Conrad Mwanawashe Business Reporter
THE Reserve Bank of Zimbabwe should adopt proactive and holistic measures to detect and stop illicit financial flows which cost Zimbabwe about $2 billion last year.
Economic analysts said the central bank should strengthen internal early warning systems that can trigger red flags for wayward transactions.
At a time when Zimbabwe is grappling with liquidity challenges central bank records show that last year alone individuals externalised $684 million titled as donations, investments, and account transfers.
Firms externalised $1,2 billion in the form of export sales proceeds and highly inflated management fees, technical fees, professional fees. The funds were shipped out either through the formal banking system or through porous borders.
This contributed to the $60 billion Africa is losing through illicit financial flows every year.
IFFs also include trade mispricing and bulk cash movement.
In his January Monetary Policy Statement, RBZ governor Dr John Mangudya revealed how the billions of dollars are drained off the country’s formal banking system through a complex well-orchestrated system involving some corporates, banks and individuals.
Under the intricate criminal maze, the funds are creamed off from company accounts transferred into individual accounts before they are then moved out of the country, either through the formal banking system or through the porous borders.
The Reserve Bank of Zimbabwe should be proactive and strengthen surveillance systems while banks should be on high alert if the country is to successfully curb illicit financial flows, according to an economist based at the Africa University Mr Thomas Masese.
“The RBZ needs to act in a proactive manner not reactive as they are doing now. This is the second time the bank has been caught napping on the issue of externalisation.
“The RBZ’s curbing mechanisms should be modified on a regular basis in tandem with the changing environment,” said Mr Masese.
Dr Mangudya said the financial haemorrhage from capital flight is exacerbated by the openness of the economy which is susceptible to regional disruptive arbitrage activities – as businesses in the region scramble to get access to US$s from a dollarised Zimbabwe.
As such, the current practice in Zimbabwe of distinguishing foreign exchange between free funds and non-free funds under a multi-currency system economic environment is a great misnomer which is a breeding ground for IFFs.
All funds under the multi-currency system are fungible. Such funds lose identity when commingled, that is, when mixed in the banking system and/or on person.
“In view of the foregoing and in an effort to improve transparency in the utilisation of scarce financial resources, the Bank is putting in place, with immediate effect, the following measures to close the gaps and loopholes arising from inconsistencies and inadequate enforcement of rules on financial transparency and accountability, which in some instances, bodes around embezzlement of national resources and ignorance,” said Dr Mangudya.
He dispensed with concept of free funds and said free funds terminology was relevant under the Z$ era.
“The concept of free funds has become a fertile breeding ground for IFFs. Getting rid of that pseudo foreign exchange classification was therefore long overdue,” he said.
As part of monitoring measures, all suspicious transactions as generally reported by financial institutions under the Suspicious Transaction Reports (STRs) should now be reported to RBZ before processing of the outgoing transactions by financial institutions.
The current fait accompli of ex-post reporting is not useful because the country is continuously losing liquidity much to the detriment of the economy.
Some of the measures include the promotion of plastic money and bank transfers to minimise the unnecessary burden on consumers of carrying and paying in cash.
In order to uphold the integrity of the banking system that takes account of customer due diligence (CDD), know your customer (KYC) principle and the lead time for the importation of cash by banks to liquefy the economy, prior reasonable notice of not less than a day should be given to financial institutions for all cash withdrawals of an equivalent amount of above $10 000.
Banks will also now be required to conduct strict Customer Due Diligence and that each person, subject to the jurisdiction of the Zimbabwean financial system, having an interest in or has authority over one or more financial accounts or securities or investments in a foreign country should report, through normal banking channels, to RBZ if the aggregate value of such accounts or securities at any point in a calendar year exceeds $10 000.
Going forward, any offshore investments would require prior bank approval.
The central bank will also from now monitor the operations of offshore related companies because it has observed increased service payments between related companies, especially holding companies and their subsidiaries or sister companies to an extent where monetary authorities believe that some local entities are being used as cost centres.
While the moves by the RBZ have been welcome and because the financial services sector is a vibrant area, the bank should move with the changing dynamics, as criminal elements will quickly figure out how to beat the new systems.
“The measures for curbing illicit funds flow will be effective in the short run but soon people will learn how to circumvent the system,” said Mr Masese.
The RBZ should closely monitor if some banks are not complicit in the illicit funds flows.
“Most transactions originate in the banking systems and banks can raise red flags if unusual traffic is noticed in certain accounts. However, most illicit funds flows happen through our porous borders.”