In global financial governance, timing and process are everything. Institutions tasked with regulating the cross-border financial system, policing illicit financial flows, and safeguarding financial integrity are, by their very nature, expected to operate on principles of multilateral consensus, evidence-based assessment, and procedural fairness. It is precisely for this reason that the Financial Action Task Force (FATF) and its network of regional bodies, such as the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), exist to provide a uniform framework of peer-reviewed evaluations and recommendations upon which countries are classified, improved, or sanctioned.

And yet, in its latest Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) strategy update, the European Union (EU) has broken ranks with this principle. It has placed Kenya on its list of high-risk third countries, even before the country’s scheduled mutual evaluation by ESAAMLG in July.

This is a premature move that raises uncomfortable questions about the coherence of international financial regulation, the integrity of multilateralism, and the latitude powerful economic blocs like the EU afford themselves in shaping global risk narratives.

Kenya’s AML/CFT Trajectory: A System Under Reform

To understand the gravity of this development, one must first appreciate the context of Kenya’s current AML/CFT framework. The last mutual evaluation by ESAAMLG appreciated that the global financial landscape has transformed radically, with the rise of digital payments, cryptocurrencies, offshore secrecy havens, and increasingly sophisticated transnational financial crime networks.

In recognition of these evolving risks and gaps, Kenya has undertaken substantive reforms over the past five years. Central to this effort is the overhaul of the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), with new amendments expanding the definition of reporting institutions, strengthening the supervisory powers of the Financial Reporting Centre (FRC), and tightening obligations on beneficial ownership disclosure, a perennial weak point in Kenya’s financial system.

More recently, the government has fast-tracked the introduction of the Virtual Asset Service Providers (VASP) Bill, a landmark regulatory framework aimed at bringing digital asset providers, wallet services, and cryptocurrency exchanges into the formal regulatory fold. In a financial ecosystem where virtual assets increasingly serve as conduits for cross-border illicit flows and terrorist financing, this legislation is not only timely but essential.

Further administrative reforms have also been pursued. Kenya has expanded risk-based supervision across financial and non-financial sectors, enhanced inter-agency collaboration in financial intelligence, and widened the scope of Designated Non-Financial Businesses and Professions (DNFBPs) subject to AML/CFT obligations from law firms and casinos to real estate dealers and precious stone traders.

These efforts reflect a jurisdiction acutely aware of its vulnerabilities but equally committed to systemic reform. And yet, rather than being acknowledged as a reforming state in transition, Kenya has now been pre-emptively condemned in the EU’s high-risk listing without the benefit of its imminent ESAAMLG evaluation.

The Problem with Premature Listings

The EU’s decision undermines not just Kenya, but the legitimacy of the very multilateral system it purports to support. At the heart of the FATF framework lies the principle that national risk assessments and country listings should follow a sequenced, peer-reviewed, evidence-based process. Mutual evaluations provide an opportunity for countries to be assessed on their technical compliance and the effectiveness of their AML/CFT measures not on perception, speculation, or legacy risk profiles.

Kenya’s evaluation, scheduled for July, is precisely intended to take stock of these reforms, benchmark them against FATF standards, and, where necessary, prescribe corrective action. By jumping ahead of this process, the EU sends an unsettling message: the judgments of powerful financial centres can supersede multilateral review processes when expedient.

There is a troubling pattern here. In 2019, the EU faced widespread criticism for a similar move when it sought to unilaterally expand its AML/CFT high-risk list without aligning with FATF decisions, leading to intense diplomatic backlash and eventual retraction. Kenya’s current listing suggests that the lesson was only partially learned.

 Unintended Consequences for Reform and Inclusion

The consequences of such premature listings extend beyond mere diplomatic discomfort. They inflict material costs on financial institutions, increase the compliance burden for cross-border transactions, deter foreign investment, and risk complicating vital remittance flows that millions of Kenyan households depend on.

Equally damaging is the chilling effect such decisions have on domestic reformers. By placing countries under punitive classifications without awaiting the outcomes of credible, transparent evaluations, global financial regulators risk fostering reform fatigue, breeding cynicism towards multilateral processes, and inadvertently empowering domestic actors opposed to transparency measures under the guise of nationalistic defiance.

The paradox is that Kenya’s ongoing reforms, including the VASP legislation and POCAMLA amendments, are precisely the kind of proactive interventions the EU and FATF frameworks encourage. To penalise a state mid-transition, without granting it the benefit of formal evaluation, is to risk discrediting the very incentives for compliance upon which the AML/CFT system relies.

Re-asserting Multilateralism in Financial Regulation

Kenya’s situation highlights the asymmetries of global financial governance. It underscores how developing economies remain vulnerable to unilateral determinations by more powerful jurisdictions, even in matters where multilateral frameworks exist. Retaining credibility of the international AML/CFT need consistency to be restored.  Listings should align with FATF mutual evaluations and follow due process not pre-empt them.

Kenya, for its part, must remain firm in pursuing its AML/CFT reforms, ensuring that the upcoming ESAAMLG mutual evaluation not only validates the progress made but also outlines a credible roadmap for addressing residual gaps. But, Nairobi would also be right to rally other African states and regional blocs in pushing back against premature, unilateral listings, advocating for the primacy of multilateral processes in global financial risk governance.

At a time when geopolitical tensions, digital financial innovations, and the growing reach of illicit networks challenge established AML/CFT frameworks, coherence and procedural integrity must be non-negotiable.  Anything less, as Kenya’s case shows, weakens the system for all.