THE FINANCIAL INTELLIGENCE CENTRE

THE FINANCIAL INTELLIGENCE CENTRE

TYPOLOGY REPORT2020

CORRUPTION, TAX EVASION AND ASSOCIATED MONEY LAUNDERING

Republic of Zambia

THE FINANCIAL INTELLIGENCE CENTRETYPOLOGY REPORT, 2020


TABLE OF CONTENTS

ACRONYMS ........................................................................................................................ i

MESSAGE FROM THE DIRECTOR-GENERAL ................................................................... ii

1.0 ORGANISATION STRUCTURE .....................................................................................1

2.0 CORE FUNCTIONS OF THE FINANCIAL INTELLIGENCE CENTRE ........................2

3.0 OVERVIEW ..................................................................................................................3

3.1 Corruption ..........................................................................................................3

3.2 Tax-Evasion .........................................................................................................4

4.0 TRENDS .........................................................................................................................5

4.1 Observed Trends on Corruption .....................................................................5

4.2 Observed Trends on Tax Evasion ....................................................................6

4.3 Observed Trends from Currency Transaction Reports ...............................8

4.4 Observed Trends from Suspicious Transaction Reports ..............................9

4.5 Observed Trends from wire transfers ..........................................................10

5.0 CASE STUDIES ............................................................................................................11

5.1 Case studies on Corruption ...........................................................................11

Case 1: Suspected Procurement Corruption ..........................................11

5.2 Case studies on Tax evasion .........................................................................12

Case 1: Suspected tax evasion ...................................................................12

6.0 RECOMMENDATIONS .............................................................................................14

7.0 CONCLUSION ..........................................................................................................14

8.0 WORKING DEFINITIONS ..........................................................................................15

Item Page


ACRONYMS

AML/CTPF Anti-Money Laundering/Countering Terrorism andProliferation Financing

AMLA Anti- Money Laundering Authority

AML Anti-Money Laundering

BO Beneficial Ownership

CTR Currency Transaction Report

DNFBP Designated Non-Financial Businesses and Professions

ESAAMLG Eastern and Southern Africa Anti Money LaunderingGroup FATF Financial Action Task Force

FIC Financial Intelligence Centre

LEA Law Enforcement Agency

ML Money Laundering

ML/TF/PF Money Laundering/Terrorist Financing/ ProliferationFinancing

MVTS Money Value Transfer Services

NRA National Risk Assessment

PIPs Prominent Influential Persons

PF Proliferation Financing

SDR Spontaneous Disclosure Report

STR Suspicious Transaction Report

TF Terrorist Financing

CBCDRs Cross Boarder Currency Declaration Reports

WT Wire Transfer

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MESSAGE FROM THE DIRECTOR-GENERAL

The Year 2020 was an unprecedentedyear in the operations of the FinancialIntelligence Centre (the Centre or theFIC) in that like many other institutionsthe world over it too felt the impactof the COVID-19 global pandemic.However, despite the challenges thatthe Centre encountered as a result ofthis pandemic, it continued todispense its core functions so as toensure its continued prevention anddetection of money laundering,terrorism and proliferation financing(ML/TPF) and other crimes.

In resonating with its vision, ‘A Zambiawith a stable financial system resilientto financial crimes,’ the FIC’s 2020Typology Report gives the Centre’sperspective of the emerging trendson corruption and tax evasion withthe intention of educating thereporting entities and the public onthe nature, methods and techniquesemployed by perpetrators of thesetwo financial crimes.

As intimated in the previous reports,one of the major drivers forgeneration of proceeds of crime iscorruption. Further, in light of theCOVID-19 global pandemic, this is asgood a time as any other for the 2020Report to focus on corruption becausethe handling of this pandemic perfectlyillustrates the need for integrity in themanagement of this crisis. For instance,the large sums of monies needed todeal with this crisis and the urgencycreated in disbursing these monies(which at times may necessitateoverlooking strict adherence to setpolicies and guidelines on thedisbursement of such funds) all brewthe perfect environment for corruptionto occur. Corruption is an obstacle tothe development of our society and thegeneral welfare of the Zambianpeople, therefore, the Centre wouldbe failing in its obligations if it did nothighlight the notable trends used toeffectuate and conceal this vice.

