Is demonetisation Kenya’s magic wand against financial crime?

2019-08-27

Kenya plans to replace 23-year-old KSh1 000 notes valued at about US$10 to fight financial crime. The demonetisation policy aims to rid Kenya’s economy of what financial experts call ‘black money’. It also targets what the Central Bank of Kenya (CBK) refers to as ‘emerging concerns about illicit financial flows and counterfeit money in the country’.

About US$400 million in fake local and foreign currency has been seized this year, according to media reports. This is double the amount reported seized for all of last year.

The CBK intends to withdraw and replace the notes by 1 October. CBK statistics estimate the value of legal tender in KSh1 000 notes to be about Ksh218 billion (US$2.18bn). This represents 83% of the total value of currency held in shilling banknotes, making the demonetisation bid risky.

Being the banknote of highest value in Kenya, Uganda and Tanzania, the  KSh1 000 note, introduced in 1996, is the preferred denomination for consumers and traders in the region. ‘The Kenyan currency is the regional US dollar,’ CBK governor Patrick Njoroge reportedly said regarding the note’s widespread day-to-day use

An economic crisis looms if the value of old notes that are returned exceeds the expected KSh218bn

The country’s media have been reporting increased seizures of fake notes since last year, raising fears that Nairobi could be turning into a base for transnational counterfeit currencies. Some of the reports on the discovery of counterfeit notes, mostly KSh1 000, link the crime with corruption.

The Proceeds of Crime and Anti-Money Laundering Regulations (2013) require banks to refer to the CBK for vetting customers conducting large cash transactions above KSh5m (around US$50 000). However a local bank executive who requested anonymity says a robust regional money laundering system is in place in Kenya and criminal groups know about the plans to change the currency. Thus large amounts of illicit money could be injected into Kenya’s economy long before the CBK notices.

Andrew Franklin, a security expert based in Nairobi, expresses scepticism about the measures. He told ENACT that not all companies providing financial services, including replacing the currency notes, were regulated by the CBK.

The demonetisation policy aims to rid Kenya’s economy of what financial experts call ‘black money’

The CBK says it has drawn lessons from India’s experience in 2016, when a costly demonetisation policy failed to uncover black money. Economist Sahil Shah told ENACT that the return of over 90% of the withdrawn rupee currency notes after India’s November 2016 demonetisation showed either that the Reserve Bank was wrong about the amount of black money circulating in the country’s economy, or money-laundering networks had outwitted it.

Several scenarios are likely before 1 October. There could be a last-minute rush to replace the demonetised currency. Criminals might launder more illicit money through the informal cash-based economy ahead of the deadline. Little or no old currency might be returned, meaning the policy has succeeded or the bulk of counterfeit money may be held in foreign currency, mainly US dollars.

An economic crisis looms if the value of old notes that are returned exceeds the expected KSh218bn. Like in India, a currency crisis could follow if not enough new banknotes are issued.

Deo Gumba, ENACT Regional Organised Crime Observatory Coordinator – East and Horn of Africa and Mohamed Daghar, Researcher, ENACT project, ISS

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