Report of

THE TASKFORCE ON

UNCLAIMED FINANCIAL ASSETS

November 2008

Ministry of Finance Unclaimed Property Assets Register (K) Limited

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Report of

THE TASKFORCE ON

UNCLAIMED FINANCIAL ASSETS

Submitted in November 2008

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TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................. iv Objective................................................................................................................ iv Background ........................................................................................................... iv Analysis of the Unclaimed Financial Assets In Kenya ...................................... iv Way Forward .......................................................................................................vii Financial Implications.......................................................................................... ix Recommendations ................................................................................................ ix

1.1 INTRODUCTION ....................................................................................... 1 1.1.1 Background Information ..................................................................... 1

1.2 REVIEW OF GLOBAL EXPERIENCE .................................................. 2 1.2.1 Australia ................................................................................................ 2 1.2.2 Canada................................................................................................... 3 1.2.3 Malaysia ................................................................................................ 3 1.2.4 Ireland ................................................................................................... 4 1.2.5 Uganda................................................................................................... 4 1.2.6 United Kingdom (UK).......................................................................... 4 1.2.7 United States of America (USA).......................................................... 5

1.3 LESSON LEARNT FROM THE ABOVE REVIEW .............................. 5 2.0 ANALYSIS OF THE SITUATION/PROBLEM .......................................... 7

2.1 THE BANKING SECTOR ......................................................................... 7 2.2 THE CAPITAL MARKETS SECTOR ................................................... 11 2.3 THE PENSIONS SECTOR ...................................................................... 13 2.4 THE INSURANCE SECTOR .................................................................. 13

3. 0 MAIN STUDY FINDINGS.......................................................................... 15 4.0 OPTIONS ON THE WAY FORWARD...................................................... 18

4.1 FINANCIAL IMPLICATIONS ............................................................... 20 5.0 RECOMMENDATIONS .............................................................................. 20 6.0 APPENDICES A ........................................................................................... 23 7.0 APPENDICES B............................................................................................ 44

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EXECUTIVE SUMMARY Objective 1. The objective of this Executive Summary is to provide a brief of the Final Report of the Taskforce on Unclaimed Financial Assets. The Taskforce set out to ascertain the current practice, size and extent of unclaimed financial assets in Kenya and to recommend a national policy framework on unclaimed financial assets based on international best practice, including reviewing existing legislation and /or developing new legislation for unclaimed financial assets. Background 2. The Minister for Finance, represented by the Economic Secretary, inaugurated the Taskforce on Unclaimed Financial Assets on 19 March 2008.The aim of the Taskforce was to ascertain the nature, extent and value of unclaimed financial assets in Kenya. The Taskforce members are drawn from the key sectors of Kenyans financial system. It comprises representatives of key regulatory bodies, including the Central Bank of Kenya (CBK), the Insurance Regulatory Authority (IRA), the Capital Markets Authority (CMA), the Retirement Benefits Authority (RBA), the Commissioner of Cooperatives, and the Consultant, the Unclaimed Property Assets Register (K) Limited (UPAR). 3. The mandate of the Taskforce includes reviewing existing practices in Kenya and comparing them to practices in selected international jurisdictions. The Taskforce is required to ascertain or estimate unclaimed financial assets held in relevant sectors by conducting appropriate inventories of those assets. The Taskforce is also required to make recommendations for an appropriate legal, regulatory, and institutional framework to govern unclaimed financial assets in Kenya. Analysis of the Unclaimed Financial Assets In Kenya 4. Many developed countries have explicit policy frameworks for the management of unclaimed financial assets. The current international best practice for managing unclaimed financial assets, including the management of information and data related to such assets, is the establishment of a mandatory legal and regulatory framework. This typically entails the mandatory identification of unclaimed financial assets according to prescribed definitions as well as the segregation, reporting and remittance of such assets into a central

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reclaim fund or trust and the establishment of an unclaimed assets agency to regulate and manage these assets. The portion of remitted funds in excess of those required to meet claims of asset owners is invested for social, community, and economic benefit. 5. The current situation in Kenya contrasts sharply with the best international practice. It is estimated that the overall universe of unclaimed financial assets in the financial system, the corporate sector and other institutions, including utilities, may exceed KSh. 200 billion. Actuaries estimate that about 60% or more of these unclaimed assets may never be reunited with their owners or beneficiaries. Reasons behind this lack of unification include the passage of time, death of owners, missing records, lack of asset tracking mechanisms and the absence of legal and regulatory requirements for institutions to declare the unclaimed assets that they hold. 6. The current framework in Kenya does not provide for a system of mandatory notification or reminders to potential unclaimed financial asset owners nor the disclosure or publication of unclaimed financial assets. Implementing an effective reunification system would help protect the interests of potential unclaimed financial asset owners, particularly the most vulnerable owners and beneficiaries such as widows, orphans, dependents and others who are less financially literate. A robust reunification service should include third-party unclaimed financial assets service providers who work in the best interest of asset owners as well as financial asset holders. 7. An analysis of unclaimed financial assets in Kenya revealed the following: Surveyed institutions in the Banking, Capital Markets, and Insurance sectors

reported total unclaimed assets of KSh.9.1 billion. Of this total, banks reported KSh.7.4 billion, listed companies KSh.1.5 billion, insurance companies KSh.283 million, one pension fund (NSSF) KSh. 243 million and one utility firm (KPLC) KSh.66.8 million. The reported unclaimed assets was far below the originally estimated KSh. 200 billion. This could be attributed to a number of factors. The main ones being exclusion of non-financial assets like land and property, significant under-reporting by holding institutions surveyed particularly in the pensions and insurance sectors, and non-reporting of unclaimed assets by government agencies like the Public Trustee.

There is considerable variation in the treatment, accounting and reporting of

unclaimed financial assets within sectors, as well as across different sectors. Many holding institutions have weak policies on unclaimed financial assets

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that do not match the best practices in their industry. This gives rise to the need for setting uniform rules, definitions and accounting and reporting requirements on dormant and unclaimed assets across the financial system.

Respondents to the Taskforces survey on the proposed structure of an

unclaimed financial assets framework indicate broad support for the introduction of uniform best practices within industries as well as the creation of an independent unclaimed financial asset agency and trust fund, particularly by large banks, insurers and other listed entities. The respondents placed more emphasis on recognition of the contractual relationship between the holding institutions and the asset owner. The respondents however noted that transferring the unclaimed financial assets minimizes the risks of holding the assets in their books.

In the absence of a mandatory regulatory frame work (as opposed to a

voluntary regime) holding institutions have no legal compulsion or commercial incentive to identify, segregate, report and manage unclaimed assets with due consideration to the interests of asset owners.

An unclaimed financial assets regime will assist the financial system to

minimize fraud by employees of holding institutions, curb corporate malpractices by holdings institutions, and promote sound corporate social responsibility (CSR) through re-unification services. It will also raise standards of corporate governance (CG) through increasing transparency and accountability in the management of third party assets.

A long-term investment policy and strategy be part of the overall unclaimed

financial assets framework. This will increase buy-in by other stakeholders and, in addition, accord the Government an opportunity to exercise its responsibility as bona vacantia holder of assets in the public interest.

Re-unification services are critical in both the temporary and permanent

phases of separation, particularly the reunification of financial assets with widows, orphans, dependants and beneficiaries of the assets.

Dormant and unclaimed financial assets resulting from owners relocating

overseas points to the need for a robust framework to reunite Kenyas Diaspora with the financial assets they leave behind. This offers tangible benefits to the Diaspora and helps to increase Diaspora remittances, recognized under Kenyas Vision 2030 as an important source of long-term financing and which is slated to increase from the current 5% to 10% of GDP.

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Several listed companies are avoiding paying unclaimed dividends to the

regulator under the Investor Compensation Fund by amending their Articles of Association to allow them to write back unclaimed dividends after short periods of non encashment, thus avoiding the seven-year statutory period for holding of the assets as defined under the CMA Act. Some companies are selling shares whose owners are inactive to third parties such that the six years of accumulated unclaimed dividends of the original shareholders would be funneled back to the company through its profit and loss statement.

A reasonable transition period of 1 to 3 years is deemed as appropriate in

complying with the requirement to transfer all financial assets that qualify as unclaimed as opposed to immediate transfer. This is because immediate transfer could result in a liquidity constraint, particularly for banks while companies could resort to selling of assets to meet such a requirement leading to unanticipated financial burden.

