A storm has broken out among statistics wonks over a controversial study which analysed trade data to show that misinvoicing of commodities is costing some developing countries billions of dollars a year.
Using data gathered over two decades, the UN-commissioned study claimed that the underinvoicing of gold exports had cost South Africa 67% of the value of its gold sales from 2000 to 2014. The total loss in revenue was claimed to be US$78.2bn.
This was just one of the key findings of a report which sought to draw attention to the very real issue of misinvoicing, a method of trade-based money laundering, which is often used to avoid tax or to finance terrorism or organised crime.
The findings were reported by GTR and other media, however, researchers and statisticians have since claimed that the data has been misinterpreted and that the discrepancies in export and import data can be explained by differences in reporting techniques, or by the very nature of some commodities markets.
The location of an importer is not always the final destination for a commodity that can be sold on an exchange, or which may change hands on numerous occasions before it reaches its final import market. The import value may not always, therefore, mirror that of the export.
In the case of South Africa, the discrepancy is not necessarily due to gold being smuggled out of the country illegally, but more likely because the South African government does not report gold exports in a way that is standard elsewhere in the world.
Maya Forstater, a researcher on sustainable development, explains in a blog post that South Africa includes “gold exports in in its domestic statistics, but due to ‘legacy rules’ it is treated ‘both as a good and as a country’ and reported under the special code ZN ‘Origin of Goods Unknown’. The South African Reserve Bank and SARS do not report details of where the nation’s gold exports go to (so therefore this data would not be retrievable from COMTRADE). SARS is aiming to move to the more general system of reporting in the future”.
The report in question was authored on behalf of the UN Conference on Trade and Development (UNCTAD) by Léonce Ndikumana, a professor of economics at the University of Massachussetts Amherst, and an expert on capital flight.
In an email exchange with GTR, he acknowledged the debate that his research had ignited, but suggested that greater transparency in trade data was the answer.
He wrote: “Exporting countries need to know whether they are getting a fair share of the price of their commodities. This requires, at a minimum, the sale price at both ends of the trading chain. Exporting countries need to be assured that, in cases where exporters are given export tax credits, that these tax credits are calculated on the basis of a correct value of exports. If the exporters cannot show the actual destination of the merchandises, such assurance is compromised.”
He did not specifically address concerns that he had misconstrued the data or implied misinvoicing erroneously. In the case of South African gold, Ndikumana said that it “is something that deserves to be investigated looking at alternative databases from the South African side” and that he would be investigating the issue further.
I don’t know where it leaves the role of the UN. When these processes are violated, who should we then trust? Pali Lehohla, Statistics South Africa
However, Pali Lehohla, statistician-general at Statistics South Africa, claims that in failing to liaise with his office on the correct data and by failing to follow the “forensic process” required to analyse South African gold exports, the professor had violated the conventions of the UN Statistical Commission “in a dramatic way”.
In a telephone interview from Pretoria, Lehohla tells GTR: “I don’t know where it leaves the role of the UN. When these processes are violated, who should we then trust? The fundamental principle of trust is anchored on the protocol that comes from the UN. When the UN Statistical Commission was established in 1947, this was the glue that was going to bind nations, as a method of enhancing trust among nations. That was an observed principal: 1947 was a watershed in statistical history.”
He adds: “I can’t talk on behalf of other countries, but it is very difficult to understand how the professor came to the conclusion that it is fraud, underinvoicing. He comes to very profound conclusions without any evidence that it is fraud.”
The chief of UNCTAD’s Commodity Research and Analysis Section, Janvier Nkurunziza, has stood by the report, telling this magazine: “Our objective when we decided to produce this paper was to explore the issue of transparency in commodity trade. Our findings show that the lack of transparency is a serious issue that needs attention. And from the reactions we’ve had, so far, this finding has not been credibly disputed so we stand by our findings.”
Transparency and uniformity in the reporting of commodity trade would be a great improvement. The debate over the UNCTAD report, however, should not detract from the issue of misinvoicing, which is almost certainly costing billions to the global economy every year.
Research group Global Financial Integrity (GFI) found that between 2002 and 2011, “the developing world lost US$5.9tn in illicit financial flows”.
Meanwhile, another report released this week claims that “abnormally priced goods imported and exported by US companies are masking complex tax avoidance strategies that have cost the US government more than US$2.3tn in revenue from 2003 to 2014”.
The examples of misinvoicing cited by the report include “vitamin E imported from Ireland for US$30,334.36 per kilogram” and “Steel ladders exported to Mexico for fifteen cents each”.