Unpacking the Reserve Bank of Zimbabwe “Looters List” and the need for a holistic approach to combat Illicit Financial Flows (IFFs) in Zimbabwe. “An emphasis on the Mining Sector”.

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Unpacking the Reserve Bank of Zimbabwe “Looters List” and the need for a holistic approach to combat Illicit Financial Flows (IFFs) in Zimbabwe. “An emphasis on the Mining Sector”.

 

Introduction

To the public, the concept of Illicit Financial Flows (IFFs) is something that is generally elusive and a bit tricky to understand. This is despite the fact that illicit financial flows affect the poor proportionally more than they do to the rich. The Global Financial Integrity (GFI) defines illicit financial flows as illegal movements of money or capital from one country to another. According to GFI, as long as the funds are illegally earned, transferred and/or utilised

[1]

, they are classified as illicit flows. The high-level panel report on Illicit Financial Flows from Africa estimates show the African continent is losing more than US$50 billion annually through illicit financial flows

[2]

.

According the Africa Progress Panel, the sub Saharan African bears a heavy burden of IFFs. Studies between 2002 and 2011 show that IFFs affected the Sub Saharan African region more than any other region in Africa

[3]

. The African Progress Panelalso estimates thatthe Sub Saharan Africa suffered revenue losses to illicit financial flows equivalent to 5.7% of its gross domestic product (GDP) over a ten-year periodthereby prohibiting millions of Africans from accessing betters services such as education and health

[4]

.

Zimbabwe is also not immune to the scourge of illicit financial flows. According to GFI estimates,Zimbabwe could have lost close to US$ 2.8 Billion (representing an annual average loss of US$276 million)during the period ranging from 2004 to 2013

[5]

. These cumulative estimates represent potential revenue loss of close to 51% of the 2018 revenue projections of US$5.533 Billion

[6]

. Another report by the African Forum and Network on Debt and Development (Afrodad) also show that Zimbabwe could have lost significant revenue through IFFs. Afrodad estimated that Zimbabwe could have lost annual average of US$ 570.75 million between 2009 and 2013

[7]

.

Exploring the socio- economic and political impacts of Illicit Financial Flows

Many a times when the topic illicit financial flows feature, there is a danger of viewing it as adebate for the elite and hence usually attract less interest from the common person in the street including those from rural communities. Illicit financial flows have serious social, economic and political ramifications hence this subject cannot be divorced from the populace.

IFFs result in immediate loss of government revenue. The immediate impact of illicit financial flows is on the National budget. Due to increased illicit financial flows, government is prejudiced of the much-needed revenue, resulting in limited fiscal space. According the 2018 National Budgetstatement

[8]

, Zimbabwe has an estimated budget deficit of US$ 672 million

[9]

a figure that is almost close to the average annual average loss of US$570 million through IFFs as estimated by Afrodad

[10]

. It is therefore imperative for Government to make efforts to curb illicit financial flows in order close this fiscal gap. IFFs also cripple Government’s ability to mobilise adequate domestic capital for investment to sustain a long-term economic growth prospects.

There is a strong link between illicit financial flows and the common person and the opportunity cost of IFFs is the essential social services.  Illicit financial flows rob the government from the much-needed funds to invest in health and social service delivery.  Zimbabwe’s health system in in serious need of funding. It is estimated that over 70% of the drugs in the public health institutions in Zimbabwe are donor funded

[11]

. In 2016, the United Bulawayo Hospitals (UBH) resorted to suspend elective surgeries due to lack of drugs

[12]

. To make matters worse, the doctors embarked on an industrial action in March 2018 citing poor working conditions and lack of equipment and drugs. All these have a heavy bearing on the poor who cannot afford private hospitals.

IFFs also result in crowding out and low private sector investment. With limited fiscal space, it is very difficult for government to mobilise cheap and long-term capital to resuscitate the ailing industries. By closing in on IFFs, there will be improved fiscal space and less fiscal borrowing to finance budget deficits thereby minimising government crowding out of private sector borrowing.