The tax revenue generated by ourGovernment is used to fund varioussectors such as infrastructure, health,education and national security. The

Centre has noted with concern thegrowing trend of both natural andlegal persons deliberately avoiding topay their true tax liabilities.

Notably, there is a direct correlationbetween corruption and the collectionof tax revenue. Studies have shownthat corruption not only lowers the tax-GDP ratio but also causes long-termdamage to the economy by detractinginvestment, increasing the size of theunderground economy, distorting taxstructures and corroding the taxmorality of taxpayers. This in turnreduces the long term revenuegenerating potential of the Zambianeconomy.

The year 2020 also saw the Centreimplementing its 2020-2022 StrategicPlan whose focus is to enhancecollaboration and cooperation withLaw Enforcement Agencies (LEAs) andother stakeholders.This collaboration isnecessary in the fight against financialcrimes.

The Financial Intelligence Centre ActNo. 46 of 2010 (the FIC Act) wasamended in December 2020 throughthe enactment of the FinancialIntelligence Centre (Amendment) No.41 of 2020. Following the results of the2019 Zambia Mutual Evaluation Reporton its anti-money laundering andcounter-terrorist financing measures,it was seen that there is need tofurther improve the provisions of theAct No. 46 of 2010 with regards to, interalia, the obligations relating tocustomer identification and verification,wire transfers and administrativesanctions.

With the continued support ofGovernment and in collaborationwith all AML/CFTP stakeholders theFIC will continue to uphold its mandatein the fight against ML and TF.

Mary Chirwa (Ms.)DIRECTOR-GENERALFINANCIAL INTELLIGENCE CENTRE

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1.0 ORGANISATION STRUCTURE

The Director-General is the Chief Executive Officer of the institution appointed bythe Board subject to the Minister’s approval pursuant to section 7 of the FIC Act.The FIC comprises the following departments:

(i) Monitoring and Analysis

(ii) Inspections

(iii) Compliance and Prevention

(iv) Legal and Policy

(v) Information Communications Technology

(vi) Finance

CHART 1: ORGANISATION STRUCTURE

Source: Financial Intelligence Centre, Zambia. 2020

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2.0 CORE FUNCTIONS OF THEFINANCIAL INTELLIGENCE CENTRE

The functions of the FIC as provided

under Section 5 of the Financial

Intelligence Centre Act No. 46 of 2010

(as amended) are inter alia to:

(a) Receive, request, analyse and

evaluate suspicious transaction

reports and information from any

other source authorised under

any written law to make a

suspicious transaction report

including a designated foreign

authority to determine whether

there are reasonable grounds totransmit reports for investigationby law enforcement agenciesor designated foreign authorities;

(b) Di s seminate in fo rmat ion ,spontaneously or on request, tolaw enforcement agencies andother competent authorities,where there are reasonablegrounds to suspect moneylaundering or financing ofterrorism or proliferation;

(c) Provide information relating tosuspicious transactions to anydesignated foreign authority,subject to conditions thatthe Director-General maydetermine, in accordancewith this FIC Act.

Source: Financial Intelligence Centre, Zambia 2020

The STR value chain

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3.0 OVERVIEW

This Typology Report gives theFinancial Intell igence Centre’sperspective on how the fight againstcorruption and tax evasion isinextricably intertwined with that ofMoney Laundering (ML). Proceeds offinancial crimes are not beneficialunless they are placed, layered, andintegrated into the financial system.This Report differs from other reportspreviously produced by the FIC in thatit focuses on two prominentpredicate offences (Corruption andTax Evasion) observed in the pastthree(3) years.

3.1 Corruption

It is globally accepted that corruptionhurts economic performance byadversely affecting private andpublic investment, reducing taxrevenue, resulting in an inefficientfinancial system. Further, corruptioncan also have adverse distributionaleffects as it hurts the poordisproportionally. Countries with highlevels of corruption achieve lowerliteracy rates, have higher mortalityrates, and overall have worse humandevelopment outcomes. Corruptiondeepens poverty by reducing pro-poor public expenditures, creatingartificial shortages and congestion inpublicservices,andinducingapolicybiasin favor of certain sectors of society,which perpetuates unemployment.

