Money Laundering and Real Estate Sector in Kenya: Towards Robust Regulation By Ssekubwa Rogers Githinji Student No. 094294 Master of Laws October, 2022 Money Laundering and Real Estate Sector in Kenya: Towards Robust Regulation By Ssekubwa Rogers Githinji Student No. 094294 Submitted in Partial Fulfilment of the Requirements for the Degree of Master of Laws (International Financial Law and Regulation) at Strathmore University Strathmore Law School Strathmore University Nairobi, Kenya October, 2022 ©This thesis is available for Library use on the understanding that it is copyright material and that no quotation from this thesis may be published without proper acknowledgment. ii Declaration and Approval Declaration I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis contains no material published previously or written by another person except where due reference is made in the thesis itself. © No part of this thesis may be reproduced without the permission of the author and Strathmore University Student’s name: Ssekubwa Rogers Githinji Signature: Date: 24/08/2022 Approval The thesis of Ssekubwa Rogers Githinji was reviewed and approved for examination by the following: Dr Constance Gikonyo Lecturer, Strathmore Law School, Strathmore University Dr Peter Kwenjera Dean Strathmore Law School, Strathmore University Dr Bernard Shibwabo Director of Graduate Studies, Strathmore University iii Abstract The problem this study seeks to address is how the failure to impose money-laundering reporting obligations on all non-financial actors who play a critical role in land transactions where the real estate sector falls is linked to the promotion of money laundering in Kenya. With the over-regulated financial system, smart money launderers move to the underregulate real estate sector with many unregulated actors. Laundering money through real estate has led to negative consequences such as increased prices, destabilisation of the property market, and, most importantly, providing a safe investment for criminals. The legal regime on anti-money laundering and land laws does not explicitly address money laundering through real estate. The existing gaps can be exploited to invest dirty money into real estate. This study is done through a doctrinal research methodology to investigate the research problem. The study takes land laws, POCAMLA, Anti-Corruption and Economic Crimes Act as a case study. A review of the gaps in land laws generates new insights and informs the formulation of regulations for safeguarding Kenya's real estate sector against money laundering. The study also looks at best practices in jurisdictions such as the United States of America (USA) and South Africa (SA) to draw lessons on how to address money laundering through the real estate sector. The lessons drawn from these two jurisdictions are intended to inform the formulation of robust, sector-specific legislation to curb money laundering through real estate based on Kenya's local context. This research poses and investigates three questions to achieve its overarching purpose. First, in answering the questions on the difficulties of using the current land laws and anti-money laundering regulatory framework, the study establishes that the laws are not specific to addressing money laundering through Kenya's real estate. As a result, they are ineffective in solving the problem. This inefficiency originates from challenges arising from the non- inclusion of all non-financial actors as reporting agents. Furthermore, there is a disconnect between land laws and anti-money laundering regulations when addressing money laundering, specifically in real estate. The research shows that there are no robust safeguards to anticipate and lock out money laundering activities from the onset of a conveyancing transaction to the completion stage, during which the title is registered in favour of a purchaser. A specific anti-money laundering regime for real estate transactions would be effective because it will enable the implementation of context-specific and appropriate strategies for the real estate sector. The study further concentrates on measures to curb money laundering through real estate in the USA and South Africa. The findings have important implications for the general understanding of the effectiveness of Kenya's anti-money laundering regime in dealing with real estate money laundering. Additionally, other East African countries with similar legislation to Kenya could benefit from seeing the weaknesses identified in the Kenyan regime and the possible solutions they may borrow from. iv Table of Contents Declaration and Approval ....................................................................................................... ii Abstract ..................................................................................................................................... ii LIST OF ABBREVIATIONS ............................................................................................... vii LIST OF CASES .................................................................................................................. viii LIST OF STATUTES AND CONVENTIONS .................................................................... ix ACKNOWLEDGEMENT ...................................................................................................... xi DEDICATION ....................................................................................................................... xii Chapter One ............................................................................................................................. 1 1.1 Introduction ................................................................................................................. 1 1.2 Background ................................................................................................................. 1 1.3 Statement of the Problem ............................................................................................ 5 1.4 Statement of Objectives ................................................................................................... 5 1.5 Research questions ........................................................................................................... 5 1.6 Hypothesis........................................................................................................................ 6 1.7 Justification of the Study ................................................................................................. 6 1.8 Theoretical Framework: The Badman Theory Rational Choice Theory ......................... 6 1.9 Literature Review ........................................................................................................... 10 1.9.1 Anti-Money Laundering Regulations and the Real Estate Sector ..................... 10 1.9.2 Challenges in Regulating Money Laundering through the Real Estate Sector .. 13 1.9.3. Suggested way forward for combatting money laundering in the real-estate sector .......................................................................................................................................... 14 1.10 Research Methodology ................................................................................................ 15 1.11 Chapter Breakdown ..................................................................................................... 16 Chapter Two ........................................................................................................................... 17 2.1 Introduction .................................................................................................................... 17 2.2 The Real Estate sector in Kenya .................................................................................... 17 v 2.2.1 Commercial ............................................................................................................. 18 2.2.2 Residential ............................................................................................................... 19 2.2.3 Hospitality ............................................................................................................... 20 2.3 The Real Estate sector as a channel for money laundering ........................................... 20 2.4 The money laundering process in real estate ................................................................. 21 2.5 Legal and Institutional Framework ................................................................................ 26 2.5.1 Land Act, 2012 ........................................................................................................ 28 2.5.2 Land Registration Act, 2012 ................................................................................... 29 2.5.3 Estate Agents Act .................................................................................................... 30 2.5.4 Stamp Duty Act ....................................................................................................... 30 2.5.5 Income Tax Act ....................................................................................................... 31 2.5.6 Anti-Corruption and Economic Crimes Act ........................................................... 32 2.5.7 Proceeds of Crime and Ant-Money Laundering Act, 2012 .................................... 33 2.5.7.1 Lawyers and their roles as designated non-financial professions ........................ 35 2.5.7.2 Advocates client privilege .................................................................................... 39 2.5.7.3 Banks and money laundering through real estate ................................................ 40 2.6 Conclusion ..................................................................................................................... 40 Chapter Three ........................................................................................................................ 42 3.1 Introduction .................................................................................................................... 42 3.2 Prevention mechanisms against money laundering in the USA .................................... 43 3.2.1 Prevention through legislation ................................................................................ 44 3.2.2. Geographic Targeting Orders ................................................................................ 53 3.3 Measures taken to curb money laundering in South Africa ........................................... 57 3.3.1 A historical perspective of money laundering in South Africa's real estate sector . 57 3.3.2 Measures to detect and deter money laundering in the South African real estate sector ................................................................................................................................ 59 3.3.3 Implementation of the FICA ................................................................................... 61 vi 3.4 Conclusion ..................................................................................................................... 62 Chapter Four .......................................................................................................................... 63 4.1 Introduction .................................................................................................................... 63 4.2 Key Findings .................................................................................................................. 64 4.3 Importance of findings ................................................................................................... 