Trade misinvoicing is simplified by the Global Financial Integrity (GFI) as a form of tax fraud. It involvolves importers and exporters who deliberately falsify the quantity, value or nature of goods or services in a commercial transaction.
Similarly, trade misinvoicing involves the movement of goods and services in and out of a country by an act of overstating the value of exports and understating the value of imports and vice versa.
Trade misinvoicing is estimated as the biggest share of illicit financial flows by GFI. In simpler terms, it is a well-structured way of illegally transferring value across countries.
Each year, only 2 per cent of all cargo containers are physically inspected worldwide, that simply suggests why trade misinvoicing is increasing the ‘best way’ individuals and multinational companies engage in IFFs.
How does the GFI estimate trade misinvoicing?
GFI detects trade misinvoicing by identifying the “value gaps” or mismatches in reported international trade data. Each year, countries submit official trade reports to the United Nations, the International Monetary Fund and other international organizations documenting their imports and exports over the previous year. GFI analyzes such data to detect mismatches in reporting, which are then summed into value gaps.
Note: In 2015 GFI estimated that trade misinvoicing drains $800 billion from developing countries, the findings inspired the UN Economic Commission for Africa (UNECA) and the African Union who decided to set up a High-Level Council on Illicit Financial Flows from Africa who found out that $50 billion of illicit financial flows from Africa resulted from trade misinvoicing.
Why do they engage in Trade Misinvoicing?
The major necessity to move wealth into harder currencies – For example, business people in China have used overpayments for imports as a means to get around the country’s currency controls and build up a nest egg of savings outside China.
To evade tax and/or customs duties – In 2015 Côte d’Ivoire Customs issued 2,420 fraud reports. The offences most commonly recorded by frontline services are false values, false goods, and false weight declarations (Victorien Gnogoue, 2017)
Dodge currency controls – In Venezuela scammers used inflated import invoices to buy cheap dollars from the official currency control agency
Shift profits offshore – In Nigeria oil is sold from the national oil company at profitable prices to politically well-connected brokers known as “briefcase companies” who sell it on at a significant margin without serving any commercial function, essentially privatizing what should be public revenue
Clean the proceeds of criminal activity – Dealers in Tanzanite has been found to be smuggling the gemstone out of Tanzania including in private cars and carried by Makai herdsmen
Other reasons as to why companies and individuals practice trade misinvoicing is for the purposes of smuggling, tax and tariff evasion, paying bribes and kickbacks, and to evade capital controls and strategic transfer pricing used for profit shifting by multinational corporations.
Why is understanding trade misinvoicing of concern?
The portion of the money that is never taxed because of poor accounting, and reporting, could have raised tax revenues for poverty reduction, finance development and other sustainable development goals agenda.
In conclusion, trade misinvoicing is largely affecting developing countries and it’s time for accountability.