draining development.pdf - Khazar University

10Trade Mispricing and Illicit FlowsVolker NitschAbstractA potential vehicle to move capital unrecorded out of a country is the misinvoicingof international trade transactions. Exporters may understate theexport revenue on their invoices, and importers may overstate importexpenditures, while their trading partners are instructed to deposit the balancefor their benefit in foreign accounts. Aiming to quantify the extent oftrade mispricing, studies have analyzed asymmetries in matched partnertrade statistics or examined price anomalies in transaction-level price data.This chapter critically reviews these empirical approaches and brieflydescribes an alternative methodology. Overall, the accuracy and reliabilityof estimates of illicit financial flows (IFFs) based on trade mispricing arequestioned. In particular, it is argued that estimates of trade mispricing arecritically dependent on assumptions on how to interpret observed asymmetriesin trade statistics. For instance, various reasons for discrepancies inbilateral trade statistics are discussed, and incentives for faking tradeinvoices other than capital flight are highlighted. Also, aggregate trade datamay mask considerable variation in trade discrepancies at the transactionlevel. Most notably, the importance of trade mispricing as a method for theunrecorded crossborder transfer of capital is generally unclear.309