69 4.4 Recommendations .......................................................................................................... 71 4.4.1 Sealing loopholes and omissions ............................................................................ 71 4.4.2 Institutional synergy in the fight against money laundering in real estate ............. 75 4.4.3 Non-financial actors as key players in real estate transactions ............................... 76 4.5 Conclusion ..................................................................................................................... 81 Bibliography ........................................................................................................................... 83 Journal Articles ................................................................................................................ 83 Reports ............................................................................................................................. 84 Online sources .................................................................................................................. 84 APPENDICES ........................................................................................................................ 91 Appendix A: Ethics Clearance Certificate .......................................................................... 91 Appendix B: Plagiarism Report ........................................................................................... 92 vii LIST OF ABBREVIATIONS Advanced Notice of Proposed Rulemaking ANPRM Anti-Money Laundering AML Beneficial Ownership BO Commercial Real Estate CRE Customer Due Diligence CDD Customer Identification Program CIP Financial Action Task Force FATF Financial Crimes Enforcement Network FinCEN Geographical Targeting Order GTO Know Your Customer KTC Limited Liability Companies LLCs Politically Exposed Person PEP Real Estate Money Laundering REML Suspicious Activity Report SAR Suspicious Transaction Report STR Financial Investigation Unit FIU Financial Reporting Centre FRC United States of America USA Eastern and Southern Africa Anti-Money Laundering Group ( ESAAMLG) viii LIST OF CASES Pillay and Others v S 2004 (2) BCLR 158 (SCA) The matter of Estate Agency Affairs Board v Auction Alliance (Pty) Ltd and Others (CCT 94/13) [2014] ZACC 3; 2014 (3) SA 106 (CC): 2014 (4) BCLR 373 (CC) Hattingh v S [2015] ZASCA ix LIST OF STATUTES AND CONVENTIONS Annunzio-Wylie Anti-Money Laundering Act (1992) (USA) Anti-Drug Abuse Act (1988)(USA) Bank Secrecy Act (1970) (USA) Constitution of Kenya (1963) (Kenya) Constitution of Kenya (2010)(Kenya) Crown Land Ordinance (1902) (Kenya) Currency and Foreign Transactions Reporting Act (1970) (USA) Financial Intelligence Act (2001) (South Africa) Income Tax Act (2012) (Kenya) Intelligence Reform & Terrorism Prevention Act (2004) (USA) Money Laundering and Financial Crimes Strategy Act (1998) (USA) Money Laundering Control Act (1986) (USA) Money Laundering Suppression Act (1994) (USA) Prevention of Organised Crime Act (1998) (South Africa) Proceeds of Crime and Ant-Money Laundering Act (No. 51 of 2012) (Kenya) Stamp Duty Act ( 2020) (Kenya) The Land Act (2012) (Kenya) The Land Registration Act (2012) (Kenya) The Proceeds of Crime and Anti Money Laundering Act (2017) (Kenya) x Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (2001) (USA) xi ACKNOWLEDGEMENT I am indebted to my supervisor Dr Constance Gikonyo, Strathmore Library Team for responding to my emails timeously, my Father Dr Githinji Gitahi for his consistent support over the years. The God Almighty remains the giver of strength. xii DEDICATION This thesis is dedicated to my friend Edwin Saluny who at the time of undertaking my Advocates Training Programme (ATP 2021-2022) at the Kenya School of Law concurrently with my Master of Laws dedicated his time out of practice to mentor me and cheer me on. The sacrifices were not in vain. 1 Chapter One This study shows how land laws and land transactions facilitate money laundering. It explores the regulatory framework for land transactions and money laundering and shows how the existing regulatory gaps are not robust to fight money laundering through Kenya's real estate sector. The study will analyze how Kenya's real estate sector is used for money laundering in purchasing and selling land. A review of the gaps in land laws would generate new insights and inform the formulation of regulations for safeguarding Kenya's real estate sector against money laundering. This research will utilize a doctrinal research methodology to demonstrate the topic under study. This chapter begins with an overview of the context and background that frames the study. Then, it will state the problem statement, the statements of objectives, the research questions and the hypothesis. The chapter concludes with the justification for the study, a theoretical framework, a literature review and a research methodology. There is a rise in the growth of real estate in Kenya.1 This growth is evident in both residential and commercial real estate.2 The increased number of domestic and foreign investors is fuelling the development of Kenya's real estate sector.3 However, aside from the legitimate funding source derived from these investors, media articles show that illicit funds form a substantial amount of capital invested in Kenya's real estate.4 Reports by FATF show that real estate transactions are susceptible to money laundering, a problem many countries worldwide are grappling.5 However, despite the various media reports on money laundering through Kenya's real estate sector, no scholarly literature expounds on 1 Ayemoba A, The Kenyan real estate market and the introduction of Real Estate Investment Trusts, 14 February 2017- 01 February 2022 2 Ayemoba A, The Kenyan real estate market and the introduction of Real Estate Investment Trusts, 14 February 2017- 01 February 2022 3Ayemoba A, The Kenyan real estate market and the introduction of Real Estate Investment Trusts, 14 February 2017- 01 February 2022 4 Mwita M, ‘Nairobi named among top cities with stolen wealth in real estate’ The Star, 20 July 2020 < https://www.the-star.co.ke/business/2020-07-20-nairobi-named-among-top-cities-with-stolen-wealth-in-real- estate/> On 22 July 2022. 5 Financial Action Task Force, Money Laundering and Terrorist Financing Through the Real Estate Sector, 29 June 2007,4. 1.1 Introduction 1.2 Background 2 the relationship between Kenya's real estate transactions and money laundering. In addition, land laws are not robust in addressing money laundering through the real estate sector. The existing regulatory gaps create an opportunity for smart money launderers to invest dirty money into the real estate sector. Money laundering refers to the injection of illicit funds into a legitimate economy, while real estate refers to residential and commercial developments.6 In Kenya, the regulatory framework that deals with money laundering is the Proceeds of Crime and Anti-money laundering Act (POCAMLA); however, the Act does not explicitly address money laundering through the real estate sector. On the other side, several land laws deal with real estate transactions. These include the Land Act, the Land Registration Act, Stamp Duty Act, and the Income Tax Act. These key land legislations provide a regulatory framework that informs buying and selling of land. The concern of this study is that the failure to impose money-laundering reporting obligations on non-financial actors who play a critical role in the land transactions where the real estate sector falls may be linked to the promotion of money laundering in Kenya. Land laws play a crucial role in buying and selling real estate. Therefore, in this quest to monitor money laundering through the real estate sector, there is a need to investigate the link between money laundering and Kenya's real estate transactions. Interestingly, the land legislations and POCAMLA are silent on how to address money laundering through land transactions. As a result, this topic has not been discussed in academic resources in Kenya. Most of the information related to the link between money laundering and Kenya's real estate sector is in the news, but this is not to say that the problem does not exist in Kenya. Accordingly, this study will show how the gaps in Kenya's land laws encourage money laundering during the selling and purchasing of real estate. Money laundering through real estate transactions is not just a local problem. South Africa, Canada and the United States of America are some of the countries facing manipulating land transactions for money laundering due to the gaps in existing land laws. 6 Financial Action Task Force, Money Laundering and Terrorist Financing Through the Real Estate Sector, 29 June 2007,5. 3 Moreover, a review of FATF reports on money laundering through the real estate sector, taking the perspective of countries such as South Africa and the United States of America, exposes a link between land transactions and money laundering.7 Despite Kenya having a regulatory framework that deals with money laundering and land transactions, according to a 2020 report by 'The Sentry', Nairobi is one of the top cities with laundered money in real estate.8 The city is amid a housing crisis, with dirty money driving the luxury real estate market.9 Critiques have stated that the surge in real estate investment is driven by dirty cash.10 This abnormality raises one fundamental question: what is fuelling the drastic growth in Kenya's real estate sector? Smart money launderers heavily use Kenya's real estate sector to clean up proceeds from graft and other illicit financial flow, with Nairobi's real estate market being the most preferred.11 This sector is favourable for laundering illegal funds because it facilitates large cash transactions and provides money launderers with an additional opportunity for profit.12 As a result, Kenya is a transit point for trade-based money laundering.13 It is, therefore, vulnerable to money laundering, a process made easy by lawyers who use legal privilege to circumvent money laundering investigations by refusing to provide information that they consider confidential.14 Money launderers also use limited liability companies (LLCs) and shell companies to purchase real estate in big cities. These legal entities are, in most cases, financed by other offshore 7Financial Action Task Force, Money Laundering and Terrorist Financing Through the Real Estate Sector, 29 June 2007,17. 8 Mwita M, ‘Nairobi named among top cities with stolen wealth in real estate’ The Star, 20 July 2020, - on 16 August 2021. 9 Omondi D, ‘How dirty cash fomented Kenya’s real estate boom’ The Standard, 22 July 2021< https://www.standardmedia.co.ke/business/real-estate/article/2001418885/how-dirty-cash-fomented-kenyas- real-estate-boom > On 16 August 2021. 10 Omondi D, ‘How dirty cash fomented Kenya’s real estate boom’ The Standard, 22 July 2021< https://www.standardmedia.co.ke/business/real-estate/article/2001418885/how-dirty-cash-fomented-kenyas- real-estate-boom > On 16 August 2021. 11Mwita M, ‘Nairobi named among top cities with stolen wealth in estate’ The Star, 20 July 2020, < https://www.the-star.co.ke/business/2020-07-20-nairobi-named-among-top-cities-with-stolen-wealth-in-real- estate/> On 31 May 2021. 12Freckleton M, Is Jamaica’s anti-money laundering regime effective?’’22(1) Journal of Money Laundering, 2019,93. 13 Gikonyo C, ‘The legal profession in Kenya and its anti-money laundering obligations or lack thereof’ 22(2) Journal of Money Laundering, , 2019, 247. 14 Gikonyo C, ‘The legal profession in Kenya and its anti-money laundering obligations or lack thereof’, 247. 