By

Tom Odhiambo

Title: Corrupt Histories; Editors: Emmanuel Kreike and William Chester Jordan; Publisher: University of Rochester Press – Studies in Comparative History; Date: December 2004; Pages: 498

It is a given today that every human being pays tax in one form or another. It may be immediate or deferred; direct or indirect; voluntary or involuntary etc.

Tax is part and parcel of human life because it is in many places the primary source of revenue for governing authorities, with which they provide public goods and services. Public roads, schools, hospitals, security, medicine etc. should be and are often paid for by taxes.

History shows, however, that it is not often easy to collect taxes. Not all citizens find it agreeable to pay taxes. Many deliberately avoid paying taxes or only pay partially.

Why would people who benefit from goods and services paid for by their taxes refuse to or only pay a part of what they owe the ‘public purse’?

There are many answers to this question. But one of the most cited is corruption. What do we mean by corruption? There are almost as many definitions of corruption as the number of individuals who try to define it.

Yet this amorphous word is still used to describe behavior that serves the interest of the individual when they handle public resources. A government officer who uses an official car for personal errands is deemed to be corrupt.

A public office holder who seeks a bribe or an inducement in order to render services for which she is officially paid is said to be corrupt. An individual who solicits extra payment – where expected payment is already made – so as to perform their duties is seen as corrupt.

The monies extorted from members of the public seeking public goods and services is an added tax, only that in this case the revenues don’t reach the common purse but go into the pockets of individuals.

Public service or state offices, even though they are established on behalf of the general populace and are paid for from a common purse tend to be some of the most corrupt places in many societies.

They are generally rated corrupt by several institutions that research and produce an index of the levels of corruption, locally or globally.

The police service, for instance, is always fingered in many countries in the world, as corrupt – by which it is generally suggested that police officers seek bribes or even extort payment above the officially stated fee for services sought by members of the public.

But is this a recent phenomenon? Scholars suggest that there is enough evidence to show that such practices have always existed in history.

In Corrupt Histories (edited by Emmanuel Kreike and William Chester Jordan) several authors write about the nature, causes, and consequences of corrupt practices throughout history.

The authors note that in some state jurisdictions, government agents would levy taxes, from which they were expected to deduct the cost of their services and remit the rest to the central state.

Such a system relied on the willingness and honesty of the said individual to not levy more than expected taxes (and so avoid restlessness by the citizens, and probable resistance), and also send to the government its due.

As would most likely be expected when an individual is given such powers, some would not follow the law; they would instead bend it to serve their interests.

In an essay, ‘Officials and Money in Late Imperial China: State Finances, Private Expectations, and the Problem of Corruption in a Challenging Environment’, Pierre-Etienne Will, shows how the individual appointed by the state to administer a region, and also collect taxes, may be overwhelmed by the conditions under which they work and exceed the specific functions of their office.

The story goes like this: the state sends a civil servant to administer a region. It expects him to perform all the functions that come with the ‘office’, including behaving in a manner that befits the office – being a man of dignity.

The author summarizes the problem this way:

“What makes the Chinese case particularly interesting to the study is that the very notion – usually thought of as a modern one – of a civil servant getting paid a salary that is supposed to make him self-supporting and independent, and hence able to operate and yet ‘not take one cent from the populace’ for whose sake he is expected to mobilize all his energies in a devoted and impartial way, was very much present in the Chinese discourse.”

The Chinese state would often not bother as its officials, spread in the countryside, far away from the ruling center, charged extra fees in order to raise enough money for their services and upkeep.

In many cases, the tax collector was the accounting authority, and the head office had little or no control over him. Many of these officers in the far corners of the country could not raise enough money from local levies to pay for the cost of the bureaucracy they were running.

Historically, civil service salaries have always tended to be poor compared to remuneration in the private sector.

Civil servants are generally paid lowly yet expected to maintain social status that reflects their high office – live well, dress well, have domestic servants, have means of transport, employ subordinate staff, progress socially etc – as well as the seriousness of the very office of the state that they represent.

