Ensure Greater Transparency Around Bids and Contracts (KE0014)

Status quo or problem addressed by the commitment Systems within Government and Private Sector have long tolerated those who have been suspect to benefit from illicit gain, money laundering, manipulating of public tenders and contracts. This ability circumvents checks and balanced within our systems and have normalized the abnormal. Furthermore, we have not ensured full disclosure of information of such activities. According to the Global Finance Integrity Report, more than US$13.5 billion flowed illegally into or out of Kenya from 2002 through 2010 through the mis-invoicing of trade transactions, fueling crime and costing the Kenyan government at least US$3.92 billion in lost tax revenue. Main objective Publish information on beneficiaries of contracts by individuals and companies in Kenya. Brief description of commitment Create an open, usable and publicly accessible beneficial ownership register, including information of the ‘actual owners’ and ‘beneficiaries’ of Companies.

µ5. Transparency around bids and contracts by individuals

Commitment Text:

Title: 5. Ensure greater transparency around bids and contracts by individuals and companies in Kenya

Status quo or problem addressed by the commitment: Systems within Government and Private Sector have long tolerated those who have been suspect to benefit from illicit gain, money laundering, manipulating of public tenders and contracts. This ability circumvents checks and balanced within our systems and have normalized the abnormal. Furthermore, we have not ensured full disclosure of information of such activities. According to the Global Finance Integrity Report, more than US$13.5 billion flowed illegally into or out of Kenya from 2002 through 2010 through the mis-invoicing of trade transactions, fueling crime and costing the Kenyan government at least US$3.92 billion in lost tax revenue.

Main objective: Publish information on beneficiaries of contracts by individuals and companies in Kenya.

Brief description of commitment: Create an open, usable and publicly accessible beneficial ownership register, including information of the ‘actual owners’ and ‘beneficiaries’ of Companies.

Milestones:

5.1. Initiate an open and transparent multistakeholder consultation on the state, perception and legislation on Beneficial Ownership in Kenya.

5.2. Prepare legislation and submit legislation to the National Assembly

5.3. Develop an Open, accessible and usable Beneficial Ownership Registry

Responsible institutions: Office of the Attorney General

Supporting institutions: State Department of Justice & Office of the Attorney General; Kenya Revenue Authority; Article 19; Tax Justice Network (TJN-A); International Budget Partnership (IBP); Infonet Africa; and Ushahidi

Start date: 30 June 2016

End date: 30 May 2018

Editorial note: This commitment is clearly relevant to OGP values as written, has transformative potential impact, and is substantially or completely implemented and therefore qualifies as a starred commitment.

Context and Objectives

This commitment seeks to address transparency in the public procurement process by introducing beneficial ownership regulations and disclosure policies. Beneficial ownership^{[Note101: The term is often used to contrast with the nominee company owners, who might be registered as legal owners of the asset without any benefits. Nominees obscure the real company structure and owners. Professional nominees are paid a fee for their services but otherwise have no interest in the transactions. Nominees can also be family members or friends.] describes the natural person who directly and ultimately owns, controls or benefits from a company or trust fund and the income it generates. The absence of proper checks and balances within the Kenyan financial architecture has resulted in limits to full disclosure of information such as contract beneficiaries. Illicit financial flows (IFF) have been identified as a key factor undermining domestic resource mobilisation in Africa. The High-level Panel on Illicit flows from Africa (HLP) report titled 'Track It, Stop It, Get It'[Note102: Available at https://www.uneca.org/publications/illicit-financial-flows-why-africa-needs-%E2%80%9Ctrack-it-stop-it-and-get-it%E2%80%9D.] identifies the three major causes of IFF in Africa to be through harmful commercial transactions by multi-national corporations (MNCs), criminal activities, and corruption and abuse of power by state officials. The HLP report indicated that Kenya lost up to 1.5 billion dollars between 2002 and 2011 due to trade invoice errors. According to this report, illicit flows from Kenya are estimated to be as high as 8.3 percent of the country’s GDP. According to the African Development Bank, the exploitation of weak legal and regulatory framework and capacity challenges has stifled the socio-economic progress by draining scarce foreign exchange resources, reducing government tax revenues, deepening corruption, aggravating foreign debt problems and increasing economic dependency.[Note103: Governance and Public Financial Management Coordination Office, 'Bank Group's Policy on the Prevention of Illicit Financial Flows' (African Development Bank Group, Mar. 2017) https://www.afdb.org/fileadmin/uploads/afdb/Documents/Policy-Documents/Bank_Group_Policy_on_the_prevention_of_illicit_financial_flows.pdf.]}