4 firms.15 As a result, they enjoy several benefits and protection, from keeping the beneficial owners of real estate anonymous to protecting them from any company liability.16 Unfortunately, no one knows the exact amount of money laundered in the real estate sector annually because it is challenging to do so accurately, and the absence of such reliable figures is admitted at a policy level.17 Money laundering operates in three key stages: (1): placement, where illicit cash enters the financial system, commonly through bank deposits; (2) layering, where the launderer performs multiple transactions to conceal the illegal origins of the funds; and (3) integration, where the illicit funds disguised as legitimate funds is put back into the economy.18 In the money laundering cycle, money laundering through real estate is encountered at the reintegration stage. During this final stage, dirty money is introduced into the real estate sector by purchasing and developing residential and commercial buildings. The illegally obtained funds can be hidden in real estate by several transactions that cloak the genuine source or invest in properties that provide a façade of legality.19 Furthermore, real estate owners may sell real estate without the involvement of agents and banks through an all-cash purchase, which sidesteps anti-money laundering ( AML) client-identification procedures.20 Additionally, land and house purchases involve a tremendous amount of money coupled with fewer regulatory and reporting requirements, creating a loophole to reintegrate illicit funds into the legitimate economy.21 The consequence of investing dirty money into the real estate sector is that real estate becomes expensive for ordinary people to afford.22 Although Kenya's steps are commendable in fighting money laundering, it is still necessary to review the specific regulatory framework in place in order to evaluate its readiness to deal with the problem of money laundering through the real estate sector. 15Teichmann F, ‘Twelve methods of money laundering’ 20(2) Journal of money laundering, 2017,135. 16McPherson G, ’Floating on a sea of funny money: An analysis of money laundering through Miami real estate and the federal government’s attempt to stop it’ 26(159) University of Miami Business Law Review, 2017, 165. 17 King C and Zavoli I, ‘New development: Estate agents’ perspectives of anti-money laundering compliance - four key issues in the UK property market’, 1. 18Boles J, ‘Anti-money laundering initiatives for the South African real estate market’ 1(1) Journal of comparative urban law and policy, 2017,198. 19Boles J, ‘Anti-money laundering initiatives for the South African real estate market’ ,200. 20 Boles J, ‘Anti-money laundering initiatives for the South African real estate market’ ,201. 21Naheem M, ‘Money laundering and illicit flows from China-the real estate problem’ 20(1) Journal of money laundering, 2017, 17. 22 Remeur C, ‘Understanding money laundering through real estate transactions’ European Parliamentary Research Service, 2019,7. 5 In Kenya, the primary focus is on fighting money laundering through banks by imposing strict reporting requirements on these financial institutions. Money laundering is characterized by taking proceeds from unlawful activities and re-introducing these proceeds back into the economy as legitimate funds, which can then be used to conduct economic activities without being linked to illicit sources.23 Money launderers use skilled professionals such as investment bankers, lawyers, accountants, real estate agents, and bondholders to legitimize their criminal proceeds through innovative techniques.24 With the over-regulated financial system, smart money launderers move to the underregulate real estate sector with many unregulated actors.25 The consequence of investing dirty money into real estate is that real estate becomes expensive to afford for ordinary people who earn money through legitimate means. Some of the factors that lead to money laundering in the real estate sector include the lack of effective and efficient internal controls for most players. Examining the relationship between money laundering and the real estate sector could significantly prevent the investment of dirty money into real estate. This research seeks to investigate this issue. 1. To demonstrate how land laws can prevent or aid money laundering through real estate sector in Kenya. 2. To demonstrate how money laundering is perpetuated through real estate sector in Kenya. 3. To draw lessons for Kenya from best practices in other jurisdictions (the United States of America and South Africa). 1. How can land laws can assist in preventing or aiding money laundering through the real estate sector in Kenya? 2. How is money laundering perpetuated through the real estate sector in Kenya? 23 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 17, European Parliament, Understanding money laundering through real estate transactions, 2. 24 Smith K, ‘Challenges Combating Money Laundering in the Real Estate Sector in South Africa’ University of Western Cape, 2021, 34. 25 Remeur C, ‘Understanding money laundering through real estate transactions’ European Parliamentary Research Service, 2019,1. 1.3 Statement of the Problem 1.4 Statement of Objectives 1.5 Research questions 6 3. What lessons can Kenya learn from select jurisdictions such as The United States of America and South Africa? There are loopholes in the land laws and anti-money laundering legislations in Kenya and this encourages laundering through the real estate sector. The findings of this study will enable Kenya's financial investigation unit and the courts to effectively detect, investigate and prosecute money laundering in the real estate sector. In addition, the study will highlight the roles of the different key players in real estate transactions and how they can be involved in resolving the problem of money laundering in Kenya's real estate sector. Increased understanding of how money laundering is done through the real estate sector and devising means to overcome this problem may minimize the chances of money laundering through the real estate sector. This will stabilize the real estate market, making it affordable for ordinary people. Furthermore, the study will inform legislators on what improvement can be made to Kenya's regulations concerning the real estate sector. Moreover, the findings of this study may prompt legislators to include conveyancing advocates and land registrars in Kenya's legal regime on anti-money laundering as reporting agents. More still, as a result of this study, real estate title issuers may also be required to file suspicious activities reports if they suspect that a client is involved in money laundering at the point of registering a transfer in favour of a purchaser. This study is rooted in the nexus between the real estate sector and money laundering. It is underpinned by the Badman Theory and the Rational Choice Theory. Justice Oliver Wendell Holmes Junior propounded the badman theory. He defined law as predictions of what courts 1.6 Hypothesis 1.7 Justification of the Study 1.8 Theoretical Framework: The Badman Theory Rational Choice Theory 7 will decide.26 According to him, the law is derived from judicial decisions enforced by the state.27 His view of law considers other factors that influence a legal system instead of focusing on "pure law". Such factors include philosophy and economics. According to Justice Wendell, laws are not to be followed because they have been in existence for a long time. He said laws need to be practical and not merely formal or traditional. He states that: "The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race. Suppose you want to know the law and nothing else. In that case, you must look at it as a bad man who cares only for the material consequences that such knowledge enables him to predict, not as a good one, who finds his reasons for the conduct, whether inside the law or outside of it in the vaguer sanctions of conscience.28 The bad man cares only about the functional content of the law and does not care about the law on the books so long as it does not translate into the law in action. For example, why should the bad man care if the law says contracts must be performed when the only sanction for breach is a damage award that would cost the bad man less than performance? The law-on-the-books obligation to perform does not motivate the bad man unless it is backed up by a sanction sufficient to make performance in the bad man's self-interest.29 A bad man has as much reason as a good one for wishing to avoid an encounter with the public force. The bad man wants to avoid coming to crossroads to avoid sanctions.30 In speaking of the 'bad man,' it is clear that Holmes intended to include any person who is having to contemplate legal proceedings, whether (as a bad man) as an accused in criminal proceedings or a litigant, whether plaintiff or defendant, in a civil action. When the bad man hires a lawyer, he only wants to know the practical consequences of doing a certain act (which might be considered illegal). The bad man is pragmatic in that he wants to know the consequences not because he is a moralist but because he knows there is what one may call the law, a force he cannot challenge as applied by courts. 27 Holmes O, ‘The Path of the law’ The Harvard Law Review Association, 110(5), 1997, 994. 28 Holmes O, ‘The Path of the law’ The Harvard Law Review Association, 110(5), 1997, 993. 29 Holmes O, ‘The Path of the Law’ Harvard Law Review Association 10 (8), 1897, 459. 30 Holmes O, ‘The Path of the Law’ Harvard Law Review Association 10(8), 1897, 461. 8 The rational theory provides that a cost-benefit analysis influences the commission of a crime.31 Man is a rational being; based on this premise, he estimates the cost (punishment) and benefit (gain) if he engages in any criminal undertaking before getting involved in any criminal activity.32 Therefore, the decision to opt for laundering money using the real estate sector versus the other sectors results from money launderers gauging the effort, risks and benefits involved. The goal of investing dirty money into the real estate sector is to legitimise its origin. Money launderers are more interested in cleaning the dirty money than making a profit, even though it has been proven that laundering money through the real estate sector is more profitable than other sectors.33 When buying real estate money, launderers pay close to 30% of the purchase price in cash, which is beneficial to them and the seller because this amount is not subject to tax.34 The other 70% is paid through the banking system to avoid raising any red flags.35 In weighing the alternative sectors for money laundering criminals: (a) look at the risks involved, such as the chances of being caught, and (b) the amount of money that is likely to be lost in the process of cleaning the dirty money, (c) the chances of attracting attention from the public as well as raising suspicion from investigation agencies, (d) the possibility of arrest and successful prosecution and the benefits of choosing the real estate sector over other sectors. Public service officials, politicians, and civil servants hold positions that present opportunities for channelling money from the government to themselves and third parties.36 This class is well-educated and knows how the real estate sector works. As such, they have the correct information before investing dirty money into the real estate sector. By investing dirty money into the real estate sector, the elite can conceal large amounts of cash while in office and further distance themselves from the ownership of such real estate through third-party buyers.37 From the money got through corruption, the elite can purchase apartment 31 This theory was explained from an economics perspective by Gary Becker. See Becker, ‘Crime & punishment: An economic approach’ in Becker & Landes (eds) Essays in the Economics of Crime and Punishment, 1974. 