Thursday, December 27, 2012

Mis-Invoicing

Mish has an article on the Chinese economy and gets around to mis-invoicing, with the point being a lack of transparency makes any calculations regarding the Chinese economy dicey at best.  Mis-invoicing is cited as one element that clouds the window.

Mis-invoicing, what I've always called falsifying documents, is nothing new.  Let me give you 4 examples:

1. An importer in USA faces 60% duty on goods from Vietnam.  He asks the Vietnamese to invoice at $1.00 each instead of $2.00 each, so on his $10,000 importation, the invoice falsely states $5000.00 and the duty would only be $3000.00, not $6000.00, as it would be if the invoice stated the correct $10,000.00. The USA importer pays $5000.00 to the Vietnamese exporter through regular banking channels so the importer can "prove" what he paid to USCustoms.  The USA importer arranges the other $5000.00 owing on this importation to be paid to the Vietnamese through some other back channel.  Here the opportunities are endless, for example, simply handing over $5000.00 cash to some restauranteur, a cousin in San Francisco of the exporter in Saigon.

2. An exporter in Vietnam desires to A. avoid Vietnam taxes on income and B. hide money overseas.  So he willingly engages in example #1, since by doing so his profits appear lower on a $5000.00 sale vs. a $10,000 sale, and the end result is not only lower taxes in Vietnam, but $5000.00 is tucked away in USA.

3.  An exporter in USA desires to avoid USA federal taxes on profits.   So he engages in 2. A and B.

4. An importer in Vietnam faces 60% duty on goods from USA.  So he engages in number 1 above.

It is the same thing, either way, import or export, goods or services, with a different party in each transaction.  It is not always the case that the counter-party to falsification is pursuing his own ends.

Things can get more complicated, for example when the Iranians stood up and were in the process of tossing out the Shah of Iran from Iran, the Shah's minions were clamoring to get their money out of Iran in anticipation of a revolution.  The Shah seeing these rats fleeing a sinking ship outlawed money expropriation.  So one common way around this was for Iranians to buy up Persian carpets and export them to USA or wherever, to sham buyers who "would pay on time."  So you spend $500,000 on carpets in Iran, ship them to New York, fly to New York, take a payment of whatever you could get ($250,000?) and then never return to Iran.  $250,000 in New York is far better than $500,000 in a Tehran that began practicing Islamic justice.

A more modern version would be for a Chinese exporter to invoice $2 million worth of goods as $1 million to a Hong Kong company, which in turn sells it to a USA company for $2 million.  Now the Hong Kong company, controlled by the Chinese exporter, invests the extra one million in China as foreign investment, with tax advantages, etc.  So you see, it is the same basic scam worked countless ways.  And it is nothing new.

Academics spend a lot of time studying this but can get no hard data.  Estimates are that from 2001 to 2011 the flow of this from China is about $3.5 trillion dollars.  The academics do their job by claiming this makes the rich richer and the poor poorer, and also "costs governments" and so we need more controls.

Well, if there is really no way of knowing, then the estimates are not very reliable.  But let's say the numbers are accurate.  We already have excellent means for combatting this practice, in 2 parts: 1. on every customs declaration, you must state if the counter-party is related to you.  Yes or no.  You either are, or are not.  2. Customs can see where the valuation of your goods falls on a bell curve.  Any worthwhile shenanigans will fall outside the bell curve, and warrant an investigation.  The fact you claimed NOT to be a related party leaves you dead to rights.  It is a simple scam with a simple solution.

If the numbers are that large, then there has been no enforcement of the laws.  If the numbers are that large, then there can be no enforcement of the laws, for the trade is too big to curb.  It would be clear that political appointees are directing law enforcement to refrain from prosecuting these particular crimes.  How would more pointless rules help?  Why would anyone think that the people who populate government are not happy with the situation, and the prosperity it brings to society in general, and the politicians in particular?  Crime pays.

Now Mish wants to know what it is so he can better factor risk.  But that is what we get with states, and that is chaos.  With no state, anarchy, we get straight forward trade since people are not constantly gaming the system, to make an impossible situation ordained by the state work.

A side issue among academics is the issue of trust among traders who engage in this activity.  Are you kidding?  This is an example of a profound blind spot among most academics.  people in business do not need the state because they honor agreements.  This is unthinkable among people who presume there is no power except the state, and all is lost if the state does not control all.

If you engage in world trade, you'll often be asked to falsify documents.  For example, once I was exporting two 40' container of Bartlett Pears to Brazil, and the importer asked me to falsify the documents to assist in avoiding duty.  I said no.  No problem, they will just falsify the documents themselves.

It has never occurred to me to comply with any such request, and I've had even tailors as a matter of routine hand me invoices that stated the suit at half value.  Instead of being censorious, I simple thank the benefactor and then throw away the falsified document at my hotel, not willing to give offense.

I suppose I would be much richer if I engaged in such acts.  I have no problem with others engaging in such acts, and would plead with a court to offer leniency in the case if, contrary to past practice, someone was actually prosecuted for such a crime.  The problem is not with people making business, the problem is with legislators writing stupid laws, and states proceeding with stupid economic policies.

Competing on design, with customers proven they will cover all of my costs and profit, why do I need to cheat?  We at the small business level, competing on design, have no reason to do so.    And since each transaction is so small, what would be the point of running afoul of a federal felony to obscure a couple thousand dollars?  It would make no sense.

And what is extremely valuable to me is the freedom to point out just how deplorably stupid our government and its rules are.  If I was cheating on the rules, then I would have no basis for complaining, since I was not burdened by the rules.  But since I comply I can complain.

(Now, note I am not claiming to be better than anyone else, just that this is a non-issue to me.  Should I find that some big score was in the cards, who knows what I might do?  It is not the hand you are dealt, it is how you play the cards.)

One other point.  All of these articles point to China.  USA is the #1 offender world wide in this regards, as it is #1 in everything.  That is just baked into the world economy.

Feel free to forward this by email to three of your friends.


1 comments:

Anonymous said...

Here is an interesting WSJ article on US companies trying to get foreign customers and export business:

http://online.wsj.com/article/SB10001424127887323530404578203803475190428.html?mod=WSJ_hpp_sections_smallbusiness