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: