Posted Sunday, October 17 2010 at 17:47

http://www.nation.co.ke/business/news/How%20financial%20systems%20abet%20dirty%20money/-/1006/1034566/-/11tnliiz/-/

A recent report by the Kenya Police indicated the stark reality: Commercial banks lost a staggering Sh761 million in the first six months of this year through fraud.

A huge chunk of these clandestine activities have been perpetrated through what is popularly referred to as ‘insider-jobs’.

The report recommends that the Central Bank of Kenya and Kenya Bankers Association should organise training to educate bank officials on fraud and put in place measures to curb the crime.

Can training and awareness be a panacea to these ills? Warren Buffet once quipped, “In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.”

My nursery school teacher narrated a story that still remains indelibly etched in my mind. A king in a far-away kingdom was growing old and wanted to choose a successor.

His majesty called all the boys in the kingdom together one day. He said: “It is time for me to call it quits. I therefore need to choose my heir and have decided to choose from one of you.”

The young souls were aghast! The king gave each of the boys a seed and directed them to go home, plant the seed, water it and come back after one year. What the boys didn’t know was all the seeds were boiled and the king was testing their honesty.

One year down the line, the boys came back — all of them but one — with magnificent plants. The king did not have kind words for the ‘exceptional’ sowers. He chose the boy who courageously stood his ground and didn’t opt to ‘cut corners’ to win the coveted prize.

An issue that has lately been hogging the headlines is the controversy surrounding a bank that has been under statutory management due to allegations that it abetted anti-money laundering activities. The outgoing US Ambassador, Michael Ranneberger, articulated his government position on the matter.

Money laundering is largely hedged on the issue of integrity and legitimacy of the money that circulates through the banking system of a nation. The vice is a covert process of disguising an illicit origin and unlawful or immoral nature of funds by moving them indiscernibly and investing them in indisputable businesses, securities, or bank deposits.

Ideally, ‘dirty money’ involves proceeds from activities such as sanctions-busting arms sales, smuggling, trafficking in humans, organised crime, drug trafficking, prostitution, embezzlement, insider trading and bribery, among others.

Contrary to popular belief, money laundering is not a vice unique to Africa. Obviously, most African countries are still lagging behind in terms of implementation of solid and robust anti-money laundering structures, including laws.

But if you still subscribe to that school of thought, sample this: The head of the Vatican Bank, Ettore Gotti Tedeschi, is under investigation due to allegation of the bank’s involvement in money-laundering. What an irony? My point: The integrity of our financial systems is on trial.

Some of the systems are often clogged up with illicit financial transactions at times abetted by some Western governments that shout loudest against the vice.

What is the way forward then? First, institutions need to identify the real ‘land mines’. These are activities highly prone to suspicious activities. The Financial Action Task Force continually monitors and identifies jurisdictions, which are less proactive in the fight against money-laundering.

But simply, institutions must be careful while dealing with Politically Exposed Persons; people suspected to be in illegal drugs, piracy, and other illegal businesses.

Transactions involving wire transfers should always be thoroughly vetted. Indeed, it is a challenge to keep up with the changes in money laundering these days.

Criminal organisations are now adopting new technologies. Institutions must therefore step-up their surveillance efforts to avert likely risks related to money laundering.