[Updated on August 2nd and 3rd, and 16th  and December 27th and August 21 2017 – updates at the bottom]

This is a running update post following my post of July 20th 2016: Misinvoicing or Misunderstanding? . I will keep updating it.

The story so far

On July 16 2016 UNCTAD published a study on Trade Misinvoicing in Primary Commodities in Developing Countries with the headline “Some developing countries are losing 67% of commodity exports to misinvoicing”.

The study by Professor  Léonce Ndikumana, a leading expert on capital flight from Africa, looked at mismatches in the data from the UN COMTRADE database on exports of commodities such as cocoa, copper, gold, and oil from Chile, Cote d’Ivoire, Nigeria, South Africa, and Zambia. It was presented as revealing “staggering revenue losses to developing countries from commodity trade mispricing”, including  the explosive claim that between 2000 and 2014, $78.2 billion of gold – or 67% of overall gold exports were ‘misinvoiced’ (i.e. smuggled) out of  South Africa, and other claims such as that Zambian copper exported to Switzerland was going missing.

UNCTAD gave the study a lot of weight Dr.Mukhisa Kituyi Secretary General of UNCTAD said “This research provides new detail on the magnitude of this issue, made even worse by the fact that some developing countries depend on just a handful of commodities for their health and education budgets. Importing countries and companies, which want to protect their reputations, should get ahead of the transparency game and partner with us to further research these issues”. It was also highlighted by Deputy Secretary General Joakim Reiter in the closing statement to UNCTAD’s Global Commodities Forum. 

On July 18 it was reported in the FT and was also picked up by other media including Mining Weekly and  Global Trade Review.

The study was reported by the Tax Justice Network which seem to have endorsed its findings, arguing  that the research really does demonstrate misinvoicing in these countries. TJN Research Director Alex Cobham said the study “strongly supports the view that misinvoicing is a problem of first-order economic importance for developing country commodity exporters. It also shows that the risks are likely to be greatest where the partner countries are not the final destination, but trading hubs such as Switzerland and the Netherlands – especially when the physical product does not actually pass through the hubs.“

There was a critical article by Tim Worstall in Forbes pointing out the problems with the methodology, in particular in relation to trade involving countries such as Switzerland and the Netherlands that act as real or virtual trading hubs.   “It’s true that the Swiss import statistics and the Zambia export ones don’t match up. But that’s the nature of this form of trade, not some nefarious plot to deprive anywhere of tax revenues. The leap from the facts to the claim is the result of simple pure ignorance.”

On July 20th I published a blog post highlighting that there are simpler explanations for many of the data gaps. In particular it is clear from notes to the  South African Revenue Service trade statistics that South Africa  does not publish the destination of its gold exports (due to ‘legacy rules’). So these gaps in the trade data which UNCTAD had interpreted as smuggling are simply that; gaps in the trade data.

I sent a letter to the FT which was published on July 21

What happened next?

On July 25th the South African Chamber of Mines issued a statement disputing UNCTAD’s claims “The Chamber disputes the veracity of the data, the assumptions on which the research is based and the conclusions drawn as a result. A cursory review of the dataset referred to indicates significant gaps and errors. The assumption that companies are mis-pricing rather than that this ‘data’ is simply under- or over-reported is astounding.”

On July 28th Statistician General Pali Lehola gave a press briefing disputing the accuracy of the report and calling it irresponsible.

On July 29th the South African Revenue Service (SARS) sent out a media statement arguing that “the methodology followed has severe limitations. This led to flawed conclusions on the purported missing gold.” SARS says that a correct reading of the published data shows that  South Africa’s reported gold exports for the period 2000 to 2014 are in fact $124.1bn, rather than the $34.5 billion reported by UNCTAD.

