Curbing money laundering through trade misinvoicing 

On 16 December, Global Financial Integrity (GFI), a US-based think tank, published a report titled "Trade-Related Illicit Financial Flows in 134 Developing Countries 2009-2018". 

The report suggested that Bangladesh had lost $8.275 billion or Tk71,000 crore each year between 2009 and 2018 on average to trade misinvoicing. 

The report also suggested that the country suffered from an estimated loss of 17.3 percent of its trade volume with international trading partners because of trade misinvoicing. 

For those in the dark, trade misinvoicing refers to the illicit practice of moving money across borders most often by over-invoicing imports (exhibiting a higher value than what was actually paid) and by under-invoicing exports (exhibiting a lower value of exports than actually received). 

Consequently, both the exporter and the importer can now bury these unreported earnings or expenses in an offshore account or invest in an offshore property without paying the due taxes to the Government of Bangladesh.  

Trade misinvoicing is also a favourite tool for money-launderers. The eight Bangladeshis recently named in the Pandora papers can probably testify to this statement. So, how do they do it?

Through misinvoicing either exports or imports, money launderers can disguise the proceeds of their criminal activities as income/expenses on trade and legitimise their origins. 
 
That is, in some permutation and combination of these tactics, trade misinvoicing facilitates not only tax evasion, but also money laundering, as well as, avoiding capital controls in the country of origin.  
 
And it can have severe adverse effects on the economy. For starters, money syphoned away from the domestic economy could have been invested in domestic industries that would have fostered innovation, increased production and generated employment. 
 
Rampant trade misinvoicing without any oversight grants criminals a sense of impunity that they can get away with crimes and encourages reckless behaviour in the long run as well.
 
Moreover, developing countries are not particularly famous for their strong institutions as most either fall victim to corruption and cronyism under seemingly autocratic or pseudo-fascist regimes. 

Trade misinvoicing is also a favourite tool for money-launderers. The eight Bangladeshis recently named in the Pandora papers can probably testify to this statement.

 
These weak and corrupt institutions foster poor infrastructure and in the case of tax collection, a poor infrastructure implies loopholes that gradually become endemic to the system as evidenced by a tax-to-GDP ratio that historically oscillated around the 10% mark in developing and least-developed countries. 
 
Increasing tax evasion through trade misinvoicing only deteriorates the already vulnerable tax regimes and halts any progress in the redistribution attempts of the government. 
 
So, trade misinvoicing is deplorable. Then, why are we unable to stop it? What can we learn from other countries that may guide us in this regard?
 
In the case of Bangladesh, NBR's Transfer Pricing Cell is the financial intelligence unit responsible for auditing international transactions made by firms. 
 
However, the Transfer Pricing Cell is rather ill-equipped as it does not have access to real-time data for transactions and also has limitations in terms of manpower, all of which makes it rather ineffective in monitoring trade misinvoicing or money laundering through trade.
 
According to a report by the World Customs Organisation, another issue auditors in developing countries face in tackling misinvoicing is the lack of communication and information sharing among domestic and international agencies dealing with international trade. 
 
In other cases, financial intelligence units simply lack the teeth to tackle money laundering, especially in the digital sphere now that digital scams are becoming more and more mainstream. 
 
Lack of digitalisation of the financial intelligence agencies can also make it easy for traders to launder money through offshore accounts and trade mispricing with little to no oversight.
 
Moreover, even when there are laws to prevent trade misinvoicing and money laundering, these laws are rarely implemented. On top of that, intermittent opportunities of transforming black money into white money preserve the incentive for criminals to resort to such malpractices.
 
Finally, weak, undemocratic, and corrupt institutions in most developing and least-developing countries are susceptible to cronyism as most money-launderers or large traders have close ties with government officials or political leaders which keep them outside the reach of law enforcement authorities. 
 
South Korean Customs Services (KCS) can be the epitome in terms of tackling such illicit financial flows through trade misinvoicing. The principles that made KCS a success goes as follows: access to information; power to investigate, interagency cooperation, and most importantly, government goodwill.
 
In the 1990s, a desperate South Korean government committed itself to curb illicit financial transfers through trade misinvoicing and granted KCS the right of ex post facto (a criminal statute that punishes crimes retroactively) investigation into forex transactions. 
 
That is, the KCS not only obtained access to previous as well as real-time transaction data but could now launch investigation probes into previously suspect transactions. With increased power and access to information, the KCS cross-referenced customs declaration data (on transferring of goods) with forex transactions data (payments on traded goods). 
 
Any mismatch between the two sets of data would flag the transaction and the KCS would launch an investigation for potential invoice falsification. 
 
The Korean government also criminalised misinvoicing regardless of the potential adverse effect it may have on the economy. The KCS also empowered its financial investigative units with more manpower and information to tackle trade misinvoicing.
 
Quite successfully, from 2001 to 2008, the KCS detected 2,598 criminal transactions and the number rose to 3,658 between 2009 to 2016. In each year, the KCS has investigated $3 billion worth of illicit transfers through trade.
 
If there is any lesson to be taken from the KCS in terms of tackling trade mispricing, the financial integrity unit at Bangladesh Bank and the Transfer Pricing Cell at NBR should be equipped with more manpower as well as real-time information on all transactions taking place digitally.
 
Furthermore, comprehensive inter-agency communication - both at a domestic and international level - should be developed to ensure prompt investigations into suspect transactions and can allow regulatory authorities in countries to take prompt action. 
 
There should be a database management system that records each export and import transaction on a real-time basis. Also, there must be rigorous interagency communication and sharing of information so that each transaction can be compared with the global standard. In this way, potential mispricing can be flagged and thoroughly investigated.
 
Most importantly, the governments in developing and least developed countries like Bangladesh must commit to curbing money laundering like South Korea in 1999, regardless of how it may affect their cronies or the economy for that matter.