Peter Kihoro Money Laundering.

CHALLENGES FACING FINANCIAL INSTITUTIONS IN COMBATING
MONEY LAUNDERING IN KENYA A CASE STUDY OF KENYAN

WOMEN'S FINANCE TRUST
BY
KIHORO PETER MACHARIA
REG NO B010-03-0038/2014
A Research Project Submitted to the School of Business Management and

Economics, Department of Finance in Partial Fulfillment for the award of
Bachelors of Science Degree in Commerce at Dedan Kimathi University of
Technology
FEBRUARY, 2017
DECLARATION
Declaration by the Student

This project report is my original work and has never been presented for any award in
this or any other University.
Name: KIHORO PETER MACHARIA. Sign… Date:

12/2/2018
REG NO: B010-03-0038/2014
APPROVAL
This research project is been submitted for examination with my approval as
University supervisor.
Dedan Kimathi University of Technology
Department of Finance
Name of Supervisor
Mr. Ngugi Warugongo Sign………………….. Date………………………….
ii
DEDICATION
This research project is dedicated to my brothers Antony Irungu and George Mwangi
for their moral support and encouragement in the course of my study.
iii
ACKNOWLEDGMENT
I wish to give thanks to the Almighty God for giving me the strength, ability, wisdom,
resources and the determination to work on this research project. I would like to thank
the fraternity of Dedan Kimathi University of Technology for giving me the support
and encouragement during the entire research project. I would also like to thank my
supervisor Mr. Ngugi Warugongo for his guidance and advice during the research
project. Lastly, I thank the management of KWFT for granting me an opportunity to
conduct my study at their premises.
iv
ABSTRACT
One of the economic crimes that have adversely affected the level of economic
development in Africa today is money laundering. Money laundering has the
notorious tendency to discourage or frustrate legitimate business enterprise, corrupt
the financial system and ultimately, the socio-political system. Money laundering
diminishes government tax revenue and weakens government control over the
economy and thus undermining the function and integrity of financial systems.
Modern financial systems, in addition to facilitating legitimate commerce, permit
criminals to order the transfer of millions of shillings instantly. Criminals have always
endeavored to conceal the origin of illegally generated funds in order to erase all trace
of their wrongdoings. The specific objectives of the study was to analyze the effects
of institutional framework, lack of trained personnel, bank confidentiality and failure
to know your customers on combating of money laundering in financial institutions in
Kenya. Descriptive research design was adapted in conducting research. The target
population was 132 employees. I used simple stratified random sampling procedure to
select a sample size of 66 respondents. Questionnaires used had open and closed
questionnaires to collect data.
From the findings the study concluded that money laundering has the tendency of
eroding financial institutions and weakening the financial sectors role in economic
growth..
The study recommended ensuring the stability and integrity of the financial system
the financial action task force (FATF) should continue to be implemented in addition
to regulatory and institutional framework under the AML Act, in collaboration with
the Central Bank of Kenya (CBK)
v
TABLE OF CONTENTS
DECLARATION………………………...……............................................................ii
DEDICATION..............................................................................................................iii
ACKNOWLEDGEMENT............................................................................................iv
ABSTRACT...................................................................................................................v
TABLE OF CONTENTS.............................................................................................vi
LIST OF TABLES.....................................................................................................viii
LIST OF FIGURES .....................................................................................................ix
LIST OF ABBREVIATIONS........................................................................................x
CHAPTER ONE
INTRODUCTION OF THE STUDY
1.1 Background of the Study.........................................................................................1
1.2 Statement of the Problem.........................................................................................4
1.3 Objectives of the Study............................................................................................5
1.4 Research Questions..................................................................................................5
1.5 Justification of the Study.........................................................................................6
1.6 Scope and Limitation of the Study...........................................................................6
1.7 Operational Definition of Terms..............................................................................7
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction .............................................................................................................8
2.2 Review of Theoretical Literature ............................................................................8
2.3 Stages of Money Laundering.................................................................................10
2.4 Empirical Review...................................................................................................11
2.5 Research gaps.........................................................................................................18
2.6 Summary of Literature Review..............................................................................18
2.7 Conceptual Framework .........................................................................................19
vi
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction ..........................................................................................................21
3.2 Study Design .........................................................................................................21
3.3 Target Population...................................................................................................21
3.4 Sampling Design....................................................................................................21
3.5 Data Collection Instruments..................................................................................22
3.6 Data Analysis Methods..........................................................................................23
3.7 Ethical Consideration.............................................................................................23
vii
LIST OF ABBREVIATIONS/ ACRONYMS
ML - Money Laundering
AML - Anti Money Laundering - Measures used to combat money laundering.
CBK - Central Bank of Kenya
GOK - Government of Kenya
IMF - International Monetary Fund
KYC - Know Your Customers - Thorough knowledge of own customer.
KWFT- Kenya Women and Finance Trust
FRC - Financial Reporting Centre
viii
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
According to the United Nations Conventions (1988) and (2000) money laundering is
defined as “the conversion or transfer of property, knowing that such property is
derived from any offence or offences or from an act of participation in such offence or
offences, for the purpose of concealing or disguising the illicit origin of the property
or of assisting any person who is involved in the commission of such offence or
offences to evade the legal consequences of his actions”. The "International Guide to
money laundering: Law and Practice" defined it as the criminal process whereby, the
proceeds from crime are hidden and transferred by attempts to integrate them into the
financial system in order to give them the appearance of legitimate funds". It can also
be defined as the various processes or methods by which profits from criminal
activities are disguised as legitimate funds, by concealing their true origin and
ownership, to give the picture that they emanate from legitimate source so as to
permit the criminals further use of the money(Ali, 2013)
According to Imala, (2014) money laundering is the process criminals use to hide,
control invest, and benefit from the proceeds of their criminal activities. Crimes
committed for financial gain tend to produce cash. These crimes include illegal arms
sales, smuggling and the activities of organized crime. Others are drug trafficking,
prostitution rings, embezzlement, insider trading, bribery, tax related economic crimes
and cyber-crime. This poses real problems for criminals because spending large
amount of cash arouses suspicion. Therefore criminals attempt to create a legitimate
background for their money. Consequently, money laundering is a derivative or
second-order financial crime. By this, is meant that for money laundering to take
place, there must be an underlying criminal activity that will generate proceeds which,
when laundered, results in the offence of money laundering. Money laundering is also
often a trans- border crime. Unchecked money laundering has a high potency to
corrupt and sabotage the economic policies of governments as well as threaten
national and international security leading to unpleasant consequences such as,
undermining initiatives and efforts to establish and strengthen market-based
economies, discouraging foreign private investments, contaminating the financial
system and making it vulnerable to failure, facilitating tax evasion and denying
1
governments of substantial revenues, exposing governments and financial institutions
reputation risks, threatening national and international security and free movement of
persons and creating unhealthy volatility in banks' deposits.
One of the economic crimes that have adversely affected the level of economic
development in Africa today is money laundering. Not only has it negatively
impacted on the economies of African countries, but it has also seriously dented the
image of the continent at the international arena. Indeed, it is the international aspect
and adverse effect on international business and commerce that has galvanized
national and international action to regulate it, (Mclean, 1990). Money laundering has
the notorious tendency to discourage or frustrate legitimate business enterprise,
corrupt the financial system and ultimately, the socio-political system. It is the
consequence of such activities that has negatively affected the level of direct foreign
investment in a number of African countries, Kenya included. The effect of this crime
is so devastating that certain business transactions are now on a gradual decline
particularly in those areas where local businessmen do not have the necessary
resources to meet the required investment profile. Money laundering diminishes
government tax revenue and weakens government control over the economy and thus
undermining the function and integrity of financial systems, (Bartlett, 2012).
Us reports has named Kenya among countries classified as money laundering

hotspots, the report by the bureau for international narcotics control and law
enforcement affairs on international control strategy named Kenya among those
countries whose financial institutions engage in currency transactions involving
significant amounts international narcotics trafficking. The report covering 2016 says
laundering occurs in the formal and informal sectors and derives from both domestic
and foreign criminal operations including transactional organized crimes, cybercrime,
corruption, smuggling, trade invoices manipulation, illicit trade in drugs, counterfeit
goods, trade in illegal timber and charcoal, and wildlife trafficking. Mobile banking
providers such as M-shwari and M-pesa has disrupted traditional financial systems in
many ways in which conventional banks could only dream of. Though this mobile
banking are also vulnerable to money laundering activities, according to the
report.Kenya’s proximity to Somalia makes it an attractive location for laundering of
certain piracy related proceeds. There is a black market for smuggled and grey
2
markets goods in Kenya which serves as a transit country for the region. The report
says the tracking and investigation of suspicious transactions within mobile payment
and banking system remains difficult (CyrusOmbati 6th March, 2015)
The problem brought about by money laundering is that it disguises the source of
money or assets obtained from criminal activities. Money laundering can vary in
complexity, it involves three stages placement, layering and integration. First the
illegitimate funds are furtively introduced into the legitimate financial system. Then
the money is moved around to create confusion through transferring into numerous
accounts and it is integrated into the financial institutions through additional
transactions until the dirty money appears clean. Following the fall of Dubai bank,
Imperial bank and chase bank three months after it collapsed it raised fears that have
led to Several banks been under investigations, this happened despite the country
having too many global standards of anti money laundering and counter terrorism
financing regulatory and legal regime (Gili, 2014)
1.1.1 Kenyan Women's Finance Trust (KWFT)

