Fraudulently under-reporting the price, quantity of a product or service and the value of a commercial transaction in invoices are resulting in African and developing countries missing out on billions in tax revenues, foreign exchange and ultimately development.
A new study by the United Nations Conference on Trade and Development (UNCTAD) shows how trade misinvoicing in some commodity-based African countries caused these countries to lose as much as 67 percent of income from their exports.
The UNCTAD report, called “Trade Misinvoicing in Primary Commodities in Developing Countries”, reported for example over the 2000 to 2014 period under-invoicing of gold exports from South Africa amounted to US$78.2 billion, or 67 percent of total gold exports of the country.
According to South African official data, only 4.6 percent of the country’s total gold exports go to India.
However, India’s equivalent data showed that 35 percent 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 US$3bn to China and US$1bn to Japan. Iron ore exports from South Africa to the Netherlands are on the other hand over-invoiced by US$1.4bn. Substantial amounts of iron ore, recorded to have been exported to the Netherlands, did not arrive in the Netherlands.
Zambia experienced a cumulative under-invoicing of its copper exports of US$12bn over the 1995 to 2014 period. Of Zambia’s total copper exports to China over the 1995-2014 period US$5.6bn or 61 percent was under-invoiced. Zambian copper exports under-invoicing to China represented 10 percent of Zambia’s total copper exports.
Zambia’s copper exports to Italy were under-invoiced to the tune of US$2bn. In the official Zambian copper exports to Italy, only US$3.9m was recorded. Zambia’s copper exports to South Korea were underinvoiced by US$3.9bn; yet only US$358m was declared.
Zambia’s copper exports to Switzerland shows an over-invoicing of US$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 US$69.7bn and to Germany US$23.9bn.
When importing oil a similar pattern of misinvoicing is prevalent. Total oil import underinvoicing into Nigeria amounted to US$45.6bn during the 2006-2014 period. Oil imported from the Netherlands to Nigeria was underinvoiced to the amount of US$24bn. However, oil shown as imported from the Netherlands (recorded as such in the Netherlands) do not appear to reach Nigeria, as it is not recorded in Nigeria as having been received.
The UNCTAD study showed that in the case of trade with the US, the cumulative capital outflows from Nigeria as a result of trade misinvoicing amounts to US$66.8bn, with Germany US$24.1bn and with Switzerland US$7.3bn. The report showed that 29 percent of cocoa exports from the Ivory Coast do not show up in the books of the Netherlands.
The UNCTAD study reported that in many cases trade misinvoicing or illegal or illicit trade 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”.
Separately, Global Financial Integrity, the civil society lobby group, has reckoned that trade misinvoicing, which it calls trade-based money laundering, is the largest component of illicit financial outflows from developing and African countries, causing massive capital outflows and tax losses.
“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) organisation warned in the past.
There are a number of reasons for why the practice of trade misinvoicing is so pervasive. 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-oriented industrialisation (export oriented industrialisation 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 authorisations and controls, in order to speed up execution and settlement of transactions”.
Trade misinvoicing is particularly prevalent in countries with high levels of corruption, where companies and individuals use misinvoicing to escape red tape, and corrupt public officials often facilitating such illegal or illicit trade.
The UNCTAD report stated that high value, but low weight commodities such as gold and diamonds appear to be more vulnerable to trade misinvoicing. 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 makes it 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 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 and it is therefore difficult for poorly resourced African governments to monitor their activities.
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.
African governments, civil society groups and citizens should make stopping the siphoning off of financial resources through corrupt means an urgent priority.
*This article was published in African Independent. To view the article on their website click here.