FRC report shows how KRA recovered Sh1 billion from shady foreign contractor
Intelligence unit's 2024 annual report shows that part of funds that were paid to shell companies were withdrawn in cash, converted into foreign currencies while a smaller portion was paid to the suppliers
The Financial Reporting Centre (FRC) has revealed how it helped the Kenya Revenue Authority (KRA) recover over Sh1 billion (US$8.5 million) from foreign contractor engaged in mega infrastructure projects in the country after it was found guilty of money laundering and tax evasion.
In its 2024 Annual Report, FRC says it received suspicious transactions reports relating to DDD, a foreign construction company and after analysis, it was established that it also has two local subsidiaries, also identified by pseudonyms, TKK and KKT, that are involved in construction of mega infrastructure projects.
“The directors of the three related companies hatched a scheme of evading taxes through making fictitious payments. They used company employees to register shell companies that were used to raise invoices claiming to be suppliers of construction materials. The shell companies recruited businesses which were dealing in hardware and construction materials. They subcontracted them to make the supplies,” the report says.
It adds that part of the funds that were paid to the shell companies were withdrawn in cash, converted into foreign currencies while a smaller portion was paid to the suppliers.
The FRC developed a report and disseminated it to KRA for tax assessment for all the entities involved. KRA then conducted investigations and established that the firm and its subsidiaries were involved in a complex tax evasion scheme that entailed claiming of Value Added Tax (VAT) through inflated and fictitious invoices. This was with an aim of reducing their tax abilities. The entities raising the invoices were shell companies with no known business operations.
According to FRC report, KRA then issued the firm with an assessment of US$8.5 million for VAT and income tax, but which was objected and the directors filed an appeal at the Tax Appeal Tribunal.
KRA demonstrated that fictitious invoices were used to legitimise the transfers and to reduce tax liabilities. The ruling was upheld and the taxes recovered.
The case is contained in the report as one of three case studies of the outcomes of collaboration between FRC and other agencies, including KRA, National Intelligence Service (NIS), Ethics and Anti-Corruption Commission (EACC), Directorate of Criminal Investigations (DCI), Assets Recovery Agency (ARA) in 2024.
FRC, the country’s Financial Intelligence Unit, is established under the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) 2009 to assist in the identification of the proceeds of crime and the combating of money laundering, financing of terrorism, and proliferation financing.
According to the report, in 2024, it received 8,057 reports consisting of 5,454 suspicious transaction reports (STRs), 2,482 suspicious activity reports (SARs) and 114 stolen assets recovery (STARs) reports from reporting institutions and seven reports from walk-ins / whistle blowers.
This represents a 22 per cent increase as compared to the previous year where FRC received 6,631 reports. The banking sector has maintained its consistency as the primary source of STR/SAR/STARs reporting. However non-banking sector have increased their reporting by 66 per cent whereas the banking sector grew by 17 per cent in the same period.
There was an increase of STRs reports in the months of July and August when the FRC received 784 and 843 reports respectively but it attributes heightened financial activity among corporations / government agencies during the closure of the financial year, which is customarily characterised by settlement of outstanding obligations and pending bills.
In total, the FRC received 7,287 reports filed by Commercial banks and / or mortgage institutions
while 819 came from other sectors.
According to the report, of the sectoral reports received from Commercial banks/or mortgage institutions, 94 were related to terrorism financing while 7,193 were with regard to money laundering.
This was an increase to the 6,131 received from the credit institutions of which 72 had to do with terrorism financing and 6,058 were about money laundering.
In 2024, the total number of Cash Transfer Reports (CTR) reports received was 7,802 representing a 29.6 per cent decline in CTRs received as compared to the previous year which had 11,079. However, the number of transactions increased significantly from 82,664 to 234,787. It is important to note that one CTR report can have multiple CTR transactions. The increased CTR transactions can be attributed to the increase in number of reporting institutions.
Regulation 34 of the POCAMLA Regulations 2023 requires all reporting institutions to file reports with the Centre on all cash transactions equivalent to or exceeding US$15,000 or its equivalent in any other currency carried out by it, whether or not the transaction appears to be suspicious. The cash transaction reports are submitted by the end of every week.
In 2024, 299 spontaneous disseminations were made to various Law enforcement agencies representing a 21 per cent increase as compared to the previous year. This is attributed to the increased engagements with reporting
entities for reporting excellence, technological upgrades, sectoral indicators development and aligning disseminations to the operational needs of the law enforcement agencies, according to the report.
Of these, 57 were reported to the DCI, resulting in a similar number of investigations. However, 40 were still under investigation while 10 were closed and new lines of investigations initiated on 19 of them.
The EACC received 45 spontaneous disseminations of which are still under probe.
On the other hand, KRA received 54 and opened a probe into all of them, which is still ongoing with new lines opened into 28.
The NIS received 78 and has since investigated all of them resulting in action being taken into 30 of them while 20 were closed but are under monitoring. New lines were opened into two of them.
ARA received 43 spontaneous disseminations from FRC , all of which are pending investigations.
In 2024, most of the cases were related to tax evasion, which stood at 67 compared to 25 in 2023 while cases of corruption reduced from a high of 75 to 59.
Fraud cases also reduced from 56 to 46 but there was an increase in money laundering from 32 to 37 while terror financing offences increased from eight to 14.
There was one case of drug cases compared to none in 2023 while other predicate offences increased from one too 13.
In total, the number of suspected offences increased from 197 in 2023 to 237 in 2024.
