A forensic audit has exposed the looting of tens of millions in royalties meant for local musicians, some of whom are living in squalor, as those tasked with looking after their welfare live large.
The audit has exposed the rot at the Kenya Association of Music Producers (Kamp) and the Performances Rights Society of Kenya (Prisk), including the suspicious award of a tender inflated by Sh69 million to a firm that failed at the evaluation stage and hefty allowances for board members that far exceed the royalties paid to members.
Auditors also uncovered Sh158 million owed to artistes after reviewing licence fees collected by the two agencies against the distributed royalties for the three-year audit period (2020–22).
The investigation has revealed misappropriation of Sh28.6 million at Prisk, a collective management organisation (CMO) established in 2009 and licensed to represent performers in musical and dramatic works.
However, the full extent of the scandal of ripping off musicians has yet to be established because another CMO, the Music Copyright Society of Kenya (MCSK), declined to allow auditors to inspect its financial accounts.
According to the audit, these agencies have routinely violated the 70:30 rule, which requires that at least 70 per cent of collections be disbursed to artists, and instead have squandered most of the cash on lavish staff allowances and suspect procurement dealings, leaving peanuts for musicians.
Muita Njoroge Associates, certified public accountants (K) and forensic auditors who were tasked by the Kenya Copyright Board (Kecobo) to audit the financial statements for January 2020–December 2022, reported that Kamp owes musicians Sh75 million in withheld royalties.
“Our review of Kamp performance on royalties indicated that the company, over the last six years, has not met the legal requirement. As such, the company owes members the said amount pertaining to the audit period and should be disclosed in the financial statements as liabilities,” reads the report dated May 5. It was stamped ‘received’ by Kecobo on May 9.
“Taking into account the licence fees collected during the period under review, Kamp under-distributed royalties by Sh75,688,619. Despite not meeting the 70-30 rule, the proposed royalties over the years beginning 2013 remained unpaid to date, totalling Sh14,514,455.”
In the years under review, Prisk also failed to adhere to the 70-30 per cent distribution rule, which led to under-distribution of royalties to its members. Auditors concluded the CMO owes its members Sh83,629,977 royalties for the three years. The 70-30 rule stipulates that 70 per cent of collected royalties are set aside for distribution, while 30 per cent goes to administration costs.
The audits revealed lavish payments to board members and staff like Sh7.8 million to pay directors’ honoraria, Sh2.7 million in unmerited extraneous allowances and Sh10,000 each as lunch allowance, which is four times the capped Sh2, 500.
As musicians suffer, the audit found board expenses far exceeded royalties paid to members for the years 2021 and 2022 by Sh4.4 million and Sh4 million respectively. Similarly, board allowances and staff costs constituted up to 69 per cent in the period under review—way beyond the total administration cost capped at 30 per cent.
Kamp was licensed in 2008 by Kecobo to represent the interests of producers of sound recordings through collection of licence fees and distribution of royalties.
Music producers or owners of sound recordings are entitled to royalties every time their music is commercially used.
Kamp collects money from establishments that play music like clubs, hotels, retail shops, matatus, hospitals, banks, radios and many others. It then distributes the money to its members. But the scrutiny of account statements for Kamp, Prisk and MCSK for three financial years has detailed questionable dealings.
In particular, the report questions the procurement of a Sh80 million royalty collection and distribution system from an IT firm.
The audit report says the firm that was awarded the inflated tender “did not qualify the technical evaluation undertaken by the tender evaluation committee as it attained 61.41 marks out of the pass mark of 63 marks.”
Even more curious is that the firm’s bid price as evaluated by the committee was a total cost of Sh23.2 million inclusive VAT and perpetual commission of 25 per cent of gross royalties collected.
But the contract price as signed between Kamp-Prisk-MCSK and the firm was Sh80 million—being the cost of the system and recurring costs and commissions (one per cent) of gross monthly royalties collected.
The contract price is Sh68 million higher than that quoted by a firm that was initially recommended to be awarded after evaluation of the bids by 10 companies that expressed interest in the tender floated in 2019. Of the four companies that qualified for technical evaluation, only one, which bid Sh23.2 million, satisfied the criteria to proceed to the final evaluation stage. Auditors question how the contract was awarded to the firm that didn’t qualify and for a much costlier sum than its initial bid.
“There is no documentation on how it was awarded, and how an amount of Sh80, 000, 000 was arrived at,” says the report.
“The award of the contract was under unclear circumstances and no document was presented to substantiate the events that resulted in the said award. Further, no document was provided to substantiate the circumstances that resulted in the contract price rising from the initial quote of Sh23.2 million to Sh80 million that was Sh56.8 million higher than the initial price quoted.”
