Nick Shaxson ■ Finally, trade misinvoicing gets political


UnctadWe recently helped publicise a report by the UN Conference on Trade and Development (UNCTAD) in our blog entitled Some countries “lose” 2/3 of exports to misinvoicing. As a reminder, trade misinvoicing is a form of money laundering that involves deliberately misreporting (on an invoice to customs) the value of a commercial transaction, so as to shift money illictly across borders. The study seeks to get a handle on the scale of the problem by studying mismatches between export data from the exporting countries (Chile, Cote d’Ivoire, Nigeria, South Africa and Zambia, in this case), and values reported by the importing countries, including hubs such as Switzerland, the Netherlands, the United Kingdom and United States.

There’s been some pushback against the UNCTAD study since we wrote that, and there’s lots to welcome here. In particular, the South African component in the report has prompted both business interests and South Africa’s respected chief statistician, Dr Pali Lehohla, to criticise the assessment

The extent to which manipulation of trade prices and volumes is used as a vehicle for evading taxes and for other illicit financial flows remains an open question, for several reasons set out below. There’s a bit of a vicious circle here: there is not much high-quality data available, so we can’t be certain of the true scale of the problem – but without hard numbers on the scale of the problem, policymakers have been reluctant to push for better data. 

In short, Lehohla says UNCTAD is wrong because South Africa follows a ‘legacy rule’ of suppressing details of its gold trade, which makes the study’s approach to bilateral trade anomalies inappropriate. (Since at least August 2015, there has been a declared intention to eliminate this rule; perhaps now there will be pressure to deliver.)

In a not unrelated matter, Switzerland – a major historical partner of South Africa’s Apartheid regime – requested back in 1968 the suppression of their own position in the South African Reserve Bank’s statistical releases. As we’ve said many a time, secrecy is rarely the friend of justice or human rights.

There are three main generic reasons for anomalies in trade data:

1.       Deliberate manipulation, for the purpose of facilitating illicit financial flows;

2.       Genuine data errors – remember that international data here is the product of individual traders recording their transactions with customs, which then report to the UN system; and

3.       Different rules of reportingMost commonly, exporting countries identify the immediate destination country, but final importing countries identify the original exporter. . For example, Zambia’s exports to the UK via South Africa may be recorded in Zambia as exports to South Africa, but in the UK they’re recorded as imports from Zambia, resulting in an apparent anomaly in UK-Zambia trade, despite there being no illicit component in reality.

But there are other issues here too – not least, the failure of Switzerland and other transit trade or merchanting hubs to follow minimal levels of transparency: a failure to report both the final export and import prices, and also to report the margin that can be derived from these.  This is particularly problematic for countries like Switzerland that have designed predatory tax regimes specifically to entice this kind of transitory business, at great cost to taxpayers elsewhere.  These failures create major ‘black holes’ in the data, for exactly those trading partners (i.e. financial secrecy jurisdictions) where misinvoicing is likely to be a particular risk.

There is also a question why exporting nations would be willing to accept ‘Switzerland’ as the export destination for goods which will never arrive in the Alpine secrecy state, but instead make their way directly to India or another genuine import partner.  These standards need to be thoroughly reviewed and a common standard needs to be found, so everyone is on the same page and key discrepancies can be removed from the equation. 

While there is certainly a risk of identifying all three anomalies as ‘proof’ of category 1 misinvoicing, there has been a countervailing temptation for some, who seem categorically opposed to tax justice, to present evidence of anomalies in categories 2 or 3 as ‘proof’ that misinvoicing is not a problem. Clearly both approaches are unhelpful. 

But as long as data issues remain unaddressed, the debate is likely to remain unsolved. And for that reason, we welcome the politicisation of the debate that has resulted from the UNCTAD study. Three valuable areas of progress can now be identified:

  • Harmonisation and improvement of customs data reporting, with particular priority for major commodity exporters – which face the highest risks of illicit flows. This includes consideration of the basis on which exporters accept customs declarations in relation to commodity hubs such as Switzerland, and also the urgent need to address anomalies such as the South African gold data suppression.
  • Harmonisation and improvement of both customs data and transit trade reporting by major commodity hubs, in particular Switzerland and the Netherlands – whose lack of transparency poses the greatest risk of illicit flows to others. Such reporting has been debated repeatedly in the Swiss parliament, and the central bank collects all the necessary data, but has yet to be approved.
  • Research: namely, using anonymised transaction-level trade data to establish definitive findings on the extent of misinvoicing, up to and including the scope for criminal investigation and prosecution. With Prof Simon Pak, co-author of the seminal US Congress study, TJN has been involved for some time in one such effort with a major commodity exporting country. The technical approaches are available for existing customs data, and we are of course open to involvement in additional studies and/or to providing advice to customs statisticians etc.

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