False trade invoicing accounted for $8.8 trillion of developing world's trade figures over 10 years, study says

03 Mar 2020 12:00 am by Robert Thomason

An $8.8 trillion gap in the reported value of international trade of developing countries over a 10-year span is due in part to exploitation of the system by financial criminals said a transparency think tank that studied discrepancies between import and export figures. Global Financial Integrity, the group issuing the report today, said that money laundering, tax evasion and corruption were among the reasons for the inconsistency.

Looking at trade data submitted to the UN between 2008 and 2017, GFI compared the value that countries reported for their exports with the value reported by the countries receiving the goods as imports. GFI said differences resulted from trading partners declaring values for their imports or exports that were too high or too low relative to the normal value of the goods traded.

The practice is called "trade misinvoicing." Although it can occur because of honest mistakes, it is often used intentionally to divert funds for malign purposes, GFI said.

"Trade misinvoicing is a well-established method of hiding illicit financial flows within the international commercial trade system, as well as evading and/or exploiting customs regimes," GFI said. "The report evidences that trade misinvoicing continues to be a major drain on domestic tax bases in developing countries."

Avoiding taxes or tariffs is a major motivation for misinvoicing trade goods, GFI said.

But the technique can be used to divert money secretly. If an importer overstates the amount that is being paid for a good. In this case the legitimate amount goes to the exporter selling the product, and the remainder is deposited in an offshore account.

The GFI estimate of $8.8 trillion in trade misinvoicing is only part of a bigger picture of malign financial activity in world trade. For instance, another manipulation of international trade occurs when exporters and importers collude to falsify customs records to show higher or lower values for the goods delivered. This "same-invoice faking," as researchers called it, was not reflected in GFI's calculations.

Misinvoicing involves different values being assigned to the same good as an export and as an import. Same-invoice faking involves the same fraudulent value being assigned to a good both as an import and an export.

"By their nature, illicit financial flows are typically intended to be hidden, meaning that even the types of illicit flows that can be measured must be measured indirectly and are, therefore, an imprecise estimate of this activity," the GFI report said. "This is a common problem faced by law enforcement agencies and financial crime units around the world."

— US legal actions —

Despite the difficulties of discerning trade misinvoicing with precision, prosecutors and regulators have taken action against financial crimes in which trade invoicing was part of the scheme.

For instance, a Colombian drug cartel arranged, via brokers in Los Angeles, to import stuffed animals from China using drug proceeds. False customs declarations overstating their value allowed the cartels to sell the toys at a profit and launder the surplus into Colombia's banking system. US-based executives pleaded guilty in 2012 to conspiracy to structure currency transactions, Immigration and Customs Enforcement said.

In July, Two Venezuelan businessmen, Alex Saab and Alvaro Pulido, were indicted in the Southern District of Florida on money-laundering charges stemming from a scheme in which they allegedly bribed Venezuelan officials to help them fake import documents for construction materials and equipment that were never received. Saab and Pulido also were sanctioned that month by the US Treasury Department for a food distribution scheme that included, in part, overvaluing food imported from Mexico.

— Misinvoicing by the numbers —

GFI looked at the bilateral trade between developing countries and advanced economies. In 2017, the most recent year with complete data in the UN Comtrade database used for the study, an $817.6 billion inconsistency was found.

China's trade with advanced countries showed the largest annual average gap of all the developing countries: $323.8 billion on average for each of the 10 years. Mexico had the next largest, at $62.9 billion.

Among the types of goods traded, electrical machinery, which includes cell phones, was the most misreported, with $153.7 billion on average reported each year. Mineral fuels, which include oil and coal, were next at $113.2 billion.

— Recommendations —

In many countries, falsifying trade or customs records is not illegal, and GFI recommended that all countries criminalize the activity.

GFI also cited the World Customs Organization as saying that only 2 percent of the world's trade shipments are inspected, and called for increased inspections. It said that law enforcement capacities of customs services in all countries should be strengthened and that those systems should be subjected to more oversight.

GFI further suggested that distributed ledger or blockchain technology could be developed to provide a more transparent recording system.

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