The main perpetrators of corruption areboth public and private individuals whoare in privileged positions. The findingsof the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)typology study of 2019 on ‘ProcurementCorruption in the Public Sector andAssociated Money Laundering in theESAAMLG Region’ established that themain perpetrators of procurementcorruption in the Region were PoliticallyExposed Persons (PEPs), Investors, publicprocurement officials, suppliers, agents of

suppliers, political party members andforeign companies and governments1.The report further established that health,defence and infrastructure sectors arethe most vulnerable to procurementcorruption.

Zambia conducted a ML/TF NationalRisk Assessment (NRA) in 2016. Thereport established that corruption isamong the top five (5) most prevalentfinancial crimes in Zambia. TheAuditor- General’s Report of 2019equally unearthed methods andtechniques of corrupt activities takingplace in Government Ministries,Parastatals and quasi-Governmentinstitutions.

The FIC disseminated eighty (80)intelligence reports to Law EnforcementAgencies (LEAs) in 2018, involvingsuspected financial crimes valued atZMW 6.1 billion of which ZMW 4.9billion related to corruption. The mostprevalent forms of corruption notedin 2018 were those involving bribery,self-dealing/conflict of interest. In2019, the Centre analyzed onehundred and one (101) STRs of whicha total of forty four (44) intelligencereports were disseminated to LEAsbordering on ML and variouspredicate offences. Of interest, four(4) disseminated Intelligence reportsbordered on suspected corruptioninvolving an amount of ZMW332million.

During the period under review, theFIC analyzed three hundred and sixtyfour (364) STRs compared to onehundred and one (101) in 2019. A totalof sixty one (61) intelligence reportswere disseminated to LEAs comparedto forty four (44) in 2019. Theintelligence reports disseminated in

1Procurement Corruption in the Public Sector and Associated MoneyLaundering in the ESAAMLG Region, 2019

3

2020 bordered on suspected moneylaundering and other various predicateoffences including corruption. Out of thesixty one (61) disseminated Intelligencereports, fourteen (14) bordered onsuspected corruption involving ZMW 2.2billion. The FIC has continued to observethat cases of corruption continue to belinked to public procurement contractsand are often perpetrated by ProminentInfluential Persons (PIPs)or their associates.

3.2 Tax-Evasion

Governments around the Worldprimari ly raise revenue throughtaxation to fund public services andoperations. In particular tax revenueis used to fund various sectorsincluding infrastructure, health,education and national security.However, there has been growingconcern around the World on thelack of tax transparency among taxpayers. Lack of tax transparency hasbeen cited by various studies ascontributing to illicit financial flows fromdeveloping countries annually.

The lack of tax transparency in Zambiahas negatively affected Zambia’sdomestic resource mobilization efforts.The absence of tax transparency maskstax crimes and other practices such astax evasion.

Tax evasion can be understood asdeliberate practices by individualsand/or corporates to circumvent taxlaws in-order not to pay their fair shareof taxes2. In this context, certainmethods of tax evasion will requirethe income generating activity toremain outside the formal economy.In Zambia, practices such as the useof personal accounts for business inorder to circumvent paying taxes

have exhibited a growing trend3. The2016 Money Laundering National RiskAssessment revealedthattaxcrimeswerethe second most prevalent predicateoffense of money laundering in Zambia.Tax crimes in the form of tax evasioncan end up cascading into otherfinancial crimes such as corruptionand money laundering. This trend ofcascading financial crimes has beenobserved in Zambia. Proceeds of taxevasion can be used to bribe officialsand further down the chainlaundered to hide their illicit origins4.In most cases, income generatedfrom corrupt activities is usually notdeclared for tax purposes and it iseventually laundered in varioussectors.4.0 TRENDSIn the period under review, theCentre analysed 364 STRs comparedto 101 in 2019. The increase in thenumber of reports analysed was as aresult of sufficient funding to carry outanalysis. A total of 61 intelligencereports were disseminated to LEAs outof which 14 were on corruption and24 on tax evasion compared to 4 and17 respectively in 2019. The amountinvolved in the disseminated reportsrelating to corruption was [ZMW 2.22billion: 2020] compared to [ZMW 332million: 2019]. This represents 71% of thetotal value of dissemination amountsin 2020. Disseminations on suspectedtax evasion accounted for [ZMW 717million: 2020] compared [ZMW 144million: 2019]. The increase in the valueof disseminated intelligence reportsfor both corruption and tax evasion isattributed to higher value of thereports analysed.

