Kenya tightens rules for forex dealers

By Standard Team

Foreign exchange dealers can resume telegraphic money transfers and third-party cheque transactions, services they have been unable to offer since June last year.

Central Bank of Kenya (CBK) has lifted its ban on the services while publishing new rules to govern forex bureaus. The guidelines, which come into force next month, seek to ensure the bureaus do not engage in money laundering, tax evasion, fraud or even support of terrorist activity. They provide stricter supervision of bureaus and harsher penalties for violations.

The sector’s operators have quickly criticised them as being "too strict" and "likely to stifle development in the industry".

CBK, which is headed by Ms Jecinta Mwatela, the acting governor, says tougher penalties are necessary because some bureaus violated the ban especially in dealing with money transfer.

"The attention of the CBK was drawn to the fact that several forex bureaux had been violating various sections of the guidelines, including dealing in third party cheques and telegraphic transfers without the approval of the Central Bank," says CBK.

Money laundering

A bureau manager, Mr Anthony Mbaavu, confirmed that a number of bureaus had been placed under CBK investigation for money laundering but declined to name them. He said bureaus had operated under very difficult conditions in the last one and half years after the CBK stopped them from transferring money.

"Money transfer was a big activity as we had many customers transferring money to their children in foreign universities," said Mbaavu, a manager at Middle Town Forex Bureau. He said though the CBK had now allowed the transactions, the new rules were very stringent and the licence approval period too long.

Bureaus will only handle telegraphic transfers and bank drafts in amounts below $10,000 (Sh700,000) per transaction. They have been warned against dealing with transactions that appear to have been deliberately split to avoid the requirement of documentation. They are also required to retain crucial information on their clients, a rule industry players say could scare away some clients.

Documentary evidence

Under the guidelines, the bureaus are required to maintain copies of national identity card or passports and ascertain that they have not been tampered with. CBK also wants them to establish and maintain documentary evidence on the bona-fide source, the beneficiary and purpose for all telegraphic transfer transactions.

"We must provide information to the banks as we get to our customers but most of them (banks) do not make these disclosures to us," said Mbaavu.

He says the stringent requirements would strain their relationship with the banks, as they were not facilitating speedy transactions on behalf of their clients.

"In line with know your customer (KYC) requirements, the commercial bank must satisfy that foreign currency transactions involving telegraphic transfers, bank drafts, and personal cheques on behalf of bureaus are supported by appropriate documentation and reported to the CBK as required under the guidelines on foreign exchange transactions," says the CBK.

Enhancing competition

But CBK denies imposing the guidelines on the bureaus, saying its officers had discussed the proposals with the Kenya Forex Bureau Association.

"The Central Bank held discussions with officials from the Kenya Forex Bureau Association and agreed to develop a framework for strengthening the guidelines in general," says CBK.

CBK says the guidelines are meant to provide an opportunity for the sector to realign itself in order to enhance competition in the foreign exchange market.

It would particularly provide a service to a market segment largely excluded from the mainstream-banking sector due to the size and frequency of transactions.

Forex bureaus were established and first licensed in January 1995 to foster competition in the foreign exchange market and to narrow the exchange rate spread in the market. Between 1998 and 2004, the forex market experienced rapid growth, with the number of operating bureaus increasing to 89 in 2004.

According to the guidelines, a bureau is not permitted to act as an authorised dealer in gold, engage in lending money, maintain current accounts on behalf of customers or establish letters of credit or deal in the forward market.

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