By Abraham Kapambwe

Unmasking Trade-Based Money Laundering: A Deep Dive into Zambia's Financial Shadows using Data Analytics.

The United States Government Accountability Office (GAO) has identified Trade-Based Money Laundering (TBML) as one of the most challenging forms of money laundering to detect. The complexities of trade transactions and the sheer volume of international trade make TBML a formidable adversary for regulators and law enforcement agencies. This blog will explore how TBML operates, using Zambia as a case study, and delve into the broader implications of illicit financial flows (IFFs) and corruption in the country. We will also discuss how Neosoft can help investigating agents implement Advanced Data Analytics using Microsoft Fabric to identify and mitigate these corruption scandals in real-time.

What is Trade-Based Money Laundering (TBML)?

Trade-Based Money Laundering (TBML) involves the process of disguising the proceeds of crime and moving value through trade transactions to legitimize their illicit origins. This can be achieved through various methods, including over-invoicing, under-invoicing, multiple invoicing of goods and services, and falsely describing goods and services. In the context of Zambia, TBML is particularly challenging due to the country's extensive trade networks and the involvement of multiple stakeholders, making it difficult to detect and prevent.

Overvalued Zambian Imports: A Case Study

Imagine a criminal in Zambia who wants to launder ZMW1 million to a foreign country. The scheme would require the collusion of a foreign exporter. Here’s how it unfolds:

• Initial Purchase: The foreign exporter buys 10,000 razor blades for ZMW0.10 per blade, totaling ZMW1,000.
• Inflated Export: The foreign exporter then exports these 10,000 razor blades to a domestic importer in Zambia, but at an inflated price of ZMW100 per blade. The total invoice now stands at ZMW1,000,000.
• Payment: The domestic importer pays the foreign exporter ZMW1,000,000 for goods worth only ZMW1,000.
• Outcome: The domestic importer has effectively moved ZMW1 million to the foreign country, minus the ZMW1,000 cost of the razor blades.

Data Sources and Trade Flows

The World Bank's World Integrated Trade Solution (WITS) provides data on trade flows, expressed in thousands of US Dollars at the 6-digit level. This data covers Zambia’s major trade partners, including China, Congo DR, Switzerland, South Africa, UAE, Singapore, and India, from 2016 to 2020. Interestingly, the UK accounts for an astounding 66% of Zambia’s transnational ownership ties, warranting careful scrutiny.

Indicators of Illicit Financial Flows

Monitoring and measuring IFFs is inherently challenging due to their secretive nature. However, Foreign Direct Investment (FDI) can serve as a useful indicator. The main destinations for Zambia’s FDI outflows are China (23%), the UK (19%), the US, and South Africa (both at 16%). These outflows likely include IFFs.

The Role of Precious Stones and Metals

Interviewees from Transparency International (TI) noted that individuals seeking to move illicit funds often purchase precious stones and metals, such as gold, and smuggle them to high-demand markets like India and Dubai. These items are sold on the black market or semi-formal markets, which do not require certificates of origin. The proceeds are then transferred back to Zambia or masked as investments.

Enablers of Illicit Financial Flows

TI’s extensive review of 78 cases across 33 African countries identified 87 professionals and businesses facilitating IFFs. These enablers include accountants, business consultancies, law firms, notaries, real estate agencies, tax advisory businesses, and trust and corporate service providers (TCSPs). They offer services critical to the corrupt, such as creating and managing companies and trusts, helping clients remain anonymous, and concealing the illicit origin of funds.

Investigations and Anti-Corruption Efforts

The Investigations Department of the Anti-Corruption Commission (ACC) in Zambia is responsible for investigating corruption and related crimes. The department gathers intelligence, analyzes data, and conducts inquiries authorized by the Director General. When evidence is established, suspects are arrested and prosecuted. President Hakainde Hichilema has emphasized the necessity of combining prosecution with asset recovery in the fight against corruption.

Notable Corruption Scandals in Zambia

• The Mukula Tree Scandal: Involves illegal logging and export of the Mukula tree, implicating high-ranking officials.
• Social Cash Transfer Scandal: Misappropriation of funds meant for vulnerable households, leading to aid suspension by donors.
• Road Contracts and Infrastructure Projects: Allegations of inflated costs and kickbacks in awarding contracts.
• Health Sector Corruption: Misappropriation of funds for medical supplies, impacting healthcare quality.
• Fuel Procurement Scandal: Inflated contracts and kickbacks in fuel procurement.
• Mining Sector Corruption: Underreporting production, tax evasion, and IFFs in copper mining.
• Public Service Employment: Nepotism and favoritism in job allocations.
• Election-Related Corruption: Vote-buying and misuse of state resources during elections.
• ZRA Tax Evasion: The Zambia Revenue Authority (ZRA) has taken significant actions against tax evasion and non-disclosed gemstone operations. A search operation at Good Time Steel Company in Kitwe led to the seizure of USD $250,000 and 2.5 million Zambian kwacha, following allegations of tax evasion.

Leveraging Real-Time Analysis with Microsoft Fabric

Real-time analysis can be a powerful tool in identifying and mitigating corruption scandals, such as those highlighted in Zambia, by providing timely insights and enabling swift action. Microsoft Fabric, a comprehensive data platform, can help in several ways:

• Integrate Diverse Data Sources: Real-time data from various sources such as financial transactions, trade records, social media, and government databases can be ingested and integrated. For instance, data from the Zambia Revenue Authority (ZRA), customs, and trade databases can be combined to monitor trade activities and financial flows.
• Monitor Transactions: Real-time processing of financial transactions can help identify unusual patterns indicative of money laundering or corruption. For example, sudden large transactions or repeated small transactions that sum up to significant amounts can be flagged for further investigation.
• Trade Anomalies: Real-time analysis of trade data can detect anomalies such as overvalued imports or undervalued exports, which are common in trade-based money laundering schemes.
• Predictive Analytics: Machine learning models can be trained to predict and identify potential corruption activities based on historical data. For instance, models can be developed to detect patterns in procurement processes that are indicative of kickbacks or inflated contracts.
• Anomaly Detection: Advanced analytics can be used to detect anomalies in financial and trade data that may indicate corruption. For example, deviations from normal trading patterns or discrepancies between declared and actual values of goods.
• Real-Time Dashboards: Interactive dashboards can provide real-time insights into financial transactions, trade activities, and other relevant data. These dashboards can highlight key metrics and anomalies, making it easier for authorities to identify and investigate suspicious activities.
• Custom Reports: Detailed reports can be generated to provide insights into specific areas of concern, such as the Mukula Tree Scandal or the Social Cash Transfer Scandal. These reports can help in understanding the scope and impact of the corruption.

Conclusion

Trade-Based Money Laundering and other forms of illicit financial flows pose significant challenges to Zambia’s economic integrity. While the government and organizations like Transparency International are making strides in combating these issues, the complexity and secrecy involved require continuous vigilance and robust regulatory frameworks. By leveraging Microsoft Fabric for real-time analysis, Zambia can enhance its ability to detect and respond to corruption scandals. The integration of diverse data sources, real-time processing, advanced analytics, and interactive visualization can provide the insights needed to identify suspicious activities and take swift action. This holistic approach can significantly improve the effectiveness of anti-corruption efforts and help ensure that the nation’s resources are used for the benefit of all its citizens.