Trade misinvoicing—the misrepresentation of the price, quantity, origin, or quality of traded goods—is a serious problem. Misinvoicing deprives the government of revenue by enabling importers and exporters to evade taxes and duties, or to claim undeserved tax incentives. Consider the case of Colombia: According to estimates, in 2016 the country lost approximately US$2.8 billion in revenue due to trade misinvoicing (equivalent to roughly 5.2% of total Colombian tax revenues collected that year)—revenues that could have paid for Colombia’s 2018-2022 National Development Plan more than eight times over. Trade misinvoicing also plays a key role in so-called trade-based money laundering (TBML), as the under- or over-statement of value of traded goods is one way to move value across borders and disguise the origin of illicit wealth. This form of money laundering is especially attractive to criminals, in part because roughly 80% of global trade transactions do not involve bank financing and as a result are not subject to the anti-money laundering (AML) controls that apply to the financial sector. Myriad TBML cases can be found in countries where corruption is systemic and impunity reigns (see here, here, and here).
Corruption of customs officials is the lubricant that makes trade misinvoicing possible. As one illustrative example of the extent and impact of such corruption, consider the case of Humberto Angulo Montero, the former head of the Cartagena Office of Colombia’s National Directorate of Taxes and Customs (Dirección de Impuestos y Aduanas Nacionales, or DIAN). In 2015, following a nine-year investigation, Angulo was arrested for taking kickbacks from smuggling networks importing alcohol, cigarettes, textiles, and shoes. The investigation revealed that Angulo facilitated the under-reporting of goods by up to 50%, allowing the importers to make colossal profits. In return, the importers gave Angulo a share of those profits—a hefty enough share that his personal wealth increased an astounding 580% between 2003 and 2009. Angulo’s case may be extreme, but it is hardly unique.
Governments in countries like Colombia can and should do more to prevent this sort of corruption. While Colombia took an important step forward in 2015 by passing its Customs Law No. 1762, there is still much room for improvement. Here are four recommendations for making progress on this issue, which are tailored to Colombia but that may apply more broadly:
- First, the government should conduct annual national risk assessments to pinpoint trade sectors that are at especially high risk for corruption and misinvoicing; such reports can help the government determine how to allocate its anticorruption resources most effectively. High-risk areas might include free trade zones, and might also include goods and sectors with larger import-export value gaps, as well as trading partners where TBML risks are greatest. Colombia’s Financial Intelligence Unit (Unidad de Información y Análisis Financiero, or UIAF) has been conducting national risk assessments every three years, but these assessments do not focus specifically on trade misinvoicing and TBML, and lack clear recommendations for addressing these problems. Future UIAF assessment should include a chapter dedicated specifically to trade. This assessment should be prepared in collaboration with DIAN, and should incorporate findings from think tanks and international organizations such as Global Financial Integrity (GFI), the Latin American Financial Action Task Force (GAFILAT), and the International Monetary Fund (IMF), all of which have conducted numerous analyses identifying country-specific vulnerabilities and facilitators of trade-based corruption and money laundering. GFI’s 2019 report on Colombia, for example, flags mineral fuels, precious stones and metals, and machinery as high-risk products for trade misinvoicing, and also identifies Colombia’s trade with the United States, China, and Mexico to be high-risk trading partners for TBML.
- Second, countries can make use of modern technology to increase transparency and accountability at customs checkpoints. In Colombia, for example, DIAN should make use of GFTrade – a tool that provides real-time price comparisons for traded goods, thereby helping to flag potential trade misinvoicing for further investigation. In addition, Colombia should convert the processing of trade-related documents from traditional systems to technologically advanced systems using distributed ledger technologies (DLT) such as blockchain. According to GFI, DLT can “help share and verify data across multiple devices to increase transparency, reduce the risk of tampering, and remove the need for a trusted third party.” Admittedly, a country like Colombia might not have the resources or technical expertise to implement such tools, but if that is so, then the international community should provide appropriate assistance.
- Third, DIAN should implement fully the World Customs Organization’s Data Model, which standardizes customs procedures by consolidating data requirements and facilitating cross-border information sharing. Although DIAN has made some efforts in this vein, it has not yet fully implemented this model in its customs management system. Doing so would help DIAN close gaps in information, and ensure the proper control and efficient movement of goods across borders.
- Fourth, the collection and sharing of beneficial ownership (BO) information must be done in a complete and timely manner. Currently Colombian customs authorities are missing important BO data for complex corporate structures, especially when foreign ownership or control is involved. Moreover, there is a one-year time lag in between the update of BO registers. These inefficiencies create loopholes for legal entities to hide their true identity through the use of proxies at the time of reporting. To address this challenge, Colombia should integrate BO information as part of its customs laws and create a public registry of BO information within an integrated and secured system that would allow the real-time access of information among all relevant stakeholders, such as UIAF and DIAN.
In Colombia, as in far too many countries around the world, criminal networks are able to corrupt the customs service in order to facilitate smuggling, money laundering, and other malfeasance. Implementing the recommendations described above might not eliminate this problem, but would nonetheless make it substantially harder for corrupt customs officials to facilitate (or, worse participate in) trade misinvoicing schemes without getting caught.
Really interesting post! As I read through your recommendations, I had two lingering questions:
Do you have a sense of why some trades might be more susceptible than others to TBML schemes? You mention some examples of those trades (for example, machinery and mineral fuels), but it didn’t seem to me that there was an obvious pattern. One obvious answer might be that the market price for certain goods in international markets is not settled, which would provide leeway for inflating the price for the purposes of money laundering. But I would be surprised if some of the goods you mention fit this description (do mineral fuels really not have a settled price?), so I wonder if there is another explanation that I am missing.
I briefly looked at GFTrade, and it does indeed look like an effective tool. As far as I can tell, the tool is aimed at combating the issue of mispricing, but it’s not apparent that it can counter some of the other kinds of trade misinvoicing you mention, like misrepresentations of quantity or quality. I imagine that those forms of misrepresentation are much more difficult to tackle in real-time. Do you have a sense of how technological solutions can be deployed for those issues?
Thanks, Ella. Your post raises a host of interesting issues. Your suggestions all seem helpful in reducing TBML of the proceeds of corruption. I agree that collecting and sharing beneficial ownership information is important, but I wonder how realistic it is–at least in the short-to-medium term. Collecting BO information is difficult and time-consuming and ensuring its accuracy, as you note, is especially difficult. That said, anything that makes international trade more transparent would be helpful.
You mention that corrupt customs officials often make the TBML system in Colombia and other countries work. I wonder if we could do more to identify or expose such officials. Angulo seems to have become prosperous through his illicit activities, and it took his colleagues a long time to catch on. Given these circumstances, it seems as though the customs service should impose additional controls for identifying and apprehending corrupt officials.
Wonderful post, Ella! Thank you for these insights and articulating some possible ways forward for Colombia. Your solutions appear to be cross-cutting, and importantly adapt to some of the modern ways corrupt actors have taken advantage of gaps at customs checkpoints, for example. I am curious, however, about your assessment of the government’s ability to implement some of these much-needed responses. You mention that Colombia took a promising step with the 2015 Customs Law–how has that legislation been working in the last several years? Has the government attempted to engage in any extra-legislative measures? If not, then it seems all the more necessary for some of these solutions to move forward.