ILLICIT FINANCIAL FLOWS IN ZIMBABWE BULAWAYO 28 SEPTEMBER 2016 KUPUKILE MLAMBO DEPUTY GOVERNOR, RESERVE BANK OF ZIMBABWE 1 1

What is Illicit Financial Flows? The term was initially associated with capital flight. It now generally refers to cross-border movement of capital associated with illegal activity Acts of IFF are characterized by the following three main acts: The acts themselves are illegal (e.g., corruption, tax evasion); or The funds are the results of illegal acts (e.g., smuggling and trafficking in minerals, wildlife, drugs, and people); or The funds are used for illegal purposes (e.g., financing of organized crime).

Methods of IFF from Zimbabwe & Africa According to Global Financial Integrity (GFI), the main channels for IFFs are: over-invoicing or underpricing trade deals transfer pricing (avoiding taxes by setting prices in trading between their divisions) offshore banking and the use of tax havens Gold and diamond smuggling

Methods of IFF from Zimbabwe & Africa …..Cont’d….. Illegal tax evasion is not the only drain on the fragile public finances of developing countries Billions of dollars are also lost through legal tax avoidance by multinational companies and wealthy investors In the mining sector, multinational companies make use of shell companies in offshore tax havens to evade taxes

Example….Panama Papers scandal

Panama Papers Some of the 280 Zimbabweans named in the Panama Papers could have externalized money from Zimbabwe, which is a punishable offense. Some major Zimbabwean companies were named in the Panama Papers, for paying their executives through offshore companies and accounts. The Reserve Bank of Zimbabwe opened enquires into the 280 locals named in the Panama Papers.

Panama Papers… In the enquiry, the central bank noted that there could have been legal reasons for opening offshore account and as such would approach the issue with an open mind, as not everyone named could be guilty of a crime. However, the bank questioned the morality of transferring large amounts of cash to tax havens like the Cayman Islands and the British Virgin Islands.

How Big is the Problem of Illicit Financial Flows in SSA? UNCTAD Reports US$854 left between 1970 and 2008 a total of US854-billion left Africa through IFFs. Thabo Mbeki Report (AU-High-Level Panel): Africa losing US$50 billion annually through IFFs Contrast with Africa’s external in 2008 of $32.6bn; ODA of US$45.2bn ($47.8bn in 2014), and FDI $53.9 in 2014. Illicit financial flows are growing fast at of 20% per year, which makes Africa unfortunately today, the region with the highest share of IFFs as percentage of GDP

How big is the problem of IFF in Zimbabwe? In Zimbabwe, US$864 million was externalized in 2015 by individuals under the auspices of free funds for various dubious and unwarranted purposes that included: remittance of donations to oneself, offshore investments; Externalization of corporate funds using individual bank accounts; externalization of export proceeds by corporates, through individual accounts, leading to pervasive tax evasion and externalization. U$1.2 billion was externalized by companies in the form of export proceeds, high management and expert fees. RBZ data shows that Zimbabwe lost an average of $150 million every month of year 2015.

How big is the problem of IFF in Zimbabwe Afrodad estimates Zimbabwe lost US$2.83bn between 2009 - 2013, through illicit flows—translates to about US$570.75m a year. Of this: 97.88% (US$2.793 billion) were in the mining sector 0.98% Fisheries 0.61%, Timber 0.53% in wildlife Platinum mines—lack of full and transparent accounting after final processing at the Rand Refinery in South Africa for by-products of platinum refinery When the country liberalized the economy at the onset of the multicurrency era, we opened up and became a safe haven for anyone looking to get $$. 

Impact of Illicit Financial Flows A 2013 Global Financial Integrity (GFI) Africa is a net creditor to the world. IFF are costly: Robs countries of needed developmental resources through loss of tax revenues—thus anti-developmental Puts local businesses, and investors at a competitive disadvantage Unlike MNCs, they generally can’t shrink their tax bills by taking advantage of cross-border tax haven transactions. This tilts the playing field against them when competing against the multinational companies, for market share and better terms of trade.

Impact of Illicit Financial Flows ..............Cont’d…. IFFs drain foreign exchange reserves and worsen poverty. For dollarized countries like Zimbabwe, risks financial instability—for the US, dollar clearance is a national security issue For dollarized countries, reduces domestic liquidity

Where are proceeds from IFF going? Banks in developed countries like the United States and United Kingdom, as take up 55% (GFI Research) tax havens and offshore financial centres such as, Switzerland, the British Virgin Islands account for the remaining 45% of illicit flows Tax havens are often criticised for playing host to money laundering and celebrity tax evasion. Tax havens are depriving some of the world’s poorest countries of their vital resources to fight poverty.

Measures to curb IFF. Countries need: A clear regulatory frameworks that monitor movement of capital and trade transactions Financial transparency An efficient and effective customs administration which keeps track of the value and volume of trade deals. International co-operation on tax matters so as to have the same accounting and reporting standards for transnational corporations across countries.

Measures to curb IFF… According to the Global Financial Integrity (GFI) countries should enact policies to: Detect and deter cross-border tax evasion; Eliminate anonymous shell companies; Strengthen anti-money laundering laws and practices; Work to curtail trade mis-invoicing; and Improve transparency of multinational corporations.

Measures to curb IFF in Zimbabwe The Reserve Bank of Zimbabwe (RBZ) has put in place stringent prudential measures to plug illicit financial flows The new measures include, among others: Getting rid of the concept of free funds Reporting of suspicious transactions Use of plastic money Limit withdrawal of cash to a maximum of US 1 000 and US 10 000 for individuals and corporates respectively. Any amount above the stipulated limits, requires RBZ authority. Service payments should not exceed an aggregate of 3% of revenue and RBZ approval is now required .

Further Measures to curb IFF in Zimbabwe The Zimbabwe Financial Intelligence Unit (FIU) has negotiated and signed MoUs for information exchange and cooperation, with 15 foreign FIUs, including South Africa, Botswana, Egypt, Mauritius and Seychelles, to name a few These arrangements have helped the FIU to obtain information on financial crime cases involving Zimbabweans with business interests outside the country. The FIU passes on such information to local Law Enforcement Agencies, for further investigation and possible prosecution. Integration of CEPECS & CEBAS systems with ASCYUDA World System: collaboration between RBZ and ZIMRA to facilitate and monitor exports and imports. The integration will provide real time online system, linking ZIMRA & RBZ. Any offshore investments now require prior RBZ approval.

Measures to curb IFF from Zimbabwe The Financial Intelligence Unit co-operates with Law Enforcement Agencies (Police, ZACC, ZIMRA, Immigration) by providing them with financial intelligence on suspected criminal activities in the financial sector. Resuscitate the Zimbabwe Mining Revenue Transparency fiscal mining regime, as a way of improving accountability and transparency by players in the mining industry. Capacity building and increase budgets for the Financial Intelligence Unit, Minerals & Boarder Control Unit, CID Serious Frauds and Prosecutors who deal with economic crimes. Establishment of the Asset Forfeiture Unit whose mandate is to follow proceeds of crime and confiscate them. Establishment of platinum refinery: Zimbabwe has shortlisted two firms to build a platinum refinery.

Challenges Zimbabwe is facing in the fight against IFF Legal and institutional lapses in the domestic fiscal and financial systems, leading to corruption and other forms of trade mal-practices. Porous borders/exit points Corruption Zimbabwe being a cash economy: cash movement across borders is difficult to monitor and control. Resource constraints to capacitate customs authorities, the police, central bank, the banking system and the financial intelligence unit

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