Terrorism, human trafficking, and drug smuggling have long painted a gritty picture of crime in the developing world, but new details are coming to light about another much less visible form of crime and its adverse effects on developing countries. Fraudulent financial transactions, in particular the misinvoicing of international trade transactions, are having a significant impact on the economies of five African countries, according to a report published May 12th titled Hiding in Plain Sight: Trade Misinvoicing and the Impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania, and Uganda: 2002-2011.
According to the report, which was published by Global Financial Integrity (GFI) and funded by the Ministry of Foreign Affairs of Denmark, the misinvoicing of international trade transactions has allowed for the fraudulent movement of at least $60.8 billion in and out of the five African countries between 2002 and 2011.
Misinvoicing is a form of trade-based money laundering that includes the over and understatement of import and export values on official forms and records. Firms engaging in international trade in developing countries often conduct these fraudulent transactions in order to evade tariffs and taxes, collect additional export-related tax credits and subsidies, or move large amounts of capital in and out of countries illegally. Misinvoicing can typically be as simple as altering the values on the books for a given transaction. For example, a firm may understate the value of an import shipment in invoices and records in order to pay lower tariffs or overstate the value of an export shipment in order to gain more export credits and subsidies than the shipment actually earned.
Catching those that engage in misinvoicing is typically difficult for developing countries. Often times misinvoicing can be performed effectively by making very small augmentations to the prices of common goods. If a firm augments the value of its goods by only one or two dollars per unit, even the best customs officers would be unlikely to notice it, and the benefits of such an augmentation could still add up significantly in large volumes.
However, this is only trade misinvoicing in its mildest form. In many cases, firms engaging in misinvoicing and other forms of money laundering send their transactions through anonymous shell companies in tax havens and developed countries in order to further disguise their activities, allowing them to augment values much more as the important details of the transactions disappear without a trace behind a shield of secrecy and anonymity.
The effects of trade misinvoicing on the economies of these countries are significant. As a result of it, developing countries lose out on vital government revenue that could be used to aid their development through infrastructure projects and domestic investment, further perpetuating underdevelopment in these countries. GFI estimates that the five case countries lost a combined $14.39 billion in government revenue between 2002-2011. Uganda’s government was hit hardest, losing an average of 12.7 percent of its total government revenue annually to trade misinvoicing, followed by Ghana (11.0 percent), Mozambique (10.4 percent), Kenya (8.3 percent), and Tanzania (7.4 percent). With such significant portions of potential government revenue being lost to trade misinvoicing, it is easy to see how it has adverse effects on the economic growth of these countries, who would otherwise be able to use that money on much needed development projects such as constructing infrastructure or funding public education.
Misinvoicing is often used as a means to move capital in and out of countries to finance other organized criminal activity. Organizations ranging from militant Islamist groups such as Hezbollah to drug cartels in Mexico and South America are known to use trade-based money laundering to help finance their operations and move large amounts of illegal capital across national borders undetected. Putting a stop to trade-based money laundering would make it more difficult for criminal organizations to access their finances and would therefore be a step toward winning the fight against those organizations that perpetuate crime and instability in the developing world.
The five African countries studied in the report are merely a handful of examples of a larger global problem in the developing world. Illicit capital flows, in particular trade misinvoicing, pose a major problem for most developing countries, whose governments frequently lack the adequate institutions and capabilities to monitor international financial transactions to the degree necessary to prevent misinvoicing. Globally, $946 billion flowed out of developing countries in 2011 alone, and misinvoicing accounted for nearly 80 percent of this figure.
The report recommends general policy measures that could help curtail the misinvoicing problem in developing countries, primarily including steps to increase the accountability and transparency of international trade transactions. The report identified customs agencies as the “first line of defense” against trade misinvoicing and encouraged governments in developing countries to adopt a variety of measures to combat this practice. These included urging them to boost their customs enforcement capabilities, better scrutinize trade transactions involving tax havens, and create central, public registries of companies in their countries, to name a few. With governments in developing countries losing upwards of 10 percent of their annual revenue, investing in measures that could effectively curtail fraudulent transactions would likely pay for itself while simultaneously helping curb other forms of crime in their countries.
The report finally reiterates that illicit financial flows are not exclusively a developing world issue and that developed countries have a responsibility to aid in tackling this issue by setting international standards on trade practices and improving transparency in their own financial systems. Adopting these measures to curtail the practice of trade misinvoicing is undoubtedly an investment that could have a huge impact on the future growth of developing countries and the fight against crime and instability around the world.