This commitment addresses beneficial ownership transparency in Kenya by proposing legislation to require beneficial ownership reporting and by making reported information open, accessible and useable for the public. As written, the commitment could be more specific by defining the full scope of each step. For example, the commitment does not clearly state whether beneficial ownership disclosure to the public will be required for all companies and individuals operating in the Kenyan financial system, or if it will be applied only more narrowly to those bidding on publicly funded government contracts.

The baseline for this commitment is represented by the Companies Act of 2015, which consolidated and reformed the law relating to incorporation, registration, operation, management, and regulation of companies and makes other provisions relating to companies in Kenya. This commitment proposed legislative steps that go beyond the 2015 Act to require that companies report and disclose beneficial ownership information.

The commitment fails to specify the required details about how beneficial owners will be defined in law, and what identifying information they will be required to disclose (for example name, tax ID, citizenship status, addresses).

If fully implemented as written, this commitment would legally require that companies record and make public the beneficial owners of companies for the first time in Kenya. This would allow citizens and CSOs to access information about all beneficiaries of public contacts, allowing them to track the ultimate beneficiaries of public spending. Such opening could have a transformative impact on citizens’ ability to access information identifying conflicts of interest and corruption. Beneficial ownership information is also a necessary prerequisite for tracking illicit financial flows. This is a new commitment, and Kenya is using the OGP platform to address corruption through beneficial ownership transparency for the first time.

Completion

5.1. Initiate a multi-stakeholder consultation on Beneficial Ownership in Kenya – Substantial

The Kenyan government has committed to meeting a number of international obligations regarding the implementation of beneficial ownership policy. The procurement and oversight authority, under the Treasury, has partnered with CSOs such as Hivos to help in making the beneficial ownership registry a reality.

The government, in close collaboration with TI-Kenya, organised a training on beneficial ownership for key government departments. It convened the stakeholders to participate at a forum discussing its findings of the status of legal and policy frameworks for beneficial ownership in Kenya.

The meeting was held on 31 August 2017. The various stakeholders were from the Government and private sectors and the discussions included what the laws in Kenya provided for in terms of disclosure of beneficial ownership, and what more could be done to align these laws with international best practice. The meeting was well-attended with representatives from the Office of the Attorney General, the Kenya Revenue Authority, the Capital Markets Authority, the Financial Reporting Centre, the Kenya Human Rights Commission, FIDA-Kenya, the Kenya Association of Manufacturers, the Kenya Private Sector Alliance, the International Commission of Jurists and the Companies Registry, amongst others.

TI-Kenya also recently conducted an assessment of legal frameworks, capacity building for civil society and government, and multi-stakeholder dialogues regarding beneficial ownership.^{[Note104: Nikhil Sesai, et al., 'Towards Beneficial Ownership Transparency in Kenya' (Transparency International - Kenya, accessed 21 Feb 2018) https://tikenya.org/wp-content/uploads/2017/11/Beneficial-Ownership.pdf. ]}

5.2. Prepare legislation and submit legislation to the National Assembly – Complete

The Companies (Amendment) Act 2017, was assented to by President Uhuru Kenyatta on 21 July 2017 and came into force on 3 August 2017. This amended the Companies Act, 2015 to introduce for the first time in Kenya regulations on beneficial ownership for public and private companies. The Companies (Amendment) Act, 2017 defines beneficial ownership and requires companies to keep a register of beneficial owners and to submit a copy of such to the national Registrar of Companies. As defined in the commitment, this milestone was to prepare new legislation and submit it to the National Assembly. However, stakeholders found it sufficient to amend the existing Companies Act to include the provision on beneficial ownership instead of enacting a standalone law.^{[Note105: TI Kenya Representative, personal interview.]}

