In April 2018, KRA outsmarted a businessman in a sophisticated tax evasion case ever witnessed in Kenya before arresting and charging him in court with counts relating to evading payment of Sh7 billion in value added tax (VAT) and income taxes. KRA had been investigating the case for more than one year.
The suspects had allegedly registered more than nine business names and used them to make fictitious invoicing in excess of Sh15.3 billion. The tax fraud syndicate had used several registered business names for fictitious invoicing in a scheme that is similar to the “missing trader” phenomenon in India and Europe.
The traders involved, use fictitious invoices to depict a business transaction where there is no actual supply or movement of goods and services. In the scheme, business entities mimic a genuine trading process by trying to meet all the legal requirements of a ‘supply’ for tax purposes.
The “missing trader” in the Kenyan case is one in which the traders in the business chain, do not supply any goods or services but “payment” is made to create notional cost of goods sold. This scheme appears to delink and hide the final economic beneficiary of the purchases.
Investigations reveal that the vice affects almost all sectors of the economy. However, the most affected are: construction sector, importers of clothing and textiles, tiles and other construction materials, suppliers of scrap metal, as well as steel manufacturers. Major contractors to the government also obtain fictitious invoices to justify kickbacks which are later classified as consultancy or facilitation fees. These are subsequently claimed in tax returns as costs.
Other tax evasion schemes unearthed, include using fake invoices to reduce tax liability or to claim tax refunds, concealment of sales through secret bank accounts, smuggling of goods and under declaration of values during importation.
It is regrettable that tax evasion and other economic crimes like money laundering, bribery and corruption are hindering developing countries from effectively mobilizing domestic resources to finance development in a sustainable way.
It is for this reason that KRA has identified some of these economic vices as key risks under its recently launched 7th Corporate Plan. To mitigate them, KRA is reducing the extent of exposure by ensuring that key strategic objectives are achieved.
First, KRA has embarked on a programme to actively source intelligence to support tax enforcement. This entails investment in conventional intelligence collection resources including people and technology to undertake conventional surveillance operations and penetrate tax evasion cartels.
Effective intelligence collection is a key factor in achieving successful interdiction, arrests and prosecutions of suspected tax evaders. The strategy is broad based covering all aspects of operations from domestic tax to Customs where a full array of solutions covering cargo declaration, cargo inspection and scanning and the tracking of transit cargo is applied.
KRA has recently adopted the intelligence based and prosecution led investigations model. Under this approach, intelligence is collated and utilized with the ultimate aim of prosecuting the perpetrators of tax crimes and related offences.
In addition to prosecution, an integral aspect of investigations is to link assets acquired through the commission of tax crimes and offences with the aim of tracing and recovering them. This, KRA does in collaboration with other enforcement agencies.
To support tax crime investigations, the Directorate of Criminal Investigations (DCI) has seconded a team of over 100 officers to work with KRA. The officers who are well trained in economic and forensic investigations are posted to all KRA regional offices.
As part of the broader tax investigation strategy, KRA has also embarked on capacity building for tax crime investigators. For instance, KRA has, in collaboration with the Organisation for Economic Co-operation and Development (OECD) trained over 80 financial crimes investigators from different tax and law enforcement agencies across Africa in the last two years under the Africa Academy for Tax and Financial Crime Investigation pilot programme.
Globally, KRA officers have participated in training of tax and financial crimes investigators since it started in 2013 in Oslo, Italy. Kenya is privileged to be the first and so far the only country to host the programme in Africa. KRA held the first pilot programme in June 2017. The programme is also in line with capacity building framework approved by the East Africa Revenue Authority Commissioners of Tax Investigations (EARACTI), the G20 Africa Focus and the G7 Bari Declaration.
The use of technology, through the tax digitisation programme has also been identified as a key intervention in the fight against tax crimes specifically its use in detection and reduction of tax crimes and risk management. Furthermore, technology has reduced the contact between taxpayers and staff, hence reduced instances of bribery and corruption.
KRA is also part of the multi-agency task force (MAT) formed to tackle insecurity, smuggling and illicit trade. KRA is championing continued collaboration with other national and international agencies involved in similar crime investigations for the purpose of capacity building and information sharing.
David Yego, is the Commissioner for Investigations and Enforcement at the Kenya Revenue Authority: Email: firstname.lastname@example.org