Trade-based money laundering (TBML) and tax evasion
Trade-based money laundering (TBML) and tax evasion contributed to a nearly $9-trillion loss for developing countries between 2008 and 2017, according to a report published on Tuesday.
Washington, DC-based Global Financial Integrity (GFI) analysed inconsistencies in import and export values between a developing economy and its developed economic partner. Adding all the differences for 135 of the former and 36 of the latter, comprising nearly 5,000 trade relationships, GFI arrived at a $8.8-trillion figure.
This value gap has been attributed to trade misinvoicing, which is the deliberate falsification of the price, quantity or other details of a transaction. According to GFI, this is done by parties wishing to conceal the movement of illicit wealth out of a developing country and into a more secure developed country.
Although the report noted that it is not possible to ascertain why the invoices were falsified, why the gaps arose or who is to blame, it stressed that hiding illicit wealth from national authorities is a “major impetus” that makes individuals engage in trade misinvoicing.
“GFI believes the greater ability to store wealth, secure assets and hide illicit finances offered by the advanced economies and ‘secrecy jurisdictions’, such as tax havens and offshore centres, are the overriding ‘pull factors’ driving much of the world’s trade misinvoicing activity,” the report said
In 2017 alone, the latest year for which GFI has data, the aggregate value gap amounted to $817.6 billion.
Of the 135 developing countries, the five with the biggest value gaps over the 10-year period have stayed the same: China, Mexico, Russia, Poland and Malaysia. China had the biggest value gap in trade with developed countries, at $323.8 billion. However, it drops out of the number one spot when comparing the gaps as a percent of total trade.
In this case, it is The Gambia that has the largest gap as a percentage of its total bilateral trade with the 36 advanced economies, at 37.3%, followed by Gabon, Togo, The Maldives and Malawi.
Comparing value gaps between developing regions and the developed countries, Asia had the largest, at $476.3 billion, while sub-Saharan Africa had the smallest gap, at $27.2 billion. Sub-Saharan Africa had the biggest average gap over the 10 years as a percent of its total trade, at 21.9%.
The report also looked at which products traded between the 135 developing and 36 developed countries in the 10 years had the biggest value gaps. It found electrical machinery, at $153.7 billion, topped the list, followed by mineral fuels and other machinery.
GFI’s conclusion is that trade misinvoicing is an enormous problem of huge ramifications across the developing world, and that it equally afflicts bilateral trade between developing countries as well as between developing countries and developed countries.
“The main point of the report is just to show that the magnitude of the overall problem is still so huge,” said senior GFI economist Rick Rowden, in an interview. “Each one of these value gaps represents the loss of revenue for each country, which isn’t so much a problem for the rich countries but it is a huge problem for the developing countries.”
One reason for this magnitude is that it is very difficult to detect fraudulent trading activity, according to Anton Moiseienko, a research fellow at RUSI’s Centre for Financial Crime and Security Studies.
“If a client asks a bank to wire money as payment for goods, it’s very difficult for the bank to say whether that payment is adequate, too much or too little,” he said. “Because it won’t necessarily know what the goods are, what the quality is, and it can be difficult to price them anyway. So banks just don’t have enough information to be able to say, ‘this is trade-based money laundering.'”
But this is different from trade financing, where banks can request more documents as a condition for financing trade, Moiseienko added. “They can ask questions about the business, about the kinds of goods that they trade. The bank has more information and so more opportunity to detect money laundering.”
Because a very small proportion of trade is being financed by banks, this information is mostly unavailable.
While access to the right data is a barrier in detecting this type of activity, more can also be done to empower customs officials, according to Alexandria Reid, also a research fellow at RUSI.
“Good data—both in terms of quality and quantity—is a barrier to detecting TBML, but not necessarily the main barrier,” she said. “In most cases, it’s actually the fact that customs are traditionally focused on the detection of misinvoicing as a part of their revenue collection functions, so they’re not necessarily looking to detect TBML, and they’re not necessarily mandated to detect it either. This means that very few systems and processes are set up to empower customs to detect TBML.”
Introducing a law enforcement element to customs’ traditional tax collection role, especially in the less regulated free trade zones, is one of the recommendations made by GFI in the report. This would empower them to prioritise fraudulent trading activity. It also suggested making trade misinvoicing illegal in the countries where this has not yet been done.
Hiba Mahamadi is a freelance journalist based in the UK.
Drawing on deep subject matter expertise and our many customer and partner relationships globally we deliver valuable insights through weekly KYC newsletters, white papers, podcasts and events.Explore the Knowledge Hub
KYC360 Weekly Roundup
KYC360 Weekly Roundup