Politics is driving Kenyan government attacks on Nigerian FinTech Startups
Nigerian startups are increasingly under attack from Kenyan authorities, particularly the Central Bank of Kenya and its Asset Recovery Agency (ARA) over allegations of card fraud and international money laundering.
In the more recent charges, Flutterwave Payment Technology Limited, Boxtrip Travel and Tours Limited, Bagtrip Travel Limited, Elivalat Fintech Limited, Adguru Technology Limited, Hupesi Solutions, Cruz Ride Auto Limited and one Simon Ngige were all charged with money laundering by a Kenyan court in Kenyan High Court seizes Sh7 billion ($59 million), from 56 accounts belonging to FinTechs.
Others include Chipper, Korapay and Kenyan-based Remix, all embroiled in fraud allegations by Kenyan authorities.
Kenya’s Asset Recovery Agency (ARA) filed 2 lawsuits against the companies forcing the High Court to freeze their accounts on suspicion of embezzlement $50 million (KES6 billion) into Kenya as part of a money laundering scheme.
A few months back, reports emerged in Kenyan media accusing Multigate and Remix of being involved in Sh25.6 billion ($220.9 million) in wired transactions that took place between October and November 2020.
The Nigerian companies Multigate, Flutterwave and Korapay have strongly denied all allegations.
How this started
Following the ban by the CBN on using the Nigerian banking system to facilitate cryptocurrency transactions, most FinTech companies gravitated towards Kenya.
- The Central Bank of Nigeria’s ban on facilitating crypto transactions shuts out an important source of revenue for high-value Nigerian FinTech startups that were under pressure to scale their business.
- Kenya was a strategic option considering how easy it is to trade in foreign currency.
- The East African country has a loose currency policy that enables easy repatriation of currency out of the country.
- Partnering with internationally recognized global electronic money transfer companies Visa and Master Card, Nigerian companies leveraged their technology and scale to facilitate payments for merchants across the country.
Important to add that beyond FinTechs, some major Nigerian banks such as UBA, Access Bank, GT Bank and Ecobank have a commercial presence in Kenya.
How do FinTechs work?
When a customer pays through their debit cards, exchange channels like Flutterwave and Chipper Cash work with Visa or Mastercard, and settlement banks to ensure merchants get their money, customers get paid, and in exchange they keep the fees.
- Some of these transactions involve foreign currency and this is where the likes of Korapay, Elivalat Fintech Limited, Hupesi Solutions and several other FinTechs and currency traders come in.
- The currency traders simply match forex buyers and sellers who often leverage cryptocurrencies to facilitate tens of millions of dollars in transactions daily.
- Fintechs also earn juicy fees and spreads per completed currency transaction.
- Nigerian FinTechs at the center of the transaction flows increased their brokerage footprint by setting up outlets in Canada, the US and other major sources of currency, enabling seamless deal closing between those looking to buy currency and those looking to sell.
Sometimes payments are made directly to foreign suppliers in China, Vietnam or any major manufacturing center on behalf of Nigerian businesses seeking to secure raw materials.
In return, the Kenyan economy attracts significant foreign exchange inflows that also help strengthen exchange rate stability.
FinTechs also support the local economy by increasing e-commerce transaction volume for local merchants looking to increase sales via social media and other online platforms.
Is this illegal?
Checks by Nairametrics indicate that the transactions have yet to be established as legal, as the Kenyan authorities have yet to prove illegality or convict anyone of fraud.
However, the companies do not have a license to operate in Kenya, a situation which the Nigerian companies attribute to delays by Kenyan authorities.
- One of the owners of the FinTech firms involved in the controversy, who preferred to speak anonymously as they are still negotiating an amicable settlement with the Kenyan authorities, informed Nairametrics that while their central bank governor may be right that they are not licensed, the reality is more nuanced.
- “It is a case of regulation overriding innovation as has been the case in Africa and even developed economies. Some of us have been applying for licenses for years now but they are yet to approve despite meeting all their conditions ,” they noted.
Regulatory delays in licensing
Flutter wave recently issued a press release explaining that they had applied for a license as far back as 2019 and have been awaiting approval ever since.
- “Our attention has been drawn to reports regarding our operating license in Kenya. Like many other financial technology service providers in Kenya, ours entered the market through partnerships with banks and mobile network operators licensed by the Central Bank of Kenya. In 2019, as our business grew , Flutterwave submitted its payment service provider license application. We have been in constant contact with the Central Bank of Kenya to ensure we deliver all the requirements and we look forward to receiving our license.”
Kora Pay on the other hand, it explains the $250,000 for which it was taken to court was legally deposited into its Kenyan account as part of the capital requirements of the Central Bank of Kenya (CBK) to obtain a payment service provider and remittance operator license.
- “As part of the capital requirements of the CBK to obtain a payment service provider and transfer operator license, Kora deposited the sum of $250,000 into his newly opened bank account. In line with CBK requirements, this amount was left untouched pending the award of our licence. Easily verifiable records of this account will show that the $250,000 deposit is the only transaction made in that account to date.”
- “Unfortunately, Kora has been dragged through Kenyan courts on empty, unsubstantiated allegations of money laundering since May 2022. As a responsible corporate citizen, we have consistently challenged all these allegations in court and will continue to do so; we have documents to support our position. We are confident that the Kenyan courts will find that the charges against us are not only completely baseless, but borderline malicious.”
Is this all politics?
Regulatory delays aside, several sources in the Nigerian FinTech community have classified these allegations as slanderous, far from the truth and politically motivated.
- Rather, they attribute the accusations to the highly contested election in Kenya between Raila Odinga, 77 years old, (who is supported by President Uhuru Kenyata), and the current Vice President, 55-year-old William Ruto.
- Nairametrics understands that at the heart of the whole debacle circles around the son-in-law of the Vice President, Ruto, who has a close relationship with a Kenyan FinTech Startup as well as several Nigerian FinTechs.
- The son-in-law is the Nigerian Alexander Ezenagu and he is married to June Ruto, the second daughter of the vice-president of the country.
- Sources suggest the hotly contested election is prompting a series of accusations and counter-accusations against Ruto and his running mate with Nigerian businesses in the crosshairs.
Just a few days ago, Rigathi Gachagua lost Sh202 million to the state after a Kenyan high court ruled that the money comes from corruption. The money was kept in a microfinance bank.
A judge ruled that Gachagua admitted receiving the funds from government agencies without proof that he provided services or goods to the government.
Gachagua, on the other hand, demands the money “was money in a fixed revolving fund that rotated between three accounts for seven years” and not benefit from corruption.
What is the way forward?
Nairametrics understands that leaders of the Nigerian FinTech are working around the clock to resolve the issues with the Kenyan authorities.
- However, sources familiar with the workings of the Kenyan government believe that the problems will be resolved, but not before the elections are over.
- The Nigerian companies are also likely to face heavy fines as a form of out-of-court settlement, a deal most of them will find acceptable as it absolves them of fraud.
- The Nigerian government has yet to issue any formal press release on this matter.
