Amid perennial foreign exchange shortages, Malawi loses $650 million (K650 billion) annually to illicit financial flows (IFFs) largely through trade misinvoicing, the 2021 Global Financial Integrity (GFI) report shows.

The Washington DC-based think-tank, which analysed IFFs in 134 developing countries from 2009-2018, says the figure is now six times more than what Malawi lost in 10 years, between 2004 and 2013.

The amount is almost a third of Malawi’s import bill of roughly $2 billion as at the end of 2020.

It is also equivalent to 89 percent of Malawi’s total export earnings for 2020 when it earned $730 billion and is 22.8 percent of the 2022/23 National Budget of K2.84 trillion which has a fiscal deficit of K884 billion.

The GFI report also states trade misinvoicing has been heightened since the Covid-19 pandemic struck in 2020 as it has increased opportunities for crime, smuggling and IFFs.

For instance, the findings show that the crisis presented corrupt officials, counterfeiters and smugglers new opportunities to exploit inefficiencies in customs departments.

Tchereni: It’s a huge loss

Reads the report: “As government mobilised large fiscal stimulus packages to keep their economies afloat, this meant large bursts of emergency government spending typically involving a sudden increase in purchase orders goods being quickly moved from national to local level.”

Over the past two decades, Malawi has lost over $3.1 trillion in IFFs, according to the 2022 Malawi Economic Justice Network (Mejn)-Tax Justice Network Africa (TJNA) EURODAD report.

Says the GFI report: “Trade misinvoicing is when importers and exporters deliberately falsify the declared value of goods on the invoices they submit to their customs authorities in order to illicitly transfer money across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts.

“By over-pricing or underpricing the declared value of imports or exports, traders illicitly move wealth across international

borders by hiding it within the regular payments for commerce in the international trading system.”

Malawi has been ranked among top five countries with largest average value gaps as a percent of their total trade with 36 advanced economies at 28.5 percent.

Sierra Leone registered the highest at 42.6 percent followed by Gambia at 42.4 percent, according to the report which also

found that $835.0 billion was the sum of the value gaps identified in the 134 countries and 36 advanced economies.

Financial services regulator, Reserve Bank of Malawi (RBM) Governor Wilson Banda referred us to Regina Ramuja who asked for more time to respond to our inquiry while tax collector Malawi Revenue Authority corporate services manager Steve Kapoloma did not respond to our questionnaire by press time.

But in a telephone interview, coordinator for Integrity Platform in Malawi Jeff Kabondo said the country seems to lack a clear strategy for dealing with IFFs such that anti-corruption strategies do not adequately address issues such as money laundering and tax evasion.

Said Kabondo: “Matters of investigating IFFs also seem to be shrouded in secrecy and hence it’s difficult to hold any of

our State agencies accountable on how they are managing the situation. Further, criminal cartels have become more sophisticated, operating in very complex financial transactions some of which are supported by skilled and powerful

people in public office.”

Financial Intelligence Authority (FIA) compliance and public relations manager Masautso Ebere in an e-mailed

response said FIA and RBM have enhanced supervision of reporting institutions particularly on establishment of beneficial

ownership information in relation to international transactions.

He said: “The FIA has also strengthened the regulation of some enablers of illicit financial flows such as lawyers, real

estate agents and accountants.

These reporting institutions are encouraged to conduct thorough customer due diligence which includes establishing the source of funds for their customers, “As part of enforcing compliance with anti-money laundering and combating the

financing of terrorism (AML/ CFT) requirements, various forms of administrative sanctions are now being imposed on noncompliant reporting institutions.”

According to Ebere, at institutional level, FIA has signed memoranda of understanding (MoU) with domestic law

enforcement agencies (LEAs), Super visory Authorities of reporting institutions and  other government oversight institutions, and 27 financial intelligence units (FIUs) of other countries.

He explained that when the FIA obtains information from other FIUs it uses it for its analysis and filling of gaps relating to joint investigations and prosecutions or makes disseminations to LEAs.

Economic, health and education experts said in separate interviews the money Malawi loses through IFFs would help offset most of the problems the country is facing.

Malawi University of Business and Applied Sciences economics lecturer Betchani Tchereni in an interview described the amount as a huge loss to the economy in need of foreign exchange to buy fuel and drugs currently in short supply.

He said: “Over and above that these are resources which could be taxed and cause government to spend on important things in the country.”

Mejn executive director Bertha Phiri urged government to invest in ICT to avoid human interaction as well as relook the current poor transfer pricing framework— rules and methods for pricing transactions within and between enterprises under common ownership or control.

An education expert Steve Sharra in an interview this week said the amount would be enough to pay salaries for 18 000 new teachers for the next 10 years, even after factoring in inflation and mild devaluations.

According to him, the education sector has a 4.4 million desk shortage, which requires K176 billion for every Malawian child in primary and secondary school to sit on a desk.

Said Sharra: “We would be able to build several hundred secondary schools, which we desperately need. Only 38 percent of Standard 8 learners who pass the PSLCE exam are selected to secondary school, because we only have about 1 200 public secondary schools. We need 1 000 new secondary schools to be able to double the primary to secondary school transition rate from 38 percent to 76 percent.”

A health expert Maziko Matemba said such losses are regrettable considering that majority of financing in the health sector is from donors and is now becoming unpredictable due to global financing challenges.

Findings of an investigative report by office of the Ombudsman on abuse of Covid-19 funds released a week ago, showed that some controlling officers and parliamentarians expenditure, are named in the report as having abused expenditure lines for the extra K17 billion, Treasury released to finance the Covid-19 Response Plan in February 2021.

A study commissioned by the African Union and Economic Commission for Africa (AU/ ECA HLP) on IFFs in Malawi was undertaken recently and validation of the results took place last month in Lilongwe where the country adopted a multi-sectoral approach to combating IFFs.

The report highlighted that the main IFF risk sources in the country are trade-based money laundering, corruption, fraud, illegal externalisation of forex, investment incentives, smuggling of goods, tax crimes, drug trafficking and human trafficking.

In an earlier interview, private practice lawyer Jai Banda, an expert in anti-money laundering laws, attributed the situation to the snail’s pace in putting measures to curtail IFFs.

He said: “The problem in Malawi is that government takes too long to put measures in place. We are conservative. Some of us started talking about putting an anti-money laundering law in 2000. At that time, government did nothing about it. It was only in 2006 that we incorporated the law.”

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