Misreporting of invoice values is occurring “at massive scale” across Asian supply chains, researchers have said, with as much as a quarter of China’s trade showing signs of potentially fraudulent misinvoicing.
The findings were outlined in a paper published last week by Global Financial Integrity (GFI), a US-based think tank that analyses illicit financial flows, which studied the information reported by companies on each side of international transactions.
It found that in 2022, the difference between what companies reported totalled a record US$1.7tn across developing Asia, up from US$1.5tn the year before and around double the figure a decade earlier.
It said the findings suggest a “huge hidden leakage” of funds, which could indicate a combination of trade-based money laundering, import tax evasion and capital flight.
“The scale indicates that illicit financial leakages through trade are a first-order economic challenge for Asia,” GFI said. “The opportunity cost is enormous: funds on the order of trillions that could have been used for development have instead been smuggled out, laundered or lost to governments.”
Over the past decade, China’s invoice value gap was estimated to stand at US$7tn, by far the largest contributor to misinvoicing in the region.
“This staggering number reflects China’s status as the world’s largest trading nation and indicates that misinvoicing is occurring at massive scale across its supply chains,” the paper said.
The think tank found the disparity is similar in China’s trade with both developing and advanced economies. It said efforts by underground banking networks to evade currency controls through fake export or import invoices is a primary driver.
Thailand, which is “deeply integrated” in manufacturing supply chains, was the second-largest contributor to the invoice value gap, at around US$1.2tn since 2013. It was followed by India, where outflows are likely a sign of customs duty evasion and capital flight, at US$1.1tn.
In other markets, GFI flagged concerns over Mongolia’s minerals exports, such as copper sold to international commodity traders, and cited the Maldives’ heavy reliance on fuel and luxury goods imports as “susceptible to under-invoicing”.
The think tank has long warned that falsified trade invoices present reputational, business and compliance risks for lenders that facilitate international commerce.
It recommended that governments across Asia tighten oversight of international trade, improve cross-border collaboration between authorities and strengthen enforcement to help curtail illicit flows.
“Encouragingly, awareness of illicit financial flows is growing, and international support is more available than ever,” GFI said.
However, verifying prices for trade finance transactions is challenging for lenders, according to a paper published in February as part of the International Trade and Forfaiting Association’s Financial Crime Compliance Initiative.
The paper said complexities faced by financial institutions “include the quality and types of documents received, the vagueness and lack of contextual detail associated with open account trade products, and the suitability of technological approaches to detect and manage true and false positives”.
As a result, approaches taken vary across the sector. For example, lenders sometimes compare prices on invoices to their own historical data or to external sources. A mirror method, which compares customs data from either side of a trade flow, can help institutions target specific corridors rather than assess risk on an invoice-by-invoice basis.
Institutions also sometimes set a threshold for potential price discrepancies and investigate if an invoice value falls outside of that figure, the paper added.
But Byron McKinney, co-author of the paper and senior director for Dow Jones Global Risk Insights, said price checking can be difficult when other costs – such as freight and insurance – are bundled together with the underlying price of goods on an invoice.
“You don’t always get that itemised breakdown, to be able to work out what the true cost of the goods were from that overall price,” he said. “So you have to try and account for that in some way.”
Another issue is that buying in bulk from a manufacturer often results in discounts, which makes setting specific price thresholds “a grey area”, added co-author Edward Stoltenberg.
And comparing customs data relies on counterparties using matching HS codes, whereas in practice the vast number of categorisations makes assignment “an art form” rather than an exact science.
The paper said there is no single standardised or prescriptive method for identifying trade-based money laundering through price verification, and banks should “calibrate controls to their inherent risk exposure and conduct structured risk assessments to define risk appetites and control design”.
