Sierra Leone

Political situation

Sierra Leone has consolidated peace and stability after a period of conflict and is now on the path to democracy, having held its third general elections since the end of the civil war in November 2012 without major political violence. International observers judged these elections free and fair, despite allegations of fraud reported by the main opposition party. Although there was no visible violence at national level, mistrust and rivalry between the two main parties intensified and their supporters sometimes clashed during the election campaign. These elections were a test for Sierra Leone, a barometer of the progress made on its road to peace, stability and democracy, all the more so as the opposition had refused to concede defeat after the National Electoral Commission declared the results in favour of the ruling party.

During the same period, Sierra Leone made significant progress in good governance. This progress placed the country 30th out of 52 African countries on the 2012 Mo Ibrahim Index of African Governance. Sierra Leone was also ranked 123rd out of 176 countries on Transparency International’s 2012 Corruption Perceptions Index. However, strengthening transparency and accountability in the management of public finances and natural resources remains a considerable challenge.

The Sierra Leone Truth and Reconciliation Commission urged the Government to focus on other priorities, such as weak democratic institutions, fragile social cohesion and national reconciliation, a culture of political intolerance, and corruption.

Economic and financial situation

Sierra Leone’s economic growth has improved in recent years, driven by the development of agriculture, services and construction. Real GDP growth rose gradually from 5.7% in 2011 to 6.2% in 2012. The start of iron ore mining at the end of 2011 was expected to boost growth and exports significantly in 2012 and well beyond. The Government forecast real GDP growth of 18.2% in 2012.

Inflation was expected to fall from 16.6% in 2011 to 11% in 2012, owing to higher agricultural output, the introduction of a new goods and services tax (GST) and slower currency fluctuations. However, the removal of fuel subsidies could feed through into prices.

Internationally, the country also benefited from higher exports of its mineral resources and lower imports as a result of the exploitation of its deposits. Projections pointed to a jump in exports from USD 385.72 million in 2011 to USD 1.53 billion in 2012, and a fall in imports from USD 1.96 billion in 2011 to USD 1.32 billion in 2012, producing a trade surplus.

The medium-term outlook is favourable. However, it depends on risks linked to the uncertain prospects of the global economy and potential changes in commodity prices. To sustain broad-based growth and reduce the economy’s vulnerability to external shocks, the authorities will need to continue their efforts to improve the business environment and tackle the main obstacles to growth: continued investment in infrastructure to strengthen productivity gains in the private sector, greater economic diversification, and wider access to finance, particularly for small and medium-sized enterprises, in order to create job opportunities.

Tighter fiscal and monetary policy could also help Sierra Leone manage its debt sustainability more effectively. In addition, genuine reforms have sought to reduce corruption, provide free health care and improve the dilapidated transport system; electricity and public health infrastructure are the Government’s top priority in 2012 and beyond. With all these initiatives, the country was ranked among the top reformers in the World Bank’s Doing Business 2012 report.

Sierra Leone’s financial sector continued to face a number of challenges: banks are small (assets of about USD 45 million); efficiency is low (average non-interest expenses are around 10% of total assets and the interest rate spread is around 11 percentage points); concentration is high, with the three largest of the fourteen commercial banks holding nearly 54 percent of total bank assets; bankers’ skills and experience are relatively limited; and financial sector associations, including the bankers’ association, do not function properly. The payment system is not modern and there is no interoperability across the ATM network; local transactions are dominated by cash, with little use of cheques or the internet, and of course no electronic large-value payment system. In addition, standard financial markets (short-term credit, medium- and long-term credit, foreign exchange market, etc.) are rudimentary and do not function efficiently. The new stock exchange nevertheless has a significant number of listings. Efforts are under way to develop a payment system that meets international standards. The AfDB has provided funding for an automated payment system comprising: (i) a real-time gross settlement system; (ii) automated cheque processing and a clearing house; (iii) a scripless securities settlement system; and (iv) core banking applications.

As noted above, bank deposits, which make up about 90% of the sector’s total assets, were equivalent to 19.2% of GDP in 2010. Capital inflows in 2012 amounted to USD 80 million, or about 3.4% of GDP.

On a more positive note, the banks’ capital-to-assets ratio, for example, stands at 17%, even though non-performing loans remained fairly high at 14% of GDP in 2011, down from 15.2% in 2010. However, banking supervision is underdeveloped, as the liquidity ratio of net loans to total deposits has remained fairly high at 40.1%. There is therefore an urgent need to review the soundness and risk management of financial institutions, with particular emphasis on the importance of fully understanding financial risks and their fundamental responsibility for managing the different types of risk (in particular liquidity, credit, interest rate, market, foreign exchange, operational, sovereign, legal and fraud risk). There is also an urgent need to develop a specific, coherent regulatory strategy in line with international good practice.

The Financial Sector Development Plan (FSDP) is in the early stages of implementation. Its objective is to address financial issues in an inclusive way. It aims to strengthen existing programmes such as microfinance, rural banks and branchless mobile banking. It also aims to introduce new products to address problems arising from the current payment system. The secondary financial market is narrow and needs to be broadened by introducing long-term securities and shares and by attracting new players, both domestic and foreign. The capital market must make progress, as very few companies are listed on the stock exchange.

