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How Pakistan's Corrupt Elite Use Trade Misinvoicing to Launder Money

Pakistan's exports have declined significantly since former Prime Minister Nawaz Sharif's PMLN party assumed power in 2013. They are down from about $25 billion in 2013-14 to about $20 billion in 2016-17.  At the same time, the nation's imports have jumped to $47 billion during this period, widening the trade deficit to a record $27 billion. Overvaluation of the Pakistani currency and CPEC related imports are often cited as a reason for it. The other, probably more important reason, may be increasing misinvoicing of trade facilitated by the people in power. Trade misinvoicing is the largest component of illicit financial outflows from developing countries, according to Washington-based Global Financial Integrity (GFI) which tracks such flows.

Trade Misinvoicing:

Global Financial Integrity (GFI) defines trade misinvoicing as "fraudulently manipulating the price, quantity, or quality of a good or service on an invoice submitted to customs" to quickly move substantial sums of money across international borders.

How does trade miscinvoicing work? Here's an example:

Let's say an exporter in Pakistan exports goods worth $1 million to a foreign country and invoices it at $500,000 through an offshore middleman.  The middleman invoices and collects $1 million from the end customer, sends $500,000 to Pakistan and deposits $500,000 in an offshore account. The result: Pakistan is deprived of the $500,000 in foreign exchange.

Similarly, imports of goods worth $1 million to Pakistan are overinvoiced at $1.5 million through an offshore middleman and the difference is kept in an overseas account. The result: Pakistan loses another $500,000 in foreign exchange. Meanwhile, the Pakistani traders and the officials facilitating misinvoicing together pocket $1 million or 50% on the two trades.  Pakistan's trade and current account deficits grow and the foreign exchange reserves are depleted, forcing Pakistan to go back to the International Monetary Fund (IMF) for yet another bailout with tough conditions.

Terror and Drug Financing:


It is not just greedy politicians, unscrupulous businessmen and corrupt officials in developing countries who rely on fraudulent manipulation of trade invoices; all kinds of drug traders, terrorists and criminals also use what is called TBML (trade-based money laundering).

John A. Cassara, former US intelligence official with expertise in money laundering, submitted written testimony for a US Congressional hearing on “Trading with the Enemy: Trade-Based Money Laundering is the Growth Industry in Terror Finance” to the Task Force to Investigate Terrorism Financing Of the House Financial Services Committee February 3, 2016. Here's an except from it:

"Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur. This businessman could charitably be described as being involved in international grey markets and illicit finance. We discussed many of the subjects addressed in this hearing including trade-based money laundering, terror finance, value transfer, hawala, fictitious invoicing, and counter-valuation. At the end of the discussion, he looked at me and said, “Mr. John, don’t you know that your adversaries are transferring money and value right under your noses? But the West doesn’t see it. Your enemies are laughing at you.”"

Foreign Residency(Iqama):

Assets held by people in offshore tax havens are tracked by their country of residence, not by their citizenship, under OECD sponsored Agreement On Exchange of Information on Tax Matters. Pakistan is a signatory of this international agreement.  When Pakistan seeks information from another country under this agreement,  the nation's FBR gets only the information on asset holders who have declared Pakistan as their country of residence. Information on those Pakistanis who claim residency (iqama) in another country is not shared with Pakistani government. This loophole allows many Pakistani asset holders with iqamas in other countries to hide their assets. Many of Pakistan's top politicians, bureaucrats and businessmen hold residency visas in the Middle East, Europe and North America.

Loss of Tax Revenue:

Customs duties in developing countries often make up a huge part of the tax revenue collected by the governments. Trade Misinvoicing not only increases current account deficits but also worsen budget deficits by cutting tax receipts. Raymond Baker, author of Capitalism's Achilles Heel, has written about it as follows:

"The Pakistan government's largest source of revenues is customs duties, and therefore evasion of duties is a national pastime. Isn't there a way to tap into this major income stream, pretending to fight customs corruption and getting rich at he same time? Of course; we can hire a reputable (or disreputable, as the case maybe) inspection company, have the government pay the company about one percent fee to do price checking on imports, and get multi-million dollar bribes paid to us upon award of the contracts. Societe de Generale de Surveillance (SGS), headquartered in Switzerland, and its then subsidiary Cotecna, the biggest group in the inspection business, readily agree to this subterfuge. Letters in 1994 promised "consultancy fees", meaning kickbacks, of 6 percent and 3 percent to British Virgin Island (BVI) companies, Bomer Finance Inc. and Nassam Overseas Inc., controlled by (Benazir) Bhutto and (Asif) Zardari. Payments of $12 million were made to Swiss bank accounts of the BVI companies."

