Money laundering, tax evasion and street forex

T

here have been convictions on money laundering bordering on “cash gate”. It took a couple of years to have this legislation in place. I recall a lot of sensitisation meetings for the general public, media, MPs, financial experts to come to grips with the legislation. Fast forward, we all have woken up that you can still launder a few billions and spend a few years in jail. I guess we never envisaged a situation whereby crafty individuals would do this. I guess this is the reason there is a discussion to make changes to the legislation. Maybe it should have a provision for life sentence. One would think punitive measures should also apply to banks including individual officials that facilitate such transactions. The issue here is not law, but we can reflect on various alternatives to deal with this malaise.

In earnest, money laundering has hallmarks of tax evasion and remains a catalyst of the vibrant parallel or street market of foreign exchange. Laundered money in billions simply goes onto the street and exchanged with all types of foreign exchange.  Financial criminals call it safe haven as our central bank has no control over supply of foreign legal tender. This makes it hard for banks and the law abiding to trade fairly. The point is money laundering distorts the foreign exchange market and I think drastic measures are needed.

Folks externalising foreign exchange without documentation have been caught in our airports. But sadly we don’t know how many. Such huge sums of money have traits of laundered proceeds and as such not easily amenable to taxation. Most of such individuals do not pay tax.

Worse still some of the laundered money is used for imports by big traders whose tax paying history is often very dubious. The resistance by some private businesses to accept automated payment of value added tax is a pointer. Yet the same community was keen to use legal means to stop legitimate actions by tax authorities to put in place efficient means of tax collection.

Tax evasion is a huge cost to the average citizen that is supposed to enjoy some basic rights. That our public hospitals, roads, schools and universities are in shambles is an open secret. While we fraught corruption, the very corrupt or those that play such a game enjoy spinning a double edged sword. Not only do they drain public coffers through inflated contracts or services that never get delivered but fail to pay tax. They are the brains behind the robust and vibrant street forex market to the extent that their powerful lobbying may even lead to legalisation of street trade in currencies. Such an occurrence would be a disaster for the banking system and its drive to modernise.

Late Bingu made one bold attempt to crack on foreign exchange traders. It was at a peak when the kwacha was overvalued and the banks were struggling to meet demands. Forex was grossly rationalised to focus on fertiliser and medicines. Businesses too resorted to using the street market and how they brought goods in the country remains an obvious guess.  I recall police being deployed all over country hunting for illegal foreign exchange.  It didn’t work. Money transfers facilities such Money Gram and Western Union only receive and sending funds out is not allowed since then. If anything, the black market flourished and one could get any amount they want as long as they were able to pay a high rate.

For those believing in the economics of free market, a currency devaluation during the regime of Joyce Banda got a shock. The kwacha lost value but the parallel market in foreign exchange remained active and is even stronger to this day.

The question is: Who is investing in the black market? Or who are these currency traders? Are they fronts of some unknown businesses? These questions arise simply because the cost of borrowing from the banks is very high. The simple answer is money laundering. One would say these might be proceeds of crime that go untaxed, cripple the foreign exchange regime and detrimental to the well-being of our financial system and provision of public tax payer funded services. Evaded taxes are simply one of the reasons why government is borrowing and pushing interest rates up that makes capital finance out of reach for many small-scale businesses, the major employer of our unskilled youth. Can we do anything?

I think we have tried many options. Strengthening legislation is surely one of the ways but it is also important to explore means of disrupting such illegal activities. I believe one day, we all can wake up to find that the 2000, 1000 and 500 kwacha bills have been made useless with new notes to be exchanged at the banks. At the same time that anyone changing these notes has the funds deposited directly into their accounts with an instant withholding tax deducted. Some legislation or guidance can be done. I call this a variant to the Indian problem.

Am I dreaming? What do you reckon? n