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Corrupt firms banned from the forex auction


GOVERNMENT has suspended 12 companies allegedly involved in transfer pricing from the foreign exchange auction system on suspicion they channel part of the funds from the auction to the parallel market.

The malfeasance was exposed following a paper trail probe on transactions conducted by investigating authorities on companies participating in the foreign exchange auction.

The Reserve Bank of Zimbabwe (RBZ) and its investigating arm — the Financial Intelligence Unit — have been busy fighting corrupt practices by firms involved in transfer pricing.

Transfer pricing, also known as transfer mispricing, refers to trade between parties at manipulated prices to sway the market and deceive tax authorities. Although the legality of transfer price manipulation depends on tax jurisdictions, most governments view it as fraud or tax evasion.

Transfer pricing reduces exchange exposure and circumvents foreign exchange controls and sometimes restricts profit repatriation.
Finance and Economic Development minister Mthuli Ncube told the Zimbabwe Independent that corrupt companies have since been banned from the foreign exchange auction network launched by the government in June 2020 to contain volatile exchange rates.

He said: “At least a dozen companies have already been suspended from participation in the auction, pending full investigations, following prima facie evidence of various malpractices that include transfer pricing.

“We are aware of the allegations that some companies that are benefitting from the auction are engaged in transfer pricing, among other malpractices. The Reserve Bank of Zimbabwe and Financial Intelligence Unit are already investigating such reports.”
Monetary authorities said a full-swing investigation was underway to punish all the culprits, whose names will be released in the coming weeks once the probe has been concluded.

A fortnight ago, RBZ governor John Mangudya said the FIU had raised red flags on some shelf companies being used to siphon foreign currency off the official foreign exchange auction system.

The companies were accused of offloading the Zimbabwean dollar at the auction and accessing foreign currency which is later chaperoned to the parallel market.

RBZ high level officials said the probe on corrupt companies involved some banks, which facilitate payments for the firms.

“There is complicity between companies and banks; hence the network is wide, but we are plugging that loophole. Anyone found wanting will face the legal consequences,” a central bank official said.

Ncube said since the introduction of the foreign currency auction system in June 2020, US$760 million has been allocated to the various sectors of the economy with 45% or US$340 million being allocated for imports of raw materials.

About 17% or US$130 million was allocated for importation of machinery and equipment while the rest of the sectors had almost equal allocations of between 6% and 10%.

“The current exchange rate stability is not managed and neither is it manipulated. It is a reflection of underlying demand and supply fundamentals, and the auction system simply assists in the discovery of the appropriate market-based price for foreign currency,” the minister said.

“At the introduction of the auction system in June 2020, the parallel exchange rate premium on the US dollar had risen to more than 300%. Allowing the interplay of market forces to establish a market-based exchange rate has seen the premium falling to less than 20% by the end of 2020 before the setting in of the festive season.”

Ncube added that: “Parallel market premiums of between 10% and 15% are considered normal and tolerable by other country experiences; for example, the premium on Nigeria’s Naira has gone up to 30%, for the Kenyan Shilling up to 12%; for the Tanzanian Shilling up to 9% and for the Malawian Kwacha up to 15% without noting extreme cases such as Argentina where the premium on the Peso exchange rate has gone up to more than 100% in the recent past.”

He said the recent pressure on the ZWL$/US dollar parallel exchange rate premium has, however, been a result of multiple exogenous factors; especially the seasonality factor caused by the closure or low operation capacity for most companies, between December and January.

This saw increased activity in the parallel market.

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