Transparency International has assessed the new legislation and found that when compared against the ten international beneficial ownership transparency principles, Kenya’s performance ranges from average to very strong in nine out of ten principles.^{[Note106: Nikhil Sesai, et al., 'Towards Beneficial Ownership Transparency in Kenya.'] The new law was found to be especially strong in their definition of a beneficial owner as 'a natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement.'[Note107: Kenya Gazette Supplement No. 70 (National Assembly Bills No. 23) (Nairobi: The Government Printer, 12 May 2017) kenyalaw.org/kl/fileadmin/pdfdownloads/bills/2017/CompaniesAmendmentBill2017.pdf. ] The new law applies to all companies registered under the Companies Act. Therefore, all companies will have to amend their registers to include details of beneficial owner(s) or risk a fine of up to 500,000 shillings (about 4,900.00 USD).[Note108: Daly & Inamdar, 'Impact of the New Companies (Amendment) Act 2017 ('The Amendment Act') (legal analysis), http://www.dalyinamdar.com/wp-content/uploads/2017/10/IMPACT-OF-THE-NEW-COMPANIES-AMENDMENT-ACT-2017.pdf.] It is also now a legal requirement that the name and address of the beneficial owners (if any) be entered in the companies’ registers of members which must be filed with the Registrar of Companies within 30 days after its completion and which will be available for inspection by the public. Section 93 (9) of the law further provides that any amendment to the register of members is to be filed with the Registrar within 14 days after the amendment.[Note109: Robson and Harris Advocates, 'Key Highlights on the Amendments to the Companies Act, 2015' (1 Nov. 2017)}

http://robsonharrisadvocates.com/key-highlights-on-the-amendments-to-the-companies-act-2015/.] The law’s greatest weakness is the lack of an auditing or oversight mechanism to ensure that the information companies report is accurate, complete, and up-to-date.

5.3. Develop a Beneficial Ownership Registry – Limited

Under the Companies (Amendment) Act 2017, the law requires beneficial ownership information maintained by the Registrar of Companies be available for inspection by the public. As of September 2017, in order to ascertain the beneficial ownership of a company, one may conduct an online official search on the e-Citizen platform for companies registered under the Companies Act of 2015. For companies registered under the older Companies Act (Cap 486), one may file an application with the Registrar requesting a CR12 which contains the details of all the members at a fee of 600 KES (about 6.00 USD).^{[Note110: Daly & Inamdar, 'Impact of the New Companies (Amendment) Act 2017 ('The Amendment Act') (legal analysis).]} According to TI- Kenya’s analysis of the legal framework, the Registrar must include the shareholders of a company, the beneficial owners, the directors, and the address of the company. Additionally, the Registrar is required to keep all records 'in such form as will enable all the information contained in the records to be readily available for inspection and copied.'^{[Note111: Nikhil Sesai, et al., 'Towards Beneficial Ownership Transparency in Kenya.']}

To fully realise this, the Registrar of Companies, under the State Law Office, Office of the Attorney General, and Department of Justice is currently developing forms to aid collection of beneficial ownership information. InfoNET Africa,^{[Note112: InfoNET is a technological innovation and development facility that is committed to expand the democratic space by strengthening collaboration between government, private sector, civil society and citizens by fostering good economic and democratic governance as well as service delivery through the strategic use of technology.]} an ICT-based NGO, is establishing an open beneficial ownership register in close collaboration with the government and wider consultations with stakeholders. This would be linked to the Public Service, Public Procurement, and Campaign Financing Acts, as well as the global beneficial register.^{[Note113: Open Ownership, 'Home' (accessed 21 Feb. 2018) https://openownership.org/.]} 'This is a tool for exposing and ending the clandestine activities of anonymous companies, part of a broader effort to curtail the widespread global problem of bribery and other illegal activities.'^{[Note114: Nikhil Sesai, et al., 'Towards Beneficial Ownership Transparency in Kenya.']} The register is being created by a coalition of international organisations, including Global Witness, Open Contracting Partnership, OpenCorporates, The B Team, The Web Foundation, Transparency International and ONE. Once this new register is online and available, users will have immediate access to beneficial ownership information in one centralised portal.

Early Results

No early results can be determined yet as the law passed at the conclusion of the first year of the commitment’s implementation.

