Inside intricate multi-billion shilling trade in counterfeit alcoholic drinks

KRA officials destroy counterfeit and illicit alcoholic drinks intercepted in different parts of the country at Nairobi City Water and Sewerage Company in Ruai. [David Njaaga, Standard]

The proliferating trade in counterfeit alcohol is not only costing Kenyans their lives and livelihoods but also denying the country billions of shillings in taxes every year, a chilling intelligence report reveals.

The report, seen by The Saturday Standard, says unscrupulous manufacturers are spiking drinks with deadly industrial chemicals to make them more potent and get customers hooked. Common illicit additions include methanol, ethanol, fermented sisal juice and jet fuel.

The report, which was put together by multi-agency market surveillance teams between January 2019 and June 2020, with the support of the National Intelligence Service (NIS), reveals that at least eight million Kenyans consume sub-standard alcoholic drinks every year.

Overall, illegal trade in Kenya is valued at Sh826 billion, according to the Anti-Counterfeit Authority (ACA). It has grown seven times faster than legal trade since 2014, increasing by an average of at least Sh100 billion every year.

A well-coordinated syndicate comprising unscrupulous employees from tax, customs, investigative and judicial agencies has ensured illegal merchants continue to spread across the market.

And when it comes to alcohol, the situation is exacerbated by ignorance about the risks of counterfeits and poor enforcement of regulations.

“However, our surveillance reports indicated that the level of public awareness on counterfeits is at 68 per cent. We are yet to establish whether this illicit trade is escalated by poverty or a don’t-care attitude,” said Florah Mutahi, the chair of  Kenya Association of Manufacturers (KAM).

Major loophole

Kenya Revenue Authority (KRA) puts the proportion of foods, beverages and non-alcoholic drinks in the market that are illegal at 23 per cent, quoting the National Baseline Survey on the Extent of Illicit Trade and Consumer Survey.

With alcohol, a major loophole exploited by rogue traders is in bottling.

Between 2019 and 2020, several companies imported more than 200 million empty bottles from Oman and Tanzania, the intelligence report shows.

With alcohol, a major loophole exploited by rogue traders is in bottling. [Courtesy]

The 250-millilitre bottles were cleared duty-free and declared as glassware raw material inputs for pharmaceuticals and a variety of healthcare products.

However, a significant percentage of these bottles were instead filled with liquor, branded and sealed with fake Kenya Bureau of Standards (Kebs) certificates and KRA stamps, and sold to unsuspecting customers.

About 10 companies have been implicated in this particular scam by enforcement officers, who say these unscrupulous manufacturers target low-cost brands with a high percentage of alcoholic content.

KRA said all manufacturers of alcohol are required to register for an excise license in line with the Excise Duty Act. Their records show there are currently 37 licensed alcohol manufacturers, yet there are hundreds of companies that pass themselves off as legitimate brewers.

“All the unlicensed companies and manufacturers we have identified have been closed and the people behind them prosecuted,” Anne Irungu, KRA’s deputy commissioner for enforcement, said.

In the last few months, she said, several illegal manufacturers have been shut down in Embu, Thika and Meru towns.

Additionally, used bottles are being collected from garbage dumps, washed and repackaged with alcohol from unlicensed and unregulated sources, the report says.

In Mathare, for instance, The Saturday Standard came across a den where liquor is brewed, packaged in used bottles and then sold across the informal settlement at low prices.

The intelligence report says more than 1,000 companies are operating bottling units for alcoholic beverages with dubious licensing.

“They operate under little to no oversight on their compliance to health regulations, taxation, or Kebs and Kenya Intellectual Property Institution (KIPI) guidelines,” it states.

A KRA officer inspects alcoholic drinks in Nairobi's Embakasi Estate. [Willis Awandu, Standard]

Additionally, imports from neighbouring countries are brought into Kenya, bottled and re-labelled with local brand names.

“Alcoholic drinks are sold at a higher price in Kenya than in other markets in East Africa, which makes it lucrative for traders to sneak in the beverage through porous borders, repackage it and falsely label it,” said KRA's Irungu.

According to ACA, 70 per cent of counterfeits are sneaked in through Kenya porous borders. The economy lost Sh153 billion in revenue to counterfeit and illicit trade last year, an increase from Sh129 billion in 2019.

One senior forensic investigator at KRA, who asked not to be named as he is not authorised to speak to the press, said while the taxman has adopted technology that tracks excisable goods and cargo, corruption within enforcement teams has affected the gains made.

He added that wrangles between multi-agency teams and consumer demand for cheap products have made stopping counterfeits more difficult.

“For instance, if KRA intercepts cargo believed to have sub-standard goods, the DCI will say the case belongs to them, the police will argue it is their responsibility to make the arrests, and by the time an agreement is struck, those who brought in the goods will have already found their way out,” he said.

The investigator said this poor collaboration between agencies has led to minimal exchange of information and few successful joint operations.

“The counterfeiters are now smart. They offload these goods in their residential houses, which serve as central storage centres.

"When multi-agency teams conduct raids in their shops, they find there is very little evidence to pin them down,” he said.

