ANTI-MONEY LAUNDERING, COMBATING FINANCING OF TERRORISM: Kenya at high risk, a blessing for Tanzania

DAR ES SALAAM: TANZANIA’S excellent leadership in financial management in international interactions has led to its removal from the EU High-Risk AntiMoney Laundering (AML) and Combating Financing of Terrorism (CFT) list.

On the other hand, Kenya’s continued inclusion on the list of countries at risk for these issues is undoubtedly a blessing for Tanzania, as it allows the country to grow its economy through substantial investment and become a competitive country in the East African region.

For those unfamiliar with these matters, let me explain what the EU High-Risk AML/ CFT list is before delving into how Tanzania is surpassing Kenya in several economic areas.

Kenya was officially added to the European Commission’s list of high-risk third countries on June 10th last year, due to weaknesses in the Anti-Money Laundering, Countering the Financing of Terrorism and Countering Proliferation Financing (AML/CFT/CPF) framework.

Non-EU countries whose financial systems are thought to have strategic flaws and gaps in preventing illegal financial flows are listed here. When a nation is included, financial institutions subject to EU regulation must apply more rigorous due diligence in all their interactions with customers, banks, companies, or transactions involving that nation.

Due to advances in Tanzania under the unquestionable leadership of President Samia Suluhu Hassan, Tanzania, together with other countries, except Kenya, have recently been removed from comparable lists.

The EU list is legally enforceable across all EU member states and among private economic actors, including banks, insurers, auditors, attorneys, remitters and fintechs. Tanzania is treated leniently; it must now treat Kenya as a very high risk in regulatory and commercial terms.

For instance, Kenya isn’t doing enough to comply with the EU high-risk AML/CFT list protocols, as evidenced by ongoing US government investigations, led by President Donald Trump, into a massive fraud scheme known as the Feeding Our Future scandal.

For those unaware, in this scheme, criminals in Minnesota diverted approximately KSh 32.3 billion (250 million US dollars+) in US federal funds intended for child nutrition during the Covid-19 pandemic. Surprisingly, a significant portion of these stolen funds was laundered into the Kenyan real estate sector, particularly in Nairobi, a country that previously prided itself on being a well-performing economy.

As an economist, I could easily identify four direct economic effects that Kenyans would be embarrassed to discuss publicly. One is that Kenyan economic actors will face greater operational challenges and higher compliance costs.

When onboarding Kenyan counterparties, EU banks and financial institutions will apply enhanced customer due diligence (EDD). This means that, unlike before, Kenyan economic actors will need to continuously monitor transactions and verify beneficial ownership and funding sources.

I believe EU institutions may occasionally impose sector-specific restrictions or even sever correspondent banking relationships. Kenyan banks, companies and investors seeking European investment or collaboration will be significantly affected by these additional regulations, which also raise costs and cause delays.

Kenyan exporters seeking EU trade credit, banks offering foreign exchange services, fintech companies working with European partners and legal and professional services supporting cross-border transactions would all incur higher compliance costs as a result.

Kenya would therefore, become less appealing compared to peers, such as Tanzania, which it considered lower risk due to delayed approvals and higher operating costs. Kenya will have reduced access to EU capital and banking services, in contrast to Tanzania, which is set to become a destination for strategic investment in the EAC economic zone.

Doing business with Kenyan entities will be perceived as riskier when they are on the EU’s high-risk list. In my opinion, European banks will raise the cost of loans to Kenyan borrowers, restrict or reduce correspondent banking links and impose conservative internal limits, or even terminate relationships they deem too expensive to underwrite.

I envision this playing out through higher interest rates for Kenyan borrowers seeking euro-denominated financing, restricted access to EU trade finance instruments, letters of credit, and guarantees, and most importantly, slower settlements and limitations on cross-border payments.

Crucially, even though Tanzania is seen as a practical destination for investment, in Kenya this will affect capital flows, company confidence and operating costs, all of which are vital to economic expansion.

Following its removal from the EU list, Tanzania will benefit from increased investor confidence, whereas Kenya will see a decline. Kenya may not want to acknowledge this, but being on the EU list is often seen as a symptom of institutional and regulatory weakness, particularly in financial governance.

