Trade misinvoicing, or simply misinvoicing, refers to a means of illegally moving large amounts of money over national borders via misreporting or misrepresenting the total value of a given commercial transaction exchange. This sleight of hand form of money laundering which is trade based is actually done using an incorrectly filled out invoice which the perpetrators submit to customs. Of the various kinds of illegal financial outflows which world organizations monitor, this trade misinvoicing is among the biggest components.
In general, there are four main reasons for why businesses and criminals deliberately misinvoice their trade. These are money laundering, claiming tax incentives, evading customs duties and taxes, and avoiding capital controls. Money laundering is a way in which either criminals or even government officials try to wash their funds which they obtain through either crime or graft and corruption.
Where claiming tax incentives is concerned, there are many nations in the world today which provide generous taxation incentives to those domestic exporters who export and sell their services or goods overseas. Criminals are able to take advantage of such tax incentives through inflating their export amounts in the local currency.
Evading customs duties and taxes are two separate issues that are still related. When an importer lies about its goods and services values, it is successfully able to straight away avoid significant import duties. There can be a range of other taxes, including corporate or personal income taxes and VAT taxes which the company or individual is able to avoid as well.
Avoiding capital controls is a controversial issue which different cultures value independently of each other. There are numerous developing nations which restrict the value of capital which businesses or individuals are permitted to either withdraw from or bring into their national economies. Seeking to get money moved into or out of their native country is a strong reason behind trade misinvoicing. This is still considered to be an illegal means of moving money out of the country in question. It does not matter to enforcers of a country’s laws that it may seem unfair or unreasonable to restrict the rights of individuals and businesses to move their own funds across borders and currencies.
Because great numbers of countries try to rapidly process their customs transactions so that they can increase their economic growth and encourage international trade, it is easy and with little risk for criminals to engage in trade misinvoicing. This is particularly the case for such enterprises that only choose to slightly misinvoice their trade transactions by amounts ranging from five percent to 10 percent.
An example of how this trade misinvoicing works in practice helps to understand the illegal practice. An Indian importer purchases $1 million in cars from an American exporter. He utilizes an intermediary locate in Mauritius to re-invoice the cost of the cars as $1,500,000. The Indian importer then pays his American exporter the fair $1 million. The remaining half a million dollars which remains the Indian importer then quietly diverts to an offshore bank account, probably also located in Mauritius, which the importer owns. By engaging in this practice, the Indian importer has been able to illegally smuggle half a million U.S. dollars out of India to Mauritius. This firm will not pay taxes or import duties on the half million dollars either, since to Indian customs it does not exist.
Tax avoidance and trade misinvoicing should not be confused, though they both utilize mispricing to accomplish their nefarious ends. International corporations often engage in aggressive schemes of tax avoidance. In and of itself, this is not misinvoicing, even though many multinationals do practice such illegal and incorrect invoicing.