Money laundering and income tax evasion: the determination of optimal audits and inspections to detect abnormal prices in international trade
| DOI | https://doi.org/10.1108/13590790510624972 |
| Date | 01 April 2005 |
| Pages | 123-130 |
| Published date | 01 April 2005 |
| Author | Maria E. de Boyrie,Simon J. Pak,John S. Zdanowicz |
| Subject Matter | Accounting & finance |
Money Laundering and Income Tax Evasion: The
Determination of Optimal Audits and Inspections to
Detect Abnormal Prices in International Trade
Maria E. de Boyrie, Simon J. Pak and John S. Zdanowicz
INTRODUCTION
Untrimmed pillowcases imported from France for
$909.29 each? Slip joint pliers from the UK for
$489.75 each? Razor blades from Panama for $29.35
each? Machine guns exported to France for $364.08
each? Military ri¯es to the UK for $106.87 each?
SLR 35mm cameras to Colombia for $7.44 each?
These and thousands of similar transactions reveal
the magnitude of abnormal pricing in international
trade. However, the inability to analyse the massive
amounts of detailed data contained in international
trade databases has allowed many to use international
trade as a means to launder money and evade taxes.
The purpose of this paper, therefore, is to present a sta-
tistical auditing system that provides a methodology
to conduct a statistical analysis of international trade
prices. This analysis can help governmental and inter-
national lending agencies, as well as private sector
®rms who engage in international trade, to determine
the optimal level of audits and inspections of inbound
and outbound cargos needed to detect abnormally
priced imports and exports.
The lack of detailed international trade transaction
data has made the analysis of international trade
¯ows and international trade pricing a dicult task.
International trade ¯ows and pricing are of great inter-
est to both private and public sector organisations. The
major obstacle to their analysis has been the massive
amounts of detailed data contained in international
trade databases. The contribution of this research is
the development of a statistical auditing system that
facilitates this analysis. The statistical audit system
will assist governments and international economic
development agencies in the determination of abnor-
mally priced imports and exports. The use of this tech-
nique will provide a means to conduct a statistical
analysis of international trade prices and the determi-
nation of optimal audits and inspections of inbound
and outbound cargos.
International trade ¯ows
The ability to analyse the details of international
trade ¯ows will assist government and international
development agencies to promote economic develop-
ment of a country and the development of industrial
sectors within a country. Import and export informa-
tion on commodities such as dollar values, quantities,
and market share and prices will greatly enhance the
ability to conduct market research studies and establish
economic development programmes. Private sector
exporters will ®nd the data useful to determine their
competitive position in the world market.
International trade pricing
The detection of abnormal pricing in international
trade has long been an area of concern of governments
of developed and less developed countries, interna-
tional economic development agencies, and private
sector ®rms engaged in international trade.
Governments and international economic develop-
ment agencies are interested in the detailed analysis of
international trade prices as a means of monitoring and
detecting illegal activities and illegal transactions.
Abnormal pricing in international trade may be due
to a lack of knowledge of worldwide prices, but
may also be motivated by various illegal activities.
Over-invoiced import transactions may be utilised
as a means to evade income taxes, launder money
obtained from illegal activities, and facilitate capital
¯ight.
1
See Chart 1 for examples of over-invoiced
imports into the USA during 2001.
Over-invoiced import prices may also serve as a
justi®cation for excessively high domestic prices in
countries where price controls exist. They may also
conceal illegal commissions that are hidden in the
in¯ated prices. Under-invoiced import prices may
re¯ect attempts to avoid or reduce import duties or
the dumping of foreign produced goods at below
market prices as a means of driving out domestic
competition.
When analysing tax avoidance and evasion in inter-
national trade, it has been found that collected import
duties as a share of import value rise less than one-for-
one with the tari rate, which has been interpreted, in
the literature, as evidence of tax evasion/avoidance.
2
A
Page 123
Journal of Financial Crime Ð Vol. 12 No. 2
Journalof FinancialCrime
Vol.12,No. 2,2004,pp. 123 ±130
#HenryStewart Publications
ISSN1359-0790
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