Global Financial Integrity

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Trade-Related Illicit Financial Flows in 134 Developing Countries 2009-2018

In this report, Global Financial Integrity (GFI) documented the international problem of “trade misinvoicing”—when importers and exporters deliberately falsify the declared value of goods on the invoices they submit to their customs authorities in order to illicitly transfer money across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts. By over-pricing or under-pricing the declared value of imports or exports, traders illicitly move wealth across international borders by hiding it within the regular payments for commerce in the international trading system. Trade misinvoicing activity represents a major global challenge on two fronts: for customs and tax authorities around the world, particularly in developing countries, trade misinvoicing reflects the loss of USD billions in uncollected trade-related tax revenues every year; and for law enforcement, trade misinvoicing facilitates illicit financial flows (IFFs) throughout the global economy.

GFI explored the magnitude of this problem by examining the latest international trade data officially reported by governments to the United Nations in order to estimate the scale of trade misinvoicing activity occurring within the global commercial trading system. Trade misinvoicing is one of the largest components of measurable illicit financial flows (IFFs). We analyzed the last 10 years of trade data for the 134 developing countries for which there is sufficient data available in the United Nations Comtrade database to identify the mismatches, or “value gaps,” between what any two countries had reported regarding their trade with each other. In examining the bilateral trade data for each of the 134 developing countries, we looked at both 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 ten-year period of 2009-2018 in order to identify and calculate the value gaps found in the official data. The value gaps, or mismatches in international trade transactions, indicate that developing countries are not collecting the correct amount of trade-related taxes and duties that are owed, leading to potentially massive amounts of revenue losses. While these value gaps are only estimates of misinvoicing, they indicate the scale of the problem.

It is important to note that while the term “illicit financial flows’’ (IFFs) tends to include many types of activities, such as tax evasion, smuggling, etc., this report only focuses on trade misinvoicing, or the trade-related aspects of illicit financial flows. It does not address all forms of IFFs. The list of countries used in this report are based on a classification system established by the International Monetary Fund (IMF), which includes categories of 148 developing countries and 36 advanced economies. However, 14 of the 148 developing countries listed in the IMF’s classification were excluded from this analysis because they have not reported sufficient annual trade data to the United Nations over the ten-year period of 2009-2018, leaving a set of 134 developing countries on which to focus this report.

Key findings include:

US$835.0 billion

The sum of the value gaps identified in trade between 134 developing countries and a set of 36 advanced economies in 2018, the most recent year for which comprehensive data are available.

US$1.6 trillion

The sum of the value gaps identified in trade between 134 developing countries and all of their global trading partners in 2018, the most recent year for which comprehensive data are available.

China – US$305.0 billion

Poland – US$62.3 billion

India – US$38.9 billion

Russia – US$32.6 billion

Malaysia – US$30.7 billion

Developing countries with the five largest value gaps identified in US Dollars in the bilateral trade between 134 developing countries and 36 advanced economies in 2018.

The Gambia – 45.0%

Malawi – 36.6%

Suriname – 31.9%

Kyrgyzstan – 30.6%

Belize – 29.2%

Developing countries with the top-five largest value gaps identified as a percent of total trade in the bilateral trade between 134 developing countries and 36 advanced economies in 2018.

Developing Asia – US$388.6 billion

Developing Europe – US$158.6 billion

Western Hemisphere – US$97.4 billion

Middle East & North Africa – US$58.6 billion

Sub-Saharan Africa – US$25.2 billion

The average value gaps identified in US Dollars within the bilateral trade between five developing country regions and the set of 36 advanced economies over the ten-year period of 2009-2018.

In order to identify a country’s potentially misinvoiced imports/exports, GFI conducted a value gap analysis by examining official data submitted by governments each year to the United Nations Comtrade database. GFI used a customized program to conduct a partner-country analysis, which compares what any set of two trading partners each reported about their trade with one another in a given year in order to identify any mismatches or value gaps in the officially reported trade data. For example, if Ecuador reported exporting US$400 million in bananas to the United States in 2016, but the US reported having imported only US$375 million in bananas from Ecuador in that year, this would reflect a mismatch, or value gap, of US$25 million in the reported trade of this product between the two trading partners for that year. GFI then sums 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.

While the available data in the United Nations database is not perfect and country figures are not exact, these value gap estimates are the result of rigorous analysis of such data and provide an order of magnitude view of each country’s trade misinvoicing challenge, and give an approximation of the degrees of trade misinvoicing happening between any two countries. When the identified value gaps are totaled, the analysis offers an estimate of the size of the global problem of trade misinvoicing which is occurring in the international commercial trading system. Overall, the analysis shows that trade misinvoicing is a persistent problem across developing countries, resulting in potentially massive revenue losses – at a time when most countries are struggling to mobilize domestic resources to achieve the internationally-agreed upon UN 2030 Sustainable Development Goals (SDGs) and address the economic slowdown related to the COVID-19 pandemic.

Further, because it is difficult to know which side of the transaction mispriced the shipment, this report seeks to highlight the overall scale of the total value gaps identified in global trade that can be empirically identified in the UN data. In doing so, we intend to underscore the magnitude of the problem at the global level in terms of lost tax revenues for governments around the world, particularly the developing countries which rely disproportionately on trade taxes as a key part of their national revenue base. Using this approach to identify value gaps, the report shows the results of examining the bilateral trade data for 134 developing countries’ bilateral trade with 36 advanced economies for each year over the ten-year period of 2009-2018, reflecting 4,824 bilateral trade relationships in the UN database. “The report also analyses the bilateral trade data for 134 developing countries’ bilateral trade with all of their global trading partners over the period, and conducts a regional-level analysis as well.” The findings are presented in two ways: a) in US Dollars; and b) as a percent of total trade between each developing country and the set of 36 advanced economies.

The analysis is intended to help developing countries understand the magnitude of their misinvoicing activity – in dollar terms and as a percentage of total trade – in order to highlight potentially massive revenue losses due to uncollected taxes and duties. In the final section of this report, GFI provides a list of specific policy recommendations for governments to consider adopting in order to more effectively address the problem of trade misinvoicing in particular, and the broader problems of IFFs in general. The recommendations include both steps that all countries can take at the national level as well as steps that can be taken in coordination with others at the international level.