How have civil servants dealt with the contradiction of low or poor pay and the need to project the dignity and seriousness of their office?

History shows, as the essay we cite above notes, that civil servants have been inclined towards levying extra duties on local businesses and populations – either with the express or implied permission of the appointing authority.

It is this extra taxation that makes some bureaucracies appealing. The taxation comes in many forms, all falling under the umbrella corruption. Indeed, the general public simply calls it corruption, be it a police officer extorting from a hapless citizen or even seeking a bribe politely.

It could be direct embezzlement of resources meant for some public project. A local administrator may levy a non-existent fee for some services or adjust the fee and keep the extra money.

In other words, although popular discourse uses the word corruption to refer to these practices, citizens need to begin to understand that this is just another tax, added onto the formal taxes that they pay.

When a passenger pays 10 extra shillings which is passed on to the traffic police officer, that citizens is being taxed, without his or her consent.

When an administrator insists on payment for services that should generally be free, they are introducing a new tax, which doesn’t enter the common pool of public revenue.

All the money collected goes to the administrator’s pocket and those of his seniors who may have encouraged him to levy the fee.

When corruption seems to be an integral part of public office, it is taxation by any other name. And the reason it cannot be wholly eliminated is because it has an osmotic effect – it flows upwards, despite the denials by higher officers.

The bribes or extorted monies collected by the low-level clerk, or the policeman on the beat, or the cess collector, among others, may end up in the individual’s pocket in the immediate. But in the long run it that money is shared upwards in one form or another.

Supposing that the same low-level civil servant faces such extra taxation beyond his workplace, then the cycle repeats itself, sometimes becoming so vicious as to undermine the progress of the society.

This is one of the main reasons why the ordinary citizens need to understand the history and workings of corruption in relation to the tax burden they carry. With knowledge on the debilitating effects of corruption, it is possible to think critically about reforms and remedies in relation to taxation.

The writer teaches at the University of Nairobi. Tom.odhiambo@uonbi.ac.ke. He can also be contacted at 0720009155

By

Tom Odhiambo

Title: The Burden of Produce Cess and Other Market Charges in Kenya; Author: Bayesian Consulting Group Limited; Publisher: Kenya Markets Trust; Language: English; Online: 68 Pages.

Cess is a very old tax. It used to be lied on wealthy members of the society who sought some public services.  As a colonial tax, cess was levied on goods – mainly agricultural produce – supposedly to raise taxes for the local government.

It was assumed that the money collected through cess would be used for local development. The justification for cess in many parts of the Kenyan countryside is that it is to be spent on developing, improving and maintain roads, schools, water, sanitation or health services, among others.

That is the ideal situation or claim. However, where this tax is collected, there is a significant disparity between the promise of the services to be rendered and the services delivered. The evidence is stark for any observer.

A drive to any of the counties that produce raw material, especially farm produce, leads to a barrier across the road. The barrier is generally marked CESS COLLECTION POINT. It is generally manned by individuals who look more like security officers than tax collectors.

But there is actually a tax agent, not so far away. She – they always tend to be women – will have a bunch of receipt books in her hands. One can only guess that the receipts she issues are genuine, and that the money collected goes into the rightful account.

But this isn’t even the issue with cess. The problem with cess is that it is double taxation. In fact, in Kenya cess could be even triple taxation.

Consider this: an individual transporting fresh produce, say sukumawiki from Uasin Gishu County to Vihiga County through Nandi County could easily end up paying cess at three different collection points.

As research by Kenya Markets Trust done in 2016 notes, some counties refuse ‘to accept permits issued by other counties.’

The report, The Burden of Produce Cess and Other Market Charges in Kenya shows, cess adds a significant value to the final cost of the produce to the producer and to the sale price of goods delivered to the market.

To the consumer, cess adds between 5% and 10% to the final cost of the food one consumes. But it is the farmer who suffers most.

The Kenyan farmer suffers a range of costs (formal and informal taxation, if you like) before delivering his produce to the market. Among these include storage, packaging, market levies, loading and offloading, brokerage (the middleman), transport, cess, among others.

