Monday, August 01, 2016

Misinvoicing = Corruption

Fraudulently under-reporting the price, quantity of a product or service and the value of a commercial transaction in invoices are resulting in Africa and developing countries missing out on billions of dollars in tax revenues, foreign exchange and ultimately development according to a new study by the United Nations Conference on Trade and Development (UNCTAD). Trade misinvoicing in some commodity-based African countries caused these countries to lose as much as 67% of income from their exports. The UNCTAD study reported that in many cases trade misinvoicing or illegal or illicit trade or trade-based money laundering as Global Financial Integrity calls it, took place simultaneously with legal trade, with individuals and companies often engaging “in both legal and illegal trade so that the former helps disguise the latter”.

The UNCTAD report, called “Trade Misinvoicing in Primary Commodities in Developing Countries”, reported that, for example, over the 2000 to 2014 period under-invoicing of gold exports from South Africa amounted to $78.2bn, or 67% of total gold exports of the country. According to South African official data, only 4.6% of the country’s total gold exports go to India. However, India’s equivalent data showed that 35% of South Africa’s total gold exports go to India. This means that the difference between what South Africa’s official gold export figures to India is missing income for South Africa. Export underinvoicing of South Africa’s iron ore amounts to $3bn to China and $1bn to Japan. Iron ore exports from South Africa to the Netherlands are, on the other hand, over-invoiced by $1.4bn. Substantial amounts of iron ore, recorded to have been exported to the Netherlands, do not arrive in the Netherlands.

Zambia experienced a cumulative under-invoicing of its copper exports of $12bn over the 1995 to 2014 period. Of Zambia’s total copper exports to China in the 1995-2014 period, $5.6bn or 61% was under-invoiced. Zambian copper exports under-invoicing to China represented 10% of Zambia’s total copper exports. Zambia’s copper exports to Italy were under-invoiced to the tune of $2bn. In the official Zambian copper exports to Italy, only $3.9m was recorded. Copper exports to South Korea were under-voiced by $3.9bn; yet only $358m was declared. Zambia’s copper exports to Switzerland shows an over-invoicing of $31.8bn, yet “no such exports” are recorded to have arrived in Switzerland. The question that remains is: where did the Zambian copper exports that were supposedly exported to Switzerland actually go to?

In Nigeria, underinvoicing of oil exports to the US amounted to $69.7bn and to Germany $23.9bn. When importing oil a similar pattern of misinvoicing is prevalent. Total oil import underinvoicing into Nigeria accounted to $45.6bn during the 2006-2014 period. Oil imported from the Netherlands to Nigeria was underinvoiced to the amount of $24bn. However, oil shown as imported from the Netherlands (recorded as such in the Netherlands) does not appear to have reached Nigeria, as it is not recorded in Nigeria as having been received. In the case of trade with the US, the cumulative capital outflows from Nigeria as a result of trade misinvoicing amounts to $66.8bn, with Germany $24.1bn and with Switzerland $7.3bn.

29% of cocoa exports from the Ivory Coast do not show up in the books of the Netherlands.

“By manipulating the price, quantity, or quality of a good or a service on an invoice, criminals can easily and quickly shift substantial sums of money across international borders”, the Global Financial Integrity (GFI) organization has warned in the past. It has reckoned that trade misinvoicing is the largest component of illicit financial outflows from developing and African countries, causing massive capital outflows and tax losses.

There are a number of reasons for why the practice of trade misinvoicing is so pervasive. The Global Financial Integrity (GFI), which has also done research on trade misinvoicing, says the very obvious reasons is companies wanting to launder the proceeds of corruption. Corrupt individuals and companies may also want to dodge taxes and custom duties. Some countries provide tax incentives for local exporters. By over-reporting exports, corrupt individuals and companies can secure tax incentives. The dangers of export over-invoicing are also very real in countries where governments offer incentives to encourage export-orientated industrialization (export orientated industrialization is crucial if countries want to boost development). Corrupt individuals and companies also use trade misinvoicing to illegally escape capital controls. Many African and developing countries have restrictions on the amount of money that can be taken out or brought into the country. The UNCTAD report says the motive for trade misinvoicing is also to circumvent currency controls. In the cases where exchange rates are volatile (in most African countries now), and where foreign exchange controls are in place, corrupt companies and individuals over- and under- invoice to generate additional foreign exchange. The UNCTAD report says trade misinvoicing also often takes place because individuals and companies want to circumvent administrative red tape, such as “lengthy paperwork and delays in administrative authorizations and controls, in order to speed up execution and settlement of transactions”.

The UNCTAD report stated that high value but low weight commodities such as gold and diamonds appear to be more vulnerable to trade misinvoicing. Products not governed by standardized international pricing regimes are also vulnerable. Goods produced in informal production practices, such as informal mining, are also highly vulnerable to illegal trading. The large volumes involved in mining exports also make them vulnerable to illegal trading as many African countries have limited capacity and resources to regulate and monitor exports. Governments have a discretionary power over the production of natural resources, and bureaucrats and politicians in charge of natural resource sectors are vested with considerable powers of control over these. They can manipulate regulations, controls and rules that govern the import and export of commodities for personal enrichment. Large multinational mining companies can exert considerable influence on governments. These multinationals are also complex; it is therefore difficult for poorly resourced African governments to monitor their activities. Many multinational companies typically have affiliates in different countries. Export earnings could be disguised in inter-firm trade to reduce tax obligations. At the same time, companies could through intra-firm trade shift their profits through transfer pricing. The practice of transfer pricing happens when affiliates of the same company in different countries trade with each other. When the affiliates decide on a price for the trade between them, the practice is called transfer pricing. In such transactions transfer mispricing takes place when the price is under- or over-priced, to shift profits from one affiliate to the other to escape taxes.

Taken from here

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