The goal of the Kenyan Women's Finance Trust (KWFT) program is to promote the
access of economically active low-income women to sustainable financial and non-
financial services to enable them to improve the economic and social status of their
households. Since 2004, KWFT has grown into one of the biggest NGO-based
microfinance operators in Africa. In Kenya, it is by far the largest microfinance
institution (MFI). Its membership today exceeds US$220,000, representing a growth
of 173 per cent over the program period and exceeding the target by 138,000
members. The outstanding portfolio has increased by 297 per cent to just over US$79
million, which is nearly four times the target of US$20 million. Client savings
collected through the commercial banks have also increased by 284 per cent to more
than US$29 million. Looking ahead, KWFT plans to expand into two new regions in
the coming years. It aims to reach about 1,464,000 members by 2020, with an
outstanding portfolio expanding to about US$331,635,000 from the current
U$79,454,000. This would require a growth in the number of KWFT staff from the
current level of 916 to about 2,400.KWFT transforming into a deposit-taking financial
institution, offering projected client savings accounts of up to US$264,019,000 by
2020, thereby reducing the overheads created by using other commercial banks and
passing on the savings to the beneficiaries in the form of cheaper loans.
3
1.2 Statement of the Problem
According to the IMF (2010), money laundering averages between $725 billion (Kshs
56.5 trillion) and $ 1.8 trillion (Kshsl40.4 trillion) worldwide. This is the case because
only a limited number of countries have set up anti money laundering regimes that are
up and running and therefore able to provide appropriate statistics. Despite the
enactment of AML laws designed to curb crime and acts of crime, these evils still take
place and are in most cases on the increase. In order for the government to protect
their respective financial systems from the destabilizing effects of money laundering,
it is imperative that they act and respond to this scourge with unprecedented resolve
and commitment to combating it. To combat money laundering activities, commercial
banks have been given a greater role by Anti- Money Laundering legislations (Dan,
2009). The financial services industry provides an important means through which
‘dirty money’ can be laundered. New technologies such as the internet offer speed and
anonymity, potentially providing distance between launderer and law enforcement.
This research project highlighted some of the underlining challenges that KWFT is
facing as it looks for ways of stemming the crime. There are local research studies and
literature that have been done in Kenya on money laundering, Kegoro, (2002) did a
study on money laundering patterns in Kenya to find out the nature and extent of
money laundering in Kenya. His studies found out that Kenya’s strategic location was
relatively well developed sea and air transport infrastructure aided with informal
economy and lax law enforcement environment made Kenya excellent money
laundering destination. He associated money laundering with crimes as corruption,
fraud, and drug trafficking. Unpublished academic research studies done in University
of Nairobi by 3 MBA students on money laundering includes; Mbwayo, (2005)
researched on ,The Strategies applied by commercial Banks in Kenya in anti-money
laundering compliance programs. He observed various measures have been put in
place by Kenyan Banks in joint forces with the regulator to fight against money
laundering this includes passing of laws and enacting of various prudential guidelines
to try and control and possible avoid the country' from being a centre of money
laundering. His studies did not cover the role that CBK plays and the challenges it
faces as a regulator in the industry. This research was intended to contribute to the
devastating consequences of money laundering and terrorism financing on
development growth and political stability, the challenges facing the financial
4
institutions in combating money laundering in the country and determine how the
banks is dealing with this challenges.
1.3 Objectives of the Study

1.3.1 Broad Objective
The broad objective of this study was to establish the challenges facing financial
institutions in combating money laundering in Kenya
1.3.2 Specific Objectives
i. To analyze the impact of institutional framework on the financial institutions in

combating money laundering in Kenya.
ii. To assess the impact of lack of trained personnel on the financial institutions in
combating money laundering in Kenya
iii. To establish the impact of bank confidentiality affect the financial institutions
in combating money laundering in Kenya
iv. To investigate how failure to know your customers affect the financial
institutions in combating money laundering
1.4 Research Questions

i. What was the impact of institutional framework on the financial institutions in
combating money laundering in Kenya?
ii. What was the impact of lack of trained personnel on the financial institutions in
iii. To what extent did bank confidentiality affect the financial institutions in
iv. Did failure to know your customers affect the financial institutions in combating
money laundering in Kenya?
5
1.5 Justification of the Study
The findings of this study were to enable the KWFT to come up with
recommendations to ensure that financial institutions adhere to anti-money laundering
regulations. In doing so, it will help to reduce incidences of money laundering in
financial institutions.
On the other hand financial institutions will also use these findings to improve the
state of adherence to anti-money laundering regulations. Basically the findings of this
research study will be made available to the CBK as the in charge of the financial
institutions, so as to help them mitigate issues related to money laundering in their
operations as well as improving their adherence to anti-money laundering regulations.
Findings of the study will also serve as a stepping stone to researchers to conduct
further studies on the same or similar topics. Specifically, findings of the study will
pave the way for further studies on anti-money laundering regulations.
1.6 Scope and Limitations of the Study

The study was restricted to the challenges facing financial institutions in combating
money laundering in Kenya with a case study of KWFT. A limitation of the current
study was small, non-probability sample of convenience. Due to financial constraints,
the study was under-powered, and thus, may not have reached statistical significance.
The size, convenience, and homogeneity of the sample were limited by the
generalibility of the study.
6
1.7 Definition of Terms
Institutional framework refers to a set of formal organizational structures, rules

and informal norms for service provision. Such
a framework is the precondition for the successful
implementation of other sanitation and water
management intervention tools and therefore needs to
be considered in particular.
Personnel training is the process of orienting and educating employees in

the workplace. In many cases, this form of training is
associated with entry-level education that helps to
prepare new employees for the work they will do
Bank confidentiality is a legal requirement in some jurisdictions which

prohibits banks providing to authorities personal and
account information about their customers, except in
certain conditions, such as if a criminal complaint has
been filed.
Money laundering is the generic term used to describe the process by

which criminals disguise the original ownership and
control of the proceeds of criminal conduct by making
such proceeds appear to have derived from a legitimate
source.
7
CHAPTER TWO
LITERATURE REVIEW AND THEORITICAL FRAMEWORK
2.1 Introduction
This chapter presented the literature related to the study. The focus was based on the
research objectives. Theoretical and literature review on corporate performance of
Saccos are highlighted at end of the chapter.
2.2 Theoretical Review

