Walking a tight rope: Of taxing proceeds of crime

By Steve Umidha

Many will not associate it with relatively mundane behavior, such as grabbing a piece of land belonging to school-going pupils, looting public coffers with no absolute remorse or operating a commercial premises in breach of its permitted use.

In recent years under this administration which assumed office in 2013, such has been the case with the prowling binge in billions now seen as a norm.

It is a concern that continues to be raised by helpless Kenyans who desperately want to see more done to recover the proceeds of corruption from graft suspects.

Despite the existence ‘powerful’ legal apparatus in this country, Kenya seems not to be making any headway in fighting corruption, with each passing day the country is awaiting a new scandal. No high and mighty suspect has been put behind bars, let alone recover proceeds of illicit business – and this despite the existence of an agency called The Assets Recovery Agency through which the powers of the State are exercised in this regard.

We also have another legal system contained in the Anti-Corruption and Economic Crimes Act, which was passed way back in 2003 that gives power to the Ethics and Anti-Corruption Commission (EACC) to confiscate any property that is acquired as a result of corrupt conduct.

Two characteristics of these laws make them the perfect weapon in the anti-corruption war, but little has been achieved in that regard.

The absence of the above mentioned in fight against graft and tracking corruption loot has made it even impossible to tax proceeds from the vice.

It is against this backdrop that a civil society led review of the ITA suggested guidelines to be developed on taxing illegal income – income earned through corruption arguably falls under this proposed tax bracket.

While it is a challenging recommendation considering the trends in illicit financial flows (IFF), which are difficult to detect because of several reasons, it is a war that will be won, maybe not today.

A report by East Africa Tax and Governance Network (EATGN) titled Changing the Tax Architecture acknowledges that it is going to be a complex undertaking owing to the multifaceted global wealth chains located in tax havens or in jurisdictions with which Kenya has no automatic exchange on tax information make it entirely impossible to detect capital flows, profit shifting and transfer pricing.

Taxing illegal income, according to the report launched last week in Nairobi, would require a definition of what constitutes illegal income.

“The High-Level Panel Report on Illicit Financial Flows11 defines IFF as income earned or received from corruption. Corruption is an economic crime under the Anti-Corruption and Economic Crimes Act12 and corrupt proceeds are subject to confiscation by the government on the suspect’s conviction. Thus, the taxation of income from corruption cannot be subject to the civil society led recommendation,” reads the report in part.

Third, dodging tax through digital presence results from digital currencies, which currently remain unregulated and untaxed in Kenya.

The use of digital currencies for illegal money has been confirmed by several criminal investigations against currency providers, such as E-gold or Liberty Reserve and it is also a well-known fact that digital currencies, like Bitcoin, are being used for payments at the online underground markets.

According to the report, what makes the situation even more difficult is that “many of those currencies are decentralized and thus hard to control; for example, shutting down Bitcoin literally requires shutting down the internet because there is no core node that can be taken down.

The use of the unregulated digital architecture can make it possible to transfer corrupt earning first, without detection, and second to redirect such proceeds into tax-exempt business investments.”

The report is now recommending a systematic approach to tapping illegal income, which it wants developed in Kenya.

As it is currently constituted, Kenya’s Income Tax Act (ITA) offers no mechanisms for control and monitoring of such capital flows.

“Digital currencies remain an untapped revenue source that neither the ITA nor the Income tax Bill (ITB) have captured for taxation,” the report notes.