Aid in Reverse:

Some have called London the "Money Laundering Capital of the World" where corrupt leaders from developing nations use wealth looted from their people to buy expensive real estate and other assets. Private individuals and businesses from poor nations also park money in the west and other off-shore tax havens to hide their incomes and assets from the tax authorities in their countries of residence.

The multi-trillion dollar massive net outflow of money from the poor to the rich countries has been documented by the US-based Global Financial Integrity (GFI). This flow of capital has been described as "aid in reverse". It has made big headlines in Pakistan and elsewhere since the release of the Panama Papers and the Paradise Leaks which revealed true owners of offshore assets held by anonymous shell companies. Bloomberg has reported that Pakistanis alone own as much as $150 billion worth of undeclared assets offshore.

Impact on Economic Growth:

There's a direct relationship between investment and GDP. Flight of capital reduces domestic investment and depresses economic growth in poor countries. Lower tax revenues also impact spending on education, health care and infrastructure, resulting in poor socioeconomic indicators.

In Pakistan, for example, it takes investment of about 4% of GDP to grow the economy by 1%. Lower levels of investments in the country has kept its GDP growth below par relative to the rest of South Asia.  Any reduction in the outflow of capital to offshore tax havens will help boost economic growth in Pakistan to close the gap with its neighbors, particularly Bangladesh and India whose economies are both growing 1-2% faster than Pakistan's.

Summary:

Pakistan's exports have declined significantly since former Prime Minister Nawaz Sharif's PMLN party assumed power in 2013. They are down from about $25 billion in 2013-14 to about $20 billion in 2016-17. Overvaluation of the Pakistani currency is often cited as a reason for it. The other, probably more important reason, may be increasing underinvoicing of exports facilitated by the people in power. Trade misinvoicing is the largest component of illicit financial outflows from developing countries as measured by New York- based Global Financial Integrity (GFI) which tracks such flows.

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Views: 102

Comment by Riaz Haq on May 1, 2018 at 7:50pm
The Magnitude of Trade Misinvoicing and Resulting
Revenue Loss in Pakistan
Tehseen Ahmed Qureshi* and Zafar Mahmood**


http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/Journals...

Abstract
This study estimates the magnitude of trade misinvoicing in Pakistan with
21 of its developed trading partners in 52 major traded commodities during 1972–
2013. We find that the total volume of trade misinvoicing for this period exceeds
US$92.7 billion. The gross revenue loss borne by the national exchequer due to
trade misinvoicing is estimated at US$21.2 billion. Moreover, the total net revenue
loss is an estimated US$11 billion in the form of evasion of customs duties and
export withholding tax. The annual average net revenue loss due to trade
misinvoicing is almost equivalent to 11.2 percent of the total revenue generated
from customs tariffs. We also find that customs tariffs and the interest rate are
positively associated with import under-invoicing, while improvements in the
current account balance and political stability reduce the extent of import overinvoicing.
Capital account openness is found to be insignificant in determining
trade misinvoicing.

-------------


Kar and Spanjers (2015) estimate that the sum of total trade
misinvoicing in 2013 in developing countries was US$1.1 trillion. The total
trade misinvoiced during 2004–13 is estimated to be around US$7.8 trillion
for 55 developing countries. Furthermore, trade misinvoicing accounts for
83 percent of the total illicit trade in developing countries. This implies that
illegal financial flows resulting from trade misinvoicing have a
considerable damaging impact on developing economies (Kar, 2010).
Kar and Spanjers (2015) also point out that, in the Global South,
trade misinvoicing has increased over time. Trade misinvoicing in
emerging countries is increasing on average at 6.5 percent per annum.
The total trade misinvoiced in Asia accounts for 38.8 percent of total trade
misinvoicing in emerging countries. It also has the highest annual growth
rate of trade misinvoicing at 8.6 percent. The top exporters of illegal
capital are Asian countries, including Malaysia, China, India, the
Philippines, Indonesia and Thailand. Russia is the main source of trade
misinvoicing in Europe. Illicit flows from the West are generated
primarily by Mexico and Brazil.
The first study to estimate illegal flows of capital from developing
countries due to trade misinvoicing was carried out by Bhagwati (1964). He
compares the bilateral trade data for Turkey with that of its trading
partners. He accounts for the discrepancies between the trade figures of the
partner countries by indicating that either of the two or both had exploited
their trade invoices to move capital. Given that the customs administration
in advanced countries is more likely to be simpler, transparent and
accountable relative to developing countries, we can assume that the data
for developed countries is more reliable for comparison purposes
(Bhagwati & Hansen, 1973).
Historically, Pakistan has maintained very high tariff rates and
relied on nontariff barriers (NTBs) to protect domestic industries from 
The Magnitude of Trade Misinvoicing and Resulting Revenue Loss in Pakistan 3
foreign competition. Both tariffs and NTBs are seen as major reasons for
import under-invoicing. Pakistan has also offered many incentives to
promote export-oriented industrialization. While these incentives have
helped the country maintain a reasonable rate of export growth, many
exporters have also manipulated them to their advantage by engaging in
unfair and illegal practices. Such practices cause not only financial losses to
the exchequer, but also undermine the very objective of these policies.
Consequently, exporters who do not engage in such malpractices are
subject to large losses because their bargaining position in the market tends
to weaken (Mahmood & Mahmood, 1993)
Comment by Riaz Haq on May 1, 2018 at 9:16pm