IFFs also rob the nation the much-needed funds for infrastructure development. Zimbabwe is in facing serious infrastructure challenges. Some of these challenges include, but not limited to;

v 

Poor road infrastructure that has now become a death trap

v 

poor water and sanitation infrastructure that has resulted in people dying from waterborne diseases that can be easily prevented;

v 

poor and inefficient rail network with the National Railways of Zimbabwe (NRZ) have ancient rail infrastructure and locomotives;

v 

Inadequate electricity generation capacity, with Zimbabwe having to import electricity. At one point in time in Zimbabwe accumulated more than US$47 million in arrears from Eskom

[13]

;

v 

Poor water harvesting infrastructure that has resulted in majority of farmers relying more on rain fed agriculture being susceptible to climate change.

Uptake of IFFs disclosures by public and civil society.

The Panama leaks

[14]

amongst other significant events around IFFs, although global disclosures had strong implications for Zimbabwe but public demand for accountability from government and corporates was rarely stimulated. The Panama leaks exposed around 280 Zimbabweanindividuals that were mostly business executiveswho owned and operated offshore accounts. The publication of the list did not necessarily imply that these individuals had committed a crime by operating offshore accounts. Only further investigations by authorities could establish the merits of each individual case. There was little excitement to demand answers from these investigations by the public.

In November 2017, there was rekindled public excitement after the Government of Zimbabwe disclosed that there was over US$1.4 billion of funds externalised out of Zimbabwe. Governemnt alleged that it had evidence of individual and companies that externalised funds outside Zimbabwe. Government of Zimbabwe introduced an amnesty period of three months for all individuals and companies that externalised funds outside the country to return the funds without prosecution

[15]

. The government promised to prosecute, name and shame all those that will have failed to heed Government’s call. Unlike the Panama Leaks, there was stimulated public interest when government promised to decisively deal with externalisation.

There was also strong public scepticism from certain sections of the society; can the so-called new government with old faces genuinely fight corruption. The proposed publication of the list and naming and shamming of perpetrators was a viewed as an “AHA” moment for Zimbabwe by the public. As the deadline for the amnesty period approached, public expectations were buoyed. Even a common pensioner who was failing to access cash from the bank was optimistic that this could end the nightmare of sleeping at a bank queue.

Civil society organisations (CSOs) also welcomed Government’s initiative to name, shame and prosecute those involved in externalising. CSOs applauded this development as it was in line with their calls for the Government to deal with illicit financial flows that syphon funding for service delivery.

The release of the list of individuals and companies who externalised funds provides ZELA and exciting opportunity to analyse illicit financial flows as far as the mining sector is concerned. How significant is the disclosure in the fight against IFFs, what can we learn from the list, and importantly how can CSOs build on public interest to generate political will that is always deficient in the fight against IFFs.

The analysis unpacks the adequacy of the methodology used by RBZ to come up with list released under the three categories of illicit financial flows and compares the extent to which it matches to the technical approach used to measure illicit financial flows. The study also goes further to analyse the list with a view of identifying the potential risk from the mining sector and to provide recommendations to Government, civil society and CBOs.

 

Is RBZ disclosure adequate in combating Illicit Financial Flows?

There were so many mixed reactions soon after the release of the “looters list” by RBZ. To the surprise of many, names of some big and “obvious” political heavy weights were missing from the list. The public “cum public juries” had their own list of “convicted” looters who associated with corruption deals or scandals. The public anticipated the majority with questionable wealth to appear but alas, this was not so.The RBZ had classified the list into three categories namely

a)   

Illicit financial flows: funds externalised through non- repatriation of export proceeds.

b)   

Illicit financial flows:  funds externalised through payment of goods not received in Zimbabwe.

c)   

Illicit financial flows: funds externalised to foreign banks in cash under spurious transactions.

