NAME: NIYOKWIZERA EMMANUEL

Has Uganda’s prudential regulation of banks helped in its war on money

laundering?

Introduction

Regulation

The term regulation means a set of binding rules which are issued by a
private or public body. They are rules which are applied by all regulators in
fulfilment of their functions. In the financial service area, they include
prudential rules as those influencing conditions of access to the market and
those aimed at preventing risk associated with financial activities, corporate
governance and internal control systems, conduct of business rules and
methods of supervision.1

Banks/ Financial institutions

There is no direct definition of banks in the statutes. Banks have therefore

been known by their characteristics; the first is that they accept money from
and correct cheques for their customers and place them to their credit, the
second is that they honor cheques or orders drawn on them by their
customers when presented for payment and debit their customers
accordingly.2

A financial institution means a company which is licensed to carry on or

conduct financial institutions business in Uganda and it includes a
commercial bank, Merchant bank, mortgage bank, credit institution among

1
Kenneth Kaoma Mwenda, Legal aspects of financial services, Regulation and the Concept of a unified Regulator,
The World Bank, 2006 at Page 5
2
G.P Tumwine Mukubwa, Essays in African Banking law and Practice, 2nd Edition 2009 at Page 57

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others. This discussion will only focus on the regulation of banks regarding
anti-money laundering and not the other financial institutions. 3

A banker is defined to include a body of persons whether incorporated or not

who carry out the business of banking, 4 and a bank has characteristics such
as acceptance of deposits, issue of deposits substitutes, lending and
extending credit.5

Money laundering

Money Laundering is a process which involves procedures to change the

identity of illegally obtained money so that it appears to have originated
from a legitimate source. The cash gives anonymity to criminal activities and
it is the normal medium of exchange in the world of drug trafficking. The
process therefore gives rise to three common factors; the criminals need to
conceal the true ownership and origin of the money, they need to control the
money and they need to change the form of the money. 6

Regulation of banks

The regulatory framework for financial services is comprised of a

combination of primary enabling legislation, secondary legislation which is
issued pursuant to enabling statute, principles, rules and codes which are
issued by the regulator and guidance or policy derivatives which are issued
by the regulatory authority.7

In Uganda, Bank of Uganda regulates, licenses and supervises financial

institutions. This is done to protect depositor’s funds and to ensure the
safety and stability of the financial system so as to enhance economic
growth. The supervised financial institutions include commercial banks,

3
Section 3 of the Financial Institutions Act 2004
4
Section 1 (c) Bill of Exchange Act Cap 68
5
Supra Note 6
6
The Hong Kong Institute of Bankers; Banking Law and Practice, John Wiley & Sons Singapore Pte Ltd 2013 P 85-86
7
Supra Note 1

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credit institutions, micro deposit taking institutions, credit reference bureau
services, large savings and credit societies among others. 8

Bank of Uganda proposes and maintains laws, regulations and guidelines

that provide a frame work within which financial institutions are licensed,
supervised and resolved. The said regulations create an enabling
environment which among others helps to combat money laundering. 9

Banking institutions are required to demand proof of and record the identity
of its clients or customers whether usual or occasional when establishing
business relations or transacting. These can include opening accounts,
issuing cash books and performing large cash transactions. The officers and
employees are required to report promptly in case there is suspected money
laundering activity relating to any account held with the financial
institution.10 In that sense, the law in Uganda against money laundering is
effective.

More so, financial institutions are by law required to report promptly to the
national law enforcement agencies on any suspected money laundering
activity that may relate to the account held with the financial institution.
Money laundering covers all activities and procedures which are designed to
change the identity of illegally obtained money so that it appears to have
originated from a legitimate source.11

In the Anti Money laundering law, an authorized officer can apply in court ex
parte and in writing for a monitoring order directing a financial institution to
give information to an authorized officer. The application must be supported
by an affidavit explaining the circumstances under which such an order
should be issued.12

