Limited Transparency and Accountability in Public Sector

Limited transparency and accountability in the public sector constitute significant impediments for prevention of corruption. The rules related to access to information, asset disclosure by top officials, BO transparency, monitoring of PEPs and legal protections for whistleblowers are identified as insufficient, limiting citizens' ability to hold those in power Accountable.

The constitutional recognition of proactive and timely provision of accurate information as a guiding principle of the public service (art. 173.1.h) remains declaratory without an enabling law. The mission was informed that a draft access to information act is being finalized and it is planned to be adopted by the end of 2022. A robust access to information framework, including requirements for proactive publication, can help decrease corruption opportunities especially in activities with increased corruption risks, like public expenditure, revenue administration, mining and procurement.

Delays in the preparation and publication of activity reports across government is yet another contributing factor to the weaken institutional accountability. While the authorities cite lack of resources and the capacity constraints as impediments to publication of activity reports (including those on budget spending and performance), the root cause is a strong tendency for opacity in the public sector, including in the institutions, which should set a high standard for transparency and accountability. The authorities were unable to provide updated statistical data and activity reports from public agencies, including the ACC, AML institutions, SOEs and justice sector.

Anti-Corruption Information Sharing, Formulation of Policies and Strategies

Formulation, monitoring, coordination and evaluation of anti-corruption policies and strategies are sporadic, not based on needs and priorities. There is no legal requirement for corruption risk-mapping and assessment, or for the preparation, periodic update and evaluation of the National Anti-Corruption Policy and related strategies.³⁰ No entity is designated by law to lead the anti-corruption policymaking and coordination. The first and the only five-year National Anti-Corruption Policy was adopted in 2009 under the auspices of the ACC. Implementation of the 2009 Policy, like any other government policy, was coordinated by the Secretary to the Cabinet through a steering committee composed of different agencies and civil society actors. The implementation of the 2009 Policy was formally evaluated in 2015. The MOJ was recently entrusted with coordinating the development of a new Anti-Corruption Policy.

Internal Audits, available in all public institutions, can contribute to systematic detection, analysis and communication of corruption risks and vulnerabilities. The Public Finance Management Act (PFM Act) provides that all government agencies must have internal auditors, who carry out financial, performance, compliance and forensic audits and are in prime position to observe and report on areas where control systems are inefficient or insufficient and detect corrupt and corruption-enabling practices. Internal audit findings from across the government are consolidated by the Controller of Internal Audit, who prepares reports and recommendations for the Treasury Secretary for remedial and in-house disciplinary actions. Sharing the findings related to corruption with the ACC (or other anti-corruption institutions) can contribute to effective follow-up, risk mapping and strategy formulation.

Asset Disclosure by Public Officials

The lack of a comprehensive and effective framework for asset disclosure by public officials limits the integrity, accountability and prevention of corruption in public service. The Constitution requires a person holding public office³¹ to disclose assets and liabilities, before assuming or leaving office (art. 263). The option to disclose assets either at the time of assuming or leaving the office renders the system ineffective, as assets verifications require initial, exit and periodic declarations. Enabling legislation has not been adopted since the Constitutional revisions in 2016. The current Parliamentary and Ministerial Code of Conduct Act of 1994 only requires Ministerial office holders, the Speaker and Deputy Speaker to disclose assets, liabilities and interests within thirty days after their appointment and within thirty days after each anniversary of the appointment (sect. 10), and all members of the National Assembly, the Vice-President, Ministers or Deputy Ministers are to disclose any interest in government contracts (sect. 6). The Chief Justice is required to register declared information in a special registry and make it available to the public at all reasonable times (sect. 11). Failure to disclose interests, assets, liabilities and incomes or making a false declaration amount to a breach of the Parliamentary and Ministerial Code (sect. 6, 7), yet it does not provide sanctions or a mechanism to monitor the accuracy of the disclosed information. The mission was informed that these provisions are hardly implemented in practice. For instance, only 21 assets and liabilities declarations were filed in 2019-2020 and 64 in 2021. As of May 2022, only the Speaker, two Deputy Speakers and 17 Ministers complied. Employees of the ZRA, the ACC and the DEC are required to file assets and interest disclosures, but enforcement is very limited (on the ZRA see Section IV below).

Monitoring Politically Exposed Persons (PEPs)

PEPs play a major role in creating and exploiting corruption vulnerabilities across various sectors of the economy. Zambian authorities, financial institutions and Designated Non-Financial Business and Professions (DNFBPs) are aware of the corruption and Money Laundering/Terrorism Financing (ML/TF) risks posed by PEPs (known in Zambia as prominent influential persons – PIPs), yet “some reporting entities both in the financial sector and DNFBPs compromised on their reporting obligations because of heavy dependence on some prominent influential persons for business."³² The FIC annually disseminates reports on patterns of PEPs' illicit involvement, including related to public contracting processes, large cash deposits or the creation of opaque beneficial ownership structures to evade taxes, hide relationships with public officials or funnel funds outside of the country. To date, the FIC has compiled numerous case studies on the main predicate offences of corruption and tax evasion, which reveal (i) prominent patterns of “influence peddling by PIPs and suspected abuse of office by using strategically appointed officials", (ii) PEPs as the beneficial owners of companies bidding for procurement contracts and (iii) PEPs as holders of accounts used for large cash deposits or suspicious transfers. In their analysis of currency transactions reports (CTRs) submitted by the ZRA in 2021, the FIC also observed a general increase in CTRs reported for individuals, of which “an excess of ZMK 50 million and USD 3.5 million in cash withdrawals was accounted for by Prominent Influential Persons.” This trend in frequent withdrawals was eminently observed before and after the general elections."³³ The FIC publishes several policy recommendations in each annual Trends Report, based on the trends and risks observed in a given year. However, the follow-up to implement these recommendations has been limited. The FIC is also still lacking an appointed Board to support the Acting Director General and the FIC's work, affecting the FIC's decisions as to which policy and operational recommendations should be publicized.

Zambia has recently revised its legal framework for PEPs to cover domestic and foreign persons. The FIC (Amendment) Act No.16 of 2020 does not differentiate between foreign and domestic PEPs, instead applying a comprehensive definition of “prominent influential persons,” which is in line with the FATF standards to include heads of state, political functionaries and senior public officials, as well as immediate family and close associates. Magistrates, judges “and other senior officials of quasi-judicial bodies” are also covered under the definition. The legal framework also includes a specific focus on potential sole and joint beneficial ownership or control legal entities and arrangements involving 'close associates' of PEPs. In 2021, the FIC issued a 'Revised Guidance Note – AML/CFT Procedures for Prominent Influential Persons'³⁴ to highlight the amendments of the FIC Act of 2020 and provide further guidance on related AML/CFT measures. All reporting entities are required to apply appropriate risk management systems to identify domestic, foreign and international organization-related PEPs, including the verification of the identity of a beneficial owner of a client legal entity or of the person acting on behalf of a beneficial owner.³⁵ The BoZ's Corporate Governance Directives (art. 6.11) differentiate between 'politicians' and PEPs and place a restriction on politicians to serve as directors of a regulated entity. For a PEP, there are specific restrictions to serve on a Board, but the BoZ can “determine on a case-by-case basis whether such a person is eligible for appointment as a director of a regulated entity".

The lack of reliable information on BOs limits effectiveness of identification of PEPs and creates significant challenges for supervisors and regulated entities in Zambia. In line with the FIC guidance, the BoZ applies enhanced due diligence measures when dealing with potential PEPs. It incorporates PEP screening into the risk assessment and vetting process of its supervised institutions and includes a focus on PEPs in its supervisory examinations. The reliable identification and verification of PEPs and their associates however still presents practical challenges. The BoZ finds that banks' policies on PEPs are generally adequate, but the identification of PEPs remains a weakness depending on the size and sophistication of an entity. Larger institutions, especially those that are part of an international banking group, use not only BoZ's and FIC's PEP guidelines to calibrate their own internal lists, but also subscribe to third-party providers' global PEP lists, while smaller institutions often rely on information provided by their customers. The FIC underlines that the customer itself presents a valuable source of information to determine PEP status, but additional sources such as commercial third-party databases are often needed to identify the source of wealth and source of funds. Reporting entities are encouraged to develop their own in-house databases and share information with foreign subsidiaries to the extent possible. The DNFBP sector remains particularly vulnerable to illicit involvement of PEPs, due to “poor identification of clients and [difficulties] obtaining of beneficial ownership information [and] establishing the source of income used in large cash transactions."³⁶

Transparency of Beneficial Ownership Information

Zambia's revised legal framework on BO transparency is advanced for the region, but enforcement and operationalization are not yet effective and impede the use of this information. The Companies Act No. 10 of 2017 requires companies to maintain, update and share a beneficial ownership register of all shares of a company (both domestic and foreign) and their associated voting rights, and to provide a statement with information on each beneficial owner during the application for incorporation. The regulations provide for unrestricted access to the beneficial ownership register by law enforcement officers and allows requests for access by persons “showing sufficient interest to the Registrar", but also allow PACRA to restrict the publication of certain beneficial ownership information. The Companies Amendment Act of 2020 broadened the definition of beneficial owner [to bring it in line with the Financial Action Task Force (FATF) standard]. Authorities also amended the Land (Perpetual Succession) Act governing trusts in 2020 to require the submission of beneficial ownership statement for incorporation of trusts and applicable sanctions for non-compliance.

Transparency of companies and trusts should be strengthened to support an effective AML/CFT regime and protect the financial system from abuse by corrupt officials and the launderers of the proceeds of corruption. Legal persons and arrangements can be used to obfuscate payments of bribes by firms to public officials (e.g., by hiding the ultimate beneficial ownership). Collecting and making information on their BO available to competent authorities without impediments limits opportunities for corruption through the misuse of legal persons and arrangements. The current lack of reliable BO information presents a significant vulnerability for corruption and other ML predicate crimes in Zambia. Shortcomings in the implementation of the BO framework are also impacting corruption-vulnerable sectors, such as mining, procurement and tax collection/administration. The FIC's annual Trends Reports regularly present anonymized case studies describing how certain PEPs and their close associates are using legal persons such as limited liability companies and sole proprietorships to hide ownership structures and transfer illicit funds, in particular related to contract awards in public procurement and tax evasion.

Applicable sanctions for different types of breaches with the BO obligations of companies and trusts remain unclear. Authorities could not demonstrate any examples of sanctions imposed for non-compliance, noting enforcement-related shortcomings, as that the current legal framework focuses more on penalties against individuals such as directors instead of a company-level focus on fines and de-registrations. Another key weakness is the quality of beneficial ownership information collected by PACRA. Supervisors, banks, and LEAs cite the quality of available beneficial ownership information as inadequate, either due to lack of such information in the database or because the information is not regularly updated, verified, or does not provide details on complex ownership structures.

