Zimbabwe can prosecute those who externalised funds

Former Finance Minister Tendai Biti

Zimbabwe’s President Emmerson Mnangagwa on Monday, 19 March 2018, released a list of 1,844 alleged ‘externalisation’ cases implicating mostly corporate organisations and a handful of individuals.

The president’s list has triggered debate on what constitutes ‘externalisation’ in Zimbabwe’s context, considering that the country has formalised the use of several foreign currencies, including the United States dollar and South Africa’s rand.

Former finance minister Tendai Biti has led criticism of Mnangagwa’s crusade against alleged offenders.

Biti, who served as finance minister between 2009 and 2013 is quoted by the Zimbabwe Independent of 9 March, 2018saying:

“When you talk of externalisation, you are talking of getting foreign currency, that is money which is not the legal tender of that country outside Zimbabwe. So after 2009 we have to be careful now because the US dollar is now the legal tender.

“Strictly speaking, externalisation is when you take money which is not your domestic currency and you get it out.”

In the quoted article and others published by various media outlets, Biti has called for legal clarity with regard to prosecution of individuals and corporates  for externalisation of funds and assets.

He argues that there is need to differentiate between externalisation and illicit financial flows.

Biti’s argument is based on the fact that, prior to the adoption of the multi-currency system, the concept of externalisation was clearly laid out in the Reserve Bank of Zimbabwe Act (Chapter 22:15) and involved remitting foreign currency to offshore destinations. When Zimbabwe adopted the multi-currency system in 2009, it amended the RBZ Act (Chapter 22:15) to declare a basket of foreign currencies as legal tender. So, from his argument, externalisation refers to the offshoring of money which is not Zimbabwe’s legal tender.

However, the argument overlooks several legal and policy issues that support the case for “externalisation” under the current multi-currency system.

International transactions are part of any country’s capital account, which is administered by the central bank according to policy goals and priorities. Even in the US where the USD is both legal tender and international reserve currency, the Fed reserves the right to impose controls and other administrative measures on the capital account from time to time. Administrative measures may take the form of restrictions on international transactions.

In Zimbabwe, international transactions are regulated by the Exchange Control Act (Chapter 22:05), which confers powers on the President to impose restrictions and administrative measures related to gold, currency, securities, exchange transactions, payments and debts, and the import, export, transfer and settlement of property, and for purposes connected with the matters aforesaid. These statutory regulations are administered by the RBZ for policy purposes.

Biti’s claims seem to suggest that international transactions processed in Zimbabwe are subject to the provisions of the RBZ Act (Chapter 22:15) only. It seems to disregard the fact that the RBZ Act (Chapter 22:15) is administered together with the Exchange Control Act (Chapter 22:05) and its subsidiary regulations.

The fact that the USD and other currencies were made legal tender through an amendment of the RBZ Act (Chapter 22:15) does not mean that they are no longer subject to exchange controls regulations under the Exchange Control Act and Exchange Control Regulations. They are legal tender as far as domestic transactions are concerned. International transactions that breach statutory regulations are, from a legal perspective, illicit transactions.

Statutory Instrument (S.I.) 145 of 2017 considers such illicit transactions as “illegal expatriation of property”. In terms of the statutory instrument, “illegal expatriation of property” refers to the “illegal transfer/export of foreign exchange and/or assets from Zimbabwe and/or offshore retention of foreign exchange and/or assets due to Zimbabwe, without relevant regulatory authorisations”. Regardless of which term is used—whether ‘externalisation” or illicit “international financial transactions” or “illegal expatriation of property”—unauthorised international transactions in USD or other legal tender are in contravention of national laws.

When the cross-border transactions contravene both national and international laws, they can be considered to be either illicit financial flows or money laundering, depending on their volume and purpose. These wide categories encompass several different types of financial transfers, made for different reasons, including: funds with criminal origin, such as the proceeds of crime (for example tax evasion, money laundering, fraud and corruption), legal requirements (such as transparency or capital controls), to mention just a few.

The argument that it may be difficult to prosecute perpetrators involved in the illegal expatriation of property or externalisation, as it is commonly referred to in Zimbabwe, does not have a solid factual basis. It is legal to prosecute the individuals and corporates who contravened the Exchange Control Act and its subsidiary exchange control regulations.

By Onias Mugowo is an econometrician and researcher. He holds a first class M.Com (Economics) degree from the University of Venda. This article was first published by Zimfact