The Case of the Missing Exports: What Trade Discrepancies Mean for Anticorruption Efforts

In 2017, the Republic of Georgia sent $272 million in exports to its neighbor, Azerbaijan. The same year, Azerbaijan reported receiving $74 million—that’s not a typo—in imports from Georgia. Goods worth $198 million seemingly disappeared before they reached Azerbaijani customs. The gap is a big deal. Azerbaijan taxes imports just above 5% on average (weighted for trade), which means its treasury missed out on collecting roughly $10 million in tariffs—0.1% of all government spending in that year—from just a single trading partner.

Many factors could explain the gap (see, for example, here, here, and here). Shippers might have rerouted goods to other destinations, the two countries’ customs offices might value goods differently, or the customs offices could have erred in reporting results or converting them to dollars. But one reason Azerbaijan’s reported imports are so low—not only here, but systemically across trade partners and years—is corruption and associated tariff evasion. Many traders likely undervalue and/or underreport their imports when going through Azerbaijani customs, and the sheer magnitude of the trade gap suggests the complicity or collusion of the authorities. The corruption involved might be petty (e.g., an importer bribing a customs officer to look the other way, or a customs officer pocketing the tax and leaving it off the books) or grand (e.g., a politician with a side business using her influence to shield imports from inspection; see here). A similar dynamic might also be at work in exporting countries: companies may undervalue exports to limit their income tax liability, possibly paying bribes to avoid audits.

Though Azerbaijan may be an extreme case, it is not unique. Economists have examined these export gaps (sometimes called “mirror statistics”) and have found similar discrepancies in, for example, Hong Kong’s exports to China, China’s exports to the United States, and Cambodia’s imports from all trading partners. Most recently, economists Derek Kellenberg and Arik Levinson compared trade data across almost all countries over an eleven-year time period, finding that “corruption plays an important role in the degree of misreports for both importers and exporters.” For lower-income countries, Professors Kellenberg and Levinson showed a positive relationship between a country’s level of perceived corruption, as measured by Transparency International’s Corruption Perceptions Index (CPI), and its underreporting of imports. The authors also showed a strong positive relationship between perceived corruption and the underreporting of exports across all countries.

Mirror statistics are an imperfect measure of customs corruption, to be sure, but they can serve two useful purposes in fighting this sort of corruption, and anticorruption reformers should pay more attention to this type of data. Continue reading

The Global Community Must Take Further Steps to Combat Trade-Based Money Laundering

Global trade has quadrupled in the last 25 years, and with this growth has come the increased risk of trade-based money laundering. Criminals often use the legitimate flow of goods across borders—and the accompanying movement of funds—to relocate value from one jurisdiction to another without attracting the attention of law enforcement. As an example, imagine a criminal organization that wants to move dirty money from China to Canada, while disguising the illicit origins of that money. The organization colludes with (or sets up) an exporter in Canada and an importer in China. The exporter then contracts to ship $2 million worth of goods to China and bills the importer for the full $2 million, but, crucially, only ships goods worth $1 million. Once the bill is paid, $1 million has been transferred across borders and a paper trail makes the money seem legitimate. The process works in reverse as well: the Canadian exporter might ship $1 million worth of goods to the Chinese importer but only bill the importer $500,000. When those goods are sold on the open market, the additional $500,000 is deposited in an account in China for the benefit of the criminal organization. Besides these classic over- and under-invoicing techniques, there are other forms of trade-based money laundering, including invoicing the same shipment multiple times, shipping goods other than those invoiced, simply shipping nothing at all while issuing a fake invoice, or even more complicated schemes (see here and here for examples).

