Lame beneficial ownership laws recipe for procurement fraud

Economic experts in Kenya are calling for the implementation of procurement laws, especially on beneficial ownership, a key ingredient in the fight against corruption and Illicit Financial Flows (IFFs).

The country is looking at a fiscal gap of about $6.2 billion (Sh863 billion) in the current 2022/23 financial year, according to data from the National Treasury.

This is amid the huge sums that the country is said to be losing on corruption annually, a sum that could be enough to cater for the fiscal deficit.

The economic think tank, Institute of Economic Affairs (IEA), in one of their media sensitisation forums on procurement fraud early this year, said the government could serve the current fiscal gap with sealed corruption loopholes, instead of using debt and raising taxes to finance the gap.

Back in January 2021, former president Uhuru Kenyatta while speaking to local vernacular stations, noted the country was losing approximately $14.5 million (Sh2 billion) daily to corruption.

This was reiterated by ODM party leader Raila Odinga in May last year when he said the nation is losing $5.1 billion (Sh700 billion) to corruption every year.

He was speaking in Vihiga county in a meeting with local leaders during his campaign tour, prior to the August 9, 2022, general elections.

Further, in Transparency International's 2022 Corruption Perceptions Index, Kenya scored 32 on a scale from 0 (highly corrupt) to 100 (very clean).

When ranked by score, Kenya ranked 123rd among the 180 countries in the Index, where the country ranked first is perceived to have the most honest public sector.

Although some IFFs are difficult to be tracked due to sophisticated secrecy, a recent report by Transparency International Kenya indicates that Kenya losses an average of Sh40 billion every year since 2011.

Eric Ngumbi, the Ethics and Anti-Corruption Commission (EACC) spokesperson, says that of all the cases investigated in the country on public funds embezzlement, over 80 per cent are procurement related, cutting across private and public sectors.

According to IEA, sabotage of the Beneficial Ownership Act is one major factor exacerbating procurement fraud, with proxies apprehended, letting the real faces behind the cult walk free.

A Partnership for African Social and Governance Research 2018 report, states that most of the money lost through procurement fraud ends up leaving the country as the culprits fear being traced, discovered, or will be forced to share the stolen money with other corrupt officials.

"In Kenya’s case, new laws and regulations have been inadequate to address IFFs; there is a clear need for political will, tax reforms and accountability measures that provide sanctions and encourage compliance to deal with IFF," the report says.

Kenya has been ineffective in combating IFFs partly because of uncoordinated financial institutions, loopholes in its several pieces of legislation and inadequate resources allocated to its relevant agencies and institutions, the report reads in part.

IEA echoes this, saying that most of the companies securing big tenders from the government are registered with pseudo-owners, frustrating the beneficial ownership act, which makes it difficult to trace the actual contributors and beneficiaries for prosecution in case of money losses.

“Some of these companies are owned by top government officials, others by individuals based outside the country, in tax haven regions, who ride on tax evasions, reliefs and agreements that are costing the country billions every year,” IEA says.

Executive director of Transparency International, Kenya Sheila Masinde, says there have been instances where companies involved in procurement fraud in the country have been found to be registered under pseudo-owners or individuals acting as proxies.

“This practice is employed to conceal the true beneficiaries and facilitate fraudulent activities. The use of pseudo-owners has made it hard to combat procurement fraud.”

She adds that it creates an environment that fosters impunity, as the individuals behind fraudulent activities can avoid accountability and legal consequences.

“Publishing registers with actual beneficial ownership information helps shine a light on secret corporate structures that can be exploited to launder the proceeds of corruption, hide conflicts of interest, improperly win lucrative government contracts and evade tax payments,” Masinde says.

She however acknowledges that Kenya is facing a hurdle in implementing beneficial ownership transparency measures which can be remedied through sustained commitment, adequate resources and continuous monitoring and evaluation to ensure effective implementation of the Act.

“If comprehensively implemented, the act and supporting legislation can help detect and prevent fraud and other procurement ills, help strengthen tax collection by clamping down on tax evasion and enable citizens to hold rogue companies accountable.”

On their part, IEA also thinks legal action against real perpetrators will do good for the country.

The Constitution in Article 227 requires that public procurement be carried out in a system that is fair, equitable, transparent, competitive and cost-effective.

It insists that procurement processes in the past decade have not been transparent enough, posing significant challenges to the country’s economic development and public trust.

The government has in the past put in measures to curb corruption through procurement.

For instance, it issued executive order 2 of 2018 which subsequently established the public procurement information portal (tenders.go.ke) to try and enforce accountability.

This portal is meant to publish details of companies (directors and beneficial owners), and contract amounts among other details.

Unfortunately, the compliance rate with this directive remains less than 50 per cent, according to Transparency International Kenya.

Further data shows that only nine per cent of almost 4,000 procuring entities in the country have so far uploaded their contracts on the Public Procurement Information Portal (PPIP).

Close to 91 per cent have not uploaded their contracts, suggesting either a widespread lack of compliance or worse contracts that are not fit for open scrutiny undermining the efforts for full disclosure of public contracts as envisaged in the Public Procurement and Asset Disposal Act.

"An additional provision in law that holds all the accounting officers at any level, accountable for any losses of public funds, should be provided," Ngumbi says.

Another key step would be strengthening the due diligence process for company registration including robust verification mechanisms and comprehensive background checks to confirm the legitimacy of individuals claiming to be company owners or representatives.

This story was produced by Alfred Onyango. It is written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.