Way Forward 8. FOUR possible options have emerged from the assessment by the Taskforce on unclaimed financial assets in Kenya. These are: Option 1: Maintain the current legal and regulatory framework largely unchanged .The current legal and regulatory framework continues unchanged with a reactive approach to policymaking and regulation. The Taskforce views this option as unfavourable given Vision 2030s social and economic pillars of a free, equitable, and just society with access to affordable and competitive financial services. In addition, from international best practice, the government would be abdicating its mandate as bona vacantia holder of unclaimed asset in trust. Moreover, there is convergence of opinion on the matter that these assets should be under regulatory oversight. Option 2: Introduce a voluntary legal and regulatory framework. This option requires that all participating institutions holding unclaimed financial assets volunteer to participate in a self-regulatory regime. This option would imply that institutions holding unclaimed financial assets exercise their discretion either to participate or not as they are not compelled to do so either by law or principle. This option is also rejected given that the holding institutions have been beneficiaries of the current absence of statutory requirements. In the absence of a

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mandatory regulatory framework, holding institutions have no legal compulsion or commercial incentive to identify, segregate, report and manage unclaimed financial assets with due consideration for the interests of the asset owners. Option 3: Introduce a mandatory legal and regulatory framework within Regulator(s). This option entails use of the existing systems and infrastructure of regulators to domicile the unclaimed financial assets agency. Given the Government policy stance of not creating new agencies but rather consolidating agencies, this option requires that such an agency be domiciled in an existing regulator, such as the Retirement Benefits Authority (RBA), which has the capacity of overseeing Trust Funds or under the Capital Markets Authority (CMA), which has the Investor Compensation Fund. This will be similar to the practice in Australia where the Australia Securities and Investments Commission (ASIC) is responsible for regulating and managing Unclaimed Assets across all sectors. The CMA currently possesses some limited legal and regulatory powers to manage unclaimed dividends. This option would be consistent with the trend towards consolidation of the regulation of financial services under a unified financial sector regulator. Option 4: Introduce a mandatory legal and regulatory framework with creation of a new Regulatory Agency. The option entails establishment of an new unclaimed financial assets agency tasked solely with the responsibility of regulating, supervising, and managing unclaimed financial assets across all sectors in Kenya. The framework would address the most common causes of dormancy, provide for uniform definitions and standards of accounting and disclosure, and establish regular reporting requirements. This option would further ensure that the four pillars of a robust unclaimed assets framework identified by the Taskforce are catered for, namely (i) mandatory accounting and reporting obligations on holding institutions including requirements to identify, segregate, report and remit unclaimed financial assets; (ii) enactment of a mandatory legal regime for unclaimed assets that includes the creation of a regulatory authority and a central trust fund; (iii) robust reunification measures guaranteeing owners the indefinite right to reunification; and (iv) provisions for investment of Unclaimed financial Assets funds for long term economic development. The Task Force recommends this option.

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Financial Implications Option 1: There are no additional costs involved under this option. However, there would be continued accumulation of unclaimed financial assets across all sectors in the financial system with no re-unification. There would be limited intermediation or productive use of these dormant and unclaimed assets for economic development. Option 2: The Government may draft guidelines on voluntary management of these unclaimed financial funds. There would be minimal additional costs for drafting new guidelines and harmonizing laws as well as amending existing Acts. Other additional costs would accrue from creating new regulations to be administered by existing regulators. Option 3: There will be costs related to the set up, establishment, and revision of existing legislations to incorporate unclaimed financial assets. There will also be costs for capacity building for existing and/or new staff within the existing regulatory agency identified to domicile unclaimed financial assets. Option 4: There will be more resource commitments with this option. This entails creation of an Unclaimed Assets Agency to regulate and administer the new institutional structure. New resources will be required to cover the set up costs, establishment of infrastructure, staffing, and training. The initial costs would be in the region of KSh. 80 million per annum as set out in Appendix B at page 55. Recommendations The Taskforce recommends Option 4 as the ideal structure that takes into account the four pillars of a robust unclaimed assets framework, namely (i) mandatory controls, accounting and reporting obligations on holding institutions (ii) indefinite right of reunification for owners; (iii) a mandatory legal framework that includes creating a regulatory agency and trust fund, and (iv) provisions for investment of unclaimed financial assets for long-term socio-economic development. In this regard, the Taskforce has developed a draft unclaimed assets bill for consideration by the Ministry of Finance. The draft bill contains guidelines for a regulatory and institutional structure for the administration of unclaimed financial assets.

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1.0 OBJECTIVE OF THE REPORT The objective of this report was to ascertain the current practice, size, and extent of unclaimed assets in Kenya and recommend a national policy framework on unclaimed financial assets based on international best practice, including reviewing existing legislation and/or developing new legislation for unclaimed financial assets. 1.1 INTRODUCTION 1.1.1 Background Information Unclaimed Assets are tangible or intangible property that has gone unclaimed by its rightful owners, or assets where there have been an absence of owner-generated activity for a defined period. Common examples of unclaimed financial assets include the following: a) Customer and client accounts and balances held at banks, building societies

and other depository financial institutions but which have been inactive for a long time (dormant accounts);

b) Unclaimed income from stocks and shares in the form of dividends and

interest earned; c) Unclaimed utility deposits in the books of power and water companies; d) Unclaimed or uncollected retirements benefits at insurers and pension

administrators including unidentified or un-credited contributions to private and public pension schemes;

e) Unclaimed death benefits and annuities from insurance companies; f) Unclaimed or uncollected bail and bond monies deposited in Courts of law; g) Unclaimed deposits and benefits in collapsed institutions like banks, building

societies, insurance companies and stock brokerages; and h) Uncollected lottery prizes and other prize monies Many developed countries have explicit policy frameworks for the management of unclaimed financial assets. The current international best practice for managing

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unclaimed financial assets, including information and data relating to unclaimed financial assets, is predominantly a mandatory legal and regulatory framework. These usually require identification of unclaimed financial assets according to prescribed definitions, followed by segregation of these assets, periodic reporting, and remittance to a central agency upon expiry of prescribed dormancy periods. The portion of funds remitted to the central reclaim funds in excess of amounts needed to satisfy claims is normally invested for social and economic benefits.

The picture in Kenya contrast sharply with current international best practice. It was originally estimated that unclaimed financial asset holdings in Kenya exceeded KSh. 200 billion in the financial system, corporate sector and other institutions including utilities.

Estimates from international jurisdictions indicate that about 60% or more of unclaimed financial assets are permanently separated from their owners or beneficiaries. The cause include the passage of time, death of owners, missing records, lack of asset tracking mechanisms and the absence of legal and regulatory requirement for institutions that hold these assets to declare or report the unclaimed assets that they hold.

Under the principle of bona vacantia, government is the ultimate custodian and owner of unclaimed property in any modern state. Prior to reverting to government, reasonably thorough, effective, and cost efficient efforts need to be made to re-unite unclaimed assets with their owners and discharge holding institutions of the liability to the owners. Only where the owners and beneficiaries of the assets cannot be found or traced should unclaimed financial assets be remitted to agencies of government or independent reclaim or trust funds for investment in social and economic development.

1.2 REVIEW OF GLOBAL EXPERIENCE 1.2.1 Australia The unclaimed financial assets framework in Australia includes individual state laws that pertain to unclaimed balances. These laws are not consistent or uniform across all state jurisdictions. Other laws include the Disposal of the Uncollected Goods Act, the Warehousemens Lien Act, and Trustees Act. The Banking Act and Commonwealth Corporations Law affect the laws established by individual states. Australia offers wide coverage with separate legislation for each financial sector. Reunification measures include public access to an online, searchable unclaimed assets database and a consumer website (FIDO), which is maintained

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by the Australian Securities and Investments Commission (ASIC), the capital markets regulator. They operate an unclaimed moneys service unit as a public service and settlement mechanism for state treasurers. All unclaimed moneys are forwarded to the ASIC independent of the sector from which they originate. ASIC pays unclaimed balances to the Treasury as revenue ASICs responsibility to act as the reclaim and re-unification services provider may conflict with its regulatory role. Australias unclaimed financial assets funds are not intended for re-investment for long-term economic development but used for local investment. 1.2.2 Canada Canada provides a framework for managing unclaimed balances from inactive accounts on defined thresholds for a total of 40 years. Under the Canadian framework, unclaimed balances from federally regulated banks and trust companies are managed for 10 years at the original holding institution. After expiry of this period, they are remitted to the Bank of Canada which manages them at the Central Bank for an additional 30 years before transferring them to ordinary government revenue. The Office of the Superintendent of Financial Institutions (OSFI), equivalent to the Bank Supervision Department of the Central Bank in Kenya, publishes an extensive register of unclaimed balances in the Canada Gazette. 1.2.3 Malaysia Malaysias unclaimed financial assets framework is based on the Unclaimed Moneys Act of 1965. Its regulatory framework offers some of the best international practices that Kenya could draw from in terms of defining unclaimed assets as well as mandatory provisions for identifying, segregating, reporting, and remitting unclaimed financial assets. Its regime provides universal coverage over all sectors in the economy and casts the net over unclaimed assets wide enough to include all unclaimed monies held by any person or individual. This means that Malaysia offers potentially the most extensive coverage. All categories of unclaimed monies are remitted to the Registrar of Unclaimed Moneys and are designated as ordinary government revenue after being for 15 years. Malaysias unclaimed financial assets framework provides for reunification measures that include mandatory publication of unclaimed financial assets by holding institutions and the Registrar of Unclaimed Monies in the national gazette. However, it has few guidelines on the use and investment of unclaimed funds for social causes or economic development.

