TAX EVASION:
Laundering and corruption laid bare
Continued From Yesterday 4.0 TREND ANALYSIS
The trends and patterns of activities observed in 2016 were in many ways similar to those observed in the previous year. What was peculiar, however, was that 2016 was an election year and the highest volume and values of STRs received were observed in the two months preceding the elections. The trend may indicate a need for election campaign finance reform and/or regulation.
4.1 Large and Unusual Cash Deposits
Cash related transactions, which amounted to ZMW 347 million, accounted for 48% of the STRs that were reported in 2016. One of the patterns observed involved large amounts of cash being deposited in business accounts. These would then be followed by wire transfers to individuals and corporations outside the country.
Most beneficiaries were in the Middle East, Asia and a named Southern African Country. Another trend involving the use of cash related to significant cash withdrawals over short periods of time.
The withdrawals were in some cases traced to candidates of a named political party.
4.2 Inward and Outward Remittances
There was an increase with respect to inward remittances on accounts held by Politically Exposed Persons (PEPs). Analysis revealed that the transfers were often followed by cashwithdrawals, which was intended to disguise ultimate beneficial owners.
Further, we observed an increase in the repatriation of
funds from offshore Centres such as Mauritius and Singapore into Zambia.
In an incident involving a non-governmental organization (NGO), we noted that the entity received large inward transfers which were later diverted to businesses and to political campaigns.
With regard to outward remittances, the pattern observed was that most foreign companies that wired funds to foreign jurisdictions were not tax compliant.
The Centre further observed an increase in transfers to high risk countries or known tax havens such as Mauritius and the United Arab Emirates. In some cases, shell companies registered in these jurisdictions were used to layer funds before returning them for use in Zambia.
4.3 Corruption
Although the number of reports received on the grounds of suspected corruption only represented 6% of the total number of reports received in 2016, the value of transactions was significantly high, and accounted for 76% (over ZMW 3 billion) of the total value of cases analyzed.
Cases of corruption continued to be linked to public procurement contracts and were often perpetrated by PEPs or their associates.
We further noticed the use of proxies in business transactions and the avoidance of the banking system through third party cash payments. This may point to the need to further designate more businesses as reporting entities for purposes of currency transaction reports (CTRs). It may further point to the need for smart regulation in the use of cash in commerce.
The Anti-Money Laundering Authority (AMLA) has taken in terest in this matter and initiated a project on the use of cash in commerce.
During the period under consideration the Centre noted with concern that some employees of competent authorities were providing private consultancy services, which could indicate a conflict of interest.
4.4 Other Trends
The Centre observed that Designated Non- Financial Businesses and Professions (DNFBPs), in particular law firms, were used in a number of cases to facilitate the receipt of questionable incoming funds, which in some cases originated from high risk jurisdictions. The receipts were structured in order to avoid being detected.
In addition, the funds were received on behalf of other parties including PEPs, in order to conceal beneficial ownership. Ac cording to the Global Financial Integrity Report 2015, on illicit financial flows, Zambia is estimated to be losing an average of US$2.8 billion per year, through financial flows, which are often concealed or disguised using corporate vehicles before they are introduced into the financial system.
Despite the essential and legiti mate role that corporate vehicles play in the economy, under certain conditions, they have been misused for illicit purposes.
Furthermore, corporate funds are externalized through overinvoicing of goods and services provided by foreign suppliers, who are given preference over local suppliers by multinationals. The Centre has found that some contractors to multinational companies are related to the Board or Management of the companies. Therefore, it is not always that transactions between them are at arms-length. The contraction of loans from secrecy havens at non arms- length terms is another common method used by corporations to reduce reported profits.
5.0 EMERGING, DECLINING AND CONTINUING TRENDS 5.1 Emerging Trends
The Centre noted an emerging trend within the Real Estate sector that involved deceptive land or property dealings, as well as money laundering activities by both foreign and Zambian nationals. It was noted that funds that were illegally obtained through government contracts were invested in assets and properties using proxies of PEPs.
A recent development has been observed within the Insurance Sector, in which the principal-agent relationship is being abused, resulting in policy holders being denied insurance services.
Another emerging trend was observed in the border towns where accounts belonging to Zambian nationals were being utilized by foreigners to purchase foreign currency. The pattern observed was that Zambian nationals would open bank accounts and within a short period of time begin to receive huge cash deposits, above their declared income. These funds would almost immediately be debited through foreign currency purchases. This trend was most prevalent in the border towns of Livingstone and Nakonde.
The Centre further observed a practice in which Asian nationals purchase copper ore from small scale miners on the Copperbelt, which they subsequently export to entities that are known to be shell companies or that are registered in tax havens. The practice may be encouraging criminality in the region.foreign currency purchases. This trend was most prevalent in the border towns of Livingstone and Nakonde.
