Under-invoicing is a fraudulent practice where the seller deliberately states a lower price on the invoice than the actual value of the goods or services provided. This practice is used to evade taxes, reduce customs duties, or facilitate money laundering by underreporting the transaction value.
Key Points:
- Purpose: The primary objectives of under-invoicing are to evade taxes, lower customs duties, and facilitate the movement of illicit funds by disguising the true value of the transaction.
- Mechanism:
- Deflated Prices: The seller issues an invoice with prices significantly lower than the actual value of the goods or services provided.
- Tax and Duty Evasion: By underreporting the value, the buyer pays lower taxes or customs duties, resulting in financial savings that can be split between the buyer and seller or used to conceal illicit funds.
- Fund Diversion: The difference between the actual value and the invoiced amount can be diverted to secret accounts or used for illegal activities.
- Uses of Under-Invoicing:
- Tax Evasion: Reducing the reported income to lower tax liabilities.
- Customs Duty Evasion: Paying lower import duties by declaring a lower value of imported goods.
- Money Laundering: Moving illicit funds across borders by manipulating the invoice values to underreport the transaction amount.
- Detection and Prevention:
- Document Verification: Cross-checking invoices with contracts, purchase orders, and delivery receipts to ensure the accuracy of billed amounts.
- Market Price Comparison: Comparing invoiced prices with market prices for similar goods or services to identify significant discrepancies.
- Customs Audits: Conducting regular audits of import/export transactions to detect and investigate under-invoicing.
- Trade Monitoring Systems: Implementing automated systems to monitor trade transactions and flag potential under-invoicing activities.
- Regulatory Compliance: Adhering to AML (Anti-Money Laundering) and CFT (Counter-Terrorist Financing) regulations that require thorough due diligence and reporting of suspicious activities.
- Indicators of Under-Invoicing:
- Unusual Price Discrepancies: Significant differences between invoiced prices and market prices.
- Frequent Amendments: Repeated changes to invoices or contracts that result in lower billing amounts.
- Unjustified Low Prices: Lack of justification or documentation supporting the lower invoiced prices.
- Linked Parties: Transactions involving parties with known business or personal connections, raising potential conflicts of interest.
- Examples of Under-Invoicing:
- A company exports goods to a foreign subsidiary at prices much lower than the actual cost, allowing the subsidiary to reduce import duties and taxes while the parent company diverts the remaining value to offshore accounts.
- An importer declares a lower value for goods at customs to reduce import duties, with the true value being settled through undisclosed payments or kickbacks.
- Regulatory Framework:
- Financial Action Task Force (FATF): Provides guidelines for combating trade-based money laundering, including practices like under-invoicing.
- Customs and Trade Authorities: National and international authorities monitor trade transactions for compliance with trade regulations and AML standards.
- Tax Authorities: Monitor and investigate potential tax evasion schemes involving under-invoicing.
- Challenges in Addressing Under-Invoicing:
- Complex Schemes: Sophisticated under-invoicing schemes can be difficult to detect, especially when they involve multiple jurisdictions and layers of transactions.
- Lack of Transparency: Limited access to accurate trade data and the use of shell companies can obscure the true nature of transactions.
- Resource Intensive: Effective detection and investigation require substantial resources, including skilled personnel and advanced monitoring systems.