Boosting state revenue

In 2004, the Kenya Revenue Authority (KRA) set up an Investigation and Enforcement Department (IED) as part of RAMP, its ambitious Revenue Administration Reform and Modernisation Programme. The IED handles all tax and customs investigations, including tax evasion and fraud, documentation of illegal imports and improperly registered vehicles. Its mission is to optimise tax collection.

The IED relys on help from police officers drawn from the Criminal Investigation Department. It has trained hundreds of police officers, moreover, in the use of special investigation techniques. The IED determines the modus operandi, identifies sponsors or perpetrators of criminal activities and prosecutes them. It also detects areas of wilful negligence and graft within the KRA itself and recommends disciplinary action.

The IED is chaired by a commissioner who reports to the KRA’s commissioner-general. It has four divisions (Business Intelligence, Invstigation, Enforcement and Internal Affairs). They are each headed by a deputy commissioner, and their operations are independent of the mainstream revenue collection. The priority is to investigate those areas in which tax leakage is most rampant. Efforts are being made, moreover, to encourage whistleblowers on unethical practices.

Border control

The port of Mombasa is a hotspot of tax evasion. In the financial year 2006/07, government revenue worth two billion Kenyan shilling (Sh) (almost € 25 million) was lost there, according to an official report by the auditor general. The report further said that foreign-trade obligations worth Sh 1.5 billion were not accounted for in the same period. The East Africa Business Council, a private-sector lobby group, reckons that conterfeit and contraband trade in the region are worth an annual Sh180 billion.

With the help of the police, the KRA has begun to crack down on tax evaders in Mombasa. The combined forces found out that clearing agents, importers and customs official were understating the value of shipments, forging documents and tampering with Simba, the KRA online system. Last year, KRA seized two 40-foot containers holding cigarettes with a tax liability of over Sh 50 million alone.

The KRA has invested heavily in state-of-the-art patrol boats to control the coastline of Mombasa as well as Lake Victoria. The obvious goal is to curb smuggling into the country, facilitate arrests and the confiscate illicit goods.

The KRA cetainly is not idle. Its invstigators exposed a racket at Soko la Magendo (“Smugglers Market”). Lorries from Uganda that officially carried grains and cereals were really selling “re-exported” wines and spirits to wholesalers and retailers. The smugglers were exploiting the tax differentials between Kenya and Uganda. In Uganda, wines and spirits are subject to a 45 % duty, whereas Kenya imposes 65 % on spirits and 50 % on wines. The KRA had identified this sector as a key area for improving revenue collection.

“We are losing a lot of money,” the KRA’s Joseph Nduati said at the time. “We cannot meet our targets because the majority of wines and spirits manufacturers are unknown to the KRA. They are not registered and the illicit trade in this subsector is entrenched.” Nduati stressed that the KRA had to depend on the police in order to intervene successfully, as was subsequently done.

The enemy within

Perhaps the biggest challenge, however, is the KRA staff itself. A CID officer at the IED, who does not want to be named, says that tax investigations are challenging work: “After my training I was given my first assignment at the border and for a second I contemplated quitting. What I came to learn was that there was a very well established racket that was working in cohort with custom officers to evade taxes.” The culprits tried to bribe him, but also harrassed and threatened him. They said things had always been done the way they were handling them. The officer says he was unable to unmask the racket, as the pressure was too great. The case is still under investigation, however.

According to the officer, the racket is about customs officers irregularly clearing containers. Although the containers’ content matches the importers’ declarations to some extent, the items tend to be more valuable than indicated. Accordingly, taxation should be higher. Two containers, for instance, were declared to have plastic shoes and some clothing. Upon verification, the containers had no plastic shoes, but new clothing, which attracts higher duty.

The KRA leadership is aware of the fact that its officers have a history of colluding with tax evaders. It has taken measures to rise to this challenge. Responding to reports from its intelligence unit, the authority dismissed 162 workers in the past one and a half years. In 2009, according to M. G. Waweru, the commissioner-general, the internal court division handled 78 cases of staff corruption. Of these, 32 were determined and the culprits dismissed, demoted or prosecuted.

To better check its staff, the KRA has installed surveillance cameras at its headquarters. Sensitive areas, such as cash offices and banking halls are being monitored in a very litteral sense to record underhand dealings.

Technology is useful, no doubt. But it is also a double-edged sword. Waweru recently said that, as technology advances, tax evasion is becoming increasingly widespread and sophisticated: “Tax offenders are expanding the sphere of their activities to more geographic areas and areas of expertise.” He pointed out that criminals use “money-laundering schemes to hide the proceeds of tax evasion, drug trafficking, arms smuggling and other offences without borders”. Waweru called on all relevant government agencies to cooperate.

Experience so far confirms that it makes sense for Kenya’s revenue service to systematically work with the police. Doing so helped to stem tax losses. In 2009, 96 special officers were posted at evasion hotspots, including ports and borders. For good reason, the KRA has also begun to cooperate with the country’s Anti Corruption Commission.