On July 31st  South Africa’s City Press published an article by Dewald van Rensburg entitled “How Wrong the UN was on SA gold ‘smuggling'” . He looked at both the alledged misinvoicing of gold and platinum from South Africa and found that “In both cases, the estimates are seemingly the result of basic statistical errors that City Press was able to uncover without difficulty.” Dewald points out (as I do) that the methodological issues over the specific South African cases are also likely to be reflected in other illicit flows estimates “The mistakes call into question some of the shocking and politically potent estimates of how pervasive trade misinvoicing is supposedly the leading contributor to illicit capital flight from Africa and South Africa in particular.”

UNCTAD has not yet issued a statement, but one is expected on tuesday (August 2nd) . I will post it here (along with any further updates)

UNCTAD responds

On August 2nd UNCTAD published a response to some of the criticism of their claims “UNCTAD welcomes discussion, transparency on commodities and misinvoicing” 

The statement, oddly, highlights comments and questions from three individual writers (including me),  but ignores criticisms by Pali Lehohla (Statistician-General, Statistics South Africa), the South African Revenue Service and the Chamber of Mines.

In the statement UNCTAD they say they stand by their claim that the research shows that some countries  may be losing as much as 67 percent of their commodity exports. They  say that “we do not see a convincing challenge to the source of our data (Comtrade), the data itself, or even the methodology used to arrive at the figures for misinvoicing”.

At the same time they appear to be trying to redefine what they meant by ‘misinvoicing’ (which Ndikumana explains here as “manipulations of exports and imports invoices by operators seeking to either secure [illicit] foreign exchange advantages and/or to avoid taxation or customs duties”) as involving a term that they apply with ‘no judgement’ and “without attributing blame or making any specific accusations.”

It is a long statement and deserves a blog post of its own.

The Tax Justice Network has also published  additional commentary today “Finally, trade misinvoicing gets political”

They now say that “the extent to which manipulation of trade prices and volumes is used as a vehicle for evading taxes and for other illicit financial flows is an open question”, as mismatches in the trade data can arise from either deliberate manipulation, genuine data errors or different rules of reporting. They say “there is certainly a risk of identifying all three anomalies as ‘proof’ of category 1 misinvoicing” (but also warn against the countervailing temptation to present evidence of  anomalies with innocent explanations as ‘proof’ that misinvoicing is not a problem).

July 3rd – I have published a blog post on UNCTAD’s disappointing response to date to the serious questions about the validity of this work.

Global Trade Review has also reported again on the controversy including an interview with Pali Lehohla, Statistician General who said “it is very difficult to understand how the professor came to the conclusion that it is fraud, underinvoicing. He comes to very profound conclusions without any evidence that it is fraud.”

The chief of UNCTAD’s Commodity Research and Analysis Section, Janvier Nkurunziza, said “Our objective when we decided to produce this paper was to explore the issue of transparency in commodity trade. Our findings show that the lack of transparency is a serious issue that needs attention. And from the reactions we’ve had, so far, this finding has not been credibly disputed so we stand by our findings.”

August 16th – There has been some more coverage in the South African press:

Dewald van Rensburg wrote a second article in City Press (7/8/16) highlighting that ‘Recent misinvoicing statistics blunder by Unctad sounds the alarm bell on how much we just don’t know [on illict] financial flows’. He argues (and I would agree) that “activists and policymakers working in, and on behalf of, Africa need to take stock of the recent blunder by the UN Conference on Trade and Development (Unctad) regarding illicit financial flows”. He notes that South Africa’s exports of  gold which were erroneously interpreted as illicit flows by UNCTAD also make up a large chunk of the estimates of illicit flows by the High Level Panel chaired by Thabo Mbeki.

Gavin Keeton in Business Day (15/8/16) says ‘UN wide of mark on mineral export figures’ “These sensational claims were based upon flawed methodology and have been thoroughly discredited. As commodities are such a significant part of our exports, it is important that South Africans are aware of this so that the accusations do not continue to carry false credibility…..It is unquestionable that there is an incentive for companies to use transfer pricing as a means to channel profits to lower tax regimes. For this reason, it is critical that tax authorities monitor compliance with the utmost vigour. This requirement is not assisted by sensationalist claims of massive cheating.”