Of all these levies, only cess would be deemed beneficial to the producer. The justification for charging the farmer or livestock owner or fisherman this tax is that it will improve services and goods that have a direct effect on the individual’s production.

Thus, there is a good reason to pay it. Or rather, it is not worth avoiding. In any case because it is directly levied, escaping from it isn’t easy.

Yet, evidence on the ground suggests that this is probably an unnecessary tax. It possibly denies the producers extra income that would go a long way in improving their livelihoods.

Roads in agricultural parts of Kenya, cattle dips in livestock rearing regions of the country, landing bays on the shores of Kenya’s lakes, markets, fresh farm produce collection points, health centers in the countryside, schools, among other utilities that should be developed from cess are generally unattended.

In fact, some of the cess collection points are found on such muddy roads that vehicles collecting the tax have no option but to stop and pay.

By the time the farmer or whoever is ferrying the produce to the market pays the levy, they would have travelled through a worse stretch. Nevertheless, cess continues to be collected.

How can farmers, livestock keepers, fishermen etc. deal with this situation where they get taxed supposedly to pay for services and goods which are actually paid for by the central government in most cases?

Can’t the taxpayers agitate for such levy to go into a common pool, which would then be administered locally, with the local community monitoring projects that are funded by such a tax?

Is there a possibility that the local communities themselves could agree on what amount to levy, which could be used to complement what the local or central government collects?

These questions are important to ask because the history of cess collection in Kenyan sits quite uncomfortably with the promised development in the areas where it is collected.

For instance, farmers in highly productive regions of Kenya routinely complain about lack of farmer support services, poor roads, inadequate storage facilities, inaccessible markets, poor prices because of rogue middle men (the middlemen will buy the produce at throwaway prices because it won’t reach the market on time), expensive or poor farm inputs etc.

These complaints tend to show that the cess collected isn’t really spent on the goods and services for which it was primarily meant.

In the end, very hardworking farmers remain poor and dependent on an exploitative farm-to-market chain system that would be eliminated if the cess collected were used correctly. Why retain this tax when it doesn’t really serve its purpose? 

The writer teaches at the University of Nairobi. He can be reached at: tom.odhiambo@uonbi.ac.ke; 0720009155

Mauritius Treaty Network Creates Tax Avoidance Loopholes as a Conduit for Resource Flight

By

Everlyn Muendo

International Financial Centres (IFCs) were previously associated with major global cities such as London, Paris and New York or overseas territories such as the British Virgin Islands. However, this has changed, with the steady rise of IFCs in Africa.

Two IFCs are present in South Africa namely, Cape Town and Johannesburg, with another two being established in the East African Community (EAC) namely, the Nairobi International Financial Centre (NIFC) and the Kigali International Financial Centre (KIFC).

This is not to mention the Mauritius International Financial Centre (MIFC) whose (bad) reputation precedes itself.

Consequently, what are IFCs and how do they relate to Double Taxation Agreements (DTAs)?

The Problem of IFCs in Africa

IFCs may be described as ‘financial free zones’, or areas which are structured to provide financial services to foreigners or non-residents.

They are structured to attract foreign investment through tax incentives, 100% foreign ownership, laws that are distinct and more favourable to foreigners than the non IFC area, full repatriation of profits and a dispute resolution system that is predictable.

Aside from these incentives, IFCs make it very easy for foreigners to set up companies and other such entities, by offering a host of corporate solutions.

These include allowing for the setting up of holding and management companies as well as special purpose vehicles, in order to make procedures as simple as possible by reducing the bureaucracy that is normally involved.

Such characteristics of IFCs are expected to have a positive effect on the flow of foreign investment into a state, particularly if a country is in need of financing for development projects.

However, IFCs can be very harmful to a state’s economy in relation to its domestic revenue mobilisation (DRM) efforts.

This is because the lax regulations and tax incentives that IFCs provide are often used to channel capital out of states with no real intention of initiating real economic activity within countries.