During the period under review, thereports analysed showed that corruptionand tax evasion occurred concurrently.It was noted that corporates and/orindividuals involved in corruption werenon-compliantwithtaxobligations. Table1below shows the number and values ofdisseminated reports over the past three(3) years.


2 Uncovering the unknown: An analysis of Tax Evasion in Zambia,ZIPAR,2014

3 2019 Financial Intell igence Centre: Trends Report on MoneyLaundering and Terrorist Financing

4 OECD, 2019

4

4.0 TRENDS


In the period under review, theCentre analysed 364 STRs comparedto 101 in 2019. The increase in thenumber of reports analysed was as aresult of sufficient funding to carry outanalysis. A total of 61 intelligencereports were disseminated to LEAs outof which 14 were on corruption and24 on tax evasion compared to 4 and17 respectively in 2019. The amountinvolved in the disseminated reportsrelating to corruption was [ZMW 2.22billion: 2020] compared to [ZMW 332million: 2019]. This represents 71% of thetotal value of dissemination amountsin 2020. Disseminations on suspected

tax evasion accounted for [ZMW 717million: 2020] compared [ZMW 144million: 2019]. The increase in the valueof disseminated intelligence reportsfor both corruption and tax evasion isattributed to higher value of thereports analysed.

During the period under review, thereports analysed showed thatcorruption and tax evasion occurredconcurrently. It was noted thatcorporates and/or individuals involvedin corruption were non-compliantwith tax obligations. Table1 belowshows the number and values ofdisseminated reports over the pastthree (3) years.

Table 1: Disseminated Intelligence Reports

4.1 Observed Trends on Corruption

Corruption is a predicate offence to

money laundering. Intelligence reports

bordering on suspected corruption are

disseminated to the Anti-Corruption

Commission which is the principal

institution responsible for combating

corruption in Zambia pursuant to the

Anti- Corruption Act No. 3 of 2012.

During the period under review, a total

of fourteen (14) intelligence reports were

disseminatedtocompetentauthoritieson

corruption involving an amount of [ZMW

2.22 billion: 2020] compared to [ZMW 332

million:2019].

Graph 1 below shows the dissemination

amounts for suspected corruption over

the past 3 years.


5

Suspected

Offence

2020 2019 2018

No. of

reports

Values

(Millions)

No. of

reports

Values

(Millions)

No. of

reports

Values

(Millions)

Tax Evasion 24 717 17 144 51 1,000

Corruption 14 2,228 4 332 7 4,795


Graph 1: Suspected corruption


During the period under review, the number of intelligence reports associatedwith suspected corruption increased compared to 2019. This was as a result of theincrease in the value of intelligence reports associated with this predicate offence.

TechniquesThe following are some of thetechniques that the perpetratorswould use to advance their corruptactivities.

(i) PIPs used their positions inpublic institutions to influencethe awarding of contracts tocompanies in exchange forgratification in the form ofcash, real estate and motorvehicles.

(ii) Contracts being awarded toindividuals with advancepayments without any intentionsto execute the works.

(i i i) Awarding of contracts toentities that had no capacityand were none compliant fortax purposes.

(iv) Exploitation of single sourcing

(v) Companies awarded contractsto close associates of PIPs toconceal ultimate beneficialowners.

(vi) Overpricing of contractamounts.

Sectors involved

During the period under review it was

noted that the health, Construction,

Transport and Mining were the sectors

where corrupt acts were most

prevalent.

Main Perpetrators

The disseminated cases revealed that

the main perpetrators of corruption

were PIPs and their associates,

political party sympathizers and

private individuals.

4.2 Observed Trends on Tax Evasion

In the period under review, the

Suspicious Transactions Reports (STRs)

analysed revealed a continued trend

in which Individuals deposit large

cash amounts from businesses into

personal accounts. Furthermore, it

was noted that some of these

individuals are not registered for any

type of tax.

6


The FIC in 2020 disseminated 24

intelligence reports on suspected tax

evasion amounting to ZMW 717 million

compared to 17 reports amounting toZMW144 million recorded in 2019. Thisrepresents a 65% increase in thenumber of intelligence reportsdisseminated in the review period.

ZRA assessed ZMW 63.3 million as aresult of the disseminations made bythe Centre in 2020 compared to ZMW27.7 million assessed in 2019.

The graph below shows thedissemination amounts for suspectedtax evasion over the past 3 years.

