Headline: Money Laundering Threatens Economic Growth in Zimbabwe: A $3 Billion Problem
Background
Money laundering, the process of making illegally-gained funds appear legitimate, remains a significant risk to Zimbabwe’s economy. Since the introduction of bond notes in 2016, combating this illicit activity has faced numerous challenges, contributing to a negative impact on economic performance.
Impact of Bond Notes
Bond notes, issued to address the inability of banknotes to keep pace with rampant inflation, have created their own set of problems. Among these issues are those connected to money laundering, which damages financial sector institutions essential for economic growth and encourages crime and corruption.
Risk Factors
- Human trafficking
- Tax evasion
- Smuggling
- Corruption
- Fraud
- Drug trafficking
Human Trafficking
- Estimated annual loss: $34 million
Drug Trafficking
- Estimated annual loss: $360 million
Common Channels for Money Laundering
Money launderers frequently funnel illicit funds through associates’ cash-generating businesses or overinflate invoices in transactions with shell companies.
Zimbabwe’s Risk Score
According to the 10th Basel Anti-Money Laundering Index, Zimbabwe’s risk score increased in 2021, largely due to heightened risks of the abovementioned illicit activities.
Impact of Parallel Market Activities
The scarcity of foreign exchange has led to an increase in proceeds generated from parallel market operations. One of the most detrimental impacts is the negative effect on income distribution. Though measuring the social damage is challenging, the increase in the income gap fuels criminal activity and makes money more attractive.
The Government’s Response
The government is taking steps to curb the parallel market, including the introduction of gold coins and maintaining stable exchange rates.
Corruption
Corruption contributes an estimated 5% of illicit financial flows, with losses to the tune of at least $1 billion each year, according to Transparency International Zimbabwe (TIZ) in 2016.
Human Trafficking
Exploitation in return for money generates an average of $34 million annually. Human trafficking remains a significant source of income that is disguised before being introduced into the legitimate financial system.
Tax Evasion
With taxes representing a substantial portion of public revenues, revenue shortfalls may lead to budget deficits. Unreported income, which is not subjected to taxation, amounts to an estimated $340 million, according to a national risk assessment.
Conclusion
Money laundering poses a significant threat to Zimbabwe’s economic growth and financial stability. Effective efforts to address this issue must be multifaceted and involve both law enforcement and policy interventions to ensure the integrity of the financial sector and curb the incentives for criminal activity.