However, Raymond Baker, President of of Global Financial Integrity in Business Day (16/8/16) defends the study under the headline ‘Cooking invoices costs Africa billions’, saying  “We, and all researchers in this area, depend on the accuracy and compatibility of reporting by governments….Unctad and Ndikumana have done a valuable service in drawing attention to illicit trade flows and the importance of more accurate data in analysing and understanding it.”

December Update

December 14 – The South African Chamber of Mines has published a review of the UNCTAD report . The independent report by economics consultancy Eunomix  says that “there is no consensus, whether theoretical or empirical, that trade data discrepancies correlate with trade misinvoicing, much less that trade misinvoicing would be the primary cause of such discrepancies.” Looking at South Africa’s gold exports specifically, it finds that three quarters of the apparent trade discrepancy can be accounted for simply by cross-checking other publicly available official statistics .“This very large margin of error in itself is sufficient to nullify the claim made in the UNCTAD study that systematic large trade discrepancies can only be caused by trade misinvoicing and not data errors because data errors are zero-mean-reverting over time.”

December 16 – Dewald van Rensburg at City Press writes that the remaining  $19.5 billion in unexplained “underinvoicing”  seems to have a simple explanation – relating to the re-export of foreign gold  refined at South Africa’s Rand Refinery. Dewald tests this theory by looking at import statistics which show a surge in imports of gold from Ghana in 2011-2013, which would not have been reported as a South African gold when reexported but would have been counted as South African gold by some destination countries.

December 23 – UNCTAD has published an updated report which it says “takes into account the comments received on the Advance Copy” (although it does not specifically acknowledge, reference or address the comments received). In an accompanying note it dismisses the idea that the apparent misinvoicing could be due to discrepancies between the data in official national statistics and COMTRADE saying that “such discrepancies are likely to be minimal given that these international institutions receive the data from national sources” .

December 26 – Leonce Ndikumana article on the controversy ‘Treking the Gold Trail’. He says that the main conclusions of the study remain unchanged and argues “The existing evidence clearly demonstrates that while trade misinvoicing cannot be measured precisely, the sheer magnitude of the estimates suggests that the problem is real and it must be tackled with all the attention it deserves. In the meantime, a healthy, dispassionate debate on the data, methodology and other aspects of the research on trade misinvoicing constitute an integral part of the learning process towards generating policy relevant results.”

(This is one that got away: I just noticed this from back in August: The  Executive Vice president of the Chilean Copper Commission,  Sergio Hernandez, also weighed in saying the report contained serious methodological flaws, and that customs data “do not reflect the traceability of the globe trade in goods and represent an imperfect source of information to support the author’s conclusions.”)

(From February 2017) At the sidelines of the Mining Indaba, Dr Mukhisa Kituyi, Secretary General of UNCTAD, spoke to Fin24. He recognised that the UNCTAD report made a mistake in  “blankly generalis[ing] that the difference between the exports and arrivals represented mis-invoicing.” He also seemed to try to distance UNCTAD from the report;

“We gave a grant to an eminent scholar, who prepared a working paper for us. We explained this in our disclaimer in the report. We simply aim to provide a platform to grow the debate on mis-invoicing,”

2017!

August 21 2017 – The South African Chamber of Mines has published a final report by Eunomix.

It highlights that the issues with the UNCTAD/Ndikumana report also relate to the high profile Global Financial Integrity studies of Illicit Financial Flows and the High Level Panel on IFFs from Africa (‘the Mbeki Panel’). The Eunomix report notes;

These findings are not trivial. They carry very significant implications for the global economy, for the relationship between developing countries and their trading partners, for the management of customs authorities, for the administration of global trade, and for the reputation of companies exporting from developing countries.

Mining Week is reporting that the The South African Chamber has “reiterated calls for UNCTAD to withdraw the report and acknowledge the shortcomings”.

UNCTAD responds by Twitter: “We stand by our landmark #commodities misinvoicing study. It’s vital to spotlight issues hitting much-needed revenues, key for #development”