Kenya is the world’s easiest place to start a shell company —firms that exist on paper only — a new global survey shows.

The country is the top abuser of international rules put in place by the Financial Action Task Force (FATF) — a global body backed by 180 nation states that promotes policies to combat money laundering and terrorist financing.

The rules require that countries take all necessary disclosure measures to ensure the owners of companies are known to authorities.

The survey, by a team of academics from Australia’s Griffith University working under the auspices of the Centre for Governance and Public Policy, says tax havens such as Jersey and the Cayman Islands performed better than Kenya in complying with the standards.

“It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the US than in any other country, save Kenya,” said the report dubbed Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies.

Kenya remains on the global watchlist of countries yet to make enough progress in implementing anti-money laundering (AML) plans and criminalising financing of terrorism (CFT). Although the country escaped being grouped among the blacklisted countries — namely Iran and North Korea — it was kept on the watchlist in a FATF meeting late last year.

Kenya was listed with Nigeria, Tanzania and Cuba as among “jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies.”

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But Kenya has been seeking to be removed from the watchlist by enacting several laws, among them the Anti-Terrorism Act signed into law in October last year.

Kenya has also established the Financial Reporting Centre (FRC), the National Treasury’s independent arm for combating money laundering and terrorism financing.

While a majority of shell companies are completely legal and legitimate, laws that make it easier for people to control firms that authorities cannot trace back to them make them open for exploitation.

The researchers approached 3,700 agents (through e-mails) who are in the business of incorporating companies to open shell companies for them in 182 countries.

The experiment sought to test whether international rules requiring those selling shell companies to collect identity documents from their customers are effective. International regulations require that corporate service providers obtain identity documents from clients to aid in opening the companies.

Nearly half, 48 per cent of the agents who replied, failed to ask for proper identification and were never asked by authorities for such identification. The study found that Kenya’s incorporation services provide one of the easiest routes to setting up an anonymous shell company, ahead of the US. The report however does not give data on other East African countries.

“Shell companies are a threat when they cannot be traced back to the real person or people in control. Anonymous shell companies are useful to criminals because they veil illicit conduct,” said the report.

For example, Kenya is estimated to have lost billions of shillings in the Anglo Leasing scandal, where a shell company was supposed to supply goods and services to the government. Investigators have struggled to bring to account the people behind the firm, partly because of opacity around the firm’s details.

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“From a corporate governance stand, I oppose shell companies… but then again, at times people may have a genuine reason for incorporating them. For example some don’t want the kind of publicity that comes with being branded as wealthy,” said Karugor Gatamah, chief executive officer at the Africa Corporate Governance Advisory Services, a governance think-tank.

According to a 2006 report by the Parliamentary Accounts Committee chaired by Uhuru Kenyatta, then leader of the official opposition and now president, the Anglo Leasing company was registered in the UK.

Experts say part of the problem and the reason why Kenya ranks top of the list is because of its outdated company law, saying it needs to be changed to reflect the growing complexities of business.

“The law is based on the UK Companies Act of 1948. Since then, new challenges have emerged including money laundering,” said Mwalimu Mati, the chief executive at Mars Group, an anti-corruption crusader.

Under the Kenyan law, one needs a minimum of two directors to register a company and they don’t have to necessarily be the owners of the company or physically present themselves to the Registrar of Companies.

“Criminals take advantage of this and place law firms as directors. Because of the lawyer-client confidentiality, their identities are hidden,” said Mr Mati.

According to a World Bank analysis of the 213 largest corruption cases that occurred between 1980-2010, in 70 per cent of the cases, companies and individuals used shell companies to siphon money from the public. In 2009, it emerged that Mobitelea, a shell company registered in Guernsey and thought to have been owned and controlled by high ranking government officials during the Daniel arap Moi regime, owned a 10 per cent stake in Safaricom.

Mobitelea later sold the stake to Vodafone UK. Because of the corporate structure of Mobitelea, it was hard to prove the real owners of the company and thus the country ended up losing billions of shillings.

(Read: Mobitelea:Kenyans can now seek details)

In June, a group of former public prosecutors and anti-corruption campaigners wrote to the grouping of the eight biggest economies (G8) calling on them to take action to prevent anonymous companies from being used for criminal activities.

“We believe that part of the solution is for governments to require existing company registrars to collect information on the ultimate owners of all companies. To have the most impact, this information should be in the public domain. This would help law enforcement chase down money launderers, but it will also enable citizens, journalists and civil society to hold companies to account for their actions,” reads the statement by the group.

According to the United Nations office on Drugs and Crime (UNDC), East Africa is quickly becoming a favoured region for organised criminals, attracted partly by the non-existent or ineffective border controls, meaning that if there is little scrutiny of company registration, the region becomes even more attractive to criminals.

“Criminals can form a series of companies, capitalise them and use these as fronts to clean their ill-gotten funds… it may be as simple as them being suppliers to these companies,” said Mr Mati.

The new ranking is likely to place pressure on Kenya to reform its company law. Under Kenya’s Vision 2030, the country has identified building a financial centre in Nairobi as one of its flagship projects.

Already, the country’s Capital Markets Authority has signed a memorandum of understanding with CityUK, an independent body promoting UK-wide financial and related professional services, to help develop Nairobi’s position as the region’s premium financial hub.

Two months ago, Kenya cancelled over 500 mining licences, accusing some companies of speculation by applying for licences that they later sell off to other companies at a profit. A good number of these corporations are shell companies whose owners are not known, experts said.

(Read: Outcry over cancellation of mining licences)