Ghana among countries with largest average value gap due to trade related illicit financial flows

Developing and poor countries are mostly the hard hit from illicit financial flows, resulting from trade misinvoicing. A new report released early today by the Global Financial Integrity (GFI) which examines the latest official government trade data reported to the United Nations to estimate the magnitude of trade misinvoicing – one of the largest components of measurable illicit financial flows (IFFs) between and among 135 developing countries and 36 advanced economies, has found Ghana among one of the countries with the largest average value gap due to trade misinvoicing.

According to the GIF, trade misinvoicing 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.

The report noted that while by contrast, China ranked 80th out of the 135 developing countries analyzed, with an average value gap of 18.8 percent of its total bilateral trade with the 36 advanced economies over the same period, developing countries with the largest average value gaps as a percent of total trade between the 135 developing countries and all trading partners over 2008-2017 – are The Gambia – 46.8 percent; Seychelles – 38.3 percent; Paraguay – 27.1 percent; Ghana – 26.5 percent, and The Bahamas – 25.9 percent.

“It is important to note that while the term “illicit financial flows’’ (IFFs) tends to include many types of activities, such as trade misinvoicing, smuggling, tax evasion, etc., this report only focuses on trade misinvoicing, or the trade-related aspects of illicit financial flows. It does not address all forms of IFFs,” the authors stated.

The GFI indicates that the countries included in the report are based on the International Monetary Fund classification system, which is comprised of 148 developing countries and 36 advanced economies. However, 13 of the developing countries did not report sufficient trade data to the United Nations to be included in this analysis.

“In order to identify a country’s imports/exports that may have been misinvoiced, GFI conducts a value gap analysis by examining data submitted by governments each year to the United Nations Comtrade database and applying a series of filters to ensure unmatched trades are omitted. GFI then uses a partner-country analysis to compare and contrast the differences between any set of two countries in order to identify value gaps, or mismatches, in the reported data.

For example, if Ecuador reported exporting $20 million in bananas to the United States in 2016, but the US reported having imported only $15 million in bananas from Ecuador that year, this would reflect a mismatch, or value gap, of $5 million in the reported trade of this product between the two partners for that year.

While the available data is not perfect and country figures are not exact, the resulting value gap estimates are the result of rigorous analysis and provide an order of magnitude view of each country’s trade misinvoicing challenge, reflecting the degrees of trade misinvoicing happening between any two countries,” it explains.

The key findings of the report include:

$8.8 trillion is the sum of the value gaps identified in trade between 135 developing countries and 36 advanced economies over the ten-year period 2008-2017;

$817.6 billion – the sum of the value gaps identified in trade between 135 developing countries and 36 advanced economies1 in 2017, the most recent year for which comprehensive data are available.

“This analysis adds to what GFI has provided in previous annual reports.Developing countries with the largest annual average value gaps (in US dollars) in their bilateral trade with 36 advanced economies over the ten-year period 2008-2017,” the report said.

The three largest value gaps (in US dollars) by harmonized system (HS) chapter between the 135 developing countries and 36 advanced economies over 2008-2017: Electrical Machinery (HS 85) – $153.7 billion Mineral Fuels (HS 27) – $113.2 billion Machinery (HS 84) – $111.7 billion.

The GFI notes that overall, the analysis shows trade misinvoicing is a persistent problem across developing countries, resulting in potentially massive revenue losses – at a time when most countries are struggling to mobilize domestic resources to achieve the internationally-agreed UN 2030 Sustainable Development Goals (SDGs).

The analysis is intended to help identify the countries most likely at risk for trade misinvoicing (and therefore, significant government revenue losses), and to recommend policy measures to combat trade misinvoicing to customs authorities in-country and those of their major trading partners.

By Emmanuel K. Dogbevi