ILLICIT FINANCIAL FLOWS

Kenya part of global economies hit by trade misinvoicing - report

The country lost Sh1.5 trillion in 29

In Summary
  • Itccurs when importers and exporters deliberately falsify the declared value of goods on invoices submitted to customs authorities.
  • Globally, $1.6 trillion is lost every year
KRA's Moyale OSBP station manager Joel Ndege speaks during a stakeholders forum
KRA's Moyale OSBP station manager Joel Ndege speaks during a stakeholders forum
Image: MARTIN MWITA

The global economy loses at least $1.6 trillion, more than the size of Kenya's Gross Domestic Product every year through trade misinvoicing. 

According to the latest report by Global Financial Integrity (GFI) an estimated $1.6 trillion in potential trade misinvoicing among 134 developing countries, of which $835 billion occurred between developing countries and 36 advanced economies, in 2018.

Trade misinvoicing occurs when importers and exporters deliberately falsify the declared value of goods on invoices submitted to customs authorities.

The report comes at a time the Kenya Revenue Authority (KRA)  estimates the country loses more than Sh125 billion every year in taxes to shrewd traders who falsify the value of goods and services.

According to the revenue body fraudulent schemes by domestic firms and multinationals could be depriving Kenya as much as 8.3 per cent of government revenue, which amounted to nearly Sh1.51 trillion for the fiscal year ended June 2020.

“It is estimated that Kenya’s tax loss from trade misinvoicing by multinational corporations and other parties could be as high as 8.3 per cent of government revenue.

“This clearly hampers economic growth and results in huge loss in tax revenue,'' KRA said in a statement. 

The GFI report titled Trade-Related Illicit Financial Flows in 134 Developing Countries 2009-2018, shows trade misinvoicing is a persistent problem across developing nations, resulting in potentially massive revenue losses and facilitating illicit financial flows across international borders.

GFI’s President Tom Cardamone said at a time when developing countries are scrambling for every penny to fund vaccines and medicines to fight Covid-19 infections, billions of dollars in duties and taxes are going uncollected.

This allows traders to illegally move money across international borders, evade tax and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts.

''It is absolutely shocking,” he continued, “how few governments are paying any attention to these massive losses,'' Cardamone said. 

Value gaps, or mismatches in international trade transactions, indicate that developing countries are not collecting the correct amount of trade-related taxes and duties that are owed, leading to potentially massive amounts of revenue losses.

While these value gaps are only estimates of misinvoicing, they indicate the scale of the problem. 

In order to identify potential trade misinvoicing, GFI examined official trade data reported to the United Nations to identify value gaps, or mismatches, in the data regarding what any two countries reported about their trade with one another.

While there are reasons for some mismatches to regularly show up in the international trade data, GFI believes that the majority of the gaps identified are indicative of trade misinvoicing activity.

GFI looked at all bilateral trade data for 134 developing countries, as well as trade between those countries and 36 advanced economies.

The developing countries with the largest value gaps identified in trade with 36 advanced economies in 2018 as a per cent of total trade are Gambia (45 per cent), Malawi (36.6 p[er cent), Suriname (31.9 per cent), Kyrgyzstan (30.6 pr cent) and Belize (29.2 per cent).

The developing countries with the largest value gaps identified in trade with 36 advanced economies in 2018 are China ($305.0 billion), Poland ($62.3 billion), India (US$38.9 billion), Russia ($32.6 billion) and Malaysia ($30.7 billion);