Graph 2: Suspected tax evasion

During the period under review, the number of intelligence reports associatedwith suspected tax evasion increased compared to 2019. This was as a result ofthe increase in the value of intelligence reports associated with this predicateoffence.

Prevalent methods employed to

evade tax:

(i) Repatriation of proceeds from

mining companies in Zambia

to offshore jurisdictions while

declaring losses in Zambia

(ii) Use of employee accounts by

corporates in order to reduce

the revenue and therefore

the tax liability

(iii) Entities operating in Zambia

without being registered for

taxes.

(iv) Use of personal accounts for

business purposes by business

proprietors.

(v) False accounting techniques

to reduce tax obligations.

Main Perpetrators

Thedisseminatedcases revealedthat the

main perpetrators of tax evasion were

cross border traders, local and foreign

nationals, PIPs and their associates and

multi-national corporations.

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4.3 Observed Trends from CurrencyTransaction Reports

In the period under review, theCurrency Transaction Reports (CTRs)analysed revealed a continued trendin which Individuals deposit largecash amounts from businesses intopersonal accounts. In certaininstances, many third parties woulddeposit funds into an individual’s bank

account, accompanied by wiretransfers (WTs) outside the Country forvarious business activities. It wasfurther noted that some of theseindividuals were not registered forany tax type.

Tables 2 and 3 below show the numberand values of both Corporate andIndividual CTRs received over the pastthree years.

Table 2: Summary of the Corporate CTRs

Source: Financial Intelligence Centre, 2020

There was an increase of 118.5% in thenumber of corporate CTRs received from2018 to 2019. In 2020, a total of eightyfive thousand and ninety five (85,095)corporate CTRs were receivedcompared to one hundred andtwenty one thousand six hundred andseven (121,607) in 2019 representing adecrease of 30%. The decrease couldbe attributed to most corporate entitiesusing digital channels as the result of theCOVID-19 regulations.

Further, analysis of corporate CTR’srevealed that most of the cashtransactions were made by

construction companies as thesector remained active in 2020despite the COVID-19 restrictions.The FIC continued to observe a rapidincrease in the number of individualCTRs received over the last three (3)years. In 2020, the number ofindividual CTRs received increasedby 59.7% from 2019. This can beattributed to continuous use of cashin the informal sector and thereluctance by individuals to adhereto COVID -19 guidelines.

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CORPORATES Currency

Year No. ZMW USD GBP ZAR EUR

2020

85,095 28,501,782,782.19 6,267,100,864.50 906,528.89 46,896,445.66 13,272,579.99

2019

121,609 31,096,100,316.14 3,734,903,113.29 139,271.81 13,395,525.56 10,597,929.05

2018

55,658 10,808,403,865.09 1,869,864,663.88 351,873.68 2,710,350.00 28,750.00


Table 3: Summary of the Individual CTRs


4.4 Observed Trends from SuspiciousTransaction Reports

In 2020, the FIC received a total of

two thousand two hundred and sixty

six (2,266) STRs compared to seven

hundred and forty-eight (748) in 2019,

representing an increase of 203%.

Table four (4) below shows the

number of STRs received over the last

three (3) years.

Table 4: STRs received by number

Year Number of STR received

2020 2,266

2019 748

2018 724


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INDIVIDUALS Currency

Year No. ZMW USD GBP ZAR EUR

2020

44,731 10,030,488,242.96 962,820,146.38 7,868,395.94 9,166,746.59 2,853,268.75

2019

28,016 5,314,335,071.38 380,456,069.73 3,056,045.12 13,500,757.11 266,505.84

2018

19,934 4,850,931,898.77 399,819,450.03 - 4,475,430.00 -


The sharp increase in the number of

STRs received between 2020 and 2019

can be attributed to the COVID-19

pandemic as most transactions which

would be carried out in person were

done through the digital platforms to

avoid the use of cash thus prompting

the bank to increase their surveillance.

Accordingly the FIC during the year

issued a guidance note urging reporting

entities tomonitornewandemergingML/

TF/PF threats associated with COVID-19.

Reporting entities were urged to continue

monitoring transactions and pay

particular attention to unusual and

suspiciouspatterns incustomer’sbehavior

and financial flows, identifying risk

indicators and implementing processes

and controls to prevent suspected ML/

TF/PF. However, it was noted that the

DNFBPs in the period under review did

not submit STRs.

