Misinvoicing Costing Nations Billions, Warns UNCTAD

Invoice mistakes are costly. For many organizations, errors across the accounts payable and accounts receivable processes can range from mismatched data between invoice and purchase order to misstated prices, often attributed to manual data entry.

And for most businesses, these errors lead to time and money spent on the resolution process. Other times, misinvoicing is the work of cybercriminals against individual firms. For others, however, entire national economies can be affected.

According to the UN Conference on Trade and Development (UNCTAD), that’s exactly what’s happening in some developing nations, in which invoice errors across Africa and South America are leading to the loss of up to two-thirds of commodity export value.

Worse, these mistakes often aren’t simply a matter of innocent human error; rather, tax evasion and money laundering tactics are impacting invoice accuracy in cross-border trade, analysts found.

“Trade misinvoicing continues to be used as a key mechanism of capital flight and illicit financial flows from developing countries,” UNCTAD stated in its report. To demonstrate the issue, analysts turned to five markets — Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia — in which misinvoicing has led to billions in lost or unaccounted for funds.

Why It Happens

There are a few reasons why exporters and suppliers intentionally misinvoice.

One, UNCTAD said, is to underreport the value of a sale to lessen the tax burden on the supplier. The second is to circumvent currency controls, a tactic that “creates a black market premium that traders will seek to exploit to their advantage,” the report stated, explaining that overinvoiced imports and underinvoiced exports can be used to generate extra foreign exchange. Lastly, UNCTAD said, cross-border trade misinvoicing can be used for the purpose of smuggling imports or exports in order to bypass burdensome regulations, controls and paperwork.

Where It Happens

Misinvoicing can occur anywhere, but UNCTAD focused on a few particular markets.

Between 1990 and 2014, Chile lost an estimated $16 billion in potentially taxable revenue on copper exports to the Netherlands. “This means that the bulk of Chile’s copper exports to the Netherlands are not reported in the Netherlands’ trade data even though they are reported in Chile’s trade data,” the report explained. China and Japan also exhibit evidence of over- and underinvoicing with regards to Chilean exports.

“On paper, most of the copper goes to Switzerland, but in reality, the majority of it goes straight to buyers in other countries,” offered Christine Clough from Global Financial Integrity in an interview with Financial Times last week.

Zambia, on the other hand, shows evidence of copper export underinvoicing (except with trade with the U.K. and Switzerland). Between 1995 and 2015, the majority of Zambia’s copper exports were linked to erroneous invoices, while nearly $29 billion worth of those exports to Switzerland go unreported due to overinvoicing. Data also shows $16 million worth of copper exported to Italy, while Italy’s books reveal $2 billion worth of copper from Zambia, a discrepancy due to underinvoicing.

Between 1996 and 2014, $69.8 billion worth of oil exports from Nigeria to the U.S. was misinvoiced; Italy, the Netherlands, Brazil, Canada, France and other trading partners show evidence of export overinvoicing from Nigeria.

Exports of cocoa from Côte d’Ivoire were overinvoiced to the Netherlands, leading to a $5 billion discrepancy between 1995 and 2015, researchers found; nearly a third of cocoa exports from Côte d’Ivoire to the Netherlands don’t appear on Netherlands’ trade books, UNCTAD said.

Finally, evidence revealed misinvoicing within South Africa’s silver and platinum exports, with “systemic underinvoicing” present since 2000, especially with China and the U.S.

What It Means

According to UNCTAD, the trading practices of trading partners should be examined just as carefully as the practices of exporting nations.

The report highlights a key trend, researchers said, “namely that a few trading partners account for a large share of total primary commodity exports of each of the same countries studied.” UNCTAD concluded that the majority of misinvoicing likely occurs for the purpose of tax evasion, with exported products landing in tax havens, as could foreign exchange and capital account controls.

Misinvoicing may also be at the hands of buyers, researchers pointed out, in addition to product smuggling. Misalignment of trade rules between partners and a lack of transparency and availability of trade data are also making the situation more difficult to gauge — and, therefore, to correct.

“Statistical errors don’t normally have a trend and keep growing over time,” said Léonce Ndikumana, who is the lead author of the report, in an interview with Financial Times. “The implication is that it is the operators who are explicitly manipulating the invoices. There has to be complicity on both sides. There’s a serious lack of transparency on both sides.”

Regardless of why it happens, the evidence suggests these nations are robbed of billions of dollars of revenue, according to UNCTAD.

“Enhanced transparency in global trade is indispensable, especially through coordinated enforcement of the rules on country-by-country reporting by TNCs at the global level,” UNCTAD’s report concluded.