First Follow Up Mutual Evaluation Report of Sierra ....
Republic of Sierra Leone
Republic of Sierra Leone |
Political Situation
Sierra Leone consolidated its post-war peace and stability and remained on a democratic trajectory, having held its third general elections since the end of the civil war in November 2012 without major political violence. The elections were judged by international observers as free and fair, despite allegations of fraud by the main opposition party. Notwithstanding the absence of nationwide violence, mistrust and rivalry between the two leading parties intensified while supporters of the two parties clashed occasionally during the campaign period. The elections tested Sierra Leone’s progress toward peace, stability, and democracy as the opposition refused to concede defeat, even after the results were declared by the country’s electoral commission in favor of the ruling party.
At the same time Sierra Leone registered commendable progress towards good governance. The country’s progress was acknowledged in the 2012 Mo Ibrahim African Governance Index, particularly with its ranking of 30th out of 52 African countries. Sierra Leone also ranked 123rd out of 176 countries in the 2012 Transparency International Corruption Perception Index, compared with 134th out of 183 countries in 2011. Nonetheless, enhancing transparency and accountability in the management of the country’s finances and natural resources remains a daunting challenge.
Sierra Leone’s Truth and Reconciliation Commission called on the government to focus on tackling other challenges, such as weak democratic institutions, weak national cohesion and reconciliation, a culture of political intolerance, and corruption.
Economic and Financial Situation
Sierra Leone’s economic growth has strengthened in recent years, driven by expansion in agriculture, services and construction activities. Real GDP growth was expected to rise gradually from 5.7% in 2011 to 6.2% in 2012. The commencement of iron ore production in late 2011 was expected to boost growth and exports significantly in 2012 and beyond. Government projections showed a one-time expansion of real GDP growth of 18.2% in 2012.
Inflation rate was expected to decline from 16.6% in 2011 to 11% in 2012 due to improvements in domestic agricultural production, the introduction of the new goods and services tax (GST) and the slower rate of currency depreciation. Nevertheless, the removal of fuel subsidies is expected to push up prices.
Furthermore, the external position was set to benefit from increased mining exports and reduced iron ore related imports. Exports were projected to surge to 1.53 billion US dollars in 2012 from 385.72 million US dollars in 2011, while imports are expected to drop to 1.32 billion US dollars in 2012 from 1.63 billion US dollars in 2011, recording a trade surplus.
The medium-term prospects are favourable. However, they are subject to downside risks related to the uncertain global economic outlook and potential adverse movements in commodity prices. To support broad-based growth and reduce the economy’s vulnerability to exogenous shocks, the authorities would need to sustain efforts to improve the business environment and address impediments to growth. Key among these are a continued investment in infrastructure to support productivity gains in the private sector, increased economic diversification, and broader access to financial services, particularly for small- and medium-sized enterprises to create employment opportunities.
The tightening of fiscal and monetary policy will also help Sierra Leone to manage its debt sustainability better. Furthermore, strong reforms aimed at reducing corruption, providing free health care and improving the decrepit transport, power and public health infrastructures top the list of the government’s priorities in 2012 and beyond. As a result, the country is ranked as one of the world’s top reformers by the 2012 World Bank’s Doing Business index.
Sierra Leone’s financial sector continued to face a number of challenges: banks are small (assets average about USD 45 million); efficiency is low (non-interest expenses average about 10% of total assets and interest rate spreads are around 11 percentage points); there is high banking concentration where the three largest banks (out of the fourteen operating commercial banks) hold about 54 percent of total bank assets; the skill and experience level of bankers are deemed to be low; and the financial-sector associations, including the bankers association, do not function well. The payment system is under-developed, with no interoperability across the ATM system; domestic payment transactions are dominated by cash with limited use of cheques or internet banking, and, of course, no electronic large-value payment system. In addition, the normal financial markets (short-term credit, medium and long-term credit, foreign exchange, etc.) are rudimentary and do not function well. The new stock exchange is yet to obtain a significant number of listings. Efforts to develop the payment system in line with International Standards are thus underway. The AfDB is financing the automation of the payment system, which includes: (i) real-time gross settlement; (ii) automated cheque processing and an automated clearing house; (iii) a scriptless securities settlement system; and (iv) core banking applications.
As indicated above, the deposit money banks that makes up for about 90% of the sector’s total assets valued at 19.2% of GDP in 2010. Remittances inflows in 2012 amounted to USD80 million, which represents about 3.4% of GDP.
On a more positive note, the capital-asset ratio of the banks, for example, is a healthy 17 percent, though non-performing loans are still high at 14.96 percent of GDP in 2011, down from 15.61 percent in 2010. Nevertheless, banking supervision is underdeveloped as the liquidity ratio of net loans to total deposits, which is still as high as
40.1 percent. Thus, there is an urgent need to examine the soundness and management of financial firms against risks and risk management, and to emphasize the importance of a clear understanding of financial risks and optimal assignment of the responsibility for managing different types of risk (namely: liquidity, credit, interest-rate, market, foreign exchange, operational, sovereign, legal and fraud risk). There is an urgent need to develop a regulatory strategy that is focused, coherent, and in line with international best practice.
The Financial Sector Development Plan (FSDP) is in its preliminary stage of implementation. The objective of the plan is to address financial inclusion issues. The plan is intended to reinforce existing programmes such as microfinance, rural banking and the branchless mobile banking. It is also aimed at introducing new products that address the challenges imposed by the current payment system infrastructure. The secondary financial market is narrow in scope and there is need to open up and introduce long-term securities and bonds, and attract new players (both domestic as well as foreign). The capital market is yet to make headways as there are very few enlisted companies operating in the stock exchange.