32 Becker G, ‘Crime and punishment: An economic approach’ (76)2 The University of Chicago Press Journals, 1968, 177. 33 Teichmann F, ‘Financial crimes in the real estate sector in Austria, Germany, Liechtenstein and Switzerland’, Journal of money laundering, 2020, 12. 34 Teichmann F, ‘Twelve methods of money laundering’135. 35 Teichmann F, ‘Twelve methods of money laundering’,135. 36 Esoimeme E, ‘Institutionalising the war against corruption: new approaches to asset tracing and recovery’, 218. 37 Kiplagat S, ‘How Civil servant bought sh279m houses in days’ Business Daily, 23 June 2021, https://www.businessdailyafrica.com/bd/economy/how-civil-servant-bought-sh279m-houses-in-days-3447186 On 24 May 2022. 9 blocks in Nairobi's suburbs and invest in luxurious residential homes.38 For politicians and the get-rich, quick middle class looking into legitimising illicit cash acquired through kickbacks and corruption, investing in the real estate sector makes the risk worth it.39 Money launderers hand over their illicit cash to renovation companies, construction companies, real estate agents and other proxies to transact with it on their behalf. As such, there is minimal risk for the corrupt elites and politicians to route illicit cash into the real estate sector. On the other side, the risk is more significant for third parties who pose as real estate buyers if the money laundering scheme is unearthed.40 In terms of risk, getting caught and successfully prosecuted is near zero. The politicians, elites, and third parties investigated for money laundering in the real estate sector are often left scot- free. Most culprits are arrested and released as per the current cases of money laundering through the real estate sector. Moreover, the chances of arrest for the money launderer are minimal given the involvement of shell companies, trusts and third parties who obscure the true owner of real estate acquired through money laundering. Shell companies conceal the beneficial owners of real estate; moreover, the weak institutional infrastructure at the Lands Registry and the divergence between POCAMLA and The Land laws in fighting money laundering through the real estate sector is a significant gap in holding the criminals accountable. 38 Kiplagat S, ‘How Civil servant bought sh279m houses in days’ Business Daily, 23 June 2021, https://www.businessdailyafrica.com/bd/economy/how-civil-servant-bought-sh279m-houses-in-days-3447186 On 24 May 2022. 39 Kiplagat S, ‘Civil Servant busted with half a billion shillings in four bank accounts’ Daily Nation, 4 August, 2021 -< https://nation.africa/kenya/news/civil-servant-found-with-half-billion-in-4-banks-3498166 > on 23 August 2021. 40 Muthoni K, ‘Court allows agency to recover shillings 39 million looted from NYS in an undefended case’ The Standard, 24 July 2020 -< https://www.standardmedia.co.ke/kenya/article/2001379874/court-allows-agency-to- recover-sh39-million-looted-from-nys-in-an-undefended-case > On 23 August 2021. 10 Most of the literature on money laundering in Kenya places a heavy focus on the role of commercial banks in money laundering and the effects of the crime on the performance of financial institutions.41 It also extends to the role of the legal profession in money laundering and the development of the crime concerning mobile banking.42 Little has been said in literature directly targeting how money laundering interacts with the real estate sector. Still, as demonstrated in the background of this dissertation, the real estate sector has become one of the popular means through which money may be laundered in the country.43 Despite this lack of an expansive body of literature that directly speaks to how money laundering interacts with the real estate sector in the country, this literature does the following. First, it reviews the existing scholarship on money laundering in the real estate sector. Second, after doing such a review, it analyses how scholars have attempted to reconcile anti-money laundering regulations in curbing money laundering within the real estate sector. Third, it examines the literature on some challenges in addressing money laundering in real estate. It then concludes by clearly stating the way forward suggested in scholarship to solve this issue. 1.9.1 Anti-Money Laundering Regulations and the Real Estate Sector Literature reveals two significant themes regarding scholarship on how anti-money laundering legislation can be developed to curb the crime of laundering within the real estate sector. On the one hand, there is scholarship that mainly advocates for the role of banks in the fight against money laundering to make it particularly difficult for criminals to launder their proceeds of crime using financial institutions. With this, scholars such as Naheem M argue that formal financial services play a pivotal role in detecting money laundering through the real estate 41 Gikonyo C, ‘Banks in Kenya and anti-money laundering obligations: the conflicts of interests arising’ 24(2) Journal of Money Laundering Control, 2021. See also, Gikonyo C, ‘The legal profession in Kenya and its anti- money laundering obligations or lack thereof’, 2019. See also, Nyaboke M, ‘Money laundering in the banking sector: a critical analysis of the enforcement procedures in Kenya’ - https://su- plus.strathmore.edu/handle/11071/10213 - 2020. 42 Pambo K, ‘Designating lawyers as reporting entities under the Kenya’s anti-money laundering regime’ 23(3) Journal of money laundering control, 2020. See also, Vlcek W, ‘Global Anti-Money Laundering Standards and Developing Economies: The Regulation of Mobile Money’ 29(4) Wiley Online Library, 2011. 43 Teichmann F, ‘Twelve methods of money laundering’ 20(2) Journal of money laundering, 2017,132. 1.9 Literature Review 11 sector.44 But on the other hand, it is not evident in literature how this would play out in a jurisdiction such as Kenya. Researchers such as Farah Faiza provide that anti-money laundering legislation has placed a more significant role on commercial banks in combating money laundering.45 Scholars argue that banks can be used to facilitate criminal activity.46 This can be through adopting them as intermediaries of the funds for such illegal activity with the intent of hiding the source and the beneficial ownership of the money.47 Further, Eleni Tsingou advances this claim, arguing that anti-money laundering professionals have an implementing and monitoring role and protect their interests, shaping the content of legislation and that this process is evident in banks and financial institutions.48 Tsingou establishes that 'Professionalization has strengthened the relative standing of compliance departments against a background of lower tolerance for illegal and irregular transactions and a growing reputational and financial cost for banks knowingly or accidentally enabling such activities.49 The views of Faiza and Tsingou have been grounded in the Kenyan context, as one can notice from Article 48 of the Proceeds of Crime and Anti- money Laundering Act. However, no obligations of reporting money laundering have been placed upon lawyers when it comes to professionals.50 Despite these legal mechanisms that Kenya has put in place in terms of reporting obligations placed upon financial institutions such as banks, amongst others, it has been contended that among the many ways that money laundering takes place in the real estate sector is that at the point of purchase a percentage of illicit money is paid to the owner of the property in cash.51 44 Naheem M, ‘Money laundering and illicit flows from China-the real estate problem’ 20(1) Journal of money laundering, 2017, 12. 45 Faiza A, ‘Assessment of the implementation of anti-money laundering policy: perspectives of corporate bank clients’ in Kenya’- https://su-plus.strathmore.edu/handle/11071/6575 - Strathmore University, 2019. 46 Report on the Prevention of Criminal Use by the Banking System for the Purpose of Money Laundering, < Prevention of criminal use of the banking system for the purpose of money-laundering (December 1988) (bis.org) > December 1988. See also, Measures against the Transfer and Safeguarding of Criminal Origin, Recommendation No. R (80)10 adopted by the Committee on Ministers of the Council of Europe on 27 June 47 Report on the Prevention of Criminal Use by the Banking System for the Purpose of Money Laundering, < Prevention of criminal use of the banking system for the purpose of money-laundering (December 1988) (bis.org) > December 1988. See also, Measures against the Transfer and Safeguarding of Criminal Origin, Recommendation No. R (80)10 adopted by the Committee on Ministers of the Council of Europe on 27 June 1980. See also, Gikonyo C, ‘Banks in Kenya and anti-money laundering obligations’, 2021. 48 Tsingou E, ‘New governors on the block: the rise of anti-money laundering professionals’, 2018. 49Tsingou E, ‘New governors on the block: the rise of anti-money laundering professionals’, 2018. 50 See generally Gikonyo C, ‘The legal profession in Kenya and its anti-money laundering obligations or lack thereof’ Journal of Money Laundering, 22(2), 2019. 51 Teichmann F, ‘Twelve methods of money laundering’135. 12 This arrangement is incentivised because the seller and buyer benefit by not paying tax.52 However, to avoid suspicion and make the sale appear legitimate, a more considerable percentage of the purchase price is paid with clean money through domestic banks.53 Money launderers, therefore, tend to avoid making direct transfers from suspicious offshore destinations.54 This and other similar schemes make it problematic to exclusively rely on the banks to detect money laundering in the real estate sector.55 While we can conclude that this reveals that there is a need to advance the money laundering regulations within the formal financial sector (making them suited to curb the crime when it comes to real estate), it also establishes that placing a heavy reliance on the formal financial services such as the banks, there exist limitations in the detection, investigation and prosecution of money laundering in the real estate sector.56 Therefore, while the approach of combating money laundering in Kenya by placing proper safeguards when it comes to financial institutions is a step in the good direction, there is a need to take cognisance that money launderers do not heavily depend on the financial sector, as is also argued by some scholars such as Teichman.57 Teichman asserts that the over-regulation of the financial sector prompts money launderers to move to other sectors with minimal risks of getting caught. One such sector is the real estate sector.58 It has been argued that there is an ambiguity in anti-money laundering legislation. This, in turn, results in uncertainties in applying the laws.59 There is a shortage of literature regarding anti-money laundering regulations, specifically within the real estate sector in Kenya.60 Scholars such as Shehu have provided that there is a need to avoid regulatory uncertainty as this will reduce the possibility 52 Teichmann F, ‘Twelve methods of money laundering’135. 53 Teichmann F, ‘Twelve methods of money laundering’,135. 54 Teichmann F, ‘Twelve methods of money laundering’,135. 55 Other schemes some which are provided in, ‘Financial Action Task Force, Money laundering and terrorist financing through the real estate sector, 29 June 2007’. 56 Teichmann F, ‘Twelve methods of money laundering’,135. 57Andrews J, ‘ Why financial criminals use real estate to launder money’ Curbed, 10 August 2018, < https://archive.curbed.com/2018/8/10/17674584/money-laundering-real-estate-paul-manafort-trial > On 1 May 2021. 