To understand misinvoicing and trade misinvoicing, we have to first understand what an invoice is.
An invoice shows what must be paid by the buyer to the seller. Under misinvoicing, the amount actually paid or obtained may be higher or lower than the amount indicated in the invoice.
Trade misinvoicing is deliberately misreporting the value of a commercial transaction on an invoice submitted to customs officials. This practice is adopted by traders to transfer money illicitly to foreign countries or in other words to keep their money in foreign accounts.
The Global Financial Integrity (GFI) has cited trade misvoicing as the main component of illicit money transferred from developing countries like India. Nearly 84% of the illicit money transferred from countries like China, Russia and India are due to trade misinvoicing according to the GFI’s December 2015 report.
Misinvoicing through trade can be of two forms- underinvoicing and overinvoicing.
Underinvoicing by exporters
In the case of exports, a firm interested in moving capital out of a country would underinvoice its exports, thus bringing reduced foreign exchange into the country. Underinvoicing means reporting less value for exports. “A firm interested in moving capital out of a country would underinvoice its exports, thus bringing reduced foreign exchange into the country.” (Ila Patnaik Abhijit Sen Gupta, Ajay Shah, ‘Determinants of Trade Misinvoicing’, NIPF Working Paper, 2010).
Overinvoicing by importers
On the other, a firm engaging in imports may overinvoice it. Here, the difference between the invoice amount (higher) and the actual amount (he paid) will be transferred to other countries, keeping in his account. An example for misinvocing in trade is a situation where an Indian importer repots $100 for an imported good with the support of a foreign supplier. The importer here obtains the $100 invoice but the actual price may be $80. The remaining $20 the importer keeps in his account in foreign countries.
Misinvoicing mechanisms allow domestic to keep hard currency assets overseas. Trade misinvoicing is a form of trade-based money laundering.
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