Application of AML/CFT Preventive Measures

The understanding of ML/TF risks and the application of preventive measures varies between financial institutions and DNFBPs in Zambia. Under the FIC Act of 2020, financial institutions and DNFBPs are obliged to apply AML/CFT preventive measures and evaluate the ML/TF risk profiles of their customers. Depending on their size and sophistication, larger financial institutions and DNFBPs have a better understanding and management of ML/TF risks whereas small to medium-sized entities are not yet on par with regards to tools and procedures to effectively implement AML/CFT preventive measures.

Despite the BoZ's good understanding of sectoral ML/TF risks, more work is needed to implement an effective risk-based approach to AML/CFT supervision. According to the 2016 National Risk Assessment (NRA), banking is the largest sector in the financial system and plays a prevalent role in the Zambian economy, and it was assessed with a 'medium' risk for ML vulnerability.³⁷ The ESAAMLG 2019 MER however identifies banks as the channel most vulnerable to money laundering activity due to their material importance to Zambia's financial sector. Understanding current issues related to risk-based banking supervision and related enforcement is therefore a key focus for this AML/CFT assessment. While the FIC had issued a risk-based supervision framework and guidance manual, supervisory bodies had yet to apply it to develop an effective risk-based approach to AML/CFT supervision.³⁸ Currently, the BoZ's AML/CFT inspections form part of its prudential supervision schedule. Although every full scope on-site examination covers AML/CFT, these examinations are primarily driven by prudential risk assessments. However, since 2020 the BoZ has developed its approach to AML/CFT examinations based on ML/TF-specific assessments as required by the FATF's risk-based approach to AML/CFT supervision. To this end, the BoZ conducted a pilot on-site AML/CFT examination in 2020-2021, based solely on a dedicated AML/CFT risk assessment. The mission was informed that, since 2016, information on AML/CFT risk assessment is collected through quarterly returns and questionnaires completed by supervised banks, instead of collecting the information during an examination. The information includes risk gradings of natural and legal persons, PEPs, wire transfers and suspicious transactions.

The BoZ has committed to establish a dedicated AML/CFT supervision unit to support effective risk-based supervision of reporting entities. The BoZ currently has 38 staff that cover both prudential and AML/CFT examinations for banks and non-bank financial institutions. In addition, the BoZ conducts AML/CFT on-site examinations and transaction monitoring for bureaus de change. Another department provides prudential and AML/CFT oversight over the payment system service providers. In 2020, one virtual AML/CFT examination was conducted. In 2021, two prudential examinations were conducted, which included AML/CFT. In 2022, two AML/CFT-specific examinations were conducted. The BoZ imposed sanctions on three banks in 2020-2021 for AML/CFT-related breaches, which reportedly made a positive impact on the sanctioned entities. Based on information provided by the BoZ, one bank was sanction for AML/CFT breaches in 2022, and the sanctions for another are pending. The establishment and resourcing of a dedicated AML/CFT supervisory unit is intended to address the identified shortcomings by supporting the BoZ's risk-based approach to AML/CFT supervision and the effective application of sanctions, in particular for high-risk entities and customers including politically exposed persons.

Lack of resources and a broadened mandate are hampering supervisors' effectiveness and enforcement of preventive measures. Zambia's legal framework under the FIC Act of 2010 and related amendments provide for a range of sanctions, including supervisory directives and license suspensions. In practice, however, supervisors do not apply effective, proportionate, and dissuasive sanctions, and “mainly opt for issuing recommendations, directions and, in few instances, suspension of licenses.³⁹ Neither remedial actions nor sanctions have been issued by DNFBP supervisors, owing to the lack of inspections. The FIC Amendment Act no. 16 of 2020 introduced administrative sanctions that can be imposed by supervisors and by the FIC itself, including financial penalties. The introduction of sanctioning powers for the FIC under this act was finalized in 2021 and the FIC is in the process of operationalizing its administrative sanctions regime. In addition to the BoZ's supervision, the FIC, as the “supervisors of the last resort” is tasked with risk-based AML/CFT supervision of the DNFBPs.⁴⁰ As such, in 2021 the FIC undertook AML/CFT supervisory activities for banks (2 on- and off-site inspections and 16 post-monitoring reviews) and DNFBPs including accountants, real estate brokers and casinos (33 off-site monitoring engagements and 95 post-monitoring reviews). As a result, the FIC froze 55 bank accounts held with eight commercial banks due to suspected illicit activities, but still chiefly relies on awareness raising and training sessions for reporting entities.⁴¹ Overall, the FIC's effective fulfillment of its broadened mandate is hampered by budget and operational constraints. It currently operates at about 50% of its envisaged staff capacity and requires additional budget, staff and office space to effectively fulfil its expanded role, while ensuring the quality of its disseminations.

Economic and Financial Crimes Court – a new anti-corruption institution

In January 2022, the Economic and Financial Crimes Court (EFCC) was established as a “fast-track” specialized division in the High Court,⁵⁵ to hear corruption, ML and asset recovery cases, but legislative reforms are needed to materialize swifter adjudications.⁵⁶ The EFCC was granted general jurisdiction to adjudicate matters relating to economic and financial crimes and corruption, but no legal instrument clarifies what precise offenses are included in these categories to adequately establish its jurisdiction. Authorities and legal practitioners recognize that tangible fast-tracking of corruption and ML cases will require targeted training and legal reform to provide for more agile procedures. Comprehensive fit and proper criteria and eligibility requirements for the appointment of EFCC judges should be established. It is of paramount importance that judges sitting on the EFCC are impartial and independent and prosecute corruption and financial crimes on their merit free of external influence and are perceived so. The mission was informed that eight judges at the EFCC will be designated by the Chief Justice from the cohort of 51 sitting judges on the High Court, that currently there are no plans for providing specialized trainings to EFCC adjudicators to handle complex corruption and related ML cases and that additional resources are needed. While the EFCC is pending to be operationalized, eight magistrates (seven in Lusaka and one in the Copperbelt) were designated by the Chief Justice at the subordinate court level to hear corruption and economic and financial crimes cases. These magistrates have started trials, but no judgements have been rendered (as of July 1^st, 2022). The magistrates' judgements can be appealed at the EFCC.

Along with strengthening the EFCC, addressing low public trust, as well as the perception of corruption in the judiciary, recognized by the Chief Justice in his inaugural speech,⁵⁷ is important for the sustained effectiveness of anti-corruption and AML efforts. Increased transparency in the work of the judiciary, as well as in the procedures and practices related to appointment, promotion, discipline and dismissal of judges, should help build greater public trust, which as the Chief Justice noted, is a “sine qua non to an effective judicial system which supports the rule of law that is in turn crucial to democracy and good governance."⁵⁸ Under the Constitution of Zambia, judges are appointed by the President upon the approval of the Parliament (art. 140). The candidates are proposed by the Judicial Service Commission (JSC). There are no publicly available rules and procedures for selection of judicial candidates by the JSC and the mission was informed that vacancies are not publicized. Little information is available on the discipline of judges by the Judicial Complaints Commission (JCC) or their removal by the President upon JCC's recommendation. Recently, the media reported on the removal of one High Court judge and the suspension of another by the President on corruption allegations.⁵⁹

C. Anti-Corruption Anti-Money Laundering Enforcement

The legal framework does not effectively promote exposing corruption, as it puts whistleblowers under the risk of retaliation. While the Public Interest Disclosure (Protection of Whistleblowers) Act grants legal safeguards to individuals who expose corruption in public and private sectors, reporting can be discouraged by criminalization of “frivolous, malicious or vexatious” complaints.⁶⁰ International experience shows that such a liability, even when aimed at the protection of reputation of others, can be used to deter whistleblowers from disclosing illegal activities.⁶¹ The fear of consequences is identified as one of the main reasons for reluctance to report corruption.⁶² In 2017 the ACC noted and expressed concern over a declining trend in corruption-related reports and complaints from 2011-2017⁶³, but no updated data was provided to ascertain the current state of reports. According to the AfroBarometer, eight in 10 (79%) respondents said ordinary people risk retaliation or other negative consequences if they report corruption to the authorities.⁶⁴

Corruption investigations and prosecutions seem to have increased since the new government took office, but they are undertaken without clear risk-based prioritization criteria or strategies and lack of updated statistical information impedes assessing the effectiveness of enforcement efforts. The ACC was unable to provide up-to-date data and statistics to the mission.⁶⁵ Reports on corruption received by the ACC are analyzed by the internal Complaints Review Committee (CRC).⁶⁶ The CRC makes recommendations on launching investigation to the Director-General.⁶⁷ Recently, priority has been given to high profile cases and those where asset recovery is more likely to be attained. The ACC's Prosecutions Department confirmed the absence of a strategy or specific criteria for prioritizing prosecutions and allocation of resources. The Investigations Department conveyed the need for better capacities and trained professionals in financial investigations, intelligence gathering, asset tracing and forensics. The investigations manual is currently under the review.

Effectiveness of investigation and prosecution of corruption and ML cases has been undermined by strained relationship between anti-corruption and AML agencies and the DPP. According to the ACA and ACC Act, the ACC has power to conduct investigations in corruption cases, but it shall seek for the DPP's consent to prosecute.⁶⁸ The DPP can terminate (nolle prosequi) or take over cases from the ACC.⁶⁹ Likewise, all ML-related investigations conducted by the DEC shall be sent by the AMLIU to the DPP for prosecution.⁷⁰ The DPP reviews all corruption and ML cases grants, denies or conditions the consent in no particular timeframe. The mission was informed that this power of the DPP has become a significant bottleneck in corruption and ML prosecutions in Zambia and has resulted in unjustified delays and duplication of efforts. Relying on the legal framework, the DPP does not usually explain why it denies the consent for prosecution or grants immunities to defendants in corruption or ML cases. These factors diminish accountability and create a public perception of external undue influences over the prosecution service.

Centralization of prosecution of corruption cases can increase efficiency and consistency in practice, when there are clear statutory guarantees for independence and accountability both at institutional and individual levels. It is of paramount importance to ensure that individual prosecutors exercise their duties without improper interference and with high professional standards of integrity. For this end, fair, transparent, merit-based procedures for appointment and promotion/demotion, and the safeguards against arbitrary dismissal shall be in place and enforced. In the centralized systems like in Zambia, the selection of the chief prosecutor (i.e. DPP) shall enjoy confidence from public and the legal profession. International practice is increasingly tilted towards the involvement of professional, non-political expertise in the selection process and the creation of a commission of appointment comprised of respected professionals with highest integrity.⁷¹ The guarantees for independence shall be accompanied with transparency and accountability, which can include a requirement for a regular publication of activity reports, prosecution guidelines and policy priorities, as well as a requirement for a reasonable timeframe for well-grounded decisions. Prosecutors are expected to demonstrate the utmost commitment to keep public informed about the decisions that allow termination of criminal proceedings in cases of corruption or other offences involving public officials.⁷²

Investigations, prosecutions, and convictions of corruption-related money laundering do not correspond to the existing risks. Corruption (along with tax evasion) is the most prevalent predicate offence for money laundering (ML) in Zambia.⁷³ PEPs such as politicians and public procurement officials, along with their associates, are predominantly involved in these predicate crimes.⁷⁴ The inadequate effectiveness in implementing legal and administrative measures by various law enforcement agencies, along with other factors such as tolerance to corrupt practices, contribute to very high ML risks.⁷⁵ The authorities understand the specific money laundering risks related to corruption in different high-risk sectors but did not share specific data on the number of related investigations, prosecutions, and convictions. Several authorities, including the ACC, DEC's AMLIU, and Zambia Police are actively investigating ML offences through joint investigations, but no specific statistics on case numbers are available. The FIC as Zambia's FIU is the main disseminator of intelligence, but it also makes policy recommendations to the government and is tasked as the AML/CFT “supervisor of last resort.” The FIC indicated that in 2021, it made 25 requests for information to the competent authorities, received 33 requests and undertook 4 joint operations with LEAs.⁷⁶ There are however no correlated statistics on the number of resulting prosecutions and convictions.

