Report Compiled by: Godess Bvukutwa

  1. Introduction

Illicit Financial Flows (IFFs) are illegal movements of money from one country to the other. Global Financial Integrity classifies this movement as an illicit flow when funds are illegally earned, transferred, and/or utilized across an international border. The concept of IFFs can be rather complex and daunting to many thus the need to build the capacity of the Parliamentary Portfolio Committee on Budget, Finance and Economic Development for them to understand better what IFFs are. For this portfolio committee to be able to exercise their parliamentary responsibility of oversight on budget, finance and economic development they need to better understand the concept and how best they can curb them.

  1. Welcome Remarks 

Between 2004 and 2013, Zimbabwe lost more than 200 million to externalisation, tax evasion, corruption and creative accounts; this according to Dr Nyashanu, the Chairperson of the Portfolio Committee on Budget, Finance and Economic Development. He called IFFs, the enemy of financial progress and said the executive must adhere to the principal elements in financial management, Section 198 of the Constitution of Zimbabwe. He said the MPs must address all forms of Illicit Financial Flows through gaps in legislation through the Public, Financial Management Bill. Lastly, he called on MPs to invest their energies into the series of workshops facilitated by Silveira House in partnership with the Parliament of Zimbabwe. 

  1. Workshop Objective: 

To capacitate the Portfolio Committee on Budget, Finance and Economic Development on the effects of illicit financial flows in financial development 

  1. Facilitators 

Fr Charles Chilufya SJ- Jesuit Justice and Ecology Network Africa (JENA) 

Fr Fernando Saldivar SJ- (JENA) 

  1. Workshop Participants 

The workshop was attended by the Chairperson of the Portfolio Committee on Budget, Finance and Economic Development, Dr Nyashanu, the Director of Silveira House Fr Moyo, members of the parliamentary Portfolio Committee on Budget, Finance and Economic Development, representatives from the Ministry of Finance and Economic Development, a representative from AFRODAD and Parliament of Zimbabwe Staff. 

GENDER AGE DISABILITY 
Male 18Above 35 16Persons with Disabilities
Female 835 and Below 10Able Bodied 26
Total 26  26 26 
  1. Training Methodology 

Facilitators made use of powerpoint presentations but made sure sessions were interactive with the participants. 

  1. Overview of Illicit Financial Flows- Fr Fernando Saldivar

IFFs are a global problem which affect different countries differently, but the solution is not a one size fits all. One of the MDGs targets is to reduce IFFs and organised crime by 2030.  According to the International Monetary Fund (IMF), IFFS are broad cross border economic financial transactions, that is money illegally earned; corruption; tax evasion; funds that are the result of illegal acts (drug trafficking, professional wildlife poaching); and funds used for illegal purposes. But not all illicit flows are illegal which is problematic. IFFs do not agree on what is legal or illegal therefore, conditions must determine what is legal and what is not. For example, tax evasion is debated on whether it is an IFF or not. 

Definition of Terms 

Tax Evasion- activities which are intentionally illegal, there is no attempt to work within the confines of tax laws; aim is to hide revenue. 

Tax avoidance- Schemes which are illegitimate but not necessarily illegal; Stretching tax laws; looking for loopholes and grey areas. 

Licit Tax Savings- Businesses lower tax by finding ways to; for example, philanthropic work lower taxes on business. 

Global Dimension on IFFs 

IFFs represent a significant leakage of finances. 1.3 trillion dollars over 20-25 years left the continent through IFFs. This money could have gone to development. This has a negative impact on the ability for states to develop especially during COVID. There is a substantial overlap of mechanisms:

  1. Transparency, openness will cast a light on IFFs because they succeed in secret and in shadows. It’s a shadow world that wants to survive outside of the bright light. 
  2. Everything is tied to taxation and revenue and is a result of tax avoidance by large companies.  

