Trading is all about buying and selling, where the price of one’s sales is equal to another’s purchase.
The aggregate figure of buying and selling is referred to as trade volume.
Say Mr X is selling goods of 100 units of currency to Mr Y.
Sales revenue of Mr X is recorded in his books as 100 units of currency. Same figure needs to be recorded as a purchase in the books of accounts of Mr Y.
This will result in a trade volume of the transactions at 200 units of currency.
However, in reality, recording time of the transactions may be different.
Mr. X will record the transactions on delivery of the goods on an accrual basis meaning that receipt of payment does not matter.
On the other hand, Mr Y will record the same on receipt of the goods. So there may be a value gap at a point of time. This is customary in trading activities.
The situation may be different.
Mr X is selling goods of 100 units of currency but disclosing it as 80 units of currency or 120 units of currency.
Same situation may take place at Mr Y’s end.
He may disclose either 80 units of currency or 120 units of currency.
This can be considered as unfair disclosure.
This practice is possible to detect through cross check.
In domestic trade, this situation may take place to avoid taxes.
We have been hearing over and under-invoicing for a long time.
In aggregate terms, it is called mis-invoicing.
It is a bilateral win-win game at the cost of an economy.
Under the situation, say, Mr X is importing goods from abroad for 100 units of currency for which he negotiates with foreign supplier Mr Y to pay 120 units of currency through the official channel.
In this case, payment of 120 units of currency is to be remitted to Mr Y who in turn arranges settlement of an excess fund of 20 units of currency, net of his service charges, at the advice of Mr X.
In this situation, trade volume will be 240 units of currency.
Value gap will arise between importing countries and exporting countries provided that Mr X remits payment of 100 units of currency to Mr Y and the remainder to third country.
Illicit fund flows
Huge value gap is shown in a recent report by GFI on Trade-Related Illicit Financial Flows in 134 Developing Countries 2009-2018.
The report states that the sum of the value gaps identified in trade between 134 developing countries and a set of 36 advanced economies in 2018 is $835 billion.
The figure stands at $1.6 trillion considering all of the global trading partners in 2018.
As per the report, for 2018, the countries with the largest identified value gaps are China, at $305 billion, followed by Poland ($62.3 billion); India ($38.9 billion); Russia ($32.6 billion); and Malaysia ($30.7 billion).
Data on Bangladesh are found at Table A - the sums of the value gaps identified in trade between 134 developing countries and 36 advanced economies, 2009-2018 - with yearly average of $3,568 million.
Table E - the sums of the value gaps identified in trade between 134 developing countries and all of their global trading partners, 2009-2018 - of the report shows Bangladesh with a figure of $8,275 million as yearly average.
It is not sure whether the figure indicates illicit inflows or outflows.
However, commonly such issues are blamed as outflows.
In Bangladesh, cross border trading activities of goods are guided by specific regulations.
Both transactions of export and import are subject to compliance with set regulatory provisions.
In case of import, a letter of credit authorization (LCA) form needs to be registered with banks.
Import value needs to be competitive as per import policy order in force.
Payment is subject to report on IMP Form to the central bank.
The payment on account of imports needs to be matched with the proofs - entry of goods into the country through a bill of entry.
From issuance of LCA form to clearance of goods, every step is reported to banks, central bank and customs authorities with documentation.
On the other hand, export trade is subject to declaration of fair value of goods by exporters on specified form known as EXP form.
Export contracts/letters of credit need to be submitted to banks. Export information is channeled from exporters to customs authorities by way of banks and central banks.
Therefore, a myriad of formalities need to be compiled by importers and exporters to execute cross border transactions.
The need for third parties
It is rarely possible to execute international trade directly between exporters and importers, support from third parties are needed.
With regards to export trade, it is observed orders are routed through buying agents operating in third countries.
Based on the orders, export goods are shipped to different destinations.
Value declared on EXP form is repatriated after deductions of permissible charges like agent commissions, acceptance charges, discounting charges, discrepancies charges, bank charges and so on.
As a result, export proceeds of 93 units of currency may be repatriated against an export value declared on EXP form of 100 units of currency.
Whatever is repatriated, 100 units of currency is reported as official export from Bangladesh.
But the import value of the partner country is not the same as recorded in Bangladesh.
There becomes a value gap between trading partners. Is it illicit outflow?
Trade transactions give birth to non-trade transactions like commissions, charges and different intermediator services.
These are reflected in the part of current account transactions under the balance of payment statement.
GFI report focused on trade transactions, nothing is found on non-trade transactions being integral part of trade transactions.
With regards to import transactions, orders/letters of credit are placed to traders who in turn arrange shipments from suitable suppliers from acceptable locations after necessary screening.
Bangladesh makes payment to traders in accordance with sales contracts/letters of credit.
What payment received by exporters abroad, net of trade commissions and other legitimate service charges, is reported by exporting countries as their exports.
But the payment is not the same as import payment made from Bangladesh.
The gap is basically service income of other countries including exporting ones which is reflected in their balance of payment statements as per service trade under the category of current account transactions.
Every trade transaction in Bangladesh is subject to routine reports. Based on the information, the balance of payment statement is prepared by the central bank.
Actual information is reflected in the statement, not on survey information.
How a trading partner prepares such reports is not stated in the GFI report.
There are some issues as noted above including time lag of the reporting.
If the illicit flows as shown in the report are outward, Bangladesh is in possession of huge external assets.
Where the assets are located needs to be unearthed.
Surely, they are within the supervision of AML/CFT norms of the countries wherein they reside.
So, there is no problem on the part of GFI to identify the locations of those assets.
They should come up with another research report, reflecting offshore assets of developing economies.
Otherwise such a report as published by them on illicit flows is nothing but an armchair analysis.
Without specific observations, the citation as done in the report is a common denunciation to external trade and its operators who work as blood circulators of the economies.
As such, the report of illicit flows can rarely work as glasses to look into the reality.
The author works in the development sector and can be reached at [email protected]