8
https://www.bou.or.ug/bou/faq/Related-faq/supervision/index.html accessed on 28th June 2023
9
The mandate to supervise the financial institutions is derived from the Financial Institutions Act 2004
10
Section 129(1) and (2) of the Financial Institutions Act 2004
11
Section 130 (1) & (2) of the Financial Institutions Act 2004
12
Section 56 of the Anti-Money Laundering Act

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When an application for issuance of a monitoring order is made, the court
can make an order directing that a financial institution should disclose
information obtained by the institution about the transactions which are
conducted through the account which is held by a particular person in that
institution.13

An employee or agent of a financial institution that is subjected to

monitoring order shall not disclose the existence or operation of the order to
any person except in given circumstances for example other than the
employee of a given institution to ensure compliance with the legal order or
the legal adviser to obtain legal advice or representation in respect of that
order.14

Whether Uganda’s regulation of banks has helped in its war on

money laundering

Section 6(7) (b) of the Anti- money laundering Act as amended in 2017
requires financial institutions to obtain senior management approval before
establishing or continuing for existing customers such relations. This is
further provided for under Regulation 29 (2) (a) of the Anti- money
laundering regulations as amended 2022.

Section 6 (7) (a) of the Anti-Money laundering Act 2017 requires financial
institutions to take reasonable measures to establish the source of wealth
and source of funds for customers and beneficial owners who are identified
as PEPS.

Section 6 (7) (b) of the Anti- money laundering Act as amended 2017
requires financial institutions to conduct enhanced ongoing monitoring of
business relationships. These in my view go a long way in tying the loose
ends in the law against money laundering in relation to financial institutions.

13
Section 57 Ant- Money Laundering Act
14
Section 60 of the Anti -Money Laundering Act

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The definition of PEP under the Anti- money laundering Act as amended in
2017 (section 1 (h)) now includes both domestic PEPS and persons having
prominent functions in international organisations in addition to the foreign
PEPS. In addition, the minister of finance planning and economic
development issued an amendment to the AMLA 2015 regulations on
January, 14, 2022, which amended Regulation 29. By expanding the scope of
the definition, the war against money laundering was strengthened. 15

Section 6 (7) (b) and 6 (3) (b) of the AMLA as amended 2017 (to be
read together with regulation 2) of the 2022 AMLA amendment regulations)
requires financial institutions to put in place risk management systems to
determine whether a customer or the beneficial owner is a domestic PEP or
persons entrusted with prominent functions in international organisations,
and if so to take required measures in addition to customer due diligence
obligations.

Section 6 (7) (c) of the AMLA as amended in 2017 requires financial

institutions to apply the measures, where the risk of money laundering and
terrorism are high in respect of domestic Politically exposed persons who are
or have been entrusted with a prominent function by an international
Organisation. Although the measures are not clearly indicated, this obligation
at least gives room for such institutions to be able to exercise due diligence
in the fight against money laundering.16

Section 6 (7) (b) of the AMLA as amended in 2017 requires financial

institutions to obtain senior management approval before establishing or
continuing, for existing customers such business relationships. This is also
provided for under Regulation 29 (2)(a) of the AML regulations as amended
in 2022. All the above are also applicable to immediate family members or

15
This is because the net was made wider to include those PEPS that would otherwise evade the law since they
were previously not mentioned in the law.
16
Due to the fact that money laundering techniques always change depending on the culprits, it is good that no
particular formula was prescribed under this rule so that institutions can be free to develop best practices
depending on the facts before them.

