged something more than economic growth was at play. Would you explain the significance of those findings?

BAKER - Our data indicates that trade mispricing in Kenya is huge. For 2011, the latest year, import underpricing was $1.8 billion, $11.5 billion for the decade. This is done to curtail payments of customs duties and VAT taxes. But where is all this money coming from?  I've never known import under-invoicing that wasn't matched with some other way of getting money out of a country.  But that mechanism for taking the money back out is unclear in Kenya, and as a percent of GDP, it’s enormous. 

      It certainly suggests huge sums are being laundered.  And you are right, Somali pirates do not account for all of this. Other sources of money are flowing in, but from where? Other East African countries? The United Arab Emirates?  Money laundering is already well developed in the country.  Kenya has been rated as the easiest country in the world where an anonymous corporation can be established.

Q – John, how do you explain what is going on? What makes Kenya so attractive for illicit money?

GITHONGO – A perfect storm of a sophisticated services sector that enjoys a reputation for professionalism and probity thus far; the growth in transnational crime (drugs, people trafficking etc); and a government willing to turn a blind eye. The legal and accounting professions here have globalised pretty effectively with larger firms entering into partnerships across the world that allow transactions that would be illegal in one jurisdiction to be reflected in the books of another arm of the same entity.

Q- So government complicity plays a critical role, in your view. Certainly the Financial Action Task Force, the global financial regulation standard setter, is unimpressed by Kenya's willingness to enforce its anti-money laundering laws. Others say it just needs to build capacity and skills. Is that letting the government off the hook too easily?

GITHONGO - We don't have a capacity problem in Kenya. We have some of the best trained people on the continent and export them throughout the region. Political will at the highest levels of government explains the contradictions that you are describing. We also have an expensive democracy here. The last election was the most expensive in Kenyan history - estimates vary but hundreds of millions of dollars were spent by the leading parties. That money doesn't come from membership fees.

Q – (From Stella Dawson) - Interesting.  In Washington you hear capacity as a reason to give Kenya more time. What can you tell us about Kenya’s goal of turning Nairobi into an international financial hub by 2030?  What are the risks against this backdrop?

GITHONGO - Kenya has what it takes to become a key financial hub and profit handsomely from it for all. We don't have the culture yet though. It would criminalise almost immediately. It would be like a financial crime aircraft carrier, self contained and able to cause considerable damage.

MIGIRO -  By way of background, in July 2012 the president of Kenya expressed the desire to build relationships with the U.K. to help develop Nairobi as an international financial centre (IFC) to serve the East African region. The bodies appointed to deliver the work, under the sponsorship of the Lord Mayor of the City of London and the Ministry of Finance in Kenya, are TheCityUK and the Kenyan Capital Markets Authority.

BAKER - Kenya becoming an offshore financial centre (OFC), a tax haven, is a most worrisome prospect. Such a reality will continue, indeed acelerate, the outflow of money from the country and its surrounding neighbours.

COBHAM -  I'd agree with John on the capacity argument, not only because of Kenya's strengths in some areas, but also because this just isn't a legitimate defense if a government is pursuing growth in this area. You can claim capacity limits if you have no intention to promote financial flows with other jurisdictions, but not if that is your aim. If you're going down that road, you need to resource your capacity to ensure transparency and cooperation. 

GITHONGO – Correct. Kenya is ideal because it has the capacity.

COBHAM - In terms of the plan for a Nairobi financial centre, this should sound alarm bells for Kenyan citizens, and for Kenya's neighbours. Kenya's neighbours will know that the evidence shows immediate neighbours of tax havens tend to see falling investment flows and also greater exposure to illicit flows. For Kenya's citizens, the plan raises a number of risks. First, tax havens become such by giving up control over some of their legislation - the 'commercialisation of sovereignty', as the academic literature has it. This inevitably weakens links between citizens and their political representatives.

     The second aspect is that pursuing a financial centre, if successful, is likely to be associated with higher income inequality; and as the State of East Africa Report 2013 and others have shown, there are clear concerns over inequality already.

      The third concern for Kenya's citizens would be that the prospects for success, in a context of weakening governance, are unlikely to be great in any case - so it may be a wasted investment, even on its own terms.

BAKER - I second Alex's point. Inequality is a huge challenge for Africa and will be driven further by setting up the nation as a tax haven.

COBHAM - The other big project of the City of London body that is working with Nairobi is... Moscow. After several years there has been a lot of legal change, but little growth. And of course the external perception of Russian governance is weakening too. The Government of Kenya (GoK) should think about their own position in this light, perhaps.

MIGIRO - Yes, growth is 5 percent but most Nairobians are struggling to eat with high inflation.

Q – (Anna Y.)  As a citizen who cares about this issue- what can I do? We passed the anti money laundering bill in 2009, but have failed to enforce it.  

