Capital flight as cash is stashed in foreign banks

And that is not all, with even non-criminal yet hard to detect factors such as under invoicing, unreported income, wages and salaries as well as assets from unreported work also contributing to Kenya’s ever rising amount of undeclared monetary resources that have illegally found their way to highly secretively bank accounts abroad.

The report notes that most of these activities are usually engineered by members of economic and political elite, who exploit their privileged positions to acquire and channel funds abroad.

According to Dr Attiya Waris, a co-author of the report and a lecturer at the University of Nairobi’s School of Law, the figure of capital flight from Kenya is estimated on the lower end as there are still no exact figures on the magnitude of the problem at the national level.

Portfolio diversification

But a recent report by the Washington DC-based Global Financial Integrity (GFI) indicated that the average of annual illicit outflows from the country between 2002 and 2006 was about Sh61 billion (US$ 686 million).

Notably, it was around the same period the country was rocked by the multi-billion shilling Anglo Leasing scandal.

"This amount could be compared with the net official development assistance received, which for year 2000 was US$509 million (Sh45.3 billion) and had risen to US$752 million (Sh67 billion) by 2005," notes Dr Attiya, who is also the vice-chair of the Tax Justice Network and an advocate of the High Court.

Another report from GFI estimates the average tax revenue loss per year from 2002-2006, due to just one form of trade mispricing, was Sh4.3 billion (US$ 48.55 million).

Across the border in Tanzania, GFI estimations put illicit capital flight at about US$ 660 (Sh58 billion) million per year from 2002-2006, with illicit capital flight between1970-2008 estimated at US$7.356 billion.

On the causal factors of illicit capital flight in Kenya over the years, the report singles out portfolio diversification motives, political and macroeconomic instability, fiscal deficits, and devaluation of local currencies as the root causes.

Unabated growth

"However, recent data shows capital flight has continued to grow unabated even in recent years when fiscal deficits and macroeconomic volatility have been regulated, suggesting there may be other determining factors, particularly individual corruption and poor governance," the report states.

It highlights tax evasion by multinational companies as another key avenue for illicit capital flight.

The report states that despite Kenya having made significant gains to recover its lost revenue capacity, the country’s domestic and international underground economy remains a significant area of revenue losses, much of which, it notes, has neither been quantified nor tackled.

It, for instance, notes that Kenya has found herself on the receiving end of money laundering; a problem it says is hard to tackle.

Only recently, the Central Bank of Kenya disclosed there was a large amount of unaccounted for liquidity in the economy, a problem that was attributed to the possible influx of proceeds from piracy at the Kenyan coast.

The report qualifies this perception, noting that money laundering is difficult to detect in an environment where a large part of the economy is informal and where record keeping is largely overlooked in the formal and informal sectors.

Difficult to detect

"An aspect of this informality is the widespread use of cash to transact legitimate business, which makes it easy to introduce cash earned from crime into the financial system.

Record keeping by public authorities is in considerable chaos and has effectively imposed secrecy in the conduct of business transactions, which the law never intended," it notes.

To eradicate illicit capital flight, Attiya notes, there is need for more in-depth and detailed knowledge on how banks are involved in and facilitate capital flight both into and from Kenya at the national, regional, continental, and international levels.

And while diverse fiscal legislation to stop this outflow has been recently implemented, she says there is need to strengthen tax authorities to ensure compliance.

"There is also need for information exchange to receive information on unreported wealth held in tax havens, as well as information on the profits that multinational companies are making to detect mispricing practices," she advises.

The tax lawyer also calls for drives to enhance the understanding of citizens and policy makers on the effects of illicit financial outflows on individual Kenyans and the State.

She equally emphasises on the need to take the legislation against the vice a step further and pursue its effective and efficient enforcement.

"Whether the current framework of guidelines are sufficiently addressing the particular context of Kenyan economy, which is largely cash based, heavily reliant on a parallel, informal banking system, and where informal value transfer methods are the norm, is yet to be seen," she says.

But one key question that remains unanswered is whether Kenya will ever manage to bring back the billions of shillings that have been looted from the economy and stashed abroad.

Kristina Froberg, co-author of the report and an advocacy officer at Forum Syd in Sweden, says this will be possible if an ongoing global bid to have tax havens drop secrecy provisions proves successful.

Country-by-country reporting

This, Ms Froberg notes, will be fast tracked by the Domenici report, a resolution that was adopted by the European Union Parliament last year, and which recommends that country-by-country reporting becomes obligatory for multinational companies.

"This report in particular suggests a public register listing the names of individuals and undertakings having set up companies and accounts in tax havens, with a view to unveiling the true beneficiaries shielded by offshore companies.

With this expected automatic exchange of information, many countries will eventually get their looted resources back," Froberg, who is also an experienced political scientist, says.

She says it is worrying money lost annually through illicit capital outflow in developing countries is about four times higher than the US$40-60 billion required every year to meet the milestone UN Millennium Development Goals by 2015.