Measuring the size and development of organized crime and/or money laundering is
done by a few researchers, only. One of the most well-known economists doing
macro estimates of the size and development of money laundering is John Walker
(2007, 2004 and 2014). His model of global money laundering was based on standard
economic theory, in which he tries to develop an international input-output-model.
The Walker model relies on estimates of the extent of various different types of
crimes in single countries around the world, estimates of the proceeds resulting from
these crimes and the probability of those proceeds being laundered. Walker
determines the laundering pathways by an “attractiveness index”, which is based on a
range of factors that express the opportunities and risks presented by the financial
sectors/institutions in each country. He claims that his approach to quantify money
laundering is arguably superior to those based on analysis of financial transactions,
since there is no potential for the double counting inherent in the layering and
placement stages of money laundering processes. The model defines the types of data
and analyses the need to be generated in order to effectively model global
transnational crime and money laundering
Walker (2007) concludes that since 2000 global money laundering may account for as
much as US$ 3 trillion p.a. and that business fraud exceeds illicit drugs as a source of
laundered money. He argues that attacking the economics of crime can be an effective
transnational crime prevention strategy and that economists can play a valuable role in
monitoring and combating transnational crime and money laundering. Peter Reuter
(2007, 1983), who is quite critical to the findings of John Walker, comes to the major
conclusion that neither on the national nor on the global level, credible estimates are
available (Reuter, 2013).
8
He justifies his conclusion as follows: First, these aggregate findings conceal as much
as they reveal. Second, the anti-money laundering control regime has been
constructed not so much to reduce money laundering as to namely reduce income
producing crimes, increase the integrity of the financial system and control corruption
and terrorist financing. From this, he concludes that the volume of money laundry is
more of a scientific interest than a useful outcome for counter measures. Moreover, he
comes to the result that estimates of the underground economy are inherently weak in
their own terms and even weaker as estimates of the volume of money laundry
because so little is known about what share of proceeds, either legitimate or
illegitimate, are processed in ways that are designed to conceal the origin (Imala,
2014)
On the other hand, Brigitte Unger (2007, 2006), quite strongly defends the research of
John Walker, arguing that since the pioneer study of Walker (1994),it is possible to
create a framework to measure money laundering per country and worldwide.
Furthermore, she argues that Walker’s model is a positive example for
interdisciplinary work of criminology and economics. In her own work, Unger tries to
justify the Walker model and tries to give a theoretical underpinning of the Walker
model by using Tinbergen’s old gravity model. The gravity model principally says
that the export flows from country i to country j depend on the GDP of both exporting
and importing countries and the distance between them. She applies this approach to
the Walker model; i.e. using the modern gravity approach, in which the attractiveness
to launder money depends among other factors on the bank secrecy in countries, the
government attitude against corruption and crime, etc. She admits that this model
needs a better micro foundation, but she clearly argues that the original Tinbergen’s
ad-hoc formula was later on progressively micro-founded. Hence, Brigitte Unger
provides a first theoretical basis of the Walker model applies it and shows that she can
reach plausible estimates of money laundering and organized crime.
Unger (Unger et al. (2014)) estimates the amount of money laundering in the
Netherlands from 18 to 25 billion Euro (year 2004/05), which is approximately 5% of
the Dutch GDP. The report of Unger et al.(2006) presents a list of 25 effects of money
laundering on society, which are both positive and negative and have an effect in both
the short and long term. This list includes effects on crime rates, economic growth,
imports, exports, statistics, terrorism, the solvability and liquidity of the financial
9
sector. Unger et al. come to the conclusion, after identifying all effects and reviewing
the literature, that most literature on money laundering effects are pure speculation
and furthermore, one source refers to the other sources, without much empirical solid
backup.
2.3 Stages of Money Laundering
2.3.1 Placement
This is the initial entry point into the financial system of funds derived from criminal
activities. The proceeds generated from criminal activities are placed into the financial
system, or invested into real estate and movables. This may include the use of "front’
businesses such as hotels, cinemas or casinos that may reasonably claim to do
business in cash. It may also involve the use of ‘smurfing’ techniques, through which
launderers make numerous deposits of amounts of money that are small enough to
avoid raising suspicion or triggering reporting mechanisms. The main goal is the
lodgment of such proceeds into legal financial flows or their transfer outside the
country. In this phase, the launderers must expose their earnings, which is crucial for
the easier detection of dirty money (Holder, 2016). This is the most dangerous phase
for criminals regardless of whether their money appears in cash or not
2.3.2 Layering
This is the creation of complex networks of transactions to obscure the link between
the initial entry point and the end of the laundering cycle. Layering often uses
complex corporate structures and trusts, perhaps involving a number of jurisdictions,
and is, therefore, a stage of the process which requires particular vigilance. It is more
difficult to detect layering as the inter-company transfers may be disguised to lend the
transactions an air of commercial reality and probity. The final goal of such money
transfers is the dispersal of money and earnings and the laying of as many paper-trails
as possible to confuse ongoing supervision or future investigations and finally, the
making of an artificial origin or source of money,( Lilley,2010).
2.3.3 Integration
After layering, integration schemes place the illicit proceeds back into the economy,
making them appear to be genuine and bona fide business funds. The money
laundering process never stops. Yet regardless how many phases dirty money passed
10
through and how many forms it takes, such proceeds will never be legal in the sense
of the law, (Claessens, 2000). Corruption plays a potential role at every stage of the
money laundering cycle, but has its greatest opportunity at the placement stage. As
the placement stage usually involves face-to-face contact with financial institutions
(who are required to verify the identity of the customer and carry out a certain
measure of due diligence of the customer), there is increased risk of detection of
criminality
2.4 Empirical Literature Review
2.4.1 Institutional Framework

In 1989, the Group of Seven Industrial Democracies (G-7) created a global money-
laundering watchdog organization called the Financial Action Task Force (FATF),
with an Organization of Economic Cooperation and Development (OECD) Secretariat
in Paris. In 1990, the FATF issued its first annual report, containing its now-famous
FATF 40 Recommendations on actions for governments to take to combat money
laundering. These 40 recommendations fell into three categories: Legal: What law-
making bodies need to do create an overall legal framework to combat money
laundering For example, the first legal recommendation was that governments
criminalize money laundering in its own right, and not merely in connection with drug
trafficking (FATF, 2001).
Mbwayo (2014) wrote a paper on the strategies applied by commercial banks in

Kenya in institutional money laundering programs. Mbwayo (2014) found out that
“As anti-money laundering measures are implemented in financial institutions, the
risk of detection becomes greater for those seeking to use the banking system for
laundering criminal proceeds. Increasingly, money launderers seek out the advice or
services of specialized professionals to help facilitate their financial operations.
Solicitors and accountants…provide advice to individuals and businesses in such
matters as investment, company formation, trusts and other legal arrangements, as
well as optimism of tax situation. Additionally, legal professionals prepare and, as
appropriate, file necessary paperwork for the setting up of corporate vehicles or other
legal arrangements.
11
The legal, institutional and policy framework needed to address cases of bank
insolvency during periods of systemic instability or systemic crisis is, in many ways,
qualitatively different from the framework for periods of financial stability. As it is
not possible to predict when systemic instability may occur, the framework for
systemic crises will generally draw on the framework in place during stable periods. It
must include a flexible policy response that aims at protecting the payment system,
limiting the loss of depositor and creditor confidence, and restoring solvency,
liquidity and stability to the banking system. While the current financial market
turmoil is still unfolding, and the outcome of crisis response measures remains to be
seen, many lessons can be drawn from previous systemic crises. This study explores
relevant issues while recognizing that practices in this area are evolving (Mclean,
2013)
Controls used by banks to prevent and detect money laundering have received a lot of
attention from regulators worldwide in 2013.A report released this year by the UK
Financial Conduct Authority found that policies, procedures and controls to combat
money laundering were generally weak at 17 banks it studied. Fitch Ratings warned in
April that a number of highly visible enforcement actions of anti-money-laundering
(AML) laws by US regulators pointed to growing costs of compliance and increased
risks of significant fines. Anti-money-laundering laws and regulations target activities
that include market manipulation, trade of illegal goods, corruption of public funds
and tax evasion, as well as the activities that aim to conceal these deeds. Money that's
obtained illegally through actions such as drug trafficking needs to be cleaned. To do
so, the money launder runs it through a series of steps to make it appear like it was
earned legally. Once there's a record to show how the money was earned, the
criminals hope it will not arouse suspicion. One of the most common ways to launder
money is to run it through a legitimate cash-based business owned by the criminal
organization. Money launderers may also sneak cash into foreign countries for
deposit, deposit it in smaller increments or buy other cash instruments. Launderers
often want to invest, and brokers will occasionally break rules to earn larger
commissions (Koskei, 2013)
Institutional money laundering investigations center on parsing financial records for

inconsistencies or suspicious activity, and these financial records often tie perpetrators
12
to criminal activity. In today's regulatory environment, extensive records are kept on
just about every significant financial transaction. Therefore, when trying to uncover
the identity of a criminal, few methods are more effective than locating records of
financial transactions in which he or she was involved. Terrorists, organized criminals
and drug smugglers rely extensively on money laundering to maintain cash flow for
their illegal activities. Taking away a criminal's ability to launder money hampers the
criminal operation by shutting off cash flow. Therefore, fighting money laundering is
a highly effective way to reduce overall crime. In cases of robbery, embezzlement or
larceny, the funds or property uncovered during money-laundering investigations
frequently are able to be returned to the victims of the crime. For example, when
money that was laundered to cover up embezzlement is discovered, it can usually be
traced back to the source of the embezzlement. While this does not nullify the original
crime, it can put the money in question back in the proper hands and part it from the
perpetrator(Ali, 2013)
Weak institutional framework, especially weak corporate governance regime is an

important threat to combat money laundering in developing countries. Bartlett (2002)
argued that there is a strong correspondence between anti-money-laundering policies
and financial good-governance rules. The agency conflict between the managers and
the shareholders, leads to moral hazard behavior by the managers. Such behavior may
sometime patronize / encourage money laundering activities to generate higher free
cash flow for the managers‟ self-interest. Therefore, unless the managers are rightly
compensated by the owners or are ethically motivated, the success of AML
mechanism will remain in questions(Cooper, 2013).
2.4.2 Lack of trained personnel
Employees training play an important role as it enhances efficiency of an organization