BAKER - When Ghana was giving consideration to becoming a tax haven, the point was made that this should be a good reason to cease foreign aid from donor nations. It is probably time to put forward that argument in the case of Kenya.  Being a haven for dirty money and asking for foreign aid shouldn't go together. And it's up to the donor nations to make this point clearly.

GITHONGO – That’s a good idea….. The first thing to do is raise it as an issue - blow the whistle on it; ask questions about it; seek to have presented to all Kenyans the regulatory framework envisaged.

COBHAM - Raymond is right - the pressure from international actors for financial transparency is greater now than it has ever been, so there would be no free ride for Kenya if it goes this road. The OECD today published a report which is damning about the transparency of its own members, so no country should imagine that they will be able to hide behind a 'capacity' defence.

GITHONGO - Then you ask the 'Who?' question and a lot becomes obvious. Our elites are small - the WHO always includes leading politicians and their proxies.  

BAKER - The High Level Panel on Illicit Financial Flows from Africa led by President Thabo Mbeki is addressing illicit financial flows for the continent and will come out with recommendations next year. This is a start to the WHO question. Next, donor nations need to speak up with a reasonably united voice. Next, civil society organizations (CSOs) in Kenya need to get much more active on the issue.

MIGIRO -  I don't think donors lecturing Kenya on how to behave has gone down very well recently... look at how their warning not to vote for Uhuru Kenyatta worked! And now he's been trying to ban foreign aid

GITHONGO - CSOs like Africog and Transparency International in Kenya are already biting at the edges of the issue.

COBHAM - John, I think there are three possible dynamics here: 1) As you say, some big actors looking for less heavily regulated locations; 2) A genuine desire to spread the benefits of highly financialised economies; and/or 3) A recognition of the strength of the development argument against financial secrecy, leading those actors to seek developing country supporters. No. 2 seems unlikely, given the global crisis has just highlighted the risks of depending on the finance sector; while 3 may be overly Machiavellian, so perhaps 1 is the strongest shout. 

GITHONGO - I think the soft underbelly here are professional associations - the legal, accounting, secretarial services fraternities etc.

MIGIRO - The challenge is to show ordinary people how it hurts them. There is a culture of admiring rich people, no matter where it came from. Kamlesh Pattni of the Goldenberg scam, Sonko our 'bling' Nairobi Senator...

COBHAM - Katy, in this case the international community has a pretty big stick - in that if the Nairobi centre were seen to be failing to meet international standards, it would be confined to smaller, dirtier amounts of money than if it can compete with the more respectable Offshore Financial Centres (OFC)

Q – (Unidentified journalist) - One argument that is always made for the formation of the Nairobi International Financial Centre (NIFC) is that Kenya needs the investment to grow. The project is also anchored in the country's Vision 2030 project and supported by none other than the president himself who insists that we need to do things on our own rather than relying on donor aid. Last month the treasury gazzetted the board that will buttress the formation of the NIFC, so this shows that the train has left the station.

COBHAM - This is a good question, but with a clear answer: if Kenya can make a success of NIFC on the basis of meeting the emerged consensus on transparency of beneficial ownership of companies, and on automatic international exchange of tax information, then you'll know the investment is largely real.

BAKER - But, Alex, we know that OFCs are essentially designed to handle dirty money. It's optimistic to think that we are going to see a well functioning regulatory regime keeping Kenya's OFC handling only clean money.

COBHAM - Overall, there seems a grave risk here that GoK invests heavily in pursuing an idea which is unlikely to succeed; and which, if it did, is likely to exacerbate the existing problems of governance and inequality. The question should be asked of what the government calculation is that could make this seem sensible.

GITHONGO - My question is where do we as an economy draw the line between genuine foreign direct investment (FDI) and dirty money?  The direction of travel in the G8 is generally towards increased regulation after the 2007/8 crisis. It’s a kicking-and-screaming ride but the direction seems steady. So, yes, as they say, when the hedge fund managers show up, real trouble is only just round the corner.

BAKER - I agree that getting citizens to understand something of this issue is important. But it is certainly not sufficient. This case against becoming a tax haven needs to be made by multiple groups at the highest levels of the government and the parliament, repeatedly.

GITHONGO – I would second that.

Q – (From Katy Migiro) - John, isn't one of the reasons that lots of international banks are coming here is because of the oil that's coming and local banks can't finance its development? Don't we need more foreign investors?

GITHONGO - We do, but the regulatory environment and culture is key. The money laundering legislation has made little difference since it was passed and that isn't because we don't have the people to make it work; rather it isn't in the interest of those in power and vested interests for it to work. And cleaning up the financial sector would threaten too many of the "WHO" 's interests for them to contemplate, surely.

