Corruption in Kenya
While some level of graft exists in every country, Kenya’s case is major problem of Global concern. Corruption has deeply entrenched itself in the moral fabric of the society. According to Wrong (2014) “everyone in Kenya is corrupt including grandmothers. Kenya loses over 30% if it’s annual budget to the vice well over African Union estimate of 25% for the rest of African countries, Kimeu, (2014). Owing to this high prevalence, corruption ranks as the country’s biggest problem.
Successive regimes have waged war against the Vice, the first stab being made in 1956 when the first anti-corruption legislation was established. Since then anti-corruption institutions have metamorphosed and rebranded and continue to wage war against the vice. The Key mandate of all anti-corruption institutions has been to stamp out the evil and recover the loot. Recovery still remains a mirage due to the complex nature of the vice and its deep entrenchment in the society. According to EACC’s annual report of activities the commission, out of Sh. 57.1 pursued only Sh. 256 million worth of assets was recovered in 2017 representing 0.44% success rate. This was a drop from 2016 recovering rate 0.75% for Sh. 770.58 million recovered from Sh. 93.326 that was under probe. This is a clear indication of how intricate it is to recover looted assets through conventional methods.
One major challenge in asset recovery is proofing that they were acquired out of corrupt practices. It remains extremely complex to locate and return assets, freezing is slow, and seizure is difficult, cross-jurisdictional investigations are complex and expensive (Transparency International, 2014). UNODC (2011) unveils that 99% of looted funds remain undetected with a seizure rate of 0.2 per cent.
There is an asset recovery agency which applies the Anti-corruption and economic crimes act 2003 (ACECA). Recovery of assets through this law as previously been challenged as seen in the case of Ethics and Anti-Corruption Commission vs Ministry of Medical Services & Another [2012].
Wealth acquired illegally better known as unexplained assets is subject to forfeiture by the state according to section 55 of ACECA 2003. Kabau 2016, opines that the greatest impediment in the application of this section is the fact that it is against the constitutional right to a fair trial, particularly the presumption of innocence and the right against self-incrimination. This was evident in the case CIVIL MISC APPL 328 OF 00 pitting Kiprono Kittony and others vs anti-corruption commissions which was dismissed on grounds that the commission did not afford the defendants a chance to explain the unexplained assets.
Recovery of loot through taxes
On the subject of corruption two facts stand out, one there is wanton looting from public coffers secondly, all the concerted efforts towards recovery and conviction of offenders have not yielded any fruit. With the law on recovery being challenged, which alternatives does the state have to recover unexplained assets and discourage corrupt activities? The state has wide ranging powers through taxation that can be extended to economic crimes like corruption. Recovery of crimes proceeds through a tax assessment places the burden of proof on the taxpayer to negate it, Norman v Colder[1945] According to Mumford and All dridge (2002), Tax authorities are unlike other unpaid creditors since they have extremely efficacious enforcement mechanisms available to them for the extraction of information and money from the recalcitrant.
This raises the question, can corruption proceeds be subjected to taxation corruption being illegal?
Taxing Illicit incomes
The famous case of Mann v Nash (HM Inspector of Taxes) clarifies that income from illegal are taxable. In his land mark ruling in this case, Rowlatt J dismissed the case before King’s Bench Division on the 10th March, 1932 where the appellant Mann insisted his gains from illegal automatic vending machines are not taxable. In his ruling the learned judge stated “The Revenue, representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it; it merely finds profits made from what appears to be a trade, and the Revenue laws happen to say that the profits made from trades have to be taxed”. This ruling has shed a lot of light on taxation of illicit income.
This position has been upheld by many courts around the world as seen in the case of; Sullivan v United States also in James v United States. A profound ruling was made in Southern (H. M Inspector of Taxes v AB (supra) concerning profits of illegal vetting transactions the court held: “That although the businesses carried on by the respondents were unlawful, they nevertheless constituted a trade within the meaning of the Income Tax Acts and that the profits therefrom were properly assessable to Income Tax.
Taxing income from unknown sources or from mysteries activities is nothing new in Kenya. Just having a colossal sum in his bank account, Pili was liable to taxes in Kenya as directed by the courts in the case of Pili Management Consultants Limited Vs Kenya Revenue Authority, Civil Appeal NO. 154 of 2007.
In taxing illicit incomes we borrow from the provisions of the income tax act chapter 470. Section 3 (1) states “ Subject to , and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya”. The above provision does not give any restriction to legality of the income. This position is supported by the Court of Appeal of Kenya landmark ruling In the case of Kenya Revenue Authority v Yaya Towers Limited. The contention in this case was an employee who was illegally hired. His benefits were consequently taxed notwithstanding his illegal source
Taxing illicit income justified
As income inequality increasingly becomes part of the political dialogue, finding efficient ways of reducing income inequality may be increasingly important. (Sanchirico, 2000). Kenyan case of inequality is worsened by the fact resources have been allocated unfairly through corrupt practices. This may elicit negative reaction from law abiding citizens ranging from civil revolt to tax resistance. A simple act by the tax gatherers against the corrupt officers is likely to boost the confidence of the genuine tax payer.