and helps employees to boost their performance in an efficient manner. There are
many reasons that create the barriers to perform the task such as organization culture
and politics. Some of the employees have lack of skills, abilities, knowledge and
competencies due to this they are failed to accomplish task on timely basis (Zuhair
Abbas 2014) now a day’s several trainings is obtainable to employees inside the
organization, in order to increase their productivity and decrease the frustration. Most
13
of the time the less capable employees prefer to leave the job because they have lack
of ability to understand the technicalities of the given task (Bouris 2007).
However, workforce is anticipated to learning new stuff and shows their commitment
level with positive involvement in organizational success. Skilled employees can
handle the critical situation in a well-organized manner. Training defined as an
“efficient process of getting knowledge, abilities, skills and the behavior to meet the
requirements of the job” (Gomez-Mejia 2207). Training helps employees to meet their
existing job requirements or helps employees to increase their productivity. Although,
its benefits may spread throughout an employee’s career and help employees to meet
their future responsibilities. Organization that doesn’t provides training to their
employees is failed to compete in the market. It generally happens because the
employees of such organizations are incapable of enhancing their productivity. In
other words, training helps employees to adopt the market chances and make them
capable to meet the technology changes and competition (Dessler 2002). Training has
important role in the achievement of organizational goal by integrating the interest of
organization and the workforce. An employee is the assets and most important
resource for an organizations so those organizations who provides training to their
employees increases their productivity (Stone ,2012).
The impact of training is double. From an organization point view, training of

employees are essential for organization operations and advancement. From an
employee point of view training activities is important for skills and development,
employee performance and career advancement (Acton & Golden 2002). There are
many factors that influencing the quantity and quality of training activities like
internal change, change in the external environment, the availability of skills in
employees etc. (Cole 2002). Training enhances knowledge, skills, competencies and
attributes ultimately increase worker performance and productivity of organization.
Today’s education systems, do not essentially impart knowledge for job positions in
organizations. Due to this organizations labor force comprises of few employees with
right skills, abilities and knowledge required to fill the job position in the market. So
there is a requirement for effective training for employees to improve their
organization productivity and performance. In the banking sector employee skills and
knowledge are important assets that enhance productivity and performance. This is
because, bank is a service industry, the services that bank is provided are delivered
14
into its employees and the services are consumed by its customers at the same time.
The bank employees stand for services and represent to the customer the quality and
value of the banks service (Aryee 2009).
In Kenya Wachira (2013) linked employee training and development activities to

business growth in Barclays Bank. She posits that training and development activities
have been used by the bank to ensure that it had well-grounded staff to support the
growth agenda and as a result, many of her employees got opportunities to take on
higher 4 responsibilities as well as being able to in achieving the best in all areas of
their professional and personal lives. This was supported by a study by Otuko, Chege
and Douglas (2013) looking at the effect of training dimensions on employee’s work
performance with a focus on Mumias Sugar Company. The study indicated that there
was a positive and significant effect between training needs assessment; training
contents and employee performance in Mumias Sugar Company Limited.
2.4.3 Banks’ confidentiality requirements

According to (Aufhauser, 2013), bank operations are governed by confidentiality
rules and thus they are exposed to the risk of lawsuits and of loss of trust if they
breach confidentiality by reporting customers, whose identity is then revealed.
Bankers argue that banking is first and foremost a business and that anti-money
laundering measures sometimes scare off potential or existing customers. This is a
short-term problem for the banks, though reputable banks are willing to take this risk
as they believe there will be long-term benefits for their efforts. According to (Ali,
2003) some banks have trained their staff in how to use anti money laundering
policies and rules but without revealing what they are aimed at because they fear the
staff may not use them or that they may scare off customers. In sum, in some
instances banks are suspicious of certain kinds of activities but may fail to enforce
appropriate measures because they fear to lose their customers. There is a need to
review confidentiality laws in Kenya with a view to removing any confidentiality
impediments or giving legal protection to banks who breach confidentiality as part of
implementing anti- money laundering policy.
Bank secrecy (or bank privacy) is a legal requirement in some jurisdictions which

prohibits banks providing to authorities personal and account information about their
customers, except in certain conditions, such as if a criminal complaint has been
15
filed. In some cases, additional privacy is provided to beneficial owners through the
use of numbered bank accounts or in other ways. Bank secrecy is prevalent in certain
countries such as Switzerland, Lebanon, Singapore and Luxembourg, as well as
offshore banks and other tax havens under voluntary or statutory privacy provisions.
Numbered bank accounts were first created in Switzerland by the Swiss Banking Act
of 1934, where the principle of bank secrecy continues to be considered one of the
main aspects of private banking. Switzerland has also been accused by NGOs and
governments of being one of the main instruments of the underground
economy and organized crime, in particular following the class action suit against the
Vatican Bank in the 1990s, the Clear stream scandal and the terrorist attacks
of September 11, 2001. Former bank employees from banks in Switzerland
(UBS, Julius Baer) and Liechtenstein (LGT Group) have testified that their former
institutions helped clients evade billions of dollars in taxes by routing money through
offshore havens in the Caribbean and Switzerland. One of these, Rudolf M. Elmer,
wrote, "It is a global problem...Offshore tax evasion is the biggest theft among
societies and neighbor states in this world." The Swiss Parliament ratified on June 17,
2010 an agreement between the Swiss and the United States governments allowing
UBS to transmit to the US authority’s information concerning 4,450 American clients
of UBS suspected of tax evasion(Holder, 2016)
Proceeds of Crime and Anti-Money Laundering (AML) law aims to enable the
identification, tracing, freezing as well as seizure and confiscation of proceeds of
crime. The AML Law seeks to establish a Financial Reporting Centre (FRC) and
Assets Recovery Agency, to criminalize money laundering and further require
reporting institutions to take measures to help combat money laundering. The Act has
further ensured Kenya’s compliance with anti-money laundering standards set by the
Financial Action Task Force on Money Laundering (FATF, 2003) an
intergovernmental body that promotes policies to combat money laundering and
terrorist financing globally. The law’s enactment is being lauded as a positive move
by players in the country’s banking and financial services sector, who see it as a key
step in the country’s fight against money laundering in the country and region. As
banks improved their controls for preventing, detecting and reporting money
laundering, however, and as law enforcement has made similar strides, criminals have
16
learned to diversify their operations and to expand into other financial institutions or
conduits of financial activity (Mutheu, 2008).
2.4.4 Failure to Know Your Customers - KYC
Some financial institutions, especially those that are not commercial bank, cannot
know their customers because they operate without accounts. In most cases they
conduct once-off transactions. The financial institutions most attested by this include
forex bureaus, where transactions take place at the counter and no record or identity
of the customer is kept. Cash receipts are issued, which are used by the officers in the
Research Department to assess foreign exchange flow. The postal and courier services
also have a similar problem. Combating money laundering and terrorism funding
starts with identification. When prospective customers apply for a new account, KYC
teams check the applicants’ identification information, whether the applicant is an
individual or an entity. KYC teams also assess individual transactions, when needed.
When applicants move money to or from another institution, the teams investigate the
sending or receiving institution. They investigate its reputation for strict AML/CTF
enforcement or, if it is in another country, even the country’s commitment to
AML/CTF. Customer relationships with institutions that have questionable practices
are a red flag of possible money laundering or terrorism funding involvement and will
trigger more intensive investigations and higher risk ratings(Mclean, 2010)
They check whether the identification information legitimate. They investigate

whether the applicant is truly the person described in the identification information,
and not someone using a stolen identify. Verifying that applicants’ identification is
true and complete keeps money launderers and terrorism funders from using bank
financial networks under false identity.KYC/CDD teams investigate also whether the
applicant is the beneficial owner (the one who actually owns and benefits from the
account), or someone acting as a third-party representative of someone else. If the
applicant is only a third-party representative, The KYC/CDD team must do a
thorough investigation of both the applicant and the beneficial owner. All of this
further protects the bank from money launderers or terrorist funders hiding their
account involvement behind someone else. Once all identification is verified,
KYC/CDD teams move on to the next level of scrutiny. They check watch lists for
money laundering or terrorist activity to make sure applicants do not appear on them.
17
Beyond the applicants themselves, KYC/CDD teams investigate whether applicants
have connections to any known money launderers or terrorists. They perform rigorous
background checks, searching for any suspicious activities; suspicious relationships or
contact with countries that are under sanction, all signs that could point to money
laundering or terrorism involvement (Douglas, 2014).
2.5 Research Gap

This chapter reviewed literature on the work of past scholars in the area of anti-money
laundering and its effects on an economy. It reviewed the theories that the study is
grounded including the agency theories. The study used theory of crying wolf,
Transparency-Stable Theory and the Economic Theory. Bartlett (2002) argued that
Money Laundering facilitates illicit capital flight from developing economies and that
financial institutions in the developing countries could be eroded through three main
means: the possibility that individual customers could be defrauded by corrupt staff of
the institutions; by increasing probability that the institution itself could be corrupted
and controlled by criminal interest and thirdly the institution itself been defrauded.
Mutheu (2008) observed that law’s enactment is being lauded as a positive move by
players in the country’s banking and financial services sector, who see it as a key step
in the country’s fight against money laundering in the country and region. Mbwayo
(2004) did a study on the strategies applied by commercial banks in Kenya in anti-
money laundering compliance programs whereby he found out that as anti-money
laundering measures are implemented in financial institutions, the risk of detection
becomes greater for those seeking to use the banking system for laundering criminal
proceeds. Increasingly, money launderers seek out the advice or services of
specialized professionals to help facilitate their financial operations. No study has
been done on of anti-money laundering regulation implementation on the financial
performance of commercial banks in Kenya. Therefore, this study sought to fill the
gap by investigating the effects of anti-money laundering regulation implementation
on the financial performance of commercial banks in Kenya
2.6 Summary of Literature Review

