Date
By Moses G. Chamisa
Introduction
In most developing countries, natural endowments have the potential to drive economic growth, help to narrow inequality gap and to reduce poverty. However, most developing countries do not realise the full potentials from their natural resources due to a number of reasons. One of the key reasons is illicit financial flows (IFFs). Generally, illicit financial flows is an umbrella term for a broad group of illegal cross-border economic and financial transactions. They usually involve the transfer of money through illegal means such as corruption, criminal activities and efforts to hide wealth from a country’s authorities. They are a hindrance to development and in most cases increase the inequality gap between the rich and the poor. They severely negatively affect the most vulnerable groups such as women, youths and those with disabilities.
Recently, the outbreak of the Covid-19 pandemic in December 2019 has worsened the situation as most illicit exploitation of and trade in natural resources in most developing countries went unchecked due to national lockdowns instituted by governments as a measure to combat the pandemic. Additionally, although international commodity prices slumbered briefly at the beginning of the pandemic, they later regained with metals such as gold and platinum group of metals (PGMs|) registering record high prices.
Despite all these positive developments in international prices, and record high profits by major resource companies most developing countries failed to reap the full benefits most importantly because of illicit financial flows. Consequently, this has raised discontentment and frustration among policymakers, donors, civil society organisations and the general citizenry. Globally, extractive sectors currently generate about US$3.5 trillion in annual gross revenue, corresponding to around 5 per cent of global gross domestic product (GDP). According to the World Bank, the world total natural resources rents (as a percentage of GDP) was 2.13% in 2017 while for Zimbabwe it was 7.13%.
In Zimbabwe, mining is the major extractive sector activity and is a key pillar to the economy. Between 2009 and 2015, the sector contributed an average of 6.2% of GDP. The contribution increased to 8.4% between 2016 and 2018. In 2019, total mining export receipts amounted to US$2.9 billion, which translates to about 55.2% of the country’s total exports. As a percentage of the total mining exports gold contributed 37%, PGMs 43%, diamonds 5.71% and nickel 1.72% respectively. Other minerals that include chrome, coal and iron share the reminder of the share of total mining exports. Basing on the huge potential that lies in the mining sector, the government of Zimbabwe through the Ministry of Mines and Mines Development launched an ambitious US$12 billion mining economy by 2023, which is a 312% increase from the US$2.91 billion in 2019.
However, the possibility of achieving this seems a mammoth task if rampant IFFs within the mining sector are not checked. For instance, in September 2020, the Minister of Home Affairs alluded that the country is losing an estimated US$100 million worth of gold every month due to rampant smuggling through the country’s porous points of entry and this translate to US$1.2 billion per year. To buttress this, gold export earnings decreased from US$1.3 billion in 2018 to US$946 2019, perhaps an ominous sign that the gold smuggling problem is festering. Against this background, this essay looks at IFFs and the mining sector in Zimbabwe. The essay looks at the sources of IFFs in the mining sector, and the nexus between IFFs and mining sector. The essay also focuses on the impact of mining IFFs and concludes with recommendations to curb illicit financial flows in the mining sector.
Illicit financial flows (IFFs) statistics
In 2015, High Level Panel on Illicit Financial Flows headed by the former president of South Africa, Thabo Mbeki reported that illicit financial flows increased from US$20 billion in 2001 to US$60 billion in 2010. Another study by the Global Financial Integrity revealed an alarming trend growth of 20.2% per year for illicit financial flows from Africa for the period 2002-2011.
A recent study by UNCTAD indicated that illicit financial flows in extractive sectors in Africa are of high magnitude thereby jeopardizing the development of the sectors and the countries at large. Africa lost approximately $40 billion linked to illicit financial flows in the extractive sectors and of these 77% emanated from gold, 12% to diamonds, 6% to platinum and 5% to other extractive commodities. These illicit financial flows mainly stemmed from the under-invoicing of extractive commodities exports. Coming closer home, a study by Chamisa revealed that Zimbabwe has lost about $11.2 billion to illicit financial flows between 2009 and 2018 through trade mispricing.
Sources of illicit financial flows in the mining sector
There are various sources of illicit financial flows and the major ones that fall under this essay are corruption, illegal/criminal exploitation and tax evasion and avoidance.
Corruption
Generally, Zimbabwe is perceived as one of the most corrupt countries globally. This is despite President Emmerson Mnagagwa’s rants on zero tolerance to corruption. According to the Transparency International (TI) Corruption Perception Index in 2019, Zimbabwe scored only 24 points out of 100 making it to settle at number 158 out of 180 countries.