The constitutional definition of “public officer” creates a legal impediment to hold top officials, such as the President, members of Parliament, ministers and judges, accountable under the anti-corruption legislation. The ACA provides a broad and inclusive definition of public officer⁷⁷, in line with UNCAC, but the constitutional definition introduced in 2016 excludes top government officials, such as State⁷⁸ and Constitutional Office⁷⁹ holders, counsellors, judges and judicial officers⁸⁰ (art. 266). As the main corruption offences apply to public officers, in order to avoid legal challenges for not meeting the elements of a corruption related crime, the ACC has resorted to bringing charges under other offenses, such as theft of public property, illegal expenditures or failure to comply with regulations.

International Cooperation

International cooperation and exchange against corruption, money laundering and for asset recovery is increasingly important, supported by the FIC's admission to the Egmont Group. Regarding mutual legal assistance processes, the authorities indicated that some regional mutual legal assistance agreements are of limited usefulness due to lack of responses from receiving countries or differing legal definitions of predicate crimes. The authorities are therefore looking to strengthen mutual legal assistance agreements with additional jurisdictions. For the informal exchange of information, the authorities noted that the exchange is generally improved under the umbrella of ESAAMLG membership in the region. The access to the Egmont Group's platform in 2018 is supporting the FIC's requests and receipt of information, originating from a diverse group of countries from the ESAAMLG region, Asia, the Middle East and Europe. Other authorities such as the DEC also request occasional assistance from foreign FIUs via the FIC, such as information related to cross-border transactions in the region and off-shore jurisdictions. In 2021, the FIC collaborated with 11 Egmont Group member FIUs and 4 non-Egmont member FIUs. The FIC made 10 requests for information to foreign FIUs (compared to 5 in 2019 and 20 in 2020), but only received 5 requests (compared to none in 2019 and 4 in 2020)⁸¹. However, the authorities did not demonstrate current data or information on any case management system, which precludes an assessment of whether the current processes to provide mutual legal assistance and exchange information are working effectively in practice. A focus area going forward is asset tracing within the ESAAMLG region and selected overseas jurisdictions, which is however still hampered by long response times or lack of responses. International cooperation in anti-corruption is weak and the authorities underlined the importance of improving the legal framework in this area to better respond to the transnational character of corruption-related offences, expedite asset recovery processes, and support extradition procedures between jurisdictions.

Asset Recovery

Along with prosecution of corruption and money laundering, recovery of proceeds of crime is a priority for the authorities of Zambia. A robust asset recovery framework is in place. The Forfeiture of Proceeds of Corruption Act (FPOCA) of 2010 allows conviction and non-conviction-based forfeiture of the proceeds of crime; deprivation of any person of any proceeds, benefits, or property derived from the commission of any serious offence; facilitation of the tracing of any proceeds, benefit, and property derived from the commission of any serious offence. The Asset Forfeiture Department (AFD) is responsible for leading the implementation of FPOCA. The AFD has shown some successes in its efforts to recover proceeds of corruption but also recognizes the challenges, such as the need for continuous capacity development, enhancement of inter-agency, regional and international cooperation. Other institutions involved in the process (i.e. ACC and NPA) have conflicting views on the effectiveness of the current framework but agree that judges require training in the adjudication of these types of cases. The data on recovered assets is incomplete and does not allow monitoring progress.

Decisions on seizure are being challenged by defendants, exposing the State to liability for mismanagement or undue deterioration of seized assets. Seized and confiscated asset management is increasingly becoming a serious operational challenge. Due to the absence of a proper legislative framework, law enforcement agencies experience difficulties in adequate management of seized/forfeited assets. Roles and responsibilities are not clearly defined and involved institutions require sufficient resources and skills to perform the task. The authorities recognize the complexity of the asset management and put effort to find a solution.

Public Investment Management

Over the past several years, the weaknesses in the public investment management framework have resulted in major inefficiency and waste of government spending in multi-year infrastructure contracts. Several large public projects have been stalled at different levels of completion due to inadequate funding caused by poor planning and budgeting. The Strengthening Expenditure Controls and Arrears Management report by IMF shows that roads construction contracts are the largest category in the outstanding stock of arrears (15.5 billion ZMK as of July 1, 2021), and arrears related to public investment projects in water, education, health sectors are also significant (2.9 billion ZMK as of July 1, 2021).⁸²

Key recommendations made by IMF's Public Investment Management Assessment (PIMA) remain valid and should be implemented without delay.⁸³ The PIMA noted weaknesses such as lack of investment project appraisal for domestically financed projects; the absence of a central screening process to be underpinned by feasibility studies; the inclusion in the budget of projects that have not been identified in sectoral development plans; uncertainly of funding for multi-year contracts. (see Box 2).

Zambia's PIM Guidelines (see Box 3) along with the National Planning and Budgeting Act (NPBA) of 2020 provide sound legal basis for public investment management but the ongoing efforts to improve the implementation should be accelerated. There is work in progress to align the guidelines to the NPBA. The MoFNP has been working on a standard methodology for project appraisal, which is expected to be finalized soon. The lack of capacity in ministries, provinces and spending agencies (MPSAs) in undertaking projects in compliance with the guidelines is a major challenge. Cooperating Partners have been proactive in supporting capacity development activities; last year, MPSAs staff have been trained in new regulations with support of the Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ). PIM implementation is hampered by the lack of an available software solution and advanced technical skills to use easily accessible software applications, such as MS Project and MS Excel.

The role of the National Planning Directorate (NPD) of the MoFNP as a central “gateway” is yet to be strengthened and institutionalized. After the Ministry of Finance and Ministry of NationalPlanning merged into the Ministry of Finance and National Planning, the National Planning Directorate (NPD) resumed the role of the secretariat to the Public Investment Board⁸⁴and the central “gateway” of investment projects. The NPD, working in coordination with the Budget Directorate, is responsible for ensuring a cohesive process (i.e. starting from including projects in the government PIP and budget, continued to securing project funding for the complete cycle, and maintaining the expenditure). So far, only some of the line ministries' investment project proposals include the project appraisal. To be effective as the gateway, NPD should have a role in providing advice before major projects are approved (regardless of funding source). The NPD should also have access to timely, periodically updated information on major capital projects at the sector level to develop a comprehensive pipeline of public investment projects. The channel for communication between NPD and the Budget Office should be leveraged and ensured.

Project selection should strictly adhere to the availability of funding in an annual budget and a medium-term budget timeframe, to avoid waste of public funds. Project selection is mostly guided by the NDP's (and sectoral) priorities and an affordability criterion based on sectoral resource envelopes. MoFNP considers NDP priorities while developing resource envelopes for sectors and communicates these priorities in the budget strategy paper. Ministries submit investment project proposals to the Cabinet for a final decision.

Weak Expenditure Controls and Inadequate Utilization of Financial Management Information Systems

Governance weaknesses arise from weak expenditure controls and persistent accumulation of arrears. Large number of budget expenditure commitments occur in MPSAs with limited visibility to the MoFNP. Due to acute cash constraints and cash rationing, large portion of government bills remain unpaid. Arrears outstanding as of December 2021 is ZMK 82.1 billion, equivalent of 20 percent of the GDP. Interest payments charged on overdue invoices are a significant source of waste in public finances as well. The AG 2020 report indicates that wasteful expenditure on delayed payments comprised 1.4 bln ZMK in 2022. The authorities made a commitment under the Extended Credit Facility to prevent the accumulation of new arrears and publish a strategy for clearing the expenditure arrears, which includes the criteria for prioritization and timing of the payments.

Inadequate functionality and coverage of the Financial Management Information System (FMIS) and heavy reliance on manual expenditure processing are major impediments to effective expenditure controls. The major bottlenecks to efficient expenditure controls, identified by IMF's past CD mission, remain outstanding:

• (i) The FMIS commitment functionality is not fully utilized, and a parallel paper-based process is still followed.⁸⁵ Most of the government contracts and commitments are processed outside the FMIS. The standard functionality of budget and cash releases are modified to accommodate the cash rationing approach. The process of daily allocation of cash releases to MPSAs is discretionary and raises corruption vulnerabilities. The practice of daily cash releases does not allow a sufficient planning horizon and make it difficult to manage the government expenditures. Therefore, only prioritized commitments are entered into FMIS for processing and payment and a large part of expenditures is undertaken outside of the FMIS.

• (ii) Compliance to commitment control is not adequately enforced. Clear directives should be issued to all MPSAs to use the FMIS platform not only for expenditure at the payment stage but importantly at the commitment stage. Failure to comply with the rule, leads to a non-recognition and non-payment of the expenditure by the government. Infractions to commitment control should be dealt with through appropriate measures, such as disciplinary proceedings and surcharge, as prescribed under the PFM Act 2018.

• (iii) The coverage of FMIS is limited and currently includes 59 MPSAs and 10 provinces. Statutory bodies established under the line ministries, such as Zambia Medicine and Medical Supplies Agency and Zambia Roads Development Agency, with considerable budget spending, along with district-level spending agencies and Grant-Aided Institutions are outside the FMIS.

Current efforts to enhance and expend the FMIS system should be accelerated. A contract has been signed on the FMIS enhancement with the system provider to activate the budget release process as intended and facilitate the expenditure control process. After completion of the user acceptance testing, Office of the Accountant General will take a lead in training the MPSAs staff in updated system functionality. The consultations are underway on potential inclusion of statutory bodies into the FMIS. A few institutions have been identified as potential pilots, like the University Teaching Hospital (UTH) controlled by Ministry of Health, which has been connected to FMIS. The authorities have reached out to Cooperating Partners to carry out a feasibility study of rolling out FMIS in districts and Grant Aided Institutions (GAIs), versus deploying alternative solutions.

Digitalization of PFM processes can promote greater transparency and integrity. Digital systems and platforms allow greater and more prompt access to information and automation of services. It also increases efficiency, decreases costs to businesses, helps reduce corruption vulnerabilities, for example by minimizing personal contact and excessive discretion.

