Ill-gotten Money and the Economy
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Tax evasion. The tax gap in Malawi has an estimated value of 8 to 12 percent of GDP. Tax evasion negatively impacts revenue mobilization on the part of the government. The Malawi Revenue Authority has already used the AML framework to go after the proceeds from tax evasion. The successes gained from such a proactive approach should be consolidated and scaled up to be part of the enforcement strategy of the Malawi Revenue Authority. Corruption. According to our estimates, income derived from corruption amounts to about 5 percent of GDP. There is general agreement on the direct negative impact of corruption on economic development and poverty alleviation, ranging from poor delivery of products and services to a majority of the population to leakages in government expenditures with lower multiplier effects and a long-term negative effect on confidence in government institutions. And, as one interviewee said, “it kills the spirit of hard work.” The authorities, specifically the ACB, should use the financial intelligence information in the FIUs database to follow the trail of suspected proceeds of corruption. This has not been the case up to this point. Financial inclusion. Promotion of financial deepening and financial inclusion is important in making the AML system relevant in Malawi. The cash-based character of the economy impedes effectiveness of the AML system in Malawi. Spending of ill-go en money in Malawi probably simply occurs mainly through the direct purchase of goods and services, cash investments in real estate or business enterprises, or family support. Informal sector. Financial inclusion strategies should also be targeted at the rich population segments of Malawian society. Informality and the use of cash are not only restricted to small-scale economic activities. A significant number of Malawians with small- and medium-size businesses, Chinese business people, and business people from other African countries have a preference for using cash, as well. Moreover, some members of Malawian society prefer to avoid the banking system for cultural and religious reasons (there are no Islamic banks in Malawi). Impact of AML policies. AML is generally perceived as not having a negative impact on financial inclusion strategies (see box 3.12). Banking sector inefficiencies, tedious bureaucratic procedures, high costs, negative real interest rates, and lack of confidence, are considered to be major barriers to an increased role of the financial sector in the dayto-day economic relations of individuals and business firms in Malawi. Gatekeepers. Despite the fact that cash dominates the Malawian economy, and a significant majority of all transactions are in cash, at one point or another lawyers, real estate agents, and car dealers will have dealings with individuals and businesses that want to spend their ill-go en money. As such, the authorities should consider focusing most of their a ention on ensuring that these gatekeepers undertake appropriate due diligence when engaging in large transaction, preferably above a specified threshold. Hitherto, most a ention has been paid to the financial sector (primarily banks), but as observed in this chapter, most financial activities take place outside the formal financial system. Consequently, it is recommended that implementing the AML measures in the case of the securities and insurance sectors may not be the optimal way. Transfer pricing and forex dealing. Transfer pricing abuse and black market forex dealing have a negative impact on economic development in Malawi, particularly when one considers the small resource base of the country. Nevertheless, using AML as a tool to tackle these issues is not the right policy response. Transfer pricing abuse has to be