$10bn lost annually as illicit financial flows ride through South Africa – Rowden

South Africa is combatting a scourge of illicit financial flows out of the country. In 2015, former President Thabo Mbeki released a report in which he said that illicit financial outflows from South Africa far outstripped official development aid. Even Jacob Zuma raised the alarm about 'the scourge of illicit flows" just before he departed and said South Africa signed several international treaties to exchange information. It is not always easy to come up with exact numbers of what the extent of the problem is, but a Washington-based company, Global Financial Integrity has identified a $8.7trn gap in global reported trade. The GFI has indicated that $1 of every $5 that is sent out of South Africa in trade, is actually done illicitly, which means Finance Minister Tito Mboweni is missing out on an eye watering sum of trade taxes. The GFI's Rick Rowden, a senior economist told Alec Hogg that they have developed a data tool that can analyse the individual transactions of companies. – Linda van Tilburg."What we monitor is the amount of trade that happens between two countries that is not recorded. Sort of the hidden amount of trade that is happening, the actual value that is being hidden because of the way the importers and exporters falsify the prices that they put on their invoices that they submit to their respective customs," says the Global Financial Integrity's Rick Rowden. The actual price of cargo being shipped between countries could either be under-priced or over-priced depending if people were trying to move money in or out of countries. 20% was roughly their estimate for South Africa's trade with 36 advanced economies..___STEADY_PAYWALL___.Rowden said they worked out what the gap was by using the partner country method and by doing an analysis of the international trade data. Every year, most countries will submit reports to the United Nations, the International Monetary Fund or other international organisations about what their total number of imports and exports were over the previous year and that was a standard procedure that a lot of countries have done for many decades..What they do, is to take the reported official data by governments and compare and contrast any two trading partners to see what each said about the other or about their trade with the other. "So, for example if Ecuador said it exported $20m in bananas to the United States in 2016 but the United States reported that it only imported $15m in bananas from Ecuador in that year; then you would have a value gap or a mismatch of $5m. It is the difference between what two countries each report about having imported and exported with another in a given year. We identify those gaps.".Rowden said every exporter or importer, when they were making a shipment, had to submit invoices about that cargo to the customs authorities in their countries and there was a space on the invoice form where they have to declare a price for those goods. "And what we have specialised in, is to understand the practice of what we call, trade 'mis-invoicing', where importers and exporters will deliberately under-price or over-price the cargo they are importing or exporting as a way of shipping money illicitly in and out of countries. It is not so much money per se, it's more like value that is being moved." They could be overpricing food commodities or stuffed animals or cell phones. It didn't really matter what goods were being shipped. It was the fact that the money was illicitly moving along with the cargo when it was either being over- or under-priced..In the case of South Africa, the illicit flows went both ways. In the report, they looked at two sets of countries, 135 developing countries and their officially reported trade with a set of 36 rich countries or advanced economies, and identified all of the mismatches in the officially reported data to come up with one big value gap per country over the previous 10 years. They also looked at the trade between 135 developing countries with a broader set of countries in the same way. The illicit flows between South Africa and 36 of the rich countries amounted to $9.8bn a year on average over the ten years between 2008 and 2017. What it means was that for each one of the 36 richer countries; there was a mismatch, people on one or both sides of those trades were falsifying the prices of their imports and were moving unrecorded money illicitly along with their cargo..If you can break down individual trade flows; can you break down into individual companies and go after them, Biznews publisher Alec Hogg asked. Rowden said they could, and they were encouraging developing countries to develop the capacity to do this as they were losing huge amounts of potential trade taxes. The rich countries were losing taxes as well, but when developing countries were losing these taxes, it had a much bigger impact on developing countries as they needed as much public revenue and trade revenue as they could get to invest into development and poverty reduction. They are concerned about the amount of value that is transferred in and out of countries which is not being properly taxed. It was not taxed on both sides, but they were especially concerned about the loss of tax revenues on the developing countries side..There are things developing countries can do to prevent this. The GFI has developed a particular tool but there are similar exercises if countries wanted to invest in the resources needed to do it. He said they could go down to the transactional level of a particular company. They developed a data base tool that allowed customs officials to see what an importer and exporter had declared for the price on their invoice for a particular shipment.."They can look over the previous 12 months and see what the average prevailing price for the same goods for imports and exports were for 43 other major economies around the world. "We can see if this person is declaring a price that is similar to that or is it 'out of whack." If it was way off the average prevailing prices over the previous 12 months by other economies; that invoice could be flagged, and customs authorities could set it aside for further inspection of the cargo or dig deeper into what was going on what that exporter or importer. They have experimented with the policy tool in a few countries and it has been going really well so far..Rowden said they wanted to encourage other developing countries to undertake similar measures to crack down on the problem of trade invoicing. He did not want to reveal the names of countries that they have been working with but shared the example of one African country where they managed to flag $100m of cargo that was mis-invoiced over a three month period. It enabled the authorities to dig into that and find out what the true value of imports and exports were and to re-tax the imports and exports for the actual amount due on the $100m worth of cargo and they were very happy about that..He said it took political will on the part of the government and what was needed was to have governments who were willing to crack down on these practices He said the practice of mis-invoicing was an established practice within the domestic political economy and in some cases the governments and businesses had a vested interest in keeping these practices to continue to benefit from it. They were calling on governments to crack down..Rowden was not sure whether the African country in question made any arrests. He said in some countries it was not technically illegal to falsify an invoice for an import or export. In 2013, South Korea did make invoice falsification a crime and his organisation wanted to encourage other countries to do that. They are also encouraging governments to step up penalties for being involved in such activity..South Africa ranked 112 out of 135 countries on the list, which meant that it was not as bad as many other developing nations, but he still regarded it as a considerable problem. $10bn should have been collected by South Africa annually over the ten years and represents 19% of the country's total trade with the 36 richest countries. "One fifth of the value of your trade moving illicitly is quite a lot of money that South Africa is missing out on trade taxes."

$10bn lost annually as illicit financial flows ride through South Africa – Rowden

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