PFM information systems are critical to support good governance, allow effective controls and oversight and promote transparency of public funds. International experience shows that digitalization efforts can have important gains in PFM workstreams like procurement, budget and expenditure controls, payroll and Government-to-Private (G2P) payments. To fully realize the potential benefits, development and roll out of IT systems should be closely coordinated and integrated, where suitable. The fragmented use of IT systems creates risks to operational and governance efficiency and inflate development and maintenance costs. At present, there are number of different information systems and digital solutions utilized in PFM, including central FMIS, budget management information systems in statutory bodies and districts, e-GP and toll-fee management system of NRFA, Public Service Pensions Fund; however, these efforts have not been coordinated and integrated with each other.

Zambia has invested in developing institutional and legal frameworks to implement a digital transformation agenda but a more integrated approach and stronger leadership from relevant agencies are needed to fully benefit from the system. The Smart Zambia Institute is in charge of leading and coordinating the development of IT system, IT infrastructure, IT services and compliance. Special information and communication technology (ICT) units are established at ministries and the provincial level. Zambia Information and Communication Technology Authority is an ICT regulator. The President has recently signed the commencement order for the Electronic Government Act No 41 of 2021. Implementing regulations to ensure digital transformation are being developed. Focus areas and priority programs include transitioning to a Cash-lite Economy and migrating bulk government cash payments onto a digital platform, development of key public sector infrastructure and application of the digital signature, construction of an integrated national data center infrastructure, extension of the government wide area network backbone infrastructure, and integration and enhancement of a secure government ICT network connectivity infrastructure in underserved districts. It is critical that the authorities continue focusing on providing connectivity and infrastructure. The authorities should ensure synergies among different types of systems and available technical and technological capabilities. The in-house IT and IT project management capacity needs to be strengthened to facilitate the demand driven approach.

Strengthening digital information systems is critical to support good management, promote transparency and allow effective control and oversight. Elimination of manual intervention will reduce unnecessary administrative burdens that generate inconsistency and a lack of information and traceability of final expenditure. The lack of integration of budgetary accounting information prevents adequate monitoring of the transaction in a timely manner.

Fiscal Decentralization

Substantial work remains to be done to establish key principles of fiscal decentralization, inter-governmental fiscal architecture and assignment of revenues and expenditures, including development of the equalization formula, which is in its infancy. The fiscal decentralization agenda is jointly led by MoFNP and the Ministry of Local Governments and Rural Development (MLGRD). It aims at inclusion of local communities in budget decision-making and supporting local socio-economic development programs. Both ministries are in consultation with the line ministries to identify main areas of expenditure and revenues for delegating and/or devolving to local authorities. Within the reform, the MoFNP is also considering the need to further clarify borrowing and debt management arrangements for local governments.⁸⁶

The Constituency Development Fund (CDF), one of the mechanisms for intergovernmental transfers,⁸⁷ has increased considerably, but significant capacity gaps at local level pose risks to its effective management. In 2022, the budget allocated to the CDF comprised 25.7 million ZMK (increased from 1.6 million in 2021) per constituency. With the support from the GIZ, trainings were provided to the CDF committee members, yet, there remains a need for capacity development in budget management. The districts use locally developed budget management systems, which should be improved or replaced.

Progressing the government's decentralization agenda without parallel capacity building in budget management and introduction of accountability and oversight mechanisms can expand the areas of corruption vulnerabilities. Going forward, it will be important to provide clarity and transparency of roles and responsibilities for central, provincial and local authorities, to ensure the accountability necessary for efficient and sound decentralization. Adequate flexibility should be given to local authorities to decide on expenditure priorities within the given budget constraint. The clarity of the CDF guidelines on the roles of involved stakeholders and the framework for managing and utilizing public funds can help achieve a balance between centralized control and local autonomy in managing the CDF funds. Building administrative and technical capacity, in preparing, managing, accounting, reporting and auditing budgets, as well as mechanisms to ensure coordination and cooperation both at the political and the technical level are key pre-requisites for successful decentralization. With the help of CPs, the authorities have taken steps in building the technical capacity necessary to move the fiscal decentralization reform forward.⁸⁸

Electronic Government Procurement

Ensuring transparency in public procurement processes is critical for holding decision-makers accountable to the public. It also helps promote competition and, hence, obtaining value for money. It is important to ensure transparency and disclosure of procurement throughout the cycle - from the procurement plans and budget allocations to implementing contracts and auditing performance. Electronic procurement systems and platforms are essential tools to provide access to procurement related information.

The electronic government procurement system (e-GP) has been live since 2015 in Zambia and its mandatory application was provided for in the Public Procurement Act of 2020, but utilization has been uneven. Procuring Entities must use e-GP for publication of bidding documents, notices and invitations to tender; for submission and opening of tenders; bid evaluation; and publication of procurement contracts and their performance. Procuring Entities were given three years from commencement of this Act to comply with this provision. ZPPA is mandated to provide trainings for procuring entities, assess and facilitate their e-readiness and provide capabilities for the private sector and citizens to access the system.

E-GP utilization has been limited with no clear timeline to bring all Procuring Entities into the portal, and the e-GP is not integrated with the FMIS. Currently, there are 115 active users connected to e-GP and 160 entities use the system to publish their procurement plans. In total, 169 Procuring Entities (including provincial level governments) have been trained in e-GP functionality. Reportedly, the connected Procuring Entities use the e-GP portal for about half of their procurements. The ministries have reported that they see less active participation in online bidding compared to traditional manual process. ZPPA has carried out an assessment for e-readiness of procuring entities who are not yet connected. The issue of access to adequate infrastructure and connectivity needs to be resolved. The AG 2020 report includes the failure to integrate FMIS with e-GP in the list of main findings not being resolved during the audit.⁸⁹ Despite the technical requirements of the contract, the system provider is not able to interface with the FMIS. As a result, the e-GP system is unable to ensure checks of annual procurement amounts against the relevant budget line, and therefore, it is unable to avoid contracting over available budget. According to the ZPPA, a change request to address this issue has been initiated, and joint work with the MoFNP is underway. There are issues in business continuity and incidents management in the event of disruption of the e-GP procurement.⁹⁰

To ensure transparency in the procurement processes, the government should further invest in strengthening the e-GP. It is key that the portal is simple and consistently used across procurement agencies. The ZPPA should lead capacity building efforts through providing trainings and online video-guides. A time-bound plan for adding procuring entities to the system should be developed and its implementation strictly monitored. Building the IT capacity internally to manage incidents and address minor change request should be developed. The portal should also provide easy access to the private sector for active participation and for civil society engagement to ensure external oversight. It is also important to sensitize private sector and civil society representatives.

Influence of PEPs in Public Procurement

In Zambia, procurement-related corruption is particularly affecting the health, construction, transport and mining sectors. Annual analyses by the FIC confirm that “cases of corruption continue to be linked to public procurement contracts and are often perpetrated by Prominent Influential Persons (PIPs) or their associates."⁹¹ Common patterns during the contract award stage include: PEPs abusing their positions of power in public institutions to influence contract awards in exchange for financial or material rewards such as cash, real estate or cars; contract awards to individuals with advance payments but without execution of the project; contract awards to entities owned by close associates of PEPs to conceal their beneficial ownership; and contract awards to companies that do not meet the capacity requirements and are not tax-compliant. After contract award, observed issues relate to collusion between employees and vendors, defrauding by employees or vendors and submission of false claims.

Corruption in public procurement is consistently cited among Zambian authorities as a particular vulnerability and predicate offence to money laundering. An ESAAMLG 2019 typology study on 'Procurement Corruption in the Public Sector and Associated Money Laundering in the ESAAMLG Region' found that “the main perpetrators of procurement corruption in the Region were Politically Exposed Persons (PEPs), investors, public procurement officials, suppliers, agents of suppliers, political party members and foreign companies and governments.”

Effectiveness of ZRA's Anti-Corruption Framework

ZRA has a sound anti-corruption framework in place, but the implementation should be strengthened to address the weaknesses in the asset and financial disclosure and corruption reporting. Key elements of ZRA's anti-corruption framework include:

• Integrity Committee with the mandate to prevent corruption by inter alia, conducting corruption vulnerability assessments, developing annual corruption prevention plan, advising and training staff on ethical matters, handling complaints on unethical conduct and preparing quarterly progress reports to management and the Secretary to the Cabinet through the Anti-Corruption Commission.⁹²

• Trained focal point representing the Integrity Committee at stations and the head office.

• Key policy documents such as Code of Ethics, taxpayer charter, gifts and benefits policy, conflict of interest policy, whistle blower policy and asset disclosure instructions.

• Internal Affairs Unit with resources, experience and training to investigate professional conduct issues and cooperate with the ACC and police department.

• Independent Internal Audit with trained and experienced auditors who perform investigative, operational, IT and specialized audits.

• Independent external oversight by a dedicated unit in the Office of AG responsible for annual audit of the financial statements and operations of the ZRA, which is submitted to the Parliament and is publicly available.⁹³

• ZRA contracts private external auditors to assess the risks and potential misstatements of major account balances and transactions.

The assets and financial interest disclosure declarations submitted by ZRA employees are not verified in practice. Asset disclosure and verification of accuracy of information is a cross-cutting challenge, manifested in the ZRA too (for weaknesses in asset disclosure system see Section II on Anti-Corruption and AML/CFT Frameworks). Upon appointment, a new employee is required to submit a Declaration of Assets and Business Interests (known as Form HR15A) to the Human Resources Department. This Declaration should provide valuable information on the financial situation and wealth of a new employee. However, its accuracy is not verified, and the information is not integrated in a database that would allow its utilization. The Code of Ethics provides disciplinary sanctions for the failure to declare assets in accordance with the policy (point 9.0), but it is not enforced.

Corruption reporting channels and related instructions are not publicized and therefore not effectively used. The ZRA has policies and instructions, such as the whistleblower policy, to encourage its employees and general public report corruption allegations through a mobile hotline, email, and the “suggestion boxes” at station. However, these policies and instructions remain on paper. Neither staff nor public is sensitized about the process and specially designated, effective reporting channels are not available.

Resilience of Core Business Systems and Processes against Corruption

The functioning of ZRA's ICT, VAT refund process, compliance risk management and organizational structure increase corruption vulnerabilities in the system. The delays in transition to TaxOnline II and ASYCUDA World has negatively affected the control of core businesses and key processes, such as VAT refund, transit management, customs warehouse management, bonded warehouse modules, bond redemption process and clearing agent, all of which have been operating in different environments and combined with legacy systems and manual processes. In addition, the lack of electronic case management systems for several ZRA units such as Finance Division, Internal Affairs, Human Resource, Investigations Department, Legal Services Department and Enforcement Unit makes it difficult to control the operation therein. The instability of the systems weakens confidence in audit trails, which are key deterrents to corruption.

The massive backlog in VAT refunds, exacerbated by cumbersome refund processes, creates significant corruption risks. The backlog is partially a product of a strict application of the VAT Rule 18 of 2014⁹⁴ and the inability to pay the refund timely due to the insufficient budget funds. The refund claims are paid from gross revenue collections with the annual cap of ZMK15.6 billion.⁹⁵ The refund cap also affects new refund claims as it is used to cover backlog too. This mechanism creates potential for discretionary decisions, as companies can pressure ZRA for preferential treatment to get their refunds.

