The determinants of corporate disclosures of anti-money laundering initiatives by Kenyan commercial banks
| Published date | 02 April 2020 |
| DOI | https://doi.org/10.1108/JMLC-01-2020-0001 |
| Pages | 609-635 |
| Date | 02 April 2020 |
| Author | David Mathuva,Samuel Kiragu,Dulacha Barako |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
The determinants of corporate
disclosures of anti-money
laundering initiatives by Kenyan
commercial banks
David Mathuva
Business School, Strathmore University, Nairobi, Kenya
Samuel Kiragu
School of Business, Nova Scotia Community College, Halifax, Canada, and
Dulacha Barako
Academic Department, Kenya School of Monetary Studies, Nairobi, Kenya
Abstract
Purpose –This study aims to examine theextent and drivers of anti-money laundering (AML) disclosures
in the auditedannual reports of regional listed banks in Kenya.
Design/methodology/approach –Using the Financial Action Task Force recommendations and other
guidelines, the authors develop an AML disclosure index that is used to score the extent of AML disclosures by
banks. A sample of 15 listed regional banks in Kenya over the period of 2007-2017 is used. Using this sample, the
authors performed fixed-effects regressionsto identify the significant determinants of AML disclosures.
Findings –The study establishes a low level of AML disclosuresin the audited annual reports of sampled
banks. The extent to which the AML disclosuresimproved across three distinct regulatory regimes over the
period of 2007-2017 is reported. The authors find that theAML disclosures are largely driven by corporate
governance(board size and audit committee size) and the ratio of diaspora remittancesto GDP.
Practical implications –Owing to the global natureof money laundering activities, the studysuggests
that the CentralBank of Kenya needs to internationalizeAML regulations and followinternationally accepted
best practicesin AML to respond to emergingtrends in money launderingand related crimes.
Originality/value –To the best knowledge of the researchers, this is perhaps the firststudy to examine
the drivers of AML disclosures by banks in a developingeconomy in the East and Southern African region.
Given the global nature of money laundering,the study makes an important and original contribution to the
body of knowledge with potentialfor replication in other jurisdictions. The findings will alsoform a basis for
developingan AML reporting or disclosure framework.
Keywords Kenya, Corporate governance, Anti-money laundering, Disclosure practices,
Financial Action Task Force (FATF)
Paper type Research paper
1. Introduction and motivation
Money laundering, largely viewed as the process of concealing the illicit origin of the
proceeds of crime with theaim of legitimizing their future use, has become a globalconcern
The authors would like to thank participants at the 2018 Annual Governance, Risk and Compliance
(GRC) summit held at Strathmore University for their useful comments on this research. The authors
also thank Kennedy Opondo for providing excellent research assistance. The usual disclaimer
applies.
Determinants
of corporate
disclosures
609
Journalof Money Laundering
Control
Vol.23 No. 3, 2020
pp. 609-635
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-01-2020-0001
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
(Financial Action Task Force [FATF],2012;Nobanee and Ellili, 2018). The Financial Action
Task Force (FATF) estimates money laundering to be between 2 per cent and 5 per cent of
the annual global gross world product, which is estimated at US$1.38tn to US$3.45tn
(Pitney Bowes, 2016). Money laundering, which is classified as financial crime, often gives
rise to compliance and reputationalrisks, especially to the financial institution implicatedin
it. The penalty imposed on leading global banks, for instance, on HSBC, amounting to US
$1.9bn in a money laundering–related case, illustrates the financial implication of money
laundering to the affectedinstitutions (Stanley and Buckley, 2016)[1].
As a financial crime, money laundering requires implementation of mechanisms and
structures to combat the risks so as to protect the integrity of markets and global financial
architecture (IMF, 2001). A number of initiatives have been pursued to combat money
laundering crime and terrorist financing. Notable examples of such initiatives include the
Vienna Convention, the Council of Europe Convention in 1990, the Basel Committee
Statement of Principles, the European Union Directive, the International Criminal Police
Organization, the Resolution of the International Organization of Securities Commissions,
the Wolfsberg Principlesand the FATF (Nobanee and Ellili, 2018).
Various countrieshave implementeda set of guidelines together withlegal and regulatory
requirements to promote transparency in the disclosure of money laundering–related cases
(Financial Action Task Force [FATF], 2012). For instance, the US Patriot Act 2001 requires
all financialinstitutions to establish anti-money laundering(AML) programs. It also requires
the development of internal policies, procedures and controls to forestall money laundering.
Other requirements include the designation of a money laundering compliance officer,
continuous training programs and an independent audit function to continuously monitor
compliancewith money laundering requirements (Nobaneeand Ellili, 2018).
The Basel AML Index indicates that the risk of money launderingand terrorist financing
is higher in low-income countries, with sub-Saharan African countries comprising 50 per
cent of the top 10 high-risk countries (Basel AML Index, 2012). Weak AML and countering
financing of terrorism (CFT)systems, together with structural and functional vulnerabilities
such as perceived corruption, weak legal systems,poor financial sector standards and high
political risks, are the reasons for the high-risk rating when it comes to money laundering–
related risks (IMF, 2001;BaselAML Index, 2012).
Extant literature reveals numerous studies on money laundering, especially on disclosure of
AML activities by banks (Van der Zahn et al.,2007); the drivers of money laundering compliance
(Vaithilingam and Nair, 2007); an overview of AML laws (Shanmugan et al.,2003;Sham, 2006;
Kwok, 2008;Subbotina, 2008;Azzam and Tommalieh, 2013;Nguyen, 2014); combating money
laundering (Shanmugan and Thanasegaran, 2008); money laundering techniques, inc luding
detection techniques (He, 2010;Simser, 2014;Ahmad and Mohamed, 2012;Gikonyo, 2018); and
the effectiveness of AML regulations (Kemal, 2014;Yeoh, 2014). At the firm level, we find limited
studies examining AML disclosures and corporate characteristics (Van der Zahn et al.,2007;
Nobanee and Ellili, 2018). Given the importance played by banks in dealing with money
laundering, the present study attempts to examine the drivers of AML disclosures, with a focus
on Kenya, which is a developing country within the high-risk Sub-Saharan Africa region. Kenya
also plays as a regional and economic hub for countri es within the East African region.
The study contributes in a significantway by establishing the drivers of AML disclosure
levels by banks. Understanding the drivers of AML disclosures is useful in designing a
strategy for dealing with money laundering and terrorist financing. We enrich the analyses
by Van der Zahn et al. (2007) and Nobanee and Ellili (2018) by linkingAML disclosures with
certain variables believedto influence the AML disclosures. The AML disclosure index used
in the present study builds on Nobanee and Ellili’s (2018) 55-item AML index by
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