Detecting Abnormal Pricing in International Trade: The Greece-USA Case

Abstract

Government authorities, international lending agencies, and private sector firms try to detect abnormal pricing in international trade. Abnormal prices in international trade may indicate capital flight, import-duty fraud, income-tax evasion, or money laundering. We developed a framework for filtering all annual trades between two countries, which includes thousands of harmonized commodity codes and millions of import-export transactions. It produces a prioritized list of commodities traded at potentially abnormal prices and can help auditors to identify such items ranked according to likelihood of abnormal pricing. We estimated the economic impact of over invoiced imports to Greece from the United States and underinvoiced exports from Greece to the United States. These transactions shift as much as $400 million in income annually out of Greece to the US (and well over $5.5 billion out of Greece to all other countries or about four percent of the GDP of Greece), lowering the level of taxable income and the tax liability of firms operating in Greece, thus increasing the public deficit and reducing domestic investments. The treasury of Greece is losing an estimated $1.4 to $2 billion revenues annually from worldwide trade shifted income. By auditing only the top 25 income-shifting items with the US (identified through a pricing filter), the Greek treasury could capture about 3/4 of the income shifted from exports and over 1/2 of the income shifted from all imports.

Estimating Trade Mis‐invoicing from China: 2000–2005

“…, which measures 1 Recent approaches and empirical studies use the price-comparison or unit-values approach, as suggested by Gabrisch and Szalai (2002), Pak et al (2003)…”

Trade misinvoicing in copper products: a case study of Chile and Peru

“…The price filter methodology espoused by Zdanowicz, Pak and Sullivan (1999) and by Pak, Zanakis and Zdanowicz (2003) is aimed at detecting international trade transactions that diverge from what is considered to be a normal price range (i.e. market price or freely competitive price) and then gauging the extent of that divergence.…”

Trade-Based Money Laundering and Terrorist Financing

“…More recently, the concern has been that false trade invoicing is being used as a source of money used to support terrorist activities. Empirical evidence of trade-based money laundering has been published in both academic and professional publications (Bhagwati, 1964;Cuddington, 1987;DeBoyrie et al, 2005b;De Wulf, 1981;Gulati, 1987;Pak et al, 2003;Zdanowicz et al, 1999;Zdanowicz, 2004b). …”