Pak China under-invoicing

https://www.brecorder.com/2018/03/12/404239/pak-china-under-invoicing/

About a decade ago, it was proposed that Pakistan Customs be linked with China Custom to curb or at least minimize under-invoicing. Intermittently, there have been reports about progress towards the establishment of an Electronic Data Interchange System (EDIS) but nothing appears to have materialized until now. This month the deadline of April 30 was set for Pakistan and China to exchange trade data digitally.

Yes, the discrepancies of Pakistan China trade have undoubtedly raised many red flags. While many problems plague Pakistan’s current account that would require extensive re-hauling of the economy in the long term to fix, this is a problem that can be addressed in the short term and can save the economy billions.

One estimate suspects under-invoicing to have crossed the Rs.300 billion in 2010 on imports from China. A relatively simplified but pertinent estimation of Pakistan-China trade by PBC placed the discrepancy at $3.5 billion for 2016.

But as laudable as this measure is, assuming that its implemented timely and not left to languish for another decade, it has a number of caveats attached. Pak-China trade is not the only bilateral trade prone to under-invoicing nor is the official channel of formal trade the only avenue for nefarious activities.

A study published in 2016 by the Lahore Journal of Economics estimated more than $92.7 billion in losses from 1972 to 2013 for 52 major traded commodities for trade with 21 partners due to mis-invoicing. The gross revenue loss to the national exchequer was placed at $21.1 billion while loss of revenue in the form of custom duties evasion and export withholding tax was at $11 billion. The annual average net revenue loss due to it was roughly equal to 11.2 percent of revenue from tariffs. While trade with China was identified as one of the main culprits, it is by no means the only one.

A PBC study on under-invoicing from UAE lists a range of goods from mineral and chemicals to dyes, cosmetics and textiles on which disparities were observed. As per the study, Pakistan loses about Rs.150 billion each year to under-invoicing which is part of the Rs.600 billion lost each year due to smuggling and misuse of concessionary duties.

Among other countries, a cursory comparison between ITC data and SBP data for Pakistan’s trade with USA, Japan, and Indonesia lead to a discrepancy of nearly Rs.1.9 billion.

APTTA is another channel that is in a league of its own. In 2015, 9 out of the top 10 products imported through APTTA were recorded at values significantly higher reported exports by partner countries. The value of these discrepancies of the top 10 products alone was $1.4 billion that is nearly 60 percent of APTTA’s $3.18 billion trade (as per statistics reported by PBC based on Pakistan Customs data).

By its very nature, it is hard if not impossible to gauge the actual extent of illicit trade activities. The estimates however provide a rough guideline as to the scale of problem faced by the country. One hopes that EDIS would be implemented this time and not left to dwindle away in talks. One also hopes that this is seen as a step in the right direction, the first of many, which need to be taken to fix the chronic problems of trade figures’ disparities.

Comment by Riaz Haq on May 1, 2018 at 9:39pm

GFI on Trade Misinvoicing:


http://www.gfintegrity.org/solutionsforinspiredeconomies/

Trade misinvoicing has impacted emerging market and developing countries for decades by siphoning capital out of economies and denying governments vitally important domestic resources. This phenomenon is utilized for the purpose of 1) manipulating VAT taxes, customs duties, income taxes and other sources of revenue for Governments, and 2) shifting money into or out of countries in a manner that cannot be easily detected.

This reality may be manifested through:

Import Over-Invoicing
Import Under-Invoicing
Export Under-Invoicing
Export Over-Invoicing

The drainage of money out and the loss of revenue in emerging market and developing countries is in the hundreds of billions of dollars annually.

