WASHINGTON, DC – The latest issue of The Economist profiles the problem of trade-based money laundering, which drains hundreds of billions of dollars from developing economies each year, according to Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. The prestigious financial news magazine cites heavily from GFI’s research and experts, while warning that efforts to tackle trade misinvoicing are “the weakest link” in the international effort to fight illicit financial flows.
“The misinvoicing of trade transactions is the most widely used method for transferring dirty money across international borders,” said GFI President Raymond Baker, a longtime authority on financial crime. “Illegally siphoning at least US$763bn from developing countries in 2011, trade misinvoicing—a prevalent form of trade-based money laundering—accounts for nearly 80 percent of all illicit financial outflows that can be measured using available data.”
“Trade misinvoicing is a massive problem that hampers economic growth, decimates government revenues, and facilitates myriad criminal enterprises,” said GFI Junior Economist Brian LeBlanc, who is quoted in The Economist’s story. “It is used to launder the proceeds of human trafficking, terrorist financing, and drug dealing; it is used hide the ill-gotten-gains of kleptocrats; and it is routinely used by companies and individuals to evade taxes and customs duties.”
How It Works
Trade misinvoicing involves the deliberate manipulation of commercial invoices in order to misreport the value of a transaction, thereby illegally shifting money across international borders without detection.
"The basic technique is misinvoicing. To slip money into a country, undervalue imports or overvalue exports; do the reverse to get it out. A front company for a Mexican cartel might sell $1m-worth of oranges to an American importer while creating paperwork for $3m-worth, giving it cover to send a dirty $2m back home. One group of launderers was reportedly caught exporting plastic buckets that cost $970 each from the Czech Republic to America.
"To lessen the risk of discovery the deal may be sent via a shell company in a tax haven with strict secrecy rules. This may mean using a specialist ‘re-invoicing’ firm to ‘buy’ the oranges at an inflated price with an invoice to match and charge the importer the true price. The point is to get paperwork to justify an inflated transfer to the seller. Re-invoicers are used by multinationals to shift profits around, which gives them a veneer of respectability, says Brian LeBlanc of GFI—but they also ‘feed a giant black market in the offshore manipulation of paperwork’."
The following chart from GFI presents a hypothetical incident of trade misinvoicing involving India, Mauritius, and the United States:
Need to Prioritize Curtailing Trade Misinvoicing
Despite the massive scale of the problem, The Economist notes that efforts to tackle trade-based money laundering have been weak. The article states:
“International efforts to stamp out money laundering have targeted banks and money-transmitters, and the smuggling of bulk cash. But as the front door closes, the back door has been left open. Trade is ‘the next frontier in international money-laundering enforcement,’ says John Cassara, who used to work for America’s Treasury department.”
GFI estimates that trade misinvoicing from developing countries has grown at an inflation-adjusted 8 percent per year over the last decade, significantly outpacing economic growth.
“Governments and donors have not fully come to terms with this problem yet,” noted Mr. Baker. “While significant momentum has emerged on other aspects of illicit flows—such as tax information exchange and curtailing anonymous shell companies—trade-based money laundering remains the elephant in the room.”
Case of India
One country that is attempting to curtail trade misinvoicing is India. The Indian government announced this week that, during the 2013-2014 fiscal year, it had detected 694 cases of "commercial fraud involving customs duty evasion" worth approximately US$512 million. The government sent notices to importers demanding US$433 million worth of unpaid customs duties and ended up recovering approximately US$208 million in revenue.
Research by GFI—which published a country-specific case-study of illicit financial flows on India in November 2010—has been cited hundreds of times in India by government officials and top news outlets, galvanizing public opinion and pushing Indian policymakers to focus on the topic of illicit financial flows and trade misinvoicing.
Notes to Editors:
GFI spokespersons are available to comment on the trade-based money laundering. To schedule an interview with Mr. Baker, Mr. LeBlanc or other GFI spokespersons, contact Clark Gascoigne at +1 202 293 0740 ext. 222 (Office) / +1 202 815 4029 (Mobile) / email@example.com.
Click here to read an HTML version of this press release on our website.
Click here to read the article in the May 3, 2014 issue of The Economist, titled “Trade and Money Laundering: Uncontained – Trade is the weakest link in the fight against dirty money”.
Click here (.xls) for GFI’s latest data on trade misinvoicing, broken down for each developing country.
Click here for an interactive chart displaying GFI’s data on trade misinvoicing from developing countries between 2002 and 2011.