The major question was how did the RBZ come up with the list? Are all the transactions illicit financial flows as stated by the RBZ? In order to unpack these issues there is need to explore the methodology used by the RBZ. It also important to unpack the import and export document process.

Before a company exports goods outside the country, it takes the necessary documentation such as invoices to its bank or authorised dealer. The bank, on behalf of the client then facilitates the generation of the form CD1

[16]

for the export in the system in the Computerised Export Payments Exchange Control System (CEPECS). The Zimbabwe Revenue Authority will then use the form CD1 to facilitate physical export of the goods. In accordance with the exchange control regulations, the company must ensure repatriation of funds from the goods exported within three months or 90 days from the date of export, unless there are other prior contractual agreements with exchange control. The exporter is then supposed to acquit the export within 7 days after receiving the funds by taking the proof of payments by the buyer to the bank. According to exchange control regulations, the funds received from offshore through normal banking channels must be used acquit the transaction. If the export is not acquitted, the transaction is flagged in the system as overdue and such is the case with the transactions listed under category one by the RBZ list.

There are however many reasons for overdue exports, some cases are administrative in nature. Exporters might have received the funds from offshore but fail to take the proof of receipt of funds to the bank to acquit the export. In other cases, technicalities may arise after export for example the buyer outside the country may face viability challenges or become insolvent.

Similarly, for importations, an importer provides an invoice to the bank and anelectronic funds transfer to the supplier of the goods outside the country is done. This transaction (together with all other foreign payments) is recorded in the Computerised Exchange Control Batch Application System (CEBAS). When the goods arrive in the country, the Individual or company is then supposed to take the supporting Bills of entry to the bank to acquit the importation in question. Failure to do so will then result in the particular transaction being flagged as overdue in the system such is the case of transactions listed under category two.

The Third category is for individuals that transferred funds to foreign banks in cash under spurious transactions. In most cases, individuals transfer cash outside the country for various reasons such as payment of school fees, medical services, and other intangibles.  In this case there is need to establish the merits of every single case and establish the reason for every transaction. According to the RBZ exchange control guidelines, the funds are considered as “free funds”. It is now up to the legal minds to debate the possibility of prosecuting these cases.

 
 

 

 

 

 

 

This methodology adopted by RBZ is rather a narrow approach by RBZ to identify and plug illicit financial flows. There is need for a holistic approach to detect and curb illicit financial flows in Zimbabwe.  Cases captured by RBZ will only qualify to be illicit funds if investigations can prove that these funds were been obtained, transferred and/or utilised in violation of the laws and regulations of the land. According to the Commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development

[17]

, Illicit Financial Flows consist if funds that illegally earned, transferred and/or utilised. These funds typically originate from three sources namely;

A)   

Commercial tax evasion, trade mis-invoicing and abusive transfer pricing.

B)   

Criminal activities including drug trade, human trafficking, illegal arms deal and smuggling of goods such as tobacco, and minerals.

C)   

Bribery and theft by government officials.

Most of these activities go unrecorded in official systems and hence they do not feature under the RBZ list, hence the need for a holistic approach to illicit financial flows. “IFFs are very complex and difficult to accurately measure, due to the fact that many illicit transactions tend to be settled in cash, as parties involved in such transactions eliminate any incriminating audit trails. Furthermore, transactions of this nature are never declared and becomes extremely difficult to track and measure how much Government revenue is lost through these malpractices” (Afrodad

[18]

).

There are a number of methodologies to detect illicit financial flows. The GFI for instance has the trade-mispricing model that detects trade mis-pricing (the deliberate misrepresentation of exports and imports declarations to evade paying tax).  According to the GFI, mis-invoicing constitutes 80% of the world’s illicit financial flows

[19]

. Similarly,GFI figures show that trade mis- invoicing accounted for 96% of the value that Zimbabwe lost for the period ranging from 2004 to 2013. The model has the capacityto detect trade mispricing on sectorial level.