Finances are then whisked away through the IFC for the purpose of avoiding taxes or some other regulation that may be present in capital importing countries or the final destination of the money.

DTAs Create Loopholes

DTAs on the other hand are agreements which are used to decide taxing rights between two states or more on cross border income.

They determine which of the two states will have: the right to tax an entity i.e. a person or company; the circumstances in which those rights apply; and, the extent they shall be able to tax them on an identified income.  

Such treaties normally determine which state has the right to tax based on two things.

First is, whether the economic activity from which that income is derived has been carried out within a state or not. This relationship between where an income is generated and the state is known as the source taxation principle.

Second, is whether the income which is subject to tax has been derived from an entity i.e. an individual or company, residing within a state. This relationship between the entity/taxpayer and the state is known as the residence taxation principle.

DTAs are intended to encourage cross border trade and investment by reducing the risks of being taxed multiple times on the same income.

Nevertheless, there has been wide abuse of DTAs for the sole purpose of aggressively avoiding paying taxes on incomes by taking advantage of the loopholes therein.

This leads to significant loss of revenue for many governments, particularly in developing countries who often sign away most of their taxing rights to developed states in disproportionate DTAs.

A Tax Avoidance Ecosystem

The combination of IFCs and DTAs can be said to the main components of a tax avoidance ‘ecosystem’. IFCs will allow foreign entities to easily register themselves as commercial vehicles within a jurisdiction, enabling them to gain residency status.

As global multinational companies these entities will therefore be able to carry out activities within any state yet take advantage of the DTA facilitation and linkage to IFCs outside their jurisdictions.

While IFCs provide secrecy and DTAs offer lower taxation, an accurate description of cross-border activities needed in determining legitimate revenue gains to be accorded to government will be hidden away from authorities while the resources are whisked away from their reach.

The Mauritius Tax Conduit

Over a decade ago, the MIFC launched its global business sector allowing for the licensing of companies carrying out business outside Mauritius by foreign entities.

These authorizations referred to as global business license 1 (GBL 1) and global business license 2 (GBL 2) allowed companies that were carrying out economic activity outside the country to gain Mauritian residence.

Additionally, as residents they allowed holders of such licenses to derive treaty benefits from Mauritius’ wide DTA treaty network, which is well known for its vast reach, boosting the country’s reputation for being a gateway into Africa.

This dangerous treaty web of the MIFC and its DTA network has led to aggressive tax avoidance and the use of Mauritius as a conduit of Illicit Financial Flows (IFFs).

It has encouraged harmful tax practices such as treaty shopping and roundtripping as has been exposed in the Mauritius Leaks.

Local companies transfer their registration to Mauritius and wire back their capital investments to their respective countries as foreigners to avoid taxes such as capital gains tax and corporate income tax.

This has not gone unnoticed, considering how the MIFC has suffered continuous reputational damage, as seen in the latest Global Financial Centre Index of September 2020.

The index ranks IFCs in order of their competitiveness in five main areas. These include; reputation, business environment, human capital, infrastructure and financial sector development.

Yet again, Mauritius has been ranked among the bottom 15 countries with a poor reputation of an unscrupulous getaway jurisdiction thanks to its financial secrecy, and low taxes that serve as a conduit of resources by corporations dogging their revenue responsibilities.

This means that the overall qualitative character of the MIFC is more in question than its expected quantitative gains such as: the volume of capital it attracts, or its contribution to the economy in terms of GDP.

Developing countries are increasingly cautious of Mauritian DTAs due to the significant negative impact they are likely to have on their revenue collection.

Cosmetic Reform?

In 2018, due to the pressure of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the Mauritian government was forced to change the structure of their global business sector.

Further, Mauritian DTAs are being challenged. While its DTA with India was reviewed, in the case of Kenya,  Tax Justice Network Africa (TJNA) – a civil society organization – petitioned the High Court claiming a violation of constitutional principles.

