Capital flight through trade mis-invoicing staggeringly high

Bangladesh lost a staggering $7.53 billion on an average between 2008 and 2017 to trade mis-invoicing during its foreign commerce with its 135 trading partners, said the Global Financial Integrity Report (GFI).

The loss accounted for 17.95 per cent of Bangladesh's international trade with all trading partners during the period, according to the GFI's its annual update, "Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008-2017", which was released on Tuesday.

The country lost $11.51 billion in 2015, the latest year for which data was available for Bangladesh. The report stated no such data for Bangladesh for 2014, 2016 and 2017.

When pointed out the absence of the data, Maureen Heyd, communications coordinator of the GFI, in an email to The Daily Star, said: "Yes, there was a lack of reported trade data for Bangladesh in recent years. This is unfortunate, as it limits our ability to investigate illicit activity in Bangladeshi trade."

"We don't know why reporting to the UN Comtrade for Bangladesh has dropped off in recent years."

Heyd, however, said the report represents new findings for Bangladesh, in that this report has been made with the most up to date available data, and therefore, it is the most current of the GFI's work examining Bangladesh.

This report also examines Bangladesh's trade mis-invoicing with all its global trading partners -- whereas the previous GFI reports examined only Bangladesh's trade with the 36 advanced economies.

Bangladesh's loss to trade mis-invoicing with the 36 advanced economies averaged $3.29 billion during the decade, which is 14.62 per cent of the country's global trade.

When asked about the report yesterday, Finance Minister Mustafa Kamal told reporters yesterday: "I know nothing about the report. They [GFI] didn't inform us anything."

The GFI published the update examining trade-related illicit financial flows across 135 developing countries and 36 advanced economies by trading partners, commodities, regions and per cent of total trade among other indicators.

By analysing individual country government trade statistics supplied to the United Nations Comtrade database, the GFI identifies "value gaps," or mismatches, in the reported data.

The report finds gap of $8.7 trillion in reported trade between developing and advanced economies over 10 years.

It states trade mis-invoicing is a significant obstacle to sustainable development.

In 2017, the most recent year for which data are available, the total value gap in trade between advanced economies and developing countries was $817.6 billion.

The act of trade mis-invoicing is a major type of illicit financial flow and can be used to evade customs duties, VAT taxes, and currency controls among other illicit activities. It also deprives developing country governments of desperately needed tax revenues.

Developing countries are losing a significant percentage of the value of their trade transactions, said Tom Cardamone, president and chief executive officer of the GFI, in a statement.

"Indeed, in 2017, the value gap associated with trade mis-invoicing amounted to 18 per cent of developing country trade. If the integrity of trade transactions cannot be assured, it is unlikely countries will be able to achieve the UN Sustainable Development Goals by the 2030 deadline."

Cardamone also noted that poorer nations are often the hardest hit by mis-invoicing: of the 10 countries with the largest average value gap from 2008-2017, six are in Africa and are among the poorest countries in the world, including Sao Tome and Principe, the Gambia and Burundi.

The developing countries with the largest annual average value gaps in their bilateral trade with 36 advanced economies over the ten-year period were China ($323.8 billion), Mexico ($62.9 billion), Russia ($56.8 billion), Poland ($40.9) billion and Malaysia ($36.7 billion).

Developing countries with the largest value gaps as a per cent of their total bilateral trade with the 36 advanced economies over the ten-year period were the Gambia (37.3 per cent); Togo (30.2 per cent); The Maldives (27.4 per cent); Malawi (26.8 per cent); and the Bahamas (26.6 per cent).

"We would say though that our most recent work does represent new findings for Bangladesh, in that this report has been made with the most up-to-date available data, and therefore, it is the most current of our work examining Bangladesh."

This report examines the latest official government trade data reported to the United Nations to estimate the magnitude of trade mis-invoicing -- one of the largest components of measurable illicit financial flows (IFFs) between and among 135 developing countries and 36 advanced economies.

Trade mis-invoicing occurs when importers and exporters deliberately falsify the stated prices on the invoices for goods they are importing or exporting as a way to illicitly transfer value across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls and hide profits offshore.

It is important to note that while the term "illicit financial flows" (IFFs) tends to include many types of activities, such as trade mis-invoicing, smuggling, tax evasion and so on, this report only focuses on trade mis-invoicing or the trade-related aspects of illicit financial flows. It does not address all forms of IFFs.

The US, the UK, Canada, Australia, Singapore, Hong Kong, the UAE, Malaysia, and the British Virgin Islands are among the major destinations the money launderers from Bangladesh use to siphon off their illicit funds, said a government report of Bangladesh in November last year.

The government identified the countries and territories based on independent studies and cases of illicit flow of funds.

The launderers siphon off the money under the guise of some available facilities like investment visa, permanent residency, long-term residency, second home project and relaxed exchange control, according to the report.

Trade-based money laundering, hundi/hawla, bulk cash smuggling and transfer pricing manipulation are used commonly to transfer funds illegally, the paper also said.