Trade misinvoicing, or deliberately falsifying import and export invoices, facilitates billions in illicit financial outflows annually across Africa. This endemic issue acts as a major barrier to unlocking the continent’s immense trade potential. What is it then?
It mostly involves exporters and importers deliberately manipulating invoices to disguise capital flows. Under-invoicing exports lower declared value to illegally move foreign exchange earnings elsewhere while avoiding taxes and capital controls. On the other hand, over-invoicing imports enables bringing additional capital into countries informally. The African Development Bank estimates trade misinvoicing drains over $50 billion in revenues yearly from the continent. In 2014, the Nigerian economy lost over $2.2 billion in revenue due to misinvoicing. This was also the sentiment shared in Kenya and South Africa, by their respective national agencies. Not only does trade-misinvoicing starve these nations of incomes needed for necessary development and liquidation of the economy, but it also undermines the State’s policy effectiveness and economic management. Trade misinvoicing has a significant impact on tax revenue in sub-Saharan Africa, reducing it by a considerable amount. Tax holidays and regulatory quality also strengthen the effect of trade misinvoicing, especially in African countries.
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It is important to state that the issue of trade misinvoicing is not limited to Africa but is a global problem. The global shadow financial system, propped up by tax havens and financial secrecy, is equally responsible for the propagation of trade misinvoicing in Africa. However, this has more dilapidating effects on African countries like Nigeria that need the facilitation of trade to rejig their economy and boost private and public economic activities.
If this is a consistent problem that has been recognised by both state and international organisations, then is there a continuous appearance of trade misinvoicing in trade in Africa? There are several issues that foster the persistence of trade misinvoicing, such as:
i. Weak customs enforcement and lack of coordinated trade data make detection difficult: Insufficient resources for customs inspections and incomplete trade documentation pose challenges in identifying invoice discrepancies across Africa’s numerous entry ports.
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ii. Opacity in global financial transactions obfuscates tracing of illicit flows: When financial transactions are not easily traceable, it becomes challenging to monitor and identify illicit flows of money. Illicit actors take advantage of the lack of transparency to engage in trade misinvoicing, a practice where the value of goods declared in cross-border transactions is manipulated to facilitate the illicit movement of funds.
iii. Abundant global tax havens and shell companies facilitate anonymity: Many tax havens and shell companies make it easy for exporters and importers to hide money secretly, consequently making it harder to uncover trade misinvoicing schemes.
iv. Lack of oversight, accountability, and corruption across jurisdictions: The dearth of accountability mechanisms exacerbates the situation, allowing individuals and entities to evade responsibility for their actions. In such an environment, there is a systemic failure to hold wrongdoers accountable, fostering a culture where improper conduct may go unchecked and, in some cases, become normalised. Also, the lack of harmonised international efforts to combat corruption allows illicit actors to exploit jurisdictional gaps, hindering the pursuit of justice and accountability on a global scale.
Plugging leakages, boosting trade
The issue of trade misinvoicing is complex, and there can be valid logistical reasons why exports reported by one country do not match with imports reported by another country for the same product. However, estimates of trade misinvoicing should be taken as a risk indicator for illicit activity in specific industries, especially in African countries. The African Continental Free Trade Area (AfCFTA) presents a significant opportunity for African countries to boost growth, reduce poverty, and broaden economic inclusion. By increasing regional trade, lowering trade costs, and streamlining border procedures, full implementation of AfCFTA would help African countries increase their resiliency in the face of future disruptions, including trade misinvoicing. With the implementation of the AfCFTA, it is hopeful that the current trade regime will be replaced by something more efficient and sustainable. However, deliberate steps must be taken to prevent these leakages, regardless of the trading system. The AfCFTA aims to create a single market for goods and services, which would reduce trade barriers and promote transparency in trade. This increased transparency can help to reduce the incidence of trade misinvoicing by making it easier to track and monitor trade flows.
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AfCFTA also seeks to harmonise trade policies and regulations across African countries, which can help to reduce the complexity and cost of doing business in the region. This will help to reduce the incentives for trade misinvoicing by making it easier and more cost-effective to conduct legitimate trade.
However, African States can also tackle the scourge of trade misinvoicing through consistent efforts on multiple fronts: – by improving transparency of trade documentation, banking records, and corporate ownership structures to remove anonymity loopholes. States can also strengthen enforcement capacities and institutions with advanced data analytics, forensic auditing, and stiffer penalties to boost compliance. Also, with the new wave of nascent technologies, States can adopt blockchain-based supply chain tracking to authenticate provenance and prevent discrepancies, whilst also forging stronger inter-agency and cross-border cooperation on investigations and information sharing.
With persistent efforts to enact multifaceted solutions, the widespread drain and market distortions from trade misinvoicing can be mitigated over the medium term. The payoff will be substantial in improved competitiveness, tax revenues, economic governance, and ultimately accelerated and equitable intra-African trade expansion.
Koroye is a PhD Candidate at the University of Bradford and a free trade fellow at Ominira Initiative.
