Draft Module Six - Combating Corruption and Fraud in Malawi PDF

**Module Six** **Combating Corruption and Fraud in Malawi Revenue Authority** 1. **Introduction to the Course (Module Six)** Corruption and fraud pose significant threats to the integrity of revenue collection systems globally, with particularly severe implications in developing countries like M...

**Module Six** **Combating Corruption and Fraud in Malawi Revenue Authority** 1. **Introduction to the Course (Module Six)** Corruption and fraud pose significant threats to the integrity of revenue collection systems globally, with particularly severe implications in developing countries like Malawi. This module aims to equip participants with the knowledge and skills necessary to understand, identify, and combat these issues within the Malawi Revenue Authority (MRA). By examining definitions, historical contexts, and real-world case studies, we will foster a comprehensive understanding of the mechanisms of corruption and fraud, their impact on governance and public trust, and strategies to combat them effectively. **1.1 Objectives** By the end of this module, participants will be able to: a. Define corruption and fraud in both a general context and within the framework of the Malawi Revenue Authority. b. Understand the origins and implications of corruption and fraud, drawing from international standards and local laws. c. Analyze Malawi\'s ranking in the Corruption Perceptions Index (CPI) and identify key factors contributing to its current status. d. Explore real-world case studies of corruption and fraud within the MRA to illustrate challenges and lessons learned. e. Develop strategic approaches to combat corruption and fraud effectively within the MRA. **1.2** **Definitions and Origins of the Words** **1.2.1 Definitions** **(a) Corruption:** - **General Definition:** Corruption refers to the abuse of entrusted power for private gain. It encompasses a range of unethical behaviours, including bribery, embezzlement, and favouritism. - **Transparency International Perspective:** Transparency International defines corruption as the abuse of power for private gain, emphasizing the impact on social and economic development. - **Corrupt Practices Act (Malawi):** Under the Corrupt Practices Act, corruption includes acts such as bribery, misuse of public office, and facilitation payments. **(b) Fraud:** a. **Basic Definition:** Fraud is the act of deceiving someone for the purpose of financial or personal gain. It involves misrepresentation, deceit, or trickery to secure an unfair or unlawful advantage b. **Legal Definition:** Legally, fraud is defined as a wrongful or criminal deception intentionally used to secure unfair or unlawful gain. This can include various forms of deceit, such as falsifying documents, making false statements, or misrepresenting facts. 2. **Origins:** a. **Corruption:** The term \"corruption\" derives from the Latin word \"corruptio,\" meaning \"to break\" or \"to destroy.\" Historically, it connotes a breakdown of integrity and morality. b. **Fraud:** The word **\"fraud\"** originates from the Latin term **\"fraus\"** which means **\"deceit\"** or **\"wrong.\"** Historically, it conveys the notion of betrayal or violation of trust. 2. **SECTION A: CORRUPTION** 1. **Malawi's Corruption Perceptions Index (CPI)** According to the most recent (2023) Corruption Perceptions Index (CPI) released by Transparency International, Malawi ranks 115 out of 180 countries with a score of 34/100. This ranking indicates a perceived high level of corruption within the public sector, highlighting the urgent need for effective anti-corruption measures. With 20% percent of Public Service Users indicating that they paid a bribe in the previous 12 months. Despite the fact that Malawi has lower levels of corruption than its sub-Saharan African peers, corruption levels remain high and have not improved much over the last decade. Moreover, data from the 2013 Global Corruption Barometer (GCB), assessed by Transparency International, seems to suggest that corruption is on the rise. 2. **Causes/Incentives for Corruption to thrive** a. **Greed:** The desire/ immoral thoughts of cheating, manipulating, taking advantage of others or pushing and bullying one's way to success. It is considered as a significant cause of corruption. b. **Weak Governance Structures:** Inefficient systems and lack of accountability lead to opportunities for corrupt practices. c. **Low Salaries/Incentives:** Inadequate compensation for public officials can incentivize corrupt behaviour. d. **Cultural Norms:** Acceptance of corruption as a norm in certain sectors perpetuates its prevalence. e. **Lack of Transparency:** Insufficient public access to information about government activities encourages corruption. 