Trade Misinvoicing in Chile
November 2, 2020
By Sue Ryu
In resource rich, commodity-dependent developing nations such as Chile, the issue of trade misinvoicing is not only highly prevalent, but of great negative consequence for public welfare.
Chile ranks on the higher end of the GDP per capita and Human Development Index spectrum of Latin America, though it is still considered a developing country by the International Monetary Fund. And despite low levels of corruption in Chile, trade misinvoicing still occurs.
Trade misinvoicing occurs when individuals or companies intentionally falsify export and/or import invoices, with the ultimate goals ranging from tax evasion to trade-based money laundering.
Several underlying characteristics of the commodity trade in developing countries—under-staffed and under-resourced customs departments, lack of proper and sufficient oversight, coupled with state-ownership of many extractive companies and the complex influence of international trade partners — invite opportunities for trade misinvoicing as well as rent-seeking by public officials.
In Chile, these conditions play out in the nation’s dominant industry: the copper business. The Chilean Copper Commission reported that in 2018, copper constituted 48.2% of Chile’s total exports, with the larger, umbrella category of minerals totaling 55.8% and US$42.1 billion. The economic importance and susceptibility of Chile’s most crucial natural resource industry to misinvoicing urges scrutiny.
As disclosed in Global Financial Integrity’s report, “Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008-2017,” Chile clocked in with a $14.5 billion value gap in trade with all global partners in 2017. GFI calculates this value gap, or the difference between values of imports and exports between partner nations, through analysis of each country’s reported trade data. This means there is $14.5 billion unaccounted for in trade records between Chile and its partners.
Other studies have pointed specifically to the vulnerability of the copper industry. A 2016 United Nations Conference on Trade and Development (UNCTAD) publication concluded that there was widespread copper export overinvoicing in Chile, particularly with some of its largest trade partners such as Japan, China, and the Netherlands.
A subsequent case study of the same industry published by the Economic Commission for Latin America and the Caribbean (ECLAC) showed chronic export underinvoicing, especially in trade with China. The difficulty pinpointing the direction of misinvoicing from national data and the consequent contradictions in reports is why GFI uses the value gap terminology, which takes only the absolute difference. Nonetheless, there are certainly irregularities in Chile’s trade, as the table below shows.
|Chile and China Trade Data (2013-2017, FOB trade values*)|
|Chile’s Declared Copper Exports to China||$69,515,443,900|
|China’s Declared Copper Imports from Chile||$71,624,635,458|
|Value Gap in Dollars||$2,109,191,559|
Source: UN Comtrade data, Accessed September 2020. *FOB values calculated using CIF/FOB factor of 1.06. HS Codes 2603 and 74.
The ECLAC linked the majority of the export underinvoicing in their study to a deal between Chile’s state-owned copper corporation, CODELCO, and a state-owned Chinese metal and mineral company, China Minmetals Corporation. In 2006, in return for a Minmetals investment of $550 million in the development of the Gaby mine in northern Chile, CODELCO agreed to supply Minmetals with copper for 15 years at a rate below the market copper price.
But in 2016, questioning of CODELCO by the Chilean tax authority on issues of tax evasion and structure caused CODELCO to pull out of Copper Partners Investment Ltd., the Bermuda-located joint venture created between CODELCO and Minmetals. Concerns arose about the nature of the CODELCO and Minmetals deal, chiefly regarding the motivations behind selling to a foreign company at such a loss to Chile.
Foreign investors like Minmetals were taxed at a rate of 35% to 42% under Chile’s Decreto Ley 600 of 1974, while state-owned companies such as CODELCO paid additional public entity taxes. Therefore, there were many potential incentives for domestic companies to underinvoice their exports and set up tax-haven ventures with foreign investors that could be used to facilitate transfer pricing.
The CODELCO-Minmetals situation is far from explicitly suspicious, but it both introduces the level of skepticism needed in examining Chile’s copper industry and illuminates the complexity of trade misinvoicing as a tool for facilitating illicit financial flows. Other cases in Chile, like a recent one in which 83 tons of stolen copper cable would have been exported to China with falsified invoices, emphasize these points.
Additional cases and scandals encompass the intricacies of trade and misinvoicing in Chile. Past presidential candidate Marco Enríquez-Ominami and ex-advisor Cristián Wagner were accused of falsifying invoices in conjunction with the high-profile, international OAS company scandal; the Milicogate embezzlement case in which Chilean military officers were investigated for allegedly falsifying invoices totaling $200 million and implicating domestic, Israeli, and US companies, made all the more complicated by the funding of the military by state-owned copper; and even cases of distributors smuggling or falsifying invoices to get cigarettes into and out of Chile while evading taxes totaling up to$57 million, emphasize that tax evasion is a big motivator behind illicit trade.
Smaller criminal cases show that trade-based money laundering in Chile often is used to obscure drug trafficking: in Caso Pilar del Norte, a fruit import/export business was allegedly used to launder drug proceeds between Mexico and Chile; similarly, in Caso Yaupel, a fruit importer and distributor reportedly laundered money digitally between Colombia, Germany, Ecuador and Chile. In a related case, Caso el Hermano de Yaupel, the importer’s brother expanded the trade-based money laundering scheme into Hungary, Panama, and the Netherlands. Other cases range from embezzlement, human trafficking and the drug trade across Latin America and other global partners.
Manuel Melero, President of Chile’s National Chamber of Commerce, said “as an Observatory of Illicit Commerce we are deeply concerned with the effects of the organized crime that is behind smuggling and counterfeiting.”
As these cases illustrate, the issue of trade misinvoicing in Chile is not simply a matter of lost revenue, but a matter of governance, transnational security, and public welfare.
Sue Ryu is a fall 2020 intern with Global Financial Integrity and a recent graduate of Ohio University, where she studied Economics and Anthropology.