4.5 Observed Trends from wire

transfers

In the year 2020, the FICanalysed thewire

transfer information and observed the

following:-

Most of the transfers were to

Asia for various reasons,

including upkeep, salaries and

management fees.

A number of Chinese Nationals

sent funds to China with

narrations “family upkeep”.

Some Zambian Nationals who

declared low monthly incomes

were noted to be sending

huge amounts outside Zambia.

It was also noted that some

narrations did not give a clear

description of what the

payments related to such as

“purchase of goods”.

Some Multi National Corporates

(MNC) were noted to make

payments to tax haven countries

such as Mauritius and Isle of Man.

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5.0 CASE STUDIES

The case studies presented belowdepict some of the analysed anddisseminated intelligence reportsduring the year under review.

5.1 Case studies on Corruption

Case 1: Suspected ProcurementCorruption

The FIC analyzed an STR bordering onsuspected corruption and moneylaundering against an individual DZ,PIPs, Company A and Company B.The suspicions pertained to theawarding of three public contracts inexcess of USD 30 million to individualDZ, Company A and Company B.

The analysis revealed the following:

(a) The bid criterion required thebidders to have a 3 yearaverage turnover which is atleast three (3) times the totalvalue of the bid. Bidders wererequired to submit a copy oftheir bank statements asevidence of their turnover.

It was noted that individualDZ, Company A andCompany B failed to meetthese requirement.

(b) The bid criterion furtherrequired audited financialstatements for the past three(3) years.

Individual DZ, Company A andCompany B failed to meet thisrequirement. Further, IndividualDZ and Company A presentedforged audited financialstatements.

(c) Individual DZ, Company Aand Company B, falsif ieddocuments pertaining to theirexperience and technicalcapabilities.

(d) The il l-gotten funds wereinvested in real estate andhospitality industry

Despite the cited irregularities,individual DZ, Company A andCompany B, were awarded thecontracts. The analysis revealedinfluence peddling by PIPs andsuspected abuse of office by usingstrategically appointed officials.

The analysis in the case above showsmethods and techniques thatperpetrators of corruption employ tolaunder ill-gotten proceeds.

Case 2: Suspected corruption, theftand money laundering

The FIC analysed STRs on suspectedillegal mining and trade in preciousmetals involving Individuals ZZ andIndividuals QQ. Individuals ZZ and QQare prominent influential persons (PIPs)holding positions in public institutionsand political parties respectively.Members of the local communitywere induced to illegally mineprecious metals by individuals ZZ andQQ. Individuals ZZ together withindividuals QQ would transport theillegally mined precious metals eitherby public transport or through use ofprivate vehicles. The precious metalswere sold domestically to Zambiansand foreign nationals. Analysis by theFIC further revealed that over ZMW160 Mil l ion was realized. It wasobserved that the subjects acquiredproperty which included land, buildings,motor vehicles and houses. The analysisfurther showed that some of theproceeds were invested in fixed termdeposits and in liquor store businesses.Some subjects incorporated companiesandopenedcompanyaccounts inwhichlarge cash deposits and withdrawalswere made by either the subjects orthird parties. Further analysis showedthat there were some transfers madeusing money value transfer services(MVTS) platforms.

The case above shows howperpetrators of corruption usecorporate vehicles and formalfinancial services to launder ill-gottenproceeds.

11


See link chart below:

Case 3: Suspected Corruption

The FIC analysed an STR involving a

PIP on suspected corruption. PIP

incorporated company R that was

used as a channel to receive bribes

from foreign owned construction

companies (Company V, Company A

and Company CH). PIP facilitated the

awarding of contracts through single

sourcing to the mentioned companies.

The analysis revealed that:

(i) Company V, Company A and

Company CH purchased a

number of properties for PIP.

Further, Company V settled

over ZMW 40,000 rent for

Company R.

(ii) Fleets of vehicles were ordered

by Company V for the benefitof PIP. An amount of ZMW 3Million was remitted to acompany in Europe for thepurchase of vehicles.

The analysis in the case above showshow perpetrators of corruption usecorporate vehicles to launder il l-gotten proceeds.

