Meaning of liability shift

Liability shift is a way for card associations to reduce card fraud. The associations (Visa and MasterCard) insist on card companies issue cards that are chip cards. Chip cards are also referred to as smart cards. The information for the card account is held in the chip with a default for magnetic stripe.

With liability shift, associations like visa and MasterCard have insisted that card manufactures, card issuers and card acquirers get certified for EMV. All card participants must get on board and different regions all have different dates by which they have to have been certified. Banking in Kenya has also been affected by these developments in liability shift.

EMV certification is a very technical and expensive exercise. Most countries in Africa have missed the deadlines or will miss the deadline due to lack of capital resources to have EMV certification.

How liability shift works

Liability shift is a tool that is being used by the associations to ensure that the card industry is EMV certified which will reduce card fraud. The liability for fraud on a card is being shifted from the merchant to the issuer and acquirer. Where an issuer has give cards that are EMV or chip, these cards use Personal identification number (PIN) to verify card transactions.  Where a chip card has to default to magnetic stripe because the merchant POS or ATM is not EMV certified, the card transaction is verified using signature on a paper receipt.

Signature is less secure than PIN because the signature is not verified at the cardholders account level on the card management system. Pin verification means that the PIN keyed on the POS or ATM is verified by the card management system. Where the PIN is wrong, the transaction will not be authorised. Charge backs for EMV cards will be allowed for most reasons where the merchant is not ENV certified.

How liability shift affects you

As a individual cardholder, the liability shift does not affect you. If you have a corporate card, the liability shift migration does not affect you either. As a card issuer, if your cards are not Chip, you will have a problem of having merchants that accept your cards because merchants will not want to accept card transactions from non-EMV cards. As merchants and Acquirers, liability shift is very important because if the POS and ATMs are not EMV certified, charge backs on transactions become the responsibility of the Merchant or acquirer.

Issuers, acquirers and card processors must ensure that they comply with the associations to become EMV compliant within the given time frames. Failure to comply will mean losses as the liability shift for charge backs will act as income leakages leading to failed, bankrupt and closed card companies.

What is the meaning of Anti-money laundering in Kenya?

Money laundering can be said to be the deposits of stolen or dirty money in the banking system with a view to make it clean. When money is gain in an unlawful way, the money will be introduced into the financial systems by purchasing goods or banking the same into a bank. The banks would rather that they are not used to clean this money and hence the anti-money laundering policies. The banks or financial institutions ask that all monies banked have a legal source.

The central bank of Kenya has published the legal obligations to be followed by the Kenyan banks for anti-money laundering. According to the CBK-prudential Guidelines 08/2006 “an Institution shall establish appropriate policies and procedures and train staff to ensure adequate identification of customers, their sources of funds and the use of the said funds. Such policies should ensure the effective prevention, detection and control of possible money laundering activities and terrorist financing.”

Core obligations of Banks for anti-money laundering in Kenya

• Know your customer (KYC), the financial institution must ensure to identify and verify the potential customer or business. Due diligence must be done.
• Record keeping. All the records of transactions between the bank and client must be kept for at least seven years of termination of the relationship or the last transactions is concluded. All KYC documents must be kept safely as evidence of due diligence carried out for KYC purposes.
• Reporting duties: The financial institutions must ensure that they report to the necessary authorities any suspicious or unusual transactions. The suspicions may be due to the huge amounts being deposited and withdrawn.
• Training and awareness creation: Employees must be trained on Anti-money laundering aspects. The clients must also be made aware of this policy. This may be through websites belonging to the financial institutions or newsletters and terms and conditions the clients sign.
• Internal operational rules and policies: policies and procedures on Anti-money laundering must be implemented in the operation of the financial institution.

Financial institutions and Banks may get involved in money laundering if they are negligent towards this policy or do not train their staff on the same. The banks must ensure that they are on the front line in fighting money launderers. Ill gotten gains should not be allowed to circulate in the financial systems. Anti-money laundering in Kenya must enforced by all financial institutions.

Several data base solutions have been relied upon to give the results in KYC compliance in Kenya and worldwide. These data bases provide legal backups and reliable reputational risk reduction measure. Information is shared from most financial institutions.

Reasons for KYC compliance in Kenya

KYC compliance in Kenya is important especially after the 9/11 terrorist attacks on the world trade centre. It was confirmed that terrorist attacks were being funded with laundered money, monies earned illegally, for example, means like narcotics trade and human trafficking, organised crime and fraud. With this in mind, it became imperative that KYC compliance in Kenya become an agenda item for all banks. KYC compliance in Kenya is no longer a suggestion for best practice but it has become a compliance mandate for banking in Kenya as in other countries worldwide.

We can therefore infer from the above that KYC compliance in Kenya is a mandate that is imposed on financial services providers or banks locally. This mandate when implemented should identify and verify the bank account applicant before the bank starts to conduct business with the customer. KYC compliance in Kenya is performed on both for the individual as well as the company or entity accounts.

To fulfil risk mitigation strategies, KYC compliance in Kenya must be performed. The key component is to ensure that the prospective customer is not on any government list as wanted for Fraud and money laundering, and is not a terrorist or a fraudster.

When doing KYC compliance checks, any revelation of the possibility of compromise of the applicant, the exposed person must be subjected to enhanced and further due diligence. This will include confirming that the applicants’ sources of wealth are not questionable. There should also not be reputational and financial risk because of who the applicant is and their public positions and associations.