58 Teichmann F, ‘Twelve methods of money laundering’,136. See also, Andrews J, ‘ Why financial criminals use real estate to launder money’ Curbed, 10 August 2018, < https://archive.curbed.com/2018/8/10/17674584/money- laundering-real-estate-paul-manafort-trial > On 1 May 2021. 59 Gikonyo C, ‘Banks in Kenya and anti-money laundering obligations’, 6. 60 The author of this research in this context is referring to research/study that specifically analyses the real estate sector when it comes to money laundering. 13 of abusing the financial system to laundering the proceeds of crime.61 Arguments have been made that for the law to have its intended impact, it should encompass all sectors where money laundering is likely to thrive, and the real estate sector is one of them.62 The following part of this literature review examines some scholars' positions in regulating money laundering in the real estate sector. 1.9.2 Challenges in Regulating Money Laundering through the Real Estate Sector In this part of the literature review, this dissertation provides that one of the significant hurdles in the fight against money laundering through the real estate sector is the exclusion of non- financial professionals within the scope of the regulations that govern money laundering – a problem that is very live in Kenya as the preceding part of this literature review has demonstrated. Non-financial professionals include registrars, real estate agents and advocates, among others.63 Scholars have argued that non-financial professionals play a central role in purchasing or selling property. However, until recently, such persons were not obligated under international standards to report suspicious activity to their national financial intelligence units.64 Yet, they are in an ideal position to detect money laundering and terrorist financing. 65 In Kenya, for example, a lot has been written about excluding advocates from the list of professionals who should report money laundering. Yet, advocates come in handy in real-estate transactions.66 Scholars such as Constance Gikonyo have argued that this constitutes a significant gap in the preventive mechanisms of money laundering. To elucidate this, Tsingou has argued that the inclusion of non-professionals in the scope of anti-money laundering legislation can enhance the fight against money laundering.67 This can also be the case within the real estate sector.68 61 Shehu A, ‘Promoting financial inclusion for effective anti-money laundering and counter financing of terrorism (AML/CFT)’ Crime Law and Social Change, 2012, 316. 62Guy S, Money Laundering A New International Law Enforcement Model, Cambridge University Press, 2000, 63 Financial Action Task Force, Money laundering and terrorist financing through the real estate sector, 29 June 2007 64 Financial Action Task Force, Money laundering and terrorist financing through the real estate sector, 29 June 2007, 10 65 Financial Action Task Force, Money laundering and terrorist financing through the real estate sector, 29 June 2007, 10 66 See generally Gikonyo C, ‘ The legal profession in Kenya and its anti-money laundering obligations or lack thereof’, 2019. 67 Tsingou E, ‘New governors on the block: the rise of anti-money laundering professionals’, 2018. 68Tsingou E, ‘New governors on the block: the rise of anti-money laundering professionals’, 2018. 14 For instance, it has been recognised that the legal profession generally and not just practising advocates is susceptible to money laundering, particularly in purchasing real property in Kenya.69 Scholars such as Gathoni Kimani and Constance Gikonyo provide that in a bid to develop elaborate schemes that work around the anti-money laundering controls, suspected criminals have sought the assistance of legal professionals.70 In analysing the relationship between the advocate-client confidentiality and the consequential effect of liability for the non- adherence to anti-money laundering legislation, they establish that advocates act as gate- keepers. Similarly, while banks in Kenya are required to file a Suspicious Activities Report in case they suspect any client depositing or transferring money to be involved in money laundering,71 real estate agents and title issuers have no such requirement under Kenyan law.72 This dissertation concludes this literature review by discussing the views proposed in scholarship for a country such as Kenya to effectively combat money laundering in the real- estate sector. 1.9.3. Suggested way forward for combatting money laundering in the real-estate sector The above literature review on money laundering in the real-estate sector provides that although it is not the case, the inclusion of non-financial professionals within the scope of anti- money laundering legislation can enhance the fight against money laundering, particularly within the real estate sector as well. This literature also reveals that one of the biggest hurdles in the fight against money laundering in Kenya today is the lack of strict anti-money laundering regulations specific to the real estate sector, mainly concerning the reporting thresholds. In an attempt to address why the real estate sector is susceptible to money laundering, Gary MacPherson provides one of the reasons as the lack of effective regulation of transactions in 69 The FATF recommendations provide situations in which recommendation 5,6 and 8-9 shall apply to lawyers and this includes in the sale of real estate. 70 Kimani G, ‘Gate-keeping on anti-money laundering and counter-terrorist financing ; A case for the Kenyan advocate’ 6535(3) South Asian Law and Economics Review, 2018. See also, Gikonyo C, ‘ The legal profession in Kenya and its anti-money laundering obligations or lack thereof’, 2019. 71 Section 44, Proceeds of Crime and Anti-Money Laundering Act (Act No. 9 of 2009). 72 The Act establishes the Financial Reporting Centre. See, Section 21, Proceeds of Crime and Anti-Money Laundering Act (Act No. 9 of 2009). One of the objectives of the Centre is to make information it collects available to the supervisory bodies. See, Section 23, Proceeds of Crime and Anti-Money Laundering Act (Act No. 9 of 2009). One of the supervisory bodies listed is Estate Agents Registration Board. See, First Schedule, Proceeds of Crime and Anti-Money Laundering Act (Act No. 9 of 2009). This Board is Established Estate Agency Act, 1984. It is however not specific with regard to money laundering as it merely provides for the registration of transactions and ensuring that the conduct of agents is of a high standard. Burden is placed on the financial reporting Centre whose operations in limited when it comes to real estate money laundering. 15 the sector, which in turn makes it difficult to deter the laundering of money.73 As it stands, this research provides that the real estate sector is not well regulated.74 In line with this, a study by Dennis Chisenga and Jackson Phiri on some of the factors that lead to money laundering in the real estate sector, they provide one of these includes 'the lack of effective and efficient internal controls for most players in the sector. As such, they state that there is a need for law enforcement agencies to establish effective strategies aimed at increasing cooperation at the domestic level. They provide this will help keep track of activities directly or indirectly linked to money laundering.75 However, the above literature reveals that at the domestic level in Kenya, there is a lack of cooperation as scholarship on anti-money laundering regulations indicates that, on the one hand, there has been a heavy focus on the formal financial sector such as banks. Yet, other actors are involved in the crime, both professional and non-financial professionals. Therefore, for the effective regulation of money laundering within the real estate sectors, there is a need to establish comprehensive controls in many areas of law touching on real estate, such as land laws, because the crime of money laundering involves a variety of actors. This study will be done through a doctrinal research methodology to investigate the above research problem. Further, for the reason of space and time, the dissertation will take land laws as a case study.76 It will also look at the practices in other jurisdictions such as the United States of America (US) and South Africa (SA) to pave a way forward for Kenya in dealing with money laundering in the real estate sector. The justification for settling on the US and SA as jurisdictions to learn lessons is that both jurisdictions have elaborate mechanisms to curb money laundering through the real estate sector. Drawing from these two jurisdictions, Kenya can also recalibrate the lessons learnt to suit her circumstances. 73 McPherson G, ‘Floating on a sea of funny money: An analysis of money laundering through Miami real estate and the federal government’s attempt to stop it’, 167. 74 McPherson G, ‘Floating on a sea of funny money: An analysis of money laundering through Miami real estate and the federal government’s attempt to stop it’, 167. 75 Chisenga D and Phiri J, ‘Factors That Lead to Money Laundering in the Real Estate Sector Based on the Financial Action Task Force Standards’ 9(1) Open Journal of Business and Management, 2021. 76 Mohamed K, ‘Combining methods in legal research’ 11(21) Medwelll Journals ,2016, 5191. 1.10 Research Methodology 16 Chapter One of this paper is this Introduction. It has provided a background to the problem, a statement of the problem, research objectives, the hypothesis guiding the study, the justification of the study, the theoretical framework, and the literature review. Chapter Two will demonstrate how land are not robust to curb laundering through the real estate sector in Kenya. Only by exploiting the loopholes in land laws regarding anti-money laundering can one understand how exactly money laundering is perpetuated in the real estate sector. Chapter II will further examine in detail how money laundering operates, and then it will look at the nature and procedure that transactions follow within the real estate sector; finally, it will conclude by establishing the link between the real estate sector and money laundering. Chapter Three will demonstrate how money laundering within the real estate sector is addressed in the United States of America and South Africa to provide Kenya with a way forward. Chapter Four is the conclusion. It will summarise the findings of the research. 1.11 Chapter Breakdown 17 Chapter Two The Land Laws and Money Laundering in Kenya The real estate sector in Kenya is diverse and comprises commercial, residential, and industrial real estate categories. In addition, sub-categories exist within these primary categories, which illustrates the sector's diversity and complexity, contributing to 10.5% of GDP in the Second Quarter of 2020 and 10 % in the Second Quarter of 2021.77 The vastness of the sector has been utilised in money laundering activities where illicit funds are channelled through real estate transactions to camouflage the beneficial ownership and make the funds available for use in the clean economy. The real estate sector is used at all the different money laundering stages, involving placement, layering, and integration. This chapter shall discuss the real estate sector in Kenya concerning money laundering. In so doing, the chapter shall: 1) Define the real estate sector in Kenya and what it comprises; 2) Discuss how the real estate sector is used for money laundering; and 3) Discuss the legal and institutional framework of real estate in Kenya and address whether this framework directly tackles the infiltration of money laundering. The real estate sector in Kenya has witnessed exponential growth in the past two decades. A key indication of this growth is the escalation in the contribution of real estate to the country's Gross Domestic Profit between 2000 and 2016. The contribution increased from 10.5% in 2000 to 12.6% in 2012 and 13.8% in 2016.78 This growth has been characterised by big-ticket developments such as the construction of Centum'sCentum's Two Rivers Mall, which attracted an investment of KES 6.4 billion from UK-based Old Mutual Property.79 The sector experienced turbulent growth in the period between 2018 and 2020. The growth percentage in 77 Cytonn, Kenya’s Q1’2021 and Q2’2021 GDP Growth, 2022, , 1. 