This resulted in the introduction of changes to the law governing the MIFC spearheaded by parliament leading to the abolition of the global business license 2 and strengthening of requirements of substance for holders of global business licenses who are therefore required to meet specified thresholds.

These include hiring a certain number of employees, carry out a specified amount of core income business activity and have their active management or control of an entity within Mauritius before they can be considered as residents worthy of receiving benefits of the country’s DTA network.

Need for Awareness

The Mauritius example, shows the need for greater awareness of the interaction between IFCs and DTAs in order to carefully scrutinise their impact.

With IFCs being set up in Kenya and Rwanda there is a need to carefully weigh their impact on internal DRM efforts and  their trading partners. This is especially the case in relation to vulnerable states with whom they have concluded DTAs with. 

As noted in the 2020 Global Financial Centre Index “We are worried about carefully constructed international taxation agreements designed to ensure fair receipts of tax based on location of earnings being undermined by nationalistic interests, and a naïve political drive simply to lower taxes to attract business…’’

The writer is a final year law student at the University of Nairobi. She can be reached at email: emuendo@taxjusticeafrica.net. Follow her on Twitter @EveKavenge

By

Brenda Osoro

On November 3, 2020, the Tax Justice Network Africa (TJNA) and the East African Tax and Governance Network (EATGN) jointly submitted feedback on the revised Double Taxation Avoidance Agreement (DTAA) between Kenya and Mauritius to the National Assembly Committee for Finance and Planning.

In an unprecedented move, the High Court had declared the previous DTAA unconstitutional in response to a petition by TJNA. The court held that the DTAA lacked approval from the National Assembly, violating the Statutory Instruments Act, 2013, and the Treaty Making and Ratification Act of 2013.

TJNA contended that while the DTAA was invalidated, the court ruling did not delve into the substance of the matter or address the technical issues raised.

The submission aimed to prompt Parliament to fully exercise its powers in scrutinizing the Mauritius treaty, advocating for the people’s benefit and urging the government to align it with Kenya’s development objectives.

Leonard Wanyama, EATGN coordinator, expressed gratitude to the committee for allowing public consultation and presented documents highlighting key technical issues on the Kenya-Mauritius DTAA along with considerations for the parliamentary committee.

During the committee’s discussions, Kitutu Chache MP Jimmy Angwenyi raised a crucial question about the relevance of DTAAs. Executive Director Alvin Mosioma explained that DTAAs offer reassurance to foreign businesses, fostering inward investment. However, expert reports indicated that this specific treaty could encourage multinational enterprises (MNEs) to establish entities in tax havens like Mauritius, enabling treaty shopping and round-tripping in Kenya’s service provision.

This approach could unfairly favor foreign businesses, discourage local enterprises offering similar services, and hinder employment in Kenya. Concerned MPs sought evidence of DTAA abuse and best practice suggestions, with EATGN/TJNA proposing the ATAF treaty model as suitable for African countries.

Responding to these concerns, TJNA/EATGN urged the parliamentary committee to summon the Kenya Revenue Authority (KRA) and request concrete data on the economic gains of the DTAA. They also called for an examination of whether the DTAA violated the principle of tax neutrality and if it followed the ATAF model treaty, most suitable for developing countries.

Lastly, the committee, chaired by Homa Bay Women Representative Hon. Gladys Wanga, commended EATGN/TJNA for raising these issues. The committee pledged to investigate the Treasury, KRA, and other stakeholders involved in the treaty signing, emphasizing the need for transparency and accountability in the process.

PHOTO CREDITS: Courtesy The East African

By

Njiraini Muchira

East African tax agencies are working on measures to deter tax evasion and avoidance even as economies struggle to remain afloat.

The regional economies are bogged down by loss of jobs, low production and growing external debts over the past nine months and face a difficult challenge of collecting revenues.

Regional tax commissioners general attending the 48th East African revenue authorities general meeting last week on Wednesday, said they are implementing a raft of measures to contain tax evasion and avoidance in the midst of substantial underperformance of revenue collections and ballooning expenditure.

