Kenya under the Radar of Financial Crime: Gold Smuggling, Tax Evasion, and Illicit Financial Flows

By Jane Doe and Joe Brown, Kenya Correspondents

Alarming Expose on Illicit Financial Flows and Money Laundering in Africa

Two weeks ago, an investigative report by Al Jazeera titled ‘Gold Mafia’ revealed the intricate process of gold smuggling and money laundering in Zimbabwe, implicating local and foreign banks in the illegal activities. The global issue of Illicit Financial Flows (IFFs) and money laundering costs Africa roughly 3.7% of its Gross Domestic Product, or approximately US$88.6 billion annually, as reported in the Economic Development in Africa Report 2020.

Kenya’s Losses and Connection to Gold Mafia

With estimated annual losses of Ksh40 billion since 2011, or nearly half its domestic revenue, Kenya ranks high among African nations losing billions through IFFs and money laundering. Moreover, one of the alleged architects of Kenya’s criminal activities, Kamlesh Pattni, is linked to the Goldenberg scandal, where Kenya lost nearly $1Billion due to subsidies paid to a company associated with him. The Kenyan implication in the expose casts a grey shadow over the country within the Financial Action Task Force (FATF)’s radar.

Understanding IFFs and Money Laundering

IFFs and money laundering are sophisticated illegal activities with wide-ranging consequences, involving the illegal acquisition, transfer, or usage of funds to evade taxes or other regulations. These activities include:

• Tax evasion
• Corruption
• Trade mispricing
• Money laundering

Money laundering is the process through which “dirty” money is disguised to appear legitimate or “clean” money. The process involves:

1. Placement: moving money from its criminal origins into the financial system
2. Layering: concealing transactions to hide the source and ownership of the funds
3. Integration: making the “cleaned” money available to the criminal for further use

Consequences of IFFs and Money Laundering in Kenya

IFFs and money laundering significantly impact Kenya by hindering economic and social transformation, fueling crime and corruption, and undermining government institutions. Major economic sectors suspected of contributing to IFFs and money laundering in Kenya include public procurement, real estate, vehicle importation business, manufacturing, and banking. These activities primarily originate from corruption and are influenced by well-placed individuals and politically exposed persons, often achieved through:

1. Public-private partnerships
2. Nominee relationships
3. Front companies
4. Direct embezzlement

Origins, Destinations, and Challenges of IFFs in Kenya

The origins, destinations, volume, and impact of IFFs and money laundering within Kenya are complex and challenging to measure. Some common destinations include tax havens such as Mauritius, Nigeria, and the UAE. Kenya must acknowledge the need for a better understanding of the origins and avenues of IFFs and money laundering to devise effective countermeasures.

Addressing IFFs and Money Laundering in Kenya

To combat IFFs and money laundering, Kenya must establish closer collaborations between its agencies, civil society organizations, and financial institutions for information provision and public awareness. Additionally, Kenya must address challenges in the comprehensive implementation of Beneficial Ownership Transparency registers. This initiative can aid in preventing anonymous companies from serving as a cover for illicit financial activities.

Institutional Frameworks and Agency Efforts

Kenya’s legislative and institutional frameworks for combating IFFs and money laundering are considered adequate. However, Kenya’s agencies responsible for fighting these vices, including the:

• Ethics and Anti-Corruption Commission (EACC)
• Directorate of Criminal Investigation
• Kenya Revenue Authority
• Financial Reporting Centre
• Asset Recovery Agency
• Office of the Director of Public Prosecutions

should intensify their efforts to combat IFFs and money laundering.