78 Cytonn, Current real estate trends in Kenya & how they affect investors, February 2022– on 06 February 2022. 79 Ayemoba A, The Kenyan real estate market and the introduction of Real Estate Investment Trusts, 14 February 2017- 01 February 2022. 2.1 Introduction 2.2 The Real Estate sector in Kenya 18 2019 stood at 5.3%, higher than the 2018 growth rate of 4.1%.80 The real estate sector's contribution to GDP reflected the same trend. The contribution decreased from 7.0% in 2018 to 6.9% in 2019 and increased to 9.1% in 2020.81 The above snapshot of the real estate sector unilaterally views the sector while the real estate sector in Kenya is heterogeneous. The various categories are discussed below. 2.2.1 Commercial a. Office The commercial office sector in Kenya has grown in tandem with the economic development witnessed in Kenya. Kenya is considered the regional financial hub in Sub-Saharan Africa. This title comes with the global recognition of the country as an investment destination for multinational firms. Beyond the international firms, domestic entities also increasingly seek modern office spaces which serve a competitive edge. The commercial office space in Kenya has evolved in response to these developments.82 Exciting developments in this space include introducing serviced offices, co-working spaces, and the reinvention of commercial office spaces, i.e., smart offices. Serviced offices are spaces furnished with technological input and business support services such as a receptionist. These spaces provide flexible payment options that allow users to pay daily, weekly, monthly or at other agreed intervals. The spaces are convenient for small businesses or organisations looking to expand or relocate.83 The smart offices also represent another innovative product to attract consumers. These offices seek to create an ecosystem that promotes performance while providing entertainment to the user. The facilities may include a gym, cafeteria, and even a bar. The quality and elegance of the smart offices attract high-net-worth clientele. The COVID-19 pandemic negatively affected this category of real estate in Kenya. In 2020 occupancy rates and rental yields decreased by 2.6% and 0.5% to 77.7% and 7.0%, 80 Kenya National Bureau of Statistics, Economic Survey 2020, < https://www.knbs.or.ke/?wpdmpro=economic- survey-2020> 184. 81 Cytonn, Nairobi Metropolitan Area commercial office report- Market under a pandemic 2021, 23 April 2021- 5. 82 Cytonn, Current real estate trends in Kenya & how they affect investors, February 2022– on 06 February 2022. 83 Makena L, ‘Co-Working Defining the Future Office Space’ Business Today, 30 January 2020- 04 February 2022. 19 respectively.84 This dip is attributable to the effects of the pandemic, which resulted in an oversupply of 7.3mn SQFT of commercial office space in the same year.85 The oversupply is largely based on the work-from-home arrangements that ensued after the pandemic announcement in March 2020. Other factors include the completion of large projects, which increased the supply. Within this period, the best performing areas for office space were Parklands, Gigiri, Westlands, and Karen.86 b. Retail Commercial real estate in the retail sector has also expanded exponentially. The increase in mall space primarily characterises the growth. Some of the most notable developments in this space include the Two Rivers Mall, The Hub, and Garden City, to name a few. The growth is driven by a widening middle class with more disposable income. This demographic has also attracted the attention of international retailers such as Carrefour, Kentucky Fried Chicken, Burger King, and Adidas. The retail sector is not limited to commercial real estate but has expanded into e-commerce. As a result, online shopping is slowly gaining traction due to the high internet penetration rate of 70% and the effects of the pandemic.87 2.2.2 Residential The residential sector is a top category of the real estate market in Kenya. The growth of this sector can be attributed to an increasing population and bulging middle class. The sector is poised to grow further due to the growing demand. A Cytonn report released in February 2022 revealed that the residential sector recently recorded the highest demand, with the nationwide housing deficit totalling 200,000 units annually, which accounts for an accumulated deficit of over 2 million units.88 Notably, the most considerable demand for residential real estate developments has been in the affordable housing sector. In response to this demand, the Government has invested heavily in housing. As a result, national Government expenditure on housing increased from KES 16.1 billion in 2017-2018 to KES 24.8 billion in 2018-2019.89 These projects are expected to provide 84 Cytonn, Nairobi Metropolitan Area commercial office report, 9. 85 Cytonn, Nairobi Metropolitan Area commercial office report, 9. 86 Cytonn, Nairobi Metropolitan Area commercial office report, 9. 87 Cytonn, Nairobi Metropolitan Area commercial office report, 9. 88 Cytonn, Nairobi Metropolitan Area commercial office report. Full citation, e.g. website where it was downloaded from, date, 89 Kenya National Bureau of Statistics, Economic Survey 2020, 187. 20 viable housing options to the 61% of urban dwellers in Kenya who reside in slums and informal settlements.90 2.2.3 Hospitality Kenya's hospitality real estate sector is vibrant and comprises four key components; accommodation, food and beverages, leisure and entertainment, and meeting and conferencing space.91 This sector is intimately connected to the tourism sector due to the parallels drawn in the services both sectors provide. Therefore, the fluctuations in the tourism sector have detrimentally impacted the hospitality sector. However, earnings from hospitality increased by 17.8%, from KES 84.6 billion in 2015 to KES 99.7 billion in 2016, and international arrivals increased by 13.5%, from KES 1.2 million in 2015 to 1.3 million in 2016.92 In addition, the sector has witnessed diversification with the growing popularity of products such as dual- branding, where mixed-purpose developments have serviced apartments and hotels.93 Real estate has remained a preferred channel for money laundering due to the ability to manipulate property prices to transfer these illicit funds between involved parties. Other factors that contribute to its popularity is the relative stability of immovable properties, the functionality of the property beyond hiding illicit funds (the properties can be used to enable other illegal activities such as hosting brothels, controlling territories, or hiding illegal goods),94 and the appreciating nature of real estate such that the illegal funds accrue legitimate interest.95 90 Cytonn, Current real estate trends in Kenya & how they affect investors, February 2022– on 06 February 2022. 91 Cytonn, Nairobi Metropolitan Area (NMA) Serviced Apartments Report 2021, 07 November 2021- 18. 92 Cytonn, Current real estate trends in Kenya & how they affect investors. 93 Cytonn, Current real estate trends in Kenya & how they affect investors. 94 Savona E and Riccardi M (Eds.), ‘From Illegal Markets to Legitimate Businesses: The Portfolio of Organised Crime in Europe, Final Report of Project OCP Organised Crime Portfolio’ 2015,12. 95 European Parliament, Understanding money laundering through real estate transactions, February 2019 < https://www.europarl.europa.eu/cmsdata/161094/7%20- %2001%20EPRS_Understanding%20money%20laundering%20through%20real%20estate%20transactions.pdf > 2. 2.3 The Real Estate sector as a channel for money laundering 21 The legitimate interests may include rents, debt service payments through financing the property, and capital gains from the property sale.96 A key advantage of real estate as a means of money laundering is that the sector is a large and diffuse market with large sums of funds moving freely.97 This fluidity allows individuals to place large sums of money in individual assets without suspicion.98 Additionally, the placement does not require any expertise, which adds to the allure. Once placed and layered, the funds are integrated into the economy as legitimate funds deriving from real estate transactions. A 2015 study identified real estate as one of the traditional infiltration areas for money laundering. The other areas included restaurants and bars, retail and wholesale trade, hotels, and construction.99 In addition, the study indicated that real estate was a vital element of the Italian Mafia investments.100 The categories of real estate included undeveloped lands, villas, and flats, among others.101 Several mechanisms and techniques have been established that misuse the real estate sector through money laundering. These techniques include using complex loans or credit finance, manipulating the appraisal or valuation of a property, using mortgage schemes, using investment schemes and financial institutions, and using properties to conceal money generated by illegal activities. Case study 2.2: Use of a notary when buying a real estate (Predicate offence: suspected money laundering by organised crime) An East European was acting under a cover name as the company director for which he opened an account with a Belgian bank. Transfers were made to this account from abroad, including some on the instructions of" "one of our clients". 96 Maloney M, Somerville T, and Unger B, ‘Combatting Money Laundering in BC Real Estate: Expert Panel on Money Laundering in BC Real Estate’ March 2019 , 16 < https://cullencommission.ca/files/Combatting_Money_Laundering_Report.pdf> 03 February 2022. 97 Maloney, Somerville, and Unger, ‘Combatting Money Laundering in BC Real Estate’ 16. 98 Maloney, Somerville, and Unger, ‘Combatting Money Laundering in BC Real Estate’ 16. 99 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 13. 100 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 13. 101 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 12. 