Anti-money laundering framework: The overview and effects (Part II)

The first article of this series described the framework for assessing the extent to which a country is capable of monitoring and controlling illicit financial flows. In short, the Financial Action Task Force (FATF) — the global money laundering and terrorist financing watchdog — assesses a country’s compliance with international standards on anti-money laundering. This is a highly complex process that is done in conjunction with regional organisations.

Muchadeyi Masunda
LEGAL PRACTITIONER

The reports published are called Mutual Evaluation Reports (MERs) and are an assessment of a country’s financial crime legislation and enforcement capabilities.

This article is the second of a three part-series analysing Zimbabwe’s current Anti-Money Laundering (AML) framework. It outlines the major findings of Zimbabwe’s September 2016 MER and the results of a re-rating which Zimbabwe sought for some of those elements in September 2019.

Both evaluations were carried out by the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG), the FATF regional body for Eastern and Southern African countries. For more information on this, please refer to last week’s first instalment of the three-part series.

Zimbabwe’s technical compliance

As pointed out in the previous article, the MER assesses a country’s AML capacity and produces findings on 11 Immediate Outcomes and 40 risk areas as well as recommendations for improving any identified deficits. The 40 risk areas form the Technical Assessment and these findings then determine the Immediate Outcome ratings.
Zimbabwe’s first MER took place in 2007, followed by a second in 2016 and a re-rating of some of those elements in September 2019. In this article, we deal with the 2016 MER and the 2019 re-rating.

No attempt is made to give detail on all 40 areas assessed. On the other hand, the primary goal is to summarise the findings and present a series of conclusions.

In the 2016 MER, six out of 40 risk areas rated as Non-Compliant (the lowest possible rating); 14 as Partially Compliant; nine as Largely Compliant and 11 as Compliant (the highest rating). This means that in half the technical areas, our country was below, and in many cases significantly below, the standards FATF expects.

The most concerning findings involve the conclusion that the AML supervisor had applied a model of supervision that fell short of FATF requirements and, when it did take action, its approach was neither sufficiently proportionate nor dissuasive to change behaviour.

In short, the supervisor did not apply a model that worked to root out money laundering, and when it did come across money laundering, the action it took was not strong enough to affect the compliance culture in the institution concerned.

In addition, there were insufficient measures to identify and assess money laundering from new technologies, no mechanisms to advise financial institutions of concerns about deficiencies in AML systems in high risk countries and a lack of transparency and information about beneficial ownership of legal entities. This last finding is particularly worrying, because information about beneficial ownership (i.e. who really benefits from the profits made by a company) is one of the cornerstones of successfully identifying and interdicting money laundering.

Following to the adoption of the MER, in 2019 Zimbabwe submitted its first request for re-rating of some technical areas and showed improvements in eight of the 12 requested areas with four not approved for re-rating. Most notable in the 2019 examination is the reduction in the number of Partially Compliant areas from 14 to six out of 40 and the increase in Compliant ones from 11 to 22 out of 40. This means that out of the 40 technical areas, Zimbabwe is Compliant or Partially Complaint in more than three quarters of them (33).

However, the number of areas with “low” ratings (Partially Compliant and Non-Compliant) is slightly less than one quarter of the total which is seven out of 40.

As can be seen, while Zimbabwe improved in a number of areas of its risk compliance assessment, there remain a number of serious outstanding issues. FATF’s “general expectation” is for countries to have addressed most, if not all, of the technical compliance deficiencies identified in their MER after three years. Thus, although Zimbabwe showed some improvement, our country clearly failed to achieve the expectation of addressing ‘most if not all’ of those deficiencies within the required timeframe.

Furthermore, in the Basel Anti-Money Laundering Index 2019, published by the Basel Institute on Governance after Zimbabwe’s 2019 re-rating, our country ranked 13 out of a list of 125 countries ranked from the highest to the lowest level of risk for AML. The Transparency International corruption perceptions index ranks Zimbabwe as 158th out of a possible 180 countries (i.e. among the most corrupt), ranking our country below the Comoros Islands and the Central African Republic and only marginally above Iraq. This clearly demonstrates that although there were some marked improvements, money laundering can still happen easily and with impunity in Zimbabwe.