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1.2.4 Ireland Irelands framework is based on the Dormant Accounts Act of 2001 (revised in 2005) and the Dormant Life Assurance Policies Act of 2003. Both Acts offer detailed guidelines, definitions, procedures, and purposes for the unclaimed financial assets regime. The regulatory framework in Ireland expressly adopts four main pillars as goals for unclaimed balances; namely, consumer protection, orderly regulation of the unclaimed balances held by financial services industry, right to reunification; and minimizing risks on institutions of holding dormant accounts. Ireland offers one of the most robust and extensive unclaimed financial assets frameworks, one that is probably more comprehensive and thus more complex than the requirements of Kenya. Irelands unclaimed assets framework explicitly provides for investment of funds for social and community development. It requires separate funds and reserves to be maintained to satisfy reclaims and expenses of the Unclaimed Assets Board and Trust funds. However, Ireland lacks a central national unclaimed assets database and independent consumer search and reunification services. 1.2.5 Uganda Ugandas Financial Institutions Act of 2004 (section 119) defines its regulatory framework for unclaimed balances. The framework is simple and brief, but makes reasonable provisions for the identification, segregation, and management of dormant and unclaimed assets while held at holding institutions. Unclaimed balances are transferred to the Bank of Uganda (BoU) after prescribed periods. This places significant re-unification responsibilities upon the BoU. The unclaimed moneys remitted to the BoU may be used to offset the costs of supervising financial institutions or used as may be prescribed. The Act is however silent on who prescribes the expenditure of unclaimed funds. Ugandas unclaimed financial assets framework does not specify objectives and mandates for the use of unclaimed funds for long-term economic development. It lacks an institutional structure and does not provide for an independent unclaimed assets agency or trust fund. It does not include provisions for private sector reunification measures that are critical to effective unclaimed assets regimes. 1.2.6 United Kingdom (UK) An unclaimed assets framework for the UK has not been fully established and is currently a work in progress. The UKs proposed unclaimed assets scheme seeks to make provisions for using money from dormant accounts for social or charitable purposes, distinct from government revenue and spending. The purpose of the proposed legislative framework is to transfer unclaimed assets to a central

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reclaim fund to be used to assist society while protecting owners rights to reclaim their money. Proposed laws seek to set up a Central Reclaim Fund regulated by the Financial Services Authority (FSA), which would extinguish liabilities to owners upon transfer of dormant accounts balances to the Central Reclaim Fund. The UKs proposed framework is a voluntary and self-regulatory scheme. It would require banks and building societies to proactively identify and reunify customers with their unclaimed balances prior to the start of the scheme. Separate provisions would apply for smaller banks with assets under UK Sterling 7 billion. The investment of dormant funds into society is the one pillar of the UKs unclaimed assets scheme that holds strong lessons for Kenya. The voluntary nature and reliance on self-regulation among banks and building societies is in sharp contrast with mandatory regimes that comprise best international practices in other jurisdictions. The UKs proposed framework includes a considerably long dormancy period of 15 years and has weak statutory provisions on the management of unclaimed balances in situ during the 15-year dormancy period. The proposed level of coverage is relatively narrow for modern financial systems by covering only banks and building societies, thus excluding unclaimed balances from the insurance and pensions sectors as well as unclaimed dividends from the capital markets segment. 1.2.7 United States of America (USA) The unclaimed assets framework of the United States includes extensive and comprehensive state-level Uniform Unclaimed Property Acts. These provide mandatory provisions for identifying, reporting, and remitting unclaimed property to State Treasurers. US regulations make State Treasurers responsible for reunification efforts. Kenyas unclaimed financial assets framework can draw many valuable lessons from the USA, including rules and regulations for the identification, reporting, and remitting of unclaimed amounts. However, the extensive legal and regulatory requirements in the USA could also be burdensome in the Kenyan context. 1.3 LESSON LEARNT FROM THE ABOVE REVIEW Pillars of an Effective Unclaimed Financial Assets Framework: The Taskforce identified four key pillars of an effective unclaimed financial assets framework: 1. Strong Controls and Reporting Requirements over Unclaimed Assets at

Holding Institutions: Strong internal controls are required at holding institutions with guidelines on application of uniform accounting treatment and best practices in each industry. These should include the identification,

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segregation, reporting and remitting of unclaimed financial assets. Regulations, policies, and procedures are essential to the proper management of unclaimed assets while they lie dormant in situ at holding institutions.

2. A Mandatory Legal And Regulatory Framework: A mandatory legal and

regulatory framework with legislation that creates a regulatory institution and trust fund to regulate, supervise, and manage unclaimed assets at all stages of separation of assets from the temporary separation phase to the permanent phase. Once holding institutions have exhausted reunification efforts and upon expiry of a prescribed period, unclaimed assets should be remitted to an independent regulatory institution and trust fund for further management. There is broad support for an independent unclaimed assets agency and an independent trust fund to regulate, own, and manage unclaimed assets. Such an agency would also be responsible for the appointment of fund managers and custodians to assist in discharging their mandate as well as provide for the licensing of unclaimed financial assets service providers offering reunification services.

3. Reunification of Unclaimed Assets with Owners & Beneficiaries: Strong

provisions for re-unification measures and services are required that cover the periods of temporary separation (when dormant and unclaimed financial assets are held by holding institutions) as well as during the transition to permanent separation (when unclaimed assets are transferred to an independent agency or trust fund). Central to reunification is the indefinite right of reclaim by owners of unclaimed assets, whether held at holding institutions or after remittance to an independent unclaimed assets agency or trust fund. Owners are inclusive of widows, orphans, and dependents. The experience from other jurisdictions indicates that about 25% to 40% of unclaimed assets are eventually reunited with owners, leaving the balance available for long-term investment in economic development that benefits society.

4. Investment of Unclaimed Funds for Long-Term Development: The

investment of unclaimed funds for long-term economic development is ultimately the primary justification for an unclaimed financial assets framework. The returns from these investments are the benefit that the country targets to obtain.

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2.0 ANALYSIS OF THE SITUATION/PROBLEM The Taskforce examined existing practices in Kenyas banking, insurance, pensions, and capital markets sectors. Companies in each sector were identified and asked to participate in a survey to ascertain the nature, extent, and size of their unclaimed assets and assess their current practices with regard to dormant and unclaimed assets. The findings for each sector are outlined below. 2.1 THE BANKING SECTOR The Taskforce received responses from 40 of the 45 licensed institutions that were surveyed. Overall, the banking sector provided quality responses to the survey. Active and hands-on assistance was provided by the sector regulator in getting institutions to participate. The 40 responding banks collectively held KSh.7.4 billion in dormant and or unclaimed balances. The values reported for various types of unclaimed assets are summarized at Table 1.

