FinServ Has The Power To Combat Invoice Fraud


A new report from Global Financial Integrity (GFI) is highlighting the contribution fraudulent trade invoicing makes to the $2.2 trillion in transnational crime every year.

Reports Tuesday (March 28) said GFI’s latest analysis found cross-border trade contributes significantly to global crime as entities misinvoice as a way to deceptively hide either the goods being traded or the amount of money being transferred. Researchers found that this invoice fraud and other types of trade-based money laundering are leading to the illegal trade of things like drugs, art, endangered wildlife and more.

Criminals can use several methods of misinvoicing to conduct illegal activity. For instance, individuals may underinvoice the value of goods coming into a country to reduce tax and customs costs — a problem that is especially hard-hitting on developing markets, according to researchers. Further, criminals may misidentify items listed on an invoice to import illegal goods. Another method includes perpetrators overinvoicing for imports, with the excess funds going to illegal activity.

“The global shadow financial system enables criminals to purchase licit and illicit cultural property anonymously and to use trade misinvoicing to both evade taxes as well as launder money,” the report concluded. “Criminals as well as terrorists have capitalized on the ability to use cultural property as a vehicle for quick financing, including the Syrian Civil War and the practice of ransoming high-value pieces.”

Last year, reports said Hong Kong’s central bank would be stepping up efforts to combat these types of invoice fraud in order to curb capital outflow from China. Billions of dollars have flowed out of the country this way, analysts said, as people look to illegally move money out of the country to safeguard their cash amid Chinese economic downturn. The central bank said at the time it would be targeting trade finance monitoring and increasing random checks on cross-border shipments.

According to GFI policy analyst Channing Sophia May, who also authored the latest report, spoke with GTR to explain how governments may be able to tackle this problem.

“TBML [trade-based money laundering] is an important component of the underlying system that supports all transnational crime,” May said. “TBML facilitates both the movement of illicit goods as well as illicit value. Attacking the systemic elements of transnational crime — TBML as well as anonymous shell companies and secrecy jurisdictions, among others — allows governments to combat crime as a whole, instead of market by market. Governments must target the profits of transnational crime, not just the people and products.”

In its report, GFI offered several recommendations for governments to combat TBML and other such crimes. They include requiring customs officers to scrutinize export and import invoices — and having them be trained on how to identify signs of misinvoicing. Going undetected means this misinvoicing can rob a government of tax and customs revenues, analysts noted, especially as criminals can underinvoice imports or deliberately sell them below market value.

But governments aren’t the only ones who can take this issue on.

“Customs agencies, central banks and private banks need to employ new techniques and strategies to detect the technical smuggling of the value of illicit goods through cross-border trade — which may help catch instances of physical smuggling of illicit goods as well,” the report stated. “Specifically, these entities should focus on trade misinvoicing, of which trade-based money laundering is a subset.”

Risk-based detection strategies are critical for governments, banks, auditors, customs officials and others to be able to mitigate the issue of misinvoicing for criminal purposes, GFI added. They must be able to access world market prices for goods in order to identify when valuations are off.

The financial services space has another incentive to combat invoice fraud: According to data released last year from Tungsten Network, financial services is the industry that gets hit with more fraudulent invoices than any other sector and loses more than $240 million every year to the crime in the U.K. alone.

“We were definitely concerned by the scale of the problem,” said Tungsten Head of Compliance Lucy Ashdown in an interview with PYMNTS.

With such high losses, financial services may want to examine how they can play their role in fighting invoice fraud and trade-based crime, analysts say.