This chapter reviewed literature on the work of past scholars in the area in challenges
of combating money laundering. It reviewed the theories that the study is grounded
including the agency theories. The study used theory of crying wolf, Transparency-
18
Stable Theory and the Economic Theory. Bartlett (2002) argued that Money
Laundering facilitates illicit capital flight from developing economies and that
financial institutions in the developing countries could be eroded through three main
means: the possibility that individual customers could be defrauded by corrupt staff of
the institutions; by increasing probability that the institution itself could be corrupted
and controlled by criminal interest and thirdly the institution itself been defrauded.
Mutheu (2008) observed that law’s enactment is being lauded as a positive move by
players in the country’s banking and financial services sector, who see it as a key step
in the country’s fight against money laundering in the country and region.
2.7Conceptual Framework
Figure 2.1 Conceptual Framework
Independent Variables Dependent Variable
Institution framework
Lack of trained
personnel Combating money
laundering in financial
Bank confidentiality institutions in Kenya
Failure to know your

customers
The study of Conceptual Framework tried to simplify the conceptualization of the

study that presented key issues expected to be dealt with in the study. Therefore, in
the context, the study mainly looked at Money Laundering challenges in KWFT bank.
Key and guidelines dealt with money laundering was identified and analyzed. They
were then compared with the practices on the ground to check the gaps between the
ideal and the real practices. Equally important, the study reviewed how banking
official conceptualize and define ML as a concept and phenomenon. Their
conceptualizations and definitions were compared with the existing definitions and
conceptualizations in the literature, and sought to see whether those gaps and their
possible effects dealt with the phenomenon. The whole analysis was expected to bring
out the weakness and strengths across ML definitions and conceptualization by
19
banking officials as well as the existing Acts, policies and practices to the real
practices. As indicated, this study is expected to advance effective and strong
suggestions on how to improve the issue studied.
.
20
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction
This chapter provided a systematic description of the research methodology that was
used to answer questions, described in chapter one of the research study. The
methodology used in the research study included: research design, target population,
sampling design and data collection and analysis procedures.
3.2 Research Design

This research used descriptive design to establish the factors hindering provision of
effective quality service in public institutions. According to Kombo and Tromp
(2006), a descriptive design is a description of the state of affairs as it exists.
Descriptive studies are not only restricted to fact findings but may often result in the
formation of important principal of knowledge and solution to significant problem.
Descriptive research design is a method of collecting information by interviewing or
administering a questionnaire to sample of individuals.
3.3 Target Population

According to Kombo and Tromp (2006), Target population is a group of individual’s
objects or items from which samples are taken for measurement or it is an entire
group of persons or elements that have at least one thing in common. The target
population was the total number of individuals in a group that I worked with. This
study targeted 132 employees of KWFT from which it’s comprised of top, middle and
support levels of management.
3.4 Sample Design and Procedure

A sample is a finite part of a statistical population whose properties are studied to gain
information about the whole research. I used stratified random sampling procedure to
select a sample that represented the entire population. These procedures best suited
the research studies, since all the target population had an equal chance of being
selected. Mugenda and Mugenda (2003) Points out stratified sampling method
ensures inclusion of small groups which otherwise could have been omitted entirely
by the other sampling methods. The sample size used was 50% of the target
population in each category.
21
Table 3.2 Sample Size
Categories Target Population Sample Size Percentage
Senior management 2 1 2
Middle management 4 2 3
Support staff 126 63 95
Total 132 66 100
Source Author (2017)
3.5 Data Collection Instrument and Procedure

3.5.1 Questionnaires
I used questionnaires as the main data of collecting instruments. The selection of this
tool was guided by the nature of data that I aimed to collect, time available and
objectives of the study. This consisted both structured and unstructured questionnaires
to avoid being too rigid and to quantify the data especially where structured items will
be used. This method helped me to collect reliable information. The study was mainly
concerned with views, opinions, perception, and attitudes. Such information was
collected through the use of a questionnaire, which was cheap, easy to administer and
collect in-depth information which was important in the study (Oso, 2005).
3.5.2 Validity and Reliability of Research Instruments

Kothari (2004), states that validity is the accuracy and meaningfulness of inferences
which are based on the research results. It is the degree through which results
obtained from the analysis of data represent the phenomenon under study while
reliability is a measure of the degree to which a research instrument yields consistent
results after repeated trials. It involves administering the same instrument a number of
times to the same group of subject. I obtained authority from relevant departmental
sections of the organization to circulate questionnaires. To ensure reliability and
validity, questionnaires were pre- tested on eighteen respondents. These respondents
were not included in the final study.
3.5.3 Administration of Questionnaires

I circulated the Questionnaires by hand-delivery and collected them after two days.
The type of questions I used included both open and closed ended. Closed ended
questions were used to ensure that the given answers are relevant. I phrased the
22
questions clearly in order to make clear dimensions along which respondents were
analyzed. In open ended questions, space was provided for relevant explanation by the
respondents, thus gave them freedom to express their feelings. This method was
effective to the study in that; it created confidentiality. My presence was not required
as the questionnaire were self-explanatory.
3.6 Data Analysis Methods

According to Kothari (2004), data analysis procedure includes the process of
packaging the collected information putting in order and structuring its main
components in a way that findings can be easily and effectively communicated. After
the fieldwork, before analysis, all questionnaires were adequately checked for
reliability and verification. Editing, coding and tabulation were carried out. The data
collected was analyzed using simple qualitative and quantitative methods.
3.7 Ethical Consideration

