Unpacking illicit financial flows-a case of Zimbabwe’s mining sector


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By Davison Kaiyo

Soon after his inauguration the President of Zimbabwe Emmerson Mnangagwa announced that he has a list of individuals and corporates that has been externalising money and assets and granted them a three-month moratorium to bring them back after which the law will take its course. There were high expectations of high profile arrests and to the disappointment of many two months later no arrests or convictions have been made.

There was a public outcry especially on social media when some names of government officials and ministers were excluded from the list. The excluded people were already convicted by the court of public opinion. What this showed was a lack of understanding of illicit financial flows and the term “externalisation” on the part of the monetary authorities and the citizens. The expectations of the common man were not met also because there was no proper unpacking of the animal called illicit finance flows and externalisation for the man on the ground to fully understand it.

This story seeks to explain illicit financial flows (IFFs) and is part of series of investigative stories on the issues surrounding illicit financial flows and seeks to show how Africa and Zimbabwe in particular has been losing money and assets over the years especially in the extractive sector with special interest in lithium mining. The series will also show the socio-economic impact of illicit flows. It is supported by the Wealth of Nations in conjunction with the Reuters Thompson Foundation and seeks to lay a background to this issue.

Africa is losing US50 billion annually through illicit financials flows (IFF). According to the Reserve Bank of Zimbabwe (RBZ) an estimated $3 billion was externalised between 2015 and 2017 to countries such as Mauritius, in the Far East and Botswana. These figures are actually said to be understated. It is believed that of the $3 billion, about $1,8 billion was spirited away illegally, while the balance was expatriated through management fees, service fees, technical fees and royalties which are in essence part of illicit flows according to the definition. The central bank also estimates that the country lost on average $150 million monthly in 2015 to illicit financial flows. The extractive sector is the most guilty one according to the statistics availed by RBZ. Also according to the research by African Forum and Network on Debt and Development (AFRODAD) and Zimbabwe Economic Research Unit (ZIPARU), it is estimated that US2.85 billion dollars sprinted out of Zimbabwe through IFFs between 2009 and 2013. Out of the mentioned figure, mining sector contributed 95% of the money flows or US2.7 billion dollars.

The laws such as The Bank Use and Promotion Act prohibits capital flight and money laundering are there to curb some of these challenges but to combat IFFs especially in the mining sector needs serious political will and according to a report published in 2017 by Trust Africa written by Farai Maguwu the Zimbabwe Revenue Authority (ZIMRA) is “poorly resourced and lack the technical, financial and human resource capacity to detect and track illicit financial flows especially in the extractive sector.”

In another study, conducted by Marko Kwaramba, senior lecturer at the University of Free State (SA); Nyasha Mahonye, senior lecturer at the University of Witwatersrand; and Leornard Mandishora, a researcher at the National Association of Non-Governmental Organisations, indicated that there was rampant mis-invoicing, particularly for minerals such as diamonds, gold, lithium and nickel. It concluded that in the 13-year period through 2013, export mis-invoicing which is a form of IFFs of diamonds which experts say is often done for tax evasion and avoidance, money laundering, and quota avoidance topped US$1,3 billion.

Illicit financial flows are the illegal flows of money into and out of a country. And this takes many forms including tax avoidance, tax evasion, money laundering, trade mis-invoicing, and transfer pricing, related parties’ transactions. Money is defined as IFFs if it is legally earned, transferred and or utilised. What is to note is the term “externalization” is loosely used in Zimbabwe to capture some of these IFFs which goes to show how the system is weak in detecting some of these leaks. Other leaks which contribute to the rampant rise of IFFs in Zimbabwe are the “sweetheart” deals with ridiculous tax breaks being offered to multinational companies and other foreign companies to attract the much needed foreign direct investment. 

This often happens in the extractives industry, where a country may not have the means to exploit a natural resource and the risks and costs associated with exploration can be high and for Zimbabwe and President Mnangagwa in particular the desperation of attracting investors after years of low or none FDI inflows. The government needs to be seen to be doing something especially in the elections season. Recently the government announced 4.2 billion dollars deal for platinum mining with Cypriot investor Karo Resources led by Loucas Pourolis. Despite the promise by the Mines minister Winston Chitando to make the details of the deal public the details are still shrouded in secrecy. Cyprus is one of the popular tax havens which attract much of money laundering proceeds and speculation is rife that this is another one of the “sweetheart deals.” Another 1,2 billion dollars investment in lithium mining deal was also announced. The “Zimbabwe is open for business” mantra exposes the country to unscrupulous characters masquerading as investors which will impact the country negatively in long term. The mantra is a sign of desperation.

Another form of IFFs if trade mis-invoicing. This is a method of moving money illicitly across borders which involves deliberate falsification of the value or volume of an international commercial transaction of goods and services by at least one party to the transaction. It is done to avoid paying taxes, avoid remitting exports proceeds among other reasons. Trade mis-invoicing, which is illegal whether it is used to smuggle dirty money out of the country or avoid paying taxes or customs duties. Faking trade declaration is the main conduit of illicit movement of capital (IFFs). This is also rampant in the mining sector.

According to the report, Investigating Illicit Financial Flows in Zimbabwe’s Lithium Mining Sector published by Trust Africa in 2017 one of the lithium mining companies in Zimbabwe Bikita Minerals maybe involved in trade mis-invoicing. According to the report in addition of failing to declare its high grade lithium to ZIMRA, the company is also said to be under invoicing its export products thereby prejudicing the country of tens of millions dollars annually! This is just but one example!

Another area that makes up IFFs include tax evasion. Tax evasion is illegal nonpayment of tax or underpayment. It involves deliberate action by the tax pay to mislead tax authorities (ZIMRA) of their tax affairs. It is also associated with informal economy and lax tax laws. It is also a result of trade mis-invoicing and transfer pricing. Tax evasion impacts on the revenue inflows of a country and thereby hampering its developmental agenda. The country therefore needs a reformed tax regime especially for the mining sector for the country to fully benefit from its finite resources.

As evidenced by the outrage shown by the Zimbabweans after the publication of the “looters” by President Mnangagwa the country need to do more to plug all leakages. People have serious belief that if the looted funds are repatriated back home the socio economic situation will improve. Indeed it will as all the money being lost to IFFs can be used for developmental agenda of the country. The Zimbabwean government must therefore enact strict laws, enforce the existing ones, taking a firm stand against illicit financial flows (IFFs) if efforts to turn around the country’s economy are to bear fruits. There must political will to reign in unscrupulous investors and have tough punitive measures must be put in place to deal with businesses and individuals found to be undermining the economic turnaround efforts of the country through underhand dealings and illicit finance flows.

This story was produced by Davison Kaiyo. It was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org