Next Steps

This commitment should be carried forward to the next action plan, taking into consideration the following recommendations for strengthening beneficial ownership regulations and the register of companies.

· One major weakness in the current law is that companies are only required to report the name and address of beneficial owners to the Registrar. The scope should be broadened to require companies report both on their own registers and in the official Registrar the following information on all beneficial owners: tax ID number, nationality, country of residence, and a description of how control is exercised.

· The Registrar should be mandated to verify all beneficial ownership information recorded, including relevant information such as identifying all company shareholders. The information reported to the Registrar should be investigated for inconsistencies, comparing findings and information using other independent and reliable sources such as government databases, on-site inspections, and analytic software. To achieve this, an independent auditing authority or ombudsman should be set up to verify information recorded in the Registrar, and define clear rules for the frequency of inspection and consequences for reporting false or inaccurate information.

· The records maintained by the Registrar of Companies are accessible to the public, with some exceptions, including omitting privately held company information. Future commitments could include regulations for beneficial ownership reporting by private companies. In addition, shareholders in companies should also be required to disclose all beneficial ownership information, and face sanctions if found in non-compliance.

· The new online registry of beneficial owners should be in open data format and developed in line with open data principles.

✪5. Transparency Around Bids and Contracts by Individuals

Commitment Text:

Title: 5. Ensure greater transparency around bids and contracts by individuals and companies in Kenya

Status quo or problem addressed by the commitment: Systems within Government and Private Sector have long tolerated those who have been suspect to benefit from illicit gain, money laundering, manipulating of public tenders and contracts. This ability circumvents checks and balances within our systems and have normalized the abnormal. Furthermore, we have not ensured full disclosure of information of such activities. According to the Global Finance Integrity Report, more than US$13.5 billion flowed illegally into or out of Kenya from 2002 through 2010 through the mis-invoicing of trade transactions, fueling crime and costing the Kenyan government at least US$3.92 billion in lost tax revenue.

Main objective: Publish information on beneficiaries of contracts by individuals and companies in Kenya.

Brief description of commitment: Create an open, usable and publicly accessible beneficial ownership register, including information of the ‘actual owners’ and ‘beneficiaries’ of Companies.

Milestones:

1. Initiate an open and transparent multi-stakeholder consultation on the state, perception and legislation on Beneficial Ownership in Kenya.
2. Prepare legislation and submit legislation to the National Assembly
3. Develop an Open, accessible and usable Beneficial Ownership Registry

Responsible Institution: Office of the Attorney General

Supporting Institutions: State Department of Justice & Office of the Attorney General; Kenya Revenue Authority; Article 19; Tax Justice Network (TJN-A); International Budget Partnership (IBP); Infonet Africa; and Ushahidi

Start Date: 30 June 2016

End Date: 30 May 2018

Commitment Aim

This commitment aimed to improve transparency in the public procurement process by introducing beneficial ownership regulations and disclosure policies, and by developing a beneficial ownership registry for Kenya.

Status

Midterm: Substantial

This commitment saw substantial implementation by the midterm. In August 2015, the government organized a meeting in collaboration with Transparency International (TI) Kenya to discuss the current legal provisions on beneficial ownership disclosure and how to align Kenya’s laws with international best practices (Milestone 5.1). [66]

For Milestone 5.2, President Kenyatta signed the Companies (Amendment) Act on 21 July 2017, which came into force on 3 August 2017. The Companies (Amendment) Act defines beneficial ownership, [67] requires companies to keep a register of its members, including information relating to beneficial ownership (name and address only), [68] and to submit a copy of such to the national Registrar of Companies. [69] The law requires beneficial ownership information maintained by the Registrar of Companies to be open to inspection by the public. By the midterm, different arrangements were applied to companies registered under the Companies Act, 2015 and companies registered under the older Companies Act, 1947 (Cap 486). For the former, any person could conduct an online search for beneficial ownership information using the e-Citizen platform. [70] (This service, however, is only available to Kenyan citizens, foreign residents, and business owners.) For companies registered under the older Companies Act, one would need to lodge an application for the information with the Registrar of Companies. By the midterm, InfoNET Africa was reportedly establishing an open beneficial ownership register in partnership with the government and other stakeholders (the Usajili project). [71] For more information, please see the 2016–2018 IRM progress report.