Shukla (2008) ethics relate to the moral choices affecting decisions, standards and
behavior and in research it has become difficult to lay down clear ground rules which
can cover all possible moral choices. According to House (1993) ethical principles are
abstract and it is not always obvious how they should be applied in given situations.
However, there are basic grounds of ethics relating to social research which the study
applied during the study as discussed in the subsequent section. I assured respondents
on the privacy of the information they provided by not divulging information to other
community members and I conducted the interviews in a private environment.
Confidentiality of the information provided was also an ethical concern which i
enhanced by assuring respondents that the information provided was only for
academic purposes.
23
CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF
FINDINGS
4.1 Introduction
This chapter presented Data collected using questionnaires. The purpose of the study
was to investigate the effects of combating money laundering on financial institutions
case study KWFT Bank. The data was collected using a questionnaire as the data
collection instruments. The data targeted 72 respondents 55 respondents out of 72
respondents were completed and returned giving a response rate of 76%. This
response is good enough as recommended by Mugenda and Mugenda(2003).The
analysis of the administered questionnaires was analyzed using MS Excel.
Table 4.2 Response Rate
4.2.1 Effects of Money Laundering on Bank reporting
Table 4.1 Effects of Money Laundering on Bank Reporting
Category Frequency Percentage
Response 55 76
Non response 17 24
Total 72 100
The presented finding on table 4.1 was based on the need to ascertain whether the
returned questionnaires warrant the continuation of the study. Based on the findings,
55 questionnaires were returned and this comprised of 76%, however, 17
Questionnaires comprising of 24% were not returned. These findings showed that the
returned questionnaires were considered adequate for the complete and final analysis.
24
4.2.2 Gender of Respondents
Table 4.2 Gender Analysis
Male 28 51
Female 27 49
Total 55 100
Table 4.2 showed that respondents involved in this study comprised of 51% male
however 49% of respondents were female. Therefore, it was established that the
gender representation in this organization was fairly balanced.
4.2.3 Highest Level of Education
Table 4.3 Highest Level of Education
Certificate 4 8
Diploma 4 8
Degree 13 24
Masters 24 44
PhD 10 18
Total 55 100
The summary of data analysis was based on education level of respondents. Table 4.3
depicted that 8% of respondents were qualified with a certificate, 8% of the
respondents were qualified with a diploma, 24% of respondents had a degree, 44%
25
had masters and 18% were PhD holders. This study indicated that those with masters
had dominated the study; this implied that the workers were learned.
4.2.4 Number of years of Service
Table 4.4 Number of years of service
3-5 Years 8 15
6-8 years 21 38
9-11 years 11 20
Above 12 years 15 28
Total 55 100
Table 4.4 indicated the analysis of work experience. 15% had 3 – 5 years’
experience, 38% 6 – 8 years, 20% represented those within 9 – 11 years and 28%
had above 12 years’ experience.
4.2.5 Institutional Framework
Table 4.5 Effects of Institutional Framework on Financial Institutions in
Combating Money Laundering in Kenya.
Yes 42 76
No 13 24
Total 55 100
26
Table 4.5 depicted study findings that showed 76% of respondents involved in the
study agreed there was an effect of institutional framework on financial institutions in
combating money laundering in Kenya however, 24% of respondents did not agree,
from the findings, majority of respondents noted that institutional framework had
effects on financial institutions in combating money laundering in Kenya
Table 4.6 Rating of Institutional Framework on Financial Institutions in
Combating Money Laundering in Kenya
Highly affect 16 29
Moderately affect 22 40
Less effect 4 7
No effect 13 24
Total 55 100
Table 4.6 provided ratings to determine the effect of institutional framework on
financial institutions in combating money laundering in Kenya. In the analysis 29% of
respondents indicated that institutional framework highly affected financial
institutions in combating money laundering in Kenya, however 40% rated moderately
affected, 7% rated less effect as 24% rated no effect. The study findings noted that
there was high effect of institutional framework on financial institutions in combating
money laundering in Kenya.
27
4.2.6 Lack of Trained Personnel
Table 4.7 Effects of Lack of Trained Personnel on Financial Institutions in
Combating Money Laundering In Kenya
Yes 38 69
No 17 31
Total 55 100
The finding on table 4.7 was generated from the study that sought to establish the
effect of lack of trained personnel on Financial Institutions in Combating Money
Laundering in Kenya. In the analysis 69% of respondents indicated that there was
effect despite 31% of respondents indicated no effect of lack of trained personnel.
Majority led to note that there was effect on Financial Institutions in Combating
Money Laundering in Kenya.
28
Table 4.8 Rating of Lack of Trained Personnel on Financial Institutions in
Combating Money Laundering in Kenya
Very great effect 26 47
Great effect 6 11
Low effect 6 11
No effect 17 31
Total 55 100
Table 4.8 comprises of findings showing a total of 47% of respondents indicated that
lack of trained personnel affected financial institutions in combating money
laundering in Kenya to a very great effect, 11% rated great effect whereas 11% rated
low effect as 31% rated no effect. The study findings revealed that there was
moderate effect of lack of trained personnel towards financial institutions in
combating money laundering in Kenya.
29
4.2.7 Bank Confidentiality
Table 4.9 Effect of Bank Confidentiality on Financial Institutions in Combating
Money Laundering In Kenya
Yes 35 64
No 20 36
Total 55 100
Table 4.9 comprised of findings showing a total of 64% of respondents involved that
agreed bank confidentiality helped to combat money laundering however 36% of
respondents did not agree to the idea. With majority of respondents, the findings
confirmed bank confidentiality had effect on financial institutions in combating
money laundering in Kenya
Table 4.10 Rating of Bank Confidentiality on Financial Institutions in
Combating Money Laundering In Kenya
Great extent 20 36
Medium extent 10 18
Low extent 5 10
No extent 20 36
Total 55 100
Table 4.10 showed the extent to which bank confidentiality affected Financial
Institutions in Combating Money Laundering in Kenya. In the analysis it was found
30
that 36% of respondents indicated that there was great extent, 18% rated medium
extent, 10% rated low extent, as 36% of respondents rated no extent. In the analysis
majority of respondents confirmed there was medium extent on effect of bank
confidentiality on Financial Institutions in Combating Money Laundering in Kenya.
4.2.8 Failure to Know Your Customers
Table 4.11 Effects of Failure to Know Your Customers on Financial Institutions
in Combating Money Laundering in Kenya
Yes 47 85
No 8 15
Total 55 100
Table 4.11 showed findings on effect of failure to know your customers, in the
analysis it was found that 85% of respondents were totally in agreement that failure to
know your customers had affected financial institutions in combating money
laundering in Kenya whereas 15% said there was no effect. The study findings
revealed that presence of failure to know your customers affected financial
institutions in combating money laundering in Kenya.
31
Table 4.12 Ratings on of Failure to Know Your Customers on Financial
Institutions in Combating Money Laundering in Kenya
High effect 20 36
Moderate effect 22 40
Low effect 5 9
Very low effect 8 15
Total 55 100
Table 4.12 provided ratings that showed the effect of failure to know your customers
on financial institutions in combating money laundering in Kenya, the study findings
showed that 36% of respondents rated high effect, 40% rated moderate effect, 9%
rated low effect whereas 15% rated very low effect. In the analysis, the findings
confirmed that there was moderate effect of failure to know your customers on
financial institutions in combating money laundering in Kenya
4.3 Summary of Data Analysis
4.3.1 General Information
The summary in this analysis first provides the response rate in which a total of 76%
questionnaires were answered fully and returned however 24% were not returned for
analysis. In gender of respondents 51% were male however 49% of respondents were
female. In highest level of education 8% of respondents were qualified with certificate
32
level of education, 8% of respondents had college level, 27% had university education
level and 47% had Masters and 18% had PHD qualification. On period of service
15% of respondents had between 3-5 years, 38% of the respondents had worked for a
period between 6-8 years, 20% between 9-11 years, and 27% for over 12 years.
33
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter presented the summary of findings, answers to research questions,
conclusion, recommendations, and suggestion for further studies. The study majored
on issues that revolved on the challenge affecting Financial Institutions in Combating
Money Laundering in Kenya.
5.2 Summary of Findings
5.2.1 How did Institutional Framework affect Financial Institutions in
Combating Money Laundering in Kenya?
The summary of findings generated from this study provided the effect that
institutional framework had on financial institutions in combating money laundering
in Kenya. The summary therefore showed 36% of respondents indicated that
institutional framework affected financial institutions in combating money laundering
in Kenya, however 40% rated moderately affected, 7% rated less effect as 24% rated
no effect. The study findings noted that there are moderate effects of institutional
framework on financial institutions in combating money laundering in Kenya.
5.2.2 What was The Effect of Lack of Trained Personnel on Financial
Institutions in Combating Money Laundering in Kenya?
This summary was about showing the effect that lack of trained personnel had on
financial institutions in combating money laundering in Kenya. In the summary of
percentage findings, respondents who constituted 47% indicated that lack of trained
personnel affected financial institutions in combating money laundering in Kenya to a
very great effect, 11% rated great effect whereas 11% rated low effect as 31% rated
34
no effect. The study findings revealed that there was great effect of policy towards
financial institutions in combating money laundering in Kenya. Therefore, the
majority of the findings implied that training of employees was essential for
organization operations and advancement. From an employee point of view training
activities was important for skills and development, employee performance and career
advancement
5.2.3 To What Extent Did Bank Confidentiality Affect Financial Institutions in
Combating Money Laundering in Kenya?
The study finding indicated the extent at which bank confidentiality affected financial
institutions in combating money laundering in Kenya. In the analysis 36% of
respondents indicated that there was great extent, 18% rated medium extent, 10%
rated low extent, as 36% of respondents rated no extent. In the analysis moderate
number of respondents confirmed there was great extent on effect of bank
confidentiality on financial institutions in combating money laundering in Kenya.
There was a need to review confidentiality laws in Kenya with a view to removing
any confidentiality impediments or giving legal protection to banks who breach
confidentiality as part of implementing anti- money laundering policy
5.2.4 What was the Effect of Failure to Know Your Customers on Financial
Institutions in Combating Money Laundering in Kenya?
The summary was in line to a study that showed the effect of failure to know your
customers on financial institutions in combating money laundering in Kenya, the
study findings showed that 36% of respondents rated high effect, 40% rated moderate
effect, and 9% rated low effect whereas 15% rated very low effect. In the analysis, the
35
findings were from a confirmation that there was great effect of failure to know your
customers on financial institutions in combating money laundering in Kenya.
5.3 Conclusions
It was generally found out that challenges facing the effective fight of money
laundering in the banks are many and critical. However, lack of competent workers in
terms of money laundering knowledge, and knowledge on the associated issues
around money laundering such as globalization, advancement in ICT, and
liberalization of the economy are seen to be the most critical ones.
It was equally found out that both money laundering policies and other alerts for
fighting money laundering practices such as anti-money laundering guidelines are
available in banks, and they have an international flavor because money laundering is
global issue. Importantly noted however, was the fact that all these measures towards
fighting money laundering have specific people to oversee and they have put forward
specific strategies for monitoring and evaluating these efforts. Despite all these efforts
in place, yet, money laundering is still seen as a big problem. It is therefore advisable
that more efforts are needed which should use more advanced technology in
identifying, controlling and preventing these practices.
It was also found out that anti-money laundering acts are present and that those who
fail to comply with them are being given relevant punishments. However, very few
seem to have been punished because of failure to comply with the law, suggesting that
most of them are complying or the laws are not working properly. Although very few
are seen to be punished because of failing to comply with anti-money laundering acts
and laws, yet, those few who are been punished are punished strong because most of
them are totally dismissed from their jobs. It was also evident that the FIU despite of
36
being relevant its performance is very low and most workers are not satisfied. This
calls for strong need of improving it so as to perform at the intended and expected
level.
It was found out that money laundering is a critical problem to the banking
operations, and that, politicians play a key role in making the efforts towards
effectively fighting of these practices unachievable dream. Political will are strong
needed if the fights against money laundering is to be achieved. This is because
money laundering practices have a lot of negative consequences to the economy. It is
clear therefore that money laundering practices are dangerous and well-coordinated
efforts towards fighting these practices are needed. It should not only be left to banks
or law enforcing organs only but the community in general should participate in this
fight.
5.4 Recommendations
This study recommended that government of Kenya should bring into force the
Proceeds of Crime and Anti-Money Laundering Law, 2009, as soon as possible. The
GOK should implement the money laundering Law. The GOK should criminalize
terrorist financing and pass a law authorizing the government to seize the financial
assets of terrorists. Kenyan authorities should take steps to ensure that non-
governmental organizations (NGOs), suspect charities and nonprofit organizations
follow internationally recognized transparency standards and file complete and
accurate annual reports. The Central Bank of Kenya (CBK), law enforcement
agencies, and the Ministry of Finance should improve coordination to enforce existing
laws and regulations to combat money laundering, tax evasion, corruption, and
smuggling.
37
This study recommended that KWFT should establish appropriate policies and
procedures to ensure the effective prevention, detection and control of possible money
laundering activities and terrorism financing. Important attention should be given to
train staff in both key division mandated with supervision and monitoring in CBK,
CID officers attached to BFID unit of CBK and those Bank Officers responsible for
the prevention, detection and control of possible money laundering activities and
terrorism financing. Institutions should ensure that their staffs are trained on regular
basis on the prevention, detection and control of money laundering and the
identification o f suspicious transactions. This study recommends that CBK calls upon
institutions to ensure they comply with this requirement and that the regulator should
also advise institutions to ensure that they conduct enhanced customer due diligence
when dealing with High risk customers.
This study further recommended that CBK should provide additional guidance on
identification of suspicious transactions by commercial Banks. Introduction of
guidance on customer Due Diligence Procedures for non face to face transactions that
have gained increased prominence with the growth in internet and telephone banking.
The rapidly changing technologies and the introduction of new financial products
remains a major challenge which requires financial institutions and regulatory bodies
to constantly remain vigilant of possible abuse o f new products by criminals. Other
recommendation is that CBK continues to monitor adherence to the existing
guidelines through its surveillance mechanisms and adopting them to the changing
environment.
38
5.5 Suggestion for Further Study
This study explored the challenges faced by KWFT in combating money laundering
and established that money laundering is a threat to both the integrity and stability of
the banking sector and even the Forex bureaus themselves. Further research is
recommended on the perceived effects of money laundering on other industries such
as real estate, precious metals trade; the stock market and the tourism sector. These
are some of the industries commonly targeted by money launders. There is need to
also carry out research to determine how well the country is prepared on the fight to
eradicate money laundering. Research is also required to determine the effect that
developments in the information technology is having on the money laundering. This
is because information technological advancement may help increase the ease of
money laundering training as enhance measure to address the same
39
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Bartlett, B. L. & Ballantine, D. (2012). “The Negative Effects of Money Laundering on

