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Kenya: LSK Heading Towards Financial Crisis over Sh186 Million Tax Bill

The Law Society of Kenya (LSK) is staring at a financial crisis as it grapples with a Sh186 million tax bill, risks losing a prime piece of land in Nairobi and more millions to corruption perpetrated by staffers colluding with lawyers.

An internal audit has revealed that all is not well at the society, as governance weaknesses dating back several years now threaten to hit the advocates’ lobby where it hurts – the pocket.

Aside from cases of inflated pricing of items bought by the society, supporting documents for some expenditure could not be traced, making it difficult to determine whether LSK got value for money in some of the big deals made in recent years.

Internal auditors started looking into LSK books following questions from members at last year’s Annual General Meeting (AGM) on how the lobby was spending the millions it collects from lawyers every year.

And it is likely to be just the tip of the iceberg, as a contested forensic audit is expected to go further down the rabbit hole to establish the depth of the rot.

But the forensic audit is among several things that has now split LSK leadership into two factions that have for the last few months been going at each other with accusations of sabotage.

On one side is LSK President Nelson Havi, and he enjoys the support of Vice President Caroline Kamende, and council members Herine Kabita and Esther Ang’awa.

The opposing faction has council members Bernard Ngetich, Aluso Ingati, Carolyne Mutheu, Faith Odhiambo, Linda Emukule, Beth Michoma, Ndinda Kinyili, George Omwansa and Roseline Odede.

The internal audit report was to be a curtain raiser for the forensic audit, but the court process has now left it hanging in the balance.

Audit report

Mr Havi’s push for a deeper probe into LSK’s books has been opposed in court by lawyer Murigi Kamande, who obtained orders temporarily suspending the process in December.

The internal audit report, completed last September and seen by the Nation, indicates that between 2014 and 2018, the LSK did not remit taxes totalling Sh122,073,296.

The Kenya Revenue Authority (KRA) has been charging interest of 20 per cent on the unpaid bill, which has accumulated an additional Sh25,247,248.

And owing to the delays in payment, the KRA has slapped penalties of Sh39,574,533 on LSK’s tax bill.

Value Added Tax (VAT) is the biggest pending levy, as it stands at Sh157,930,795 inclusive of penalties and interest.

Corporation tax, PAYE, statutory deductions and withholding tax collectively make up Sh28,964,281 of the total figure.

LSK’s auditors have suggested that the lobby engages KRA informally to negotiate payment, but have also hinted at a legal loophole that can be used to avoid a sudden large demand for tax compliance.

KRA is allowed to review tax records of individuals and institutions dating back five years. The auditors imply that complying with current tax bills will reduce the risk of inviting a KRA audit.

“KRA is allowed by law to review up to a maximum of five years backward, which implies that if the society is subjected to review and it has been complying going forward, the risk of paying the arrears reduces,” the report reads in part.

Auditors also uncovered a syndicate run by LSK staff, which aids rogue lawyers obtain fake receipts to evade fines prescribed by the disciplinary committee.

The report has now recommended that a deeper investigation be conducted on transactions involving payment of fines by lawyers dating back three years to establish how much has been lost in the forgery syndicate.

Under the scheme, lawyers fined for unprofessional conduct or for holding clients’ money obtain receipts from LSK staffers.

Sharp divisions

The receipts indicate that the fines have been paid.

A sample of 22 fine payment transactions involving three lawyers revealed that receipts worth Sh5.8 million were forged between 2013 and 2018, which cost the LSK Sh5.8 million.

One of the lawyers allegedly falsified 17 receipts to evade paying Sh3.5 million in fines.

The auditors recommend that LSK reshuffle staffers in charge of refunding clients swindled by their advocates. They add that a reshuffle has been pending since early 2019.

The LSK is also at risk of losing a 0.99-acre piece of land in Nairobi’s South C donated by the government in 2004 on condition that the lobby develop the prime property within 24 months of registration.

Violation of the 24-month window condition was to see LSK surrender the property to City Hall. It is now nearly 204 months since the land was registered to the LSK, yet it remains undeveloped.

The planned construction of an arbitration centre that was to cost Sh1.2 billion aborted following divisions among LSK’s members. By the time the project collapsed, some contractors engaged by the LSK had already completed their work. The audit report states that one of the contractors has already sued LSK to recover the agreed sum.

While the auditors do not name the contractor, they have warned that other contractors could also ask the courts to award them millions for completed works.

LSK is currently housed in a building that was condemned by Nairobi County government in 2013.

Last year, former LSK president Allan Wamae had proposed to members that the lobby put up a modern office block on its condemned Gitanga Road land. The motion did not, however, pass at the March 28, 2020 Annual General Meeting.

Among the recommendations made by the internal auditor is for the lobby to ditch Standard Chartered and KCB Bank in favour of a lender that charges less money to hold the LSK’s deposits.Last year alone, the LSK collected a total of Sh261.6 million through M-Pesa. As at the time of the audit, Sh188.8 million had been transferred to ba

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