Technische Universität Darmstadt, Department of Law and Economics, Darmstadt
A potential vehicle to move capital unrecorded out of a country is the misinvoicing of international trade transactions. Exporters may understate the export revenue on their invoices and importers may overstate import expenditures, while their trading partners are instructed to deposit the balance for their benefit in a foreign account. Aiming to quantify the extent of trade mispricing, studies have analyzed asymmetries in matched partner trade statistics or examined price anomalies in transaction level price data. This paper critically reviews these empirical approaches and briefly describes an alternative methodology. Overall, the accuracy and reliability of estimates of illicit financial flows based on trade mispricing are questioned. In particular, it is argued that estimates of trade mispricing are critically dependent on assumptions on how to interpret observed asymmetries in trade statistics. For instance, various reasons for discrepancies in bilateral trade statistics are discussed, and incentives for faking trade invoices other than capital flight are highlighted. Also, aggregate trade data may mask considerable variation in trade discrepancies at the transaction level. Most notably, the importance of trade mispricing as a method for the unrecorded cross-border transfer of capital is generally unclear.