Illicit Financial Flows (IFFs) in Zambia and in Africa

In the course of the past 2 months, we have been exploring with you the topic of illicit financial flows (IFFs); Our campaign was developed on the basis of two reports by Transparency International:

• Risks of Illicit Financial Flows in Africa: Understanding vulnerabilities to corrupt money flows in nine countries (April 2024)
• Loophole Masters: How Enablers Facilitate Illicit Financial Flows from Africa (Dec. 2023)

And now, as TI-Z, we are launching our own report on the risks of illicit financial flows for Zambia, where we are sharing a set of key recommendations to curb IFFs.

In this article, we want to sum up what we learned throughout our online campaign. And if you have any questions, don’t hesitate to reach out!

What are IFFs?

Which are the most vulnerable economic sectors?

• Extractive industries and natural resources
• Real estate and infrastructure
• Gambling
• Wildlife and environment
• Land and agriculture

What are the main causes for IFFs?

Each country and region has its own specificity, but there are a few common features among all countries of origin for IFFs.

1. Weak governance: Weak institutions, weak rule of law, rampant corruption, and political instability are important enablers for IFFs. Countries with negative levels of governance effectiveness, regulatory quality, and rule of law, tend to be countries of origin for IFFs. Countries with strong institutions, a stable economy, and rule of law are not immune from IFFs, but rather may potentially be transit or destination countries for IFFs (like South Africa or Mauritius)

2. Reliance on the extractive sectors: the extractive sector often becomes a breeding ground for IFFs because of the lack of transparency, the limited competition across the sector, and the complex technical and financial processes involved.

3. Transnational business structures and ties: Criminals use a wide range of financial vehicles and complex ownership structures which rely on several layers of companies to disguise the origin of illicit financial flows. It is hard to track them down, but thankfully there are two indicators that can help to shed some light.

1. the degree of legal entities in the target country controlled from risky jurisdictions, when shareholders of legal entities present in the target countries are registered in (for legal persons) or are citizens of (for natural persons) jurisdictions with a low level of financial and corporate transparency; the so-called tax havens.
2. the incidence of shareholders or beneficial owners who own companies registered in high-risk jurisdictions.

What are the main destinations for African IFFs?

It’s hard to answer, since the money is moved illegally and/or secretly. What we know is that the people moving IFFs normally look for countries with a stable economy and political stability, high quality banking and legal services, and possibly with loose financial and corporate regulation.

Traditionally, the most frequent destinations for IFFs from Africa have been large, developed economies in the West.

In the last 20 years, however, we have seen a global shift towards emerging economies in Asia and the Middle East, such as China, Singapore, Hong Kong and the UAE, with a strong increase in IFFs volume commensurate with trade flows, whereas IFFs to Europe and the US have remained constant (and deserve, nonetheless, strong scrutiny).

If we look at the 9 countries covered by the TI study mentioned above:

1. The UAE plays an especially important role in attracting IFFs (ranking among the top 3 trading partners responsible for IFFs vulnerability for 6 countries out of 9 in our study!).
2. African countries such as Mauritius, South Africa, Kenya, and Nigeria, play the role of transit points for IFFs before they are moved on to their final destination.
3. The main destinations for Zambian IFFs are the UAE, South Africa and Tanzania

How does the Zambian IFF network look like?

There are no certain measures nor maps for Zambian IFFs. However, a good indicator is Foreign Direct Investment (FDI). The main destinations are China, the UK, the US and South Africa. In addition, the UAE and India play an important role as offshore markets for precious stones and gold.

Zambia has a particularly high share of ownership connections (66%) with a single country: the United Kingdom. There are vast sums of money flowing between Zambia and the UK, and these ties deserve scrutiny: we are particularly likely to find IFFs hidden somewhere in the midst of all the investment and business relations between these countries. The UK network (Britain and its overseas territories, such as British Virgin Islands and Guernsey) remains one of the world’s biggest suppliers of financial secrecy and the biggest enabler.

Where do Zambian IFFs occur?

The leading sources for IFFs in Zambia are contract overpricing and bribery, as well as procurement, and the most affected sectors are mining and infrastructure projects due to the high volume of funds involved, the availability of foreign nationals willing to partake in the illicit movement, and the informal nature of the sub-sector.

The main channels used to move IFFs are banking, enabler from the legal sector, casinos, gold and precious stones, and second-hand vehicles.

What are Zambia’s main weaknesses in terms of curbing IFFs?
When looking at the recommendation made by the Financial Action Task Force (FATF), Zambia is generally compliant with most of the recommendations concerning IFF and anti-money laundering (AML) preventive measures, and international cooperation, with important steps forward recently made in regulating beneficial ownership, among other things.

However, notable weaknesses were identified on various fronts, most importantly the lack of a comprehensive framework and strategy concerning IFFs and AML, weak institutional capacity, poor intra-institutional cooperation, resulting in a low number of investigations, and the lack of an effective case management system that enables effective monitoring and accounting for cases.

What are TI’s main recommendations for tackling IFFs?

When it comes to Zambia, TI-Z makes the following recommendations:

1. The Government, through the Bank of Zambia, should tighten the regulation of cash in conducting financial transactions. There is need to introduce a threshold, beyond which, it will be illegal to make payment or transact using cash.
2. The Government, through the Zambia revenue Authority, should accelerate its efforts to formalize economic activities and strengthening border management to address trade-based money laundering and smuggling.
3. The Law Association of Zambia (LAZ) should strengthen its oversight on law firms in order to reduce the risk of IFFs and money laundering facilitated by legal professionals.
4. Government should address the risk of corruption in the public procurement process by prosecuting officials cited in FIC Intelligence Reports as well as the Auditor General’s Reports.
5. The Government, through the Ministry of Mines and Mineral Development, should accelerate efforts aimed at formalizing small-scale and artisanal mining operations across the country in order to reduce the IFFs enable by illegal mining and smuggling of minerals.
6. The Government should strengthen the institutional capacity of Anti-Money Laundering (AML) institutions in order to reduce staff turnover and increase investments in digital systems.
7. The Government should strengthen the coordination, corporation and exchange of information among AML Institutions and LEAs by strengthening the operation of the Inter-Agency Framework or National Task Force on Asset Recovery.
8. Government should review the Companies Act No. 10 of 2017, to strengthen aspects of beneficial ownership to ensure alignment with FATF recommendations, and to harmonize disclosure requirements across sectors.
9. Transparency International Zambia, and other civil society actors, should enhance collaboration, policy engagement and advocacy, as well as citizen sensitization on Anti-Money Laundering and IFFs in Zambia.