The VAT refund is managed both electronically and manually; the process is cumbersome with different rules and procedures applying depending on the year of its submission. Although the law and the Taxpayer Charter stipulate a 30-day processing time for VAT refunds, only 0.5 percent of claims and 1.2 percent by value made for 2021 were processed within the legal time frame, generating a significant number of unprocessed cases. Any VAT refund decision requires audit of all refund claims, without a risk-based approach which allows quick and simplified process for low-risk tax-payers. This policy renders the system ineffective and inefficient. Excess VAT credits are offset against other tax arrears generating transparency issues and creating a room for errors. This is so because it is not fully integrated into the ICT systems (e.g., the refund/offset notification is sent manually to the taxpayer rather than electronically through the system) and requires the MoFNP to verify what taxes are owed by a company.

The lack of a comprehensive compliance risk management (CRM) framework hampers ZRA's capacity to prevent corruption. In the recent Tax Administration Diagnostic Assessment Tool (TADAT assessment) report of March 2022, ZRA was ranked the lowest, category D, in each of the five performance indicators used to assess the compliance and institutional risk management.⁹⁶ The core business processes in risk-assessment, audit, debt management and taxpayer services are fragmented with no single owner. The tax audit cases, opened to assess a taxpayer's compliance with the tax obligations, are not selected based on the risk-assessment. These elements create opportunities for personal influence, staff discretion, revenue officers' intrusion into the affairs of compliant taxpayers and dilution of responsibilities.

Streamlining ZRA's organizational structure will help strengthen governance and reduce corruption vulnerabilities. ZRA does not follow international best practices in organizing its functions and operations: the domestic tax division is split into two divisions (direct taxes / indirect taxes and excise); the ICT department is split into two departments (information and communication technology / innovations and project management); the finance division is in charge of functions and operations that should be part of the core business, such as debt stock reduction and refund verifications audits; there are 13 units under the direct responsibility of the Commissioner General, which makes effective management/oversight difficult; and the legal services department is understaffed (20 employees) relative to its responsibilities and workload. Revamping the ZRA's organizational structure through resolving the above issues helps reducing vulnerabilities by establishing nationwide clear standardized processes and monitoring operational performance on field offices effectively.

Effectiveness of the ZRA's Information Framework to Prevent Corruption

Information is a crucial ingredient to build a solid system that strengthens the capacities of the different agencies to fight corruption. Given the nature of their mandate and functions, the revenue administrations are key in generating useful information - beyond guaranteeing due compliance with tax obligations - to analyze, identify and refer corruption cases to relevant agencies for prosecution. However, ZRA faces internal and external weaknesses that impede its ability to operate an effective information framework (see Box 4).

^{Box 4.}

Governance Weaknesses in ZRA

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Implementation of a comprehensive system that consolidates all sources of information about the wealth and income of each taxpayer will strengthen the ZRA capacity to detect corruption cases. Beyond the benefits of reducing tax evasion, effective information system allows monitoring of the increase in the wealth of taxpayers and officials in particular. It also generates a virtuous circle where the capacity of other agencies to exchange and refine information is strengthened.

Transparency in Revenue Mobilization

Zambia's transparency and allocation of responsibilities related to revenue mobilization is generally strong, although there are important areas of weakness. The MoFNP is the primary fiscal policymaker, with the responsibility to submit budgets and fiscal policy changes to Parliament where special committees debate the submissions prior to Parliamentary votes. Investment incentives are granted in a transparent and non-discretionary manner. However, a key weakness relates to a lack of information on tax expenditures.

Zambia does not publish public tax expenditure (TE) reports, nor comprehensively cost TEs for internal purposes.⁹⁷ TE reporting includes explicitly stating the purpose of a TE (e.g., to stimulate investment in the manufacturing sector) and estimating the associated revenue foregone, allowing for more transparent, regular assessment of whether the benefits of a TE outweighs its costs. As TEs can equal several percentage points of GDP, a lack of reporting and scrutiny can present a key weakness in fiscal transparency and governance.⁹⁸ Authorities acknowledge the presence of TEs and produce internal, monthly reports on TEs related to reduced customs rates, but expanding TE reporting to VAT exemptions and reduced rates (initially) and publishing annual reports would improve fiscal management and policymaking. Eventually, TE reporting could cover Multi-Facility Economic Zones (MFEZ) and provisions in the income tax codes and accompany any proposed, new TE for budget discussions in Parliament.

Investment incentives are granted in a transparent and fair manner. MEFZs are the primary avenue through which business can receive incentives, with incentives clearly stated in legislation and not provided on a case-by-case basis. Also, importantly, mining companies are subject to the general fiscal legislation and do not project-level, negotiated terms. More generally, the mission was told that tax incentives are not granted to other groups or individual companies.

Natural Resource Management

Improved governance of Zambia's macro-critical mining sector can help develop the sector in a sustainable manner and increase value for all stakeholders. In 2019, the mining sector made large contributions to government revenue (28%) and exports (77% of exports), and there are prospects to expand investment and production significantly, with the new administration aiming to increase production three-fold by 2030. Robust governance and regulatory processes are key to ensuring that the sector avoids harmful activities, such as mining license speculation and poor environmental practices, and promotes Zambia's financial, social and environmental objectives.

There are issues around transparency, potential political interference, and a lack of regulatory enforcement in the mining industry in Zambia, some of which the government is beginning to address. Several topics have been raised in AG reports (2014 and 2020), a World Bank project proposal (2016), media reports, and discussions with authorities—these topics include license holders not adhering to reporting, workplan and environmental obligations, many licenses held by a few individuals, potential political interference into the mining license approval process and the lack of digitalization for regulatory processes. Recent or ongoing initiatives to address weaknesses include a conducting a forensic audit (led by the AG)⁹⁹ and general review of the mining license approval and monitoring process; suspending the issuance of new mining licenses; and establishing the Mining Appeals Tribunal.

An overarching issue is that the MMMD does not have the resources to properly regulate the sector. The MMMD is responsible for overseeing mining activities in the over 3,000 active mining licenses (3,570 as of 2020, EITI) spread across the country, review new license applications, as well as meet its other functions, with funding of Kwacha 96 million (~USD 5.5 million, or USD 1,600 per active license). This contributes to a lack of oversight and strained resources and creates several governance vulnerabilities, such as rushed regulatory processes (e.g., license applications that are not properly scrutinized); environmental and safety risks (e.g., damages such as those highlighted in the 2014 OAG report); (iii) a lack of sectoral expertise that can be shared with other government stakeholders (e.g., the ZRA and MoFNP said they would benefit from mineral valuation and engineering expertise from the MOM when designing and implementing the tax regime); and, (iv) more generally, an inability to ensure that license holders are actually adhering to their workplans (e.g., the 2020 OAG report found that 88 percent of exploration license holders did not submit the required quarterly reports and several of the sampled mining license holders that had not started mining within 12 months).¹⁰⁰ The resource strain is exacerbated by a lack of digital, automatized processes and the large number of approved mining licenses annually. The government should prioritize increasing the human and financial capacity of the MMMD, while ensuring there is robust oversight to minimize leakage.¹⁰¹

The 2020 OAG report highlighted the mining licensing process as a specific area where the lack of resources harms governance. The OAG report found that the Mining License Committee (MLC)¹⁰² considers “seventy applications within two hours thirty minutes per meeting", or roughly one application every two minutes. Although, the applications have been reviewed by the MLC Secretariat prior to the MLC, the MLC still does not have the time needed to properly scrutinize whether an applicant can meet its obligations. The OAG report also found that the MLC Secretariat does not have the resources to properly audit licensees in the first place. An increase in resources for screening applications, digitalization of the process, and adjusting procedures to remove the bottleneck at the MLC level could help alleviate these issues.

There is evidence of license hoarding/speculation by few individuals, which results in inefficiencies and reduced mining activity. The prevalence of hoarding has regulatory and legal components: (i) the MMMD does not regularly exercise its authority to cancel or suspend licenses for not following their workplan (although such an activity was undertaken following the OAG 2020 report) and (ii) the MMDA limits the number of exploration licenses by “a single entity” (Art. 21.3) but uses an incomplete definition for “a single entity"¹⁰³ and also the MMDA provides no limits related to hoarding mining and processing licenses. Both the lack of suspending or revoking licenses due to unmet obligations and inadequate definition of an entity potentially results in mining licenses with no exploration, development, mining, or processing activity, reducing discoveries of new deposits, investment, and production. Both the legal and operational aspects should be reviewed and improved.

The criteria to determine whether a license or transfer applicant has received local and federal approvals, as well as technical and financial resources, may not be comprehensive. The 2020 OAG report found that many licensees did not have the necessary permitting from local authorities and Zambia Environmental Management Agency (ZEMA) and/or financial resources to begin mining activities.¹⁰⁴ Moreover, there is no clear criteria for deciding whether an applicant has the technical capacity to undertake its workplan (although this practice is common, see Appenix III-1), leaving room for discretion. These potential issues are applicable and worsened for transfer applicants as the MMDA does not require transfer applications to go through the MLC.

There is no process for dealing with conflict of interest in the licensing process or identifying whether a license is held by a PEP. License and transfer applications do not include information on the BO of the applying entity, creating the possibility that applicants could discretely influence the licensing process. A process to identify and safeguard the licensing process against conflicts of interest could improve governance, while authorities should consider whether PEPs are eligible to hold mining licenses.

The paper-based licensing process creates room for discretion and increases corruption risks. For example, there is no robust way for applicants to know whether their application was received or has missing information (and, thus, could be delayed or not evaluated) and to track where the application is in the licensing process. The lack of electronic, time-stamped documentation also makes the first-come, first-serve method to allocate licenses vulnerable to corruption as electronic records providing the time that an application is submitted and received is more reliable and easier to audit.

Oversight of State-Owned Enterprises

Strong governance of Zambia's large state-owned enterprises (SOE) sector is key to ensuring that SOEs generate value for the country and budget. Zambia has 34 SOEs, with estimated liabilities of 20 percent of GDP at the time of the latest IMF estimate in 2017 (IMF 2019).

SOEs are primarily owned by the MoFNP through an entity called the Industrial Development Corporation (IDC). The IDC is 100% owned by the MoFNP and acts as a holding company, with shareholdings in 41 entities across major economic sectors (e.g., mining, electricity, and banking) (AG 2021). The President has historically been the IDC's chairperson of the board and effectively elected the board (which consists of three cabinet members, two civil servants, and seven private sector members). The Parliamentary Committee on Parastatal Bodies recently recommended that the President should not sit on IDC's board.¹⁰⁵ IDC-owned SOEs are required to distribute dividends to the IDC (IDC 2017), while there is no requirement for the IDC to pay dividends to the MoFNP.