The Centre further observed a practice in which Asian nationals purchase copper ore from small scale miners on the Copperbelt, which they subsequently export to entities that are known to be shell companies or that are registered in tax havens. The practice may be encouraging criminality in the region.
5.2 Continuing Trends
The Centre noted that the use of personal accounts for business purposes in order to evade tax, has continued. Zambia is losing colossal amounts due to tax eva sion by individuals and aggressive tax avoidance schemes implemented by large international corporations.
Further, we observed that bank account activity contrary to the stated purpose of the account or activity on the account not matching the stated occupation is a continuing trend.
5.3 Declining Trends
The Centre has continued to see a decline in the number of cheque related offences. In 2016, only three case of cheque fraud were reported. 6.0 DEVELOPMENTS AND OUTLOOK
Regulations In 2016, the Financi alIntelligence Centre prescribed thresholds for currency transactions through the FIC Prescribed Thresholds Regulations, No. 52 of 2016. The regulation stipulates that any currency transaction equal to or above US$10,000 for both corporations and individuals should be reported to the Centre. Currency Transaction Reports (CTRs) will serve as an important source of information in the Centres tactical and strategic analysis.
Amendments to the FIC Act
The amended Act introduced among others, the following:
Powers to conduct AML/ CFT inspections
Administrative sanctions – the Centre will impose administrative sanctions where a reporting entity is in breach of the provisions of the FIC Act, including non-submission of STRs and CTRs. The sanctions may take the form of a caution, reprimand, directive, suspension of business activities, publication of a public notice or a financial penalty, depending on the nature and seriousness of the relevant noncompliance. With these amendments we expect increased levels of compliance among reporting entities, and a subsequent increase in STRs reported to the FIC.
National Risk Assessment
Zambia conducted its money laundering and terrorist financing National Risk Assessment (NRA) between October, 2015 and November, 2016.
The results of the NRA showed that money laundering risk is highest in the DNFBPs sector. The report further shows that tax evasion, corruption and misappropriation of public funds were among the most prevalent predicate offences in Zambia. The results of the NRA support the findings of the trend analysis for 2016.
The NRA also identified high risk sectors to which more resources will be focused in order to increase compliance. A further outcome of the NRA is that the FIC will focus on increasing the capacity of financial institutions and DNFBPs to detect and prevent ML/TF and other financial crimes. Risk –Based Supervision Following amendments to the FIC Act, the Centre will begin supervising reporting entities using a risk based framework. This
framework will be used to assess compliance in reporting entities.
The results of the NRA have influencedthe development of the AML/CFT supervision and moni toring framework through which the Centre will adopt prevention or mitigation measures commensurate to the ML/TF risks identified. In supervising reporting entities, the Financial Intelligence Centre Act No. 46 of 2010 (as amended) (the Act) empowers the Financial Intelligence Centre (the Centre) to undertake AML/ CFT inspections. Conducting of inspections in reporting entities will enhance the detection, prevention and deterring of ML/TF and Proliferation Financing.
7.0 RECOMMENDATIONS Use of Cash in Commerce
Evidently, cash remains a significant mode of transacting in Zambia. The majority of STRs reported between 2014 and 2016 were on the grounds of large or unusual cash deposits and cash withdrawals. This is an indication of the significance of cash in the settlement of transactions in the Zambian economy.
The Centre notes that high usage of cash brings a number of problems to countries, which include income leakages, tax evasion, corruption, cash couriers, and derisking. Given the aforementioned, the following measures with regard to the use of cash are proposed:
i. The obligation to report cash transactions beyond the limit as per SI 52 on Prescribed Thresholds should be extended to entities other than the reporting entities listed in the FIC Act.
ii. Zambia should consider a limit beyond which you cannot transact in cash. For example, the use of cash to purchase fixed property and motor vehicles and any other items of significant value should be prohibited.
iii. The country should consider adopting technology that enables and integrates identity documentation with e-payment systems.
iv. Government should consider a differentiated tax regime, where cash based payments attract higher taxes for given cash thresholds. This could be a form of “cash tax” to discourage this mode of payment. v. All Zambian residents, as defined by the Income Tax Act, be made to complete an annual income tax return.
Illicit Financial Flows
Access to beneficial ownership information would help to prevent the misuse of corporate vehicles for corruption, tax evasion, trade based money laundering and other illicit activities.
The Companys Act is being reviewed to include provisions on beneficial ownership. It is recommended that beneficial ownership information be held at the Patents and Companies Registration Agency and that this information be provided when companies are incorporated. It is further recommended that beneficial ownership information be required for all government contracts with third parties.
Taxation
The majority of cases disseminated to Law Enforcement Agencies in 2016 were on the grounds of tax evasion. Measures to address this continuing trend could
The Centre observed a practice in which Asian nationals purchase copper ore from small scale miners on the Copperbelt, which they subsequently export to entities that are known to be shell companies or that are registered in tax havens. The practice may be encouraging criminality in the region.foreign currency purchases.
include:
i. The Development of a General Anti-Avoidance Rule (GAAR) to deter abusive tax avoidance by international corporations and foreign work permit holders
ii. Compliance with the arms- length principle which is core in the analysis of intercompany transactions must be defined precisely in the Zambian legislation.
