By Amy Moyi
Fraudulent trade misinvoicing in Kenya, East Africa’s biggest economy, increased during the COVID-19 pandemic while customs workers were in lockdown or laid off, a closely-watched report by a research group that exposes financial corruption is likely to reveal, according to its chief executive.
Tom Cardamone, who heads the Washington-based Global Financial Integrity (GFI), said the group would release updated research on trade misinvoicing in early 2025, its first comprehensive assessment since the pandemic.
Trade misinvoicing is a way to move money across borders by falsifying the value, quantity or quality of goods on invoices. Under-invoicing of exports is the main method of shifting money illicitly out of the country and under-invoicing of imports is used to illegally smuggle money into the country. Exports and imports are booked at different values to avoid taxes or to hide large transfers of money across borders.
“Overall, while the amount of misinvoicing can fluctuate from year to year there is little evidence to indicate the amount of misinvoicing is on a downward trend,” Cardamone told Elveza Media.
“My guess, and it is just a guess, is that misinvoicing worsened during Covid because of staff shortages, which made it more difficult to identify misinvoicing when it occurs,” he said. Cardamone did not offer statistics to back up his statement but noted: “We will know more as we dig into the data.”
Tax Justice Network Executive Director, Alvin Mosioma, said it was likely that a surge in illicit financial flows, including from trade misinvoicing, during the pandemic was due to a lack of oversight and increased corruption at the country’s borders.
“Covid-19 disrupted the way of doing things,” said Mosioma. “There are concerns of an increase in the scale and scope of illicit financial flows.”
A study by GFI in 2014, which looked at the impact on revenues from trade misinvoicing in five African countries between 2002 and 2011, estimated that Kenya lost roughly $435 million annually in tax revenue during that period from trade misinvoicing, the equivalent of 8.3% of total government revenue.
To put it in perspective, the losses are seven times the $60.8 million 2024/25 budget of the Inua Jamii Programme, which benefits over 1.5 million orphans and elderly persons in the country.
Tackling the trade misinvoicing problem will be crucial as public pressure grows on the government of President William Ruto to deal with corruption and government waste. Fifty people died in protests by Kenyan youths in June after the government tried to push through tax increases to improve government finances. Ruto fired most of his cabinet and invited the International Monetary Fund to conduct an in-depth assessment of how corruption and mismanagement of state resources is draining public finances.
Cardamone said most countries failed to report their trade transactions between 2020 and 2022, the period most impacted by the epidemic when factories were forced to close and global trade was powering down across the globe. In Kenya, trade volumes declined to $16.9 million in 2020 from $18.5 million in 2019 due to a drop in imports, according to the Kenya National Bureau of Statistics Economic Survey report in 2021.
COMPLACENCY AND CORRUPTION
Charles Njonjo, a trade expert and financial consultant in Kenya, blamed trade loopholes for Kenya’s losses from trade misinvoicing, especially in the agricultural and mining sectors.
“The amount of money Kenya loses because of transfer pricing and misinvoicing continues to increase every year because of complacency and corruption by government officials, who have been pocketed by multinational corporations,” said Njonjo. “Some multinational companies produce two separate invoices to evade taxes but this is overlooked by government officials who have been compromised,” he added.
There have long been questions around the profits – and losses – in Kenya’s flower industry, one of the world’s largest exporters of cut stems. In 2011, the head of domestic taxes at the Kenya Revenue Authority, John Njiraini, launched an investigation into the flower sector, including into the three largest multinational producers Oserian, Karuturi and Flamingo on suspicions of shifting profits to other jurisdictions.
In 2016, Karuturi multinational flower farm was forced to close after being found guilty by a Kenyan court for evading $11 million in taxes. Njonjo, the trade expert, said Karuturi evaded taxes by transfer pricing and misinvoicing the cost of imports of supplies to their flower farms in Kenya.
“The company was domiciled in India, the flower farms were in Kenya, and the market is in the Netherlands,” he explained. “Karuturi sold the flowers to the Netherlands and the money was sent to India. Karuturi also supplied fertilisers and pesticides from India to Kenya at exaggerated prices, which made it impossible for their branch in Kenya to make profits,” he added.
A 2023 International Narcotics Control Strategy report by the U.S. State Department’s Bureau for International Narcotics and Law Enforcement Affairs blamed Kenya’s weak regulatory and supervisory frameworks, poor compliance, weak human capacity, and lack of transparency in the financial system for the country’s trade misinvoicing problem.
The National Taxpayers Association lobby group said Kenya’s grey-listing by the Financial Action Task Force(FATF) in February 2024 because it lacked a clear strategy for prosecuting money laundering offences.
GOING AFTER THE WRONGDOERS
Wambui, a lawyer and founder of Sheria Mtaani na Shadrack Wambui, a law firm providing free legal representation to vulnerable people, said the lack of clear legal guidelines when dealing with fraudulent companies, as well as ability of companies involved in economic crimes, makes it easy for them to avoid prosecution.
“It is easier to prosecute individuals than companies,” said Wambui. “There are laws, including the Anti-corruption Act and Proceeds of Crime Act, that are meant to deal with corruption, but people involved in corruption find ways to avoid prosecution by forming other companies,” he added.
In the most recent Mutual Evaluation Report of Kenya, published in September 2022, out of a total of 335 tax offences there were only 62 convictions.
Kenya has put in place some measures to fight illicit financial flows, however, these mechanisms have not been effectively used by the authorities, according to the anti-money laundering and counter-terrorist financing measures published in 2022.
In March 2023, the Kenya Revenue Authority, or KRA, changed the tax structure to deal with loopholes that have led to misinvoicing through underinvoicing, which causes fewer payments of Value Added Tax, or VAT, and customs duties due to the lower valuation of goods.
To further help detect tax evasion, the KRA launched “GAVA Connect”, a digital tool Ruto said would help improve efficiency and transparency within the tax system.
This story was written as part of Wealth of Nations, a pan-African media skills development programme supported by the Thomson Reuters Foundation as part of its global work aiming to strengthen free, fair and informed societies. Any financial assistance or support provided to the journalist has no editorial influence. The content of this article belongs solely to the author and is not endorsed by or associated with the Thomson Reuters Foundation, Thomson Reuters, Reuters, nor any other affiliates. More information at www.wealth-of-nations.org
ENDS