The Credit Reference Bureau, an institution of the Central Bank, which was created to provide guidance to the commercial banks in their credit risk management, is now operational. However, its existence is yet to translate into any significant improvement of the banks handling of their credit portfolio, which may be attributed to lag effect. The institution has however, provided guidance on credit risk management process which is likely to enhance the processes and procedures of identification and verification of customers in compliance with Customer Due Diligence principle, a core component of the AML/CFT standards.
Prevalence of Predicate Crimes
Sierra Leone remained an attractive transhipment point for drugs from South America en route Europe and the United States, not least because of its porous borders, weak infrastructure, weak institutions, mass poverty and unemployment, poorly manned coastline, among others. Indeed, there are concerns that the country’s largely poor and unemployed youth may become increasingly involved in drug trafficking. If, as it is hoped, democracy is taking roots in Sierra Leone and the disaffected youth no longer consider taking up weapons and going into the bush a viable option for addressing their frustration, they may well increasingly turn to the drug trade to fill the gap left by no alternative means of profitable employment. Sierra Leone’s seizure of an unknown quantity of drugs hidden in a shipping container from Ecuador in December 2011 exemplified the extent of the problem.
With regard to corruption, Sierra Leone’s Anti-Corruption Commission (ACC) announced its recovery of 552 billion Leones from corrupt individuals and corporate entities in the first six half of 2012 alone. In April 2012, the Commission indicted two individuals for allegedly taking bribes on behalf of the country’s vice president.
A major vulnerability that the country faces is the huge informal sector that is fuelled by the predominance of cash transaction. The economy continues to be cash-based with an underdeveloped financial system. The formal financial sector is still narrow and continues to face regulatory and supervisory challenges as the payment system is still rudimentary. The non-financial sector, including the DNFBPs is unregulated with weak supervision, if any. There have been efforts to improve the tax system but there still remain existing gaps that make room for tax fraud and evasion.
AML/CFT Situation
Sierra Leone continued to take steps, though slowly to comply with international AML/CFT standards. In November 2011, after discussing the lack of progress in Sierra Leone’s implementation of recommendations in its MER, the Plenary decided to issue a Public Statement against the country. That led to the passage of the AML Act in February 2012. However, the government is yet to operationalize the new bill by taking concrete measures against ML/TF. Minimal resources have been committed to the fight against ML/TF.
The FIU is yet to be fully operational and remains a unit of the Central Bank’s Department of Supervision of the Bank. In March 2012, the AML/CFT Inter-Ministerial Committee urged the president to operationalize the FIU by appointing a director, in consistent with Section 7 of the Act.
During the reporting period, 10 suspicious Transaction Reports (STRs) were received by the FIU mainly from commercial banks up from 4 STRs in 2011. Four were forwarded to the law enforcement agencies for further investigation. A total of 39,583 disclosures in respect of currency transactions above the specified threshold were received from commercial banks in 2012 up from 34,495 CTRs in 2011. In addition to the STRs received, the FIU also received three (3) requests from the Transnational Organized Crime Unit and the Sierra Leone Police for information to aid their investigation. Intelligence reports were provided by the FIU for each request.
The Transnational Organized Crime Unit (TOCU) hosted series of workshops at key border points to promote inter-agency cooperation amongst the Police, National Revenue Authority, Immigration and other stakeholders. The workshop was used to introduce the Currency declaration forms to these entry points.
Technical Assistance
In spite of all the challenges, the country has been able to partner with development partners to make some gains in its AML/CFT efforts. The World Bank supported a joint initiative by the Bank of Sierra Leone and Transnational Organized Crimes Unit (TOCU) in drafting a National Procedure on Anti-Terrorism and Proliferation Financing. The three-day workshop held on 23-25 July 2012 was attended by all relevant stakeholders. Key outcomes of the workshop included an agreed chain of distribution of the United Nations or other list of designated persons and proposed recommendations for each institution to consider. The recommendations have been circulated to all relevant institutions and agencies for necessary action.
The United Nations Integrated Peace Building Mission in Sierra Leone (UNIPSL) provided funds for the printing of 100,000 revised currency declaration forms for use in tracking cross-border movement of cash and other negotiable bearer instruments above the specified threshold. The support has enabled the National Revenue Authority to carry out its mandate of administering currency declaration at various points of entry.
Sierra Leone requires further technical assistance in strengthening its capacity to respond to the growing threat of ML/TF and the associated predicate crimes. In particular, Sierra Leonean judicial authorities, regulators, and specialized investigation and prosecution entities require further training on handling AML/CFT issues. Technical and financial support is needed to enable the country conduct an AML/CFT risk assessment survey.
Conclusion
Sierra Leone consolidated peace, stability, and democracy in the post-war period, having held its third general elections without nationwide violence. The economy is on a good footing and the path to recovery is very promising with the discovery of new mineral resources, if managed well. The overall outlook depicts sign of socioeconomic development and stability. On the AML/CFT front, the country has passed into law a new AML/CFT act. The next challenge is to operationalize the FIU, which includes the appointment of its Director and making provision for government financing. The authorities have made some gains on the AML/CFT front, but need to renew their commitment to bolster efforts in the heroic challenges ahead.