Zimbabwe’s immediate outcomes

When it came to the assessment of Immediate Outcomes, Zimbabwe does very poorly overall, with nine out of 11 outcomes ranking “low” which is the lowest possible and only two ranking “moderate”.

This is low in terms of the score but also in comparison to our neighbours, Zambia and Malawi, which rated nine out of 11 Immediate Outcomes as “moderate” and two as “low”, for the former, and seven out of 11 as “moderate” and four “low”, for the latter.

Some of the deficiencies identified were truly alarming but reflect the sad reality of life in the public sector in Zimbabwe. The review found that the legal framework did not afford the main AML supervisor adequate autonomy and operational independence — in essence it found that the possibility of inappropriate government interference in the supervisor’s functions undermined its effectiveness although, to be fair, it found no evidence of undue influence.

Worse still, the level of institutional capacity within the supervisor was assessed as low, with the report concluding that this “negatively affected implementation and effectiveness of the [anti money laundering] system”.

In terms of investigation and prosecution, the report found that law enforcement agencies had low resource capacity to conduct parallel financial investigation and money laundering investigations. Investigations and prosecutions for money laundering are rare in Zimbabwe. There was a low appetite on the part of the authorities to freeze or confiscate criminals’ proceeds of crime.

Moreover, in terms of international co-operation, although competent authorities in Zimbabwe have procedures and processes to provide MLA, extradition and other forms of international co-operation to pursue crimes associated with money laundering, there are serious constraints relating to low resources capacity and limited quality and use of financial intelligence.

The overall story told by the review was, therefore, of a country in which the set up and operation of the anti-money laundering system was clearly and unacceptably deficient with regard to a large number of elements.

After five years, FATF conducts a follow-up assessment that looks at the priority actions from the MER and the reforms the country has introduced to improve the effectiveness of its actions to protect the integrity of the financial system. Zimbabwe’s follow-up assessment is due in 2021. However, due to the demands of the process, which require considerable resources from both the assessing bodies and the assessed country, and the ongoing Covid-19 pandemic, there is still no scheduled date.

Ramifications for Zimbabwe

Zimbabwe’s weak AML framework and poor MER results have led to our country being “blacklisted” by a number of institutions. This has a negative impact on our international standing and generates a view that Zimbabwe, as a country, is not meeting its international obligations. It also has a negative effect, among other things, on the country’s general economic and financial wellbeing as well as on inward investments (FDIs) and, potentially, aid flows.

Zimbabwe is currently in the FATF “grey list”. This is a list of countries with ‘strategic deficiencies’ in their AML frameworks which have committed to actively working with the FATF to address the deficiencies to successfully counter money laundering, terrorist financing and proliferation financing. There are only four other African countries in the FATF’s grey list — namely Botswana, Ghana, Mauritius and Uganda.

Although being in this list demonstrates commitment to reforming ‘strategic deficiencies’, it generates deep mistrust among investors.

Zimbabwe has also been added to the EU High Risk Third Countries List from October 2020. This is a list of countries which pose significant threats to the financial system of the European Union and the proper functioning of its internal market.

According to this directive, “banks and other gatekeepers are required to apply enhanced vigilance in business relationships and transactions involving high-risk third countries”. This means that EU financial institutions must apply extra checks and control measures to companies and individuals in Zimbabwe, making it harder for them to transact internationally and open bank accounts in EU countries. The EU considers FATF lists as a starting point in its assessment methodology.

In addition, some decisions on inward investment and aid are subject to the country having sufficient AML controls. Zimbabwe being placed on the EU High Risk Third Countries List will make international regulatory co-operation more difficult and increases the potential for lack of confidence on the part of international regulatory partners.

When a country is struggling to attract foreign direct investments, as is the case with Zimbabwe at the moment, it is obvious that the risks for investors must be addressed seriously and urgently. Sanctions and restrictive conditions indeed reduce the confidence in Zimbabwe for investors but so too does the confidence in the country’s ability to control and prevent financial crime. The FATF findings are thus not a trivial matter but serve as a bleak testimony that sanctions are not the only disincentive to investors in our country. It is vital to address these fundamental issues if Zimbabwe hopes eventually to attract the inward investments that will help our country to thrive and attain our strategic objective of becoming an upper middle income economy by 2030.

Masunda is a senior legal practitioner as well as an international commercial and sports arbitrator. He writes here in his personal capacity.

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