The technical term is “trade misinvoicing,” which sounds like a fairly innocuous clerical error. But here’s what it actually means: falsifying the price of goods being shipped to avoid taxes or import duties or to launder money. Here’s another thing it means: Close to $600 billion yearly in what are called “illegal outflows” from 148 developing countries, much of it money lost by governments that otherwise would have collected more on products being shipped out.
But there’s another side to this form of fraud, and that’s where the money goes. It’s headed in some unexpected directions. According to a 2019 study by think tank Global Financial Integrity (GFI):
The country that saw the largest dollar value of illegal inflows from trade misinvoicing was Vietnam, which raked in $22.5 billion in 2015 alone.
The dollar value indicates the value of a dollar in that country — so while other nations like China and Mexico had a higher amount of illegal inflow, the money would be worth more in Vietnam than in China. Other countries bringing in money: Thailand ($20.9 billion), Panama ($18.3 billion) and Kazakhstan ($16.5 billion). The study used data from the International Monetary Fund, as well as United Nations data. Roughly 29 percent of trade from all 148 developing countries was affected by misinvoicing in 2015 in their trade with 36 advanced economies.
The study didn’t delve into causes or specific methods of misinvoicing — it could all be a $22.5 billion mistake, perhaps. But according to Rick Rowden, senior economist at GFI, it isn’t. “We heavily suspect that certain companies are deliberately falsifying their invoices submitted to their customs agencies and port authorities,” he says.
While Asia as a region has a lower percentage of its trade affected (only 25 percent as opposed to 32 percent in sub-Saharan Africa or 28 percent in developing European economies), so much more money is involved that the numbers swiftly become staggering. “One reason that trade misinvoicing may have increased in Vietnam in recent years is because low-technology manufacturing has been leaving China and shifting to Southeast Asia,” says Rowden.
Exports from Vietnam have tripled in value since 2010, and with that comes more misinvoicing. Rowden says recent trade may also be diverted through Vietnam to avoid the tariffs of the current trade war between the U.S. and China. Either way, the taxes not being paid on the misinvoiced trade mean less revenue is available to governments that otherwise could spend the cash on public services like health and education.
“The reason we focus on developing countries is that each of those losses creates such a massive impact,” says Channing Mavrellis, director of GFI’s transnational crime program. So while China lost an estimated $222 billion in illegal trade outflows in 2015, and Mozambique lost only $1.8 billion, Mozambique is likely to feel the loss more. Also, an estimated 9.5 percent of China’s outgoing trade was affected by misinvoicing, compared to more than 48 percent in Mozambique, nearly half its total trade for the year.
Inflows aren’t necessarily positive either. While Vietnam’s $22.5 billion infusion might sound like a good thing, it can stretch the country’s already strapped public resources and bring with it criminal enterprises that thrive on trade fraud.
Vietnam has one of the fastest-growing economies in the world and has seen urban poverty fall precipitously, though around half of Vietnam’s minority groups still live in poverty, according to UNICEF. But since Vietnam owes the sustainability of its growth to robust funding of economic, educational and infrastructural growth, tight cash flow regulation is key.
Misinvoicing is a complex crime to tackle, with systems that have often been established over decades — but in places where the political will to do so is strong, the fight becomes much easier, says Rowden. “What is more difficult is for governments is to show the political will to do so,” he says. Corrupt politicians, local authorities and business tycoons might all benefit from such illicit financial flows.
Meanwhile, countries that depend on trade and the government revenue it generates may see profits shrink even as trade volume increases, costing nations that need economic growth a significant opportunity to foster their own development. Worsening poverty, widening inequality, underdevelopment and stunted economic growth, and growth in transnational crimes have also been linked to trade misinvoicing. According to the United Nations Inter-Agency Task Force on Financing for Development, “countering these activities requires greater transparency, more-effective intelligence gathering and analysis, and improvements in cooperation and information sharing among government agencies and among countries to prevent, detect and prosecute criminals and recover the proceeds of their illicit activities.” Countries in Africa like Nigeria are working on tightening local laws guiding company ownership policy, customs operations and cybercrimes. But such initiatives are recent and thus far have had little measurable impact.
Estimates like GFI’s should be taken cautiously. Different analyses find strikingly different figures from the same countries — but according to the think tank, that’s all the more reason to pay attention, because it shows how difficult it is to collect data on the issue and gives policymakers an idea of the magnitude of the problem. “We have to be comfortable with a lack of perfect data, because if we waited for it, we would never receive it,” Mavrellis says. Still, she argues, these estimates should be enough to spur governments to action and to reclaim their slice of the billions of dollars going missing.