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Blunden, B. (2001). The Money Launderers: How They Do It and How to Catch Them
at It, Management Books, Chalford.
Central Bank of Kenya, (2007). Guidance Notes on the detection and Prevention of
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Chaikin,D. (2008). "Commercial corruption and money laundering: a preliminary
analysis". Journal of Financial Crime, Vol. 15 Iss: 3, pp.269 - 281.
Cassella,D.(2004). "Terrorism and the Financial Sector: Are the Right Prosecutorial
Tools Being Used?", Journal of Money Laundering Control, Vol. 7,
No. 3, 2004, pp. 281-285.
Cooper D.R. and Pamela S. Schindler, (2003), Business Research Methods: New
Delhi: Tata McGraw-Hill Publishing Company Ltd.
Claessens, S. (2000). •E-finance in emerging markets: is leapfrogging possible?”

World Bank Financial Sector Discussion Paper, no 4, June.
Daily Nation, (2010): Ndungu,J & Etemesi,R.,“ How local banks are copins with
fraud ”, Daily Nation, opinion column, pp 13, 10th August,2010.
Daily Nation,(2010):Thuo,K. “CBKs headache as banking on the move takes root "
.Daily Nation, Business column, pp 34, 9lh August,2010.
Douglas, T. (2006). "Notes on new Joint Money Laundering Steering Group (JMLSG)
guidance1". Journal of Investment Compliance, Vol.7 No.l pp64
40
El-Qorchi, M. (2007). "H aw ala: How Does This Informal Funds Transfer System
Work, and Should It Be Regulated!” Finance and Development,
December 2002, pp.31
FATF (2005). Money Laundering and Terrorism Financing 2004-2005 Typologies,

Financial Action Task Force. Paris. June 10. Retrieved from
http://www.fatf-gafi.Org/dataoecd/16/8/35003256.pdf
Gill, M., and Taylor, G. (2004). "Preventing money laundering or obstructing

business", British Journal of Criminology, Vol.44 No.4 pp582
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Laundering Control, Vol.7 No.3 pp207
Hoslti, J., (2014). Comparative Studies in Society and History, Capability and
Influence, Vol.16, 1974 pp.305-317
Holder, W.E. (2003). "The International Monetary Fund's involvement in combating

money laundering and the financing of terrorism". Journal of Money
Imala, O. (2004). The role of the financial services sector in combating money
laundering in Nigeria , the banking industry. Paper presented at the
4th national seminar on the economic crime retrieved from
http://wvvw.muhlenberg.edu/librarv/reshelp/aDa example.pdf
Kombo & Troop A. (1994) Purchasing Principles Storage and Distribution

Management of Materials, 6th Edition, Prentice Hall, London, UK.
Kothari, C.R. (2004). Research Methodology: Methods and Techniques. 2nd Edition:
Pitman Publishers. London,UK
Koskei F.K (2003): S/ro/egy Implementation and its Challenges in Public
Corporations: The case of Telkom (K). Unpublished MBA Project,
School of Business, University of Nairobi
Lilley, P. (2003) Dirty Dealing, The Untold Truth About Global Money Laundering,
International Crime and Terrorismt Stylus Pub Lie, 2003. pp 51-52
41
Madinger, J. and Zalopany, S.A. (1999) Money Laundering: A Guide for Criminal
Investigations, pp61
Masciandaro.D. ( 1999) Money laundering the Economics of Regulation, European

Journal of Law and Eonomics,n 3,May, pp 245-240
Masciandaro.D. and Portoano,A. (2003). International Financial Regulation and

offshore centre. Journal of Money laundering control,Vol 5, n4, pp
311-331
McDonnell, R. (1998). ‘‘Money Launder ins Methodologies and International and
Regional Counter-Measures Paper presented at the conference
Gambling, Technology and society Regulatory Challenges for the 21st
Century, Sydney, 7-8 May.
Mugenda and Mugenda (2003). Research methods, quantitative and qualitative

approaches. Nairobi African centre for technologies.
Muia, M., (2008), Perceived effects of money laundering on international business a
case study of banks in Kenya.. Unpublished MBA Project, School of
Business, University of Nairobi
Mugenda, O.M. and Mugenda, A.G., (2003). Research Methods, quantitative and
qualitative Approaches, African centre for technology studies press,
Nairobi Kenya
Njagi,(2009). “The effectiveness of Know Your Customer (KYC) policies adopted by

commercial hanks in Kenya in reducing money laundering and fraud
incidences", Unpublished MBA Project, School of Business, University
of Nairobi
Osinbajo, Y.,and Ajayi, O. (1991), "Money laundering in Nigeria", in Kalu, A.U.,

Osinbajo, Y. (Eds),Perspectives on Corruption and Other Economic
Crimes in Nigeria, Federal Ministry of Justice, Lagos, pp.58.
Schedulers, C. (2004). Research Methodology, (6th edition). New Eye International

Publisher, Nairobi Kenya.
42
Ali, S.A. (2003)Money Launderins Control in the Caribbean. Kluwer Law
International Vol 16.
Aufhauser, D.D. (2003). "Analysis - terrorist financing: foxes run to ground", Journal
of Money Laundering Control, Vol.6 No.4 pp301
Bartlett, B. L. & Ballantine, D. (2012). “The Negative Effects of Money Laundering
on Economics Development ”, Platypus Magazine, No. 77: Australia.
Blunden, B. (2001). The Money Launderers: How They Do It and How to Catch Them
at It, Management Books, Chalford.
Central Bank of Kenya, (2007). Guidance Notes on the detection and Prevention of
Money Laundering and Terrorism Financing Activities, Retrived from
http://www.centralbank.go.ke
Chaikin,D. (2008). "Commercial corruption and money laundering: a preliminary
analysis". Journal of Financial Crime, Vol. 15 Iss: 3, pp.269 - 281.
Cassella,D.(2004). "Terrorism and the Financial Sector: Are the Right Prosecutorial
Tools Being Used?", Journal of Money Laundering Control, Vol. 7,
No. 3, 2004, pp. 281-285.
Cooper D.R. and Pamela S. Schindler, (2003), Business Research Methods: New
Delhi: Tata McGraw-Hill Publishing Company Ltd.