3. **Reasons Individuals to Engage in Corruption** a. **Personal Gain:** Individuals may engage in corruption for financial benefits or personal advancement. b. **Pressure and Coercion:** In some cases, individuals may be coerced into corrupt practices by superiors or peers. c. **Normalization of Corruption/ Rationalization:** When corrupt practices are perceived as commonplace, individuals may justify their actions 4. **Forms of Corruption** Understanding these forms of corruption is crucial in developing strategies to combat them effectively. a. **Bribery:** Offering, giving, receiving, or soliciting something of value to influence the actions of an official or other person in charge. b. **Kickbacks:** A form of bribery where a contractor or supplier pays a portion of their earnings back to an official in return for favourable treatment or contracts. c. **Nepotism:** Favouritism granted to relatives or close friends in hiring or promotion processes, often at the expense of more qualified candidates. d. **Extortion:** Coercing someone to give up money, goods, or services through threats of violence or other forms of intimidation. e. **Collusion:** An agreement between two or more parties to engage in fraudulent activities, often to manipulate markets or avoid competition. f. **Misuse of Power:** Officials using their position to benefit themselves or others, often in ways that contradict legal or ethical standards. g. **Public Procurement Corruption:** Manipulating public contracts for personal gain, including rigging bids or failing to deliver on contract terms. h. **Influence Peddling:** The practice of using one\'s influence in government or connections with officials to obtain favours or preferential treatment. 5. **Strategies to Combat Corruption in the Malawi Revenue Authority** Malawi Revenue Authority has made significant strides to implement proactive and reactive measures to address the risk that fraud and corruption poses to its operations. However, because of the changing natures of fraud and corrupt practices, it still considered as work in progress. Some of the efforts include: a. **Strengthening Internal Controls:** Implementing rigorous auditing processes to detect and prevent corrupt practices. b. **Enhancing Transparency:** Ensuring public access to information regarding revenue collection and expenditure. c. **Improving Salary Structures:** Offering competitive salaries to reduce the incentive for corrupt behaviour. d. **Promoting Ethical Standards:** Fostering a culture of integrity through training and awareness programs. e. Established Institutional Integrity Committee (IIC) f. Rolled out the Tip-offs Anonymous Scheme in 2010 g. Developed and operationalized Whistleblowing Policy h. Developed a Taxpayer Service Charter. i. Developed a Staff Code of Ethic & Conduct j. Developed lifestyle audit policy and manual 6. **Effects of Corruption** a. **Poor Social Services** : As corruption becomes the center-stage, it is either governments fail to provides essential public services or the provision of quality social services is no longer a priority. No drugs in hospitals, lack of classroom blocks etc. b. **More Poverty** : Corruption results in the "rich" getting richer and the poor getting poorer as most resources are accessed by those with or in power leading to the poor continue to be marginalized. c. **Underdevelopment** : The cost of corruption makes resources for development largely unavailable. d. **Conflicts** : Frustrations due to inequality/nepotism may lead to conflicts among different tribes or regions of the country. (The Rwanda 1994 Genocide is a best Case in point). e. **Poor Infrastructure** : Corruption leads to selection incompetent people to oversee or manage already blotted budgets for infrastructure development as a result they fail. f. **Loss of Trust and Confidence:** In 2002 the control of corruption score dropped to 28, the country's lowest score, amid a scandal of corruption that led several donors such as the International Monetary Fund (IMF), the World Bank (WB), the United States and the European Union to withhold nearly US\$100 million in budgetary aid. All donors cited poor economic policies and corruption as the reasons for this. 7. **Corruption Case Studies** - **Outcome:** Investigation led to the dismissal of the Senior Oofficial and strengthened protocols for customs procedures. 3. **SECTION B: FRAUD** 8. **Forms of Fraud in the Revenue/Customs Context** a. **False Declarations:** Misrepresentation of the value or nature of goods to evade taxes or duties. b. **Underreporting Revenue:** Intentionally reporting lower income or revenue figures to reduce tax liability. c. **Fake Invoices:** Creating fictitious invoices for goods or services that were never provided, often used to siphon off public funds. d. **Misclassification of Goods:** Incorrectly classifying goods to benefit from lower tax rates or evade customs duties. e. **Collusion:** Collaborating with customs officials to manipulate the system for mutual benefit, such as fixing lower taxes on imports. f. **Internal Fraud:** Employees manipulating financial systems, such as altering records to cover theft or misappropriation of funds. g. **Round-tripping**, also known as **round-trip transactions** or **Lazy Susans:** This involves fraudulent reporting of a series and beneficial purchases on books of a company or