5.2 Case studies on Tax evasion

Case 1: Suspected tax evasion

This is a case in which the subject whois a cross border trader, declared anannual income of over ZMW 70,000 at

account opening. The subject had anumber of accounts which were

12

receiving huge cash deposits. Within

a period of one year, his accounts had

a credit turnover of more than ZMW

199 million. The funds were utilized

through outward transfers mostly to an

Asian country. It was noted that the

subject was using his personal

accounts to conduct business

transactions and had no registered

business. The analysis presented shows

that the subject was evading tax.


The FIC analysed an STR on suspected

tax evasion on Individual F, an

employee of Company Y, on

suspicions that individual F was using

their personal accounts to conduct

business transactions. Analysis

revealed that:

(i) Individual F was a director/shareholder of Company Hdespite being on a work permit.

(ii) Individual F declared a monthlyincome of over ZMW7,800 ataccount opening.

(iii) Individual F’s accounts hadcredit turnovers in excess ofZMW 19.82 million and USD 4mil l ion in the period underreview.

(iv)Individual F received USD125,000 and ZMW 500,000 fromCompany H during the periodunder review.

(v) Company H had creditturnovers of USD 2 million andZMW 6 mill ion in the periodunder review.

(vi)Company H was not compliantfor tax purposes.

(vii) There were no salary creditsinto any of Individual Faccounts from company Y,her purported employer.

(viii) Individual F made transfers ofover USD 2 million and ZMW 3mill ion from her personalaccount to various companiesin Asia to purchase goods.

(ix) Individual F was using theirpersonal accounts to conductbusiness transactions on behalfof their company.

The analysis in the case above showsmethods and techniques of taxevasion.


The FIC analysed an STR involving aPIP on suspected tax evasion andcorruption. The PIP is a beneficialowner of Company J. During theperiod under review, Company Jwas awarded a phantom contract tosupply services to a public sectorinstitution T. The analysis revealed thefollowing:

(i) I t was established thatCompany J was paid overZMW 44 million by institution T.

(ii) The PIP received ZMW 20million from Company J whichwas invested in a fixed termaccount.

(iii) Through fictitious transactionsbetween related parties,Company J was able toreduce its taxable income outof the ZMW44 million received.

(iv) Funds in excess of ZMW10mil l ion were withdrawn byshareholders from theCompany J. Some of the cashwas later deposited into thePIPs bank account.

(v) Further, it was noted thatCompany J was not compliantfor tax purposes.


13


See link chart below:

6.0 RECOMMENDATIONS

(i) Zambia should introduce a

revenue based tax system on

resource based products to

reduce the level of tax

evasion.

(ii) Government through the Ministry of

Mines and Minerals Development

should enact a law that compels

companies in the precious metals

sector to auction precious stones

in Zambia to ensure transparency

in the pricing mechanism and

therefore fair taxes.

(iii) Government should consider

differentiated tax rates for

electronic and cash transactions

to encourage use of electronic

platforms.

(iv)Government should broadenits revenue base throughcollection of presumptive taxto informal sectors, especiallysmall enterprises such as:barber shops, saloons andmicro retail stores. This wil lreduce the administrativeburden of tax collection whilstalso increasing on both the taxpayer compliance.

7.0 CONCLUSION

It is an undeniable fact that Governmentcontinues to lose revenue throughcorrupt practices and tax evasion whichnegatively affect revenue mobilizationnecessary for provision of public goodsand services. To effectively address thethreat of these vices, concerted effortsby various competent authorities in thevalue chain cannot be overemphasized.

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8.0 WORKING DEFINITIONS

Competent Authority- refers to all publicauthorities with designated responsibilitiesfor combating money laundering and/orterrorist financing. In particular, thisincludes the FIU; the authorities that havethe function of investigating and/orprosecuting money laundering,associated predicate offences andterrorist financing, and seizing/freezingand confiscating criminal assets;authorities receiving reports on cross-border transportation of currency & BNIs;and authorities that have AML/CFTsupervisory or monitoring responsibilitiesaimed at ensuring compliance byfinancial institutionsandDNFBPswithAML/CFT requirements.

Corruption- According to section (2) ofthe Anti-Corruption Act No.3 of 2012,‘corrupt’ means the soliciting, accepting,obtaining, giving, promising or offering ofa gratification by way of a bribe or otherpersonal temptationor inducementorthemisuse or abuse of public office foradvantage or benefit for oneself oranother person, and “ corruption”shall be construed accordingly.

Direct bidding - this is a procurementmethod where a bid is obtaineddirectly from a single bidder, withoutcompetition.

