Over-Invoicing and Under-Invoicing

Over-invoicing and under-invoicing are the practice of deliberately misstating the price, quantity or quality of goods on a trade invoice so that more or less money crosses a border than the goods are really worth. Over-invoicing states a value above the true one; under-invoicing states a value below it. The difference between the stated and real value is quietly transferred between the buyer and the seller, often parties who are related or working together.

Together they are known as trade misinvoicing, the main technique behind trade-based money laundering. They are used to launder criminal proceeds, evade customs duties and income tax, and get around exchange controls. They differ from legitimate transfer pricing, where related companies set prices that can be defended as arm's length, although abusive transfer pricing can shade into misinvoicing.

Imagine two cousins in different countries who want to move money between them without a bank transfer that anyone would notice. One sells the other a box of shoes worth 1,000. If the bill says 5,000, the buyer sends 5,000 and the seller has received 4,000 extra, disguised as payment for shoes. If the bill says 200 instead, the buyer keeps 800 that should have gone across, and can hand it over later through another channel.

Customs officers and banks see only a sale of shoes with an invoice that looks normal. Unless someone knows what that kind of shoe usually costs, the hidden transfer goes unnoticed. That is the whole trick: real goods travel, but the paperwork carries a second, secret payment.

The commercial invoice is the document that customs, banks and tax authorities rely on to value a shipment, so falsifying it shifts value in a predictable direction:

• Import over-invoicing. The importer pays more than the goods are worth and the excess is held for its benefit abroad, which moves money out of the country.
• Export under-invoicing. The exporter reports a low sale price and the buyer pays the balance into a foreign account, so earnings stay outside the country.
• Export over-invoicing. Value is brought into a country disguised as export income, sometimes to collect export subsidies or tax rebates.
• Import under-invoicing. Goods are declared cheaply to cut customs duty, with the rest of the price paid through an informal channel.

Variations include multiple invoicing of one shipment, describing cheap goods as premium ones, and "phantom shipments" where no goods move at all. The value hidden in a single invoice is:

• $V$ is the value moved across the border; a negative figure means value moved in the opposite direction to the payment.
• $P_{\text{invoice}}$ is the unit price stated on the invoice.
• $P_{\text{true}}$ is the fair market unit price of the goods.
• $Q$ is the quantity shipped.

If 10{,}000 units worth 8 each are invoiced at 11, then $V = (11 - 8) \times 10{,}000 = 30{,}000$, so 30,000 has moved from the importer's country to the exporter's under cover of a normal sale.

Misinvoicing serves several aims at once. Criminal groups use it to place and move illegal proceeds, and it is a settlement method in the black market peso exchange and in informal networks such as hawala and hundi, where brokers balance their books with trade flows instead of wire transfers. Businesses use it for tax evasion and to cut import duties. In countries with capital controls, over-invoiced imports and under-invoiced exports let residents move savings abroad, especially when the official exchange rate is far stronger than the street rate.

Because misinvoicing is hidden, its size can only be estimated. Global Financial Integrity, a Washington-based research group, compares what one country says it exported with what its partner says it imported. In a report published in December 2021, it put these "value gaps" in the trade of 134 developing countries with all their partners at about US$1.6 trillion in 2018, and about US$835 billion in their trade with 36 advanced economies. GFI presents the gaps as indicators of potential misinvoicing, and other researchers note that mismatches can also arise from shipping costs, timing and recording errors, so the figures are not a direct measure of illicit flows.

Customs authorities compare declared prices against databases of typical prices, a method often called price-band or unit-price analysis. Banks that finance trade through a letter of credit check that the goods, prices and parties on the invoice agree with the bill of lading and other documents. The Financial Action Task Force published a study of trade-based laundering in 2006 and, with the Egmont Group, an update in December 2020 listing red flags such as prices far from market levels, goods inconsistent with the customer's business and payments from unrelated third parties.

Some countries also use export proceeds repatriation rules, requiring exporters to bring earnings home within a fixed period. Detection remains hard because most trade is financed on open account, where banks see the payment but not the goods.

• Financial Action Task Force (FATF)
• World Customs Organization