Robust governance of SOEs is crucial as poorly governed SOEs can provide a mechanism for hidden, off-budget spending that is controlled by elected or appointed officials, resulting in substantial fiscal risks and opportunities for patronage and corruption. Transparency into SOE decision-making processes by relevant stakeholders (e.g., the MoFNP), independence from political influence, and professional management of SOEs support good governance.

The lack of a dedicated SOE legal framework and the President's position as chairman of the board of IDC have facilitated undue political interference in SOEs, which has negatively impacted their performance. As state ownership functions are not regulated in Zambia, government has considerable space for discretionary decisions on appointment and tenure of SOE board members (as evidenced by the frequent dissolution of SOE boards¹⁰⁶). There are no fit and proper criteria to select board members based on their skills, experience, merits, and independence, nor transparency requirements for appointment and removal. Accountability for SOE performance is not clear among various government stakeholders (State House, line ministries, MoFNP and Cabinet Secretary) vis-a-vis IDC, boards of directors, and management.¹⁰⁷ The mission was informed that the MoFNP is developing a new legal framework for SOEs to streamline their oversight, but there is no clear timeline for its adoption.

MOFND's ability to manage fiscal risks is limited due to information gaps and consolidation of SOEs within the IDC. The MoFNP struggles to properly monitor SOE financial performance, partly due to the fact that some SOEs do not produce audited financial statements (OAG 2021). Moreover, there is evidence of cross-subsidization within the IDC (e.g., dividends are received from profit-making entities are used to subsidize loss-making ones). Since the MOFND's primary mechanism to influence SOEs is through conditions imposed when recapitalizing (i.e., funding) SOEs, the fact that cross-subsidization is done within the IDC limits the extent to which the MoFNP can impact SOE operations, strategy, and management. Cross-subsidization also reduces transparency. The annual budget contains single line items for spending on recapitalization of SOEs (ZMK ~2 billion in 2021, 1.5 percent of total spending), but no information on dividends received from SOEs. Moreover, the IDC has not recently published financial information (the latest annual report is for 2016), and the information that it does publish is aggregated across its entities (i.e., consolidated), although the 2020 OAG report on Parastatals provides SOE-entity level information. The mission was told that the MoFNP receives annual reports and financial statements from most SOEs, but the level of detail is unclear.

BoZ's Legal Framework

The 2022 BoZ Act addresses many governance weaknesses related to the mandate, autonomy (institutional, personal and financial) and governance arrangements identified by the GDA. Namely,

• Mandate. The 2022 BoZ Act clarified the provisions on the “lending of last resort” function to distinguish a temporary liquidity assistance to solvent banks from a solvency support for financial stability purposes. In addition, it revised the provisions related to the BoZ's acquisition of shares, establishment of subsidiaries and borrowing in foreign currency to explicitly link such activities to the core objectives of the Bank. It also prohibited the BoZ to issue guarantees for Government and public institutions' loans and debts. However, the micro-prudential supervision mandate of the BoZ needs to be further aligned with Basel Core Principles for Effective Supervision (BCP1 EC2) and be enshrined in primary legislation.

• Institutional autonomy. The 2022 BoZ Act does not fully safeguard the BoZ's institutional autonomy as it still maintains a representative of the Secretary to the Treasury as an ex-officio director on the Board, who is entitled to attend and participate in any Board meeting without a right to vote. However, it is welcome that the 2022 BoZ Act includes additional safeguards on a quorum for Board meetings and a prohibition for such a representative to sit on the Audit and Finance Committee (AFC) of the BoZ. This is an important shield against a potential political interference in the work of the independent oversight mechanism.

• Personal autonomy. The 2022 BoZ Act does not fully safeguard personal autonomy as the appointment procedure for the Board members and Deputy Governors does not provide for a double veto mechanism for the appointment of the Board members and Deputy Governors. However, it is welcome that the personal autonomy for Board members is underpinned by strong eligibility criteria and safeguards against arbitrary dismissal, which are essential for independent oversight without fear of a reprisal.

• Financial Autonomy. Provisions on profit distribution now clarify that unrealized gains should be explicitly deducted from the Bank's net income before distributing profits. The monetary financing provision provides for the monitoring of compliance with the maximum permissible financing (15% of the ordinary Government revenue in the previous financial year), beyond which no further financing is permitted.

• Governance and oversight. The 2022 BoZ Act now explicitly entrusts the Board with the oversight function, which normally provides checks and balances over the executive management. However, the BoZ's governance arrangements are not supported by an explicit reference to collegial decision-making with respect to the management of the BoZ, which is important for strong checks and accountability within the governance structure. Instead, such collegiality continues to be established in practice as a matter of policy through the Executive Committee comprised of the Governor and Deputy-Governors and facilitated by a Board-approved delegation framework.

• Accountability mechanisms. Audit and financial reporting mechanisms appear to be well established. The 2022 BoZ Act does not establish an audit committee (although the AFC exists as noted above). However, it is welcome that the 2022 BoZ Act clarifies that the Board appoints the Head of Internal Audit and adopts the Internal Audit Charter.

Assessment of BoZ's Governance Arrangement and Oversight

The composition of the Board creates the opportunity for government influence. The BoZ is governed by a unitary Board chaired by the Governor and comprising six non-executive Directors, and a government official — alternate to the Secretary to the Treasury — as a non-voting ex-officio member. The Board is fully constituted and actively engaged in discharging its mandate, including through policy decisions and approval of the budget and annual accounts/financial statements of the BoZ. However, the participation of a government official on the Board is a departure from central bank governance norms as it risks actual or perceived compromise of the autonomy of the BoZ and could lead to undue government influence over its decisions.¹⁰⁹

A collegial approach to decision-making exists as a matter of policy at the management level, although it is not provided for in the law. Executive management is vested in the Governor and two Deputy Governors (Operations and Administration), who collectively form the Executive Committee; the latter is not formally provided for in the BoZ Act. The governance structure also includes different (specialized) management committees, chaired by either the Governor or one of the Deputy Governors, to assist in daily management. This collegial approach is complemented by a “delegation of authority” that facilitates collegial decision-making. This has been approved by the Board (last revised in 2021) and includes the terms of reference of all management committees. Until collegial decision-making at the management level is formally enshrined in the BoZ Act, there is a risk that the current policy could be reversed and executive powers could become exclusively concentrated with the Governor, resulting in governance modalities that cease to provide for an appropriate system of “checks and balances” and raise internal control risks.

The BoZ Board is formally entrusted with an oversight role. Also, according to its charter, the AFC is responsible for oversight of audit mechanisms (internal and external), financial reporting, internal controls, and budget performance. It has the requisite capacity and is actively engaged in its role. The AFC is composed of three non-executive Directors, and at the time of the GDA it also included the alternate to the Secretary of the Treasury as a member. As noted, the 2022 BoZ Act now prevents this. The AFC charter and its composition still needs to be revised to only include independent non-executive members of the Board in line with the amended 2022 BoZ Act.

Assessment of the financial autonomy of the BoZ

Monetary financing of the government, in breach of statutory limits, undermines the autonomy of the BoZ. As of end-December 2021, the BoZ had total assets of K120 billion (about US$7.2 billion), including credit extended to the government and related securities of K 16 billion or 13 percent of total assets and government securities acquired on the secondary market of K 13 billion or 11 percent of total assets. The claims on the government includes a portfolio of government bonds and treasury bills that is being rolled over in the primary market, and may have contributed to the breach of statutory limits on credit to the government. This portfolio resulted from past debt consolidations through various conversions of BoZ's advances and loans provided to the government in previous years. This is indicative of government pressures on the central bank in the past, as well as weak internal mechanisms to ensure compliance with the law.¹¹⁰

Assessment of BoZ's transparency and accountability

Audit and financial reporting mechanisms appear to be well established.

• External audit. The external audits have been conducted by PwC Zambia—a full member of the global firm—since FY 2020. The appointment of external auditors is subject to strong procurement rules and a public tender that sets independence and quality criteria. The external auditors issued unmodified (clean) audit opinions for FY 2019–2021, stating compliance with International Standards on Auditing.

• Internal audit. The internal audit function is provided for in the Act, and its independence and authority are well maintained. The audit approach is comprehensive and risk-based. An external quality assessment of the function, conducted in December 2020, confirmed adherence to the Institute of Internal Auditors (IIA) standards.

• Financial reporting. The BoZ applies International Financial Reporting Standards (IFRS), with timely audits and publication of audited financial statements.

Governance of Supervisory Agency

The 2022 BoZ Act substantially addresses the weaknesses in the governance legal framework of the BoZ, and strengthens its ability to operate as an independent and effective banking supervisor. As highlighted in the section on Central Bank Governance and Operations, the amended Act improved the central bank's legal framework and strengthened its autonomy and governance arrangements. In particular, these amendments were important with respect to the BoZ's banking supervision function, including by: (i) safeguarding further the BoZ's institutional, personal and financial autonomy; (ii) strengthening the BoZ's governance, with particular regard to the Board oversight over executive management; and (iii) enhancing the BoZ's accountability mechanisms.

The micro-prudential supervision mandate of the BoZ should be further aligned with international standards (BCPs) in primary legislation. Currently, the BoZ Act defines its banking supervision mandate as the formulation and implementation of supervisory policies. Also, section 5 (3) specifies the BoZ's supervisory functions as follows: “(d) license, regulate and supervise financial service providers and credit reporting agencies; and (i) to foster the liquidity, solvency and proper functioning of a stable market-based financial system". In line with the BCPs (CP1 EC2) the primary objective of banking supervision should be the promotion of the safety and soundness of individual banks and the banking system more generally (S&S mandate). To achieve this objective, the banking supervisor licenses, regulates, and supervises banks. If the banking supervisor is assigned broader responsibilities (e.g., development objectives, financial inclusion, etc.), these objectives should be subordinate to and not in conflict with the supervisor's primary S&S objective.

While some progress has been made since the 2017 FSAP, resource constraints continue to limit the effectiveness of banking supervision. The 2017 FSAP concluded that Zambia had fallen increasingly behind international regulatory standards and good supervisory practices. The revised Banking and Financial Services Act 2017 aligned many licensing, regulatory and supervisory requirements closer to international standards,¹²³ but the preparation of secondary legislation is still underway.¹²⁴ Implementing the Basel Framework is rightly a key priority for the authorities (Appendix VI-2) but requires adequate dedicated resources. Nevertheless, although the situation has improved following the recruitment of additional examiners, the resource-constraints, identified in the 2017 FSAP, remain and Banking Supervision Department is still operating below its agreed level of staffing. Recruitment of additional examiners is underway, but concerns remain about the level of experience of supervisors below Principal Examiners (team leaders). The BoZ should focus on capacity building, enhancing the supervisors' integrity framework¹²⁵ and strengthening the control in this area. It is important to continue taking steps to ensure the transparent and merit-based recruitment of supervisors to reduce the risk of political interference or influence in the recruitment process and to contribute to enhanced supervisory capacity.

