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Trade Mispricing and Illicit Flows

  • Nitsch, Volker

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.

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Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 54540.

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Date of creation: 15 Sep 2011
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Publication status: Published in Darmstadt Discussion Papers in Economics . 206 (2011-09-15)
Handle: RePEc:dar:ddpeco:54540
Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/54540/
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  1. Susan M. Collins & Won-Am Park, 1989. "Introduction to "External Debt and Macroeconomic Performance in South Korea"," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey, pages 153-158 National Bureau of Economic Research, Inc.
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  6. Clemens Fuest & Nadine Riedel, 2010. "Tax Evasion and Tax Avoidance in Developing Countries: The Role of International Profit Shifting," Working Papers 1012, Oxford University Centre for Business Taxation.
  7. Maria de Boyrie & Simon Pak & John Zdanowicz, 2005. "The impact of Switzerland's money laundering law on capital flows through abnormal pricing in international trade," Applied Financial Economics, Taylor & Francis Journals, vol. 15(4), pages 217-230.
  8. Gabriela Inchauste & Mark Gradstein & Era Dabla-Norris, 2005. "What Causes Firms to Hide Output? the Determinants of Informality," IMF Working Papers 05/160, International Monetary Fund.
  9. Jagdish N. Bhagwati, 1978. "Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1.
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