ESAAMLG- one of the Financial ActionTask Force styled regional bodies.FATF- FATF is an inter-governmentalbody which sets standards anddevelops and promotes policies tocombat money laundering andterrorist financing.

Money Laundering- According tosection 2 of the Prohibition andPrevention of Money Laundering ActNo.14 of 2001 (as amended), MoneyLaundering means where a reasonable

inference may be drawn, havingregard to the objective factualcircumstances, any activity by aperson -

(a) who knows or has reason tobelieve that the property isthe proceeds of a crime; or

(b) without reasonable excuse,fails to take reasonable stepsto ascertain whether or notthe property is proceeds ofa crime; where the person-

(i) engages, directly orindirectly, in a transactionthat involves proceeds ofa crime;

(i i) acqui res , rece iv es ,possesses , d i sgu i ses ,t rans fer s , conver ts ,exchanges , car ries,disposes, uses, removesfrom or brings intoZambia proceeds of acrime; or

(iii) conceals, disguises orimpedes the establishmentof the true nature, origin,location, movement,disposition, title of, rightswith respect to, orownership of, proceedsof crime”;

Mutual Evaluation - mutual evaluationis an assessment of a country’smeasures undertaken to combatmoney laundering and the financingof terrorism and proliferation ofweapons of mass destruction. Thisincludes an assessment of a country’sactions to address the risks emanatingfrom designated terrorists or terroristorganisations.

MVTS- Money or value transfer services(MVTS) refers to financial services thatinvolve the acceptance of cash,cheques, other monetary instruments orother stores of value and the payment of

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acorrespondingsumincashorother formto a beneficiary by means of acommunication, message, transfer, orthrough a clearing network to which theMVTS provider belongs. Transactionsperformed by such services can involveone or more intermediaries and a finalpaymenttoathirdparty,andmayincludeany new payment methods. Sometimesthese services have ties to particulargeographic regions and aredescribed using a variety of specificterms, including hawala, hundi, andfei-chen.

PIP - prominent influential person “means—

(a) an individual who is or has, beenentrusted with a prominent publicfunction by a State or aninternational or local body ororganisations but is not ofmiddle or junior ranking andincludes—

(i) a head of State or ofGovernment;

(ii) a minister;

(i i i) a member of anexecutive organ of apolitical party;

(iv) a magistrate, judge andother senior officials ofquasi-judicial bodies;

(v) a senior military official;

(vi) a senior governmentofficial; and

(vii) a member of theboard or an official insenior management ofan administrative orsupervisory body, or astate owned enterpriseor statutory body;

Predicate offences- According toFATF, predicate offences are specified“unlawful activities” whose proceeds, ifinvolved in the subject transaction, cangive rise to prosecution for moneylaundering.

Proliferation Financing- Section 2 ofthe National Anti-Terrorism andProliferation Act No.6 of 2018 actdefines Proliferation Financing as anact by any person who by any means,directly or indirectly, wil lful ly ornegligently provides funds or financialservices to be used or knowing thatthey are to be used in whole or in part forproliferation,themanufacture,acquisition,possession, development, export, trans-shipment, brokering, transport, transfer,stockpiling, supply, sale or use of nuclear,ballistic, chemical, radiological orbiological weaponsoranyotherweaponcapable of causing mass destructionand their means of delivery and relatedmaterials including both technologiesand dual-use goods used for nonlegitimate purposes, includingtechnology, goods, software, servicesor expertise, in contravention of this Actor, where applicable, internationalobligations derived from relevantSecurity Council Resolutions;

Financing of Terrorism - Section 2 ofthe National Anti-Terrorism andProliferation Act No.6 of 2018 actdefines Financing of Terrorism an actby any person who, irrespective ofwhether a terrorist act occurs, by anymeans, directly or indirectly, willfullyprovides or collects funds or attemptsto do so with the intention that thefunds should be used or knowing thatthe funds are to be used in full or inpart—

(i) to carry out a terrorist act;

(ii) by a terrorist;

(iii) by a terrorist organisation; or

(iv) for the travel of a person toa State other than theperson’s State of residence ornationality for the purpose ofperpetration, planning orpreparation of, or participationin, terrorist act or the providingor receiving of terrorist training;

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THE FINANCIAL INTELLIGENCE CENTRE

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