Overview and effects of Zim’s weak Anti-money laundering framework (Part 1)

Muchadeyi Ashton Masunda:LEGAL PRACTITIONER

The sanctions mantra is the most frequent argument used to justify the parlous state of Zimbabwe’s economy. Whatever the merits of this argument, it is also the case that Zimbabwe could actually be a much better place to do business if it were not for its weak systems and controls for preventing and fighting criminal abuse of the financial system.

This is having an outsized and yet underappreciated impact on the country’s financial and economic wellbeing and is one of the main mechanisms by which cartels and others benefit from the endemic corruption within our society.

This article is the first of a three-part series that will outline why Zimbabwe is perceived as not such a good place to do business. It will present the international institutions and evaluations used to ensure that countries are subscribing to global standards to combat money laundering and other financial crimes. The second and third articles will analyse the current state of Zimbabwe’s systems for preventing criminal abuse of the financial system and discuss concrete effects this is having on the country’s economic and financial health and on its image as not such a good and safe destination for both foreign and domestic investments.

Money laundering and crime
Since the turn of the century, the international community has become increasingly concerned about corruption and money laundering. So serious is the problem that in 2003 the United Nations took action by adopting the Convention Against Corruption (UNCAC). To date, 140 countries have signed (including Zimbabwe which signed in 2003 and ratified in 2007). It is pleasing to note that Africa has not been left behind as the African Union developed its own convention in 2003, the African Union Convention on Preventing and Combating Corruption (AUPCC). To date, 44 African countries have signed and ratified, Zimbabwe included.

A separate initiative, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), was established in 1999 and has taken seriously its mandate of ensuring that its 18 members comply with international standards to combat money laundering and financial terrorism. This is a very serious issue for Africa, as the United Nations Conference on Trade & Development (UNCTAD) estimated that the continent loses US$88.6 billion (equivalent to 3,7% of Africa’s GDP) to illicit capital flight — a marked increase from the estimated US$50 billion which was lost in 2015.

However, money laundering is not peculiar to any one country or region but international in nature. It feeds off systems that can be easily manipulated such as international trade and often involves the use of a sophisticated web of transactions designed to disguise the illegitimate source of the funds being laundered.

Large scale money laundering also relies heavily on enablers: individuals who are able to set up and run the often complex multijurisdictional corporate and financial structures through which the proceeds of crime are moved from one country to another. It is a fact that money laundering takes place on an industrial scale. A recent report published by the International Consortium of Investigative Journalists pointed out that nearly US$2 trillion may have been laundered through some of the major banks in the world between 1999 and 2017. It is for exactly this reason — the prevention of money laundering — that the international community has developed mechanisms for assessing the extent to which financial systems in various countries are able to detect and prevent this type of criminal activity.

The most comprehensive and widely adopted methodology has been developed by the Financial Action Task Force (FATF) — the global money laundering and terrorist financing watchdog that is responsible for setting and monitoring a country’s compliance with international standards on anti-money laundering. It is an enormously complex assessment tool developed in 2013 in which a team of experts drawn from FATF member countries assess the coverage and implementation of a country’s financial crime legislation and publish their findings in what they call Mutual Evaluation Reports (MERs).

As the regional body of the FATF for Eastern and Southern African countries, it is this methodology that is used by the ESAAMLG in their regular assessments of Zimbabwe.

The objective behind this highly complex process is, in the words of FATF, to determine whether “Financial systems and the broader economy are protected from the threats of money laundering and the financing of terrorism and its proliferation, thereby strengthening financial services sector integrity and contributing to safety and security.”

Zimbabwe’s latest MER was by published in September 2016. It sought a re-rating of some of those elements in September 2019.

What does a Mutual Evaluation Report (MER) involve?

MERs are very thorough and intensive. Each assessment takes 14 months to complete and is carried out by an expert team drawn from the member countries. For example, for the re-evaluation of Zimbabwe’s financial crime systems in 2019, the six members were drawn from Eswatini, South Africa, Malawi, Lesotho and Mauritius.

The evaluation is based on the examination of 40 areas of risk in the financial and regulatory systems of a country and assigns a risk rating to each of these areas.

This assessment is not totally independent as it is done in conjunction with officials of the country being assessed, although the conclusions are always agreed — as are the recommendations — and the final report is accepted by the ESAAMLG.

Every single one of the 40 risk areas is given a compliance rating. There are a total of four ratings: Compliant (C) if there are no shortcomings; Largely Compliant (LC) if there are only minor shortcomings; Partially Compliant (PC) if there are moderate shortcomings; and Non-Compliant (NC) if there are major shortcomings.

In addition, there are 11 “Immediate Outcomes” that must be assessed in the process. These are the key goals which an effective AML framework should achieve. These include, among others, appropriate supervision of financial institutions, sufficient international co-operation, adequate preventative measures, money laundering investigation and prosecution capacity and effective mechanisms to ensure that legal entities are prevented from abuse as a result of money laundering activities.

The combination of the assessment of risk factors and the immediate outcomes determines the confidence level that can be assigned to a country’s systems and controls for preventing and fighting criminal abuse of the financial and regulatory system.

The outcomes of having a fully compliant financial and regulatory system for a country are important and, as pointed out by FATF, are there to ensure 1) policy, co-ordination and co-operation to minimise if not eliminate money laundering activities and financing of acts of terrorism 2) proceeds of crime and funds in support of terrorism are prevented from entering the financial system and other sectors or are detected and reported by these sectors and 3) money laundering threats are detected and disrupted and criminals are brought to book and deprived of their illicit proceeds.

Both crime and terrorism are the targets and, of course, these risks may be very different for different countries. No one would argue that Zimbabwe poses a terrorist threat but corruption is acknowledged by our government to be a serious problem.

When corruption is a serious problem, then the systems for dealing with this scourge have to be robust, with particular reference to preventing the linkage between corruption and crime. At the heart of these linkages is money laundering.

Generally, financial institutions, such as banks, go to great lengths to prevent money laundering. Such efforts include background checks, real-time financial monitoring, monitoring bank account transactions and automatic blocking of transactions with sanctioned entities and sanctions filtering to ensure that no transactions are conducted with persons and institutions under sanctions.

The monitoring systems, especially FATF, are the means by which financial institutions can be evaluated for their effectiveness in preventing money laundering not only through financial institutions but also the whole country and the regulatory system within which the financial system and regulatory framework exist.

So what is the current state of Zimbabwe’s systems and controls to prevent criminal abuse of the financial system?

How did Zimbabwe fare when assessed by the ESAAMLG in 2016 and 2019?

This will be the subject of the next article.

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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