In recent years, the world has witnessed an explosion in mobile payments, also known as M-payments, which employ cellphones to move money.
Since M-payments were launched four years ago by Kenyan telecom Safaricom, Kenya has been a leader in employing this technology. M-payments are considered relatively safe, easy and efficient. Unfortunately, though, they are also extremely vulnerable to abuse by money launderers and terrorism financiers.
In places like Kenya, where many people don’t use banks, there is a tendency to gravitate toward M-payments, along with informal means of moving money.
In 2009, approximately 7 million Kenyans used M-payments. The number is increasing every year and the country now has several major providers.
Setting up an M-payments account is easy: users take their identification card and phone to an approved agent to have the number registered and cash is put into the new account. Those with bank accounts can also have funds wired.
Given the ubiquity of cellphones in Kenya, more and more people can access traditional financial and banking services. M-payment users can wire out funds, receive money, check balances and pay bills.
A Masai farmer recently told the BBC that after selling cows in Nairobi, he puts the cash on his phone account to stop criminals from stealing his money.
The ability to pay vendors and workers in M-payments facilitates business activity and provides access to virtual banking everywhere.
While most transactions are relatively small, averaging less than $40, intelligence suggests that criminals are exploiting vulnerabilities in this segment of the financial sector to execute their nefarious plans. Experts have discerned two primary ways lawbreakers use M-payments to skirt financial controls: digital structuring and identity theft.
In structuring, also known as smurfing, dirty money is converted into financial instruments in very small amounts so as not to arouse suspicion. Using M-payments, criminals and terrorist financiers can exchange dirty money, convert it into small amounts of digital “clean” cash, then transfer it easily via cellphone. This allows them to avoid carrying it on their person or the transparency of wiring it via the banking sector.
Not surprisingly, illicit actors regularly mix and match M-payments with other money-movement methods such as digital value cards, trade-based money laundering and charities to further obscure their trail.
Kenya should also be concerned about the rise in identity theft. M-payment users are most vulnerable when they are registering their phone with an authorized agent. Unless the agent has a strong method for securing the information received, criminals can obtain users’ personal information and steal their money.
One way to avoid this would be to require that all new users register their phone at a bank. Because most financial institutions have a robust “know your customer” process, this would reduce the chance of identity theft.
Another alternative is to have new clients register phones at automated teller machines and present their ATM card and personal identification number selection as they register the phone.
Although Kenya has made tremendous progress in recent years in implementing anti-money-laundering and terrorism-financing controls, there are still some crucial steps it can take to curb abuse of M-payments.
The government should train law enforcement and intelligence agencies on means used by illicit actors to abuse new payment methods, technology and the communication sector. Kenya’s Financial Intelligence Unit and Central Bank may also wish to avail themselves of training and guidance provided by international organizations such as the International Monetary Fund/World Bank, the Financial Action Task Force and the Eastern and South African Anti Money Laundering Group.
Each of these organizations can assist Kenya in finding ways to curb the raising and moving of tainted funds by illicit actors in a variety of sectors.
Finally, the U.S. State and Treasury departments can provide money-laundering and terrorism-financing training.
Countries like Kenya will need to find the appropriate balance between anti-money-laundering/terrorism-finance controls and the ease of new payment methods such as mobile banking. Executing measures to prevent and detect illicit financial activity is vital in protecting the integrity of the financial system and curbing the flow of dirty money.