Base Erosion and Profit Sharing (BEPS) –When tax avoidance is manipulated to reduce the tax that corporations are supposed to pay. BEPS happens when there is the use of aggressive tax transfer pricing. 

Transfer Price is the price for labour, goods and service across a large product spectrum, when a large corporation is doing business with itself. Corporations manipulate this by saying they are realising gains in ways that do not happen in the market, because if they show the actual pricing, they will end up paying higher taxes. Multinational corporations manipulate pricing by charging or reporting artificially low pricing and profits, for example the bulk of profits in cocoa in Ivory Coast are manipulated through the Cayman Islands and Luxembourg which are tax evasion districts. This is the heart of BEPS.

BEPS is a unique tax evasion issue in the world and the North is trying to reduce this problem. OECD is the group of those responsible for looking at global tax policy. The USA will be support of a global minimum tax which is an opportunity for Zimbabwe and Africa to have a say in the the tax issue. 

Tax Havens- Offshore financial centres offer minimum tax requirements. One does not have to be a citizen to gain their tax benefits. They have secrecy jurisdictions that allow individuals to practice tax crimes. 

Shell Corporations- They do not do anything other than hold money, shuffle money around the world; they are part of secrecy jurisdictions. 

Anonymous Corporations- jurisdictions that allow anonymous corporations so there is no idea who is behind those organisations. 

  1. Overview of Illicit Financial Flows- Fr Charles Chilufya

IFFs are profoundly serious for a country like Zimbabwe as it hurts them more. This has a lot to do with governance. 

Governance 

Ndikumana and Boyce (2012) state that Zimbabwe lost approximately 3 billion in one year, 2007. Governance should be stressed in businesses. Why is it that businesses are not able to pay taxes as they should? Businesses are corrupting the government, and this is a problem. Most money that goes out of the country illegally goes to China, South Africa and the UK. Unsorted diamond Zimbabwean exporters under reported trade transactions with UK and SA. This is observed for non-industrial diamonds. Many African countries put in place measures to attract FDI which does not make sense because the continent is losing 89 billion a year. There should be capacity building for local companies. The ambitious 12 billion mining economy by 2023 will remain a pipe dream if Zimbabwe does not arrest rampant IFF in the mining sector. In September 2020, the Minister of Home Affairs said that the country was losing 100 million worth of gold per year though IFFs 

Out of the 89 billion dollars lost from Africa through IFFs, 45% of that comes from Southern Africa. Is it because of the weak governance systems on minerals? 

What needs to be worked on?

Solutions

Resource rich developing countries are more likely to get buyers to accept such reformed arrangements if they join forces to hold out for them.

Strengthening of domestic resource extraction firms

Stopping the possibility of collusion

Structural transformation

Key intervention: Build capacity for legislature and tax admin.

Zimbabwe should not tax the profits of the natural resource extracting firms. It should simply charge a carefully formulated right of natural resource extraction.

Bids for particular lots could be formulated to take into account the quantity extracted and the relevant world market price during the custodial period.

Plenary Session 

Is it illegal to take advantage of depreciation? 

There is nothing illegal about an individual taking advantage of depreciation. Not every incident of tax savings is an IFF. 

Do multinationals follow Sullivan Rules of Business? 

The current international tax law in inadequate but there are legal frameworks like the Mutual Agreement on Tax in Africa which says that countries can collaborate with a multinational where tax is concerned. 

Challenges in presumptive tax collection: Presumptive tax is a way of making an exceedingly difficult sector (for example the informal sector) to pay tax. It should be considered that businesses may die, although there is money in the informal sector. It is good measure that must be done carefully so as not to hurt the poor. Also question if it is economically sensible to to spend $200 to collect a $1. 

Military regimes thriving on illicit flows? Military governments sell resources to other governments, therefore there is a need to question democratic governments which buy resources from juntas. There are international frameworks that can be used to govern that. 

SDG 14.4: Do we have an international convention where all countries may be signatories of the entire convention? 

