Official data from the Information, Communications and Technology ministry last year indicated that fraudsters made Sh13.2 billion off thousands of Kenyans who thought they were purchasing cryptocurrencies.
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How Kenya is losing millions legally to cryptocurrency fraudsters
Legal loopholes allowing the use of cryptocurrency in Kenya have placed the country at the centre of massive fraud and money laundering schemes siphoning millions of dollars each year.
Kenya is yet to enact any laws governing use or trade in cryptocurrency, leaving the unregulated product in a legal grey area that fraudsters and money launderers are now exploiting to avoid prosecution or assets seizures.
“The government is aware of the volume of trade and, as a result, through the Finance Act 2023, is attempting to levy various taxes on assets. There are several loopholes in the laws governing the ownership, management, disposal, and other activities involving such assets. Although the Constitution's Article 40 grants the freedom to hold any property, of any kind, in any area of Kenya, this constitutional description didn't take into account the fluidity and universality of cryptocurrencies,” International commercial lawyer Victor Olao of Olao & Rai Advocates argues.
“A few financial institutions that have risked to enter that new economic sector are, at least locally, physically dipping their toes in uncharted waters. Given the volume of transactions and the commonplace nature of the transactions being liquidated in foreign currencies, this provides a danger to the investor, the banks, and the insurer to the banks. Any claims may potentially be disastrous,” Mr Olao said in an interview.
Freeway for fraudsters?
In February, analytics firm Chainalysis revealed that last year alone, criminals around the world laundered at least $23.8 billion (Sh3.3 trillion) – nearly Kenya’s budget for the 2023/2024 financial year.
Official data from the Ministry of Information, Communications and Technology last year indicated that fraudsters made $93 million (Sh13.2 billion) off thousands of Kenyans who thought they were purchasing cryptocurrencies.
Joe Mucheru, who was at the time the Cabinet Secretary, did not reveal how many people were defrauded.
Esther Muthoni, a 45-year-old single mother, found herself a statistic after losing $255,988 (Sh3.2 million) in a cryptocurrency scam.
Muthoni was among hundreds of Kenyans who were defrauded by Brazilian national Ricardo Rocha through Velox 10 Global. Velox 10 Global launched operations in Kenya in 2017.
Muthoni and many others sent money to Daniel Karobia Gichuki, who was introduced as Velox 10 Global’s local agent.
In bank transfer and declaration forms seen by the Daily Nation, Muthoni indicated that the money was intended to pay Gichuki for work done.
Muthoni also introduced some of her friends, including Lucy Kamatu, who invested $3,884 (Sh550,000).
Six months later, there was no sign of getting dividends or a refund of their investments. Muthoni filed a complaint with the police, who arrested Gichuki. He was charged with obtaining money under false pretense.
In March 2023, Gichuki was acquitted after the Chief Magistrate’s Court held that there was no evidence to show he had conned Muthoni and others of their money.
In a 2019 interview, Gichuki told this reporter that he also lost money when Velox 10 Global went belly up and that he could not be blamed despite his personal bank accounts being used to take money from investors.
Vicious fraud schemes
One month after Gichuki’s acquittal, Muthoni died. She had suffered from diabetes, high blood pressure and a heart condition. She is now just another statistic in the vicious fraud schemes that have emerged in the local cryptocurrency scene.
Her son, Peter, told the Daily Nation in an interview that his mother had been hoping for even a fraction of the funds to use for medical treatment. “My mother died a very miserable death. She had been ailing for years. It’s even more painful that she died after knowing the outcome of the case and that she would never get justice,” Peter said.
Another of Muthoni’s friends, who also lost money to Velox 10 Global, spoke to the Daily Nation but declined to be named so as to avoid reopening family wrangles that were sparked by her botched investment in Velox 10 Global. “It was hard witnessing the acquittal. On my end I have accepted that I may never get justice. I decided to move on with my life,” she said.
Several cases filed by the Assets Recovery Agency (ARA) in the past three years have drawn focus to cryptocurrency as an effective money laundering tool.
Unlike regulated financial institutions, cryptocurrency dealers do not ask buyers the source of income being used to purchase the product. There are no ‘know your client’ rules, or demands to know sources of income. A willing buyer and willing seller are enough to get a deal done.
The loose nature of trade has made it an attractive platform for criminals looking to launder money without the complications of setting up a legitimate business and window dressing it to justify sudden large amounts of money made by its owners.
On May 25, 2023, High Court judge Esther Maina allowed the ARA to seize $768,959 (Sh109 million) from university student Felista Nyamathira Njoroge, who received the money from a Belgian cryptocurrency dealer she identified as her boyfriend.
Between 2021 and 2022, Mr De Mesel wired $3.37 million (Sh479 million) to Ms Njoroge and five other university students. He sent $811,287 (Sh115 million) to Isabel Nyaguthii Wanjohi, $760,616 (Sh108 million) to Tabby Wambuku Kago, $705,467 (Sh100 million) to Serah Wambui, $345,679 to Jane Wangui Kago, and $331,569 (Sh47 million) to Timothy Waigwa.
