Saturday March 02, 2024

A new channel to launder money

February 14, 2021

LAHORE: Misinvoicing of goods in trade is a serious violation and there is growing body of evidence that it can also be cleverly used for moving money illicitly across borders.

It involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs.

This is technically a method of laundering illicit wealth through trade. According to Global Financial Integrity misinvoicing is the largest component of illicit financial outflows measured. We must stop this illicit transfer through technology that is freely available.

We are struggling to meet the FATF requirements and have taken many steps to eliminate money laundering. The used car import for instance was a major avenue through which the illegal money stashed outside was transferred back to the country by car importers. The government did the right thing (under pressure from FATF member countries).

Now a used car could only be imported if the payment and its duties are made from the account of the expat Pakistani in whose name the used car is imported. Then the law that provided blanket immunity on remittances received from abroad was changed that also stopped money-whitening by many businesses in Pakistan.

Now only blood relations can get money from relatives in foreign countries and up to a limit. With these two avenues closed, the money laundering at higher level has largely stopped -not fully as hundi business is still in going strong but at lower level.

We have still not been able to control the two avenues that still allow under-invoicing. These are under invoicing and smuggling. Pakistan's manufacturing sector is hostage to these two illegal practices that grab a large share of the domestic market by avoiding custom duties and other government levies.

Under- or over-invoicing in fact is the fraudulent manipulation of the price, quantity, or quality of a good or service on an invoice. By doing so, unscrupulous elements can transfer large amounts of money across international borders easily and quickly.

We have always been talking about the revenue lost due to under-invoicing but have never raised voice against blatant money laundering that takes place through this method.

Besides finished product we also see industrial machinery with zero duties is being imported at higher values on bank loans. The additional amount is stashed outside.

The so-called respectable importers indulge in money laundering to deposit their illegal money amassed from corruption. Businessmen evade substantial amounts of taxes and custom duties under-reporting the value of goods, importers are able to immediately evade substantial customs duties or other taxes. In many countries including Pakistan some export sectors are provided rebates on exports.

To avail these rebates many exporters overreport the value of their exports. The State Bank of Pakistan has restricted the amount of money that a person or business could take out of the country. The entrepreneur breaks this capital control by misinvoicing trade transactions as an illegal alternative to getting money in or out of the country.

Most developed economies have strict controls on underinvoicing. The importers beat that control by first importing the goods from the developed economy to countries like Mauritius or Dubai.

The consignment is then reinvoiced at a much higher value and imported in the country. The over-invoice amount (it could be in millions of US dollars) is then diverted to an offshore bank account owned by that importer.

All these malpractices can be curbed with the help of technology. The Pakistan customs uses technology in case of industrial raw materials.

It calculates custom duty not on the invoice price of the raw material but the prevailing global price that it retrieves from the internet. This proves that the system is available with the custom officials but they use it on only industrial raw material.

When it comes to finished products they clear it according to the invoice value or by enhancing the value by 10 to 20 percent. This is done in connivance with the importer to show on paper that the custom officers are very vigilant. However all this is an eye wash as the original price on the invoice was only 10-20 percent of the actual value.

Adding even 20 percent value would bring the total invoice value to 12-24 percent of actual value. These products compete with similar products produced in Pakistan and marginalise the local industry. The imports are made from illicit money stashed abroad by paying the actual price to the foreign manufacturer.