Negotiations for the UN binding treaty on business are ongoing. The Chinese resist projects that are collaborative and want country- China deals. 

  1. Illicit Financial Flows in Zimbabwe: Government of Zimbabwe’s Perspective- Judith Rusike Director of Economic Affairs, Ministry of Finance 

Curbing IFFs requires strong national, regional and international cooperation. In Zimbabwe, the institutions involved are Reserve Bank of Zimbabwe, Finance Intelligence Unit (FIU), Zimbabwe Revenue Authority and the Zimbabwe Anti- Corruption Commission 

Efforts to curb IFFs in Zimbabwe. 

FIU has established MOUs for information exchange with counterpart FIDs in the region. 

Cash smuggling: Zimbabwean laws provide for a disclosure system, whereas a traveller is required to disclose cash on his person. 

Modernisation and harmonisation of entry points 

There is a National taskforce for combat money laundering. 

Consultations are currently underway to move from a disclosure system to a declaration system where it will become mandatory for a traveller to fill in a declaration form if the traveller is carrying more money than stipulated. 

Recommendations

  1. Illicit Financial Flows: Techniques to Curb IFFs by AFRODAD

IFFs are an impediment to development, they lead to poor remuneration, poor medical health services, etc. Effective strategies require understanding of the environment. 

Why is Zimbabwe prone to IFFs?

  1. Countries with a lot of resources are susceptible to IFFS, for example, transfer pricing, under invoicing and tax evasion.
  2. High levels of corruption in resource rich countries like Zimbabwe
  3. Too many agencies involved in revenue collection.

We need to take part in global processes though they are designed to favour rich countries. IFFs are increasing in Zimbabwe. According to (UNCTAD) 86 billion has been lost through IFFs in Africa since 2009. Zimbabwe has lost more than 32 billion in the last decade. 11 million is lost through invoice mispricing.

AFRODAD (2018) research shows countries spend less on health and education than on IFFs. Companies are losing 65% of their revenue on IFFs. OECD countries are involved in IFFS and multinationals belong to OECD countries so the question is, should Africa allow OECD countries to make IFF laws? To curb financial pricing, it is proper to practice an arms length policy and an availability of pricing data. Zimbabwe has established transfer pricing units situated within ZIMRA. 

How to Curb Trade Mis invoicing 

What can Parliament Do?

Plenary Session

Why were there a lot of gaps in the presentation from the Ministry of Finance? Why did not the presenter have adequate information: The Ministry was still waiting for more information and recent data from stakeholders, some of whom have not sent in requested information yet.

In what way does the government make use of and protect whistleblowers? Unfortunately, there is no stand-alone law that protects whistleblowers

Travellers are not taking much out of the country. It is the corruption and IFFs that is happening at the top level, that is top politicians and the security service that is draining the country.

Can it be that it is through the small-scale mining sector that most IFFs are happening as compared to the large and established mining companies? There is no capacity, resources and will to implement the arm’s length policy.

Is the FIU in the Ministry Capacitated enough to deal with IFFs: A bill will be coming through to parliament on FIU to make it independent, so it is moved out of the Reserve Bank.

  1. Action Plan/ Way Forward
Activity/Gap/What is to be doneBy Who?By When?
Parliamentary Network
Capacity Building Workshops
Capacitating Small Workshops to avoid smuggling
Partnership with JENA
Finance Intelligence Unit conversation with parliament

12. Vote of Thanks

Dr Nyashanu thanked the presenters for awakening the MPs on IFFs which he said was a course on its own but hoped the MPs had their own takeaways. He said the African Society has become greedy and there was a lot that needed to be done to curb this greediness. In conclusion Zimbabwe should participate in any work that increases transparency in the public sphere. The country should push for more transparency in the international transfer and tax systems. Lastly, Multilaterals are key to combating IFFs. There is a need to form a block with other states to shed light on and question IFFs.