How trade fraud deprives Kenya of trillions in taxes, fuels debt crisis

As the taxman aggressively pursues small traders and salaried employees for unpaid dues, a global financial watchdog has warned that the country is losing nearly 50 times more money through a sophisticated form of trade fraud perpetrated by large corporations.

This severely undermines the government’s ability to fund development for Kenyans and escape a crushing debt crisis.

A new report by Global Financial Integrity (GFI), a Washington-based research organisation estimates that Kenya lost over $47.4 billion (Sh6.1 trillion) over the decade from 2013 to 2022 due to "trade misinvoicing" – a practice where companies deliberately falsify the prices of imports or exports to illegally move money across borders.

This lost sum is equivalent to nearly twice the entire national budget for a single year and represents a massive haemorrhage of potential tax revenue.

Experts say recapturing even a fraction of these funds could dramatically reduce Kenya's reliance on borrowing and ease its severe public debt burden.

"While the Kenya Revenue Authority (KRA) is hunting for millions of shillings from individuals, it is overlooking billions of shillings systematically siphoned off by multinationals and large traders through manipulated paperwork," said a Nairobi-based economist who studies illicit flows, requesting anonymity due to the sensitivity of the subject.

"This isn't petty smuggling, it's financial engineering on an industrial scale, and it's starving the exchequer."

To understand the fraud, one must follow the paper trail of international trade. Every shipment from Kenya to, say, Europe or every imported machine from, say, Asia, comes with an invoice stating its value. Customs and tax authorities use these invoices to calculate duties and taxes.

Trade misinvoicing exploits this paper trail in two main ways.

The first vice is under-invoicing exports. Here, a Kenyan tea company sells a shipment to a partner in the United Kingdom. The true value is $1 million (about Sh129 million).

However, the invoice is doctored to show $700,000 (Sh90.3 million). The UK partner pays the $700,000 to the Kenyan company's official bank account and the remaining $300,000 (Sh38.7 million) into a secret offshore account controlled by the Kenyan owner. 

The result is that Kenya records less export revenue, pays less corporate tax, and the country loses foreign exchange. 

The $300,000 is now illicitly stashed abroad. The vice also happens via over-invoicing Imports. Here, a Kenyan hospital needs specialised medical equipment. 

The true cost from say an Indian supplier is $2 million (Sh258 million). The conspiring parties create an invoice for $2.5 million (Sh322.5 million). The hospital pays the full $2.5 million from Kenya.

The Indian supplier keeps the legitimate $2 million and wires the excess $500,000 (Sh64.5 million) to a private account designated by the Kenyan officials or owners.

The result is that Kenya pays more foreign exchange, the company claims a higher expense to reduce its taxable profit, and half a million dollars flees the country illegally.

GFI's methodology, explained in its "Trade-Related Illicit Financial Flows in Africa" report, compares Kenya's recorded trade data with the corresponding data from its partner countries. 

The persistent, multi-billion dollar gaps between what Kenya says it exports and what its partners say they import—and vice versa—are strong indicators of this systematic fraud.

"The data shows this is not a statistical error. It is a persistent, structural drain, and Kenya is among the top ten most affected countries in Africa both in total volume and as a share of its total trade," the report states, noting Kenya's cumulative gap equals about 25 per cent of its total goods trade over the decade.

This revelation comes amid a vigorous and often unpopular domestic tax drive. 

The KRA has intensified raids on small businesses, markets and individual taxpayers to meet collection targets, often seizing goods or freezing accounts over discrepancies amounting to thousands or millions of shillings.

Meanwhile, the GFI report suggests an annual average loss of $4.7 billion (Sh600 billion) through trade misinvoicing alone. 

This dwarfs the Sh115.3 billion ordinary revenue shortfall reported by the National Treasury for the first half of the 2025/26 fiscal year.

Treasury documents presented to Parliament last week paint a picture of a government grappling with a "shrinking fiscal space." Ordinary revenue as a share of the gross domestic product (GDP) has declined from 18.1 per cent a decade ago to a projected 14.4 per cent.

Consequently, critical development spending funded directly by the exchequer has been squeezed out, dropping from 28 per cent of revenue in 2016/17 to just 11 per cent in 2025/26.

"The share of GoK (Government of Kenya) funded development projects to ordinary revenue has declined... reflecting sustained government spending pressures despite efforts at fiscal consolidation," the Treasury presentation notes.

The lost revenue has direct consequences for Kenya's precarious debt position. With less domestic income, the government must borrow more to fund its budget.

The Medium-Term Debt Management Strategy (2026/27-2028/29) classifies Kenya's debt as being at "High Risk" of distress.

The public debt stock stood at Sh12.1 trillion by September 2025, with debt servicing consuming a staggering 39.8 per cent of ordinary revenue.

"Every dollar siphoned out through fake invoices is a dollar not available to build a school, equip a clinic, or pay a teacher. It directly forces the government to borrow more expensively," explained the economist.

"Closing these leaks is the single most effective step towards debt sustainability. The $47 billion lost could have prepaid a huge chunk of our external debt."

The GFI report states illicit flows "directly crowd out public investment and often force governments to rely on onerous debt."

Experts argue that addressing this requires a shift in focus from low-level enforcement to high-tech, systemic solutions. GFI's recommendations for Kenya and other African nations include strengthening customs. They suggest using advanced data analytics to flag suspicious invoices and investing in forensic training for customs officers.

The report also calls for boosting transparency. They suggest implementing public registries that reveal the true owners ("beneficial owners") of companies to dismantle secrecy.

They also urge Kenya to enhance international cooperation. This can be achieved through real-time exchange of trade data with partner countries and leveraging global agreements to track illicit money.

"The technology and frameworks exist. What is needed is the political will to confront powerful economic actors who benefit from this status quo," said the economist.

"Until then, Kenya will continue to borrow tomorrow to pay for the taxes that were stolen yesterday."

As the National Treasury plans its budget for 2026/27, projecting a fiscal deficit of Sh1.1 trillion, the figures in the GFI report highlight the untapped reservoir of domestic resources that continues to flow out, unseen, through the invoices of international trade.