Reserve Bank of Malawi (RBM) suspects that the economy has lost $394.60 million (about K240 billion) through unauthorised externalisation of foreign exchange by some multinationals in the country through transfer pricing.
RBM Governor Dalitso Kabambe brought to the fore the fears at the signing of a memorandum of understanding (MoU) between the central bank and seven government law enforcement agencies that deal with financial security related crimes.
Transfer pricing is a term used to describe aspects of inter-company pricing arrangements between related business entities. The arrangement widely applies to transfers, tangible property, intangible property services and finance transfers between the said companies usually operating in different jurisdictions.
Kabambe said the revelations follow investigations and transfer pricing audits undertaken by public tax collector Malawi Revenue Authority (MRA).
He said since attaining independence from Britain 54 years ago, the country has experienced plunder of foreign exchange due to illegal foreign currency externalisation and transfer pricing. He said this has negatively affected Malawi’s economic development efforts.
Said the governor: “It is disheartening to report that some companies in Malawi are involved in transfer pricing for tax avoidance. This $394.60 million is a large percentage of what Malawi has as its foreign exchange reserves. We will ensure that everyone involved in this malpractice is brought to book as this is a great disfavour to our nation.”
The amount is almost equivalent to what Malawi earns from tobacco, the country’s major foreign exchange earner estimated to account for about 60 percent. It is also about 17 percent of Malawi’s K1.4 trillion 2018/19 National Budget.
Kabambe said there were several cases of illegal forex externalisation under investigation or at prosecution stage. He said the amount involved in the pending cases is projected at K30 billion.
He mentioned the $20 million (about K15 billion) case between some commercial banks and Abdul Rehman of Cotton Ginners Limited, and others involving Malawian entrepreneurs of Asian descent worth K20 billion as some of the cases. Kabambe also said 11 firms owned by Chinese are collectively embroiled in a $5.5 million forex siphoning case.
Further, Kabambe said some individuals “masquerading as travellers” also obtained foreign currency from authorised dealer banks (ADBs) and foreign exchange bureaus have their cases in court.
The institutions that have signed the MoU include Malawi Police Service, the Office of the Director of Public Prosecutions (DPP), the Anti-Corruption Bureau (ACB), the Financial Intelligence Authority (FIA), MRA, Immigration Department and National Intelligence Service.
The institutions have since agreed to jointly fight the vice.
Speaking on behalf of the agencies, Director of Public Prosecutions (DPP) Mary Kachale said the move will expedite prosecution of cases related to externalisation of foreign currency.
She said: “This very essential because as you are aware the public has been complaining about delays in the prosecution of these high profile cases. What people did not know is that the delays were coming from the fact that there were gaps between investigative agencies and case prosecutors before the case is taken to court.
“So, this agreement addresses that. It is saying agencies will alert us when they feel they need prosecutor guidance then my office will designate a lawyer to be analysing the evidence.”
During the meeting, Kabambe also said some cases have successfully been prosecuted and RBM recovered or forfeited an equivalent of K905.7 million.
In one recent case, the Lilongwe Chief Resident Magistrate’s Court sentenced to 14 months an Indian for being found in possession of $622 820 (about K480 million), 15 860 euros (about K12 million) and £2 015 (about K1.7 million) without supporting documentation.
Currently, 10 cases involving transfer pricing and illegal externalisation of foreign currency worth K49 billion are in the courts.
Malawi has on a number of occasions experienced foreign exchange shortage which authorities have attributed to illegal externalisation.
In a bid to check against the malpractice amid a foreign exchange shortage, RBM in 2010 directed that foreign exchange bureaus should partner ADBs as per its 2007 directive. However, the Constitutional Court ruled that the 2007 RBM directive was unconstitutional because it infringed on a right to free enterprise.
Forex bureau operators were later asked to reapply for licences.