Furthermore, the mining sector in Zimbabwe is prone to corruption due to its nature. The mining sector presents huge revenues that provide fertile ground for rent seeking and patronage behaviour. Investors offer and pay bribes to officials including high standing politicians to obtain exploitation licences and access to exploitation outside agreed concession areas. The mining sector is marred with bureaucratic red tape, delays in processing applications and settling of mining disputes. In addition, the archaic Mines and Minerals Act (Chapter 21:05) coupled with the absence of a computerised cadastre system and that Zimbabwe is not a member of the Extractive Industries Transparency Initiative (EITI) creates a breeding ground for corruption in the mining sector.
A preliminary study by Transparency International Zimbabwe (TIZ) pointed out to rampant political and bureaucratic corruption (involving senior politicians, bureaucrats and law enforcers) in the mining sector in Zimbabwe. As alluded earlier, is largely facilitated by the existence of ambiguous mining framework and legislation. In June 2020, Ministry of Mines and Mines Development officials were fingered in men-made disputes relating to gold claims. It is key to note that within the mining sector, corruption features at all levels of the value chain from the initial bidding, contractual processes to the payment of taxes.
Illegal Mining
Illegal mining activities such as operating outside licensed concession areas directly contribute to illicit financial flows as they result in underreporting production thereby undermining tax collections. In addition, in Zimbabwe illegal miners and artisanal and small-scale miners (ASMers) are accessing old mines and other unlicensed concessions to mine for the most precious metals (gold and diamonds). They sell their stuff to intermediaries who then smuggle the minerals across the country’s porous borders.
Besides bleeding the economy through IFFs, illegal mining is a threat to the country’s infrastructure and environment thereby negatively impacting socio-economic development. Illegal mining disrespects environmental and social regulations. Because compliance costs are usually higher in the extractive sector, companies in the extractive sector offer and pay bribes to officials to bend rules and avoid compliance. When bribes are paid, these companies are left with more untaxed/profits (maybe due to tax avoidance or evasion) as companies deduct inflated compliance costs in their tax returns, and this leads to illicit financial flows. Zimbabwe’s environmental watchdog Environment Management Agency (EMA) estimates that there are 1.5 million illegal miners in the country, although the figure may be excluding big companies that breach their mining licences.
Tax evasion and avoidance
The third major source of illicit financial flows in the extractive sector is tax avoidance and evasion. From the start of the negotiation of exploitation contracts, most companies will try to be granted maximum if not all tax concessions stipulated in the tax and mining laws. Some even negotiate for customized arrangements such as stabilization clauses that will see them not paying taxes for long periods, for instance the case of ZIMPLATS (Pvt) LTD vs ZIMRA . This is made worse by the secrecy and confidentiality that surrounds most mining contract negotiations.
In addition, most the government enters into contracts with subsidiaries whose parent companies are incorporated in tax havens and who usually contract experts from those tax havens to provide management and consultancy fees. Examples include ZIMPLATS, Landela Mining Ventures (Ltd). Such subsidiaries are also always heavily indebted leading to issues of thin capitalisation. All these complicated set ups lead to funds being siphoned from the country to tax havens.
Further, these set ups create room for tax avoidance (Implats Panama Papers) and evasion practices such as tax treaty shopping and transfer pricing. Given also that the country lacks expertise in these areas, it makes it extremely vulnerable to IFFs from these practices.
Nexus between illicit financial flows and the mining sector
Numerous factors make the mining sector prone to IFFs. Firstly, elite discretionary political control provides a fertile ground for IFFs in the mining sector. As with the case in most countries, the president’s office, military and a few politically exposed persons control the mining resources. These few elites enjoy the illicit funds from the mining sector and usually use them to consolidate power and coerce citizens not to question them on how they govern the sector and the country at large.
Secondly, contracts are negotiated and granted secretly, leaving the task to a few elites who will serve their interests or the interests of their patrons. To mention but a few, Anjin, Alrosa operations, Caledonia Mining Corporation PLC, China’s Tsingshan, Great Dyke Investments and Landela Mining Ventures (Ltd) This practice is contrary to Section 315(2)(c) of the Constitution of Zimbabwe that requires an Act of Parliament to guide negotiation and performance of mining agreements.
In most cases, these interest are harboured behind state companies collaborating or becoming shareholders in the companies that will be awarded the contracts. Contracts that do not serve the nation are granted because bribes in the form of signature bonuses were promised or paid. Thirdly, mining sector is complex and characterised by sophisticated technical and financial processes that require a high degree of expertise. This high degree expertise are not readily available within the government and tax administration structures. A case in point is the failure of the tax administration to attract, motivate and retain key staff against the competitive employment packages offered by the private sector.