Solutions for Inspired Economies is a three-part program addressing this reality. Each part may be undertaken individually, or simultaneously, or in any order. The three components are:

Economic Analysis
Policy Dialogue
GFTrade Global Trade Pricing Database

The following materials present details on each of these components of the Solutions for Inspired Economies package.


Economic AnalysisPolicy DialogueGFTrade
Economic Analysis
Global Financial Integrity (GFI), with years of experience analyzing trade data, undertakes an in-depth analysis of a country’s misinvoicing problem. Data is drawn from two sources:

International Monetary Fund Direction of Trade Statistics
United Nations Commodity Trade Statistics Database

IMF Direction of Trade Statistics (DOTS) presents data on a country’s bilateral trade with its trading partner countries. With this data source GFI is able to appraise the magnitude of trade misinvoicing impacting a country and in many cases detect with which trading partner countries misinvoicing is most frequently evidenced.

UN Commodity Trade Statistics Database (UN Comtrade) presents bilateral trade data by country and by Harmonized System commodity code identification, enabling further examination of bilateral trade discrepancies and scrutiny of which commodity groups reveal misinvoicing most frequently.

Utilizing these two sources of data, GFI produces a thorough analysis of the magnitude of a country’s misinvoicing problem. We can determine how much of the problem stems from import over- or under-invoicing or export under- or over-invoicing. With a sufficiently long time series of data, we are often able to measure how economic and political events have influenced misinvoicing. Across shorter time periods we can estimate what revenues have been lost to Governments. And we are often able to measure the relationship of illicit financial flows through trade misinvoicing to other factors such as foreign direct investment, tax policy, social expenditures, and inequality.

The Economic Analysis provides a useful first step in determining how a country may progress in curtailing its trade misinvoicing problem.

Comment by Riaz Haq on May 2, 2018 at 3:17pm

With new order on unexplained wealth, UK can seize assets of corrupt politicians, criminals
Property in London and other major cities in the United Kingdom is said to be the major destination of corrupt cash.

https://www.hindustantimes.com/world-news/with-new-order-on-unexpla...

Corrupt foreign politicians and criminals who launder an estimated £90 billion every year through the United Kingdom will need to explain their wealth under a new law called Unexplained Wealth Order (UWO) that came into force this week, or face seizure.

Property in London and other major cities in the United Kingdom is said to be the major destination of corrupt cash. The British news media mention Russian oligarchs in this regard, but the measure applies toindividuals from all countries.

Transparency International UK has identified £4.4 billion worth of property in the UK that may be the target of UWOs. Five properties it suspects had been bought using corrupt wealth includes two by former Pakistan prime minister Nawaz Sharif in London.

Provided under the Criminal Finance Act, the UWO allows authorities to freeze and recover property if individuals are unable to explain how they acquired assets in excess of £50,000. Previously, British authorities had few powers to act unless the individuals had a conviction in the country of origin.


Ben Wallace, security minister, told The Times on Saturday that he wanted the “full force of the government” to bear down on criminals and corrupt politicians using Britain as a playground and haven: “When we get to you we will come for you, for your assets and we will make the environment that you live in difficult”.

“If they are an MP in a country where they don’t receive a big salary but suddenly they have a nice Knightsbridge townhouse worth millions and they can’t prove how they paid for it, we will seize that asset, we will dispose of it and we will use the proceeds to fund our law enforcement,” he added.

Rachel Davies Teka of anti-corruption Transparency International UK, said: “The introduction of UWOs is a significant moment in the fight against dirty money flowing into the UK. They will allow law enforcement to much more easily investigate assets that are highly likely to have been bought using corrupt money, often stolen from populations in some of the poorest parts of the world.”

“From Russia to Nigeria to the Middle East it is no secret that corrupt officials have channelled ill-gotten funds into the UK via the property market”.

Comment by Riaz Haq on May 15, 2018 at 9:39pm

Electronic data exchange between #China and #Pakistan to go live soon to deal with huge discrepancy in #trade figures ($12 billion imports in Pakistan vs $16 billion exports from China in 2017), excise #tax evasion and #MoneyLaundering. #misinvoicing

https://www.thenews.com.pk/print/317155-electronic-data-exchange-wi...

Pakistan is on the verge of launching electronic origin data exchange, which would enable real time recording of trade between the two countries and help curb revenue evasion as well as money laundering, an official said.

