Capital movement through trade misinvoicing: the case of Africa
| Date | 16 October 2007 |
| Published date | 16 October 2007 |
| Pages | 474-489 |
| DOI | https://doi.org/10.1108/13590790710828181 |
| Author | Maria E. de Boyrie,James A. Nelson,Simon J. Pak |
| Subject Matter | Accounting & finance |
Capital movement through trade
misinvoicing: the case of Africa
Maria E. de Boyrie and James A. Nelson
New Mexico State University, Las Cruces, New Mexico, USA, and
Simon J. Pak
Great Valley School of Graduate Professional Studies, Penn State University,
Malvern, Pennsylvania, USA
Abstract
Purpose – The purpose of this paper is to identify capital flows due to trade misinvoicing in 30
African nations.
Design/methodology/approach – Data from 30 African nations were examined for deviations
from average import and export prices as an indicator of capital flows This paper uses US customs
data to document the amount of capital flows which may be hidden in commodity trade. Deviations
from average prices (price filter matrix) within these commodity classes are used to identify abnormal
prices and to produce conservative estimates of the amount of capital movement from 30 countries in
Africa to the USA.
Findings – The results of this study demonstrate that, between 2000 and 2005, capital outflows from
all 58 countries in Africa to the USA grew by more than 50 percent, through both low-priced exports
and high-priced imports.
Research limitations/implications – A clear understanding as to the true purpose of the overall
capital movement is not easy to determine from the data. Approximately half of the countries (16 out of
30) utilized low-priced exports as a means to move more money into the USA, while the other half
(14 out of 30) used high-priced exports to move the most money.
Practical implications – When trade misinvoicing is used as a tool to move capital in and out of a
country or continent in order to evade taxes and/or customs duties, avoiding quotas, smuggling, and
laundering illegally obtained money, or as a means of capital flight, the economic development of the
given country is severely hindered. This movement of capital may be due to tax evasion, duty
reduction, money laundering, capital flight, or other reasons beyond the scope of this paper.
Originality/value – The technique of using a price filter matrix can be of value to researchers and
governments to identify capital flows due to trade misinvoicing.
Keywords Africa, Money laundering, Internationaltrade, Foreign exchange, Crimes,Invoicing
Paper type Research paper
1. Trade misinvoicing: reasons and consequences
In November 2005, a set of golf clubs is imported into Nigeria for $4,976, while the
US/World median price for the same set of clubs is only $82. During the same month, a
gasoline generator is imported into Ghana from the USA at a price of $60,000 that
could be purchased at the US/World median price of $63.03. During June of 2005, an
electric hair dryer is imported into Nigeria at a price of $3,800 when the US/World
median price is estimated to be $25. These transactions may be due to intentional
misinvoicing of transactions, which commonly occurs in the African continent.
In February of 2002, US customs data shows that Ghana exported diamonds to the
US through New York via air cargo a total of 37 times with a total undervalued
amount of $311 million[1]. When it comes to this country, the highest dollar amount
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JFC
14,4
474
Journal of Financial Crime
Vol. 14 No. 4, 2007
pp. 474-489
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790710828181
($328 million) of capital outflow through low-priced exports was recorded in the year
2000 (Figure 1). The amount of capital outflows from Ghana to the USA through trade
misinvoicing increased dramatically between 2003 and 2005.
Trade misinvoicing may be done for the purposes of evading custom duties and
restrictions, avoiding paying taxes and fees, avoiding quotas, smuggling, to launde r
illegally obtained money, or for other unknown reasons. When trade misinvoicing is
used as to tool to achieve any of these illicit objectives, economic development can be
severely hindered.
Misinvoicing of imports by overpricing can be used to conceal illegal commissions
and to transfer monies that are hidden in the inflated prices. Under invoiced imports
use misinvoicing to:
.avoid or reduce import duties and restrictions;
.dump foreign produced goods at below market prices in order to drive out
domestic competition; and
.smuggle goods into a country in order to avoid paying taxes and fees.
In the case of South Africa, Rustomjee (1991, p. 93) points out that, given the country’s
exchange control:
... importers are only likely to under invoice imports to reduce tariffs or circumvent
quantitative restrictions if they have other means of access to foreign exchange, perhaps
through under invoicing exports or through dividend repatriation.
Companies could over invoice their exports as a response to their governments’ attempts
to reward those companies or industries that increase their export revenues, or simply to
hide illegal commissions that can be concealed within the inflated prices. In either case,
over invoicing of exports causes the amount of export subsidies offered by som e
developing countries to increase. On the other hand, under invoiced export transactions
may be used to avoid or reduce export surcharges in countries where these ex ist or as a
technique of evading income taxes, launder money and/or facilitating capital flight.
In his study, Rustomjee (1991) points out that between 1970 and 1988, the
percentage of under invoiced exports from South Africa was, on average, 20 percent.
The author also estimated that the amount of under invoiced exports to the USA
amounted to over $720 million. Under invoiced items included, but were not limited to,
Figure 1.
Capital outflows through
trade from Ghana to the
USA 2000-2005
$0
$50
$100
$150
$200
$250
$300
$350
$400
2000
2001
2002
2003
2004
2005
Millions
Capital Outflow -Total
Outflow through High Priced Imports
Outflow through Low Price Export
Trade
misinvoicing
475
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