East African Community partner states have recorded massive decline in revenues with the quarter from July to September being the worst with revenue growth ranging from -44.9 percent to 2.1 percent.

“This was unprecedented bearing in mind that the revenues have on average been growing at double digits,” said James Githii Mburu, Kenya Revenue Authority (KRA) Commissioner-General who was hosting a virtual meeting with revenue authority commissioner generals.

He said the greatest decline was registered in May, when countries put in health restrictions that shut down economic activities.

To seal revenue loopholes, the tax agencies have resolved to adopt a common approach to address base erosion and profit shifting, and illicit financial flows within the EAC.

The authorities intend to counter tax evasion through invoice mispricing and tax avoidance through profit shifting by introducing transfer pricing rules to ensure fairness and accuracy of transaction pricing.

Eliminating base erosion and profit shifting could boost tax revenue by an estimated 2.7 per cent of GDP.

“The Rwandan Cabinet has approved guidelines on transfer pricing and we intend to publish them soon,” said Pascal Ruganintwali Bizimana, Commissioner-General of the Rwanda Revenue Authority

“In Tanzania we have developed transfer pricing regulations and guidelines that we are using to monitor abuse. We want taxpayers to abide by the rules,” said Alfred Mregi, commissioner for large taxpayers at the Tanzania Revenue Authority.

PHOTO CREDITS: People Daily

By

Steve Umidha

Tax Justice Network Africa (TJNA) and the East African Tax and Governance Network (EATGN) will move to Parliament to have the State rescind tax treaties it signed with Singapore and Barbados, barely a month after effectively petitioning the matter against the National Treasury.

On Monday, the two civil groups said there was need to evaluate both tax treaties Kenya signed with the two countries as they are likely to negatively affect Kenyan tax law.

Singapore and Barbados are on the verge of ratifying double tax treaties with Kenya, a decision that continue to face opposition from various quarters.

Revenue losses

Such a decision, the two groups added, could expose the country into future revenue losses if it is to be ratified in its current form.

The two countries are considered by anti-corruption and global anti-money laundering agencies as some of the murkiest financial centres in the world besides Mauritius and other well-known tax havens.

PHOTO CREDITS: Courtesy 5 Star iGaming Media

By Leonard Wanyama

Ronald Karauri, the CEO of Kenyan online betting giant, Sportpesa, caused a mild uproar when he announced that the firm was withdrawing the full value of all its local sponsorships on account of the proposed taxes that have been placed on the gaming industry.

Captain Karauri has admittedly compared the taxes of the betting, gaming and lottery industry to those taxes imposed on alcohol or the cigarette sectors which have established negative side effects to society despite being legal.

However, his qualms with current government proposals are that they are unfair in as much as they solely burden betting companies unlike in the tobacco or alcohol industries where the ‘sin tax’ is passed on to the consumer.

Sportpesa’s withdrawal of sports sponsorships has been met with an immediate backlash as its actions smack of blackmail especially as the public perceives the company to be more comfortable with paying higher taxes in western jurisdictions, where it operates, as compared to local rates.

This raises issues of tax injustice in regards to why a local company would be more comfortable with following rules in foreign lands as opposed to its own homeland. Kenya’s tax rates are comparatively lower to those of other countries around the world where it willingly pays more.

What is even more worrying is that this is especially critical in a context where the massive advertisements and promotion of betting companies, particularly through its sponsorships, do not protect children from undue exposure to enticing messaging.

This is despite consistent news reports of suicides and addictive or compulsive disorders among young adults that are associated with betting. Combining this with emerging anecdotal evidence as to how online betting has reduced levels of productivity in mostly poor communities’ shows how problematic this activity is.

Dr. Mukhisa Kituyi of the United Nations Conference on Trade and Development (UNCTAD) is on record stating “…you are seeing the sports gambling in Kenya today but nobody tells the gambling firms not to accept money from poor gamblers. It is the poor who must be told that they will live with the consequences of dreaming that gambling is an investment…”

Sportpesa’s act of sponsorship withdrawals can therefore be interpreted as an act of industry intimidation. The company is taking advantage of the fact that there is currently no direct evidence attributing these societal problems to its activities.

