The Missing Shot: Disclosure of Beneficial Ownership Information and Anti Money Laundering Legal Framework in Kenya
1.?????Introduction
Creation of shell companies has gained notoriety as a means of facilitating corrupt deals and criminal activities such as money laundering in Kenya. These companies enable the ultimate owners to shield their identity from regulatory scrutiny due to their intricate ownership structures.
In a 2013 Report published by the Centre for Governance and Public Policy[1] on the impact of the global anti-money laundering policy framework, Kenya was labelled as one of the most lenient jurisdictions for the incorporation of shell corporations.[2] Prior to this Report, Kenya had experienced a slew of high-profile public procurement scandals that resulted in the loss of billions of shillings from the public coffers.
The common phenomenon in these scandals has remained the inability to identify the true owners and beneficiaries of the implicated firms. For instance, in the infamous case of Anglo-Leasing and Finance Limited (Anglo Leasing), a major obstacle was prosecuting and convicting the perpetrators of the scandal. In July 2023, nearly two decades after the Anglo Leasing scandal came to light, the accused persons in the scandal were acquitted by the Court of Appeal[3] due to lack of sufficient evidence linking them to the case.
To tackle this issue, the Government of Kenya has continually taken proactive measures against money laundering. One notable move was through introducing disclosure requirements for beneficial ownership (BO) information as set out below.
2.?????Statutory changes on beneficial ownership
2.1.??Statute Law (Miscellaneous Amendments) Act, 2019
On July 5, 2019, the Government enacted the Statute Law (Miscellaneous Amendments) Act, 2019, which made amendments to the Companies Act, 2015, by introducing Section 93A, which requires every company registered in Kenya to prepare and keep a register of its beneficial owners. This provision was introduced with the aim of promoting transparency in the ownership structures of companies in Kenya.
2.2.??Companies (Beneficial Ownership Information) Regulations 2020
In a bid to operationalise Section 93A, the Companies (Beneficial Ownership Information) Regulations 2020 (the “BOI Regulations”) were published on 18th February 2020. The BOI Regulations gave directions on the criteria of identifying a beneficial owner, the information to be included in the beneficial ownership register and the filing requirements.
The enactment of the BOI Regulations and the strict compliance timelines by the Registrar of Companies in 2021 and 2022, led to frantic efforts by companies seeking to file the register of beneficial ownership. However, recent data from the Business Registration Services (BRS) shows only 40 percent of private companies have complied with the beneficial ownership requirements[4].
2.3.??Companies (Beneficial Ownership Information) (Amendment) Regulations, 2022
With a view to expand the scope of beneficial ownership compliance by companies seeking to be procured by Government, through Legal Notice No. 32 of 2022, the Government introduced new regulations on beneficial ownership by publishing the Companies (Beneficial Ownership Information) (Amendment) Regulations, 2022 (the “BOI Amendment Regulations”). ?
The BOI Amendment Regulations require that a company discloses its beneficial ownership to the procuring entity, where the company participates in public procurement and assets disposal and to the contracting authority, in the case of a public private partnership. In addition, every company which has been awarded a tender by a public entity must disclose the beneficial ownership information which shall then be published and be made publicly available by the Public Procurement Regulatory Authority (PPRA). The main objective of the BOI Amendment Regulations was to boost transparency and accountability in public procurement.
3.?????The Missing Shot
Despite the remarkable Government’s efforts in enhancing transparency through the legal reforms outlined above, money laundering and corrupt deals remain a never-ending scourge. The International Monetary Fund (IMF) highlights that the continued slow level of reporting of beneficial ownership information by companies is hampering effective implementation of the legal reforms[5]. This has in turn weakened Kenya’s ability to seek financial support from IMF and other financial institutions which are keen on financial integrity.
Another key misgiving of the beneficial ownership legal framework is the failure of the BO legal framework to include limited liability partnerships and foreign companies which also participate in government tenders. The current legal framework only requires disclosure of beneficial owners by private companies.
Additionally, the failure to impose penalties for non-compliance and the absence of specific timelines for preparing the beneficial ownership register has allowed widespread non-compliance by companies to persist.
The recently published Financial Action Task Force (FATF) Mutual Evaluation Report[6] on Kenya unmasked clear evidence of how legal structures, such as companies or joint ventures, have been misused by both foreign and domestic individuals. This misuse has been fuelled by a lack of information on the ultimate beneficial owners, enabling them to conceal corrupt and criminal activities, including tax evasion, money laundering, and procurement fraud.
In response to these findings, the Government has reiterated its commitment to the fight against money laundering and sealing the existing loopholes by bolstering the legal framework on beneficial ownership through the proposed Anti-Money Laundering and Combatting Terrorism Financing Laws (Amendment) Bill, 2023.
4.?????Will the Anti-Money Laundering Bill be a hit or a miss on beneficial ownership compliance?