companies involved with no net economic substance. In international scenarios, round-tripping is a method of structuring to evade taxes and launder money. h. **Transfer Pricing (TP):** Also known as transfer cost, are used when individual entities of a large multi-entity firm are treated and measured as separately run entities. It is common for multi-entity corporations to be consolidated on a financial reporting basis; however, they may report each entity separately for tax purposes. When these related parties are required to transact with each other, a transfer price is used to determine costs. If entity A offers entity B a rate lower than market value, entity B will have a lower cost of goods sold (COGS) and higher earnings than it otherwise would have and vice versa. When TP occurs, companies can manipulate profits of goods and services, in order to book higher profits in a country they are operating that may have a lower tax rate. 9. **Causes of Fraud** a. **Opportunity:** Weak internal controls, inadequate oversight, and lack of transparency can create opportunities for fraud. b. **Pressure:** Personal financial difficulties or unrealistic performance expectations may push individuals to commit fraud. c. **Rationalization:** Individuals often justify their actions by convincing themselves that they are not doing anything wrong, such as believing they are merely \"borrowing\" funds. 10. **Explanation of the Fraud Triangle** The **Fraud Triangle** consists of three elements that must be present for fraud to occur: a. **Opportunity:** The ability to commit fraud, often due to insufficient internal controls or oversight. b. **Pressure:** External or internal pressures that compel an individual to commit fraud, such as financial problems or job security concerns. c. **Rationalization:** The mindset that allows individuals to justify their fraudulent actions, such as believing that they are entitled to the money or that the company can afford the loss. 11. **Strategies to Combat Fraud** a. **Strengthening Internal Controls:** Implementing robust checks and balances, including regular audits and segregation of duties, to reduce opportunities for fraud. b. **Training and Awareness Programs:** Educating employees about the consequences of fraud and fostering a culture of integrity can help mitigate rationalization. c. **Whistle-blower Protection:** Encouraging employees to report suspicious activities without fear of retaliation can help identify fraud early. d. **Regular Monitoring and Auditing:** Conducting routine audits and monitoring financial transactions can deter fraudulent behaviour. e. **Transparent Reporting:** Promoting transparency in financial reporting and operations to minimize opportunities for fraud. f. **Encouraging Ethical Behaviour:** Creating an organizational culture that emphasizes ethics and integrity can reduce the pressure to commit fraud. g. **Utilizing Technology:** Implementing advanced data analytics and monitoring software to detect anomalies in financial transactions can enhance fraud detection. h. **Ensuring that technical Officers are properly trained on how to identify and deal with emerging fraud schemes:** For instance, Transfer Pricing would require technical officers to be able to identify transaction reported by an entity that might violate the arm's length transaction rule. 12. **Fraud Case Studies in Revenue/Customs Administration** **CASE STUDY NUMBER 1** ***Description:** A case where some officers Revenue Officer in DTD connived with an Officer in ICT Division to engage in fraudulent practices to manipulate taxpayers accounts leading to MRA losing revenue.* *It was alleged that the said officers were forging payment receipts to reflect the actual amount of taxes due for payment to MRA by requesting the taxpayer to make a very small payment to the bank and then use the receipts to forge the right amount which taxpayer owed the Authority.* ***Outcome:** The investigations and subsequent disciplinary hearings led to dismissal of several officers and enhanced tax protocols in DTD.* ***CASE STUDE NUMBER 2*** ***Description:** A Case where a Cashier at a Customs Border duplicated eight ASYCUDA generated revenue receipts for Toll Fees with intent to steal US\$1,620.00.* ***Outcome:** The investigations and subsequent disciplinary hearings led to dismissal of the cashier and enhanced financial reporting protocols at the border stations.* **Summary** This module has explored the critical issues of corruption and fraud within the Malawi Revenue Authority and the country at large, emphasizing their definitions, origins, and implications for governance. By understanding the root causes and examining real-life case studies, participants are better equipped to recognize, address, and combat these challenges. The fight against corruption and fraud requires a concerted effort involving improved governance, transparency, and a commitment to ethical practices within the MRA. Through collaborative efforts, it is possible to restore public trust and enhance the integrity of Malawi's revenue collection systems.