The ongoing manhunt for billionaire Humphrey Kariuki for tax evasion at Thika-based spirit distillery has opened a lid on the inside workings of a cartel powered by senior Kenya Revenue Authority (KRA) officials to steal billions shillings in taxes from the alcohol sector.
Sunday Nation has learnt from multiple sources within the industry, insiders at the KRA and police that the tax evasion empire has been in existence for years is driven by a well-organised machinery that pockets fat weekly bribes that run as high as Sh48 million a week.
So rampant is the practice that it has become the tool of trade in the sector. Alcohol manufacturers who refuse to play ball are quickly pushed out of the business through vicious pricing war or police harassment.
First, there are suppliers of ethanol — mostly from outside the country, then there is the group that imports fake excise stamps and then the spirits manufacturers, who complete the production end of the triangle.
On the other end, is a team of KRA officials and police who look the other way to allow the bleeding of tax revenues running into billions.
For tax purposes, the alcohol industry is heavily regulated with production monitoring machines installed in every licensed manufacturer’s production line to assign a unique tax stamp on every bottle passed.
The Sh17 billion Excisable Goods Management System (EGMS), which the KRA procured from a Swiss multinational SICPA Securities Solutions is meant to send real time data to Times Tower, the taxman’s headquarters, on every drop of alcohol that a manufacturer releases into the market. A team of KRA Market Surveillance Office (MSO) also patrols the wine and spirit wholesalers and retailers to randomly sample and verify that the products being sold are compliant. The officers have a scanning gadget that can detect fake stamps instantly. The KRA also introduced and widely publicised a mobile application to distinguish between genuine and fake excise stamps in 2016 to enable anyone to flag out the fake stamps on alcohol and cigarettes. The app has since been deactivated.
It is within this tight monitoring that loopholes have been created to allow for the revenue leakages in the heavily taxed sector that has seen individuals become multimillionaires.
Alcohol manufacturers collude with KRA officials to stop either the EGMS system or sidestep the system and pack alcohol, thus evading tax.
Director of Public Prosecutions Nordin Haji in his arrest order alluded to this when he accused Africa Spirits of tampering with their production system at the factory thus making fake declarations to the KRA for four years without being detected. In court papers, the taxman said Kenya lost Sh41.5 billion over the period.
Interestingly, no KRA official has been arrested.
Director of Criminal Investigations George Kinoti on Saturday confirmed that a number of KRA staff were being investigated to break the tax evasion cartel in the alcohol sector.
“Yes! We are investigating and indeed taking them to court. There is no successful theft of tax or evasion without the counsel, aid, procuring and abetting by KRA staff,” said MrKinoti in response to queries whether KRA staff were under investigation.
Top in the investigations included the MSO officers and top KRA official they report to at Times Tower said to have amassed wealth from the weekly bribes collected from the scheme.
Then there is the trade in ethanol where some manufacturers do not pay tax.
The truck trailed by the officers from the Directorate of Criminal Investigations (DCI) ferrying 80 drums of unaccustomed ethanol in the African Spirits investigation is said to have just been one among the more than 400 that would have supplied enough ethanol to distil spirit capable of evading the Sh41 billion in tax.
More than 700 million bottles would have had to be sold to raise the tax in a sector where there are countless KRA market surveillance officers. In April, a standoff ensued between two police units at a roadblock on the Nairobi-Namanga highway over suspected contraband ethanol after DCI detectives escorting a lorry from Namanga were confronted by policemen manning the roadblock.
The two detectives based in Parklands ended up being disarmed in the drama before they were rescued by their seniors from Nairobi, signalling the high stakes in the illegal ethanol trade. The driver of the lorry is said to have been on the run but those in the know say he is a free man.
While Tanzania levies a Sh60 tax for every litre of ethanol, the KRA demands Sh200 for the same quantity of the commodity, making the smuggling from Tanzania a lucrative deal with each 200-litre drum saving the dealers some cool Sh28,000.
Apart from allowing for the gaming of the EGMS machine at the production line and importation of ethanol, there is the importation of the fake stamps which also pass the same border points.
These stamps according to our sources are affixed on the bottles in away that in one box, bottles at the corners and one or two in the middle has genuine stamps. The KRA field officers are said to have hoodwinked their partners in the multi-agency teams by selective scanning of the bottles within the packages to pass them even when they have been impounded by the police.
To weaken the powers of the police who, acting on intelligence, have impounded the alcohol with fake stamps, the mobile app the police were relying on was brought down, making it unable to detect the fake stamps. The stamps are said to be imported from China with each manufacturer keeping huge rolls of the fake stamps and only using a few of the genuine ones from the KRA to game the system.
Before he was appointed to the top seat at KRA, Githii Mburu had promised to revamp the app to seal loopholes unscrupulous alcoholic products and cigarette exploit traders but that is yet to happen.
“The police are powerless and even if they were to take a suspect to court, it is the same KRA surveillance team that have to be the complainants or at least verify the stamps are fake. The police are viewed as outsiders in the market surveillance for the finished products,” another source aware of the working of the cartel said.
Multiple sources who spoke to the Sunday Nation in confidence pointed to a well wired bribery machine that has seen KRA’s surveillance team allow the tax evasion and collect weekly bribes to look the other way while spirits manufacturers mint millions in unpaid tax.
The spirit manufacturers spread around Nairobi’s Industrial Area, Embakasi and Mlolongo as well as in Naivasha and Nakuru have fast gained market share , thanks to the scheme that also involve outcompeting those who comply.
The MSO team is accused of selectively confiscating products from retail shops to send a signal to the retailer that the brand they are selling is “non-compliant” while clearing the ones owned by cartel members, effectively pushing the genuine manufacturers out of business.
“When a retailer sees that only their products are being targeted all the time while others are never touched, they would rather stock that one. That leaves the manufacturer with no option but to join the scheme and give out the weekly bribes,” our source intimated.
The bribe is said to be anything between Sh1.5 million to Sh3.5 million per week from each spirit manufacturer in the cartel comprising the 32 licensed spirit manufacturers said to be playing ball. This means the officers can collect Sh48 million on a bad week and Sh2 billion in a year. It is not clear how many people get the cash paid out.
Alcohol industry paid out more than Sh100 billion in taxes last year. Some of the MSO staff are said to have amassed so much wealth and are undertaking mega construction projects in Nairobi’s Kasarani and the rest of the country.
KRA Commissioner, Domestic Taxes Department Elizabeth Meyo declined to comment on the claims that the MSO team was deeply involved in the tax evasion racket, citing an active investigation still being carried out over the matter.
“The above queries touch on a matter that is already in court and under further investigation by the DCI as well as the office of the DPP. In the light of this, the KRA cannot comment on the matter,” Ms Meyo said when asked whether any KRA officials had been disciplined for abetting the tax bleeding in the alcohol industry.
She however maintained that the KRA was actively enforcing tax compliance.