Cover-ups that have dogged one of the biggest tax evasion scams at KRA

Kenya Revenue Authority Commissioner General John Njiraini.

Julius Musyoki, the second-most powerful officer at the Kenya Revenue Authority (KRA), had had enough.

The clock and calendar on his computer showed it was 3.36pm, Wednesday, February 3.

Mr Musyoki, the commissioner of customs services, pulled back his keyboard and fired an email that would later give the public a glimpse at a new tax evasion scandal and the subsequent cover-ups that have come to haunt KRA’s Simba System afresh.

After almost five months of an investigation that got nowhere, Musyoki decided to escalate his frustrations on the tax fraud that had rocked his department to the highest office in the building.

The subject of the email was: “Equity Bank payments and ‘lost folders’.”

The tone of the email copied to senior KRA officials was clear.

“This matter was forwarded for action in November 2015! It matter [sic] has been either ignored or swept under the carpet. However, this will not disappear until [the] issue is resolved,” he wrote in the email that hit KRA Commissioner General John Njiraini’s inbox at 3.40 pm.

Musyoki was referring to a scam that had been unearthed in November last year, and is believed to run into the billions of shillings.

But it seemed at the time he wrote the email that the more than a dozen employees implicated were determined to ensure the matter disappeared.

The customs commissioner is feared among the ranks at the authority for his tenacity in handling investigations. Therefore, there needed to exist more than just courage for these employees to defy orders issued by a man who is sometimes called upon to act as the commissioner general when Mr Njiraini is away.

The employees he was supposed to supervise conspired with bank tellers in at least four banks to ‘disappear’ folders they used to clear goods at the port. They then passed the goods as though they had been paid for, yet no money had actually been deposited in KRA’s accounts.

“The folders were too fresh by then for archiving to be an issue. Even if archived, by now they should have been retrieved and forwarded,” Musyoki complained in February.

Disciplinary action

To stamp his authority, Musyoki then directed all the officers implicated to report to the Investigation and Enforcement Department’s headquarters in Nairobi at their own cost.

He also asked the employees to ensure they write show cause letters, explaining why disciplinary action should not be taken against them. He wanted these letters in his office by Friday, February 5.

As part of the investigations, KRA had written to the banks involved in December last year seeking their side of the story.

The taxman wrote to Equity Bank on December 2, informing the lender that the Simba 2005 System had been updated without actual payments, and cited four transactions.

KRA also alerted Equity about the mis-posting of revenue transactions across the authority’s different accounts at the bank.

“As the system was being manipulated, it failed to cross-reference with Equity’s core banking product, Finacle, that provides the banking functionality to the institution,” a responding statement from the lender said.

The letter cited a register of motor vehicles account and income tax collection account.

An insider familiar with the investigations told Business Beat that the scam involved employees from several departments at KRA that are under the Office of the Commissioner General and Commissioner, Customs Office.

Given the agency is falling short of its revenue targets, it would be expected to swiftly investigate and recover the money before it is shipped out of the system.

Instead, the investigations have been marred by a series of cover-ups from within the authority.

In the first nine months of this financial year, the taxman collected Sh911.6 billion, missing its target by Sh69 billion. This gap is expected to widen in the remaining four months of the year.

New evidence

Sources said the cover-up has been getting deeper by the day, and it is highly unlikely that KRA will find any new evidence to bring those involved to book.

One of our sources was categorical about it, saying the investigation had “run cold” after it was rocked by blackmail, with employees threatening to bring down with them the high and mighty if they are touched.

“There has been so much blackmail in the case, and there is no end in sight as I see it. The bank tellers who were rushed to court may be the only people that carry the cross for this,” the source, who is highly placed and has access to some of the investigation files, said.

“The scam goes fairly high up and one of the top managers has been threatened with a damning affidavit that promises to spill the beans if some of the junior employees are taken to court.”

To pull the tax scam off, the informer said the employees would have had to get help from the Document Processing Centre (DPC).

“This is situated at the Commissioner, Customs Office, and is the nerve centre of all customs operations. There will also be someone with clearance from the ICT department and with access to manipulate the Simba System,” the source said.

Further, the finance department, in liaison with banks, is required to confirm money has indeed entered KRA’s accounts.

Banking systems

On their part, banks use suspense accounts to credit a given transaction when money is immediately withdrawn once goods have been released from the port.

“An import or export agent makes a declaration on an import or export and pays the bank. After that, the DPC verifies the payment has actually been made and that the declaration is correct, and that all required documents are attached, including bank payment details,” the insider said.

The DPC approves a transaction once it meets all requirements.

The insider explained that at this point, an agent constructs a clearing and forwarding file bearing all the approvals from the DPC, which is then transmitted to the port or a Container Freight Station (CFS).

The head verification officers receive the file and conduct a verification of goods before clearing them. It is only after this that the goods leave the port or CFS.

“The top management wants to pass the buck from themselves to the officers who handled the goods last, yet the scam is at the apex,” the source said.

Days after The Standard broke the story of the tax scam in March, KRA hurriedly arraigned in court four suspects, largely bank tellers and cash officers.

But the taxman is yet to take action against its own employees who worked with banks to pull it off.

The other question that the taxman has yet to answer is how much is actually missing, despite carrying out investigations for more than six months.

Our insider said the agency could have lost billions of shillings in the last three years, going by what has been confirmed in one branch alone.

The source said the amounts that are yet to be reconciled from banking systems could run as high as Sh68 billion.

Ironically, this is just Sh1 billion less than what KRA needed to meet its revenue collection target this fiscal year.

The authority has refused to deny or confirm these figures.

Those charged are facing at least eight tax-evasion-related counts, including conspiracy to evade payment of duty and interfering with information stored in a computerised customs system, as KRA steps up efforts to seal revenue leakage loopholes.

Paying duty

Equity Bank, which handed over its staff for prosecution, said it had discovered some of its employees and those of KRA had aided traders at the Namanga border post to import goods without paying duty.

The lender said a reconciliation it had jointly done with KRA revealed that a total of 2,926 transactions worth Sh123.6 million, and involving 916 traders, were initiated in the tax collector’s system, Simba 2005, without corresponding transactions in the bank’s system.

“A forensic audit conducted by the bank showed that the traders had presented fake bank slips forged with the complicity of the two suspects, and colluded with the KRA staff members to post false entries that showed taxes for the goods were remitted, while in actual sense, no money was paid,” the lender said.

Apart from the tax scam, Business Beat has also learnt that a top official has also been threatened with dire consequences if he allows the investigation to run its full course, including having his wealth status, which includes a house in France, leaked.

“There is a case where one of the managers is alleged to have bought a house in Paris, and it is not clear if he can justify being able to afford it. The house was recently transferred to the name of his son, and it is during this transfer that it was flagged,” the insider said.

The agency has refused to comment on the specifics of the investigations and why they have run cold.

Njiraini, who denied knowledge that the investigations were being frustrated, said he could not comment on the grounds that it would jeopardise the rest of the process.

He said after he received the email from Musyoki, he acted on it.

“The question to ask now is what happened after that [email was written]. Investigations are ongoing and some of our officers have been prosecuted. There is no cover-up,” Njiraini said.

The KRA boss, however, could not say how many of his officers had been taken to court and when. He instead asked his communications department to provide the specifics of who has been charged within the agency.

However, the communications boss later changed tune, admitting no one had been prosecuted yet.

“Kenya Revenue Authority is investigating the matter and once completed, the concerned will be arraigned in court,” the KRA spokesperson, Grace Wandera, said in an email response.

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