12 May 2014

Africa: Trade Misinvoicing Costs African Countries Billions

Washington — Misinvoiced 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."

The report, sponsored by the Danish foreign ministry, represents the first comprehensive study on the magnitude of the loss of tax revenue for these countries.

Trade misinvoicing 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.

"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.

Further, misinvoiced trade is a significant source of illicit capital flight.

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 misinvoicing 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.

"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 revenues that the governments lost due to misinvoiced trade and illicit money flows could help fill these gaps.

"The problem lies in a lack of transparency and poor data reporting. And publishing data is important," Brian LeBlanc, who co-authored the report, told IPS.

He also noted statistics presented at last week's launch of the latest report by the African Progress Panel, a think tank chaired by former U.N. secretary-general Kofi Annan. It 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.

GIF experts highlighted the importance of governments both domestically and internationally in cracking down against trade misinvoicing.

Thus, the two main objectives of the report are focused on helping governments improve transparency in domestic and international financial transactions and enhancing cooperation between developed and developing country governments to shut down the channels through which illicit money flows.

"A country with weak laws or lax enforcement of money laundering statutes could encourage trade misinvoicing by making it easier to transfer and use the money gained from the illegal transaction," the report says.

According to LeBlanc, particular attention needs to be paid to providing customs officials with "real-time access to pricing data" in order to identify the mispriced and mistraded goods. More pressure should also be placed on auditing firms to inform governments of misinvoiced trade.

Customs authorities often lack the means, or, in some cases, the will to collect the data they need to understand the magnitude of illicit flows of capital due to trade misinvoicing or the tax revenue and investment capital that are lost as a result.

Governments need to track the direction of trade flows, detect if the invoices are altered in different jurisdictions, and understand how the values of items included in invoices compare to the world market for the products involved.

"Many countries don't have access to world market prices for different commodities, this information asymmetry makes it difficult to make progress in curtailing misinvoicing trade and illicit financial flows," Clark Gascoigne, communications director at GIF, told IPS.

Not only does the information asymmetry deprive governments of tax revenues, it also hinders their efforts at halting illicit flows.

"A lack of domestic enforcement of regulations against deliberate trade misinvoicing, as well as unclear international regulations, exacerbates the illicit money flows," LeBlanc said.

The five countries are nonetheless making some progress. The establishment of electronic customs systems and, in some cases, the creation of financial intelligence units (FIUs) hold some promise.

The World Trade Organisation (WTO) could also be used as an important enforcement mechanism, according to LeBlanc, who also cited a model that has been used with considerable success in the Philippines.

"A final step to curtailing illicit trade transactions and financial flows is a whistle-blowing mechanism, where employees as well as competitors can blow the whistle anonymously if their employers or rivals are engaging in misinovocing trade," LeBlanc told IPS.

He added that it is in the interests of both employees and competitors. And while it is obvious why competitors would benefit from blowing the whistle on their rivals, LeBlanc further elaborates on why it is in the interest of employees of the company.

"There is a misconception that misinvoicing trade results in a better company performance in terms of revenue. It in fact hurts the company," LeBlanc says, 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."

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