Customers bank deposits and transfers are also scrutinised or monitored against a range of variables in the risk categories as defined by the financial institution. This too forms part of the mandate for KYC compliance in Kenya.

KYC compliance in Kenya: Implications for banks

The KYC compliance in Kenya mandate is very good but it has burdensome administrative implications. Administrators and operations teams must ensure that the mandate is being followed by all in the institution to avoid being penalised. There has to be proof of due diligence for audit purposes for each customer, who must also be identified conclusively.

KYC compliance in Kenya requirements for financial institutions

• Customers must be verified to confirm that they are not or never have been involved in illegal activities like money laundering, fraud or crime
• The applicant’s identity must be verified
• The forms and steps of verification for KYC must be stored securely
• The institution must find out if the applicant is listed on any watch list for fraud, terrorism and crimes like money laundering

KYC compliance in Kenya is a mandate for all financial institutions and auditors ensure that the mandate has been followed. Training must be given to all employees of financial institutions to ensure increased KYC compliance in Kenya.

All cheques are pre-printed crossed with the words “A/C Payee” or Account Payee Not Negotiable”. The Drawer may cancel the crossing by appending full signature against the cancellation. This makes the cheque payable over the counter without having to bank it. Unless it is your bank account that you are withdrawing from, most banks do not allow this kind of transactions. These transactions are known as third party transactions.

Precaution to observe to prevent fraud and forgeries in kenya

• The body of the cheque should be filled in by yourself or by someone authorised by you. This includes the payee name, the date, the amounts in words and figures and the cheque must be signed.
• When drawing cheques, the amount must be written in words, with minimum space between each word commencing close to the phrase “Kenya Shillings”
• The amount in figures should be written in the allocated space. The amount in figures should be terminated by a pair of horizontal lines. The figures should not be separated by commas and the Kenya shillings and cents should be separated by a double dash=
• If there are any alternations that you make when writing out the cheque, you must authenticate or append your full signature above or below the alteration.
• Use indelible Pen or ball pen or permanent ink to ensure that the information is not erased.
• The pen should also not smudge the cheque leaf as the bank will not accept unclear instructions.
• If the check is printed, do not use a typewriter fitted with carbon ribbons or incorporating a correction facility, which allows the “lifting off” of incorrect characters on the paper surface by use of a special correction tape.
• When not in use your cheque book and cancelled cheques should be kept in a safe place where it will be safe with no unauthorised access. If the cheque book is lost or stolen the bank should be notified immediately
• Do not pre-sign cheques leaf without completing the rest of the details especially the pay details. If the cheque leaf or cheque book is stolen, the thief would just complete the rest of the details and cash the cheque.

Financial institutions are not be liable when the customers have been careless or do not follow instructions to prevent fraud and forgeries in Kenya.

Fraud may be corruption, theft, misuse of funds, insider trading, tax evasion counterfeiting, forgery, conflict of interest to name but a few.

Why is fraud committed

There are three main reasons why fraud is committed. These are Motive, Rationalization and Opportunity.

Motive to commit fraud

Motive means the reason behind the action. In banking fraud, fraudsters are motivated by

• Greed because they want to have it all and more that anyone else
• Peer pressure especially where the peers have done very well financially
• Personal financial difficulties like gambling, drug abuse or alcoholism, habits that must be supported and which are very expensive.
• Revenge or grudges will motivate one to commit fraud
• Dishonesty or perceived behavioural norm
• Intimidation or threats will lead you to commit fraud because of fear
• Unrealistic targets that cannot be achieved
• Lenient penalty given to those who have been caught committing fraud will encourage others to attempt fraud since they will get away lightly

Rationalisation of fraud

These are the excuses we give to get away with our actions.

• Fun. Fraud is sometimes explained as a game by those who are fraudulent
• Taking from the rich to give and distribute to the poor. Fraud is excused as a way to ensure that there is equal distribution of wealth, so it is not wrong
• It is the order of the day and everybody is doing it. So to be like everybody else, you must join in the action.
• I will not be caught and so I will go ahead and continue with the activity. Sometimes you may think that nobody will ever know what you have been doing
• I am testing the system and control is a good excuse. The results of the fraudulent activity are never disclosed to the authorities in the bank after the ‘testing’ has succeeded
• I am being underpaid and so I must get my cut or fair pay even if I have to commit fraud to get even.

Opportunity for Fraud

• Absence of procedures. The rules that govern how the company is run are not there so the employees and the customers do what they want or think should be done. There is no precedence which creates opportunities for fraud to be perpetrated
• Inadequate or lapses in controls though better than having any procedures, is still lacking since fraud can still be perpetrated easily
• Inadequate supervision or lax management. When the management is not alert or too harassed to adequately supervise the staff and ensure the procedures are adhered to, fraud opportunities are created.
• Inadequate auditing procedures, control checks and surprise checks will lead to creation of fraud opportunities. The bank must ensure that checks are done periodically.
• Inadequate training and knowledge. Without knowledge the opportunities to commit fraud are unlimited since the fraud detection mechanism is also absent
• Inadequate staff hiring practises to ensure vetting of prospective employees. The Human resources department must ensure that the employees are vetted adequately to filter out the undesirable staff compliment.
• Inadequate physical security. It is very important that the bank ensures that physical security like safes, locks, security cameras and security guards etc are available and working. Physical security discourages fraud opportunities

Banks and other organisation must ensure that they put in place measures to counter fraud and reduce their loses.