Truths and assumptions about misinvoicing; it’s not that simple

Trade misinvoicing – misrepresentation of the value, volume or commodity in cross-border transactions – is a known phenomenon, but the amounts ‘lost’ to this form of illicit financial flow are in dispute.

According to a report by Global Financial Integrity (GFI) misinvoicing drains around $800 billion from developing countries annually. A high level panel on illicit financial flows from Africa estimates that those from a few commodities alone amount to $50 billion in Africa each year.

However, the Centre for Global Development (CGD) as well as the South African Institute of Tax Professionals (Sait) indicate that the methodology used to get these figures may be “problematic”.

Gaps and mismatches

GFI uses a methodology based on adding up gaps and mismatches in trade data to estimate misinvoicing.

While it is true that customs fraud is real, it is not clear that the influential and widely quoted figures arrived at in this manner can be directly interpreted as trade misinvoicing, CGD said in a 2018 report. It explains that large scale estimates of trade misinvoicing rely on comparing trade statistics – looking at the declared value of transactions at one end of the trade with the value declared at the other.

This mirror-data approach has been shot out of the water in terms of gold exports from South Africa.

A 2016 report by the United Nations Conference on Trade and Development (Unctad) calculated that all gold exports from South Africa leave the country “unreported”.

The UN agency accused mining companies of smuggling billions of dollars of gold. The South African Chamber of Mines and the South African Revenue Service (Sars) disputed the findings.

The chamber commissioned an independent report which found that the mining companies and public agencies did report gold exports, but not in the right format for the UN International Trade Statistics Database (Comtrade).

The Unctad report also analysed mismatches in international trade data in silver and platinum as well as iron ore from South Africa.

In the case of silver and platinum exports, the report describes the scenario where the industry swung from legal compliance to massive undetected smuggling and then back again.

However, the Comtrade database did not have records of South African platinum exports for 2000 and 2002. Sars statistics show normal levels of platinum exports during that time.

“The Unctad study attributes several billions of dollars’ worth of under-invoicing by exporters to the gap in the Comtrade data for these two years.”

Reasons for mismatches

In terms of iron ore, the study found a drastic shift from apparent under-invoicing to over-invoicing. It appears that the mismatches were due to transport costs – the price of iron ore was rising until 2009 and then started to fall gradually, while shipping costs fell steeply.

“By looking at individual commodities it is possible to see that price volatility, transit and merchanting trade, and the use of bonded warehouses can result in large trade data discrepancies arising from legitimate trade,” the CGD report notes.

Côte d’Ivoire (Ivory Coast) has often been highlighted as a country suffering from “large illicit flows” from its cocoa trade.

Some bilateral mismatches were recorded where cocoa from the Ivory Cost was exported to Estonia, Belgium and the Netherlands but did not arrive there. Meanwhile, a larger quantity of cocoa arrived in Germany, Russia, and France than reported as having been exported to these countries. It turned out that cocoa bean wholesalers in the former countries bought the beans and delivered them to chocolate manufacturers in the latter.

Simple data, full picture?

The CGD report notes that the idea that illicit financial flows can be reliably identified through simple calculations using publicly available data appears over-optimistic.

“They create perceptions that major companies doing international business in developing countries must be getting away with hiding vast illicit flows, while customs, revenue and statistics agencies in developing countries must all be utterly incompetent or complicit,” it adds.

Sait CEO Keith Engel says this is a very important narrative for South African and other multinationals operating in Africa. 

Many government officials and international agencies are operating under the assumption that vast sums are being taken from Africa via transfer pricing and other multinational tax gimmicks.

“It is asserted that the numbers by GFI indicate a new method of post-colonial extraction,” says Engel. “While no one doubts that the findings require careful review by the revenue authorities, the belief of vast sums lost could be misdirected.”

He adds that the net result could lead to unnecessarily contentious tax disputes and even present a risk to foreign investment.