The Problem Of Money Laundering In Mozambique

The problem this memorandum will address is the regional regulator’s inadequate response to the ineffective money laundering regulations in Mozambique. The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) must act for the sake of upholding the global standards to combat money laundering.

Problem Definition

Defining Money Laundering

Money laundering is the practice of concealing illegally acquired assets and making them appear to be legally acquired. It is conventional to break down the process of money laundering into three stages: the placement, layering and integration stages (Okogbule 2007, 449-463).

General Situation of Money Laundering in Mozambique

The government of Mozambique needs to institute more proper regulations to build better financial transparency and standards. Among 125 countries, Mozambique is now listed in Basel AML Index as the highest ranked money laundering country (Basel Institute of Governance 2019). The Public Attorney’s Office (PGR) estimated that about 1. 887 billion meticais were lost in 2017 due to the illicit use of Mozambique’s financial system to conceal or disguise capital of unlawful origin (Frey 2017).

Cost of Money Laundering to Mozambique’s Economy

Money laundering has largely affected Mozambique economic performance. One major effect of money laundering is that it hurts legitimate business enterprises. Launderers use illicit funds to introduce goods into the market not for profit, but to transfer laundered money. Therefore, they sell goods at lower costs in the exporting country (Ikpang 2011). This situation discourages local enterprises, which sell the same goods, resulting in many of the enterprises leaving the legitimate economy system into the hands of launderer (Akin Olawale 2016). The situation ultimately lowers foreign investments, since the economic environment is no longer well-structured (Ikpang 2011). The Foreign Direct Investment to Mozambique has been declining since 2015, making it difficult for local enterprises to survive in the economy (Shireen et al. 2018).

Another major effect of money laundering on the Mozambique economy is that it attacks the reliability of the people on financial institutions. The World Bank noted that a number of borrowers in Mozambique now lack of the capacity to pay back their debt due to lower confidence, elevated debt levels, and soaring costs of credit (Shireen et al. 2018).

Considering all the effects above, Mozambique is now falling behind other neighbouring countries in nearly all economic indicators. It has the second - lowest GDP compared to those of other neighbouring countries (World Bank 2019). Money laundering is notorious that it hinders the country ability from growing and prospering.

Challenges of Combating Money Laundering in Mozambique

The Mozambican Attorney-General's Office (PGR) and Bank of Mozambique (BOM) recognize the severe problem and promise to combat money laundering with the cooperation of the Government of Mozambique (KnowYourCountry 2018).

However, they face challenges in Implementation of Current Anti-Money Laundering Measures. Mozambique’s anti-money laundering regulation framework is mostly rules-based. There are multiple laws in place to combat money laundering, including the Law on Money-Laundering and Terrorist Financing, and decree 66/2014 (UNODC 2019). However, these laws are not as effective as intended, with a number of shortcomings were identified. These short-comings include no explicit requirement to identify and verify beneficial owners of clients or asset held, and the absence of regulation to mandate declaration of national currency entering or leaving Mozambique (UNODC 2019). One example is that the Bank of Mozambique requires some listed entities to identify their customers but finds it difficult to track all the payments. The reason is that the identification of beneficial owners is inadequately stated by law (UNODC 2019). As a result, it is easy for launderers to transfer illicit money to the third person or party as the beneficial owner. Under current rules-based system, launderers could manipulate their transactions so that they would be compliant to the standards. There is also relatively low rate of convictions. In 2016, the Mozambican Attorney-General's Office (PGR) investigated 16 money laundering cases, however, only 7 of those were brought into indictments eventually (KnowYourCountry 2018). Moreover, the administration had to process redundant information from over-reporting. Unger and van Waarden described the rules-based AML regulation as “It was rigid, formalistic, bureaucratic, and entailed high administrative burdens and hence was considered ineffective and inefficient. ” (Unger and van Waarden 2009). Besides, the costs are substantial to implement the regulations relative to the current available resources and technical capacity (KnowYourCountry 2018). According to the report, it stated that the attorneys, judges, and police in Mozambique lack the technical capacity and resources to successfully combat money laundering (INCSR 2018).

Impact of Money Laundering in Mozambique to the Region

At the regional level, severe money laundering inevitably affected neighboring countries. For example, the more active the launderers in Mozambique, the more severe the human trafficking will become, which mainly flows from Mozambique to South Africa (R. O. 2018). Ultimately, the Eastern and Southern Africa will fall into a vicious cycle of money laundering.

As discussed, money laundering in Mozambique is inadequately regulated. Due to challenges in implementation of current anti-money laundering measures, Mozambique failed to successfully combat money laundering.

Since Mozambique is the member country of The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), it is within your mandate to monitor, evaluate and make sure effective implementation of anti-money laundering measures in member countries. I believe you have the authority to address this issue and influence Mozambique authority to take proper actions to effectively implement the AML regulations. This is not only a country-level issue, but a regional wide problem that needs to be solved by appropriate intervention.

Policy Alternatives

This section presents two policy alternatives, (1) to establish a risk-based anti-money laundering regulation framework in Mozambique and (2) to provide Mozambique’s government with financial and technical assistance to improve implementation of the anti-money laundering measures. The policy alternatives defined will be assessed based on three criteria: 1) effectiveness, 2) feasibility, and 3) cost. Effectiveness will be measured based on the demonstrated progress in enforcement under its anti-money laundering (AML) laws and implementing regulations. Feasibility will be assessed based on the ESAAMLG capacity and practicality to act on the proposed policy. The final criterion, cost to the ESAMMLG will be evaluated in comparison to the alternatives.