It will entail transparency on the part of multinationals internal rules and policies. iii. The review of current and prospective tax treaties and bringing current treaties in line with OECD guidelines
Case Study 1: Usage of NGOs and Law Firms to move funds The Centre received a report indicating that a recently created NGO account had received funds amounting to USD 12 Million from a Foundation in Asia.
Findings
Possible Offences: Bribery, Tax evasion and money laundering
Suspects: Individuals, Corporations
Sector: Corporate, Non- Profit and Public entity
Indicators:
Account activity inconsistent with customer profile
Recently created NGO sudden
ly receives huge transfers
Payments that had no business rationale
Abnormal or large cash payments
Involvement of Politically Exposed Persons Case Study 2: Illicit Financial Flows & PEPs (Tax Evasion, Bribery & Corruption)
The Centre received a report alleging that Mr. B, the CEO of Company X, had been working with companies which he had interest to externalize funds to Country Z. Company X is a large mining company. It is alleged that Mr. B, a national of Country Z, is working with his colleagues from the same country who have incorporated companies in Zambia and in their country respectively.
Further, it is alleged that the shareholders in the Zambian companies are the same shareholders in Country Z. The 3 incorporated companies in Zambia are Company K, Company C and Company A. The modus operandi is that the mining Company X with the aid of the CEO would give contracts to any of the three incorporated companies in Zambia. The Zambian based company would then subcontract to a local firm at a small fraction of the contract sum.
Thereafter, funds are remitted with the narration, “man agement fees” to the sister companies in country Z upon issuing questionable invoices to the Zambian based companies.
Findings:
Our analysis revealed that that Mr. B, CEO for the mining Company X facilitated the issuance of contracts to his colleagues who had locally registered companies.
PEPs aided foreign nationals in obtaining their Immigration permits in return for some consideration such as contracts for their companies or some payments.
We noted the PEPs cited have since acquired a number of assets and built property which was not proportionate to their declared incomes.
In one of the locally incorporated companies with a foreign element, it was noted that a Zambian PEP was a shareholder. He received funds in excess of ZMW 4 Million between October 2014 and April 2016.
Company X, which is a mining company, has been reducing their taxes by inflating costs as illustrated in the next point.
In one of the incidents, Company K was paid ZMW 7 Million by the mining company for works valued at less than ZMW 100,000. Company K thereafter subcontracted Company XYZ to conduct the works.
We noted that for the total value of contract of USD 2,723,460.25 paid to Company K by the mining company, they paid the local Company XYZ USD 265,820.55 for executing the same contract.
We suspect that the mining company X has been over invoicing or over valuing works with a view to externalize funds, inflate costs and thus reduce profits and taxes due to Government.
Upon scrutiny of the com
panies incorporated in Zambia by Country Z nationals, we noted that they lacked capacity to execute the contracts and in most instances subcontracted local companies as illustrated in the table above for company XYZ.
Possible Offences: Bribery, corruption, tax evasion and money laundering
Suspects: Individuals, Corporations
Industry : Corporate and Public entity
Indicators:
Account activity inconsistent with customer profile Customers undertaking complicated transfers without a business rationale A number of irregular contracts Abnormal or large cash payments
Politically Exposed Persons
High usage of ATM Card on Corporate accounts Case Study 3: Illicit Flows in the Insurance Sector
The Centre received a suspicious transaction report from an Insurance company. The report contained allegations against some Brokers. The three allegations in the main were that the Brokers did not pass on the discounts offered by the Insurance company to their clients. Secondly, it was alleged that Brokers altered / falsified the payment schedules, which resulted in a number of policy holders being denied insurance services by the insurer. The other allegation was the issue of non-remittance of premiums by the brokers.
Findings: 1. Non-remittance of premiums
Section 21 of the Insurance Act provides that “where any premium on a policy is paid to a broker by a client, the broker shall, within thirty days of the due date of the premium, transmit the premium, less any agreed premium, payable by the insurer to the broker …” For the period June 2014 to November 2016 the broker received ZMW12 million and failed to remit premiums in excess of ZMW 6 million.
2. Altering /falsifying of payment schedules
The Centre noted that one of the brokers was removing some amounts from the schedules submitted by employers of policy holders.
3. Failure to pass the discount allowed
Our finding was that the brokers were not passing discounts to policy holders
4. Involvement of PEPs
Another emerging trend was observed in the border towns where accounts belonging to Zambian nationals were being utilized by foreigners to purchase foreign currency. The pattern observed was that Zambian nationals would open bank accounts and within a short period of time begin to receive huge cash deposits, above their declared income. These funds would almost immediately be debited through foreign currency purchases.