Making sense of Kenya’s burning money laundering feud with Nigerian fintechs


Netflix users have been known to spend the equivalent of 208 centuries (20,800 years) watching the entirety of movies like Inventing Anna and Ozark because of the movies' compelling stories that center on criminal activity. These two movies have garnered attention from people all over the world. The concept of laundering money is a central component in both of these television shows. A phenomenon that governments all over the world are attempting to address. In recent weeks, Kenya has been the focus of some interesting news stories. Does it befit a movie? So, why don't you continue reading?

A Kenyan publication called Star.co made the announcement on July 6, 2022, that a Kenyan high court had ordered the freezing of 56 accounts, the majority of which belonged to the Nigerian fintech giant Flutterwave. After the Asset Recovery Agency of Kenya (ARA) informed the court that the accounts were being investigated as possible money laundering conduits, the court made the decision to place a freeze on the accounts, each of which had a total balance of Ksh7 billion ($59 million).

Massive reactions followed this news, and despite the fact that things didn't look good for Flutterwave in light of its recent run-ins with controversies, the skies were not clear for other Nigerian fintech companies.

A Kenyan high court issued another order on July 14, 2021, to the effect that the accounts of two additional Nigerian fintech startups, Korapay and Kandon technologies, be frozen with the sum of ksh 45 million ($380,000).

The allegations made by the ARA stated that the two companies were responsible for the theft of up to $6 billion through the suspicious movement of funds. In addition to this, it stated that both companies had connections to Flutterwave and the other related companies that were accused of engaging in money laundering.

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In their respective official statements, Flutterwave and Korapay have both refuted the allegations that have been made against them. Despite the fact that Flutterwave stated that the allegations were not true, the company did not provide any additional information on the actual circumstances of the case.

On the other hand, Korapay clarified that the funds in question had been frozen because doing so was one of the prerequisites for obtaining a payments processing license in Kenya.

But the problems go much deeper than that, and this is not the first time that Nigerian businesses have been accused of wrongdoing in Kenya. To this point, the Kenyan government has placed a hold on $*** billion worth of funds that belonged to Nigerian companies.

To begin, let's sidetrack for a moment to get a better feel for the surroundings.

Kenya's fight against the practice of money laundering

Money laundering

There are very stringent regulations in place all over the world regarding the laundering of money, and these laws need to be updated frequently. People who try to hide the origin of illegally obtained funds by using legitimate businesses or foreign banks as a front account for about two to five percent of the global gross domestic product, according to the United Nations (UN). This amounts to between 800 billion and two trillion dollars.

Customers of financial institutions could take advantage of a loophole in order to facilitate the illegal process of money laundering, or a company or its founder could be directly involved in activities related to the laundering of illicit funds.

It should come as no surprise that this is why companies that provide financial services place a strong emphasis on "know your customer" (KYC) requirements when it comes to the opening of an account. Because of the possibility of financial losses, organized crime, and terrorism, the financial sector is now one of the most heavily regulated in the world.

Despite the stringent regulations that are placed on financial services institutions, money laundering still causes an annual loss of approximately $1.6 trillion to the global economy.

For a long time, traditional finance companies have struggled to keep up with the dynamic nature of fraudsters who keep finding creative ways to launder money. However, research shows that fintechs have higher risks than traditional finance companies.

The proliferation of financial technology companies has altered the way in which people around the world view the financial services industry. According to Sanction Scanner, the rapid expansion and enormous volume of transactions undertaken by fintech companies make them vulnerable to a variety of malicious actors who may be difficult to police.

How? Criminals are always finding new ways to get through seemingly impenetrable systems, and when the business in question is a fintech, this kind of thing can happen at a very high rate. In light of this, regulators either make minor adjustments or undertake significant revisions to any existing frameworks.

The Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) of 2009 was passed in Kenya to combat the practice of money laundering as well as other significant financial offenses. The act contains comprehensive guidelines to protect against these practices.

This ultimately resulted in the establishment of the Asset Recovery Agency (ARA), which is tasked with locating, tracing, freezing, seizing, and confiscating the proceeds of criminal activity in Kenya. The National Financial Intelligence Unit is Nigeria's equivalent of this type of organization ( NFIU).

The ARA is typically not made aware of problems that arise in the regulatory space. The Central Bank of Kenya (CBK) is in charge of the laborious task of ensuring that companies that provide financial services adhere to these regulations. It is unavoidable for the ARA to step in and investigate situations in which businesses operate on the margins of these regulations in an attempt to avoid being scrutinized by the CBK directly.

When a bank detects a potentially fraudulent transaction, it usually flags the account in question and contacts the account holder, requesting an explanation as to why the transaction was carried out. In more severe circumstances In Nigeria, the bank might be required to file a report with the NFIU, or if the matter is of sufficient importance, the agency might decide to become actively involved in the process.

It is interesting to note that the POCAMLA grants the ARA the authority to freeze the account of any business in the event that a questionable transaction is identified. The agency has the ability to put a hold on it for a period of 45 days, and if it is still not satisfied, it can ask for an additional 90 days to complete its investigation.

