Say No to Illicit Financial Flows

While is clear that money is the main motivation behind IFFs, literature seems to ignore the players involved and the amount of money involved.

IFFs are financial crimes by those with power (political and financial). A classic example is former Nigerian President Sani Abacha who looted about USD 800 million in Nigeria (Fontana). SABMiller was accused of shifting profits generated in its African and Indian operations to avoid tax obligations (Calling Time).Tax evasion and money laundering are the most common sources of illicit financial flows.

Baker (2005) estimates that laundered commercial money through multinational companies constitutes the largest component of IFF, followed by proceeds from criminal activities, and lastly corruption . Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts (through transfer mispricing) .Money laundering is a process to disguise the source of criminally derived proceeds to make them appear legal. IFFs breed in an environment where there is a lot of natural resource wealth, weak governance structures for natural resources, (weak policy and institutional frameworks, lack of disclosure, secrecy), high levels of corruption and high levels of impunity.

The Global Financial Integrity Report notes that the country has lost a cumulative US$12 billion in the last three decades through illegal financial outflows ranging from secret financial deals to tax avoidance and illegal commercial activities.

A study by the CNRG (2013 ) found that massive IFFs in the mining of gold in Penhalonga area of Mutare. An estimated US$1.7 million worth of gold is smuggled out of Penhalonga annually and MMCZ estimates that US$50 million worth of gold is smuggled out of the whole country every month. Given that ZIMRA is supposed to collect a royalty of 7% on gold production, Zimbabwe is losing out on US$42 million in potential royalties annually.

According to the Minerals Marketing Corporation of Zimbabwe (MMCZ), Zimbabwe loses over US$50 million worth of gold every month due to smuggling activities.The Global Financial Integrity Reports notes that illicit financial flows in Zimbabwe manifests through and as a result of secret financial deals, tax avoidance and illegal commercial activities, secrecy in the negotiation of mining contracts and concessions.

Allegations of tax avoidance by mining companies, eg the Platinum Group of Minerals gold, palladium, rhodium and nickel, which are not declared at the time of export, but are extracted during beneficiation.

The Anti Money Laundering Act – a good piece of legislation but questions relate to its implementation and enforcement (impunity). Every bank is required to perform due diligence by verifying a customer’s identity and monitoring transactions for suspicious activity.

In Zimbabwe the Bank Use Promotion and Suppression of Money Laundering Act (Chapter 24:24) of 2004 is the primary piece of legislation governing the conduct of financial institutions and their employees in relation to money laundering.

It is a useful exercise for bankers to familiarise themselves with the provisions of this Act.

Recommendations

• There should be tax reform to widen the tax base

• There should be full implementation of the United Nations Convention against Corruption

• There should be a measure that can serve to curb IFF public disclosure of financial information.

• There should be automatic exchange of information agreement with destination countries where the proceeds of tax evasion are lodged

• The Anti-Money Laundering Act – need to strengthen the capacity of the relevant authorities to initiate appropriate legal actions on the basis of these laws and reports (Financial Intelligence Inspectorate and Evaluation Unit (FIIE).