Illicit capital movement through trade misinvoicing in Burundi: a disaggregated approach
| Date | 18 May 2023 |
| Pages | 532-547 |
| DOI | https://doi.org/10.1108/JMLC-03-2023-0056 |
| Published date | 18 May 2023 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Arcade Ndoricimpa |
Illicit capital movement through
trade misinvoicing in Burundi: a
disaggregated approach
Arcade Ndoricimpa
Faculty of Economics and Management, University of Burundi, Bujumbura,
Burundi and Stellenbosch Institute for Advanced Study (STIAS),
Wallenberg Research Centre at Stellenbosch University, Stellenbosch, South Africa
Abstract
Purpose –This study aims to examinethe illicit capital movement through trade misinvoicingin Burundi,
at disaggregatedlevels by major trading partners and by major export and import commodities.
Design/methodology/approach –Trade misinvoicing is estimated by comparing the trade values
declared by Burundi with those declared by trading partners in a bilateral international transaction, after
adjusting forthe cost of freight and insurance. Disaggregatedtrade misinvoicing by major trading partnersis
computed usingthe Direction of Trade Statistics database of the International MonetaryFund over the period
1970–2019. Disaggregated trade misinvoicing by major trading commodities is computed using the UN-
COMTRADEdatabase over the period 1993–2019.
Findings –Exports of Burundito most of its major trading partners are found to be underinvoiced.The top
destinationsfor export underinvoicing are UnitedArab Emirates, Belgium and Germany. However,exports to
UK and Switzerland are foundto be overinvoiced. The major export commodities considered,coffee and gold,
are found to be affected by trade misinvoicing to a great extent. On the import side, the estimationresults
indicate that imports of Burundi from its major trading partners are in general overinvoiced. High import
overinvoicing is observedin the trade with Saudi Arabia, China and Japan. At commodity level, for the top 6
commodities considered, imports were to a great extent found to be overinvoiced. Cases of illicit capital
outflows and inflowsthrough trade misinvoicing are highlighted.
Practical implications –Some policy implicationsare drawn from this study. First, in collaborationwith
its development partners, the Government of Burundi should put in place measures to reduce the trade
misinvoicing phenomenon, whichundermines poverty reduction efforts. The study has shown whichtrade
partners are involvedand which commodities are mostly affected. Policy effortscould then be focused in that
regard. Investigationsat the company and transaction levels can be made to identifythe mechanisms of trade
misinvoicing.Second, more effort is needed in ensuring systematic and transparentreporting of international
trade transactions. To fight trade misinvoicing, transparency in international trade is key, through
coordinatedenforcement of reporting rules.
Originality/value –Previous studies analyzed the problemof trade misinvoicing at an aggregated level.
However, this leaves out essential information on trading partners involved in the phenomenon as well as
This paper is drawn from a research project the author had during his Iso Lomso fellowship with the
Stellenbosch Institute for Advanced Study (STIAS). The author would like to thank STIAS for the
fellowship. The author wishes to express his deep appreciation to African Economic Research
Consortium (AERC) for the financial support to carry out this research. The author is also grateful to
the resource persons and members of AERC’s thematic group B for various comments and
suggestions that helped the evolution of this study from its inception to completion. The findings
made and opinions expressed in this paper are exclusively the author’s. The author is solely
responsible for content and any errors.
Funding: This study was supported by the African Economic Research Consortium (AERC) (Grant
No. RT21508).
Declaration of competing interest: The author declares that there is no competing interest.
JMLC
27,3
532
Journalof Money Laundering
Control
Vol.27 No. 3, 2024
pp. 532-547
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-03-2023-0056
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
trading commoditiesaffected. This study investigates trade misinvoicing at disaggregatedlevels, at product
level and by tradingpartner.
Keywords International trade, Trade misinvoicing, Illicit capital outflows, Illicit capital inflows,
Money laundering, Burundi
Paper type Research paper
1. Introduction
The phenomenon of capital flight has become an issue of increasing concern over the past
decades because of the scourge it inflictsupon poverty alleviation efforts in the developing
countries. Among others, Ndikumana et al. (2015) give evidence that trade misinvoicing is
an important mechanism of capital flight. GlobalFinancial Integrity (2019) emphasizes that
trade misinvoicing is the largest componentof illicit financial outflows. Trade misinvoicing
is a method for moving money illicitly acrossborders by falsifying the value or volume in an
international commercial transaction of goods or services (Global Financial Integrity,2019).
Although the classic motive of trade misinvoicing is often to evade taxes, duties or capital
controls, trade misinvoicing can also be a trade-based technique for smuggling or money
laundering (Umar, 2013). Import underinvoicing and export overinvoicing can be the ways
of disguising inflows of capital to avoid capitalcontrols or anti-money laundering scrutiny,
and by doing so, money is slipped into a country(UNCTAD, 2016). By import overinvoicing
and export underinvoicing, money flees a country to evade or avoid taxes on corporate
profits in the country of export by having the difference in value deposited into a foreign
account (Ndikumanaet al.,2015).[AQ2]For Burundi, the present case study,recent estimates
(Ndikumana and Boyce, 2021) indicate that the country lost resources amounting to $5.7bn
in capital flight over the period 1985–2018, 56.1% of which went through trade
misinvoicing. Similarly, Ndoricimpa (2018) shows that about 75% of capital that fled
Burundi between 1985 and 2013 went through trade misinvoicing. Indeed, there are costs
related to trade misinvoicing, which include lost foreign exchange, lost tax revenues and
unfair distribution of the gains from trade (UNCTAD, 2016). Trade misinvoicing
undermines the current development policy agenda that calls for low-income countries to
mobilize more tax revenues. As Global Financial Integrity (2014) points out, “trade
misinvoicing robs governments of customs duties and corporate tax revenues,”
undermining social service delivery, retarding hence economic growth and poverty
reduction. This speaks volume for a fragile country like Burundi, one of the poorest
countries in the world, whichhas suffered multiple episodes of civil conflicts.
Ndoricimpa (2018) examinedcapital flight from Burundi in the first ever country-specific
study focusing on Burundi. The current study builds on Ndoricimpa (2018) by paying
special attentionon trade misinvoicing as the main channel for capitalflight. Several studies
have analyzed the problem of trade misinvoicing (see, e.g. Ndikumana and Boyce, 2012;de
Boyrie et al.,2007). However, they examined trade misinvoicing at an aggregated level,
which leaves out important informationon trading partners involved in the phenomenon as
well as trading commodities affected. Thus, there has been recently growing interest in
investigating trade misinvoicing at disaggregated levels, at product level and by trading
partner (UNCTAD, 2016;Ndikumana and Boyce, 2019;Global Financial Integrity,2018,
2019). This study followsthe current strand of literature and examines trade misinvoicingat
disaggregated levelin Burundi. Burundi deserves special attention as a country in a fragility
context, facing multiplefinancial constraints for development.
Undeniably, Burundi relies on a few primary commodities for its export revenue. Up
until early 2000s, exports of coffee and teaaccounted for about 90% of total export revenue.
Illicit capital
movement
533
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