End of term: Substantial

The commitment remained substantially implemented by the end of term.

The legislative framework for beneficial ownership (Milestone 5.2) was supplemented by Executive Order No. 2 of 2018 (effective 1 July 2018), which sets out disclosure requirements for government tenders. [72] The Executive Order requires all procuring entities to maintain and continuously update and publicize complete information on all tenders awarded, including “full particulars” of the awarded bidder, supplier, contractor, or consultant. [73] Such “full particulars” must include a list of directors, shareholders, and beneficial owners (in the case of a company). [74] According to the Executive Order, this information must be publicized through the website of the Procuring Entity, e-Citizen, Public Procurement Regulatory Authority platforms, public notice boards, and official government publications. [75] These stipulations also apply to ongoing contracts entered into by procuring entities. [76] In June 2018, President Kenyatta further declared that from 1 January 2019, all public procurement has to be undertaken through the electronic platform of the Integrated Financial Management Information System (IFMIS). [77]

Progress in establishing an open, accessible, and usable beneficial ownership registry was substantial but not complete (Milestone 5.3). In pursuance of the directives of Executive Order No. 2 of 2018, the Kenyan government launched the Public Procurement Information Portal (PPIM), which serves as an online platform for publication of contract awards and tender notices by procuring entities. [78] The PPIM sets out lists and aggregate information on tenders, contracts, suppliers, and contract values. The lists of suppliers currently include the supplier or company name; company registration number, business number, and registration date; and county of operation. Further details on the supplier or company include the entity’s physical address and the names of directors. [79] However, beneficial ownership information has not yet been fully incorporated; no detail on shareholders has been provided, and one cannot assume that the directors of a company are necessarily its shareholders. For example, the PPIM entry for Advanta Africa Limited, a private company holding a contract with the National Construction Company to the value of Ks200,000 lists four “directors,” one of which is a local company (True Brands Limited). The shareholding of the local company is not disclosed. According to Mr. John Kipchumbah, Managing Director of the InfoNET group, the Usajili project currently being undertaken by InfoNET will be incorporating beneficial ownership information into the PPIM. [80]

Did It Open Government?

Access to Information: Major

Civic Participation: Marginal

Prior to the action plan, the true beneficiaries of public sector contracts in Kenya were unknown. The absence of transparency checks fueled suspicions that public procurement processes were abetting corruption [81] and illicit financial flows out of Kenya—estimated at US$13.5 billion—between 2002 and 2010 by the Global Financial Integrity Report. [82] This situation motivated Commitment 5’s call for greater transparency around bids and contracts by individuals and companies, and in particular, the disclosure of beneficial ownership information in an open, accessible, and usable manner. Building on efforts to tighten regulation on suspicious financial activity and illicit transactions [83] and to digitize the public procurement process, [84] Kenya publicly committed to sharing data on the ultimate beneficial owners of companies at the 2016 Anti-Corruption Summit. [85]

The commitment, as implemented, has laid the basis for a major change in access to information on bids and contracts in public procurement and ultimate beneficial owners. The legislative framework—as set out in amendments to the Companies Act, 2015 and Executive Order no. 2, 2018—requires the disclosure of supplier or company information, including beneficial ownership, which is open to public scrutiny. It remains a weakness of the legislative framework that information on beneficial ownership is limited (no information, for example, on the beneficial owner’s nationality, country of residence, or form of control), and no provision is made for verification. [86] Access to information has also been enhanced by the launch of the PPIM, which includes details on public tenders, contracts, suppliers, and values, thus advancing the commitment aim of ensuring greater transparency around bids and contracts through an open, accessible, and usable registry. Although work appears to be in progress, the PPIM is limited by the failure to include shareholder information, which would allow for identification of the ultimate beneficiaries of contracts.

The commitment’s impact on civic participation has been marginal, as civil society’s involvement in the development of the legislative framework and PPIM appears to have been limited to a single stakeholder meeting.

Carried Forward?

This commitment has been carried forward to Kenya’s next action plan. Commitment 1 from the third action plan aims to publish the collected information in an open, centrally-accessible, and machine-readable format.