Q – (Unidentified journalist) - Katy has a point. Kenya has at least $4 trillion in major infrastructure projects including the LAPSET project, the standard gauge rail, Konza city etc. And we are nearing our debt ceiling so we cannot borrow as much in the future. The government can easily sell this argument (that it needs to raise money) to the people, and they do at the launch of every major infrastructure project because to some extent it makes sense. This is the same argument that has been used to set up the NIFC in the first place. How do you counter this argument?

GITHONGO – Interesting observation. As you said the train has already left the station in a sense. Key is managing all the trees it may knock down as it chugs its way through the forest of our governance institutions.

CHARLES ABUGRE,  regional director of the UN Millenium Challenge, Africa -  Comment: the international actors that might descend on Nairobi are not just banks. They will be accounting firms, law firms, all sorts brokerage entities angling to provide secrecy services. The attraction of the Qatar model - the hybrid model - is that these secrecy services also apply to local business entities. This may well be an important motivation for the actors steamrolling the IFC idea (in Kenya).  If this is the case, perhaps the biggest domestic impact will be on the revenue side as well as deepening inequalities.

     My point is not that these services will lead to significant employment growth because the experience is that one accounting firm will handle hundreds of deals etc. My point is that perhaps foreign money flowing in alone is not the greatest motivation but the ability to shield local money from public view and taxation -- this may be a big attraction and purpose.

COBHAM - Raymond, John, I agree - but I think it's not our place to take off the table the option of a NIFC that is completely clean. Rather, if GoK considers what scale of impact might be possible if there were no secrecy on offer, the cost-benefit analysis will make their decision against pursuing this idea.

       Charles, the point about a Qatar-type hybrid model is well made - and certainly if there is any success you would expect to see some (largely expat?) employment growth in these professional services. But whether this would be substantial in relation to the economy, if you think that normally financial services agglomerate around existing infrastructure and peer groups, is unclear. GoK should recall just how much investment Qatar put into achieving its - not necessarily very stable - position.

Q – (Unidentified journalist) - In addition to this, the former Kenyan PM was last year quoted as saying Kenya needs to be the next Mauritius because if our economy grows then more people will be lifted out of poverty, and that can’t be done without FDI, so he said. My concern as a journalist is how you reverse the government propaganda (which is now the central narrative) that setting up the NIFC is the best thing for Kenya's economy?

COBHAM - "The next Mauritius..."  I would think Mauritius is increasingly worried about its vulnerability to global transparency moves, and the growing pressure for renegotiation of double tax treaties. At present it benefits from a role as the preferred tax-reducing investment conduit into Africa. If this is lost, there could be major development implications. Seeing it as a model for progress would be foolhardy at best.

BAKER - All of Global Financial Integrity's work is directed toward transparency -- greater transparency in national and global financial systems. No matter how you slice it, this is the opposite of what an OFC is set up to do. The goal, more often than not, is to provide secrecy to the handling of money, and this leads to handling more dirty money than clean money.

GITHONGO - And Mauritius too - is increasingly challenged in this regard.

BAKER - The Isle of Man is a reasonable example of an OFC that has tried to convert itself into simply a place where multiple corporations and parties can come together to enter into agreements for investment elsewhere under a regulatory regime that easily handles such arrangements. Our work in two reports on illicit financial flows affecting Africa clearly demonstrates that the resource exporting countries have by far the largest problems with such flows. The prospect of this accelerating in Kenya, Uganda, Tanzania, and Mozambique is of major concern.

COBHAM - If the current consensus on financial transparency delivers global standards in terms of ownership transparency and automatic exchange of tax information, I think you'd expect the only OFCs that will continue to have meaningful existence to be those that have developed genuine niches with particular skill sets, relevant expertise and so on. It's extremely hard to imagine more than a few of these, and I would suggest impossible to think that a new effort now (NIFC or elsewhere) would have any chance of becoming one. So this looks like the worst possible time to try.

Q – (Unidentified journalist) Question to Raymond and Alex: Given the fact that Kenya and several of her neigbours have recently discovered commercially viable quantities of oil and gas, how exposed is the East African region to losing these new-found resources through IFF? More so with the setting up of the NIFC? (hoping it won’t happen)

COBHAM - Highly. Through the combination of opaque bidding, contracting and ownership; and mispricing of export commodities - see for example 

Q - (From Stella Dawson): Looking for the positive here -- given that Kenya is a relatively stable democracy, well educated and growing middle class and there is mounting global policy pressure toward ending financial secrecy, does it have a unique opportunity to be a well -regulated. model OFC for Africa? Or is it too late?

COBHAM - It's hard to see how you could make this argument hold water. It's potentially true that a new OFC could have first-mover advantage, in that it wouldn't have to dismantle existing secrecy; but as Raymond and others pointed out already, this is clearly not the Kenyan case. The other issue is how you would convince firms to come if you were starting from the disadvantage (in their eyes) of being uncompetitively transparent... hard to see it. 

GITHONGO – It’s never too late, but we have to accept the sun is setting.

Moderator:  Thank you.


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