Table 1: Unclaimed Assets held at Banks by Type of Asset Unclaimed / Dormant Assets Reported Number KSh. %Unclaimed Account Balances Savings Accounts 263,112 3,625,393,572 49.2% Current Accounts 29,258 1,783,816,755 24.2% Deposit, Call Accounts 3,522 629,583,663 8.5%Subtotal - Account Balances 295,892 6,038,793,990 81.9%Unclaimed Financial Instruments Un-Presented Cheques, Unclaimed Drafts 34,059 1,264,665,847 17.2%Customer Receipts, Remittances not credited 24,322 17,990,203 0.2%Bearer Certificates of Deposits Unredeemed 2 5,385,211 0.1%Treasury Bills, Bonds 9 202,563 0.0%Wholesale A/c - Western Union 185 2,091,215 0.0%Wholesale A/c - Money Gram 0 0.0%Unclaimed Dividends 3,575 40,786,797 0.6%Subtotal - Financial Instruments 62,152 1,331,121,837 18.1%Unclaimed Assets Reported by Banks 358,044 7,369,915,826 100.0% Survey data shows that 295,892 accounts holding unclaimed balances of KSh.6.0 billion or 81.9% of the total were unclaimed or dormant in the banking sector. 62,152 unclaimed financial instruments amounting to KSh.1.3 billion or 18.1% of the total were unclaimed or dormant in the banking sector. The largest subset of the former is savings accounts (49%) followed by current accounts (24.2%) and

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deposit accounts (8.5%). The largest component of unclaimed financial instruments was un-presented bankers cheques and drafts (17.2%). The Taskforce examined the number of deposit accounts in the Kenyan banking sector as outlined at Table 2. Table 2: Deposit Accounts in Kenyan Banking Sector

2007 Number of Bank Deposit Accounts

Bank Deposits(KSh. Billions)

Insured Deposits 4,129,162 114.2 Uninsured Deposits 608,982 595.6 Total Deposits 4,738,144 709.8

Source: Unclaimed Asset Task Force July 2007. Data from CBK Bank Supervision Report 2007. The Kenyan banking sector held KSh.114.2 billion in insured deposits (balances below KSh.100,000) and KSh.595.6 billion in un-insured deposits (above KSh.100,000) as at 31 December 2007. The banking sector held KSh.709.8 billion in 4,738,144 deposit accounts. The 40 participating banks reported 295,892 dormant accounts. As such, dormant accounts made up 6.2% by number of all accounts in the Kenyan banking system (295,892 / 4,738,144). The survey carried out by the Taskforce further indicates that in the banking system, unclaimed assets were separated from their owners for periods as long as seven or more years. Some banks were not able to identify the length of time for which balances were unclaimed. Table 3 shows the age of unclaimed account balances in the banking sector reported by the 40 participating banks. Table 3: Age of Unclaimed Account Balances

Age Analysis Of Unclaimed Balances Reported Banking Sector (KSh.) 6 Months 1,369,566,337 27.7%More than 6 Months to 2 Yrs 1,378,780,015 27.9%More Than 2 Yrs 2,191,250,461 44.4%Total Aged Analysis of Unclaimed Balances 4,939,596,813 100.0%Sub-Total - Balances Not Analyzed by Age 2,430,319,013Reported Dormant Accounts 7,369,915,826Source: Unclaimed Assets Taskforce Survey: April-November 2008

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Table 3 indicates that 44.4% of unclaimed account balances were unclaimed for more than 2 years. The remaining 56.6 % were separated from their owners for less than 2 years, with 27.6% of unclaimed balances dormant for 6 months. This finding outlines the need for regulatory requirements to properly manage unclaimed assets while they lie dormant in situ at holding institutions. It also highlights the need for robust reunification requirements as specified in the four pillars of an unclaimed financial assets regime. Overall, comments from participating banks indicate the following preferences: An indefinite right of reclaim by customers; Provisions for requisite proof of customers claims on unclaimed balances; Emphasis on the banks fiduciary duty of care to customers; The importance of the bank-customer contractual relationship; and Holders retaining custody and control over unclaimed assets. These preferences are consistent with recommendations for the management of unclaimed assets in situ during the temporary separation phase. Holding institutions guided by requirements to adopt best practices and applying uniform guidelines and procedures across industries would not gain any advantage in having custody and control.

Overall, the survey identified wide variations in the treatment of unclaimed assets with regard to accounting and banking practices within the sectors, as well as across sectors. This makes a strong case for setting uniform definitions, rules and requirements on the treatment of dormant and unclaimed assets. Other findings include: The bank reporting the largest amount in dormant or unclaimed assets in the

country holds over KSh.1.0 billion. With more rigorous definitions of unclaimed and dormant assets, The Taskforce expects significantly larger amounts to be reported in the banking sector as unclaimed.

Large banks use their contractual bank-customer relationship as a guide to setting policies on dormant and unclaimed accounts. This needs to carry

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through to the new unclaimed financial assets framework to avoid breaching existing contracts.

Many banks as holding institutions recognize unclaimed deposits and other customer dues as liabilities that are payable on demand, but nevertheless invoke the 7-year statute of limitation in their policies on unclaimed balances.

A majority of banks transfer unclaimed balances on dormant accounts into

their profit and loss accounts after periods determined by their internal policies. These periods range from as short as 2 to 5 years to the more usual 6 to 7 years. One bank recognizes unclaimed assets as income after 10 years of dormancy. Current practices by some of the banks in may breach international best practices in cases where they depart from the legal status for unclaimed deposits and dormant accounts which is that these amounts remain as liabilities of the holding institutions (contingent liability disclosures as per International Accounting Standards).

The few banks with strong policies and internal controls over unclaimed assets are burdened by the absence of laws regarding the ultimate disposition of the assets. This leads to uncertainty on applicable legal and regulatory provisions.

The most common reasons for customers to be separated from their accounts are death, relocation overseas and incorrect customer and or account details. This means that re-unification services are critical at both phases of temporary and permanent separation, extending to reunification of assets to widows, orphans, dependants, and beneficiaries of account holders.

A robust unclaimed assets framework in Kenya must demonstrate to Kenyas

Diaspora that the countrys financial and regulatory regime safeguards their interests and encourages Diaspora remittances from abroad. Kenyas Vision 2030 identifies Diaspora remittances as an important source of external financing and expects these to increase substantially, doubling to 5% of GDP.

The most common definition of dormancy is absence of user generated

activity for a defined period. The most common dormancy periods in the banking sector are 6 months to 2 years from the initial recognition of dormancy to the transfer to internal unclaimed or dormant registers.

The most common periods for ultimate disposition and recognition into profit and loss accounts are between 5 to 7 years and up to 10 years.

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2.2 THE CAPITAL MARKETS SECTOR According to Kenyan practice, dividends become unclaimed on expiry of a 7-year period after declaration and payment if the company paying the dividend is not able to effect the dividend payment or unify the unclaimed dividends with the shareholder, for whatever reason. The Capital Markets Authority (CMA) Act was amended by the 2007 Finance Act to include provisions for the collection of unclaimed dividends. This was accomplished through the introduction of an Investor Compensation Fund1. The primary goal of the survey of the capital markets segment was to determine the value of unclaimed financial assets involving capital market stakeholders, intermediaries and financial instruments in the capital markets. These include shares, stocks, dividends, collective investment scheme units, bonuses and rights issues. The survey assessed how listed companies currently treat unclaimed assets and gathered the opinions of the sector on the future unclaimed financial assets framework and its design. The value of unclaimed dividends for the 29 listed companies and 1 stockbroker that participated in the survey totaled KSh.1.0 Billion in FY2006 and KSh.1.53 Billion in 2007 as shown at Table 4. Table 4: Capital Markets Unclaimed Dividends Unclaimed Dividends By Counter 2007

KSh.2006

KSh.Industrial and Allied 682,480 422,420Commercial and Services 90,436 85,525Finance and Investment 732,905 510,046Alternative Investment 3,553 2,193 Client Nominee Accounts 23,129 - TOTAL 1,532,503 1,020,184

Source: Unclaimed Assets Taskforce Survey: April-November 2008

1 The Fund is sanctioned to collect any unclaimed dividends from listed companies that have been outstanding for more than seven years and is responsible for paying beneficiaries from collected unclaimed dividends when the rightful owners are found.

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About 75% of the participants indicated that their policies on unclaimed dividends were incorporated into their Articles of Association and that they followed the 7-year period from the statute of limitation Act to define dormancy. One company indicated that the 7-year policy was the most equitable for all shareholders and that writing back unclaimed dividends into the company tends to benefit all shareholders, not just one or two. The company also indicated that its Articles of Association only covered dividends and not untraceable shareholders. The Rights Issue Prospectus of a listed company indicates that any shareholder not notifying the company that they will take up their rights will forfeit those rights. This implies that all missing shareholders will automatically be giving up their rights without their knowledge. The sole respondent from the list of CMA licensees stated that they did not have any policies on unclaimed financial assets. However, currently they were holding KSh.23 million in unclaimed stocks, bonds, and client securities. The most common reason respondents gave as to why unclaimed assets arise included; shareholder account details that are incorrectly updated due to the wrong postal code; death; lack of knowledge of the assets; relocation of shareholders overseas into the Kenyan Diaspora. The small size of many dividend payments, especially those which attracted bank charges exceeding the dividend amount, was a significant reason many shareholders simply did not cash in their dividends. The majority of survey participants indicated that unclaimed assets should ultimately be paid to an independent agency rather than the Capital Markets Authoritys designated Investor Compensation Fund or the Government. They indicated that an independent trust fund should take ownership of unclaimed assets until such assets could be reunited with their rightful owners. Of those who indicated that funds should be paid to an independent party, most favoured an independent trust as opposed to an independent agency. One participant, however, felt that unclaimed dividends and shares should be held and revert to the holding institutions since it was most equitable to shareholders. They also preferred an option of shareholders having an indefinite time to reclaim any unclaimed dividends and shares. However, one participant proposed a special resolution to its shareholders that would cause shareholders of dormant assets to permanently lose their right to such assets. About 80% of respondents indicated that companies should be required to identify and segregate unclaimed assets as well as prepare and issue audited annual statements or reports on unclaimed dividends and shares.