Yet emerging studies, like the Implications of Sports Betting in Kenya by Amani Mwadime submitted to the Chandaria School of Business at the United States International University (USIU) in 2017 estimates that 2 million people in Nairobi alone participate in online betting.

By ignoring the ramifications of such exploratory data, the betting industry is therefore reading from the same old big corporate interference script to push scaremongering or confusing arguments like; the tax effect will lead to losses in jobs, incomes and the relocation of the company – all of which have already been done before.

Chapter 12 of the constitution on public finance management requires the creation of a tax system that promotes an equitable society. That means companies like Sportpesa are obligated to engage in good management practice by not holding the country at ransom as demonstrated in the sports industry.

Responsible corporate governance means that there is adherence to the law and in this regard, the regulations pertaining to taxation. It is only in this way that governments can derive the necessary financing to drive sustainable development.

Ultimately, whether or not Sportpesa continues to sponsor local teams, a fair outcome should ensure that betting companies pay their fair share of tax commensurate to the social costs of legal gambling in Kenya while remaining compliant within its dealings.

The author is the acting coordinator of the East African Tax and Governance Network (EATGN). Email: lwanyama@taxjusticeafrica.net Follow on Twitter @lennwanyama

By Leonard Wanyama

Ongoing revelations of corruption in state institutions, are drawing massive citizen indignation as details on the scale and magnitude in new incidences of public theft continue to emerge.

News of the second scandal at the National Youth Service (NYS), coupled with other reports such as the nefarious maize and fertilizer issues at the National Cereals and Produce Board (NCPB), payment irregularities at the Kenya Power and Lighting Company (KPLC), controversy at the Kenya Pipeline Company (KPC) among others, are enraging Kenyans.

This is, however, resulting in growing resentment towards financial institutions which are now being viewed as major accomplices to mega- corruption on account of being conduits for stolen public funds from state institutions.

Banks are being particularly singled out for facilitating this vice despite being able to prevent or even stop illegal monetary dealings based on knowing the owners of accounts in their facilities, and the ability to detect suspicious transactions by use of customer identification or profile data in their custody.

However, it seems that the banking sector’s hubristic concern for bottom- lines alone, has blinded it to how mega corruption is detrimental to the crucial implementation of trade and investment activities needed to spur widespread growth across Kenya.

Corruption, and the illicit financial flows that accompany it, cause massive losses to the country owing to how they distort revenue collection, allocation and expenditure processes thereby perpetuating the vicious cycle of poverty within the country.

This phenomenon not only jeopardises development programmes, but it also damns the country by entrenching structural and systemic inequality plus undermining socio-economic institutions. It also prevents opportunities for international cooperation due to a loss in foreign investor confidence.

Kenya’s economy is transitioning from its informal cash based systems- which are confounded by the country’s weak regulatory structures and poor supervisory frameworks- in order to restrict the proceeds from crime being infused into its financial system.

As a means of institutionalising transparency and accountability within the system, the government established the Financial Reporting Centre (FRC), a financial intelligence unit within the Central Bank of Kenya (CBK), under the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA 2009).

However, further amendments to the law in 2017 heightened financial surveillance and enabled the prosecution of individuals and organisations facilitating corruption, money laundering and illicit financial flows especially bank officials who fail to comply with reporting obligations, thereby abetting these financial offences.

Banks should therefore be at the forefront of implementing these national disclosure processes and mechanisms in order to help curb white- collar crime by encouraging transparency that lifts the veil of secrecy that has enabled, for a long time, state thievery.

Following the exposés, the Kenya Private Sector Alliance (KEPSA) was quick to issue a statement distancing itself from the named individuals and their business entities, clarifying that they were not members of KEPSA in any way, shape or form.

However it also noted a high possibility that some of its members, within the banking sector, were likely to have been involved in siphoning funds stolen from state coffers and would therefore be available to support efforts in identifying them.

