Trade Fraud Costs Africa Billions

Trade mis-invoicing is the intentional misstating of the value, quantity, or composition of goods on customs declaration forms and invoices, usually for tax evasion or money-laundering purposes. Further, misinvoiced trade is a significant source of illicit capital flight.

Mis-invoiced trade in five African countries cost their governments billions of dollars in tax revenue and facilitated at least 60.8 billion dollars in illicit financial flows from 2002 to 2011, says a new report by Global Financial Integrity (GFI), a research advocacy organisation here.

Using data on bilateral trade flows from 2002-2011 from the U.N.’s Commodity Trade database, the study calculated that the potential average annual tax loss from trade misinvoicing amounted over the same decade to roughly 12.7 percent of Uganda’s total government revenue, followed by Ghana (11 percent), Mozambique (10.4 percent), Kenya (8.3 percent), and Tanzania (7.4 percent), according to the 52-page report, “Hiding in Plain Sight,” sponsored by the Danish foreign ministry, and represents the first comprehensive study on the magnitude of the loss of tax revenue for these countries.

“Fraudulent trade transactions rob the people of these countries of funds that could otherwise have been used for investments in infrastructure, schools, hospitals, and other much-needed public services,” said Mogens Jensen, Denmark’s minister for Trade and Development Cooperation.

Tanzania tops the list, with the greatest annual average gross illicit flows of 1.87 billion dollars. Kenya is second with 1.51 billion in average gross flows. They are followed by Ghana (1.44 billion); Uganda (884 million), and Mozambique (585 million). These losses create “one of the most damaging conditions undermining economic growth and development, governance, and human rights in Africa and around the world,” according to the report which, noted that mis-invoicing thrives in a global shadow system that features financial secrecy and tax havens for the rich.

Over the decade, gross illicit outflows in Kenya were twice what the country received in official development assistance (ODA); in Ghana these flows roughly equaled its ODA, followed by Tanzania (77.6 percent), Uganda (58.9 percent), and Mozambique (32.6 percent). The numbers are huge, but experts caution that these might be too modest and an under-estimate.

“The estimates provided by our methodology are likely to be extremely conservative as they do not include trade misinvoicing in services or intangibles, same-invoice trade misinvoicing, hawala transactions, and dealings conducted in bulk cash,” GFI President Raymond Baker noted.

Ghana, Kenya, Mozambique, Tanzania, and Uganda have all experienced significant economic growth in recent years. But the wealth remains concentrated in the hands of a very few and has not trickled down to the average citizen and the very poor, who often lack basic services. The African Progress Panel, a think tank chaired by former U.N. secretary-general Kofi Annan estimated that illegal fishing and logging – most of which benefits foreign interests – cost sub-Saharan Africa an average of over 20 billion dollars each year.

“There is a misconception that misinvoicing trade results in a better company performance in terms of revenue. It in fact hurts the company,” Brian LeBlanc, who co-authored the report, told IPS, and “the extra profits from over- or under-invoicing imports and exports end up being transferred to off-shore accounts of the company owners and are not distributed to the employees.”