Capital markets can be facile targets as vehicles for money laundering because they are typically a subset of the broader market.
That is, it is a part of the financial system where funds are mobilised and channelled to productive sectors of the economy (the broader market).
For one thing, dirty money can be transferred into alternative financial instruments, ownership of shares and bonds. Another way is through brokerage firms taking “washed” or “partially washed” funds that are then used to buy shares or other financial instruments.
Money laundering can be defined as the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity.
For the past couple of years, Zimbabwe has been in a peculiar situation that saw the rise of the parallel currency market (read “black market”), which necessitates some forms of money laundering.
And with Zimbabwe’s equities market — the Zimbabwe Stock Exchange (ZSE) — bumping market capitalisation to an all-time record of circa $22 billion in October 2018 from $9,58 billion as at December 2017, the key question is what is driving this bull-run?
Because, it’s certainly not a booming economy.
It is often said the size of a nation’s capital markets is directly proportional to the size of its economy.
This has been true in past years when the depressed state of local economic performance had contributed to the general under-performance of the local capital markets.
With low capacity utilisation, company closures, high unemployment and economic fundamentals pointing southwards and low disposable income brought about by poor economic performance, the local capital market has found it difficult to mobilise savings from the public and channel them to the country’s productive sector, hence lack of provision of long-term capital, leading to thin trading and low level of liquidity.
However, in just a space of two years, some analysts say the local bourse is now over-valued.
Apparently, the ZSE’s market capitalisation as a percentage of the country’s gross domestic product (GDP) stands at a whopping 76,7 percent.
Within the SADC region Malawi follows in second with a market capitalisation as a percentage of the country’s GDP at 30,5 percent.
Comparatively, Nigeria, the continent’s second largest economy, has its main bourse with a market capitalization as a percentage of the country’s GDP of 27,7 percent.
“It is clear that there is a bubble building up on the ZSE owing to uncertainties around currency. The ZSE Industrial Index is up 79,95 percent year-to-date, ZSE Mining Index (+61, 23 percent), ZSE All Share Index (+78, 56 percent) and ZSE Top 10 Index (+89, 37 percent).
“Valuations indicate that the market is overvalued and there could be a bubble that is about to burst given that there has been a lot of liquidity — local real time gross settlement (RTGS) balances + trapped foreign money — chasing few quality stocks on the ZSE,” say analysts at Akribos Research Services.
“We have compared the ZSE with other regional stock exchanges (Nigerian Stock Exchange, Nairobi Stock exchange, Lusaka Stock Exchange and Malawi Stock Exchange) using market cap as a percentage of gross domestic product (GDP).
“Our findings are that the ZSE market cap expressed as a percentage of GDP is amongst the highest at 76,7 percent. This confirms our view that ZSE stocks are over-valued.”
But with parallel currency market activities being so rampant in the country, in addition to excessive RTGS balances, there are growing concerns that some of these illegal funds are being parked on the ZSE, especially in view of the fact that Zimbabwe’s capital markets are largely ‘open’.
There are no barriers to investing on the Zimbabwean capital market. Local investors can trade freely as long as they have the resources and minimal KYC.
The limit for an individual foreign investor is 15 percent of total issued share capital while the aggregate limit per counter is 49 percent.
Foreign investors may exceed these thresholds with prior approval from the Reserve Bank of Zimbabwe (RBZ) and the ZSE.
There is also no requirement for registration with any institution before a stockbroker can commence trading for a foreign client.
However, there might be identification document and other requirements to be met by the client as required by stockbrokers.
There are also no foreign restrictions on repatriation of initial invested capital and dividends subject to availability of foreign currency.
Financial expert Calvin Habasonda, a senior analyst in the Regulatory Policy & Research Bank Supervision Department of the Bank of Zambia says the broad range of financial institutions “are the strongest and first line of defence” against money laundering.
But disclosure of suspicious transactions and/or clients can only be successful if relevant staff are trained to identify “red flags” of money laundering activity.
Local stockbrokers might as well be capacitated in this respect as the Securities and Exchange Commission of Zimbabwe (SECZ) has made it mandatory that players in the sector have compliance officers who are expected to regularly submit money laundering related reports to the capital markets regulator.