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About 60% of respondents indicated that deadlines should be established for remitting unclaimed assets. The remaining 40% indicated that a deadline should be established, but that it should be gradual. They indicated that a transition period should be established, e.g. five years, to allow companies sufficient time to move all unclaimed assets off their balance sheets. 2.3 THE PENSIONS SECTOR The Pension sector is a significant part of the financial system having grown its assets in total from KSh.40 billion in 2003 to KSh.263 billion in 2007. Participating respondents from this sector indicated satisfaction with current practices and the existing absence or lack of a clear legal and regulatory framework regarding unclaimed financial assets. Trustees in this sector noted that they had a legal obligation to pay benefits when they become due and payable. Trustees are presented with the highest risk of litigation since, by law, trustees are liable if they release unclaimed benefits to any entity other than the beneficiary. The sector does not have clear provisions with regard to payments of claims beyond the statutory period of 60 days. In addition, existing trust laws provided for trustees to hold dormant and unclaimed benefits, which is a method preferred by trustees. Some pension schemes include provisions that allow for benefits to revert to the scheme if not claimed within 3 to 5 years. However, the Retirement Benefits Authority does not permit this practice. The sector regulator prefers these benefits to revert to their managed Unclaimed Benefits Trust. In the event that no unclaimed assets regime is put in place these assets would be managed under that regime. The industry would accept an independent unclaimed asset trust that is properly managed with the tracing of beneficiaries handled in a professional and accountable way, but also requires that assets be vested in the trust, not in Government. 2.4 THE INSURANCE SECTOR The Taskforce requested members of the insurance industry to provide responses in detailed survey questionnaire. The Insurance Regulatory Authority used a circular as the tool to seek information from life insurance offices. However, the quantitative response was poor. The Taskforce attributed this to the following factors:

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Some companies did not give the circular the attention it deserved. Some responses were, at best, casual. They lacked depth and accuracy because this assignment was delegated to junior officers within their organizations.

The values reported by the companies that responded appear to be extremely

low, and thus, inaccurate. Most life insurance companies have evolved significantly over time due to mergers, buy-outs, and acquisitions. This trend has been visible throughout the insurance sector.

Most life insurance companies underwriting policies included policies

denominated in British pounds sterling prior to independence. Most of these policies remain unclaimed, as the holders have emigrated.

The modernization of management systems by many life insurance companies

caused the loss of significant historical data. In the early nineties, when life insurance offices began computerizing their management systems, most of the data captured was primarily for current policies. Older policies may have been inadvertently omitted, or deliberately left out given that such policy types ceased to be underwritten a long time ago and there were no templates in the system to capture the details.

In view of the difficulty in obtaining timely and accurate responses from

the insurance industry, The Taskforce recommends that the process of obtaining information on unclaimed policy benefits be entrenched in regulatory and licensing requirements, and be extended to the other sectors in the banking and financial system as well.

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3. 0 MAIN STUDY FINDINGS The main findings from the work carried out to date are summarized below: 1. Size and extent of unclaimed assets: Surveyed institutions reported total

unclaimed assets of KSh.9.1 billion. Of this total, banks reported KSh.7.4 billion, listed companies KSh.1.532 billion, insurance companies KSh.283 million and one utility firm KSh.66.8 million.

2. Estimates of unclaimed assets in the financial system: The Taskforce

estimates that complete reporting by all institutions holding unclaimed assets using tighter rules on identifying dormant and unclaimed assets would yield unclaimed assets of 3.2% to 6.2% of customer deposits in the banking sector, and 2.4% to 2.8% of claims payable in the insurance subsector. The Taskforce estimates that three sub-sectors of Kenyas financial system hold unclaimed assets amounting to between KSh.19.9 billion to KSh.46.3 billion.

3. Wide variations in industry practices: There is a wide variation in the

treatment, accounting and reporting of unclaimed assets within and across different sectors. Many institutions have weak policies on unclaimed assets that are below the standards of best industry practices. This justifies setting uniform rules, definitions, and accounting and reporting requirements for dormant and unclaimed assets across the financial industry.

4. Preferences on institutional structure: Respondents surveyed on the

proposed unclaimed assets framework and institutional structure, particularly large banks, insurers and listed entities, indicated broad support for the introduction of uniform best practices within sectors as well as creation of an independent unclaimed asset agency and trust fund.

5. Preferences of large holding institutions: The large holding entities placed

greater emphasis on recognition of the contractual relationship between the holder and the asset owner and recognized the need to minimize the risks of holding dormant assets.

6. Preferences of small holding institutions Many smaller holding institutions

exhibited significant resistance to remitting unclaimed assets to an independent agency or trust fund. Much of this resistance may be due to the current short-term market circumstances of tight liquidity and the view that unclaimed funds form part of these institutions long-term capital. Thus, smaller holding institutions supported regulations, policies, and rules to

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enhance the management of unclaimed assets by holding institutions in situ without remitting them to an independent agency or trust fund.

7. holding institutions lack of Incentives to protect interests of owners: In the

absence of a mandatory legal and regulatory frame work (as opposed to a voluntary regime and codes of practice within industries) holding institutions have no legal compulsion or commercial incentive to manage unclaimed assets with due consideration for the interests of the unclaimed assets owners.

8. Benefits of unclaimed assets regime are compelling: An unclaimed assets

regime will assist the financial system to minimize fraud by employees of holding institutions, curb corporate malpractices by holdings institutions, promote sound corporate social responsibility (CSR) through re-unification services and raise standards of corporate governance (CG) through increasing transparency and accountability in the management of third party assets.

9. Unclaimed funds need to be invested for long-term economic development:

A policy of investing unclaimed balances for long-term economic development and on should be adopted as one of the key pillars of Kenyas unclaimed assets framework. This will increase buy-in by other stakeholders and provide an opportunity for the Government to exercise its responsibility as bona vacantia holder of owner-less assets in the public interest.

10. Re-uniting owners with their unclaimed assets is a critical pillar: Re-

unification services to unite unclaimed balances with their owners are critical in both the temporary and permanent separation phases, particularly reunification of unclaimed assets to widows, orphans, dependants, and beneficiaries of account holders.

11. Re-uniting Kenyans in the Diaspora with their unclaimed assets fits into the

countrys Vision 2030: Dormant and unclaimed assets resulting from owners relocating overseas points to the need for a robust framework to reunite Kenyas Diaspora with the unclaimed assets left behind. This can offer tangible benefits to the Diaspora as well as help to increase Diaspora remittances that Kenyas Vision 2030 recognized as an important source of external financing. Diaspora remittances under Vision 2030 are slated to increase from the current 2.5% to 5% of GDP.

12. Common definitions and periods of dormancy: The most common definitions

and periods of dormancy are no user generated activity for a defined period. Common periods for the initial recognition of dormancy and transfer to internal unclaimed or dormant ledgers are 6 months to 2 years. The most

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common ultimate disposition of unclaimed financial assets is recognition and transfer into the holding institutions profit and loss accounts after 5 to 7 years, and up to 10 years in on institution.

13. Regulatory requirements need to cover unclaimed assets at all stages in their

entire cycle: There is need to define dormancy, dormancy periods and the best practices for internal controls, accounting, reporting and disclosure of unclaimed financial assets while held in situ at holding institutions. There is also a need to specify the ultimate disposition of unclaimed financial assets after holding institutions exhaust reunification efforts. An appropriate unclaimed financial assets regime for Kenya would need to include regulatory requirements for re-unification that adequately cover unclaimed assets separated from their owners temporarily as well permanently.

14. Stricter compliance with Limitation Act limit of 7 years: The Statute of

Limitation Act Cap 22 at s.4 (1) defines a 7-year limitation period for initiating a cause of action. In the banking sector, this would imply the statutory limitation period starts to run when a customer makes a demand for his deposit to be repaid and the bank is unable to do so for any reason. The legal point where a cause of action arises appears to be independent of how long the customers account may have been dormant or when the customer last performed a deposit or withdrawal transaction on his account. Banks and holding institutions may be mis-interpreting the 7-year Statute Of Limitation period as starting on the date the customer last made a deposit or withdrawal on his account.

