$640.36 BILLION MOVED OUT OF US BY ILLICIT FINANCIAL FLOWS IN INTERNATIONAL TRADE

EXECUTIVE SUMMARY

TRADE-BASED TAX EVASION AND MONEY LAUNDERING - 2021

PRODUCED BY

ERYN K. SCHORNICK

Founder & Principal, Sēk Strategies

info@sekstrategies.com

 JOHN S. ZDANOWICZ, PH.D.

President – International Trade Alert, Inc.

johnz@internationaltradealert.com | (305) 951-6740

In December 2021 the government released a report, “The United States Strategy on Countering Corruption.” The focus of the report was to specify “lines of effort” to enhance anti-money laundering and countering the financing of terrorism (AML/CFT). The report also focused on curtailing bribery in violation of the Foreign Corrupt Practices Act. However, the report failed to focus on illicit financial flows due to abnormal pricing in international trade, a significant methodology used to move money out of the country, undetected and untaxed.

Also, in the past, the United States (US) Treasury Department enacted rules to make it more difficult for US companies to move their addresses outside of the country to reduce income tax expenses, clamping down on the practice known as income tax inversions. To maximize firm value, companies have been moving their legal headquarters through mergers to low tax countries. 

However, companies do not have to move their headquarters to low tax countries to evade US taxes. They can accomplish the same objective by shifting their taxable income to low tax jurisdictions. Criminals who want to launder the proceeds from their illegal activities can accomplish this through abnormal pricing in international trade. Income tax evasion and money laundering can be facilitated by abnormally priced transactions with a foreign subsidiary or a colluding foreign partner in a low tax foreign country.  A US company or criminal can shift money out of the US by importing products from a subsidiary or colluding foreign partner at extremely high prices, thus decreasing its tax obligation, and moving money out of the US undetected.  A US company or criminal can also shift taxable income out of the US by exporting products to a subsidiary or colluding foreign partner at extremely low prices.

The objective of this study was to determine the impact of over-invoiced imports and under-invoiced exports on the amount of money moved out of the U.S. during 2021. The evaluation of every import transaction and every export transaction for every product and every country, during 2021 resulted in a movement of $640.36 Billion Dollars out of the United States, undetected.

Objective: The objective of this research is to calculate the impact of over-invoiced imports and under-invoiced exports on money moved out of the US and the decrease in US federal taxable income during 2021. The inclusion of over-invoiced imports and under-invoiced exports in business or individual tax returns artificially lowers taxable income and federal income tax liability.

This research determines the estimate of lost taxable income due to abnormal international trade pricing for 2021 and is based on pricing norms, (interquartile range), as specified in the section 482 regulations of the Internal Revenue Service (IRS) tax code. A portion of the amount of money moved out of the United States during this period may also be due to trade-based money laundering (TBML) of the proceeds of money derived from criminal activities.

Data: This research is based on the analysis of US import and export data produced by the US Department of Commerce, Bureau of Census, and contained in the US Merchandise trade database. This is the same database used to determine the US balance of trade. It is assumed that the US Treasury, US Customs Bureau, and the US Department of Commerce maintain a quality control system to minimize errors and produce and sell accurate data.  

Methodology summary:

1. For the year 2021, the median price, lower quartile export price and the upper quartile import price for every product exported to and imported from every country in the world, was calculated. During 2021, there were over 19,000 import product codes and over 9,000 export product codes. There were 238 countries that traded with the United States in the same year.

2. Every import transaction price was determined and compared to the country specific import upper quartile price for every product to determine if it was over-valued. The dollar amount of over-valuation for every import transaction was determined.

3. Every export transaction price was determined and compared to the country specific export lower quartile price for every product to determine if it was under-valued. The dollar amount of under-valuation for every export transaction was determined.

4. The dollar value impact on the cost of goods sold due to the over-valuation for every import transaction was determined. The dollar value impact on sales revenue due to under-valuation for every export transaction was also determined.

5. The dollar value impact of over-stated cost of goods sold and under-stated sales revenues on taxable income was determined.

6. The total amount of money moved out of the United States during 2021 was $640.36 billion dollars. The amount of money moved out of the United States by top 25 countries, ranked by dollar value during 2021 is contained in Table 1. As expected, the countries that are the largest United States trading partners also have the largest amount of money moved out of the United States which may result in the largest amount of lost taxable income. An indicator of potential trade-based money laundering out of the United States to various countries is not the absolute dollar amount of money moved out of the US as indicated in Table 1. A better indicator of country TBML is the “SHARE OF TRADE” which is calculated by dividing the dollar amount of money moved out of the US to a country by the total value of US trade with the country. The results of ranking of countries by share of trade is contained in Table 2.

Examples of abnormal transactions. In Tables 3 and 4 are some examples of abnormally priced transactions that are contained in the US Merchandise Trade Database. The author has observed thousands of abnormally priced transactions in all US Customs Districts and with all countries in the world.

Discussion. This study is a conservative estimate of money moved out of the United States due to abnormal international trade pricing for the following reasons:

1. This study only analyzed quantifiable products that have units of measure such as kilograms, tons, units, etc. Some of the product codes in the US trade data base require dollar values to be entered on the trade documents but do not require the quantities of the units of measure. In 2021, for example, the export codes database has 16 product codes with no units of measure defined and the import codes database has 19. This study determined the implied price of a transaction by dividing the dollar value of a transaction by the quantity of the transaction. Without quantities, the implied transaction prices cannot be determined. The results of this study did not consider the transactions of products that did not have quantity amounts in the trade data base. If it is assumed that the same proportion of over and under invoicing for the products that do not specify quantities, the estimated amount of money moved out of the United States would be higher.

2. This study uses the interquartile range as specified by the IRS 482 regulations to determine abnormality. The author determined the magnitude of over or under pricing by comparing the stated prices to the interquartile prices. According to IRS code, abnormal prices would be adjusted back to the median price. This adjustment would have significantly increased the estimate of the amount of money moved out of the United States.

3. There is no sampling error in this study. This study analyzed the total population of transactions in the 2021 United States Trade Data Base. There are 19,273 import product commodity codes and 9,406 export product commodity codes. In 2021 there were 5,493,141 export records containing 38,101,940 transactions. During the same period there were 8,227,732 import records containing 102,924,125 transactions. This study analyzed every export and import transaction in 2021. There are 238 countries and 45 US customs districts in the data base.

4. This study only evaluated the impact of abnormal product prices. It does not consider money moved out of the United States due to the abnormal pricing of services and intangibles.

Table 1: Total money moved out of the United States by Country through Under-valued exports and over-valued imports (Sorted by Dollar Value)

Year: 2021

(Data obtained from the US Census Bureau)

Table 2: Total money moved out of the United States by country through under-valued exports and over-valued imports (Sorted by Percentage of Trade)

Year: 2021

(Data obtained from the US Census Bureau)

Table 3: Abnormally low export prices (2021)

Table 4: Abnormally high import prices (2021)