This article was originally published in Diplomatic Courier's July/August 2014 print edition.
a global affairs media network
Investigating Financial Smuggling’s Impact on Developing Economies
August 12, 2014
Terrorism, human trafficking, and drug smuggling have long painted a gritty picture of crime in the developing world, but new details are coming to light about another much less visible form of crime and its adverse effects on developing countries. Fraudulent financial transactions, in particular the misinvoicing of international trade transactions, are having a significant impact on the economies of five African countries, according to a report published May 12th titled Hiding in Plain Sight: Trade Misinvoicing and the Impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania, and Uganda: 2002-2011.
According to the report, which was published by Global Financial Integrity (GFI) and funded by the Ministry of Foreign Affairs of Denmark, the misinvoicing of international trade transactions has allowed for the fraudulent movement of at least $60.8 billion in and out of the five African countries between 2002 and 2011.
Misinvoicing is a form of trade-based money laundering that includes the over and understatement of import and export values on official forms and records. Firms engaging in international trade in developing countries often conduct these fraudulent transactions in order to evade tariffs and taxes, collect additional export-related tax credits and subsidies, or move large amounts of capital in and out of countries illegally. Misinvoicing can typically be as simple as altering the values on the books for a given transaction. For example, a firm may understate the value of an import shipment in invoices and records in order to pay lower tariffs or overstate the value of an export shipment in order to gain more export credits and subsidies than the shipment actually earned.
Catching those that engage in misinvoicing is typically difficult for developing countries. Often times misinvoicing can be performed effectively by making very small augmentations to the prices of common goods. If a firm augments the value of its goods by only one or two dollars per unit, even the best customs officers would be unlikely to notice it, and the benefits of such an augmentation could still add up significantly in large volumes.
However, this is only trade misinvoicing in its mildest form. In many cases, firms engaging in misinvoicing and other forms of money laundering send their transactions through anonymous shell companies in tax havens and developed countries in order to further disguise their activities, allowing them to augment values much more as the important details of the transactions disappear without a trace behind a shield of secrecy and anonymity.
The effects of trade misinvoicing on the economies of these countries are significant. As a result of it, developing countries lose out on vital government revenue that could be used to aid their development through infrastructure projects and domestic investment, further perpetuating underdevelopment in these countries. GFI estimates that the five case countries lost a combined $14.39 billion in government revenue between 2002-2011. Uganda’s government was hit hardest, losing an average of 12.7 percent of its total government revenue annually to trade misinvoicing, followed by Ghana (11.0 percent), Mozambique (10.4 percent), Kenya (8.3 percent), and Tanzania (7.4 percent). With such significant portions of potential government revenue being lost to trade misinvoicing, it is easy to see how it has adverse effects on the economic growth of these countries, who would otherwise be able to use that money on much needed development projects such as constructing infrastructure or funding public education.
Misinvoicing is often used as a means to move capital in and out of countries to finance other organized criminal activity. Organizations ranging from militant Islamist groups such as Hezbollah to drug cartels in Mexico and South America are known to use trade-based money laundering to help finance their operations and move large amounts of illegal capital across national borders undetected. Putting a stop to trade-based money laundering would make it more difficult for criminal organizations to access their finances and would therefore be a step toward winning the fight against those organizations that perpetuate crime and instability in the developing world.
The five African countries studied in the report are merely a handful of examples of a larger global problem in the developing world. Illicit capital flows, in particular trade misinvoicing, pose a major problem for most developing countries, whose governments frequently lack the adequate institutions and capabilities to monitor international financial transactions to the degree necessary to prevent misinvoicing. Globally, $946 billion flowed out of developing countries in 2011 alone, and misinvoicing accounted for nearly 80 percent of this figure.
The report recommends general policy measures that could help curtail the misinvoicing problem in developing countries, primarily including steps to increase the accountability and transparency of international trade transactions. The report identified customs agencies as the “first line of defense” against trade misinvoicing and encouraged governments in developing countries to adopt a variety of measures to combat this practice. These included urging them to boost their customs enforcement capabilities, better scrutinize trade transactions involving tax havens, and create central, public registries of companies in their countries, to name a few. With governments in developing countries losing upwards of 10 percent of their annual revenue, investing in measures that could effectively curtail fraudulent transactions would likely pay for itself while simultaneously helping curb other forms of crime in their countries.
The report finally reiterates that illicit financial flows are not exclusively a developing world issue and that developed countries have a responsibility to aid in tackling this issue by setting international standards on trade practices and improving transparency in their own financial systems. Adopting these measures to curtail the practice of trade misinvoicing is undoubtedly an investment that could have a huge impact on the future growth of developing countries and the fight against crime and instability around the world.
This article was originally published in Diplomatic Courier's July/August 2014 print edition.