It is important to note that even if the ARA freezes accounts, it will still have to investigate whether or not the parties whose accounts were frozen committed any wrongdoing.

Up to this point, the agency has made a number of high-profile court orders to freeze the accounts of companies that are under suspicion. On the other hand, recent reports suggest that Kenya is becoming a hotbed for the laundering of money, and Nigerian fintech companies appear to be facing the heat of its renewed stringent measures.

What is Kenya's motivation for what appears to be an attack on Nigeria?

A widespread belief holds that Nigeria is the birthplace of a number of different cons that are conducted over the internet. The story, on the other hand, is not as simple as what is depicted in the video that can be found below.

At first glance, it might appear that the Anti-Monopoly Agency (ARA) of Kenya has something personal against Nigerian businesses. When one examines the statements made by Flutterwave and Korapay in greater detail, it becomes clear that this is yet another instance of regulations not keeping pace with technological advancement.

In spite of this, additional investigation reveals that there is smoke coming from the huddle of coals. Depending on where you stand in the argument between innovation and regulation, you may view the series of information that I'm about to provide as suspicious or as par for the course. Your interpretation will be influenced by this debate.

Recent efforts to combat money laundering in Kenya have focused significant attention on Nigeria. Before KiwiPay, Flutterwave, KoraPay, and Kando Technologies were implicated in the ARA's investigation, the Nigerian company Multigate Limited and Avalon offshore logistics were also named as potential suspects.

It has been reported that Nehikhare Eghosasere and Demuren Olufemi Olukunmi, who is currently an executive at Venture Garden Group, are responsible for the establishment of Multigate Limited, which is currently the subject of an investigation by both Interpol and ARA.

On the other hand, Nigerian businesses are not the only ones under scrutiny in the ongoing investigation into money laundering. A Kenyan court heard an appeal from the ARA in June 2022 and froze Sh2.3 billion ($19.48 million) in the account of KiwiPay, a Singapore-based financial technology startup. The appeal was founded on suspicions of money laundering, comparable to those that had been leveled against Flutterwave and Korapay.

Approximately four Kenyans were named as directors in these companies, and the KRA demonstrated that this company may have been involved in a larger and more complex scheme to launder money. OIT Africa, a company based in South Africa, was one of the many businesses in Kenya whose bank accounts were frozen.

Additionally, the directors of RemX capital were of Kenyan descent, and the entire series of allegations feature Kenyans and Nigerians working together in concert.

There could be a few good explanations for this.

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The Chief Executive Officer of Flutterwave, Gbenga Agboola, suggested that the upcoming elections in Kenya could be a possible reason for what appears to be a witchhunt of companies based in Nigeria.

Other sources close to these fintech companies cautiously agree, stating that uniting against a common foe, even if that foe is imagined, is a surefire way to get people united during an election.

Reports that featured RemX Capital and Multigate Limited also claimed that these companies were backed by a powerful Kenyan politician who remained unnamed for legal reasons. While the political undertones are not clear, it was claimed that these reports featured RemX Capital and Multigate Limited.

The rebuttal to this idea is the assertion that the investigations, which the ARA claims to have begun in 2020, have been going on for some time and that the companies in question are connected.

The most recent actions taken by the ARA make sense, however, if there is reason to believe that opposition parties are bringing funds into the country.

We can still have a progressive discussion about this topic, despite the possibility that it contains political overtones.

Regulations versus international financial technologies

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It would be irresponsible to jump to any conclusions at this point given that every company has refuted these allegations and that the investigations are still ongoing. If you've been paying attention to the startup industry, you've probably noticed that companies are utilizing technologies to find and exploit gaps in regulations.

Solar companies are producing lower wattage mini-grids in high volumes to skirt around the regulatory limits, and digital banks are acquiring a state-level microfinance bank license that allows them to operate nationwide with the assistance of technology. The now-defunct motorcycle hailing companies of Lagos found theirs with the government's permitted bike capacity. Similarly, solar companies are producing lower wattage mini-grids in high volumes.

According to an investor who has extensive knowledge of Kenya's financial technology space, the Kenyan government has actually been supportive of financial technology companies, which is why the recent moves have been quite surprising.

If the nation of origin is irrelevant and the ARA is not targeting all fintech companies, then it would be helpful to note what these fintech companies have in common if they are all facing the ire of the ARA. All of the fintech companies in question are involved in the operation of some kind of international payment service. either through the use of cards or by sending a transfer.

It is interesting to note that the cross-border payments space in Africa has historically been difficult, and legacy companies like Western Union and Moneygram have to constantly deal with tough regulations. As a result, sending money to other countries from sub-Saharan Africa is the most expensive region in which to do so.

The vast majority of reports have concentrated on individuals sending money; however, what they haven't shown is how much more difficult it is for businesses that run global operations from these companies to manage payments and move funds across borders.