As governments have cracked down on traditional money-laundering schemes—such as cash smuggling and financial system manipulation—trade-based money laundering has become increasingly common. Indeed, the NGO Global Financial Integrity estimates that trade misinvoicing has become “the primary means for illicitly shifting funds between developing and advanced countries.” Unfortunately, trade-based money laundering is notoriously difficult to detect, in part because of the scale of global trade: it’s easy to hide millions of dollars in global trading flows worth trillions. (Catching trade-based money laundering has been likened to searching for a bad needle in a stack of needles.) Furthermore, the deceptions involved in trade-based money laundering can be quite subtle: shipping paperwork may be consistent with sales contracts and with the actual shipped goods, so the illicit value transfer will remain hidden unless investigators have a good idea of the true market value of the goods. Using hard-to-value goods, such as fashionable clothes or used cars, can make detection nearly impossible. Moreover, sophisticated criminals render these schemes even more slippery by commingling illicit and legitimate business ventures, shipping goods through third countries, routing payments through intermediaries, and taking advantage of lax customs regulations in certain jurisdictions, especially free trade zones (see here and here). In a world where few shipping containers are physically inspected (see here, here, and here), total failure to detect trade-based money laundering is “just a decimal point away.”

The international community can and should be doing more to combat trade-based money laundering, starting with the following steps:

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Why the WTO Should Tackle Border Corruption

When a state systematically fails to suppress bribery in its customs service, should that be an actionable violation of international trade law? More broadly, to what extent do anticorruption provisions have a place in the law of the World Trade Organization? In a 2014 post on this blog, Colette van der Ven squarely addressed these questions and concluded that the answer is no: the WTO, in her view, is not well suited to handling complaints of corruption.

I disagree with Colette’s well-reasoned analysis. While she is right to point out substantial challenges to grappling with anticorruption through the WTO, these challenges are surmountable—and the importance of a WTO remedy counsels in favor of surmounting them. Continue reading

A Cultural Defense to Bribery? The Solomon Islands’ Approach

Gift-giving usually has positive connotations as an expression of love, respect, friendship, gratitude, or celebration. However, when the recipient is a public official, there is always the concern that the “gift” is nothing but a thinly-veiled bribe. For this reason, countries around the world have placed restrictions on the character and value of gifts that public officials are allowed to accept. But in societies where giving gifts – including, perhaps especially, to powerful or influential figures – is an important part of the culture, treating all (sufficiently large) gifts as unlawful bribes is more than usually challenging. Indeed, a recurring question for anticorruption reformers is whether or how anti-bribery law should make allowances for local cultural norms and practices, especially those related to gift-giving. This question – often framed as one of “cultural relativism” – frequently comes up in the context of developing countries (such as Indonesia or various Pacific islands), though it is not exclusive to such countries (see, for example, discussion of this same issue in South Korea).

One country that has recently faced the challenge of regulating cultural gift-giving to and by public officials is the Solomon Islands – a small state in the Pacific Ocean consisting of over nine hundred islands, a population of about 600,000, and a rich and fascinating history. For years, the Solomon Islands has been dealing with pervasive corruption at all levels of government, most notably in natural resources management, which has had disastrous ramifications for the country’s economic development (see here, here, and here). Like other Pacific islands, the Solomon Islands is home to a practice of traditional gift-giving to and by public officials, which in many other jurisdictions could be viewed as legally problematic. According to a local custom (as explained in an official government document), public officials, as members of their community, are “expected to contribute to community events such as weddings, funerals, feasts or church gatherings” and are “obligated to reciprocate with gifts if and when they visit communities and are presented with gifts.”

In July 2018, as part of a comprehensive national anticorruption scheme, the Solomon Islands’ Parliament enacted the much anticipated Anti-Corruption Act (ACA). The ACA is especially notable, and unusual, in its approach towards customary gifts and bribery. Instead of capping the monetary value or limiting the type of gifts which public officials are allowed to accept, the ACA introduced a new cultural defense to the offence of bribery of public officials. According to this defense, a public official who accepts or solicits something of value, as well as the individual who offers or gives it, is not guilty of bribery if the defendants can prove that their respective acts were conducted: (1) “in accordance with custom,” (2) “openly, in the course of a traditional exchange of gifts,” and (3) “for the benefit of a community or group of people and not for an individual.” According to Prime Minister Rick Houenipwela, the ACA’s cultural defense is required as part of the government’s obligation “to respect our customs and traditional cultures” as “a multi-ethnic post conflict country.” However, the cultural defense has been criticized by many, including the Parliament’s Bills and Legislation Committee (see here and here) and Transparency Solomon Islands, which referred to this defense as “a good example of bad law.”