The trade mispricing illustration below show the limitation of the RBZ approach to identifying illicit financial flows. The simplified illustration below shows how it is possible for a transaction to be acquitted (and hence not red flagged)in the CEPECS and CEBAS system and yet it may be illicit in nature. The illustration show how a Zimbabwean company can use a brief case companyoutside the country to externalise funds to Botswana through over-invoicing of imports.

 

In summary, there is need to move from the casual approach and adopt a holistic approach to identify illicit financial flows by RBZ. The list appeared to be more of a report of un-acquitted imports and exports by business and individuals that had imported or exported goods and services using the formal banking system but the transactions remain un-acquitted due to various reasons. The list does not imply that all these individuals and companies fraudulently or illicitly shipped money out of Zimbabwe. It is premature to classify all of the cases as criminal in nature before the Government has investigated every single case and established the circumstances surrounding these transactions. If these funds violate the laws or regulation of Zimbabwe in their origin, movement or use then they are illicit funds according to the definition.

Though inadequate, the RBZ initiative is a first step in the fight against illicit financial flows in that it provides the potential risk areas. In purpose of unpacking the list, the analysis will not consider all the funds as having been illegally externalised outside the country but will view the balances as the value that is at risk.

What does the RBZ Disclosure tell us about the Mining Sector?

Studies have shown that the mining sector is highly susceptible to illicit financial flows. Findings by AFRODAD

[20]

, show that Zimbabwe could have lost 98% of the estimated loss of US$2.83 billion through illicit financial flows between 2009 to 2013. It is therefore interesting to explore if the disclosure by RBZ tallies with these findings concerning the mining sector considering that Zimbabwe is a mineral rich and mineral dependent economy.

 

From the disclosure by RBZ list, it is notable that the mining sector continues to be a high-risk sector in terms of illicit financial flows. The top 5 companies in terms of value at risk from non-repatriation of export proceeds are in the mining sector as released by RBZ are stated below;

Position

Company Name

Sector

Mineral

Value at Risk (US$)

1

African Associated Mines

Mining

chrysotile asbestos fibre

[21]

$62,049,622

2

Marange Resources

Mining

Diamonds

$54,238,249

3

Canadile Miners

Mining

Diamonds

$31,350,554

4

Mbada Diamods

Mining

Diamonds

$14,764,060

5

Jinan Mining

Mining

Diamonds

$11,072,668

6

Gold Driven Tobacco

Tobacco

Tobacco

$10,622,789

7

Insing Investments

Agriculture

Agriculture

$10,187,158

8

Allied Timbers Zimbabwe

Agriculture

Agriculture

$4,336,765

9

Pacific Cigarettes

Tobacco

Tobacco

$4,122,966

10

P T Royal Ostrindo Zimbabwe

Manufacturing

Manufacturing

$2,784,459

11

Pan African Mining

Mining

Gold

[22]

$2,659,335

As shown by the table above, the top five companies that are all in the mining sector have a cumulative value at risk of US$173,474,153 in non-repatriated export proceeds. It is also interesting to note that despite Zimbabwe mining sector having many minerals, mostly high value minerals such diamond and gold are prominent on the list, with four diamond mining companies featuring on the top 5 position, with $111,425,531 as value at risk in form of non- repatriation of export proceeds.The diamond sector is the leading sector is the most susceptible in terms of value at risk despite the state equity participation.

The figure below shows a detailed analysis of the value at risk through non-repatriated export proceeds per sector. The table above show that the mining sector is highly prevalent to illicit financial flows as compared to other sectors.

A cumulative value at risk from all the sectors in form of overdue amounts from non-repatriated export proceeds was US$237.5 million and the mining contributed US$180 million or 75% of the total value. There is strong need to focus on the mining sector has the highest risk.

The third category of the list provided for funds externalised to foreign banks in cash or under spurious transactions. In this category, 157 accounts were identified. Analysis show that the value at risk from only two companies in the mining sector account for 77% of the total value at risk of US$464,204,171. The table below provides a detailed analysis.