In May last year, Ruaraka MP Tom Kajwang asked National Assembly Speaker Justin Muturi to direct the Departmental Committee on Finance and National Planning to undertake an inquiry on the issue.

It was tasked to investigate the total tax paid by a selection of firms between January 2019 and March 2020.

Ruaraka Member of Parliament Tom Joseph Kajwang. [David Njaaga, Standard]

“Mr Speaker, this committee must investigate the correlation between quantities of empty bottles and bottle caps, which are subject to excise duty, supplied to or imported to the firms to establish if they pay the necessary taxes, and what measures KRA has taken to recover any lost revenue,” Kajwang said.

KRA says all companies that import bottles, caps, labels, spirits and stamps are required to declare quantities brought in and who they supply these items to.

The intelligence report, however, found that unscrupulous brewers are importing bottles through shell companies and using them for purposes outside of what is declared.

The plague of illegal stamps and labels on alcohol, soft drinks, bottled water and tobacco, according to KRA, leads to an estimated loss of Sh150 billion a year in taxes.

The agency recently intercepted 149 rolls of counterfeit excise stamps through the Lwakhakha border with Uganda.

“KRA enforces the requirement on declarations to ensure all inputs for manufacturing alcohol are tracked to enhance revenue collection. We are also working hard to harmonise alcoholic prices across the region so that it retails at the same price. This will boost our fight against illicit drinks and counterfeits,” said KRA's Irungu.

The cost of stamps

Legitimate traders indicate that the market price of any spirit should be at least Sh370 per litre.

“But unlicensed brewers will sell the same spirit brands at Sh160 per litre,” one trader told us.

The intelligence report says there are more than 913,000 cases of such illicit alcohol sold in the market every month. With each case holding 20 250ml bottles, this adds up to nearly 18.3 million bottles.

There are more than 913,000 cases of such illicit alcohol sold in the market every month. [Courtesy]

As a result, the sector is said to be losing millions of shillings in excise duty – and this excludes the cost of stamps and other indirect taxes.

According to sector players, with all these charges, a 250ml bottle should retail at between Sh150 and Sh200. However, in a spot check, we were able to purchase more than 20 brands of spirits at between Sh85 and Sh120.

Following complaints from genuine brewers, KRA wrote to all industry players in a bid to streamline retail pricing.

“We have reviewed responses from manufacturers in the sector and the selling prices in the market, and noted a big gap in prices of the same alcoholic strength and packaging.

"Based on the above review, products in the market with a selling price below Sh150 per bottle of 250ml @40% v/v are considered non-compliant in tax based on the minimum cost structure,” Irungu said in a letter to brewers.

He added: “Therefore, we request your company to adjust the prices in the current and subsequent tax returns to reflect the correct price benchmark for the alcoholic beverage sector for tax purposes.”

The Saturday Standard reached out to some of the brewers whose prices are below the recommended retail price of Sh150.

“For us, we believe we are licensed and KRA conducts regular inspection on our products. If they were sub-standard or non-compliant as it is claimed, they would have taken action,” one senior manager at a firm that sells its brands at below Sh100 said, adding that he would not disclose matters of cost analysis.

Consumer Federation of Kenya boss, Stephen Mutoro, said his organisation’s independent investigations established that about 36 brands fall under the illicit category.

In a confidential letter dated March 8 and addressed to President Uhuru Kenyatta, Mutoro accused government officers of receiving bribes to protect rogue traders, and claimed that 50 per cent of all alcohol outlets sell fake or adulterated products.

The Alcoholic Beverages Association of Kenya (Abak) notes that only 10 manufactures are licensed to manufacture alcoholic drinks, and pump into the economy about Sh130 billion each year.

However, these 10 manufacturers represent only 56 per cent of the alcohol that is the market. This means 44 per cent of what is currently being sold falls under the category of illicit or counterfeit.

To dupe consumers, Abak says the counterfeiters are riding on the most popular brands, filling bottles with cheap liquor and replicating these labels.

“They take advantage because these popular brands move very first in the market. They use very expensive and eye-catching packs so that the consumer has no doubt that the product is of good quality,” it said.

Undergoing prosecution

And these unscrupulous traders have learnt how to evade raids by setting up production units in areas enforcement officers would have a hard time accessing. They also have youth strategically positioned to tip them off in the event of a suspected raid.

To dupe consumers, the counterfeiters are riding on the most popular brands, filling bottles with cheap liquor. [Courtesy]

KRA says any brewer found with a parallel production line that is not licensed will be shut down and action taken against it.

“As we speak, we have revoked licenses for various companies. Most cases are undergoing prosecution for tax evasion,” Irungu said.

She added that they destroy goods worth an average of Sh1 billion a year and have arrested at least 4,300 people.

“The cases are progressing in court and taxes amounting to over Sh20 billion have been demanded.”

Dr John Akoten, the deputy director for research, awareness, policy and quality assurance at ACA, said the war on counterfeits will not be won if consumers are not helped to understand its dangers.

“We have lost 44,000 jobs in the legal market due to counterfeits. In about two years, we have destroyed goods worth Sh3.4 billion and seized others of the same value,” he added.