All the recipients, and Mr De Mesel, claimed that the funds were monetary gifts. Four of the women claimed to have been Mr De Mesel’s girlfriends.
Jane Wangui Kago claimed that her sister Tabby was Mr De Mesel’s girlfriend, and that the money she received was also a gift to help grow her hair salon business.
The Assets Recovery Agency (ARA) filed several cases seeking to have the money forfeited to the government after its investigations indicated that Mr De Mesel’s gifting spree was part of a money laundering spree.
Mr De Mesel argued that he made the money from cryptocurrency and stock exchange investments, but Justice Maina ruled that in Ms Njoroge’s case, there was no evidence filed in court to show the source of the funds.
In her judgment, Justice Maina ruled that the gaps in Mr De Mesel’s story indicated that he was using Ms Njoroge in a money laundering scheme.
In the last two years, the ARA has also investigated 10 Nigerian-owned companies for alleged money laundering, a scheme investigators told the courts included the purchase of bitcoins worth $35.2 million (Sh5 billion). The companies investigated were RemX Capital Ltd, RemX Holdings Ltd, Pumicells Ltd, OIT Africa Ltd, Multigate Ltd, RemX Investment Partners Ltd, Avalon Offshore Logistics, Flutterwave Payment Technologies Ltd and Kandon Technologies Ltd.
Initially, the High Court had frozen $39.5 million (Sh5.6 billion) in at least 59 accounts owned by the companies in several banks. But the money was released in September 2022 after the ARA withdrew its cases, citing lack of evidence to sustain a favourable outcome.
Money laundering investigations
In a recent interview, ARA Director Alice Mate confirmed that the agency is still investigating the companies for alleged money laundering, a process which includes scrutinising motives around the bitcoin purchases.
Slow resolution of cases has hampered the fight against money laundering through cryptocurrencies.
A criminal case against Alex Mutuku Mutungi, who was accused of extortion by demanding $43,785 (Sh6.2 million) from a local bank so as not to leak confidential data collected after a hacking incident, is yet to be concluded eight years after filing.
In June 2022, Francis Wambui and Zellic Alusa were charged in a Nakuru court after being linked to a credit card fraud syndicate that purchases cryptocurrencies to launder its loot. The case has not moved much since.
The Central Bank of Kenya (CBK) has since 2018 threatened local banks with sanctions if they facilitate cryptocurrency trade. But the CBK is now considering introduction of a cryptocurrency.
In February 2022, CBK started working on a discussion paper around the introduction of the Central Bank Digital Currency.
Financial services providers have opposed a regulator-backed cryptocurrency, arguing that it would also make the CBK a competitor in the industry.
In December 2022, the Central Bank and other regulators – Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority and Sacco Societies Regulatory Authority – formed a committee to write regulations to govern cryptocurrency trade.
The CBK has not responded to queries sent to its Governor Kamau Thugge two weeks ago. A CBK spokesperson had last week promised to follow up on the queries but had not responded by the time of going to press.
Safaricom, the country’s largest telecommunications firm, has also had run-ins with cryptocurrency dealers. The company owns M-Pesa, a popular mobile money transfer platform that is also regulated by the CBK.
In 2015, Safaricom terminated contracts with mobile payments automation firm Lipisha Consortium, which had a cryptocurrency dealer as one of its clients.
Lipisha Consortium and Bitpesa sued Safaricom, but the High Court dismissed the suit, holding that Safaricom did nothing unlawful.
Four years later, another cryptocurrency dealer sued the Capital Markets Authority (CMA), for hampering the firm’s plans to float an initial coin offering, where its Kenicoin product would be sold to the public.
Wiseman Talent Ventures further claimed that the CMA’s cautionary statements to the public led to Safaricom shutting down the cryptocurrency dealer’s M-Pesa platforms, and held that the government institution had no business regulating cryptocurrencies.
Judge Mary Muigai ruled in September 2019 that the CMA acted within its power because the initial coin offers floated by Wiseman Talent mimicked initial public offers where companies put up their shares for sale to the public.
The judge held that the initial coin offers, therefore fell under the CMA’s mandate.
After considering how other countries classify cryptocurrency, Judge Mary Muigai ruled that they should be treated as securities, which fall under the CMA’s watch. The judge read from the US market, where cryptocurrencies are treated as securities.
“Currently we are working as financial sector under the National Treasury with other stakeholders to agree on the policy position. This will guide on what falls where,” CMA CEO Wycliffe Shamiah said.
Kenya Revenue Authority maintains that money exchanges for cryptocurrencies are liable for taxation.
KRA Acting Commissioner of Domestic Taxes maintains that any income derived in Kenya is liable to tax, and intends to use the Finance Act, 2023 to net cryptocurrency dealers.
The controversial law has introduced a Digital Assets Tax, which will see the KRA entitled to collect three per cent of any revenue earned on digital assets.
This story was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.