The revenue administration continues to pay its employees in Zimbabwean dollar that has and continuously lose value when benchmarked against the US$ when the private sector including the mining industries have adopted the US$ as their payment currency. Consequently, the tax administration is experiencing high labour turnover to the private sector making it more vulnerable to complicated tax evasion and aggressive tax planning practices.
This therefore calls for extractive companies to perform their own tax computations. As most governments and tax authorities have limited tax audit skills, this creates space for extractive sector companies to manipulate their tax obligations and engage in IFFs. Lastly, the country is under sanctions and not allowed to trade openly its natural resources on the international market. To circumvent these sanctions, most trade in minerals is done covertly across borders creating room for IFFs.
Impact of illicit financial flows from the mining sector
IFFs from the mining sector do pose the same impact as any other form of IFFs from other sectors. However, most mineral resource-rich countries rely on revenues from their natural resources thereby making IFFs from the mining sector more impactful. IFFs dwindle revenue collections from the mining sector. Resultantly, they undermine economic growth, provision of quality social services such as health, education, and infrastructure. Since only a few elite benefits from IFFs, governments end up borrowing to finance government expenditure there by increasing the debt vulnerability of a country and dependence on aid and donations. Below are the socio-economic and political impacts of illicit financial flows.
Loss of government revenue
Government revenues is lost due to tax evasion and avoidance. Usually IFFs are hidden by nature making it difficult for tax authorities to tax them. Illegal exploitations also create space for under declaration of production leading to under taxation of activities in the mining sector. Additionally, mining sector is composed of both formal resource companies and informal miners. The formal resources companies are in most cases the ones involved in tax evasion and avoidance while the informal miners largely are not captured in the tax net. The tax losses are compensated through higher taxes on a few compliant taxpayers thereby violating tax justice and extremely denting a country’s governance system.
Hinders economic growth
IFFs undermine economic growth. Capital held in secrecy jurisdictions will not be available for local investments leading to distorted investment patterns. Furthermore, IFFs dwarf/crowd out other genuine economic and entrepreneurial activities since commercial activities stemming from IFFs provide high returns.
Weakened governance systems
IFFs undermine a country’s governance system. The unlawful activities that give rise to IFFs weaken both the institutions that are responsible for curbing such flows and the democratic institutions that fail to hold offenders accountable.
Public infrastructure
IFFs undermine government’s ability to provide public infrastructure. In addition, domestic investments are reduced. IFFs lead to failed education systems, health systems and public transport systems. They also lead to poor service delivery by local authorities/ municipalities.
Increased inequality
The presence of IFFs leads to widened income gap (inequality) and increased unemployment. Furthermore, income inequality breeds economic and social instability and destroys the social structure of the country. IFFs cause the nation’s income equality to be highly skewed towards the rich. The worst affected are women, children, people with disabilities and the youths.
Degradation of environment
IFFs stem from illegal exploitations. As mentioned earlier, illegal exploitation will lead to companies avoiding compliance requirements regarding protection of the environment through unsustainable exploitation and inappropriate dumping of waste. All these jeopardize the natural environment, human life, and flora and fauna.
Conclusion and Recommendations
IFFs from the mining sector are hampering socio-economic development. The outbreak of the Covid-19 pandemic has worsened the situation. However, post Covid-19 to curb IFFs and start realizing the full benefits from mining sector, the government should:
- Start the process of recognising IFFs as a key risk to economic and social development and incorporate it in national risk assessments and industry-level risk assessments.
- Capacitate enforcement agencies and tax administrations on what IFFs are. Reward them adequately to retain and attract capable staff and to help minimize the risk of corruption that facilitates IFFs.
- Join international transparency initiatives such as the Extractive Industries Transparency Initiative (EITI) that seek to strengthen governance by improving transparency and accountability in the extractives sector.
- Fully implement the pillars of the African Mining Vision (AMV). AMV is Africa’s road map for strategically harnessing its mineral resources for broad-based sustainable development.
- Strengthen information exchanges between government departments and/or agencies within the country as well as across borders.
- Fast track the amendment of the Mines and Minerals Act and its alignment with the Income Tax Act in order to avoid revenue leakages.
- Formalise and support artisanal mining.
- Create adequate space for civil society organisations (CSVs) to play their watchdog role
G. Chamisa chamisamg@gmail.com; +263774426708