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Will beneficial ownership rules curb tenders graft?

By Beatrice Nyabira and Fred Kibagendi

In many countries, public procurement has for a long time been considered one of the areas most prone to manipulation and fraud. Kenya is no exception and there have been allegations of public officials and their cronies creating and winning bids at inflated prices.

At the London Anti-Corruption Summit held in the year 2016, Kenya made several commitments on combating corruption. These included commitments to establish public central registers of company Beneficial Ownership Information (BOI) and transparent central registers of foreign and local companies bidding for public contracts and purchasing property.

In line with this, the Companies (Beneficial Ownership Information) Regulations, 2020 were published in 2020, requiring companies to maintain registers of their beneficial owners. Earlier this year, the Attorney-General published the Companies (Beneficial Ownership Information) (Amendment) Regulations, 2022 to amend the 2020 Regulations.

The 2022 Regulations seek to extend BOI disclosure requirements to entities doing business with the Government. Specifically, companies are now required to disclose their beneficial ownership information to procuring entities and contracting authorities when participating in public procurement, assets disposal and Public Private Partnership (PPP) arrangements.

The amendment also empowers the Registrar of Companies to release information on beneficial owners to the Public Procurement Regulatory Authority (PPRA) and PPP Committee, upon written request. At the same time, BOI maintained by the PPRA in the Government portal for entities that have been awarded a tender by a procuring entity, shall be published and made publicly available. The Government also has discretionary power to seek and publish any vital information pertaining to a company, if the information affects the country.

Transparency in Beneficial Ownership is critical in strengthening the framework for public procurement. It is a step towards meeting the constitutional standard that requires procurement for goods or services by the state to be conducted in accordance with a system that is fair, equitable, transparent, competitive and cost-effective. Although seemingly onerous, the Regulations are likely to positively impact public procurement in many positive ways.

To begin with, BOI can help curb fraud and corruption in public procurement. In this respect, the disclosure of beneficial ownership provides a tool for detection of links between companies purporting to be competitors, while colluding in the tendering process. This is because the existence of shared ownership among different bidders could be a red flag for anti-competitive behaviour. Collusive tendering and price fixing are restricted trade practices under the Competition Act and once a red flag is identified, closer scrutiny can be taken on these bids to address the risk of collusion, which if not checked can undermine competition and price integrity.

Second, BOI is critical for flagging instances of conflict of interest where public officials involved in the procurement process are also the beneficial owners of the entities submitting bids or proposals. It can also help to unmask relationships that may exist between politically exposed persons (PEPs), procuring and contracting authority officials and the beneficial owners of the bidders.

Third, disclosure of BOI is becoming increasingly important where procurement includes or envisages funding from financial institutions. For example, at the height of the Covid-19 pandemic, the IMF imposed conditions on countries seeking pandemic related funding. One of the conditions for the funding was for these countries to commit to ensuring transparency in their pandemic-related spending through publishing information on emergency procurement and details of the beneficial owners of their suppliers. Similarly, the World Bank in 2017 introduced a requirement for public disclosure of BOI in high value contracts, requiring governments contracting with the World Bank to publish this information, starting 2019.

BOI is particularly important to Development Financial Institutions (DFIs). Most DFIs are wary of investing in projects that involve politically exposed persons and in some cases, winning bidders have had trouble onboarding financiers due to concerns around the involvement of such persons. BOI transparency from the outset of the procurement process may therefore help to expedite ultimate delivery of projects procured under the public procurement laws, by hastening the onboarding of lenders.

BOI is also helpful in detecting instances of fraud where persons who are barred or blacklisted from taking part in PPP projects or public procurement generally, attempt to win government contracts by hiding behind a complex web of companies. It should also help in battling money laundering by identifying bidders with links to persons whose funds are illicit or from unexplained sources.

BOI transparency is similarly expected to attract participation of high quality bidders in procurement as such bidders are likely to feel that in the absence of corruption, they are on a level playing field with their competitors and therefore stand a chance to win contracts. High quality competition is in turn expected to improve value for money and service delivery.

Most importantly, if properly utilised, BOI transparency could help win the much needed public support for projects, as government will be able to demonstrate that it is dealing with reputable counterparts in procurement and not just enriching public officials and their cronies.

Overall, the mandatory requirement for BOI transparency in public procurement is a step in the right direction. If the trend in other countries is anything to go by, the beneficial ownership disclosure requirements will only keep being extended with time. They are likely to creep into other sectors such as natural resources and extractives, where the scope of BOI required when applying for licences necessary for the exploration or exploitation of these resources, may in due course, be expanded from current requirements. For now, only time will tell whether the 2022 Regulations will meet their objectives, but this is definitely a space worth watching!

The article was published in the Business Daily on 14 June and can be accessed here.