B2B Payments

Bad Invoicing Practices Costs African Nations Billions

A recent study found that the fraudulent misinvoicing of trade in several African countries has resulted in the loss of tens of billions of U.S. dollars. The research shows that the tax authorities in five countries lacked the trade, tax and deals data to curb the unlawful movement of money.

It was discovered that the potential economic growth of several African countries has been stifled by illegal financial flows into or out of the countries. Between 2002 and 2011, misinvoiced trade caused Ghana, Kenya, Mozambique, Tanzania, and Uganda to lose a combined US$14.4 billion. According to a study by Global Financial Integrity (GFI), a Washington DC-based research and advocacy organization, those five countries had over- and under-invoiced buyers that resulted in the illegal inflows or outflows of more than $60 billion during that decade.

Under invoicing is where sellers deflate the true value of their exports so they can channel the difference to a foreign account, while over invoicing which can lead to lower corporate taxes as companies inflate the cost of imports to hide capital outflows.

Danish Minister for Trade and Development Cooperation Mogens Jensen said in a GFI release that the discovery is very disconcerting, especially because Denmark has often worked to support those affected countries and help them fight poverty, as well as support economic growth and job creation.

“These efforts are clearly at risk of being undermined by fraudulent trade transactions which rob the people of these countries of funds that could otherwise have been used for investments in infrastructure, schools, hospitals, and other much needed public services,” Jensen said. “I hope that the study can help the governments in their efforts to curb illicit financial flows.”

According to the GFI release, the report reviews the components and drivers of trade misinvoicing in Ghana, Kenya, Mozambique, Tanzania, and Uganda. Additionally, it estimates the potential impact on tax revenue for each government and analyzes the policy environment in each country. Finally, the analysis provides general policy recommendations tailored to the circumstances in each nation.

The monetary loss in some countries was greater than others. For example, Kenya lost an estimated $1 billion each year through export under-invoicing, while Uganda had $813 million in import over-invoicing.

GFI president Raymond Baker explained in a company statement that the consequences of these illegal actions are “simply devastating,” and that local businesses in some countries now have less money to grow companies and hire more workers.

“The potential revenue loss from trade misinvoicing means that Ghana has less money to spend on healthcare, Kenya has less money to devote to education, and Mozambique has less money to invest in infrastructure,” Baker said. “Trade misinvoicing is perhaps the most serious economic issue plaguing these countries.”

Going forward, Baker emphasized the importance of addressing the issues and ensuring they do not continue. The GFI analysis shows that more research can and should be done, and that his company plans to work in conjunction with the governments of the affected countries to eliminate any illicit financial movement.

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