The tEU decision means that any partner country will put high vigilance in transactions emanating or, meant or involving Kenya or Kenyans. [Courtesy]
Around May 23, 2024, everything seemed normal, other than tension about the Finance Bill 2024.
At that time, the Kenyan security had an important guest, who had been trailed for six months. It was an operation dubbed after the biblical giant but brutal Philistine, 鈥楪oliath鈥, who had oppressed and massacred those he faced in wars.
The Danish national was whisked away to Germany over perhaps the world鈥檚 most daring and highest Value Added Tax (VAT) saga, Sh12 billion.
According to the European Public Prosecutor鈥檚 Office (EPPO), the man whom they did not name was the most wanted. He was the ringleader of a group fleecing the EU of much of its taxes.
He had escaped from Denmark and was being sought in connection with a criminal syndicate actively dealing with AirPods through a carousel fraud.
Fast-forward to March 2025, the Danish national and two other ring leaders were convicted at the Regional Court of Dusseldorf (Germany) for defrauding European countries of 鈧85 million (Sh12 billion).
Despite the wins against anti-terrorism financing, tax evasion, the successful Goliath operation and Kenya鈥檚 cooperation, the EU placed it on its red list as a high-risk jurisdiction.
The VAT carousel involves shell companies that take advantage of the EU’s rules on cross-border transactions between its member states.
After six months of investigations and surveillance of the Danish national in Kenya, it became clear that he, along with a Turkish national and a Hungarian, had established companies in Germany, other EU member States, and non-EU countries.
They would trade in AirPods and subsequently disappear without paying taxes, a practice commonly known as a missing trader syndicate, as it is difficult to determine who owns the shell companies.
Kenya is involved due to political instabilities in the region and terrorism, which is financed through digital platforms.
Last week, High Court Judge Diana Kavedza jailed Mohamed Abdi Ali, 61, for 30 years for terrorism financing.
However, the Judge was clear that he would serve 30 years, of which 15 years were for conspiracy to commit a terrorism act, while he would serve 15 years concurrently for each of the 14 counts relating to terrorism financing for which he was found guilty.
The import of the EU鈥檚 decision means that any partner country will put high vigilance in transactions emanating or, meant or involving Kenya or Kenyans.
“This is important to protect the EU financial system,鈥 an EU report released on June 13, 2025, stated.
To get out of the list, Kenya is required to address its strategic deficiencies through various measures that include improving the use and quality of financial intelligence products and increasing ML and TF investigations and prosecutions in line with risks.
Recent trends show a geographic and sectoral diversification of illicit financial flows (IFFs).
East Africa, traditionally seen as less exposed, is now experiencing increased capital flight through digital platforms and cross-border mobile money systems.
Kenya is also confronting the IFFs partly through the KRA鈥檚 tax investigation and enforcement function, where various schemes used to evade tax payment have been uncovered.
The schemes include the 鈥榤issing trader鈥, elaborate smuggling of goods across the border, concealment of goods, misdeclaration and under-declaration of imports, and identity theft.
KRA鈥檚 Investigation & Enforcement Department has prosecuted over 200 tax evasion cases in various courts across the country in the last two years.
At the same time, the Kenya Revenue Authority has made 78 successful interceptions of high-value smuggled goods.
IFFs operate under a cloak of legality, with perpetrators exploiting legal loopholes, shell companies, and weak regulatory systems.
Trade mis-invoicing鈥攁 technique in which prices are either under- or overstated to shift profits across borders鈥攊s the most prevalent method.
The 鈥榤issing trader鈥 tax fraud relates to this method of taxation and is similar to the 鈥榗arousel鈥 scheme in Europe.
This scheme involves the use of fictitious invoices to represent a business transaction that did not occur, followed by claiming VAT input purchases to reduce tax liability or even request a tax refund.
A recent case concluded involving a construction company that was found to have evaded payment of Sh1 billion through this scheme.
In this case, KRA investigators demonstrated before the Tax Appeals Tribunal how the company transferred incomes amounting to Sh1.07 billion to foreign accounts through a complex web of shell companies.
The firm claimed inflated input VAT from six fraudulently registered companies (tier two), which in turn claimed input VAT from seven additional shell companies (tier three), which also claimed input VAT from two further shell companies (tier four).
The tribunal noted that the firm鈥檚 transactions did not constitute a reasonable commercial transaction but were rather an elaborate scheme to evade tax payments in Kenya.
It emerges that ethanol, sugar, and powdered milk are the most common smuggled goods into the country. These create unfair competition and drain the country of taxes.