Misinvoicing robbed $1.6 trillion from global trade & hurt 134 poor countries

Global Financial Integrity (GFI) documented the international problem of “trade misinvoicing”—when importers and exporters deliberately falsify the declared value of goods on the invoices they submit to their customs authorities in order to illicitly transfer money across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts.

By over-pricing or under-pricing the declared value of imports or exports, traders illicitly move wealth across international borders by hiding it within the regular payments for commerce in the international trading system.

Trade misinvoicing activity represents a major global challenge on two fronts: for customs and tax authorities around the world, particularly in developing countries, it reflects the loss of billions of dallrs in uncollected trade-related tax revenues every year; and for law enforcement, it facilitates illicit financial flows (IFFs) throughout the global economy.

The report, Trade-Related Illicit Financial Flows in 134 Developing Countries 2009-2018,  published by Global Financial Integrity (GFI), shows trade misinvoicing is a persistent problem across developing nations, resulting in potentially massive revenue losses and facilitating illicit financial flows across international borders.

Of an estimated $1.6 trillion in potential trade misinvoicing among 134 developing countries, at least $835 billion occurred between poor countries and 36 advanced economies, in 2018.

GFI’s President and CEO Tom Cardamone said that “during a time when developing countries are scrambling for every penny to fund vaccines and medicines to fight COVID-19 infections, billions of dollars in duties and taxes are going uncollected. It is absolutely shocking,” he continued, “how few governments are paying any attention to these massive losses.”

Trade misinvoicing occurs when importers and exporters deliberately falsify the declared value of goods on invoices submitted to customs authorities.

This allows traders to illegally move money across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts.

Value gaps, or mismatches in international trade transactions, indicate that developing countries are not collecting the correct amount of trade-related taxes and duties that are owed, leading to potentially massive amounts of revenue losses.

While these value gaps are only estimates of misinvoicing, they indicate the scale of the problem. 

In order to identify potential trade misinvoicing, GFI examined official trade data reported to the United Nations to identify value gaps, or mismatches, in the data regarding what any two countries reported about their trade with one another.

While there are reasons for some mismatches to regularly show up in the international trade data, GFI believes that the majority of the gaps identified are indicative of trade misinvoicing activity. GFI looked at all bilateral trade data for 134 developing countries, as well as trade between those countries and 36 advanced economies.

• $1.6 trillion value gap identified in trade between 134 developing countries and all of their global trading partners in 2018;
• $835.0 billion value gap identified in trade between 134 developing countries and a set of 36 advanced economies in 2018;
• The developing countries with the largest value gaps identified in trade with 36 advanced economies in 2018 are China ($305.0 billion), Poland ($62.3 billion), India ($38.9 billion), Russia ($32.6 billion) and Malaysia ($30.7 billion);
• The developing countries with the largest value gaps identified in trade with 36 advanced economies in 2018 as a percent of total trade are The Gambia (45.0%), Malawi (36.6%), Suriname (31.9%), Kyrgyzstan (30.6%) and Belize (29.2%).

At the national level, countries should:

• Make trade misinvoicing illegal;
• Strengthen law enforcement capacities of customs authorities;
• Establish multi-agency teams to address customs fraud, tax evasion and other financial crimes;
• Implement readily available trade misinvoicing risk assessment tools;
• Strengthen customs oversight of Free Trade Zones (FTZs);
• Establish National Trade Facilitation Committees.

Internationally, countries should work together to:

• Expand information-sharing between importing and exporting countries;
• Explore the use of distributed ledger technology to identify trade misinvoicing.

GFI hopes this analysis will help developing countries understand the magnitude of trade misinvoicing activity and the potentially massive revenue losses they are incurring due to uncollected taxes and duties.

Taking concrete steps to reduce trade misinvoicing is necessary to address the broader problem of illicit financial flows across international borders.