Effectiveness of Know Your Customer (Kyc) Policies Adopted by Commercial Banks in Kenya in Reducing Money Laundering and Fraud Incidences

Abstract

Fraud and money laundering have bceome rampant crimes in commercial banks which unless controlled, will continue exposing the financial institutions to massive losses both in terms of financial costs and loss of customers' confidence leading into loss of business. Bank fraud includes all sorts of misappropriations, embezzlements, manipulation of negotiable instruments, misrepresentations, impersonation, cheating, thefts, undue favors and irregularities. Introduced under the Banking Act in the laws of Kenya in January 2006, prudential guidelines on proceeds of crime & money laundering, which emphasised on know your customer (KYC), aimed at reducing and finally eliminating altogether fraud and money laundering incidences. However, with the crime having entrenchcd itself over the years and its methods of execution evolving over time, it has become increasingly difficult to detect, prevent, investigate, and prosecute those involved. The objective of this study was to establish the current KYC practice, the level of compliance and the general effectiveness of the policies in reducing fraud and money laundering cases in commercial banks in Kenya. The research design was a survey with a population of 43 licensed commercial banks targeted. Primary data was collected by use of a structured questionnaire which was administered to risk and compliance managers and account opening officers, while secondary data was obtained from the industry regulator's banking fraud prevention unit. The data collected was analysed, and presented by use of graphs, pie charts, bar charts and tables. In conclusion, the KYC strategies are in themselves sufficient to curb cases of fraud and money laundering reported in commercial banks. However, the problem lies with compliance with banks choosing what policies and procedures to comply with, and what to give little importance if not ignore completely. The recommendations include putting in place mechanisms to ensure full compliance, with the industry regulator - CBK, required to play a more active supervisory role and imposing heavy penalties on non-cornpiiant banks. Establishment of a databank containing information on those involved in fraudulent and money laundering activities will help blacklist offenders, and prevent the fraudsters from opening fraudulent accounts with other banks.