The National Credit Reference Bureau, a Central Bank institution set up to guide commercial banks on credit risk management, is now operational. However, its existence is not yet reflected in a significant improvement in the management of credit portfolios, which may be due to a lag effect. The institution has nevertheless provided guidance on the credit risk management process, which could improve customer identification and verification in line with customer due diligence, an essential component of AML/CFT standards.

Prevalence of predicate offences

Sierra Leone has remained an attractive transshipment hub for drugs from South America bound for Europe and the United States because of, among other things, its porous borders, weak infrastructure, fragile institutions, poverty and unemployment, and inadequate coast guard capacity. There are fears that a large population of poor and unemployed young people is gradually becoming involved in drug trafficking. If, as hoped, democracy takes root in Sierra Leone and these idle young people stop seeing armed rebellion as a solution to their frustration, they could be tempted to turn to drug trafficking to fill the gap left by the lack of an alternative source of gainful employment. The seizure of a large quantity of drugs concealed in a container from Ecuador in December 2011 indicates the scale of the problem.

With regard to corruption, Sierra Leone’s Anti-Corruption Commission (ACC) announced that it had recovered 552 billion leones from corrupt individuals and companies in the first half of 2012 alone. In April 2012, the Commission summoned two people alleged to have taken bribes on behalf of the Vice President.

A major vulnerability the country must overcome is the large size of the informal sector, which relies on the predominance of cash transactions. The economy remains cash-based with a financial system that has seen little modernisation. The formal financial sector is still narrow and continues to face regulatory and supervisory problems because the payment system is still rudimentary. The non-financial sector, including DNFBPs, is unregulated and subject to little supervision, if any. Efforts have been made to improve the tax system, but gaps remain that open the way to tax fraud and evasion.

AML/CFT situation

Sierra Leone continues to make efforts, albeit slowly, to align itself with international AML/CFT standards. In November 2011, after discussing the lack of progress in implementing the recommendations of Sierra Leone’s MER, the Plenary decided to issue a Public Statement on the country. This accelerated the passing of the AML law in February 2012. However, the government must now put the new law into practice by taking concrete action against ML/TF. Resources, albeit limited, have been allocated to the fight against ML/TF.

The FIU must now become fully operational and remain a unit of the Central Bank department responsible for supervision. In March 2012, the Inter-Ministerial Committee on AML/CFT strongly advised the President to make the FIU operational by appointing a director in accordance with section 7 of the law.

During the reporting period, the FIU received ten suspicious transaction reports (STRs), mainly from commercial banks, compared with four STRs in 2011. Four of these STRs were passed on to law enforcement agencies for further investigation. A total of 39,583 cash transaction reports (CTRs) on foreign currency transactions above the threshold were submitted to the FIU by commercial banks in 2012, an increase compared with 34,495 in 2011. In addition to the STRs received, the FIU also received three (3) requests from the Transnational Organised Crime Unit (TOCU) and the Sierra Leone Police for information to facilitate investigations. The FIU provided intelligence reports in response to each request.

The Transnational Organised Crime Unit (TOCU) held a series of workshops at key border locations to promote inter-agency cooperation between the police, the revenue authority, immigration and other stakeholders. The aim of these workshops was to introduce currency declaration forms at these points of entry.

Technical assistance

Despite the difficulties, the country has been able to build relationships with development partners and achieve positive results in its AML/CFT system. The World Bank helped the Bank of Sierra Leone and the Transnational Organised Crime Unit (TOCU) set up a joint initiative to develop a national procedure on counter-terrorism and proliferation financing. This three-day workshop, held from 23 to 25 July 2012, was attended by all the main stakeholders. Key outcomes included the chain for transmitting United Nations and other lists of designated persons, and recommendations for each institution to consider. These recommendations were sent to all the institutions and agencies involved so that they could take the necessary decisions.

The United Nations Integrated Peacebuilding Office in Sierra Leone (UNIPSIL) provided funds to print 100,000 revised currency declaration forms to track cash flows at the borders as well as negotiable instruments above the threshold. This support enabled the revenue authority to carry out its task of administering currency declarations at the various borders.

Sierra Leone needs more technical assistance to strengthen its capacity to respond to the growing threat of ML/TF and predicate offences. Sierra Leone’s judicial authorities, regulators, law enforcement and prosecution agencies also need more training in handling AML/CFT matters. Technical and financial support is needed to enable the country to carry out an ML/TF risk assessment.

Conclusion

Sierra Leone has consolidated peace and democracy in the post-conflict period, enabling it to hold its third general elections without violence. The economy is on a sound footing and the recovery is promising thanks to the discovery of new mineral resources, if they are well managed. The overall outlook points to stability and socio-economic development. On AML/CFT, the country has passed a new law, and the next challenge is to make the FIU operational by appointing a director and putting in place arrangements for its funding by the government. The authorities have made progress on AML/CFT, but they must renew their commitment to sustaining these efforts in order to meet the challenges ahead.