If it is fair under the principles of taxation to take away the genuine wealth of the rich to benefit the poor, how fairer could it be to return illicit wealth back to the poor through same taxation principle? As Lord Morison stated in his judgement in F. A. Lindsay, E.A Woodward & W. Hiscox v Commissioner of Inland Revenue (supra) “. It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest gains escape”.
Invoking tax laws where criminal law fails- Case of Al Capone
Taxation is an Adjunct to the Criminal Justice System (Mumford and Alldridge 2002).
One of the famous crime masterminds, Al Capone dodged all other laws for crimes he had committed only to be humbled by tax law. In the 1920’s Al Capone virtually controlled all the gambling, prostitution, liquor and extortion rackets in Chicago USA. According to Forbes magazine he made vast amounts of money from these ventures estimated at 100 Million dollars. Al Capone exclusively dealt in cash with no bank account to his name. In criminal proceedings against him, no one was willing to testify against him. Despite his public and extravagant lifestyle, Capone never filed a federal income tax return, claiming that he had no taxable income. On the fateful dayJune 5, 1931 Al-Capone was indicted on 22 counts of income tax evasion and sentenced to 11 years in prison. (Clark 2008)
The above is a case where the end justifies the means. In combating crimes and fraudulent activities, the state is has to use all its machinery and power at its disposal. Although cases of corruption are not entirely issues of tax evasion, multi-disciplinary approach may yield great outcomes. One of the policy justifications for taxing illegal income for income tax is that it provides a further disincentive to criminal behavior (Mumford and Alldridge 2002)
Global perspective on tax policy for combating corruption
Article 20 of the United Nations Convention on Corruption provides that state subject to their constitutions and fundamental principles of their legal systems should consider adopting laws which address “a significant increase in the assets of a public official that he or she cannot reasonably explain in relation to his or her lawful income.
The Stolen Asset Recovery Initiative (STAR) a joint initiative between the World Bank and the United Nations office on drugs and crime advocates for use of tax laws in recovery of looted funds. All the tax authorities need to prove is that a person holds undisclosed revenue. Given the fact that this approach generally does not involve court proceedings, this mechanism is potentially cheaper and faster than civil recovery or criminal proceedings. A similar view is held by the Inter-American Convention against Corruption. The statutes permit prosecution of federal public officials who evade taxes on wealth that is acquired illicitly [Reservation (4) to the Inter-American Convention against Corruption (2014)].
May be to borrow a leaf from the united Kingdom, The proceeds of crime act 2002 of the United Kingdom empowers the National criminal agency NCA to issue an assessment where the source of income looks clandestine. The national criminal agency seemingly works parallel to Her majesty revenue purposely to earmark and demolish economic crime barons through taxation. The agency has made tremendous achievements in fighting corruption where in the year 2005-2006, 12 assessments were made and succeeded in all. Irish tax law is even more explicit in taxing income from mysterious sources. It has a category of income known as income from unknown sources. This subsection empowers the Irish tax agency to make a demand on income from miscellaneous sources
Invoking taxation powers
The fight against corruption, terrorism, money laundering and drug dealing allows institutions to profile persons and treat them with caution. For instance in banking sector politically exposed persons are given special attention because of the risk of money laundering. The World Bank has issued a criteria for identifying and dealing with politically exposed persons in its report on Asset recovery. Same criteria I propose to be applied when accepting tax returns from anyone exposed to corruption and probably the entire civil service.
Tax returns in my view should incorporate declaration of wealth rather require exposed persons to declare all assets including private ones. Further the commissioner can invoke his powers to issue an assessment to any person he suspects that has not submitted accurate returns whichever way he suspects according to –Tax procedures act (TPA Sec 29) –default assessment. This section allows the commissioner to invoke his powers to collect any income where he has the information that a tax payer has not filed a return on all his income.
The state therefore has a leeway in law to assume that the corrupt have genuinely accumulated their assets, then demand taxes from the income that has given rise to the assets. It is an uphill task for a taxpayer to explain the source of his wealth given that he cannot admit that it was fraudulently acquired. Somehow the source of the unexplained wealth justify imposition of taxes, penalties and interest. This is how Al-Capone fell.
Parting shot- By no means does the paper suggest that perpetrators of economic crimes should be taxed and set scot free. Indeed they should be thoroughly prosecuted under the respective laws.