15. Unclaimed dividends are not being paid into Investor Compensation Fund:

Several listed companies are avoiding paying unclaimed dividends to the Investor Compensation Fund of the Capital Markets Authority by amending their Articles of Association. They propose to sell the shares of members after shorter periods of dormancy, (when dividends are not collected) thus avoiding the statutory period to surrender unclaimed dividends as required under the CMA Act. As such, companies are proposing to sell the shares to other parties such that the accumulated unclaimed dividends of the original shareholder would be funneled back to the company through its profit and loss statement.

16. An unclaimed financial assets regime needs to phased in gradually: A

reasonable transition period is deemed as appropriate to ease compliance with requirements to transfer unclaimed assets, as opposed to immediate transfer. The latter due to current market conditions could result in a liquidity crisis, particularly for banks while companies could resort to selling of assets to meet such requirements leading to unanticipated financial burdens.

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4.0 OPTIONS ON THE WAY FORWARD The first of the four main pillars of an effective unclaimed financial assets framework that the Taskforce identified requires implementing best practices for managing these assets while they lie dormant in situ at holding institutions. The Taskforce has identified the best practices to be incorporated in Kenyas proposed framework for unclaimed financial assets. These practices have been documented and discussed with relevant stakeholders in the financial system. Best practices for an effective unclaimed financial assets framework begins with the adoption of definitions for unclaimed assets relevant to each sector. This requires for each sector precise definitions of unclaimed assets and their periods of dormancy, embedding strong internal controls, specifying uniform accounting and reporting requirements, and introducing new regulatory returns or schedules. The latter can be used as information gathering instruments to facilitate regular and accurate reporting. The purpose of these would be to ensure that regulations have an accurate definition of unclaimed assets and holding institutions make standard defined returns, on a regular basis to the regulator. The Taskforce has considered FOUR possible options from the assessment on unclaimed financial assets in Kenya. These are: Option 1: Maintain the current legal and regulatory framework largely unchanged. The current legal and regulatory framework continues largely unchanged with a reactive approach to regulation and policymaking. The Taskforce views this option as unfavourable given Vision 2030s social and economic pillars of a free, equitable, and just society with access to affordable and competitive financial services. In addition, from international best practice, the Government would be abdicating its mandate as bona vacantia holder of unclaimed assets in trust as well as the general obligation to protect property including property that may be separated from its owners. Moreover, there is convergence on the matter that unclaimed assets need to be placed under regulatory oversight. Option 2: Introduce a voluntary legal and regulatory framework. This option requires that all holding institutions unclaimed financial assets volunteer to participate in the self-regulatory regime. Under this option, institutions holding unclaimed financial assets can exercise discretion to participate or not as they are not compelled to do so either by law or principle.

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This option is also rejected given that the holding institutions have been beneficiaries of the absence of a mandatory regulatory framework. Currently, holding institutions have no legal compulsion or commercial incentive to identify, segregate, report and manage unclaimed assets with due consideration for the interests of asset owners. Option 3: Introduce a mandatory legal and regulatory framework with creation of a regulatory framework under an existing regulator. This option entails use of the existing infrastructure of regulators to domicile unclaimed financial assets agency. Given the Government policy stance of not creating new agencies and consolidating agencies, it was recommended that the agency could be domiciled in an existing regulator such as the Retirement Benefits Authority (RBA), which has the capacity of overseeing Trust Funds (Unclaimed Financial Assets Act) or in the Capital Markets Authority (CMA), which has the Investor Compensation Fund. The CMA under current law has limited regulatory provisions on managing unclaimed dividends. The latter would be similar to the practice in Australia where the Australia Securities and Investments Commission (ASIC) is assigned responsibility for holding unclaimed assets emanating across all sectors. This is consistent with the trend worldwide with consolidation of the regulation of financial services under a unified financial sector regulator. Option 4: Introduce a mandatory legal and regulatory framework with creation of a new unclaimed assets regulator. The option entails establishment of a new unclaimed assets agency created from scratch and tasked sorely with the responsibility of regulating, supervising, and managing unclaimed financial assets across all sectors. The framework would address the most common causes of dormancy, provide guidelines on controls, and establish uniform accounting, reporting and disclosure requirements. The Taskforce recommends this option.

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4.1 FINANCIAL IMPLICATIONS Option 1: There are no additional costs involved. However unclaimed financial assets are likely to continue to accumulate in the financial system with no re-unification or use of unclaimed financial assets for economic development Option 2: The Government drafts guidelines on voluntary management of unclaimed funds. Costs expected to be minimal are incurred in the use of consultant(s) for drafting new guidelines and harmonizing laws. This would include amending existing Acts and drafting new regulations to be administered by existing regulators. Option 3: The Government would incur minimal establishment costs, as well as costs in revision of the existing legislations to incorporate unclaimed financial assets. There will be need for capacity building for existing and/or new staff within the regulatory agencies identified to domicile unclaimed financial assets. Option 4: The Government would incur establishment costs of the Unclaimed Assets Authority and Trust Fund, as well as costs in revision of the existing legislations to incorporate unclaimed financial assets. There will be more resource commitments required under this option associated with the new regulatory Agency. These costs would specifically cover establishing systems and infrastructure, as well as recruitment, and training of staff. The initial costs would be in the region of KSh. 80 million (see Appendix B). 5.0 RECOMMENDATIONS The Taskforce recommends Option 4 as the most optimal unclaimed financial assets framework for Kenya. This option and the institutional structures established take into account the four pillars of strong controls, accounting and reporting obligations on holding institutions; re-unification with owners; a mandatory legal and regulatory framework; and provisions for investment of unclaimed funds for long-term socio-economic development. Additional Recommendations The Taskforce also makes the following further recommendations: 1. Accounting, reporting, and disclosure requirements on the institutions

holding unclaimed assets should be incorporated in their regular reporting to

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their respective regulators. The purpose of these is to introduce regular reporting of unclaimed financial assets prior to remittance to any external agency and to prepare the financial sector for compliance whilst providing the sector regulators with accurate and complete information periodically on unclaimed financial assets.

. 2. Unclaimed assets rules and regulations: In the event that Option 4 (above) is

adopted, the Minister should consider formulating and issuing detailed regulations and guidelines that implement the proposed Bill tailored to the respective financial sectors. These guidelines are necessary for uniformity of accounting treatment, internal controls and reporting of unclaimed financial assets within and across the financial sectors.

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Appendices

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6.0 APPENDICES A

Page Description 24 Proposed Regulatory Reporting Structure 25 Proposed Regulatory Agency Organogram 26 Pillars of an effective Unclaimed Financial Assets Regime 27 Overview of Unclaimed Assets Funds Flow 28 Overview of Proposed ICT infrastructure 30 Comparison with International Jurisdictions 41 Capital Markets Unclaimed Dividends 42 Insurance Firms Unclaimed Benefits 43 National Social Security Funds (NSSF)

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Proposed Regulatory Reporting Structure

(Option 4)

Ministry of Finance

Unclaimed Financial Assets Agency

Holding Institutions

Unclaimed Assets Central Reclaim Fund

Appointed Service Providers Custodians Fund Managers Administrator Re-unification

Owners and Beneficiaries

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Proposed Regulatory Agency Organogram

(Option 4)

Unclaimed Financial Assets Agency Board

Head-Legal & Compliance

Head-Finance, Operations &

IT

Head-Policy & Regulation

Officer-Legal, Policy & Research

Officer Finance, Operations & IT

Administrative Assistant

Receptionist

Support Staff (2)

Examiner/(s)

Director

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Pillars of an Effective Unclaimed Financial Assets Regime

4 Pillars of An Effective Unclaimed Financial Assets Regime

1. Holders (Temporary separation phase) strong Internal controls to

manage Assets in situ comply with regulatory guidelines

and requirements exhaust re-unification efforts (write,

issue notices, Publish in Gazette) Identify, segregate, report Remit to Agency unclaimed funds

3. Owners & Beneficiaries (Temporary & Permanent separation phase) Indefinite right of reclaim Unclaimed Assets Service Providers

licensed by Agency provide reunification services Unclaimed Assets database (online,

searchable National database, Published Gazette Registers)

2. Legal & Regulatory Regime (Temporary & Permanent separation phase) Mandatory legal and regulatory

framework Creation of independent Agency as

Regulator to administer Act and supervise Framework Holds Funds in Trust Fund to meet

claims Invests Funds balance for long-term

economic development (Strategic Investment Plan)

4. Investments for Long-term Economic Growth (Permanent separation phase) Investment of Unclaimed Funds for

long-term economic development Agency Strategic Investment Plan,

prepared, approved by Minister Investments approved based on agreed

criteria (e.g. Catalyze growth, maximum economic impact and benefits for country

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Overview of Unclaimed Assets Funds Flow