On 7th July 2023, the Cabinet approved the Anti-Money Laundering and Combatting Terrorism Financing Laws (Amendment) Bill (the "Bill") and sanctioned its transmittal to Parliament. The Bill was published on 11th July 2023 and is aimed at enhancing the Government’s strides in combating money laundering and enhancing financial integrity.
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The Bill seeks to broaden the scope of money laundering offences, obligate reporting entities to promptly report suspicious activities, and enforce stricter penalties for money laundering and terrorism financing crimes. Furthermore, the Bill reviews the laws on anti-money laundering and prevention of terrorism.
4.1. Beneficial Ownership as envisioned in the Bill
4.1.1. Proposed changes to the Companies Act, 2015
The Bill aims to amend the Companies Act, 2015 to incorporate provisions that require companies to deliver a statement of particulars of beneficial owners to the Registrar of Companies. It also seeks to mandate companies to maintain a register of beneficial owners and align various aspects of the Companies Act with the FATF Standards.
New timelines of filing the register of beneficial ownership: To address the slow compliance by companies, the Bill proposes several corrective measures. It requires a proposed company to submit a copy of its register of beneficial owners during the registration process, while existing companies will have a grace period of sixty (60) days after the Bill becomes law to comply. Existing companies may also apply for an additional thirty (30) days from the Registrar for compliance.
Nominated Directorship & Contact Persons: In Kenya, nominated directors and shareholders can be appointed without disclosing their nominators, which hampers beneficial ownership disclosure and conceals true control. The Bill aims to change this by mandating companies to maintain a register of nominee directors at their registered office and submit a copy to the Registrar within sixty days of enactment.
Appointment of contact persons: The Bill proposes that companies with no company secretary to appoint a contact person, a Kenyan resident, within sixty days of enactment. The contact person will be responsible for keeping records on directorship, shareholding, beneficial ownership, and other required information, providing copies to competent authorities and the Registrar on request. These provisions seek to boost transparency and accountability in Kenya's corporate landscape.
Beneficial owners disclosure in foreign companies: In curing the existing loophole, the Bill extends the beneficial ownership disclosure requirements to foreign companies. It provides that foreign companies must keep and lodge a copy of the register of beneficial ownership with the Registrar, similar to that maintained by private companies.
4.1.2. Proposed changes to the Limited Liability Partnership Act
Impact on Limited Liability Partnerships (LLPs): As highlighted above, LLPs in Kenya are not required to disclose their beneficial ownership information, posing challenges when public entities engage them for consultancy or advisory services. The Bill takes a more comprehensive approach by including LLPs among the entities mandated to maintain and file a register of beneficial owners with the Registrar of LLPs. If the Bill becomes law, proposed LLPs will need to submit a copy of their register of beneficial owners during registration. Existing LLPs would have a 60-day window to file a copy of their register of beneficial owners and must keep the beneficial owner's information for ten years after they cease to be the beneficial owner. Non-compliance penalties would apply similarly to LLPs and their managers as they do to companies and their officers.
Additionally, LLPs will be required to maintain a register of nominee partners and submit it to the Registrar within 60 days from the date of enactment of the Bill. This register must include the names and addresses of both the nominee and nominator, along with the date the nominee became a nominee partner.
Incorporating these measures aims to enhance transparency and accountability in LLPs' operations and promote a more robust anti-corruption and anti-money laundering framework in Kenya.
5.?????Conclusion
By implementing the measures under the Bill, Kenya aims to strengthen its financial regulations, deter illicit activities, and promote transparency in corporate structures, ultimately contributing to a more robust anti-money laundering campaign. This will also place Kenya on the map when it comes to compliance with the FATF standards on anti-money laundering and assist the government in curbing corruption by unmasking the true owners of firms winning government tenders.
It follows therefore that the enactment of the Bill will be a hit towards the right direction in Kenya’s fight against money laundering and corruption.
[1] Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies by Michael Findley, Daniel Nielson, and Jason Sharman, Griffith University Centre for Governance and Public Policy. (https://www.gfintegrity.org/wp-content/uploads/2014/05/Global-Shell-Games-2012.pdf)
[2]ibid
[3] Director of Public Prosecutions v Mwiraria & 6 others (Criminal Application E007 of 2023) [2023] KECA 633 (KLR) (26 May 2023) (Ruling)
[5] https://www.businessdailyafrica.com/bd/economy/unmasking-firms-winning-state-tenders-hits-kenya-imf--4321114
[6] ESAAMLG (2022), Anti-money laundering and counter-terrorist financing measures - Kenya, Second Round Mutual Evaluation Report, ESAAMLG, Dar es Salaam https://www.esaamlg.org/reports/me.php
Authors: Esther Omulele , Sylvia Kimani , Nyambura Waggema