Claessens, S. (2000). •E-finance in emerging markets: is leapfrogging possible?”
World Bank Financial Sector Discussion Paper, no 4, June.
Daily Nation, (2010): Ndungu,J & Etemesi,R.,“ How local banks are copins with
fraud ”, Daily Nation, opinion column, pp 13, 10th August,2010.
Daily Nation,(2010):Thuo,K. “CBKs headache as banking on the move takes root "
.Daily Nation, Business column, pp 34, 9lh August,2010.
Douglas, T. (2006). "Notes on new Joint Money Laundering Steering Group (JMLSG)
guidance1". Journal of Investment Compliance, Vol.7 No.l pp64
El-Qorchi, M. (2007). "H aw ala: How Does This Informal Funds Transfer System
Work, and Should It Be Regulated!” Finance and Development,
December 2002, pp.31
FATF (2005). Money Laundering and Terrorism Financing 2004-2005 Typologies,
Financial Action Task Force. Paris. June 10. Retrieved from
http://www.fatf-gafi.Org/dataoecd/16/8/35003256.pdf
Gill, M., and Taylor, G. (2004). "Preventing money laundering or obstructing
business", British Journal of Criminology, Vol.44 No.4 pp582
Haynes, A. (2004). "The Wolfsberg principles - an analysis". Journal of Money
Hoslti, J., (2014). Comparative Studies in Society and History, Capability and
Influence, Vol.16, 1974 pp.305-317

Holder, W.E. (2003). "The International Monetary Fund's involvement in combating
money laundering and the financing of terrorism". Journal of Money
Imala, O. (2004). The role of the financial services sector in combating money
laundering in Nigeria , the bankins industry. Paper presented at the
4th national seminar on economic crime. Retrieved from
http://wvvw.muhlenberg.edu/librarv/reshelp/aDa example.pdf
Kombo & Troop A. (1994) Purchasing Principles Storage and Distribution
Management of Materials, 6th Edition, Prentice Hall, London, UK.
Kothari, C.R. (2004). Research Methodology: Methods and Techniques. 2nd Edition:
Pitman Publishers. London,UK
Koskei F.K (2003): S/ro/egy Implementation and its Challenges in Public
Corporations: The case of Telkom (K). Unpublished MBA Project,
School of Business, University of Nairobi
Lilley, P. (2003) Dirty Dealing, The Untold Truth About Global Money Laundering,
International Crime and Terrorismt Stylus Pub Lie, 2003. pp 51-52
Madinger, J. and Zalopany, S.A. (1999) Money Laundering: A Guide for Criminal
Investigations, pp61
Masciandaro.D. ( 1999) Money laundering the Economics of Regulation, European
Journal of Law and Eonomics,n 3,May, pp 245-240
Masciandaro.D. and Portoano,A. (2003). International Financial Regulation and
offshore centre. Journal of Money laundering control,Vol 5, n4, pp
311-331
Mclean. D. (1990), "Scheme for mutual assistance in criminal mailers", in Osinbaio.
(Eds), Integration of the African Continent through Law, Federal
Ministry of Justice, Lagos, pp.46.
McDonnell, R. (1998). ‘‘Money Launder ins Methodologies and International and
Regional Counter-Measures Paper presented at the conference
Gambling, Technology and society Regulatory Challenges for the 21st
Century, Sydney, 7-8 May.
Mugenda and Mugenda (2003). Research methods, quantitative and qualitative
approaches. Nairobi African centre for technologies.
Muia, M., (2008), Perceived effects of money laundering on international business a
case study of banks in Kenya.. Unpublished MBA Project, School of
Business, University of Nairobi
Mugenda, O.M. and Mugenda, A.G., (2003). Research Methods, quantitative and
qualitative Approaches, African centre for technology studies press,
Nairobi Kenya
Njagi,(2009). “The effectiveness of Know Your Customer (KYC) policies adopted by
commercial banks in Kenya in reducing money laundering and fraud
incidences", Unpublished MBA Project, School of Business, University
of Nairobi
Osinbajo, Y.,and Ajayi, O. (1991), "Money laundering in Nigeria", in Kalu, A.U.,
Osinbajo, Y. (Eds),Perspectives on Corruption and Other Economic
Crimes in Nigeria, Federal Ministry of Justice, Lagos, pp.58.

Schedulers, C. (2004). Research Methodology, (6th edition). New Eye International
Publisher, Nairobi Kenya.

APPENDIX II
RESEARCH QUESTIONNAIRE
Kindly answer the questions by putting a tick in the appropriate box or by writing in
the space provided.
SECTION A: GENERAL INFORMATION

1. Gender:
Male {}
Female { }
2. Number of Years in Service

Between 3-5 {}
Between 6-8 { }
Between 9-11 { }
Above 12 { }
3. Highest Level of Education:

Certificate { }
Diploma {}
Degree { }
Master { }
PHD { }
SECTION B: INSTITUTIONAL FRAMEWORK

4. Does institutional framework affect financial institutions in combating money
laundering in Kenya?
Yes {}
No { }
Briefly explain
5. To what extent does institutional framework affect financial institutions in
Highly affect {}
Moderate affect {}
Less Effect {}
No Effect {}
SECTION C: LACK OF TRAINED PERSONNEL

6. Does lack of trained personnel affect the financial institutions in combating
Yes {}
No { }
(b) Briefly explain..
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……....
7. How would you rate the effect of lack of trained personnel affect financial
institutions in combating money laundering in Kenya?
Very great Effect {}

Great Effect { }
Low Effect { }
No Effect { }
SECTION D: BANK CONFIDENTIALITY

8. Does bank confidentiality affect financial institutions in combating money
laundering in Kenya?
Yes {}
No { }
………………………………………………………………………………………
………………………………………………………………………………………
9. How would you rate the effect of bank confidentiality on financial institutions
in combating money laundering in Kenya?
Great Extent { }
Medium Extent {}
Low Extent { }
No Extent { }
SECTION E: FAILURE TO KNOW YOUR CUSTOMERS

10. Does failure to know your customer affect financial institutions in combating
Yes {}
No { }
Briefly explain.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
11. How would you rate the effect of failure to know your customers on financial
institutions in combating money laundering in Kenya?
High Effect { }
Moderate Effect { }
Low Extent { }
Very Low effect { }
Thank you for your cooperation

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CHALLENGES FACING FINANCIAL INSTITUTIONS IN COMBATING

MONEY LAUNDERING IN KENYA A CASE STUDY OF KENYAN

KIHORO PETER MACHARIA

A Research Project Submitted to the School of Business Management and

Declaration by the Student

Name: KIHORO PETER MACHARIA. Sign… Date:

REG NO: B010-03-0038/2014

Dedan Kimathi University of Technology

Mr. Ngugi Warugongo Sign………………….. Date………………………….

AML - Anti Money Laundering - Measures used to combat money laundering.

CBK - Central Bank of Kenya

GOK - Government of Kenya

IMF - International Monetary Fund

KYC - Know Your Customers - Thorough knowledge of own customer.

KWFT- Kenya Women and Finance Trust

FRC - Financial Reporting Centre

Us reports has named Kenya among countries classified as money laundering

1.1.1 Kenyan Women's Finance Trust (KWFT)

1.3 Objectives of the Study

1.3.2 Specific Objectives

i. To analyze the impact of institutional framework on the financial institutions in

1.4 Research Questions

1.6 Scope and Limitations of the Study

Institutional framework refers to a set of formal organizational structures, rules

Personnel training is the process of orienting and educating employees in

Bank confidentiality is a legal requirement in some jurisdictions which

Money laundering is the generic term used to describe the process by

2.2 Theoretical Review

2.3 Stages of Money Laundering

2.4 Empirical Literature Review

2.4.1 Institutional Framework

Mbwayo (2014) wrote a paper on the strategies applied by commercial banks in

Institutional money laundering investigations center on parsing financial records for

Weak institutional framework, especially weak corporate governance regime is an

2.4.2 Lack of trained personnel

Employees training play an important role as it enhances efficiency of an organization

The impact of training is double. From an organization point view, training of

In Kenya Wachira (2013) linked employee training and development activities to

2.4.3 Banks’ confidentiality requirements

Bank secrecy (or bank privacy) is a legal requirement in some jurisdictions which

2.4.4 Failure to Know Your Customers - KYC

They check whether the identification information legitimate. They investigate

2.5 Research Gap

2.6 Summary of Literature Review

Failure to know your

The study of Conceptual Framework tried to simplify the conceptualization of the

3.2 Research Design

3.3 Target Population

3.4 Sample Design and Procedure

Source Author (2017)

3.5 Data Collection Instrument and Procedure

3.5.2 Validity and Reliability of Research Instruments

3.5.3 Administration of Questionnaires

3.6 Data Analysis Methods

3.7 Ethical Consideration

DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF

was to investigate the effects of combating money laundering on financial institutions

collection instruments. The data targeted 72 respondents 55 respondents out of 72