5 critical questions about fintech compliance in Kenya answered

Let’s face it, the past few weeks have been tumultuous for financial technology companies. Especially those who play on cross-border payment rooms. Accordingly, we must take fintech compliance issues very seriously. Starting with the Kenyan market.

Last week we dove deep into the recent heat the Kenyan government has given Nigerian fintechs that have been suspected of money laundering. We learned that these startups are using loopholes to move huge amounts of money globally against a tight regulatory terrain in Nigeria. The kind of loophole likely to raise suspicions of money laundering.

To summarize, this article shows that while money laundering may still be a distinct possibility, it should not be the only plausible narrative, pending when the Assets Recovery Agency (ARA) in Kenya completes its investigation.

While we wait, it is important that we understand fintech compliance in Kenya. How does ARA work? How do you set up shop in the economic powerhouse of East Africa?

We enlisted the help of Angela Kioi, Managing Partner, Kioi & Co.Advocates, with decades of experience helping large financial institutions to stay compliant in Kenya, to help us answer some of these questions.

What does fintech licensing look like in Kenya?

The fintech landscape is big and broad, and your regulatory regime may differ slightly from another fintech company playing in a different niche. Therefore, founders must approach compliance.

First, every company, including fintech, must take into account the guidelines and regulations of Kenya’s Ministry of ICT, the Competition Authority and the Office of the Data Protection Commissioner.

However, specific licensing regimes are subject to different regulatory bodies.

Central Bank of Kenya (CBK): Licensing traditional companies such as banks and financial technology companies that play with payments, loans and mobile money.

The Capital Markets Authority: These include companies that do everything related to investments, crowdfunding and funds.

The The Norwegian Insurance Authority deals with fintech products that provide insurance services to Kenyans.

It is important to note that depending on the products you offer, your regulations may involve more than one of these regulators.

Niche like peer-to-peer lending marketplaces do not have clearly defined regulations, but it could easily involve some of these regulators depending on the situation. If it doesn’t, our expert offers some insight

On another note, these licensing regimes are responsible for promoting law and order and contributing information to bodies tasked with ensuring that criminals do not use the fintech space for criminal activities. One such company is Ase

What is ARA?

ARA is the body responsible for tracking, freezing and confiscating the proceeds of crime in Kenya. Money earned from committing crimes such as drug trafficking, human trafficking or internet fraud is either stored in bank accounts or used to buy assets such as cars, gadgets, land or companies.

Per Kioi, when there is financial crime, evidence of financial crime or suspicion of financial crime, the ARA steps in to recover those funds and make sure they get to the right person.

“Obviously they can’t just, you know, wake up in the morning and say we want to freeze an account for person X, Y and Z, for no good reason. So they must be able to prove to the court before they can get a court order that there is evidence of something illegal going on, or that this is the proceeds of criminal activity.

“So to do that, they obviously have to show what it is they suspect. Do they have documentation? Do they have suspicious movement of money? Do they have evidence of corruption or suspicion of corruption and then they are able to get their orders and sell them to their bank accounts?

When are transactions flagged?

In several jurisdictions, when a suspicious amount enters an account, the bank usually freezes the money and invites the account holder to clarify. A similar scenario is also available in Kenya’s financial system.

Per Kioi, the Central Bank of Kenya (CBK) mandates banks to report transactions above Ksh1 million ($8,420) and you must explain why you are transferring such an amount to Kenya.

“ARA doesn’t look at people’s bank accounts and say this looks suspicious. There must be an original place where the suspicion comes from. Did it come from the banks? Did it come from CBK? Or did it come from a whistleblower? Did the banks receive notification from banks outside Kenya? Or another investigative company outside of Kenya?”

When there is reason to suspect, no organization acts in a vacuum, especially when it comes to cross-border transactions in Africa.

An example is the recent case of Flutterwave, Korapay and a number of other fintech companies that have reportedly attracted the attention of Interpol. Reports Interpol has refused to confirm or deny when asked by Techpoint.

What happens if your accounts are frozen?

When there is reason to suspect, ARA, with the help of a court order, freezes the account as a first step to assist the investigation. It is now up to the relevant company to prove or disprove ARA or CBK’s claims. You can do this either through the courts or through the ARA itself.

“Unfortunately, it looks like a very draconian action on their part, but at the same time, it’s an action that they may feel is justified,” Kioi adds. However, she adds that if the company can show that some of these accounts were frozen unfairly, they can challenge this action.

ARA has an initial 45-day window to conduct an investigation into a frozen account. If it has received nothing conclusive during that period, it can submit an additional 90 days to continue its investigation.

How to approach fintech compliance?

Fintech compliance is a difficult subject in any jurisdiction, but Kioi offers some interesting takeaways for fintech entrepreneurs in Kenya to stay ahead of any regulatory upheavals that may arise in the long, arduous journey of being a startup entrepreneur.

Deemed to comply with the requirements

Regardless of the regulatory framework your fintech product falls under, you must be compliant at all levels, leaving little room for suspicion.

“I know people come up with great ideas and say I want to do this and I think I can get the funding and they go and get the funding and they start the business in the Fintech space, but they have to figure out how the space really works and complies, says Kioi.

However, this is easier said than done for most founders who have to deal with other aspects of the business that deal with marketing, customer retention and the ever-elusive product market. In this regard, Kioi advises that fintech entrepreneurs need to acquire good lawyers, accountants and tax advisors to stay abreast of the myriad of regulations that may arise.

Merges into the lobby

Companies globally have long chosen the lobbying route to influence government decisions that will favor their business, and Kioi believes fintech companies that believe the space is not useful should band together and try to influence the government, and the various government agencies they have to deal with. .

“It might take some time, but at least I think I’ve seen a lot of times when people get together and sit down and talk to the different government agencies, you can find that as long as what you’re saying makes sense, you can you then find a middle ground and come up with new rules for the space you’re playing in and then enable that business.”

Avoid loopholes if you can

We have pointed out that innovations are always ahead of the regulations, but the regulations will always catch up. That was the spirit behind the article where we explored the good and the bad sides of regulations and always caught up with innovations.

Although startups regularly use loopholes to create exciting business opportunities, the government eventually catches up with these loopholes, and the result is rarely pleasant. In the fintech space, Kioi advises entrepreneurs to limit the use of loopholes.

“So you can’t use loopholes hoping you won’t get caught because if you’re not compliant then you’re just facing the risk and compliance is one of the things I usually tell people. It’s that or it’s no. Either you have or you haven’t, there is no gray area in compliance.”

In less regulated niches, Kioi points out that early enough lobbying can help set the standard for the sector rather than waiting for them to catch up.

“Even with organizations that are not registered in Kenya, coming to work in Kenya, coming in to work in Africa, wherever they are registered, is that you have to understand the laws of the country you are going into and you have to comply. Once that’s done, you can start saying we can actually do this better and lobby for whatever it is you want.”

The conversation about fintech compliance is broad and broad, and if you want me to go deeper, leave me a comment on any of our channels.