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close associates of persons in terms of Reg. 29 (2)(c) of the AML Regulations
2015 as amended in 2022. To this end, with all these amendments, Uganda’s
banking regulations have helped in its war against money laundering. 17

Short comings in Uganda’s regulation of banks against money

laundering

No clear legal obligation for financial institutions to take reasonable

measures

Under its second round of the mutual evaluation report which was adopted
by ESAAMLG18, Uganda was rated non-compliant with requirements of this
recommendation. The major deficiency was that no legal obligation exists for
financial institutions to take reasonable measures to determine whether
beneficiaries or the beneficial owner of the beneficiary are PEPS. There is no
clarity on the application of the Anti- Money Laundering Act requirements on
domestic PEPS. No enhanced ongoing monitoring is required. 19

There is a gap in the requirement to keep records

S.7 (1) (b) to (d) of the AMLA Amendment Act, 2017 requires accountable
persons to establish and maintain all books and records relating to all
transactions including on business correspondence and results of any
analysis undertaken. S. 7(2)(a) and (b) of the same act requires records to
be kept including any analysis that is conducted, and one-off transactions.
While S.7 (3) of the Act requires records to be kept for a period of ten years.
Regulations 28(1) and 42(2) AML Regulations 2015 also envisages details of
records that must be kept. However, because of limited technology, it is not

17
Since family members are the immediate beneficiaries, by catering for them in the regulations, the scope was
widened which in my view enhances the chances to win the war against money laundering in Uganda.
18
The East and Southern Africa Anti Money Laundering Group established in Arusha Tanzania 1999
19
ESAAMLG (2022), Anti Money Laundering and Counter Terrorist Financing Measures – Uganda, 9th Enhanced
Follow up Report and Technical Compliance Re- Rating, ESAAMLG, Dar es Salaam http://www.esaamlg.org

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clear how these records can be shared among enforcement institutions to
fight money laundering.20

No specific provisions for new products

There is no requirement to understand the nature of the business when

establishing a business relationship and when carrying out occasional
transactions above the designated threshold. There is also no specific legal
provisions requiring designated non-financial businesses and professions
(DNFPBS) to carry out ML/TF21 risk assessment when coming up with new
products, services or technology. Because of this gap, the war against
money laundering is lost since the money launderers are able to evade
regulation by hiding in such.22

No clear mechanism to enforce the know your customer

requirements

All the Designated Non-Financial Business and Professions including Trust

and Company Service Providers (TCSPs) are covered under the Second
Schedule to the AMLA, 2013. They are designated as accountable
institutions. Section 1 of the AML Act and Regulations 24-26 and 41 as
read with Part 2 of the 2nd Schedule to the AMLA 2013 require all DNFBPs
to comply with customer due diligence requirements set out in R.10.
However, the provision appears to be redundant as there is no clear
enforcement mechanism thereunder.23

No specific provisions for some potential gaps

20
This ultimately becomes a weakness because there is no mechanism for institutions to raise a red flag in case of
suspicion. Without a provision on how these records can be used, the war of anti-money laundering may be lost.
21
Money Laundering and Terrorism Finance risk assessment is a process of assessing an organisations risk of and
vulnerabilities to being used by money launderers and terrorist financiers.
22
For example, the real estate business has taken Uganda by storm. With no clear provisions on the new products,
money laundering still has a fertile ground to thrive in Uganda.
23
Because there is no clarity on how these can be enforced, the war on anti-money laundering may be lost.

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There is no specific requirement for casinos, dealers in precious metals and
precious stones (DPSMs), real estate agents, and other DNFBPs to conduct
customer due diligence measures for transactions exceeding the thresholds
required by the FATF Standard, the general customer due diligence
measures which are provided in the AMLA and AML Regulations equally apply
to all transactions regardless of value. But for trust and company providers,
the AML/CFT obligations are applicable when they provide the services
indicated under the FATF Standards. These have been partly addressed but
need to be implemented in order to have impact in the war against money-
laundering.

Lack of risk assessment measures

Uganda and DNFBPs have not undertaken any risk assessments on the new
technologies and products used by DNFBPs. Section 6A (2) of the AMLA
2013 as amended states that an accountable person including DNFBPs shall
identify, assess and, take appropriate measures to manage and mitigate the
money laundering or terrorism financing risks that may arise in relation to
the development of new products and new business practices; including new
delivery mechanisms for products and services; and the use of new or
developing technologies for both new and pre-existing products.

Conclusion

Uganda has a prudential regulation against money laundering. This has been
improved over time especially by making provision for banks and other
financial institutions to disclose information…

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