International banks and auditors involved in US$700 million TBML scheme says Zambia’s financial intelligence unit

International banks and audit firms were used by a company involved in an “aggressive profit shifting” trade-based money laundering (TBML) scheme to understate its taxable income and tax liability due to the Zambian government by over US$700 million according to a new study by Zambia’s Financial Intelligence Centre (FIC).

The purpose of the study, Trade-based Money Laundering In Zambia, is to identify TBML risk indicators and provide a basis for authorities to formulate strategies to combat TBML in Zambia. The study also provides recommendations to enhance Zambia’s capacity to combat TBML.

Produced with assistance from the US treasury department and the Italian financial intelligence unit, the study also looks at how TBML is used as an alternative remittance system that provides transnational criminal organisations the opportunity to earn, move and store proceeds disguised as legitimate trade.

Case studies

The report contains three case studies. One involves a group of politically exposed persons engaged in illegal harvesting of rosewood that was then misclassified as sawn wood when exported to an unnamed Asian country.

Another involves countries incorporated in Zambia by foreign nationals that staged phantom shipments to illegally channel US$7.8 million – most likely the proceeds of illegal activities – out of the country.

Aggressive profit shifting

An unnamed company in the extractives sector used international banks and audit firms to process its transactions and audit financial statements in what the report describes as an “aggressive profit shifting” scheme the study says.

According to the FIC, the company entered into an off-take agreement for its minerals with a related party domiciled in a secrecy jurisdiction. It sold minerals to the related party at below market price, thereby understating its taxable income and tax liability by over US$700 million over a five year period.

The company also manipulated its financial statements to mask aggressive profit shifting practices by giving the impression that it was investing in plant and machinery, which costs would be used to claim 100 per cent capital allowance for tax purposes according to the study.

South African connections

Based on an analysis of the country’s top seven trading partners, the FIC found significant anomalies between Zambian and South African trade data. Anomalies due to export under-reporting of refined copper and copper alloys as well as unwrought refined copper amounted to US$14.4 million between 2016 and 2020 according to the study.

It says other anomalies due to under-reporting of exports to South Africa were found in transactions involving various other goods, including waste and scrap metals, machinery and mechanical parts, alcohol, selected food products and electrical energy.

TBML challenges

The report says law enforcement agencies face difficulties acquiring evidence of TBML from foreign countries in cases involving multiple jurisdictions. Similarly, financial institutions experienced challenges in identifying TBML schemes because of limited exchange of information between local and foreign financial institutions.

Agencies could however increase cooperation in identifying and investigating TBML through integrating their database with the customs database and improve interagency cooperation and coordination in TBML cases the study concludes.

The FIC’s report, Trade-based Money Laundering In Zambia, can be downloaded from here.



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