State widens spy tech against cartels and tax evaders

tax cheats, spy

The Competition Authority of Kenya and the Kenya Revenue Authority are in a tight technology race to catch up with cartels and tax cheats. 

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The Competition Authority of Kenya (CAK) and the Kenya Revenue Authority (KRA) are in a tight technology race to catch up with cartels and tax cheats as more companies increasingly take to digital communications and storage of critical documents.

Both State agencies have moved to acquire forensic equipment including spyware, laptops, and sophisticated data mining and analytics tools that are targeted at reconstructing communications and transactions to provide insight into complex crimes.

CAK is the latest to go for forensic digital technology tools to strengthen its fight against cartels by sifting through high volumes of data swiftly and accurately.

The competition watchdog said in a disclosure last week that it is acquiring forensic laptops and imagers, data analysis software as well as tools to extract data from mobile phones and other electronic data.

“The Competition Authority of Kenya invites sealed tenders for the supply, delivery, installation, training, and commissioning of forensic equipment, software and licenses,” CAK director-general Kariuki Wang’ombe said in a call for bids on May 16, 2022.

Phony alliances

Cartels are considered the most serious infringement of competition law and the harm caused by phony alliances is very significant with estimates showing that the median cartel price overcharge in the EU and some developing countries is about 20 percent.

Public procurement is also highly targeted by cabals through bid-rigging to maximise illicit gains from the sheer size of expenditure by States and public agencies.

A shift to digital operations by many businesses has posed challenges to competition watchdogs the world over partly because companies communicate internally and externally via digital means and increasingly create, store and process information in the same format.

This forces competition authorities to embrace new investigative tools in line with the changed landscape to keep up with the required capacity for detection and gathering of evidence of cartel practices.

“Often, a combination of sophisticated software and simpler statistical methods and the use of structural and behavioural approaches will be adopted by competition authorities in cartel screening,” the Organisation for Economic Co-operation and Development (OECD) says in a report.

“Given that screens are mainly applied to collusive tendering, digitalisation of private businesses and public administrations and the increased availability of data in digital form contributes to facilitating the detection of anticompetitive bids,” it adds.

More competition authorities now include digital data in their inspections to gather evidence.

Like CAK, the taxman has also taken to digital technology for forensic investigations against tax revenue leaks.

KRA is setting up an advanced forensic laboratory that will allow it to mine all data, including hidden accounts and records from taxpayers’ computers, to detect tax and financial fraud.

The move by the taxman’s newly formed intelligence management division comes amid a strong shift to online transactions and electronic record-keeping by businesses from the traditional paper-based accounting systems.

KRA said the digital lab will target forensic acquisition, extraction, and e-discovery of evidential materials.

 “A lot of evidence gathered during the course of investigations is digital in nature such as e-mails, texts, video, audio, image files, and other transactional data on hard disks and other storage media,” KRA said in a disclosure on the new laboratory.

“The investigations of such crimes require sophisticated data acquisition, mining, analytics, and storage tools in addition to the technical expertise to reconstruct the transactions and provide insights into the understanding of complex crimes,” it added.

Many large corporations, including some multinationals and mobile phone operators, presently hand in records of their transactions to KRA teams in soft copy.

This shift has, however, proved problematic for tax audit and investigation teams amid growing tendencies by some firms to hide their actual financial transactions and accounts.

Additionally, an option of password protection in the digital records has proved a challenge for tax investigators and auditors seeking to get full access to all information from computers or phones seized during investigations into suspected fraud or tax evasion.

KRA disclosed that it will enlist special software to access data from Mac computers, mobile phones, Iphones, Ipads, and smartphone evidence preservation bags.

“The tool should also be compatible and have the ability to extract analyse data from all types of phones and tablets, should include full range of peripherals and accessories needed for mobile forensic investigations, including connectors/cables set, adapters, faraday bags, memory card readers, SIM and micro–Sim ID Cloning cards, camera of capturing images of the data or screenshots directly from the device,” the taxman disclosed in a tender call for supplies to the forensic lab.

Sh31.19 million

KRA in its budget for the financial year ended June 30, 2021, set aside Sh31.19 million to acquire an intelligence-gathering system as it steps up its war on tax evasion.

As part of the digital intelligence gathering, the authority has introduced stringent conditions requiring businesses to acquire internet-based electronic tax registers (ETRs) machines and connect them to its systems for real-time monitoring of their daily sales.

The two systems will give KRA a view of goods as they leave the production line to the point of exchange between retailers and consumers collecting what is due at each point along the supply chain.

The Value Added Tax (Electronic Tax Invoice) Regulations, 2020 require all businesses with an annual turnover of at least Sh5 million to have ETRs. Under the new system, KRA now receives sales and invoice data from all registered firms and traders daily in a fresh push to boost revenue collections and curb tax evasion.

Traders are also required to seek the taxman’s permission to perform any other business the next day under the system, meaning that incorrect or incomplete data logged the previous day could lock them out.

Failure to comply with the regulations attracts a fine not exceeding Sh1 million, imprisonment for a term not exceeding three years, or both.

The internet-enabled ETRs come with several unique features. For example, it captures the personal identification number (PIN) of the gadget’s buyer. The capture of the buyer’s PIN is, however, optional when generating an invoice and is only applicable where the purchaser intends to claim input tax for the VAT paid.

The new ETRs also have a control unit serial number issued by KRA to identify each tax register beside a control unit invoice number which is a unique number generated by the tax register upon issuance of each tax invoice.

The gadgets also come with a Quick Response (QR) code which helps one to confirm the validity of the tax invoice.


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