Trade Misinvoicing and Trade Based Money Laundering Risk Assessment
Section 1 – General Overview
GFTrade is a proprietary risk assessment application that enables customs officials to determine if goods are priced outside typical ranges for comparable products. The system provides officials with real-time price comparisons for goods in the port with price ranges for the same product based on global trade information which can be used to determine if further investigation is warranted. The backbone of the system is trade data from 30 of the world’s largest trading countries and the ability to search for goods values based on 80,000 Harmonized System (HS) codes. GFTrade is an essential tool to assist governments in maximizing domestic resource mobilization.
Section 2 – Application
An example of how the system works is seen in the screen shots below. In this hypothetical case, a customs official in Durban, South Africa can compare the price of motorcycles being imported from the United States against a range of pricing for the same product imported from the same country over the past year based on information in the database. The official will input an HS Code for a specific product (i.e. motorcycles – 8711500000) to examine the range of previous pricing from a specific country for purposes of comparing it against a live trade invoice. Below is a screen shot displaying pricing for shipments of motorcycles from the United States to South Africa.
Figure 1: Average pricing data visualization
The system displays dollar amounts (note: other currencies can be selected) for the most recent monthly average price, the 12-month average, and the average price one year ago. Additionally, the fluctuation in monthly average pricing for the HS code is shown in the diagram with each dot representing the average price for the month, the solid dark black line representing the 12-month average price, and two lighter blue bands representing one and two standard deviations (both high and low) from the average monthly price. The data represented on this screen establishes the basis for comparison with the price found on a live invoice.
Next, a customs official will input the total value of the shipment he/she is processing and GFTrade will return a visual comparison of the unit price of that shipment with the average price for the previous 12 months. For the purposes of this hypothetical example we have input a unit price of $18,000 per unit. This is visualized as follows:
Figure 2: Price comparison visualization
The figure above provides four ways to determine if a product in the port is priced within a typical range. The first (①) way to make a determination is seen at the top of the screen where the yellow diamond indicating “this invoice” is compared to current average pricing using a plot line. The greater the distance to the left of the diamond representing the “average cost” shows the degree of under-pricing and the greater the distance to the right of that point indicates the degree of over-pricing. In this case, the diamond indicating “this invoice” is well to the right of the average price thereby indicating that this invoice price is higher than the usual range of prices for this product. The second way (②) to make this determination is seen to the left of the screen under the heading “Difference With Most Recent Average” which notes that the current invoice value is “75.73% above” average.
The third (③) way to indicate invoice pricing variations from the norm is represented by a solid yellow horizontal line which compares to the floating monthly average price for the previous 12 months as well as to the 12-month average price represented by the solid black horizontal line. The gap between the solid yellow horizontal line and the solid black horizontal line provides a clear indication the invoice is above average pricing. This is seen again in the fourth (④) indicator (on the left margin) under the heading “Within 1 Std Dev” which notes “No, too high.”
It should be noted that the standard deviations can be used as the outer range of acceptable risk whether it be above or below the average price but these are subjective distinctions and it is up to the customs department to determine its level of risk sensitivity.
Section 3 – Users and Use Environments
Trade misinvoicing occurs in all countries and for various reasons including to evade tax and/or customs duties, to launder the proceeds of crime, to circumvent currency controls, and to hide profits offshore, among others. In developed nations revenue losses due to trade misinvoicing and the ramifications of trade-based money laundering—including its possible connection to terrorist financing—is significant. In developing and emerging market countries trade misinvoicing can drastically undermine domestic resource mobilization efforts which weakens a government’s ability to build the economy and alleviate poverty. Given that rates of tax collection in poorer nations tend to be well below those seen in wealthier nations, the loss of revenue due to trade misinvoicing is having a corrosive impact on development.
GFTrade can be utilized by customs offices or other departments that experience financial loss due to trade misinvoicing and are motivated either by a desire to collect correct taxes and tariffs or to prevent trade-based money laundering. Officials at ports or at points of inspection, scanning, documentation, or tariff collection, are logical government end-users. Additional government users include ministries of revenue, finance, the Central Bank and the justice ministry which rely on comparative trade data for price prediction and reporting, or prosecution purposes. Further, the database can also be utilized by banks providing trade financing, by insurance firms providing coverage to shipping firms, and other users when ensuring accurate trade pricing is essential.
Section 4 – Data Sets Incorporated
GFTrade incorporates data from 30 countries, including seven of the world’s 10 largest trade economies (by volume): United States, Germany, Japan, France, United Kingdom, the Netherlands, and Italy. In 2015, the 30 data source countries conducted $7.5 trillion in trade. The GFTrade database is updated monthly with 850+ MB of new trade pricing information. These updates take only minutes due to a streamlined data ingestion process. The U.S. data alone represents approximately 10 million individual trades every month. To ensure maximum accuracy in average commodity pricing, goods in GFTrade are sorted by the highest level of available detail, with up to 80,000 different products represented by 8-, 9-, and 10-digit HS commodity codes.
Section 5 – Benefits
GFTrade provides the following benefits to users:
– Accuracy: Real-time pricing information for up to 80,000 products from 30 of the world’s top trading nations.
– Speed: Results provided instantaneously – won’t delay movement of goods.
– Consistency: Product pricing information updated monthly.
– Ease of training: Price inquiries take just seconds to enter and complete.
– Ease of use: Price comparisons displayed four ways – indicates instances when action should be taken.
– Very high return on investment.
For more information, or a demonstration of GFTrade contact Managing Director Tom Cardamone at tcardamone@nullGFTrade.org