Directorate General of Reforms & Automation – Customs has developed the software in this regard and user acceptance testing by Trade Development Authority of Pakistan (TDAP) has also been concluded.

“Presently, the testing of electronic message exchange through the software is in progress between the technical teams of China and Pakistan,” the official said.

The official added that the system, being developed under China-Pakistan free trade agreement (FTA), would be available for live data exchange after the completion of testing.

Imports from China constitute a significant part of Pakistan’s total imports, which opened doors for under-invoicing aimed at revenue evasion as well as over-invoicing aimed at moving out foreign exchange in an organized manner.

Finance Minister Miftah Ismail, in a recent interaction with newsmen, had said the government had detected mass under-invoicing on imports from China. The premier had also said the record at Pakistan Customs reported imports of $12 billion from China last year, while data at Chinese Customs reported exports of $16 billion to Pakistan during the same period.

A trader, requesting anonymity, said under-invoicing and revenue evasion was only a part of the damage, China-Pakistan FTA dealt to the local industry and economy.

Quite recently, Pakistan Customs detected large scale money laundering through gross over invoicing of solar PV panels imported from China, and advocated concerted efforts involving State Bank of Pakistan (SBP) and by extension commercial banks.

Earlier in June last year, Pakistan Solar Association (PSA) in their representation to Customs authorities had shared actionable information regarding money laundering through over-invoicing of solar (photovoltaic) panels and requested investigation into the matter. The investigations had revealed the said goods were being imported into the country from China at double the international market rates.

The official further said the implementation of electronic data exchange between China and Pakistan under Pak China FTA would facilitate trade and help combating commercial frauds.

Comment by Riaz Haq on May 15, 2018 at 9:40pm

#British National #Crime Agency (NCA) warns that #UK remains prime destination for foreign corrupt person and politicians and their families to launder money, with biggest sources of #corrupt investment being #Russia, #Nigeria, #Pakistan. #MoneyLaundering

https://www.theguardian.com/uk-news/2018/may/14/uk-businesses-warne...

British businesses are at risk of being drawn into corrupt practices after the UK leaves the European Union in a Brexit-driven surge in crime, law enforcement officials have warned.

UK-based companies looking to increase trade with countries outside the EU are more likely to come into contact with corrupt markets, particularly in the developing world, the National Crime Agency (NCA) said.

Brexit will also provide greater opportunities for criminals to launder money, such as investing dirty cash in British businesses that deal in high-value items such as gems and precious metals, the agency said.

In its annual assessment of serious and organised crime, the NCA said criminals would take advantage of a redesigned customs setup when the UK leaves the EU, as well as any gaps in intelligence-sharing between countries, which could lead to international fugitives evading capture.

“As the UK moves towards exiting the EU in March 2019, UK-based businesses may look to increase the amount of trade they have with non-EU countries,” the report said. “We judge this will increase the likelihood that UK businesses will come into contact with corrupt markets, particularly in the developing world, raising the risk they will be drawn into corrupt practices.”

The NCA said the result of the EU referendum would be “a key driver of uncertainty” in the next five years.


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Nikki Holland, the director of investigations for the National Crime Agency, said: “We know the criminals will adapt to what the arrangements are and exploit any loopholes. We think while there is uncertainty … the criminals will be waiting to see what the opportunities and loopholes are, to get their goods across the border during any confusion.”

As well as the NCA, police forces, MI5, MI6, GCHQ, the Border Force, immigration enforcement and the Prison Service all contributed to the assessment.

Law enforcement agencies, including the NCA, have previously warned of the risks to intelligence sharing posed by the vote to leave the EU.

Lynne Owens, the NCA director general, has , including use of the European arrest warrant and membership of Europol, amid concerns about the impact of leaving the EU.


Membership of the EU gives the NCA and UK police forces access to tools that allow them to share intelligence quickly and efficiently with European counterparts.

Before the referendum, former security chiefs, including the former head of MI5 Eliza Manningham-Buller and the former head of MI6 Sir John Sawers, had said that voting remain was in the best interests of the country’s security.

Elsewhere in the report, the NCA warned that the UK remained a prime destination for foreign corrupt and politically exposed people to launder money, with the biggest sources of corrupt investment being Russia, Nigeria and Pakistan.

“Investment in UK property, particularly in London, continues to be an attractive mechanism to launder funds,” the report said.

The NCA said that the scale of money laundering in the UK annually is in the billions of pounds.

The agency also flagged an increase in criminal gunfire on the streets of Britain. The report said the majority of weapons had not been previously used, which suggested an easy flow of illegal weapons into the UK.



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