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Wednesday, 5 August 2009

Corruption rules as illegal imports flood Kenyan market

The taxman is losing an estimated Sh100 million every week in a tax evasion scheme involving unscrupulous importers working with corrupt customs and airport officials, according to the findings of a Sunday Nation investigation.

The epicentre of the operation in which importers bring in items ranging from top-of-the-line household goods to vehicle spare parts – all tax free – is Eastleigh, the bustling business centre just east of Nairobi’s central business district that has become notorious for illicit trade and huge cash transfers.

Goods ordered online from Dubai, China, Turkey, India and Singapore are flown into the underutilised Eldoret International Airport and ferried to Nairobi by road. Some of these duty free goods enter Kenya through Wajir airport which the government recently upgraded to international status, our investigations show.

Eldoret airport, for long considered a hotbed of corruption, was temporarily closed by the Narc government when it came to power in 2003. It was quietly reopened and, since then, it has been business as usual.

Perhaps unaware of the colossal tax losses the operation inflicts on the economy, shoppers flock to Eastleigh to order or buy various goods, attracted by the huge bargains – upwards of 100 per cent – the traders offer.

A genuine leather sofa set that retails for Sh350,000-500,000 in city furniture shops fetches as little as Sh150,000 on the Eastleigh black market. Vehicle tyres that sell for Sh5,000-8,000 in the retail market go for Sh3,000 on the black market. Chinese tyres for commercial vehicles will cost you Sh25,000 in Eastleigh instead of Sh40,000 charged by normal shops.

The Sunday Nation trailed the illegal business and learnt that the goods are not smuggled; they are cleared through normal channels and sent by road to Nairobi under the watch of customs officers blinded by generous bribes.

The shady business operates on trust. A buyer pays a deposit and is charged for freight depending on the weight of the cargo. He or she is then given a code with which to claim the goods once they arrive in Nairobi. But the traders assume responsibility until the items are collected in Eastleigh or otherwise delivered to the buyer’s destination of choice.

“The system has gained popularity over time because of the level of efficiency exhibited by the importing companies. You won’t lose even a penny in the transaction,” a businesswoman who uses the system regularly but who refused to be identified discussing her business associates, said.

A potential buyer usually contacts one of a number of offices scattered throughout Eastleigh or their branches in Dubai, India, China or Turkey. Some of the goods are ordered on the Internet, and the trader does not have to travel to the countries of origin.

Once the trader has bought the goods, they are weighed and a charge is levied according to the weight and not the value. The charges range from Sh280 to Sh350 a kilogramme.

The trader does not have to worry about any extra charges or how the goods will be shipped. Once the goods arrive in Eastleigh – usually in four or five days – all the buyer needs to do is give the code and pay the requisite amount. Payments can be made either upon ordering or on delivery, depending on the agreement reached.

The trade, our investigation established, has been supplying the retail clothing business in Kenya and may have contributed to the explosion of “exhibition” stalls that sell clothes in city and town centres and supply shops countrywide.

Illicit trade

Our findings were corroborated by Kenya Revenue Authority chief of investigations Joseph Nduati, who acknowledged that the agency is aware of the illicit operations at Eldoret airport and that the nearly duty free goods are on sale in Eastleigh.

“We are aware of the tax evasion going on at the two places and have put in place adequate measures to seal the loopholes,” he said without giving specifics. In spite of the measures he alluded to, the illegal operation continues.

KRA cannot quantify how much tax revenue the government is losing because it does not have a specific code for businesses in Eastleigh.

“Eastleigh is part of the East of Nairobi tax band which stretches from Tom Mboya Street to Jomo Kenyatta International Airport,” said a senior KRA official, who cannot be named as he is not authorised to speak to the media.

But the official put the losses at a “conservative figure of Sh100 million” a week.

This would translate into nearly Sh400-Sh500 million a month and about Sh6 billion every year. The estimated annual loss is enough to build and furnish about 20,000 classrooms at Sh300,000 per unit.

While KRA acknowledges the problem, little seems to have been done to stem the trade. This has led to speculation that top government officials could be involved in or are beneficiaries of the operation.

The booming trade in Eastleigh has brought down prices of popular electronic items like TVs and music systems and clothing. Our investigation shows that a suit that sells for about Sh7,500 in upmarket shops goes for Sh2,000 in Eastleigh. An 18-inch TV set sells for as little as Sh5,000, while a flat screen model goes for Sh20,000. Similar models sell for between Sh15,000-Sh43,000 in other parts of the city.

Eldoret International Airport manager Peter Wafula attributed traders’ preference for the airport to the faster clearance of goods.

Mr Wafula said clearing goods in Eldoret takes two days, unlike in other airports whereas it takes on average five days, making Eldoret the port of choice for many businessmen. But he noted that although some security agents had become suspicious of the faster cargo clearance, he argued that the airport’s operations conform to the security standards set by the Kenya Airports Authority.

According to KRA, clothes, including mitumba (second-hand clothes), should attract 35 per cent import duty, 20 per cent excise tax and 16 per cent VAT, while furniture attracts 25 per cent import duty, 20 per cent excise duty and 16 per cent VAT.

The clearing and forwarding agents in most of Eastleigh’s shopping malls have a standard charge for any imported item. One agent reported a roaring trade that had enabled him to open offices in Dubai, China and India to take advantage of the boom. The Dubai office also serves those who import goods from Turkey.

Our enquiries led us to the legendary Garissa Lodge on First Avenue and Stage Market next to the Country Bus Station opposite Muthurwa out of which illicit trade kingpins are making small fortunes.

One businessman gave us a telephone number for his agent in Dubai who, incidentally, is a Kenyan. Such agents, we were told, are helpful to those making an inaugural trip to Dubai or China. They help in purchasing goods at reasonable prices and leave the responsibility for packaging, freight and delivery to the agents and their Kenyan godfathers.

The merchants put light cargo on charter flights to Eldoret International Airport. But they recommend sea shipments for bulky goods like furniture.

“This is because the ship charges according to the size of the cargo while aircraft charges are according to weight,” said a man who gave his name only as Abdullahi and who helps with clearing goods in Eastleigh.

But KRA says it is determined to wipe out the illegal trade and end tax evasion by the traders. Mr Nduati said KRA would seal the loopholes exploited by those who pretend to be re-exporting the goods, closely check the goings-on at Eldoret airport as well as goods destined to and from the Export Processing Zones and smuggled goods from neighbouring countries.

“We have prioritised these areas, and KRA has already put systems in place to check these illegal schemes,” he said. He, however, said the authority would not focus on how to deal with traders operating in Eastleigh.

Just a market

“Eastleigh is just a market, and it can be transferred elsewhere. The most important question to answer is: what brings goods to Eastleigh?”

He said KRA would ensure goods in transit get to their destinations by identifying the exit points of the goods. To this end, the tax collection agency has beefed up its checks at the Isebania, Busia and Malaba border posts.

“We are demanding returns on transit goods at their points of exit,” Mr Nduati said. He added that KRA had also taken care of the EPZ goods by ensuring thorough audits.

He said he was not worried by the amount of goods brought in through Wajir as it is “negligible”.

He, however, said officers had been dispatched to the airport to enforce the rule which demands that all planes to and from Somalia land at the airport for inspection to curb smuggling.

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