Trade mis-invoicing accounts for a substantial share of the world’s illicit financial flows and national customs agencies should take steps to address it, according to a new report from the World Customs Organization.
IFFs are generally described as cross-border transfers of funds that are illegally earned, transferred, or utilized. According to the report, the term encompasses practices such as trade mis-invoicing, cash smuggling, disguised or unreported bank transfers, informal transfer systems, and disguised foreign investment. The sources of IFFs include tax evasion, proceeds from criminal activities, and bribery of government officials.
The report adds that trade mis-invoicing can be defined as fraudulent cases where either the importer or exporter, or both, manipulate the value (e.g. price, quantity, or quality) of trading goods in their customs declarations. The motives for such actions include evading tariffs, taxes, or trade regulations; exploiting trade incentives; and disguising capital flight.
While customs agencies have tended to concentrate their attention on under-invoicing of imports in line with their traditional mandate of detecting possible revenue leakage, the report states, in response to the risk of IFFs/TM these agencies should have sufficient mandate and resources to tackle (1) over-invoiced imports intended to disguise capital flight as a form of trade payment, (2) under-invoiced exports intended to conceal trade profit abroad such as tax havens, and (3) over-invoiced exports or under-invoiced imports intended to bring illicit proceeds into the domestic legal financial system.
Other policy recommendations in the report include capacity building to provide sufficient financial and human resources for customs agencies to combat IFFs/TM and enhance integrity; enhancing customs partnerships with business, other government agencies (e.g., tax authorities), financial intelligence units, police, and customs administrations of trade partners; and exploring new technology such as blockchain that could potentially help prevent and detect any fraudulent manipulation of trade transactions and related financial transactions by sharing and analyzing relevant information in a trusted and secure manner.
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