Additional legislative changes are necessary to limit the potential Government interference compromising the operational independence of the BoZ in its role as banking supervisor. The BoZ has established its credibility in the country, and day-today banking supervision is currently carried out independently. However, there are potential multiple channels through which the BoZ's independence could be compromised.¹²⁶ As noted in the section on Central Bank Governance and Operations, additional safeguards were included in the amended 2022 BoZ Act to strengthen the autonomy of the BoZ, but addressing the remaining vulnerabilities related to its autonomy is equally necessary for effective exercise of the financial sector oversight function. Although the revised Banking and Financial Services Act of 2017 reduced the MoFNP's involvement in the day-to-day supervisory activities,¹²⁷ the authorities should consider further limiting such involvement.¹²⁸ In particular, the Minister's involvement in the examination of an appeal of a supervisory decision by the Tribunal could compromise the operational independence of the supervisor. The Ministry of Finance has been considering establishment of an independent Financial Sector Tribunal for appeals, which, if implemented, will address this issue. Furthermore, the MoFNP currently has a power to be involved in making regulations for prescribing fees and charges, offences and penalties, the forms for applications, licenses, approvals, registers and orders. These powers should be carefully revised as the responsibility for such regulations falls normally within the remit of the banking supervisor. Also, the primary legislation should protect the BoZ and its staff against costs of defending their actions and/or omissions made while discharging their duties in good faith.¹²⁹

There is substantial space to enhance the BoZ's public accountability and transparency around its banking supervision mandate. Accountability is essential for the transparency, legitimacy and independence of supervisory decisions and can help prevent corruption and abuse. The BoZ has published its Strategic Plan 2020-2023, which includes five strategic initiatives aimed at strengthening micro-prudential regulation and supervision. The BoZ's Annual Reports provide statistical information on the banking sector's performance and briefly disclose regulatory measures taken (e.g., the 2020 Report describes COVID-19 relief measures), but there is no detailed information on how the BoZ delivered on its prudential supervision mandate. Furthermore, no information is provided on the actions taken to address unsafe practices or to strengthen banks' resilience. The BoZ website provides limited disclosure on its supervisory framework, policies, governance, operations and effectiveness of its banking supervision function. Moreover, secondary banking legislation is not subject to public consultations (drafts are usually submitted to banks and other stakeholders for comments). The accountability framework¹³⁰ needs to be prescribed more clearly and disclosed publicly. The BoZ should develop a culture that encourages public disclosures¹³¹ within banking supervision and promote the highest standards of public accountability through disclosures and an effective communication process.

The BoZ supervisory decision-making framework does not fully ensure that decisions are taken at a level appropriate to the significance of the issue, nor does it sufficiently promote a collegial decision-making. The internal document “Delegation of Authority” is intended to set out the formal delegations from the board to the senior management of the BoZ. However, this document does not clearly cover all licensing, regulatory and supervisory decisions. Under the Banking and Financial Services Act 2017, the BoZ has a significant responsibility for prior approvals and taking decisions on exemptions and corrective and sanctioning measures. The BoZ Board's participation in the supervisory decision-making such as approval of all internal policies that govern the supervisory function, taking possession of a financial service provider, decisions on whether an entity should be liquidated or not and decisions on termination of entities under liquidation. The authorities should consider increasing Board oversight of all licensing, regulatory and supervisory decisions¹³² and the most significant decisions in banking supervision should be taken at Board level. Currently, the majority of licensing, regulatory and supervisory decisions are signed/approved by Deputy Governor-Operations (DGO).¹³³ The Supervisory Policy Committee (chaired by the Governor) and the Licensing Committee (chaired at Departments' level) provide a good forum for discussing supervisory matters at operational level, and for making recommendations. The Registrar of banks and financial institutions, currently the DGO, is established through the Banking and Financial Services Act and takes all decisions for licensing function.¹³⁴ Concentration of power could potentially lead to problems in decision-making. The establishment of the Financial Stability Committee under the 2022 BoZ Act will contribute to a collegial decision-making. The most important decisions could be made at the higher level (for example, at the Financial Stability Committee), and the less significant ones could be made at the Banking Supervision Department level. The BoZ needs to have a comprehensive decision-making framework for all licensing, regulatory and supervisory decisions, taking into account the significance of the issue.¹³⁵

A more disciplined approach is needed for dealing with exemptions and exceptions with the BoZ's prior approvals. Exemptions and exceptions are widespread (Appendix VI-3). The Banking and Financial Services Act 2017 allows that the BoZ can exempt any financial service provider from any of the provisions of the Act, but only “on such terms and conditions as it may prescribe.” These exemptions are aimed at serving a wide range of purposes, which are granted at the BoZ's discretion. However, the secondary legislation does not always include the specific terms, conditions and circumstances, which should be followed by the BoZ in its decision-making on exemptions. The BoZ usually decides on exemptions using a case-by-case justification. Similar situation arises with the BoZ's approach to prior-approvals.¹³⁶ In some cases, banks are allowed to not comply with prudential requirements if they have received the BoZ's prior-approval. This approach shifts the responsibility for compliance with regulatory standards from banks to the supervisor and creates an environment for supervisory forbearance and increases the vulnerability for corruption. The BoZ should conduct a stocktaking exercise to determine which exemptions and prior approvals can be eliminated. For those which cannot be eliminated, the BoZ should prescribe specific terms, conditions and circumstances.

To avoid supervisory forbearance and prevent abuses in the banking sector, the application mechanism of enforcement measures should be strengthened. Supervisory forbearance could lead to increased corruption vulnerabilities and allow room for potential malfeasance and abuse. The BoZ has the main corrective and sanctioning powers to deal with breaches and unsafe and unsound practices, including a power to impose administrative fines. The Banking and Financial Services Act 2017 contains many different offences for breaching prudential requirements, including for corporate governance. Often offences are dealt with through the agreement process and sanctions are applied rarely.¹³⁷ There is evidence of supervisory forbearance when a bank's capital is below the minimum requirements. From a decision-making perspective, there was no structured or rigorous framework of timely supervisory responses to address breaches and unsafe and unsound practices at an early stage (e.g., there was no classification of the severity of issues and clear prioritization of supervisory actions to be taken), but recently approved new regulations¹³⁸ may partially address these issues. Introducing such a framework would help the BoZ to operationalize the application of its corrective and sanctioning measures.

Banks' Licensing, Corporate Governance and Related Parties

There is a formal structure in place for the bank licensing (authorization) process, but certain elements need to be strengthened. The licensing is broadly in line with generally accepted practices. Although no bank has been licensed since 2011, the BoZ has approved one transfer of significant ownership and one acquisition of a small bank since 2018. The Banking and Financial Services Act 2017 contains a requirement that a beneficial owner should be identifiable, but it does not have a definition of the 'ultimate beneficial owner'.¹³⁹ The BoZ faces challenges with ex-post assessments when the transfer of a significant shareholder has been completed (for example, in Stock Exchanges). Further, clear requirements are necessary for removing such shareholders when the ex-post assessment has resulted in rejection. It would be beneficial to dedicate more resources to the licensing function (currently only four supervisors are responsible for performing research, prudential regulatory policy and licensing).

The BoZ Corporate Governance Directive 2016 has played an important role in strengthening corporate governance in the Zambian banking sector; but the implementation could be further enhanced. Strong governance requirements can prevent banks from being used as a conduit for public sector misbehavior and political pressure. The BoZ Corporate Governance Directive 2016 contains key elements from the Basel Corporate Governance Principles for Banks 2015.¹⁴⁰ The Directive requires that the chairperson of the board submit to the BoZ for each year a compliance statement certifying that a bank has complied with the provisions of the laws, regulations, directives, and guidelines, including this Directive. Banks also issue a statement in their Annual Report that they 'comply'/'materially comply' with the requirements of the Directive. There is evidence to suggest that banks put efforts to ensure compliance with requirements on board composition, board committees, requirements for CRO, etc., and all banks have been disclosing the members of their board and management, with relevant biographies. However, more attention should be given to the proper implementation of this Directive. In particular, the effective Board oversight, conflicts of interests, corporate and risk culture, risk management, disclosure and transparency. The BoZ should consider issuing additional guidance to banks on its expectations for the most relevant corporate governance issues.

The supervisory framework should include a more comprehensive assessment of banks' corporate governance. Currently, the BoZ uses the CAEL rating system for off-site supervision and “Management” component that is carefully assessed during the on-site examinations. Additionally, “Board and senior management oversight” is reviewed by examining each risk (credit, market, liquidity, operational). The BoZ's Risk-based Examination Manual 2008 has not been updated to include the requirements of the Corporate Governance Directive 2016. It would be useful to develop a comprehensive methodology to assess banks' corporate governance during off-site supervision, on-site inspections and supervisory review process. The BoZ should consider having more experts specialized in governance. A capacity building program is necessary to prepare supervisors in carrying out comprehensive assessments of the effectiveness of banks' corporate governance policies and practices, including a forward-looking assessment.

The framework for assessing the suitability of members of the board of directors and senior management needs to be aligned more closely with international standards and effectively implemented. Strong senior managers in banks can help to safeguard the integrity of the banking sector and minimize opportunities for corruption. The BoZ performs a careful security screening on the 'probity, personal integrity and reputation' of all potential candidates. However, the criteria for assessing the qualifications of members of the board and senior management are too general ('leadership, enterprise, and judgement'). International standards require that the competencies of board members and senior management commensurate with the experience, requisite degree of knowledge and decision-making ability to fulfill that role, taking into account the bank's size, complexity and risk profile. Furthermore, the BoZ requirements do not include the criteria such as (i) the assessment of potential conflict of interests (personal, professional, financial and political); (ii) members of the board of directors, particularly in the case of non-executive directors, possessing independence of mind given their responsibilities on the board; and (iii) members of the board of directors having sufficient time to fully carry out their responsibilities. The BoZ should adopt a more risk-based approach to assessing the suitability of board members and senior management for particular roles, with increased use of supervisory judgment, structured interviews with members of the board of directors and senior management, collective assessment of the members of the board, and to update other tools and techniques for such assessments, taking into consideration good practices.¹⁴¹

In order to prevent abuses arising from transactions with related parties, the regulatory framework and supervisory oversight of banks' policies and practices in this area should be enhanced. The FSAP 2017 provided a number of recommendations to enhance the related party regime, and some of them were addressed in the Banking and Financial Services Act 2017 and in drafts of Regulations (statutory instruments) 96 and 97. However, Regulation 97 still has the word “substantially' for describing requirements of arm's length (the related party exposures should be made 'on substantially the same terms and conditions' as for comparable transactions). This could give rise to misinterpretation and increase vulnerability to corruption. Furthermore, the Regulation 97 does not include a requirement that 'write-offs' of related party exposures and other dealings¹⁴² ('loan' or 'credit facility' does not cover them) to be subject to the prior approval of a bank's board. Although Zambia has strict requirements for the prior approval of credit exposures by a bank's board and to address the potential risk of conflicts of interest, governance requirements for oversight and monitoring these transactions should be enhanced. For example, related party transactions should be monitored through an independent credit review or audit process. The BoZ should also ensure that exposures to related parties should be at least as strict as those for large exposures, in particular those to public entities. The identification of ultimate beneficial owners (UBO) of banks is also very important from a related party perspective. In terms of supervisory oversight of related party transactions, the BoZ should develop its supervisory tools¹⁴³ to enable a comprehensive assessment of a bank's policies, practices and exposures to related parties, and to ensure actions are taken to address unsound practices in this area. The BoZ should consider issuing additional guidance to banks on its expectations for the most relevant related party issues.¹⁴⁴

Disclosure and transparency requirements for banks should be strengthened. The Banking and Financial Services Act 2017 requires banks to publish its quarterly financial statement and audited annual financial statements in a newspaper of general circulation in Zambia. The BoZ Corporate Governance Directive contains more additional requirements on disclosure (corporate governance, risk management strategies and practices, transactions with related parties, ownership, etc.), and banks usually disclose these topics in their Annual Reports. However, some banks still do not publish financial statements and Annual Reports on their websites, which hampers accessibility of information by a wider audience. International standards require that disclosures should be easily accessible to the public, depositors, market participants and other stakeholders. Market discipline encourages that all these stakeholders can effectively monitor and properly hold the board and senior management accountable. The Basel Pillar 3 framework, which promotes market discipline through enhanced disclosure requirements, has not been implemented in Zambia, although the draft of the Directive on public disclosure of capital and risk exposures has been prepared.

