Governance Practices and Illicit Financial Flows in Kenya’s Oil and Mining Sectors

Abstract

Extractive industries, notably oil and mining sectors are associated with high levels of illicit financial flows. Illicit financial flows cause scathing economic, social, and political costs to a country‟s development agenda, particularly countries endowed with natural resources like oil and minerals, since they deplete a government‟s revenues by reducing a country‟s tax base, as private wealth is unlawfully transferred out of the country. While Kenya has an emerging oil and mining industry with an increasing record of the discovery of mineral resources, expanding mining ventures, and discovery of oil in Turkana, its contribution in the extractive industry is currently low and is expected to grow considerably in the next few years to become a key contributor to Kenya‟s GDP, the sectors are at risk of illicit financial flows jeopardizing the country‟s ability in collecting much-need revenue. Therefore, this study aimed to investigate the effect of governance practices, in particular transparency, accountability, and the rule of law, in curbing illicit financial flows in Kenya‟s oil and mining sectors. The theories on which this study was based included stakeholder theory, agency theory, and resource-based view theory. The researcher adopted a mixed-method research design by targeting stakeholders in the oil and mining sectors within Nairobi County. The study involved 93 respondents consisting of key stakeholders in mid-level and senior management positions in both government and civil society organizations. The quantitative data was collected by filling in semi-structured questionnaires while qualitative data was collected through drop and pick questionnaires. The quantitative data are presented using tables, texts, and graphs while qualitative data is presented through the identification of common themes from the responses. The findings from qualitative and quantitative data analysis show that the three independent variables (rule of law, transparency, and stakeholder accountability) have significant effect on curbing illicit financial flows in Kenya‟s oil and mining sectors. However, the regression model shows that the rule of law has the highest influence on the independent variable, followed by transparency, and stakeholder accountability has the least influence. The study recommends the adoption of international standards and codes governing oil, gas and mining industries globally including the Extractive Industry Transparency Initiative (EITI), to enhance contract transparency in Kenya‟s Oil and Mining sectors. It also recommends the domestication of the African Mining Vision (AMV) that offers a combination of local and international strategies that will improve capacity for mineral sector governance and contract negotiation.