SNAPSHOT: Report on corruption in Kenya's private sector offers lessons to compliance professionals

A new report by the Kenya Private Sector Alliance (KEPSA) seeks to map out corruption risks by sector and activities in the country. A2 Global assesses what the findings mean to compliance officers.

KEY POINTS

  • Since being re-elected in 2017, President Uhuru Kenyatta has cracked down on corruption. A series of high-level and high-profile prosecutions against former and current public officials indicate that his administration is serious about improving the country's reputation among international investors, who are keen to tap into Kenya's dynamic business sectors.
  • A new report by the Kenya Private Sector Alliance (KEPSA) seeks to map out corruption risks by sector and activities, while also understanding the challenges faced by companies of different sizes.
  • The report provides important lessons for companies looking to invest in Kenya but which are dissuaded by corruption risks in the country. It also gives compliance and legal departments useful insights into the areas perceived most at risk of corruption among local actors and institutions. This could help them improve their risk-based assessments and create a compliance-led culture, as recommended by the Financial Action Task Force, the inter-governmental body that seeks to combat money-laundering and terrorism financing, and other multilateral organisations.
  • Capacity gaps and lack of understanding of anti-corruption legislation is rife among small- and medium-sized companies in Kenya.

DETAILS

  • In mid-May, the Kenya Private Sector Alliance (KEPSA) a membership-based advocacy group for private sector businesses published its findings from a November 2018 survey that aims to map the corruption risks and challenges by Kenya's main economic private sectors and sub-sectors.
  • Eighty-five per cent of the 1,202 respondents said there was a corruption risk in their sector, although the risks are perceived to be higher for small- and medium-sized enterprises (SMEs). Very small businesses (VSBs) that is, with fewer than ten employees and SMEs with fewer than 50 staff presented the highest corruption risks.

Source: KEPSA, Corruption Risk Mapping in Kenya's Private Sector, April 2019
  • According to the survey, the business activities most prone to corruption were procurement and supply, finance and accounting, and import/export; all these risks were markedly higher among SMEs. In procurement and supply, the main compliance risks included lavish gift-giving in order to bypass statutory tendering procedures, while bypassing restrictions set by companies was highlighted as a key threat in the import/export segment. Favouritism and nepotism were raised as particularly high risks in human resources.

Source: KEPSA, Corruption Risk Mapping in Kenya's Private Sector, April 2019

RESPONSES AND CHALLENGES

  • The report is based on the premise that corruption is stifling foreign direct investment, and is harmful to the stability of state institutions and development more broadly. It also recognises adverse consequences to businesses engaging in or failing to prevent corruption within their value chains.

Source: KEPSA, Corruption Risk Mapping in Kenya's Private Sector, April 2019
  • Formalised processes such as formal controls, disciplinary processes, and sanctions for violating anti-bribery legislation (rather than codes of conduct) were cited as the most effective means of combating bribery within their organisations. A pitiful 0.4 per cent of respondents believe codes of ethics are effective; very few believe awareness efforts, such as training or briefings, had an impact on behaviour.

Source: KEPSA, Corruption Risk Mapping in Kenya's Private Sector, April 2019

A2 GLOBAL'S RECOMMENDATIONS

  • KEPSA's attempt at mapping the corruption risks by sector and commercial activity in Kenya provides clear lessons learned for companies concerned about corruption in the country. It also offers insights about local partners or third parties ability to ensure compliance with local and international legislation, including the US Foreign Corrupt Practices Act, the UK's Bribery Act of 2010, France's 2017 Sapin II law, and Kenya's 2016 Bribery Act.
  • Such findings should guide foreign investors approaches when engaging with Kenyan partners. Rather than ensuring compliance among local partners and third parties merely through a box-ticking exercise, they should factor the findings of this report into their risk-based assessments and consider ways in which they can improve internalisation and buy-in of these pieces of legislation. Establishing trust and understanding about the benefits of ensuring compliance with laws and regulations, and adopting risk-based approaches, should guide their engagements with in-country partners. This is key in a context like Kenya's, where institutional oversight is commonly low compared to Western standards.
  • Large foreign investors working with smaller local partners, for instance, in tourism and hospitality, where perceived corruption is elevated, should consider ways to improve capabilities and understanding among local stakeholders and third parties that are commensurate with their capabilities. This would mitigate the risk of corrupt practices compromising their own value chains. Most SMEs said they did not conduct training or raise staff awareness, and had no oversight mechanisms to ensure staff comply with Kenya's 2016 Bribery Act.
  • Some large businesses indicated they were not able to conduct due diligence of third parties, likely a result of the extent of informality in the Kenyan business sector, rather than corrupt practices.
  • Finally, foreign investors should also consider ways in which they can prevent specific corrupt practices which respondents believe are prevalent, such as fraud, tax evasion, and bribery. Compliance officers and financial service providers in particular should consider risk-mitigation strategies that reflect the risk picture highlighted in the KEPSA study, while tailored to the company's own capabilities and risk tolerance. For instance, developing off-the-shelf solutions which guarantee compliance, may instead damage the competitiveness of some SMEs by imposing too much red tape. Key in such instances is developing strategies that are commensurate with the company's skill set and risk picture.