The emergence of fintech companies with the goal of participating in the cross-border payments market has made it a great deal less difficult for people living in Africa to send money to and from the continent. B2B payments are handled by Flutterwave, which has a presence in 33 African countries. Korapay, Kandon Technologies, and Multigate Limited also assist businesses in managing funds in multiple locations and currencies. Korapay recently expanded their operations to the UK.

When one examines the situation more closely, one realizes that the ARA's suspicions appear to be directed at businesses that participate in the B2B cross-border payments service. For businesses in this position, it would be necessary to transfer enormous sums of money.

In a public statement to Nairametrics, Multigate asserts that "the mere fact that large amounts of money are moved by our businesses does not make it money laundering and demonstrates a lack of understanding of our business model." Nairametrics was provided with this information after Multigate issued the statement.

It shouldn't come as much of a surprise that they've chosen to move money through strange routes, given the stringent regulatory environment that exists in Africa; these routes have piqued the suspicion of the African Revenue Authority (ARA) regarding money laundering.

Let's take the example of Flutterwave, which is a company that settles transactions for Uber in Nigeria. Uber is a global company that provides ride-hailing services. Although the company receives payments from customers in naira, it may on occasion be required to make settlements in naira to merchants such as Uber.

It has become a significant problem in Nigeria because the Central Bank of Nigeria (CBN) has consistently put into effect stringent measures to restrict access to foreign exchanges. As a consequence of this, the company would be forced to collaborate with organizations based in nations that have a comparable level of development and policies that are favorable to foreign exchange. This is where Kenya enters the picture.

This is not a new occurrence for us.

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The fact that all of the companies were intertwined in a complicated scheme to launder money was a crucial point brought up by the ARA. Conversations I had the day before brought up even more strange occurrences, despite the fact that I could continue to play the role of the devil's advocate and attribute it to fintechs working together.

In spite of the fact that the ARA connected Korapay and Flutterwave, I learned through an off-the-record interview that neither of these companies has ever conducted business in Kenya.

Although there were no official business dealings between the two companies, it has been alleged in a number of business publications that Flutterwave made payments to Boxtrip capital. Boxtrip capital is a company that was registered by Enyioma Olufemi Madubuike, who is the Chief Compliance and Legal Officer for Korapay. The attempts that were made to get in touch with him have been fruitless. Additionally, some of the funds were moved to other companies that were registered to individuals who were affiliated with other businesses.

Even though I'm making sure not to draw any conclusions from this, it demonstrates that the ARA most likely has good reason to be suspicious of the activities taking place on such accounts. It is also a reminder to fintech companies that they need to reconsider the way in which they deal with compliance and regulations.

If a legitimate business in Nigeria transfers a certain amount of money to an account in Kenya, the first thought that should come to anyone's mind shouldn't be "money laundering." One of our sources suggests that the ARA should at the very least give the company a call and inquire as to the purpose of the transaction.

Our source claims that the approach taken by the ARA has opened the door for extortion of the respective companies, despite the fact that it has not been established that any clear cases of money laundering have occurred beyond the fact that money has entered an account.

In the instance of Korapay, the company stated that the money that was frozen by the ARA was intended to be used for the purpose of purchasing a payment license to operate in Kenya. It would appear that the funds have been accumulating in the aforementioned account since the year 2021.

When we added up everything that was required to obtain a payments license in Kenya, it totaled $250,000, which is the same amount of money that was frozen in Korapay's accounts. We were able to obtain documents from the CBK that showed all the amounts that were required to obtain those documents.

As for the sums that Flutterwave transferred to companies such as Boxtrip travels limited, Bagtrip travels limited, and Rainbow technology solutions, we could once more make reference to Nigeria's foreign exchange difficulties. This is an unmistakable indication that these businesses must be a part of a loophole to get around the CBN's tight ship.

The Nigerian Securities and Exchange Commission and Chaka Technologies provided an example of regulatory bodies freezing bank accounts during the course of the previous year. Instead of the unsettling narratives that are currently being propagated in a number of different quarters, it might be a sign that regulatory restrictions need to be tightened.

Additionally, even if the companies are not engaged in anything on towards, we need to acknowledge that making cross-border transactions seamless for honest customers could also mean making them seamless for dishonest actors who are constantly looking for financial loopholes to exploit. This is something that we need to be aware of.

As we discovered with Ping express, a US cross-border payments startup whose founders were jailed for facilitating the proceeds of romance scams in Nigeria, the companies could also be in cahoots with the individuals who are perpetrating the scams.

Nigeria reported the second highest number of cyberattacks in the world in the year 2020, and it also reported experiencing massive losses due to fraud. On a global scale, the situation is very much the same, with card fraud alone accounting for a loss of $28 billion.

I have refrained from disclosing some key information because I am unable to confirm it at this time because the details of this story are far from being finished. Keep an eye on this space for up-to-date information. You can also talk about compliance as a founder of a fintech company by catching up with us on Twitter by 7 o'clock on the evening of Friday, July 22, 2022.