Like many other nations Zimbabwe suffers from illicit financial flows, a term that usually means cross-border transfers or movements of money or capital associated with illegal activity but is sometimes extended to cover illegal domestic movements of money or capital. Three broad and often overlapping categories of illicit financial flows are generally recognised:
· Transfers or movements that are themselves illegal, e.g. where cash is smuggled across borders or where income is illegally hidden from the tax authorities and sent abroad (tax evasion),
· Transfers or movements of funds that are the proceeds of illegal acts, e.g. trafficking in drugs or people, and
· Transfers of funds intended to be used for illicit purposes, e.g. for financing terrorism or organised crime.
Apart from harming society by fostering smuggling, drug trafficking, terrorism and organised crime, illicit financial flows prejudice countries by diverting funds from legitimate activities such as developing industry, agriculture, education, health, social services and infrastructure.
Several studies have dealt with illicit financial flows in Zimbabwe. For example, in June last year Dr J. Kurebwa published an article Implications of Illicit Financial Flows on Zimbabwe’s Development in the International Journal of World Policy and Development Studies. In September this year Pact Zimbabwe produced a booklet Infamous by Design: Illicit Financial Flows in Zimbabwe by L. Keevill and N. Mukwakwami. What follows in this bulletin is drawn from those studies and others.
Extent of Illicit Financial Flows in Zimbabwe
It is impossible to give a precise estimate of how much money flows illicitly from Zimbabwe, but the amounts involved are certainly enormous:
· Between 2000 and 2020 Zimbabwe is estimated to have lost over US$32 billion through illicit financial flows
· In the shorter period between 2009 and 2013 Zimbabwe is estimated to have lost US$2,83 billion.
· In 2019 alone, according to the chairperson of the Zimbabwe Anti-Corruption Commission, Zimbabwe lost an estimated US$3 billion.
· According to a policy brief issued by the Brookings Institute, between 1980 and 2018 illicit financial flows from Zimbabwe amounted to 13,9 per cent of our total trade.
Drivers of Illicit Financial Flows in Zimbabwe
There are political and economic reasons for money to flow illicitly from Zimbabwe.
Zimbabwe’s public institutions are poorly governed and opaque, despite the Freedom of Information Act. Both these features – poor governance and opacity – encourage misappropriation and illicit financial flows. Patronage politics, whereby powerful politicians use State resources to reward individuals and groups for their support, is widespread in Zimbabwe and the boundaries between government and ruling party are blurred; again, both these features encourage illicit financial flows. Frequent cabinet reshuffles and demotions have promoted factionalism within the ruling party, leading party members to seek outside resources to fund their political activities, resulting in further illicit financial flows.
Zimbabwe has been under some form of sanctions for 28 of the past 57 years. The need to avoid sanctions has driven businesses and individuals to find informal means of accessing finance and to become adept in moving funds through informal networks rather than financial institutions which might enforce sanctions.
Furthermore the Government’s monetary policies and tight control over foreign exchange, as well as perennially high rates of inflation, have encouraged businesses and individuals to keep foreign currency earnings outside the country and to avoid domestic lending or ownership. Shortage of foreign currency within the country has encouraged a flourishing black market where foreign currencies can be bought at premium rates. Differences between the black-market rates of exchange and the official rates have encouraged arbitrage, whereby well-connected members of the élite buy foreign currency from the Reserve Bank at the official rate, sell it for local currency on the black market and use the resulting profit to buy more foreign currency from the Reserve Bank – resulting in an endless cycle of illicit financial flows.
Specific Types of Illicit Financial Flows
Four types of illicit financial flows are prevalent in Zimbabwe.
- Market and regulatory abuse
Trade mis-invoicing involves deliberately falsifying the value of traded goods in order to move capital illegally from one country to another. In Zimbabwe the most common forms are under-pricing exports and overpricing imports to evade capital controls and to avoid taxes and duties. Trade mis-invoicing is prevalent in the mining sector, where mining companies need to move their profits out of the country to repay their lenders and shareholders. Falsifying invoices is also used to conceal kickbacks for corruptly won public tenders.
