Digital lenders are the most vulnerable to abuse by criminal networks, a new survey by the Central Bank of Kenya (CBK) has revealed, citing their limited capacity to enforce sanctions on risky individuals and firms.
The CBK’s Preventive Measures Survey showed that digital credit providers (DCPs) exhibited weaknesses in their staff training and familiarity with Targeted Financial Sanctions (TFS), and few have been conducting enhanced due diligence.
CBK carried out the survey in December 2024, to assess financial institutions’ status of implementing measures to combat money laundering, financing of terrorism and proliferation financing.
The regulator sought to establish financial institutions’ capacity to enforce TFS- a set of measures and actions agreed globally, as a way to prevent the financing of terrorism and proliferation financing- since they restrict access to financial systems by individuals and entities perceived as risky.
The institutions are required to institute measures such as customer due diligence (CDD), enhanced due diligence (EDD), suspicious transaction reports (STRs), staff training and TFS to prevent money laundering, terrorism financing, and proliferation financing.
“DCPs display mixed results. Around 78 percent of staff are at least somewhat familiar with TFS regulations, yet 22 percent have no familiarity at all, underscoring a pressing need for improved training and awareness,” the CBK survey stated.
The survey warned that while 71 percent of the DCPs screen their customers against listed sanctions, less than half (47.5 percent), regularly update the sanction lists and 8.5 percent of the organisations have no measures in place “presenting significant compliance risks”.
The DCPs have also been pointed out for lacking EDD (where only 35 percent conduct).
“Screening is often irregular, with over half doing so only “as needed”. Technology use is uneven, and 48 percent did not recommend any tools, suggesting limited exposure,” the survey said.
The survey notes that among commercial banks, many have developed robust TFS compliance systems relying on automated screening tools and regularly update global sanction lists.
The survey notes that microfinance banks demonstrated a solid compliance foundation, with all of them conducting sanctions screening and three-quarters using automated tools.
The regulator pointed out inconsistent frequency in screening, low adoption of internal audits, and gaps in employee training as the areas where microfinance banks need to improve to enhance their mechanisms to prevent money laundering and terrorism financing.
“Technology upgrades, especially artificial intelligence (AI) tools, are prioritised by 83.3 percent, while 33.3 percent emphasise better staff training,” the survey says.
Other institutions surveyed for their capacity to combat money laundering, terrorism financing, and proliferation financing included money remittance providers (MRPs), foreign exchange bureaus (FXBs), and payment service providers (PSPs).
The survey observed that MRPs exhibit high awareness and comprehensive TFS frameworks with all screening customers and regularly updating sanctions lists and most using automated tools and performing ongoing monitoring.
The survey also notes that FXBs reported a strong familiarity (94 percent) and high implementation of the controls such as customer screening and sanction list updates, though noting that the majority of them only screen customers on a need basis rather than as a regular exercise.
“PSPs have high levels of awareness (83.3 percent) and implement screening (70 percent), list updates, and reporting procedures,” the survey observed, even as it pointed out that screening frequencies among PSPs vary.
The survey observes that overall, financial institutions have gaps in screening frequency, limited use of technology, and staff training to effectively combat money laundering and terrorism financing, calling for automation of processes, use of AI tools, and clearer regulatory coordination.