2.4 The money laundering process in real estate 22 The funds were then used to issue a cheque to a notary to purchase a property. However, the attention of the notary was drawn to the fact that sometime after the purchase, the company went into voluntary liquidation, and the person concerned repurchased the property from his company for an amount considerably above the original price. In this way, the individual was able to insert money into the financial system for an amount corresponding to the initial sale price plus the capital gain. Thus, he could use a business account, front company customer, real estate purchase, cross-border transactions and wire transfers to launder money that, according to police sources, came from activities related to organised crime. The company appeared to act as a front set up merely to carry out the property transaction. Indicators and methods identified in the scheme: • Instruments: check, wire transfers, real estate.102 The process of money laundering is characterised by taking proceeds from unlawful activities and reintroducing these proceeds back into the economy as legitimate funds, which can then be used to conduct economic activities without being linked to illicit sources.103 Money laundering comprises a three-step cycle of placement, layering, and integration. Placement involves moving the illicit funds linked to the crime and introducing them into the financial system. The introduction may take the form of large amounts divided into small purchases and deposits to avoid causing alarm or suspicion.104 The payments will usually be below the threshold for reporting transactions to money laundering agencies. Note that the form of currency at the point of placement will depend on the nature of the crime. For instance, payments for crimes such as sex trade, illegal gambling, and drugs will often take cash form because the parties seek to avoid a paper trail linking them to the crime. However, in crimes such as fraud, the transactions will be in the form of bank transfers between accounts.105 Numerous placement techniques exist. These include smurfing where small cash deposits are made, false invoicing of services or goods not provided, and the casino approach.106 The casino approach mentioned above was well-documented in British Columbia, where it is estimated 102 Force, Financial Action Task, ‘Money laundering and terrorist financing through the real estate sector’, Paris: FATF (2007). 103 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 17; European Parliament, Understanding money laundering through real estate transactions, 2. 104 European Parliament, Understanding money laundering through real estate transactions, 2. 105 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 17. 106 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 17. 23 that money laundering amounts to approximately $1 billion per year.107 The casino approach in the Vancouver model primarily involves the illicit flow of funds from China to Vancouver, where the funds are withdrawn. The process starts in China, where illegal activities occur, and the illegal funds are subsequently generated. The Chinese currency controls restrict transfers of more than $50,000 out of the country, so the funds are channelled to criminal-controlled bank accounts. This is the point of placement. Layering is the second stage of the laundering process. In this stage, the illicit funds introduced into the financial system are further distanced from the illegal source. Layering occurs through a series of transactions that aim to camouflage the beneficial ownership of the funds.108 The layering process utilises the complex international financial system to create innovative techniques. These include cross-border transactions, use of corporations and trusts, falsifying import and export invoices, or aborted transactions (here, money is placed in a trust account for a pending transaction and the transaction aborted, which hides the beneficial ownership over the money).109 The layering stage often requires professional advisory services due to the complexities involved. Such services encapsulate lawyers, investment bankers, accountants, and securities dealers. In the casino approach mentioned above, the individuals seeking to withdraw the funds then travel to Vancouver, withdrawing the funds in Canadian dollars. The funds are then exchanged for Canadian Casino chips used to make numerous low-value debts. This is the point of layering. The integration phase occurs concurrently with the extraction phase. This phase makes the layered funds available to fund economic activities without the funds being linked to illicit sources. The stage also helps to return the proceeds of the criminal activities to the criminals involved.110 The techniques used to integrate the funds include returns from selling properties purchased wholly or partly with illicit funds, paying wages, and returns on investments made with illegal funds.111 In the casino approach, the chips are subsequently exchanged for Canadian dollars and are then legitimate "laundered" funds that cannot be linked to their illicit 107 CBC, Money laundering in B.C. estimated at $1B a year — but reports were not shared with province, AG says, 18 January 2019 https://www.cbc.ca/news/canada/british-columbia/money-laundering-billions-bc-david- eby-1.4983471 20 February 2022. 108 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 18. 109 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 18. 110 European Parliament, Understanding money laundering through real estate transactions, 2. 111 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 18. 24 sources.112 This final stage is the point of integration. Importantly, all these different mediums of laundering illicit funds through real estate reveal that the process is not uniform; it is dynamic and adapts to the prevailing conditions. The real estate sector is utilised at different stages of the money laundering process. For instance, one can purchase real estate through a corporation using a high loan-to-value ratio mortgage. The mortgage can come from an unregulated private mortgage lender. The mortgage payments may be used for placement in such a transaction, especially where cash for debt service payments are accepted.113 One may opt to invest in mortgages at the layering stage since such investments provide a combined interest and return-of-capital flow of funds. This activity can be conducted parallel with other asset purchases and sales transactions to layer the illicit funds.114 At the integration stage, the money launderer may choose to build a custom one or conduct renovations and consequently increase the property's value, which will then be sold at a profit which appears legitimate.115 The real estate sector in Kenya has been earmarked as a destination for money laundering. For example, a 2021 report by Sentry, an international investigative and policy team, revealed that Politically Exposed People (PEP) in South Sudan use real estate in Kenya to launder proceeds of foreign corruption.116 In the report, South Sudanese generals are seen to own luxury properties in Nairobi that exceed their government salaries. One account shows a general purchased high-end property valued at $1.5 million in cash.117 Some of the techniques used are manipulating the valuation of a property. Generally, it may be difficult to estimate the value of a property, especially if it is an atypical property such as hotel complexes, golf courses, shopping centres and holiday homes. As a result, this difficulty further facilitates manipulation when the property is involved in money laundering. Overvaluation or undervaluation consists of selling or buying properties at prices above or below their market value. One of the ways this technique is used is when shell companies buy real estate, and then 112 CBC, Money laundering in B.C. estimated at $1B a year — but reports were not shared with province, AG says, 18 January 2019 https://www.cbc.ca/news/canada/british-columbia/money-laundering-billions-bc-david- eby-1.4983471 20 February 2022. 113 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 20. 114 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 20. 115 Savona and Riccardi, ‘From Illegal Markets to Legitimate Businesses’, 21. 116 The Sentry, Kenya Illicit Finance Risks and Assessment, October 2021 5. 117 The Sentry, Kenya Illicit Finance Risks and Assessment, 5 25 the company is closed shortly after. The criminals then repurchase the properties at higher prices than the original price. This way, the criminals can conceal their funds by inserting money equal to the original buying price plus capital gain. This process can be used as a tell- tale to track money laundering schemes. Another technique is successive sales and purchases of a property. In this case, the property in question is sold in consecutive transactions with a higher price. These operations often include the reclassification of agricultural land as building land. Therefore, the sale is fictitious where the criminals can conceal their illegal activity. In addition, this process covers the property owner's identity and enables them to avoid the liability for capital gains tax.118 Notably, real estate abuse in laundering illicit funds is a global phenomenon. In a report dubbed "Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat'sKleptocrat's Dream", the U.S. real estate sector was revealed to be a haven for money laundering despite the anti-money laundering measures in place. According to the study, a minimum of $2.3 billion has been laundered through real estate in the U.S. in the last five years, and over 50% of the reported money laundering cases through this sector involved PEPs.119 The Geographic Targeting Orders (GTO) has operated sub-optimally in curbing this vice. The GTO is a measure implemented by the Financial Crimes Enforcement Network. Insurance companies must identify all-natural persons acting through shell companies to purchase residential real estate.120 The GTO is location-specific and reviews purchases above a certain monetary threshold. The system, therefore, misses money laundering activities conducted through the real estate of lower value and in areas not considered prime locations. The Vancouver case, discussed above, also sheds light on the global pervasiveness of money laundering through real estate. 118 Force, Financial Action Task, ‘Money laundering and terrorist financing through the real estate sector’, Paris: FATF (2007). 119 Global Financial Integrity, Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream, 02 August 2021 02 February 2022. 120 FinCEN, FinCEN Renews Real Estate Geographic Targeting Orders for 12 Metropolitan Areas, 09 October 2021 02 February 2022. 26 Before discussing Kenya's anti-money laundering legislation and land laws, it is essential to acknowledge that Kenya's anti-money laundering laws are linked to the international anti- money laundering (AML) framework. Events at the international level prompted the development of Kenya's anti-money laundering legislation in two significant ways.121 First, Kenya is a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which is a FATF-style body, and it is undergoing review towards meeting the goals of combating money laundering and financing terrorism.122 Furthermore, the enactment of Kenya's Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) is attributed to Kenya having ratified the United Nations Convention against Transnational Organized Crimes, which provides for anti-money laundering provisions.123 The gaps in Kenya's legislation on land transactions and money laundering will show ways the law can prevent or encourage money laundering through Kenya's real estate. The identified gaps allow the laws to be misused for money laundering. First real estate laws in Kenya cannot exist without the various land laws that have been put in place over the years; the earliest laws related to real estate being the Crown Lands Ordinance of 1902 promulgated by the Commissioner, who was empowered to sell freehold estates in land and sell any land which was not under Africans without the consent of tribal Chief. Further, the laws developed when the Crown Lands Ordinance of 1915 amended the 1902 legislation redefining Crown land to include land which was in occupation of the natives and reserved for the use and support of the native tribes. Natives were rendered mere tenants because all land belonged to the Crown. The only rights that were accorded to the natives were occupancy rights. 121 Gikonyo C, ‘Detection mechanisms under Kenya’s anti-money laundering regime: omissions and loopholes’ Journal of Money Laundering Control, 21(1), 2018, 59 >www.emeraldinsight.com/1368-5201.htm < On 19 July 2022. 122 Eastern and Southern Africa Anti-Money Laundering Group, From Arusha to Maseru ESAAMLG at Ten 1999- 2009, 17 August 2009, 5. 