In this post, I do not attempt to answer the question whether the Solomon Islands’ customary gift giving should be criminalized. I do wish to argue, however, that even if we assume that local gift-giving customs are worth protecting, the ACA’s cultural defense to bribery in its current form is highly susceptible to misuse and may undermine the government’s anticorruption efforts. Both the Solomon Islands and other jurisdictions that might be considering a similar cultural defense should take heed of four significant problems with the defense as currently written: Continue reading

Cracking Down on Corruption in Haitian Customs

Billions of dollars in international aid to Haiti has been lost due to corruption, and this corruption epidemic has hindered many of the good-faith efforts to provide assistance in the wake of disasters. Of the many layers of bribery, fraud, and deceit that plague aid delivery, the one that interests me the most concerns the front-line Haitian Customs officers.

My interest stems in part from personal experience: In August 2016, I was part of a small project to engineer and build a clean water system in Haiti, which required importing equipment and supplies. As a matter of law, the items we were attempting to bring into Haiti were exempt from tax on account of their use in a non-commercial setting and our association with an NGO. Yet despite the fact that this was clearly stated on the Customs form, the Customs officials insisted that we had to pay tax on the goods, told us further that we had to pay in cash directly to the Customs officer, and reduced the tax payment we engaged in bargaining. It seemed like a bribery racket, especially with the insistence on cash payment without giving us an option to make a payment to a government agency officially. Our experience was, alas, typical: Over the past few years, there have been multiple reports of individuals being extorted for cash at Haitian Customs, with officials often unwilling to follow their own guidelines, a situation that seriously hinders the timely provision of non-profit aid.

The Haitian government is aware of the problem, and in 2013 launched a general crackdown. Yet despite a handful of successes—such as the arrest of a prominent Haitian businessman who was involved with multiple Customs officers in a corruption ring that involved contraband and trafficking—the crackdown doesn’t seem to have led to a meaningful reduction of inconsistent and corrupt Customs practices. While additional reforms to the anticorruption laws and improved internal auditing would help, there are a few other steps that the Haitian government could take that would help to combat the sort of corruption that many importers, including my own team, have encountered in Haitian Customs: Continue reading

Outsourcing Customs Inspections: Integrity for Hire

Last week I described Guatemala’s innovative approach to attacking grand corruption.  Rather than relying on domestic agencies, whose personnel may either be bought off or scared off a case, Guatemala has turned over responsibility for investigating massive theft by senior civilian and military leaders to an agency headed by an appointee of the U.N. Secretary General.  Accountable not to the Guatemalan government but to the United Nations, the Commission Against Impunity, at it is called, develops cases of grand corruption and then works with the Guatemalan Attorney General to see the accused individuals are prosecuted.  What the government of Guatemala has in effect done is outsource the investigation of allegations of grand corruption to a third-party. While countries where grand corruption is deeply ingrained would do well to adopt their own version of an impunity commission, the political obstacles to do so are steep – beginning with the fact that many of those likely to a target of the third-party would have to agree to its creation.

There are other, less controversial ways the outsourcing solution can be employed to tackle corruption.  One that deserves far more attention than it has received is to hire a private firm to inject a dose of integrity into the processing of imported goods.  Continue reading

How the WTO’s Trade Facilitiation Agreement May Reduce Bribery

I argued in my last post that the WTO is not well-suited to directly addressing bribery and corruption; even though bribery impedes trade, it would be a mistake to recognize bribery (or failure to suppress bribery) as an actionable violation of international trade law. But that does not mean the WTO should not take action to deal — indirectly — with the problem of corruption. A good example of productive measures the WTO can implement to reduce the impact of bribery and corruption in trade is the Trade Facilitation Agreement (TFA), which was negotiated in December 2013 (but has not yet entered into force).  The TFA aims to reduce transactional obstacles to trade, focusing mainly on border transactions; in doing so, it may indirectly address some of the most significant contributors to bribery in international trade, even though the TFA is not about corruption as such. The agreement provides a nice example of how the WTO system can take positive steps to combat corruption, even though the system is not equipped to tackle corruption directly.

The TFA has the potential to contribute to reducing trade-related bribery in three main ways.

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