The above diagram also show that only two mining companies exceed the remainder 155 individuals and companies. It also worthwhile to note that of the mining firms Jinan had the highest figure of US$332,980,000.

The figure provides the value at risk based on destination.

** The funds under Botswana/ China were transferred by one Chinese mining company.

Botswana, China, South Africa and Mauritius are the top 5 destinations for the funds from Zimbabwe. Based on the findings above, there is need for the authorities to monitor contracts by Zimbabwean mining companies with related companies in these destinations. Special monitoring of exports and payments to these nations must be carefully scrutinised to ensure that all the transactions are based at arm’s length pricing.

 Conclusions and Recommendations

1.   

The general observation is that the list by the Reserve Bank of Zimbabwe is a list of overdue transactions that were proceeds using official banking channels and are under the central bank radar. Without further investigations, it is difficult to classify all the cases as illicit financial flows. Although not adequate, the RBZ list will go a long way in flagging potential risk areas,

 

2.   

There is need to broaden the approach to illicit financial flows by the Central Bank. The central bank has to go beyond monitoring funds that are going out of the country through official means. Due to the nature of illicit financial flows, the bulk of illicit funds evade or go undetected by the official system.

 

3.   

Mining sector is highly susceptible to illicit financial flows with the top 5 companies in terms of value at risk from non-repatriation of export proceeds are in the mining sector. The diamond and gold sector prominently featured on the list. The responsible authorities must be vigilant in monitoring mineral export proceeds in these sectors.

 

4.   

There is high risk from Chinese nationals and companies linked to Chinese nationals. The Government of Zimbabwe need to seriously monitor and re-look the Chinese investment in Zimbabwe. Government needs to review the Chinese investment contracts in mining to ensure sustainable mining. Most of their exports are destined for China hence huge risk for trade mispricing and abusive transfer pricing.

 

5.   

China, Botswana and South Africa were the top destinations for the list. The RBZ must seriously analyse funds to these high-risk destinations.

 

6.   

Removing the secrecy surrounding contracts in the mining sector will go a long way in allowing for effective monitoring.

 

7.   

There is need for compressive strengthening and capacity building of state institutions such as MMCZ, RBZ, ZIMRA, Police Border Control and other state departments on illicit financial flows.

 

8.   

Strengthening of the public finance management system will go a long in plugging leakages in mining. The starting point is action the reports by the Auditor General’s reports.

 

9.   

Civil society needs to maintain the momentum in pushing for transparency in the mining sector through platforms such a Publish What You pay and ZMRTI.

 

10. 

Civil society must scale up capacity building of illicit financial flows to the grassroots.

 

11. 

Civil society must monitor mining sector contracts and unpack “mining sector mega deals” and flag out all the grey areas.

 

 

 

Bibliography

Zimbabwe Independent . 2016. "Panama Papers: Zim Execs may get off Scot- free." Zimbabwe Independent. May 12. Accessed March 25, 2013. https://www.theindependent.co.zw/2016/05/12/panama-papers-zim-execs-may-....

African Forum and Network on Debt and Development. n.d. Illicit Financial Flows: Towards a more integrated approach for curbing illicit flows from Zimbabwe. African Forum and Network on Debt and Development.

Dev Kar, Joseph Spanjers. 2015. "Illicit Financial Flows From Developing Countries: 2004-2013." Global Financial Integrity . December 8. Accessed March 22, 2013. http://www.gfintegrity.org/report/illicit-financial-flows-from-developin....

Global Financial Integrity. n.d. "Illicit Financial Flows: Analytical Methodologies Utilised by Global Financial Integrity."

Harris, Edward. 2013. "Sub-Saharan Africa loses 5.7 percent of GDP to Illicit financial outflows." Africa progress Panell. December 18. Accessed March 24, 2013. http://www.africaprogresspanel.org/sub-saharan-africa-loses-5-7-percent-....