123 Gikonyo C, ‘Detection mechanisms under Kenya’s anti-money laundering regime: omissions and loopholes’ Journal of Money Laundering Control, 21(1), 2018, 59 >www.emeraldinsight.com/1368-5201.htm < On 19 July 2022. 2.5 Legal and Institutional Framework 27 Later in 1915, the Government Lands Act was enacted to replace the Crown Lands Ordinance. This gave the Government absolute rights over unalienated land and control over terms and agreements concerning land.124 Fast forward to the Swynnerton Plan, a policy to further develop agricultural practices. The plan was aimed at expanding the scale of farming through improved infrastructure, market, weather forecast, and secure land tenure methods. However, this plan encouraged individualisation of tenure and issued indefeasible titles. The Land Order-in-Council of 1960 provided for the conversion of leasehold into freehold land. The law also permitted Africans to acquire land in the Highlands. This was to be done like a trade transaction between willing parties. Additionally, the 1963 Constitution of Kenya, Section 19, provided for rights over property, mechanisms to be used under compulsory acquisition, and the various avenues to seek remedy when proprietary rights are infringed. Under Section 132, the regional assembly was obliged to make laws to regulate land use.125 The above laws gave rise to the Land Control Act enacted in 1967 to direct activities on land. These activities included dividing the land, sale, transfer, lease, mortgage, and any other activity that involved the movement of interests or rights. In 1999, the Njonjo Land Commission was appointed by the Government to inquire into the land law systems of Kenya. It had the aim of coming up with principles of a National Land Policy. The Ndung'uNdung'u Land Commission, 2003, was appointed by President Mwai Kibaki. It reported on the various ways to grab land and how presidential powers were abused in land allocation. The real estate sector in Kenya became something of importance in the mid-2000s. As the Kenyan economy grew, property development in major cities such as Nairobi began to attract attention with interest in various fields of the market. These include office-based businesses, retail businesses, industrial businesses, and residential purposes. In 2009, The Ministry of Land published the Draft National Land Policy created to implement the Njonjo Commission and the Ndung'uNdung'u Commission. The policy aimed to achieve efficient, sustainable, and equitable land use. However, sessional paper No 3 of 2009 acknowledged that there were too many statutes dealing with land and proposed harmonisation to bring about efficiency and transparency. Therefore, the Government had to make the following changes, repeal the land registration stipulations of the Registration of Titles Act, 124 Crown Land Ordinance, 1902. 125 Constitution of Kenya (1963). 28 repeal the Land Adjudication Act, repeal the Consolidation Act, enact a Land Registration Act, amend the Land Titles Act, and amend the Registered Land Act. 2.5.1 Land Act, 2012 Land in Kenya is administered in accordance with the Land Act, 2012. The scope of application of the Land Act is set out in Section 3 and includes private, public, and community land. The Land Act also highlights the guiding values and principles of land management and administration.126 Further, the Land Act governs the various land systems in Kenya through a series of land regulations set out in the subsidiary legislation to the Act. It also facilitates the sustainable administration of land and land-based resources. This way, the Land Act is considered the core legislation governing land administration in Kenya. However, despite its primacy, the Act fails to make provisions for preventing money laundering within the real estate sector. The absence is demonstrated in Section 157 of the Land Act, which provides for land management and administration offences. The Section broadly prohibits fraudulent acts but does not directly address money laundering. The is a difference between particulars of fraud and money laundering. The particulars of fraud include (1) a representation of fact; (2) its falsity; (3) its materiality, (4) the representer's knowledge of its falsity; (5) the statement is intended to be acted upon by the person in a way reasonably contemplated; (6) the injured party ignorance of its falsity; (7) the injured party’s reliance on its truth and consequential injury caused.127 Contrary to fraud, particulars of money laundering include a person who knows or who ought reasonably to have known that property is or forms part of the proceeds of crime and (1) enters into any agreement with anyone in connection with that property to conceal the nature or source of that property, assist any person who has committed money laundering to avoid prosecution or tries to diminish or remove any property related to money laundering.128 Furthermore, a person who acquires uses or has in possession of property and at the time of acquisition of such property knows or ought reasonably to have known that it forms part of proceeds of crime committed by him or by another is considered to have committed the offence 126 Section 4, Land Act (No.6 of 2012) 127 Mitchell R, ‘Effective Solutions for complex financial disputes’ https://www.robertdmitchell.com/common- law-fraud On 21 July 2022. 128 Section 3, Proceeds of Crime and Ant-Money Laundering Act (No. 51 of 2012). 29 of money laundering.129 More still, a person who knowingly transports, transmits, transfers or receives or attempts to transport, transmit, transfer or receive a monetary instrument or anything of value to another, with intent to commit an offence, that person commits an offence of money laundering.130 There is a clear difference between the particulars of fraud and money laundering offences. The definition of what can be laundered as per sections 3, 4 and 7 of POCAMLA stated above captures a broader array of committing the offence of money laundering. Moreover, the scope of what is laundered is not only cash; you could launder real estate, which is the primary topic of this thesis. It is also important to note that by committing fraud you are able to create money or property that can be laundered. The prevalence of money laundering within the real estate sector and the lack of specific legislation warrant legislative action. Section 160 of the Land Act empowers the National Land Commission to make general land administration and management regulations. Accordingly, the Commission should make regulations setting out mechanisms to prevent the use of land transfers as a tool of money laundering. 2.5.2 Land Registration Act, 2012 The Land Registration Act, 2012 (LRA) also forms a substantive part of the legal framework for land administration. The LRA governs the registration of interests in land in Kenya. Section 3 of the LRA sets out the scope of application of the Act to include the registration of interests in all private, public, and community land. Section 103 of the LRA establishes the sanctions for fraudulent conduct in relation to the registration of interests in land. The provision does not directly address any fraudulent activity arising from money laundering. However, the LRA is still well-equipped to prevent money laundering. The offences set out in Section 103 (1) include knowingly making a false statement, orally or in writing, in connection with a disposition or other transaction affecting land or any other matter arising under the LRA. This offence covers instances where individuals may attempt to manipulate the land register by inaccurately registering interests in land to conceal the actual beneficial owners therein. Nevertheless, the 129 Section 4, Proceeds of Crime and Ant-Money Laundering Act (No. 51 of 2012). 130 Section 7, Proceeds of Crime and Ant-Money Laundering Act (No. 51 of 2012). 30 protection offered by the LRA will benefit from enacting the regulations on money laundering in the real estate sector, as proposed above. 2.5.3 Estate Agents Act The Estate Agents Act provides for the registration of persons who negotiate for clients when selling, purchasing, or letting land and buildings.131 The Act intends to regulate and control estate agents' professional conduct.132 For instance, unregistered persons are not authorised to practice as estate agents.133 Section 25 of the Act provides for dishonest practices.134 Any person who fraudulently makes or causes or permits to be made any false entry in the register or fraudulently procures the entry in the register of any name or other particulars, whether on his behalf or on behalf of any other person or knowingly and willingly makes any statement which is false or misleading to gain any advantage under the Act is guilty of an offence.135 The Estate Agent Act is keen on fraud but silent about money laundering; nevertheless, estate agents are listed as designated non-financial businesses or professions per section 2 of POCAMLA.136 2.5.4 Stamp Duty Act The Stamp Duty Act governs the levying and management of stamp duties. Section 10A of this Act empowers the Government valuer to value real estate and assign an actual open market value. The Act does not expressly tackle money laundering; however, the lack of pre-recorded market values creates room for money laundering practices. Stamp duty is defined as tax assessed on the transfer of immovable property. The value of stamp duty is determined by a government valuer or an appointed valuer. The government valuer is empowered by Section 10A (1) of the Stamp Duty Act to "determine the true open market value of such property as at the date of the conveyance or transfer for purposes of ascertaining any additional stamp duty is payable". Upon concluding the valuation, the valuer must release a valuation report to be assessed by the Chief Government Valuer. 131 Section 2, Estate Agents Act ( Act No.533 of 2010). 132 Section 2, Estate Agents Act ( Act No.533 of 2010). 133 Section 18, Estate Agents Act ( Act No.533 of 2010). 134 Section 25, Estate Agents Act ( Act No.533 of 2010). 135 Section 25, Estate Agents Act ( Act No.533 of 2010). 136 Section 2, Proceeds of Crime and Anti-Money Laundering Act ( Act No.9 of 2019) 31 The autonomy given to the valuers to determine the value of stamp duty to be paid is concerning. The concern is predicated on previous occasions where the government valuers have been accused of malpractices, key among them being the falsification of compensation payments where the Government has compulsorily acquired land.137 The precedence of falsification of valuations of land by the government valuers gives way to the risk of money laundering. To recap, money laundering involves a host of parties.138 First, the government valuers may collude with persons entering land sale transactions to conceal funds derived from illicit activities. In doing so, the government valuers may overvalue or undervalue stamp duty to allow for the placement of these illegal funds where the stamp duty does not reflect the "true open market value of such property". All is not lost in terms of curbing the malpractices of government valuers. The State is set to establish a land value index to provide a register of pre-recorded land values for land in different locations. A land value index is an analytical representation showing the spatial distribution of land values in a given geographical area at a specific time.139 It is purposed to steer the state compensation for compulsory acquisition of land. However, the land value index may also have the unintended effect of preventing money laundering by introducing predetermined stamp duty values based on the fixed value on the index. 2.5.5 Income Tax Act Capital G