Alternative #1: Risk-based Anti-Money Laundering Regulation Framework

The first policy alternative proposes ESAMMLG to support implementation of a comprehensive risk-based regulation framework in Mozambique that equips the country with decision-making process to target the risks of money laundering. Since Mozambique’s anti-money laundering regulation framework is mostly rules-based (UNODC 2019), a number of shortcomings were identified in the existing laws. Therefore, this alternative recommends ESAMMLG to assist Mozambique in creating a risk-based anti-money laundering regulation framework.

The risk-based regulation framework in Mozambique should include double risk assessments at both domestic level and regional level. First, on the front line, banks in Mozambique assess the risk or possibility of whether a transaction is skeptical. Subsequently, the government of Mozambique takes the responsibility to evaluate the risk or possibility that banks estimate is right or wrong (Unger 2009). On the regional level, ESAMMLG should regulate Mozambique to share the outcomes of risk assessment (see Table 1), which should be updated every two years (UNODC 2019) by Mozambique government since accurate data is the basis to refresh the risk-based decision-making system.

Projecting the Outcome of Alternative #1

Firstly, in the new risk-based AML-regulation, banks in Mozambique could develop their own explicit criteria to assess whether a case is suspicious and whether it could be a money laundering case that should be reported to the government. Thus, the process will be more flexible and result a better response to money laundering because the banks can develop their own criteria for identification. Secondly, compared to the inadequate regulations, double risk assessments can increase expertise and sound judgement of money laundering cases, eventually resolving the short-comings in the current laws. Finally, with the cross-border shared risk assessment, ESAMMLG could better monitor the country’s risk management and customize the AML recommendation for Mozambique on a regular basis.

For example, in 2005, the Dutch government implemented a similar risk-based system that reported to decrease administrative costs by 8 million Euros, which was a reduction of nearly 20%. (FIU Nederland 2008). Also, “the number of convictions of money laundering cases rose substantially, from 113 in 2004 to 427 in 2007,” implying the effectiveness of the risk-based AML regulation (FIU Nederland 2008).

Assessing Alternative #1

In terms of effectiveness, evidence from other countries suggests that the risk-based regulation contains pitfalls (Unger 2009). In the short term, there is a likelihood of an increase in indictments of money laundering cases, demonstrating a sign of improvement in the AML enforcement. However, in the long term, there could be risks that banks find loopholes in the regulation. For instance, in 2016, the Bank of Mozambique (BOM) inspected six other banks due to compliance concerns which illustrates some banks are complainant in some money laundering cases. (International Narcotics Control Strategy Report 2018).

With regard to feasibility, the ESAAMLG has the capability to implement risk-based AML measures in Mozambique, since it is stated clearly as a practical strategy in 2017-2020 ESAAMLG Strategy Plan (ESAAMLG 2017). Finally, ESAAMLG needs to build a consulting project team with three experienced Full-time equivalents (FTEs) to provide guidance and consultancy for banks and government of Mozambique to implement the risk-based regulation. It is estimated that a total cost of $348,000 for the annual compensation of new FTEs. This alternative will be less expensive than the second alternative.

Alternative #2: Financial and Technical Assistance for Mozambique’s Law Enforcement Authorities

The second policy alternative provides both financial and technical assistance for Mozambique’s law enforcement authorities. This alternative recommends the ESAAMLG to provide and manage $5 million funding for Mozambique. The grants are to finance on attorneys, judges, and police AML training programs which are currently lack of resources and mainly relied on donors (INCSR 2018). In terms of technical assistance, this alternative suggests ESAAMLG to offer technical advice for Mozambique’s law enforcement authorities on current pitfalls in the regulation system and how to better implement the international standards to better combat the money-laundering.

Assumptions

The outcome of the second policy alternative assumes that the content of attorneys, judges, and police AML training programs are aligned with the ESAAMLG standards.

Projecting the Outcome of Alternative #2

Once adopted, the results would be seen in a relatively short period of time and would have two primary outcomes. First, with additional funding sources, law enforcement authorities of Mozambique will be better equipped to oversee financial institutions. Attorneys, judges, and police in Mozambique would have the capability to judge and investigate anti-money laundering cases so that the rate of conviction in money laundering cases will go up. Secondly, with technical assistance, law enforcement authorities could identify the current short comings in the regulation and set up a better anti-money regulation framework.

Assessing Alternative #2

With regard to the effectiveness, if successfully implemented, in the short-term, the alternative can provide increased anti-money laundering enforcement and increase the rate of indictments. Moreover, in the medium to long-term, a well-skilled law enforcement workforce can embed a sound anti-money laundering regulation framework. In terms of the feasibility criterion, ESAAMLG has experienced professionals specializing in anti-money laundering legal consulting so that they can provide Mozambique with knowledgeable advice. It has already established technical assistance and training coordination forum (see Figure 1) to provide support for member countries. However, regarding the feasibility to provide grants for Mozambique, the budget for ESAAMLG is not transparent so it is doubtful that if the fund can be drawn from the organization. Finally, the projected annual cost of this alternative is at least 5 million to provide grants. If adding other costs for providing technical assistance, it would be far more expensive than the first alternative.

Conclusion

The first policy alternative of establishing a risk-based framework meets the criteria of feasibility and cost efficiency, however, it does not meet effectiveness. The second policy alternative of improving Mozambique’s law enforcement authorities meets the criteria of effectiveness and technical feasibility. However, the financial feasibility is unknown and the cost is far more expensive than the first alternative.