Trade Misinvoicing a ‘Persistent Problem’ in Developing Countries

Think tank Global Financial Integrity found $8.7tr in misinvoiced trade in the ten years from 2008 to 2017. Trade misinvoicing is one of the largest components of global illicit financial flows.

Global Financial Integrity (GFI), a Washington DC-based think tank, has published a new report examining financial crime involving trade misinvoicing, and proposing policy solutions to combat the practice.

This report examines the latest official government trade data reported to the United Nations to estimate the magnitude of trade misinvoicing – one of the largest components of measurable illicit financial flows between and among 135 developing countries and 36 advanced economies.

Trade misinvoicing occurs when importers and exporters deliberately falsify the stated prices on the invoices for goods they are importing or exporting as a way to illicitly transfer value across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits offshore.

To identify misinvoiced trade, GFI analysed data submitted by governments each year to the United Nations Comtrade database in order to identify ‘value gaps’, or mismatches, in the reported data.

The analysis found USD 8.7 trillion in value gaps in trade between 135 developing countries and 36 advanced economies over the ten-year period 2008-2017. For 2017, the most recent year for which comprehensive data is available, the value gaps amount to USD 817.6 billion.

Among developing countries, China had the largest annual average value gap in its bilateral trade with 36 advanced economies, amounting to USD 323.8 billion a year. However, as a percentage of its total bilateral trade with the 36 advanced economies, China ranked 80th of the 135 developing countries analysed at 18.77%.

This was lower than in Philippines (25.44%), Myanmar (23.24%), Laos (21.18%), Malaysia (20.7%), and India (19.5%); but higher than Thailand (18.37%), Sri Lanka (17.86%), Indonesia (17.22%), Vietnam (16.2%), Cambodia (16.1%), and Bangladesh (14.62%).

“Overall, the analysis shows trade misinvoicing is a persistent problem across developing countries, resulting in potentially massive revenue losses,” GFI said. The overarching imperatives for trade misinvoicing, it says, are for capital flight to exit weaker or more volatile currencies, and for tax evasion.

The analysis aims to help identify the countries most likely at risk for trade misinvoicing – and therefore, significant government revenue losses – and to recommend policy measures to combat trade misinvoicing.

Some of the policy recommendations include making trade misinvoicing illegal at the national level, strengthening the law enforcement capacities of customs authorities, establishing public beneficial ownership registries, and adopting FATF (Financial Action Task Force) recommendations – to name a few.

The full report is available here.

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