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Trade misinvoicing costs South Africa R325bn a year

Report confirms the continued inability of governments to stop capital flight and illicit outflows through the international trading system.
The pandemic created new opportunities to illicitly move wealth out of developing countries, as well as new incentives to do so. Image: Bloomberg

US think tank Global Financial Integrity (GFI) has published its 2021 report on Trade-Related Illicit Financial Flows in 134 Developing Countries, for the years 2009 to 2018.

Trade misinvoicing remains a major challenge for tax and customs authorities around the world, averaging a global loss of some $1.4 trillion per annum.

It is orchestrated when importers and exporters deliberately falsify the declared value of goods on the invoices submitted to the customs authorities.

The difference between what South Africa reported for trade data in 2018 compared to what its trading partners had reported – referred to as the value gap – is estimated to be $22.142 billion.

The average value gap over 10 years is estimated to be $20.435 billion. At the current exchange rate of R15.88 to the dollar, this amounts to R325 billion per annum.

Falsifying invoices or misinvoicing evades tax and/or customs duties, enables the illicit transfer of money across national borders, and circumvents currency controls. The profits from this illicit activity will be hidden in offshore bank accounts.

Trade misinvoicing is one of the largest components of measurable illicit financial flows (IFFs). Other types include tax evasion (as where an expense is fabricated) and smuggling.

Read:
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Methodology of determining the value gap

GFI compiled and analysed 10 years of international trade data for 134 developing countries and 36 advanced economies from the global commercial trading system, which is reported by governments to the United Nations (UN). Developing countries that had not reported sufficient annual trade data to the UN were excluded from this report.

The objective of the report is to identify the mismatches, or value gaps, between what any two countries had reported regarding their trade with each other. GFI analysed their trade with a set of 36 advanced economies, as well as their trade with all of their global trading partners for each year over the 10-year period to identify the potentially misinvoiced import/exports.

GFI encapsulated all of the identified value gaps for all traded products between countries each year, while applying a series of filters to ensure unmatched trades are omitted.

For example: If country A exported $200 million gold to country B, but country B reported having imported only $150 million gold from country A that year, this would reflect a mismatch, or value gap, of $50 million in the reported trade of this product between the two trading partners for that year.

Sub-Saharan Africa

Whereas the GFI report covers 36 advanced economies and 134 developing economies, this article only discusses the data of sub-Saharan Africa (SSA).

The average value gap identified in US dollars within bilateral trade between sub-Saharan Africa and the set of 36 advanced economies over the 10-year period is $25.2 billion.

GFI cautions that the available data in the UN database “is not perfect and country figures are not exact”, but that the value gap estimates provide “an approximation of the degrees of trade misinvoicing happening between any two countries”.

The analysis also does not indicate which side of the transaction the shipment was mispriced.


The value gap in sub-Saharan Africa in dollars and as a percentage of total trade

2016 2017 2018 10-year average
Value gap $22.6 billion $26.2 billion $24.4 billion $25.2 billion
% of total trade 20.5% 21.4% 19.5% 21.7%

 


Value gaps in trade between sub-Saharan Africa (SSA) and Developing Asia (DAsia), Developing Europe (DEur), Middle East and North Africa (Mena), and Western hemisphere (WHem)

2016 2017 2018 10-year average
$billion $billion $billion $billion
DAsia/SSA 18.1 18.4 19.7 15.7
DEur/SSA 1.5 2.2 2.1 1.5
Mena/SSA 3.6 3.8 4.0 2.6
WHem/SSA 1.0 1.2 0.9 1.4
SSA/DAsia 18.1 18.4 19.7 15.7
SSA/DEur 1.5 2.2 2.1 1.5
SSA/Mena 3.6 3.8 4.0 2.6
SSA/WHem 1.0 1.2 0.9 1.4

The Developing Asia region and its trade with all of the other developing country regions presents the largest value gap, most likely reflecting the role played by China within this region.

Value gaps between sub-Saharan Africa and the various regions as a percentage of each region’s total trade with the other

2016 2017 2018 10 year average
% % % %
DAsia/SSA 23.2 23.0 23.8 22.8
DEur/SSA 22.2 26.2 23.5 23.3
Mena/SSA 25.9 24.5 22.5 23.4
WHem/SSA 16.8 17.7 18.2 19.4
SSA/DAsia 23.2 23.0 23.8 22.8
SSA/DEur 22.2 26.2 23.5 23.3
SSA/Mena 25.9 24.5 22.5 23.4
SSA/WHem 16.8 17.7 18.2 19.4

Trade misinvoicing during Covid-19

The value gaps in international trade data illustrates the inability of governments to stop capital flight and illicit outflows through the international trading system.

The value of total world merchandise exports decreased from $19 trillion in 2019 to $17.6 trillion in 2020 (per the United Nations Conference on Trade and Development).

“Many countries faced declining exports, a halt to tourism and a slowing of remittances from overseas workers and, in some cases, severe food crises.”

The Covid-19 pandemic increased opportunities for crime, smuggling and illicit financial flows, and created new incentives to illicitly move wealth out of developing countries.

Foreign investors may have “pursued unofficial means of illicitly moving wealth out as well, including through the trade misinvoicing channel”.

Corrupt officials as well as counterfeiters and smugglers were afforded new opportunities to exploit inefficiencies in customs departments. For example, the sudden increase in health-related cargo made it difficult for customs officials to adequately scrutinise containers and the related customs documentation.

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The First Law of Thermodynamics says that energy can neither be created nor destroyed, only altered in form.

I often wonder how this applies to global finance. The dollars don’t get used to start a braai and they must end up somewhere; Swiss banks? Art purchases at Sotheby’s? Ferrari or Bugatti showrooms? Diamonds at Cartier or Graff? Stockholdings in Tesla?

I don’t think the trickle-down effect applies here and perhaps this is why there is an exponential increase in Asian multi-millionaires. “As of July 2020, Asia-Pacific accounted for the highest number of ultra-high net worth individuals, with 831 (38%) of the super rich residing in the region, where billionaire wealth now totals $3.3 trillion, according to Swiss bank UBS’ new Billionaires Insights Report 2020.”

It used to be a million here, a million there and soon your’e talking real money, but now we’re at trillions.

The easiest is transfer pricing in groups. A post box in a tax haven charges IP, licensing, brand and management fees like crazy.

Suddenly when say the SA branch gets bought out, the SA branch operates just fine without the very big journal entries…

I’ve heard of local banks and telecomms companies paying FAR more for software licenses via group purchasing (in Bahamas or whatever) than they used to pay directly.

Only way to stop is have the hired help sign off personally that the group charges fairly approximate what they would be willing to pay a third party for those fees. I wonder how many CFO’s will sign off when they face jail.

End of comments.

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