Illicit financial flows cost Zim US$32bn: Think Tank

Zimbabwe has lost at least US$32 billion through illicit financial flows, legal think tank, Veritas Zimbabwe has said, citing findings of recent studies on opaque movement of wealth and capital from the Southern African nation.

Illicit financial flows are reportedly “stunting Zimbabwe’s economy, fostering corruption and enriching members of the élite at the expense of ordinary people”.

Veritas said the flows could, however, be curbed, but still noted limited effort being done to stamp out the scourge.

Illicit financial flows usually entail cross-border transfers or movements of money or capital associated with illegal activity, but are sometimes extended to cover illegal domestic movements of money or capital.

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.

“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,” Veritas Zimbabwe said.

Several studies have dealt with illicit financial flows in Zimbabwe.

Lecturer in the Department of Peace and Governance at Bindura University of Science Education, Dr Jefferey Kurebwa, published an article in June 2021; Implications of Illicit Financial Flows on Zimbabwe’s Development in the International Journal of World Policy and Development Studies.

In September last year, Pact Zimbaba, a non-profit organisation with footprints in over 40 countries, produced a booklet; “Infamous by Design: Illicit Financial Flows in Zimbabwe” by economists L Keevill and Norman Mukwakwami, which extensively detailed illicit financial flows in Zimbabwe.

Findings from these studies revealed that 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, the country potentially lost an estimated US$2,83 billion.

“Illicit Financial Flows (IFFs) is a major challenge to Zimbabwe’s development. They have a direct impact on the country’s stability to raise, retain and mobilise its own resources to finance sustainable economic development.

“The study finds that Zimbabwe lost over US$32,179 billion during the period 2000 to 2020,” the study findings revealed.

In 2019 alone, according to the chairperson of the Zimbabwe Anti-Corruption Commission, Loyce Matanda-Moyo, 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 percent of its total trade.

According to evidence from research findings, there are political and economic reasons for money to flow illicitly from Zimbabwe, Veritas said, based on the studies carried out on Zimbabwe.

Political reasons

Study findings established that Zimbabwe’s public institutions were poorly governed and opaque, despite the Freedom of Information Act. Both poor governance and opacity encourage misappropriation and illicit financial flows.

Economic reasons

Economic sanctions imposed on Zimbabwe by western countries over the last two decades have also been blamed for promoting illicit financial flows in the country.

Zimbabwe has been under some form of sanctions for 28 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,” Veritas said.

Furthermore, the Government’s monetary policies and tight control over foreign exchange, as well as perennially high rates of inflation, have also reportedly 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.

Empirical evidence from studies carried out in Zimbabwe revealed four types of illicit financial flows are prevalent in the country.

Market and regulatory abuse

This entails trade mis-invoicing, which is deliberately falsifying the value of traded goods in order to move capital illegally from one country to another.

In Zimbabwe the most common forms include under-pricing exports and overpricing imports to evade capital controls and to avoid taxes and duties.

Trade mis-invoicing is reportedly 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 have been found to 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. Some of the major ones include corrupt public procurement, in which the rules and regulations for awarding government contracts are ignored.

There also is abuse of state subsidies, where subsidies are used for something other than their intended purpose – for example, inputs such as fertiliser and seed being sold on the commercial market rather than being applied for the production of food under the Command Agriculture Programme.

Further, it was noted that collusion is also prevalent and entails organisations or individuals working 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.

Generally, 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.

Counter measures may include requiring companies and other entities to disclose their beneficial owners, improving transparency and accountability in procurement, transparency in agreements disposing of national resources, tightening border controls against smuggling and empowering law enforcement agencies, among others.-ebusinessweekly