A Kenyan vendor sells second-hand shoes at the Gikomba open-air market on June 25, 2012, in Nairobi. AFP/Getty Images
New evidence provides more insight on the reality that among the most damaging economic problems facing the world’s poor nations today is the flow of illicit money leaving developing economies as a result of crime, corruption, and tax evasion: the global figure for illicit financial outflows from developing countries is approximately $542 billion per year on average (over a 10-year time series), and trade mispricing makes up close to 80% of this (or $424 billion), according to Global Financial Integrity, a Washington-based research and advocacy organization. Trade misinvoicing refers to the intentional misstating of the value, quantity, or composition of goods on customs declaration forms and invoices, usually for the purpose of evading taxes or laundering money – and is usually done with the knowledge and approval of both the seller and the buyer in the transaction. (Read more: Trade misinvoicing causes big financial hurt across africa).
In a recent regional report, GFI says that over $60 billon has been illegally moved into or out of Uganda, Ghana, Mozambique, Kenya and Tanzania in the 10 years to 2011. “Trade misinvoicing is stymieing economic growth and likely decimating government revenues in these countries,” said GFI President Raymond Baker. The vast amount is equivalent to more than double the international aid money these countries receive. In Uganda’s case, for instance, in 2011 tax revenue loss through import over-invoicing may have been as high as $524 million, which would constitute approximately 77% of the government deficit during the same year.
The five countries lost a tremendous amount of government revenue due to trade misinvoicing: Uganda tops the list of nations with an estimated loss of 12.7% of total government revenue, followed by Ghana (11%), Mozambique (10.4%), Kenya (8.3%) and Tanzania (7.4%). GFI’s results suggest that Ghana lost $386 million, Kenya $435 million, Mozambique $187 million, Tanzania $248 million, and Uganda $243 million on average per year in potential tax and tariff revenue during the ten-year period of the study.Trade and foreign investments are effective ways to fight against poverty but trade misinvoicing hampers any type of gains that have been made and, along with other factors, impedes lifting millions of people out of poverty.
The report includes several policy recommendations. The first line of defense against trade mispricing is customs agencies: governments should significantly boost their customs enforcement by equipping and training officers to better detect intentional misinvoicing of trade transactions. Financial regulators should also require that all banks in their country know the true beneficial owner of any account opened in their financial institution. Several other proposed initiatives capture the need for practical measures.
Proof of how these illicit flows are hurting these countries is mounting and the need for greater transparency is urgent. Misinvoicing hurts many other African nations besides the five the study focused on. Combating it should perhaps be among the new sustainable development goals and, at the least, be a priority for foreign countries and organizations. If they continue to allow it the numbers will only get worse in the next decade.
CORRECTION: The original $60 billon did not include money moved out of the five countries.
