Illicit flows of capital through developing countries due to trade misinvoicing are costing countries billions of dollars every year.

So says a new report published by Global Financial Integrity, a research and advocacy organisation. The report, funded by Denmark’s ministry of foreign affairs, finds that the global figure for illicit financial outflows from developing countries is roughly US$542bn over a 10-year period. Misinvoicing accounts for as much as 80% of this, or US$424bn.

The study explores the issue of trade misinvoicing using the case studies of Ghana, Kenya, Mozambique, Tanzania and Uganda and analyses data on bilateral trade flows for 2002 to 2011 from the UN’s Comtrade database.

According to findings, Tanzania suffered the greatest annual average gross illicit flows with US$1.87bn, followed by Kenya, Ghana, Uganda and Mozambique. The study also estimates the potential impact on tax revenue for each government, analyses the policy environment in each country and provides general policy recommendations as well as specific suggestions tailored to the circumstances in each nation.

“Insufficient data and limited processes for questioning mis-valued invoices are plaguing efforts of each government to curtail trade misinvoicing and reduce the reach if the shadow financial system,” the study reports. It suggests that the first line of defence against trade misinvoicing is customs agencies, which should cross-reference information from trading companies against cross-border tax data in order to question suspect transactions.

Curbing trade misinvoicing and tackling the corresponding shadow financial system would be a boon to existing efforts to boost economic development and domestic resource mobilisation, the study says. While it admits that the study cannot resolve these issues, it hopes to “inspire governments of these five countries to commit to making this issue a top political priority”.

Read the full report here.