- Tax abuse
Tax abuse includes tax evasion (the intentional non-payment of taxes and duties) and tax avoidance (the minimising of taxes and duties by exploiting loopholes and exemptions in tax law). Both types are prevalent in Zimbabwe.
- Abuse of public office
All types of abuse of public office occur in Zimbabwe, encouraged by low salaries for public officers, lax enforcement of ethical standards, lack of transparency and the political environment that we noted earlier. Some types of abuse are particularly prevalent:
· Corrupt public procurement, in which the rules and regulations for awarding government contracts are ignored
· Abuse of state subsidies, in which subsidies are used for something other than their intended purpose – for example, inputs such as fertilizer and seed being sold on the commercial market rather than being applied for the production of food under the Command Agriculture Programme
· Collusion, when organisations or individuals work together to manipulate a market to maximise their profits. One form of this occurs when fuel importers obtain foreign currency for their imports at the official rates of exchange and sell the currency at black-market rates, pocketing the difference.
The proceeds from these abuses are diverted domestically or sent out of the country and so become illicit financial flows.
- Proceeds of Crime
The proceeds of theft and large-scale corruption are often moved outside the country.
How to Curb Illicit Financial Flows
Illicit financial flows are a transnational problem but they need to be tackled locally as well as internationally. They are made possible by a global network of banks, companies and other institutions which circumvent financial regulations, sometimes with the connivance and support of governments; but the flows originate in individual countries and can be stopped at source.
The following local measures might help to curb illicit financial flows in and from Zimbabwe:
- Requiring companies and other entities to disclose their beneficial owners
The beneficial owner of a company or other entity is the individual – i.e. the real person – who ultimately owns or controls the entity or benefits from its income or profits. If registers are kept of the beneficial owners of companies, trusts and similar entities, they can help the authorities track down illicit financial flows.
Section 72 of the Companies and Other Business Entities Act requires companies to send the Companies Office accurate and up to date information about their beneficial owners, and the information is open to inspection by the Reserve Bank’s Financial Intelligence Unit as well as other law enforcement agencies and the general public.
Only companies are required to provide this information, however, so other entities such as private business corporations and trusts can maintain secrecy about their beneficial owners. The law should be changed to required them to make the same disclosure as companies. This indeed is one of the recommendations made by the Financial Action Task Force, a global watchdog against money laundering and terrorist financing.
- Improving transparency and accountability in procurement
Many of the Auditor-General’s reports have shown that government entities are either buying goods and services at inflated prices or paying for goods and services that are never delivered. Procurement regulations are often flouted. Ministries and departments often make little effort to recover overspent or misspent money.
Stringent enforcement of the Public Procurement and Disposal of Public Assets Act and the regulations made under the Act would go a long way towards preventing illicit financial flows arising from procurement. Disciplinary action against public officers who contravene the Act would bring home to them the need to comply with the law.
- More transparency in agreements disposing of national resources
The Government has entered into many agreements with foreign governments and entities granting them rights to exploit minerals and other natural resources. The terms of these agreements are not made public, even to Parliament, as they should be under section 327 of the Constitution. This secrecy may be a cloak to hide illegal deals and undue benefits giving rise to illicit financial flows. If that is so, those flows would be stopped if the terms of all international agreements were disclosed publicly.
- Tightening border controls against smuggling
The country’s borders and ports of entry have been laxly supervised so that goods, particularly minerals, have been smuggled out fairly easily. Tightening border controls would do much to prevent illicit financial flows.
- Empowering law enforcement agencies
Illicit financial flows are either illegal in themselves or arise from illegal or corrupt conduct. Most are enabled or facilitated by corrupt officials in the public or private sectors. If specialised law enforcement agencies such as the Zimbabwe Anti-Corruption Commission, the Reserve Bank’s Financial Intelligence Unit and the Zimbabwe Revenue Authority were given more resources they might be able to curb at least some of the illicit financial flows.
Most of these measures, it may be noted, entail the enforcement of existing laws rather than the enactment of new legislation.
In the End
Illicit financial flows are stunting Zimbabwe’s economy, fostering corruption and enriching members of the élite at the expense of ordinary people. The flows can be curbed, but it may be doubted if the Government has the courage and political will to do – its efforts to date have not had much success.