Herkenrath, Marc. n.d. "Illicit Financial Flows and their Developmental impacts: An Overview." International Development Policy | Revue internationale de politique de development(Online) online sice 26 January 2015, connection on 20 March 2018. URL: http://journals.openedition.org/poldev/1863;DOI:10.4000/poldev.1863.

High Level Panel on Illict Financial Flows from Africa. . n.d. Illicit Financial Flows: Why Africa needs to "track it, Stop it and get it". United Nations Economic Commisiions for Africa .

Joseph Spanjers, Matthew salomon. 2017. "Illicit Financial Flows to and from Developing Countries: 2005-2014." Global Financial Integrity. May 1. Accessed March 23, 2018. http://www.gfintegrity.org/report/illicit-financial-flows-to-and-from-de....

Kerkenrath, Marc. n.d. "Illicit Financial Flows and their Developmental Impacts: An Overview." Open Edition . Accessed March 26, 2018. http://journals.openedition.org/poldev/1863.

Mhlanga, Phillimon. 2015. "Chinese Firm externalise US$500m." Financial Gazette. April 16. Accessed March 22, 2018. http://www.financialgazette.co.zw/chinese-firm-externalises-us500m/.

n.d. "National Budget Statement for 2018 "Towards a New Economic Order". presented to Parliament of Zimbabwe on Thursday , December 7, 2017 by Hon. P. A. Chinamasa(M.P) Minister fo Finance and Economic Development."

Reserve Bank of Zimbabwe. n.d. "Foreign Exchange Guidlines ."

Sandu, Ndamu. 2014. "$2.85bn lost in Illicit financial flows ." Newsday. August 22. Accessed March 20 , 2018. https://www.newsday.co.zw/2014/08/285bn-lost-illicit-financial-flows/.

Spanjers, Dev Kar and Joseph. 2015. Illicit Financial Flows from Developing Countries: 2004-2013. Global Financial Intergrity.

Spotlight Zimbabwe. 2016. "Full List of Zimbabweans named in the panama papers ." Spotlight Zimbabwe. May 23. Accessed March 23, 2015. http://spotlight-z.com/news/full-list-zimbabwean-individuals-firms-named....

n.d. "Track It, Stop it, Get It! : Illicit Financial Flows. Report of the High Level Panel on Illicit Financial Flows from Africa. Commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development ."

 

 

 

 




[2]

Track, Stop it, Get it. Illicit Financial Flows. A report of the High-level panel on illicit financial flows from Africa. https://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf

[5]

Dev Kar and Joseph Spanjers (2015). Illicit Financial Flows from Developing Countries: 2004-2003.

[6]

Overall revenue projections including Statutory Funds, which are not available for Appropriation. Zimbabwe 2018 National Budget statement , page 116

[7]

African Forum and network on Debt and Development ( Afrodad). Illicit Financail Flows: Towards a more intergrated approach for curbing illict financial flows from Zimbabwe.

[9]

Zimbabwe 2018 National Budget statement, page 122. Presented to parliament of Zimbabwe on Thursday, December 7, 2017 by Hon. P Chinamasa. Minister of Finance and economic development.

[10]

African Forum and network on Debt and Development (Afrodad). Illicit Financial Flows: Towards a more integrated approach for curbing illicit financial flows from Zimbabwe.

[14]

These were leaks of documents containing financial transactions held by a Panama based law Firm called Mossack Fonseca.

[16]

The CD1 form is generated for export of merchandise goods, Form CD3 is for transport services, Form TR1 and Form TR2 are for tourism services, Form PTS1 and Form GSD are for telecommunications and general services respectively. 

[17]

Track it, stop it, get it. Report of the High Level Panel on illicit financial Flows from Africa. Commissioned by the AU/ECA Conference on ministers of Finance, planning and economic development.

[18]

Afrodad. Illicit financial flows towards a more integrated approach for curbing illicit financial flows in Zimbabwe.

[20]

Afrodad. Illicit financial flows towards a more integrated approach for curbing illicit financial flows in Zimbabwe.

Release Date: 
Tuesday, April 24, 2018 - 19:30

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