Trade misinvoicing costs South Africa R325bn a year

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.