Legal & Regulatory Structure Mandatory Regime Covers Temporary &Permanent Separation Phases Temporary separation phase Mostly permanent separation phase

Holders

Owners & Beneficiaries

Agency and Trust Fund

Agency and Trust Fund

40% Pay OWNERS for Unclaimed Assets expected to be re-united

40% Pay PRINCIPAL Funds into account for settling future claims Owners & Beneficiaries

Income Pay INCOME into claims Account for settling future claims

100% CONTROLS, ACCOUNTING, REPORTING strong internal

controls over dormant and unclaimed funds Identify,

segregate Re-unify by

letters, publish notices, comply with

accounting, reporting guidelines and requirements

REMIT remit amounts

eventually unclaimed to Agency

Comply with Act

60% REMIT TO AGENCY FOR INVESTMENT FUNDS For Unclaimed Assets Not expected to be Re-united

60% Pay PRINCIPAL Unclaimed Funds into Investment Account. INVEST for long-term economic development per approved Strategic Investment Plan

Income Pay INCOME into Investment Account for long-term economic development

Note: Estimates of the unclaimed amounts that will eventually be reunified with owners (above) are purely for illustrative purposes to assist in understanding the broad outlines of the flow of funds in the proposed unclaimed assets framework.

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Overview of Proposed ICT infrastructure An automated or online Unclaimed Assets Register can be designed to offer simple search services to help owners and beneficiaries find unclaimed assets and re-establish contact with the holding institutions. Outline of a Reclaim Transaction Holders of unclaimed assets submit names and unique identification details

into the database. Owners and potential beneficiaries (searchers) input the specified search

details onto the database. The system queries the database and sends the matching results to the asset

holding institutions and to the searcher. Whether the search is successful or not, the system continues to hold the

searchers details indefinitely The system continually runs searches through all new incoming asset data and

sends a notification when an asset is located. Verification and authentication of the searches are confirmed by the Asset

Holding Institutions

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Electronic Document Imaging

Unclaimed Assets

Owner

Statutory Authorities: CBK, IRA, CMA, KRA, RBA, NSSF, NHIF, Immigration, Judiciary, Police

Potential Beneficiary

Workflow, Training, Support

Reporting

Searches Unclaimed AssetDatabank

Fund Managers

Holders Database

Payments

Holders of Unclaimed Assets

Web Portal

Owner

Submit Names and Asset Details

Unclaimed Asset Register - High Level System Structure

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COMPARISON WITH INTERNATIONAL JURISDICTIONS (Source: Unclaimed Assets Task Force, July 2008)

Table 1a: Broad Principles Jurisdiction Broad Principle Australia A particular state may be affected by one or more of the

following: The Disposal of the Uncollected Goods Act Warehousemen's Lien Act Trustee's Act Banking Act Commonwealth Corporations Law Unclaimed money is generally held by the state/territory in which the holding company is incorporated. Other legislation dealing with abandoned funds varies by state / territory, but is not legally bound.

Canada Legislation requires banks, federally chartered trust and loan companies to remit unclaimed balances to the Bank of Canada. Provinces have detailed Unclaimed Property Acts that cover all other unclaimed assets and property, such as insurance policies, annuities, and securities transaction balances.

Ireland Irelands Dormant Accounts Act 2001 (revised in 2005) and the Dormant Life Assurance Policies Act 2003. Both have broad and well thought out definitions, procedures and purposes for unclaimed bank accounts and financial instruments.

Kenya Kenyan Banking Code, effective 1 October 2001. Capital Markets Authority (CMA) Act amendments under the 2007 Finance Bill.

Malaysia The Unclaimed Moneys Act 1965 (Act 370) takes a broad approach and includes all categories of unclaimed monies.

Uganda Ugandas Financial Institutions Act of 2004. United Kingdom

The United Kingdoms Dormant Accounts Bill as adopted the House of Commons in March 2008. The unclaimed assets scheme was proposed as early as 2005 report, but remains a work in progress.

United States of America

The 1995 Uniform Unclaimed Property Act (UUPA) that has been adopted by 10 states. Twenty states have adopted the 1981 UUPA while fourteen states and the District of Columbia retain the original 1954 UUPA. Eight states have their own unclaimed property statutes. State-level UUPAs have mandatory provisions for identifying, reporting, and remitting unclaimed property to State Treasurers.

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Table 1b: Unclaimed Asset Definition Jurisdiction Unclaimed Asset Definition Australia Unclaimed Balances:

Accounts that have not recorded a deposit or withdrawal by the owner for 7 years for accounts exceeding $500.

Canada Unclaimed Balances: Canadian dollar deposit or negotiable instruments issued or held at federally regulated banks or trust companies, which have had no owner- generated activity for 10 years and where the owner cannot be contacted by the holding-institution.

Ireland Dormant Accounts: Accounts where no transactions have been effected by the holder for a defined dormancy period of not less than 15 years.

Kenya Dormant Accounts (from voluntary banking code): Any account where the volume and nature of transactions has fallen to a level, which we believe, is inappropriate for the account or product type. Dividends become unclaimed after a 7-year period of the company paying the dividend and not being able to unify the dividend with the shareholder for whatever reason.

Malaysia Unclaimed Money: All unclaimed sums of money held in companies and firms, Public authorities, Government agencies, Parastatals, Cooperative societies, Superannuation funds Unclaimed financial instruments: Money held which is legally payable to an owner and has remained unpaid for 1 year or more after it become payable. Unclaimed Account Balances: All sums of money to the credit of an account that has not been operated in whatever manner by the owner for 7 years. Unclaimed Payables On Creditor Ledgers All sums of money to the credit of a trade account, which

have remained dormant for more than 2 years. Money or any security paid into, or to any account of, a court

upon expiry of 15 years after it was placed in court or last showed any activity

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Uganda Unclaimed Balances: Any current or savings accounts that have not been operated

for a period of two years or a time deposit account (that) has not been operated for a period of two years after the date of maturity of the deposit.

United Kingdom

Dormant Accounts: Accounts that have had no owner- initiated transactions (carried out by or on the instructions of the account holder) for a period of 15 years, unless the bank or building society was not able to communicate with the owner under express instructions or under the terms of the account or product

United States of America

Unclaimed Assets are defined as per the Uniform Unclaimed Property Act for a particular state jurisdiction.

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Table 1c: Industry Scope Jurisdiction Industry Scope Australia Authorized Depository Institutions, include all of the following:

Banks and Building societies Credit unions Cooperatives / SACCOs Listed Corporations Insurance Pensions Superannuation Funds: Legal trusts Estate trusts Unclaimed salaries & wages

Canada Banks & Trust companies: Deposit accounts Bank drafts Certified cheques Deposit receipts Money orders Term deposits Credit card balances Travelers cheques

Ireland Bank account balances: Current & savings accounts Fixed & call deposits Share certificates Savings bonds Installment savings accounts Financial instruments Insurance Policies

Kenya Proposed Unclaimed Financial Assets framework to include all institutions in the financial system

Malaysia Extends the definition of holders of unclaimed assets to virtually all businesses and firms of all sizes in all sectors

Uganda Banks United Kingdom

Banks & building societies.

United States of America

The scope of USA States laws covering financial and non financial assets are very extensive

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Table 1d: Ultimate Disposal Jurisdiction Ultimate Disposal Australia Unclaimed balances and money from all sectors paid through the

Australian Securities & Investments Commission (ASIC) to the Treasury as revenue. Annually, all authorized depository institutions: Must enter all specified and required details on unclaimed

accounts in the Register of Amounts Unclaimed by 31 January for the first six years. Amounts over $10 are reported to the Registrar General to be published in the Gazette.

Must publish in the Gazette by 31 March all amounts over $10 and dormant after the 6th year.

must remit to the Registrar General all amounts remaining unclaimed 1 year following publication

Under the Corporations law, abandoned stock and securities are reported to the ASIC after a 6- year dormancy period. Unclaimed money held by retirement savings accounts are received and administered by the Registrar-General. Unclaimed moneys held in legal practitioners trust accounts and real estate agents trust accounts are paid to the Registrar-General.

Canada Banks and Trust companies for all dormant accounts held: After 2 years - send written notification to customer. After 5 years - send written notification to customer. After 9 years - send written notification to customer &

publish in Gazette. After 10 years - pay to the Bank of Canada (i.e. on 11th year) After 30 years - take into revenue if less than C$1,000; if

unclaimed balance is greater than C$1,000, continue holding in Bank of Canada

After 100 years Transfer to Treasury as revenue. Ireland Annually, unclaimed balances on dormant accounts are

transferred to the Dormant Accounts Fund at the Treasury Management Agency on strict deadlines. Amounts not transferred become a Contract Debt of the holder that is recoverable by the Minister on application to a Court.