As Phase II of these investigations gets underway, it is important to not only identify the business entities that benefited from these fraudulent payments but also name the commercial banks that were complicit.

KEPSA should therefore take advantage of POCAMLA 2017 amendments to heavily penalise any of its members who get involved in graft.

The Kenya Bankers Association (KBA) should also complement this by tightening their internal and external measures in order to curb money- laundering especially in light of the fact that under the new law, individuals and corporates found guilty can be fined up to  KES 5 million and KES 25 million respectively.

The author is coordinator of the East Africa Tax and Governance Network Follow @EATGN Email: lwanyama@taxjusticeafrica.net

By Leonard Wanyama

Listening to government officials explaining policy positions exposes how out of touch they seem to be with the public’s concerns about how their country is run on a daily basis.

Sitting in on the recent Kenya Alliance of Resident Associations (KARA) bi-monthly meeting on 20 March 2018, it was clear that state functionaries need to communicate their policies a lot better than is currently the case.

The meeting examined the options for Kenya’s debt sustainability in light of existing debates which have unfortunately slipped into the typical dichotomy of whether the issue at hand is simply good or bad.  

Obviously, such a subject that is likely to affect 40 million plus Kenyans is never that clear-cut.

While it is commendable that government officials are taking time to explain economic policy in line with the spirit of public participation; they are still not adequately responding to citizens’ fears over how the acquisition of these loans will directly impact them.

Kenyans are concerned that much of the economic brunt of continuously- borrowed money will negatively affect the majority poor and the middle classes significantly more than the rich in relation to the proposed increase in taxes.

They are also worried that the country is getting into a cycle of debt in which it is taking up one loan to pay off another thereby leaving very little or no resources available for the required investments to uplift its citizens from poverty.

Public scepticism, critique and complaints over debt are therefore well founded in a long history of always getting poor returns on investments whether it is in terms of implementation of projects or administration of previous debt that has led to growing inequalities within Kenyan society.

Knowing your audience is therefore a very important aspect of any public engagement.

Bureaucrats should therefore not respond to members of the public by labelling them as intrinsically unpatriotic, pessimistic, overly political, ungrateful, or downright lazy, as it happened in not so many words.

This not only smirks of a very dismissive attitude towards the democratic mechanics of Kenyan political processes but is also very disrespectful of citizens who have taken time to engage on such subjects in a constructive manner.

Consequently, officials should consider taking note of the following when they discuss issues of Kenyan debt.

Much of the public cynicism arises from the fact that as the country borrows more money there are people-both within or outside government-who are always angling to steal large sums from state coffers. This thereby jeopardises the ability to service payments of these loans in one form or the other.

While it is clear that the country’s debt is still within constitutional, legal and international best practice thresholds, it doesn’t help to insist on using outlandish comparisons to make the point that all is well in the country.

Using the example that Kenya’s debt is okay just because its loans are way below those of Japan, the United States or Singapore without any reference to the fact that these countries experience much lower levels of corruption is disingenuous.

Secondly, government officials should learn to answer immediate citizen policy queries more directly.

Kenyans are eager to know what effect the acquisition of these new loans will have on current policies towards income tax and value added tax (VAT), because this is where the shoe pinches.

Not speaking to these taxation dynamics increasingly offends public sensibilities about government priorities.

Therefore, if these issues are continually not addressed conversations around debt sound more and more like a story of a man who has a crack in his water bucket. While fetching water in this cracked container the man tells everyone he is better off than his poor neighbour who has a hole in her pail.

Meanwhile, he also claims that because his bucket is the same colour as his neighbour’s Jacuzzi, it holds water just as well the rich man’s bathtub and therefore no one has any right to point out that his bucket is leaking.

Government officials should therefore stop acting like the imprudent man and listen carefully to the citizens’ interrogations on the crack in the bucket, so that they can address public concerns adequately.

The author is the acting coordinator of the East African Tax and Governance Network (EATGN). Email: lwanyama@taxjusticeafrica.net Follow on Twitter @lennwanyama