Auditors also flagged Sh7.8 million diverted from the distribution account to pay administration/ operating costs, including payment of directors’ honoraria, PAYE, rent, legal, insurance and other costs. Kamp board also incurred expenses that were beyond budget by Sh3.3 million.
The report arising from the audit done between February and May—yet to be made public but seen by the Saturday Nation—also reveals rampant embezzlement of funds at Prisk to the tune of Sh28,611,747.
In a summary of the findings at Prisk, the auditors noted flawed budgeting, irregular expenditure, multiple royalty payments to same individuals, irregular distribution of royalties, violation of procurement policy, gaps in payment vouchers and cheque, and other avenues that left room for misappropriation of funds.
The audit also branded the award of a Sh4.5 million tender to a firm for development of Prisk policies as a “sham aimed at justifying (the firm’s) quotation.”
Auditors also questioned hefty salary increments for two employees by up to 150 per cent between 2020 and 2022, concluding that “a total of Sh4, 392,000 was paid irregularly.” Another Sh5 million in unmerited extraneous allowances are flagged at Prisk.
The auditors also noted tax noncompliance by Prisk since the introduction of iTax in 2015.
“Prisk has never been tax-compliant since iTax began in 2015. In 2022, Prisk failed to file PAYE (Pay as You Earn) despite deducting a total of Sh5,588,479 from employees. Prisk failed to meet tax regulation timelines, resulting in penalties and interest of Sh10,505,605,” the report reads.
The reports name officials and firms whose names we have concealed for legal reasons.
In one case, the auditors noted a top official’s involvement in a Sh1.44 million loan disbursement to KPM (Kamp, Prisk, MCSK) joint operation committee in November 2020 that never reached KMP and was never repaid.
“On two occasions in November 2020, there were suspicious payments of Sh450,000 and Sh990,000 totalling Sh1,440,000 that were accounted for as loans to KPM. There was no proof that the funds reached KPM and the loans were never repaid.”
The officials also received Sh2,129,258 in unmerited monthly extraneous allowance that was not provided for in their employment confirmation letter dated June 2019.
A year later in June 2022, the officials received a leave allowance of Sh1,168,463, but the auditors found the human resource response about the payment unsatisfactory.
“Prisk disbursed a total of Sh5,038,152 in unmerited extraneous allowance. (Name withheld) was receiving a monthly extraneous allowance of Sh59,147 and this allowance was not provided in his employment confirmation letter. Therefore, he fraudulently received a total of Sh2,129,258 during the period under review,” the report says.
“Directors’ allowances and staff costs alone were averaging at 61 per cent of the revenue for the period under review.
“Prisk failed to budget for royalties in all the year under review contrary to its main objective of collecting and distributing royalties to its members.”
Prisk royalties collection in 2020 amounted to Sh47,391,349, but only Sh12,060,825 representing 25 per cent was set for distribution. In 2021, Sh45,253,642 was collected, but only 12 per cent (Sh5,592,2004) was set for distribution. Sh53,130,050 was collected last year, but only 11 per cent (Sh5,614,979) was set for disbursement. None of those distributions was made between 2020 and 2022. The only distribution made during the year under review was Sh12,320,157 (January 17, 2020), which was royalty payment due in 2018.
Annual distribution rate
Also noted in the years under review is that the organisation only made royalty distribution once every year contrary to policy procedures that direct two payments in a year for its members.
Between 2020 and 2022, Prisk had 852 new members, with the audits review of revenues associated with the new members for that period highlighting a variance of Sh145,655 in reported revenue and expected revenue.
In 2020, Prisk had 4,463 members, but 321 didn’t receive royalties that were distributed that year. It had 4,613 members in 2021, but 44 didn’t receive royalties; and 4,737 in 2022, but seven didn’t receive royalties.
It was also noted that during disbursement of the royalties, there were incidents where one phone number or email address was used by more than one member.
“On payment of royalties, most of the members are paid their royalties through M-Pesa account. Our review of payment revealed that there were members who were paid more than once amounting to Sh811,006.
Most of the members involved were ex-board members and the paid amounts were higher than the amount distributed to other members,” the report says.
As of last year, Kamp members had risen to 1,486 from 1,295 in 2020. The organisation is also not tax-compliant, with Kenya Revenue Authority penalties totalling Sh46,342,261. In a letter dated March 13, 2023, to the audit firm, MCSK, the other CMO, declined to be audited citing lack of funds to facilitate the audit as well as a court case between itself and the regulator Kecobo.
By the time of going to press, neither Kamp nor Prisk had responded to our queries over the audit reports.