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Kenya CMAs Investor Compensation Fund seeks to collect any unclaimed dividends from listed companies that have been outstanding for more than three years.

Malaysia Unclaimed Balances lodged with the Registrar of Unclaimed Moneys are first credited to a Consolidated Trust Account and held in that fund for 15 years Amounts remaining unclaimed after 15 years are transferred to the Consolidated Revenue Account.

Uganda Holding institutions are required to: Transfer unclaimed accounts into separate Dormant Accounts

Registers after 2 years of dormancy, and to provide a written notice to owners at their last known address.

Advertise in print media accounts that have been on the Dormant Accounts Registers for 3 years (for a combined dormancy period totaling 5 years)

transfer to the Bank of Uganda (BoU) balances that remain unclaimed 5 years from the date of advertisement (for a combined 10 year dormancy period)

United Kingdom

The proposed unclaimed assets scheme requires a comprehensive reunification exercise in advance of its establishment to minimize claims for monies transferred to Central Reclaim Funds. The proposed regime seeks to maintain the relationship of dormant account owners with their original holding institutions and does not introduce direct links to the Reclaim Fund. Appoints holding institutions as agents of the Central Reclaim Fund upon transfer of dormant funds for purposes of record keeping, processing, and paying owners claims.

United States of America

Each state has large holder reporting instructions and stringent data requirements for the electronic submission of reports.

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Table 1e: Ultimate Asset Holder Jurisdiction Ultimate Asset Holder Australia All unclaimed moneys and the associated detailed records are

grounded in separate legislation for each sector, but are all forwarded to the ASIC, the capital markets regulator, independent of the sector from which they originate. As capital markets regulator, ASIC, takes on consumer responsibility roles by acting as a reclaim and reunification services provider for depository institutions, stocks and securities. The Registrar General carries out that role for retirement savings trust and real estate agents trust accounts.

Canada The Bank of Canada (BoC) holds unclaimed balances as a custodian on behalf of the owners and assumes responsibility for reunification and processing claims. The BoC is required to keep records in perpetuity for dormant accounts.

Ireland The Dormant Accounts Fund Disbursements Board manages and regulates the Fund including preparing an annual Strategic Investment Plan. The Dormant Accounts Act and Unclaimed Life Assurance Policies Act separately provide complete stand-alone legislation covering bank accounts and financial instruments.

Kenya Deposit Accounts: Bank or financial institution Dividends: Investor Compensation Fund is responsible for paying beneficiaries from unclaimed dividends when the rightful owners make claims.

Malaysia The Unclaimed Moneys Act provides for a Registrar of Unclaimed Moneys who regulates and administers the Act. It requires remittance of all amounts reported in the Register of Unclaimed Moneys. Amounts are held in a Consolidated Trust Account or a Consolidated Revenue Account.

Uganda Bank of Uganda after 10 years of dormancy. The Bank of Uganda has re-unification responsibilities in paying claims after unclaimed moneys are remitted.

United Kingdom

The proposed Central Reclaim Funds to be regulated by the Financial Services Authority (FSA). The scheme proposes to extinguish liabilities to owners by participating banks and building societies upon transfer of dormant accounts balances to the central Reclaim Fund.

United States of America

Individual states have extensive legal and regulatory requirements.

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Table 1f: Disclosure Jurisdiction Disclosure Australia Section 69 of the Banking Act requires all authorized depository

institutions to submit annual Unclaimed Moneys Statements to ASIC by 31 March of each year with a cheque in the amount of the total balances on the statements.

Canada Canadas Privacy Act explicitly authorizes disclosure for the purposes of helping account holders locate balances due to them.

Ireland Balances less than Euro 100 are not included in the overall framework. However, holders of balances below Euro 100 must publish notices of these accounts in Gazette and two or more national dailies.

Kenya Banks will advise owners if their account is classified as dormant due to insufficient account operations over a given period of time. They will also advise owners of the actions required to re-activate their account (voluntary banking code)

Malaysia All firms and institutions holding unclaimed money are required to maintain a Register of Unclaimed Moneys and to file a copy of the register with the Registrar of Unclaimed Moneys annually for publication in the Gazette.

Uganda Holding Institutions are required to give written notices to owners after 2 years of dormancy Publish advertisements in the print media to the owners of

accounts that have stayed on the Dormant Accounts Registers for 3 years (i.e. on their 5th year of dormancy after the last owner generated transaction).

United Kingdom

Dormant Accounts Bill specifically proposes an unclaimed assets scheme for investment in social and environmental purposes.

United States of America

Specific rules and regulations on the identification, reporting, and remittance of unclaimed amounts.

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Table 1g: Publicly Available Info Jurisdiction Publicly Available Info Australia Companies are required to maintain a Register of Amounts

Unclaimed for 6 years that is open for public viewing. Annually, all unclaimed accounts, after the 6th year of dormancy, are published in the Gazette by the ASIC. Electronic reporting requirements and a searchable online database provide public information on unclaimed balances

Canada Information available to the public without charge from the Bank of Canadas Unclaimed Balances Services through the Internet, by mail or fax.

Ireland No central database or online consumer search mechanisms. Kenya No central database or online consumer search mechanisms. Malaysia Mandatory publications of the unclaimed registers in the gazette. Uganda No central database or online consumer search mechanisms. United Kingdom

No central database or online consumer search mechanisms.

United States of America

State Treasurers maintain or have responsibility for maintaining unclaimed assets registries.

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Table 1h: Reunification Jurisdiction Reunification Australia Amounts held in legal & estate trusts; unclaimed salaries &

wages under federal and state awards can be claimed with the assistance of the federal-level Commonwealth Department of Industrial Relations. All other owners may claim balances at the bank or online where the account was opened. The Treasury refunds the money to the bank, which passes it on to the claimant. Refunds are processed and paid when claims are made.

Canada Owners of unclaimed amounts under C$1,000 must submit written claims to the Bank of Canada before December 31st of the 40th year after the date of last owner generated account activity and before the 100th year for amounts greater than C$1,000.

Ireland No reunification methods specified. Kenya No regulatory mechanism for re-unification in place Malaysia Owners of unclaimed moneys have an indefinite right of reclaim

for moneys lodged with the Registrar Of Unclaimed Monies, whether funds are held in the Consolidated Trust Account or Consolidated Revenue Account.

Uganda Owners can claim their unclaimed balances at any time within the 5-year period from initial dormancy to publication by the original holding institution. Withdrawals on dormant accounts are allowed from the Bank of Uganda upon fulfilling specified requirements and approvals.

United Kingdom

Account holders have an indefinite legal right to reclaim and repayment from a reclaim fund through the original bank or building society. However, upon transfer of dormant accounts balances to the Reclaim Fund, liabilities to owners by participating banks and building societies are extinguished. Reunification of account holders is a central pillar of the scheme. Customers are given extensive assistance and reclaim rights including the use of the Financial Ombudsman Service (FOS).

United States of America

State Treasurers are responsible for reunification.

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Table 1i: Investment Jurisdiction Investment Of Unclaimed Funds Australia Unclaimed amounts paid to the Treasury as revenue. Canada Unclaimed amounts paid to the Treasury as revenue on the

expiry of the 40th year if less than C$1000, or held for 100-year by the Bank of Canada and then paid t Treasury as revenue.

Ireland The Dormant Accounts Fund comprises a Reserve Account for paying expenses, inspection costs and

repayment claims and an Investment and Disbursement Account. Unclaimed balances paid to the Dormant Accounts Fund above the level needed to satisfy estimated claims and administration expenses are invested annually pursuant to a Strategic Investment Plan prepared by the Dormant Accounts Fund Disbursements Board. The Strategic Investment Plan explicitly specifies unclaimed assets as investments to benefit the economy and society.

Kenya - Malaysia Unclaimed amounts paid to Consolidated Revenue account as

ordinary government revenue 15 years after lodgment in the Consolidated Trust Account.

Uganda Unclaimed funds are used to off set costs of supervising financial institutions or as may be prescribed.

United Kingdom

Unclaimed moneys exceeding estimated amounts needed to fund reclaims are proposed to be distributed to, or used to fund social, community and charitable causes, including: Big Lottery Fund, Youth schemes Financial inclusion Social and community investment.

United States of America

Unclaimed property and assets paid to State Treasurers comprise tax revenues.

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CAPITAL MARKETS UNCLAIMED DIVIDENDS Seri