Authorities likely to scrutinise invoicing more closely

Revenue authorities can expect to come under pressure from governments to examine documentation for cross-border trade more closely following the publication in December 2012 of a Global Financial Integrity review financed by the Ford Foundation. The Task Force on Financial Integrity and Economic Development recommends that authorities “require that the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mis-pricing in an attempt to avoid duties or taxes has taken place and that the transaction is priced using the OECD arms-length principle”. Formed in 2009, the Task Force is described as a global coalition of more than 50 governments as well as civil society organisations to advocate improved transparency and accountability in the world’s financial system. Trade mis-invoicing is the preferred method of transferring illicit capital from all regions except the MENA (Middle East and North Africa) region. Here it accounts for “only” 37% of total outflows for the decade ending 2010, according to the report Illicit Financial Flows from Developing Countries 2001- 2010, which found that fraudulent outflows from Africa increased by 23.8% a year on average over the decade under review. In declining order of dominance, the share of trade misinvoicing in total outflows by region is Asia (94%), Western hemisphere (84%), Africa (65%), and developing Europe (53%). Large current account surpluses of countries in the MENA region driven by crude oil exports entail larger outflows through what authors Dev Kar and Sarah Freitas term balance of payments leakages. In the case of Europe, the relatively large unrecorded outflows from the Russia’s balance of payments dominate regional outflows. The countries with the ten highest illicit outflows are China, Mexico, Malaysia, Saudi Arabia, the Russian Federation, the Philippines, Nigeria, India, Indonesia, and the United Arab Emirates, in declining order of magnitude. South Africa is ranked 12th. An estimated US8.3 bn flowed illicitly out of the country in the decade under review. Angola is ranked as the next sub-Saharan country, in 40th position. One of the hardest-hit countries is Zambia, which was singled out by Freitas in an article for Trustlaw. “Our research finds that $8.8 billion left Zambia in illicit financial flows between 2001 and 2010. Of that, $4.9 billion can be attributed to trade misinvoicing, which is a type of trade fraud used by commercial importers and exporters around the world. This is a very serious problem. Zambia’s GDP was $19.2 billion in 2011. Its per-capita GDP was $1 413. Its government collected a total of $4.3 billion in revenue. It can’t afford to be haemorrhaging illicit capital in such staggering amounts,” she says. There is a clear link between crime and lack of control over financial flows. “In previous reports, we’ve proven that illicit financial flows drive the underground economy. This means that as criminals and tax evaders avoid law enforcement and move their money overseas, it becomes easier for them to operate in Zambia. The underground economy becomes bigger, which makes it even more difficult for Zambia’s government to collect taxes. This in turn drives illicit financial flows further, completing the vicious feedback loop,” she says. INSERT Trade misinvoicing culprits Asia 94% Western hemisphere 84% Africa 65% Developing Europe 53%