The paper used a standard methodology and publicly available (Comtrade) data to look at the mismatches between import and export figures on a range of commodities exported from five natural-resource-rich countries over periods of about 20 years. In doing so, it identified clear and consistent patterns of misinvoicing, a term we use without attributing blame or making any specific accusations.
Trade misinvoicing has been generating more and more attention in the research and policy communities, linked mainly to debates on illicit financial flows. Trade misinvoicing continues to be used as a key mechanism of capital flight and illicit financial flows (IFFs) from developing countries.
The paper fits within our wider work on commodities, which aims to promote a more equitable distribution of value-added throughout the global supply chain, particularly towards the small producers and citizens of developing countries. In this respect, we join the growing number of analysts and commentators who are concerned about the lack of transparency in the global commodities trade. We work to promote transparency in the physical and financial flows related to commodities trade, to shine light on illicit activities, and to enable the citizens of developing countries to benefit more effectively from the extraction and trade of their nation's commodities.
This focus on transparency began at our Global Commodities Forum in 2014, which ran with the theme of "Global value chains, transparency, and commodity-based development." During the Forum, participants recommended that UNCTAD convene a multi-stakeholder Working Group on Commodities Governance, to promote transparency and accountability.
As part of its broader work on transparency, UNCTAD commissioned a study by Léonce Ndikumana, a leading researcher on capital flight and IFFs from developing countries, on the misinvoicing of key commodity exports from five developing countries.
Challenges to our paper have fallen broadly into two specific camps. First, some argue that UNCTAD has over-interpreted - or misinterpreted - the data with its finding that some commodity dependent developing countries are losing as much as 67 percent of their exports worth billions of dollars to trade misinvoicing. A second line of argument is that when Zambia says it exports its copper to Switzerland, it actually means that a Swiss-based company is exporting the copper, and therefore we should not take import and export data seriously when the copper does not arrive in Switzerland.
To reply to the first argument, this is what our data has shown us. 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, a term that we try to use without any implicit judgement or bias. Rather, the challenge has been to suggest that, for a range of historical and legacy reasons, South Africa simply does not record gold exports in the normal way, even if its trading partners do. We think this issue merits further research and discussion.
To reply to the second argument, we do not see any practical or moral reason why the destination country should not be recorded. Transparent documentation should make it possible to identify clearly the source country of any cargo, no matter how many times the cargo is sold or traded between source and destination countries. We agree with those traders who say that they should be free to do whatever they want with their cargoes, but we also think the traders should report to whom they sell their cargoes in order to ensure full transparency between the source and destination countries.
The importance of this transparency and traceability is that, first, full transparency on the export and trade of commodities is a necessary (if not sufficient) condition for the citizens of resource rich countries to benefit from their countries' natural resources. Second, it allows an importer to determine that its imports have no connection, for example, to human rights abuses. This is as true for gold exports from Eastern Congo as it is for blood diamonds. Third, if some companies are benefitting from tax incentives based on how much they have exported from a given country, then they should be able to identify the destination country too.
UNCTAD welcomes discussion around these issues, which shine a light on the lack of transparency in the trade of natural resources. We answer some of the specific comments and questions below:
The spectacular numbers for gold "smuggling" in the paper seem to stem almost entirely from the fact that up to 2010 the vast majority of South African gold exports were classified as "monetary" - and consequently not captured in the Comtrade database. If you check the corresponding South African customs data, there were large recorded exports in all the years up to 2011. Also, even after 2010 the vast bulk of South African gold exports are recorded, but the destination countries are not recorded. This seems to have led to huge partner mismatches because in our own and in Comtrade's numbers the 2011-2014 gold exports are all "unallocated". This is a historic practice of our tax / customs authority that only affects gold. (Dewald van Rensburg, City Press)
Tralac, the South African trade law centre says simply that South Africa does not report gold trade data. The South African Revenue Service (SARS) trade statistics website explains that South Africa does include gold exports in its domestic statistics, but due to legacy rules it is treated both as a good and as a country and reported under the special code ZN "Origin of Goods Unknown". The South African Reserve Bank and SARS do not report details of where the nation's gold exports go to (so therefore this data would not be retrievable from COMTRADE). (Maya Forstater, independent).
These comments raise further questions. Why are some data on gold exports captured in the Comtrade database, but not others? Why has South Africa not recorded the destination countries since 2011, even when their trading partners do? Why are the 2011-2014 gold exports all "unallocated"? And why is this a historic practice of South Africa's tax / customs authority that appears to affect only gold, not other exports? These idiosyncrasies only make South Africa's gold exports less transparent. We do not understand the need for, or the benefits from, reducing transparency on South Africa's gold exports.
A shipment of copper, gold, or cocoa loading up on the docks of a producer country will make its way to Rotterdam or Antwerp, Dubai, Singapore or other hub, where it may be warehoused before being split or combined with others, repacked and eventually delivered to ultimate destinations. The final endpoints may not be known when the cargo sets off, so the destination might be recorded as the home-base of the commodity company (eg Switzerland) or the first port of consignment, even though it would not be expected to be reported as an import there. (Maya Forstater, independent)
On Switzerland, Zambia, and copper… "There's a second level of complexity here which is that the Mopani brand is a London Metals Exchange branded one. This means that not all production goes direct to end users around the world. Some of it will end up in storage at least for a time. But the storage will be in bonded, LME approved, warehouses. And bonded here means that it doesn't turn up on the import statistics of a country. Because it hasn't, in the legal sense, entered a country. This is another explanation of the Chile / Netherlands puzzle too as Holland is a centre of LME warehouses. 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." (Tim Worstall, Adam Smith Institute)
Full transparency of trade flows is necessary before a country's citizens can be confident of benefitting from their country's precious natural resources. Bonded warehouses are used either as part of an export processing zone (EPZ) or they are used as a transit point for commodities travelling elsewhere. If they are used as part of an EPZ, then the commodities are registered as a duty-free import before being processed, and the destination country should be known. If the warehouses are being used as a transit point, then at some point the final destination will be clear. A clear trail of documents should allow the identification of the source and final countries.
We understand that the final endpoints may not be known when the cargo sets off. But if this is the case, why register Switzerland as the destination country?
In summary, these challenges do little to reassure about the lack of transparency in the trade of commodities from developing countries. As we have highlighted, this misinvoicing - a word that we use in its most technical sense, without attaching value or even accusation - means that some countries may be losing as much as 67 percent of their commodity exports.
As with related discussions on beneficial ownership and revenue flows in the extractive industries, more transparency in the commodities trade can only be a good thing for the citizens of developing countries. Indeed, this transparency may be the next major frontier to ensure that the citizens of resource-rich countries can benefit from their countries' natural resources.
We see this paper as a first step in a process to increase our collective understanding on transparency issues in the trade of natural resources. UNCTAD looks forward to further cooperation with partners in government, business, and the non-profit sector to better understand the lack of transparency in this sector.