For international investors, these reputational cues are important. According to my analysis, one possible outcome is the removal of risk-sensitive capital from Kenyan markets. Reduced inflows of foreign direct investment, decreased desire to form longterm alliances with Kenyan companies, and global compliance rules have a significant impact on investor image.

Other investors, even those outside the EU, may follow suit if major jurisdictions deem Kenya’s financial infrastructure inadequate, thereby impeding the expansion of financial markets and private equity inflows.

The construction and real estate industries, associated with foreign investment amid the US fraud scandal, will be bad for Kenya’s PR and international diplomacy. Kenya will also suffer in the financial sector and fintech, while Tanzania becomes the investor’s dream destination.

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The fintech sector in Kenya has been a significant growth engine, particularly in mobile money and digital payments. However, Kenyan fintechs’ access to European banking rails would be restricted by increased AML/ CFT monitoring from EU partners, which would slow collaborations with EU-based tech and financial companies.

Raising the bar for innovative product compliance standards would limit the pace of innovation, as young start-ups will find compliance costs expensive relative to immediate operational advantages, given Kenya’s continued high risk profile, despite Kenyans’ refusal to acknowledge it.

Examining the wider macroeconomic consequences, Kenya will now have to contend with balance-ofpayments pressures. Kenya’s current account will tighten if it becomes harder to obtain trade finance, particularly if exports face higher hedging costs or slower payments. Higher transaction costs can reduce a nation’s net export position, especially for a country dependent on international trade.

There will also be a rise in currency risks. A decline in confidence often affects foreign exchange markets, leading to higher risk premiums that may deter foreign investment. If import prices rise because of hedging or financing obstacles, the Kenyan shilling may depreciate further and inflationary pressures may intensify.

Because banking and finance are linked to real estate, manufacturing, and consumer lending, contagion will spread to other sectors in Kenya. Tanzania will benefit more when Kenyan banks begin to tighten lending due to perceived external risk, which will impede credit growth for consumers and enterprises and hinder overall economic activity, putting more pressure on youth unemployment in Kenya.

Why does Tanzania benefit economically from this?

Increased Investor Trust and Reduced Risk Premium. Tanzania’s withdrawal signals to foreign capital markets that its financial systems comply with AML/CFT regulations.

This can reduce perceived sovereign risk, attract new foreign direct investment, motivate global banks to strengthen their ties and most importantly, remove it from AML risk lists, thereby lowering barriers to capital inflows into Tanzania.

Simpler Banking and Trade Finance Access in Europe. Tanzanian banks will face fewer procedural obstacles in EU transactions if due diligence obligations do not increase. Access to trade finance will be easier for Tanzanian exporters, as there will be fewer restrictions on projects funded or guaranteed by EU entities. This could directly boost the competitiveness of Tanzanian businesses in Europe.

Tanzania will benefit from what I would call a competitive advantage in regional investment flows. Jurisdictions with less regulatory friction may be preferred by banks and investors seeking East African partners. Tanzania may be able to attract some of the regional financial flows that were previously going to Nairobi because of Kenya’s increased transaction costs. Above all, Tanzania’s reputation in the financial sector will improve.

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Recognition of international compliance will increase trust in Tanzania’s regulatory bodies, enhance banks’ credibility and strengthen the integrity of the financial infrastructure.

A strong reputation is a selfreinforcing economic asset that lowers insurance costs and risk premiums on international transactions. In summary, the EU’s high-risk designation will have macroeconomic repercussions, including possible disruptions to banking, remittances, trade finance, and technology, even as it raises compliance costs, restricts capital flows and undermines investor confidence in Kenya.

Tanzania’s financial reputation has significantly improved, and its removal from AML risk lists will make it easier for the nation to access European and international partners.

Compared with Kenya, Tanzania stands to gain from increased investor confidence, reduced transaction costs, and capital inflows, all of which will accelerate Tanzania’s economic growth.

Tanzania’s leadership unquestionably places the country on an economic growth trajectory that will surpass that of others who had long held the top spot in the East African economy.