Protection of Property Rights

Zambia ranks high among regional and income-level peers in the CPIA property rights and rule-based governance rating (see Box 5)¹⁴⁶, but elevated corruption risks are present in the process of transforming customary land into state land and in managing state land. Protection of property rights in Zambia should be evaluated in light of the existence of customary and State land (art. 254 of the Constitution of Zambia). Customary land is held and managed by communities and chiefs and is subject to conversion into the State land. The poorly enforced system for land status conversion increases corruption vulnerabilities and the risks of mismanagement of valuable resources.

The existing legal framework is inadequate to secure land ownership rights, properly manage land resources and address emerging challenges in environmental degradation and natural resource depletion. Zambia has vast land resources, but population increase, migration from rural to urban areas and inadequate land administration systems create challenges for prudent use of resources, a pre-condition for sustainable economic growth.

^{Box 5.}

CPIA Property Rights and Rule-based Governance Rating

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All land, customary of State, is held by the President in perpetuity for and on behalf of the people of Zambia. By estimations, 80% of the land is customary. The President has the power to alienate State land to citizens and non-citizens through the Commissioner of Lands (art. 254.2 of the Constitution). Access to State land starts with an application to the Commissioner of Lands through the local authorities while customary land may be accessed through the Chiefs. Zambian citizens can also access land through Resettlement Schemes, which is administered by the Office of Vice President and/or Farm Blocks under the Ministry of Agriculture.¹⁴⁷

Customary land can be held indefinitely by members of the clan and be transferred within the clan through male lineage,¹⁴⁸ but Customary land does not have formal documentation and land holders cannot use it as commodity. Customary land is recorded in registries managed by local Chiefs. In most cases, the registries provide little or no information on size or exact mapping of a plot. The work has been undertaken at the local level to sensitize the Chiefs and local authorities on the importance of economic empowerment of women through access to land resources. The mission was informed that a pilot implemented by the Land Alliance, a conglomerate of 13 NGOs, in southern Zambia supports Chiefs in preparing and issuing an accurate land holding certificate. This certificate is not a title but has been used in “village banking” where communities borrowed and lent internally without risk that the land would be lost to entities outside the community.

As a general rule, state land can be held for a definite tenure up to 99 years. The law provides four types of leases for State land: (i) 10 years through the land record card, (ii) 14-year lease for unsurveyed land, (iii) 25 to 30-year land occupancy licenses for residential settlements and (iv) a 99-year lease for surveyed land. In undefined special circumstances, the President can lease land for more than 99 years (art. 3 of the Land Act). No information is available if such discretion has been used but it gives rise to corruption opportunities.

The authorities recognize that the land registration and management system need to be reformed to ensure equitable access to customary and State land. Land registration in Zambia requires physical filing of documents with the Deeds Registry,¹⁴⁹ although the registration system is partially digitalized and the digitalization process continues. The mission was informed that the system is overloaded and Certificates of Titles are issued with delays as registration of land and related interest is currently undertaken only in Lusaka and Ndola. The AG reported in 2017 that issuing offer letters and title deeds by the Ministry takes too long and is a source of corruption.¹⁵⁰ Information on the State land subject to alienation is made public by the Ministry of Lands but the mission team was informed that public awareness of the process is limited. The applications are lodged in the local councils, which do not have uniform standards for selection of candidates.¹⁵¹ In practice, applicants are required to provide a bank statement, pay slip or proof of residence and demonstrate the ability to develop.¹⁵² These criteria marginalize those without formal employment who cannot bring a bank statement or afford a pay slip.

The poor system of land registration and management contributed to an increased number of land disputes. Land disputes on State land are resolved by Land Tribunals while Chiefs decide on conflicts on customary land applying local traditions. Land Tribunals are fast-track circuit courts under the umbrella of the Ministry of Land created to promote resolution and fair adjudication of land disputes. Their mandate also covers public awareness-raising on land acquisition procedures. The effectiveness of the initiative has been extremely limited as its members are part-time practitioners with other duties to attend to, compounded by inadequate resources for travel. The Lands Tribunal is not sufficiently autonomous from the Ministry of Lands, which is often a respondent in the case. The Task Force on Illegal Land Allocation chaired by the Ministry of Home Affairs was created to curb illegal land acquisition and allocation.

Contract Enforcement

The legal and institutional frameworks for contract enforcement are in place in Zambia but challenges in application persist. The key legislation, based on the common law of contracts, provides protection. Contract enforcement disputes are decided by the Commercial Court and the Small Claims Court. The Court of Appeal and the Supreme Court serve as appellate bodies in accordance with the procedures prescribed by law.¹⁵³ The Commercial Court is a fast-track mechanism within the High Court of Zambia. Lower value commercial claims of less than ZMK20,000 are resolved in Small Claims Courts located in Lusaka, Kitwe and Ndola, but sit at such times and places it considers necessary for the speedy resolution of disputes.¹⁵⁴ Claimants appear in person in Small Claims Court and are not represented by lawyers. Cases are decided by part time arbitrators known as Commissioners, usually lawyers with at least five years standing at the bar.¹⁵⁵

It is difficult to assess the extent to which judicial independence is guaranteed in practice in Zambia. According to the AfroBarometer survey (2021), 78 percent of sampled respondents believe that some elements of the Zambian judiciary are corrupt.¹⁵⁶ As the Chief Justice noted in his inaugural speech, “pockets of the Zambian society, including our politicians, civil society organizations, lawyers, clergymen, litigants and accused persons, have not concealed their shrinking faith in the Zambian Judiciary as a sanctuary for the vindication of those principles which are prized in any true democracy namely, truth, justice, fair play and equality before the law."¹⁵⁷ At the same time, many users of the courts informed the mission team that the Commercial Court is viewed as independent and professional.

The efficiency of the contract enforcement system is severely undermined by a lack of resources, resulting in limited geographical reach of courts, poor infrastructure (especially lack of courtrooms), high workload and a low number of adjudicators, poor data management practices, lack of technology and inadequate administrative support as well as limited continuous education and professional development opportunities. With 18 million people in the country of about 752,617 square meters, there are only two Commercial Courts, one in Lusaka and the other in Kitwe, with 8 judges in total.¹⁵⁸ Small Claims Courts are operational in 3 locations with 30 commissioners throughout the country.¹⁵⁹ In order to access a court, physical filing of a complaint is required and remote options are not available in law and in practice. The Commercial Court in Lusaka (7 judges) shares its premises with the Constitutional Court and the Industrial Relations Court, negatively affecting the case disposal rate.¹⁶⁰ Judges at all levels have been overwhelmed by assigned cases—for example, in 2021, 7 judges in the Commercial Court in Lusaka were responsible for 780 cases.¹⁶¹ Lack of technology, including basic equipment such as scanners and printers, force adjudicators and support staff in Commercial and Small Claims Courts to manage the process manually, which exacerbates inefficiency. Administrative support beyond registrars is unavailable, putting additional burden on adjudicators. There is a backlog of cases in most courts, but it has improved in the Commercial Court and the Small Claims Court due to the hard work of the judiciary and the Task Force on Backlog created in 2018. The mission team was informed that case disposition time from the final submission date is 180 days in Commercial Court and this timeline is respected at the expense of hard work of adjudicators and registrars. Excessive workload may result in lower quality of judicial decisions and contribute to more cases. This is particularly problematic when adjudicators have limited access to well-set induction training and continuous education opportunities. Commercial Court judges examine all kinds of commercial disputes without specialization. In light of the rapidly evolving nature of commercial activities, specialized trainings are much desired.

Alternative dispute resolution mechanisms exist but are ineffective. Arbitration, court-annexed mediation and traditional dispute resolution are recognized by the Constitution and the laws of Zambia. Court Annexed Mediation was formally introduced in 1997.¹⁶² Statutory Instrument No 72 of 2018 amending the High Court Rules on Mediation requires a judge to refer the case to mediation at the scheduling conference and before setting the action down for trial, except for a case involving a constitutional issue, liberty of a person or injunction or any other ground when a judge considers the case unsuitable to mediation. The legislation recognizes party autonomy, which is an important principle in ADR. The law now requires that parties be given a chance to choose their Mediator from a list of accredited mediators.¹⁶³ The mission was informed that use of court attached mediation proves to be ineffective in practice. One of the reasons for inefficiency is low remuneration (ZMK750 per day) for mediators, which excludes professional and dedicated mediators from the pool. Any mediation outcome as a result of a process initiated outside the Court system is not recognized, hence enforcement of any outcome is a challenge when a party defaults. Arbitration in commercial matters is governed by the Arbitration Act No. 19 of 2000, which incorporates United Nations Commission on International Trade Law (UNCITRAL) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Act applies to both domestic and international arbitration. Zambian courts have no jurisdiction if parties have agreed to an arbitration clause in their contract. Arbitration awards are recognized and enforced in the High Court of Zambia, and judgments enforcing or denying enforcement of an award can be appealed to the Supreme Court.

Traditional dispute resolution mechanisms, such as Chiefs and local courts have a significant role, especially in rural areas. Article 118 (2) (d) of the Zambian Constitution as amended in 2016 provides that alternative forms of dispute resolution, including traditional dispute resolution mechanisms, shall be promoted provided that they do not contravene the Bill of Rights, are inconsistent with the Constitution and other laws, and are not repugnant to justice and morality. Most Zambians resolve disputes at the informal level using traditional forums.¹⁶⁴ Local Courts are the most organized form of traditional dispute resolution. With a defined territorial jurisdiction, Local Courts examine inheritance claims up to a certain value (among other local disputes) and apply African Customary Law.¹⁶⁵