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Logo of Phnom Penh Post newspaper Phnom Penh Post - Illicit trade costs millions

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A general view of the busy Phnom Penh Autonomous Port in 2012. Heng Chivoan

Illicit trade costs millions

Illicit financial flows in and out of Cambodia starved the Kingdom of at least $360 million in lost taxes annually between 2005 and 2014, according to a new report.

The US-based nonprofit Global Financial Integrity (GFI) measured illicit financial flows – the illegal movement of money or capital from one country to another – and found that as much as $45 billion in trade activity in Cambodia over the period was not accounted for.

The loss has been primarily attributed to the misinvoicing of imports and exports, an illegal method of misrepresenting trade activity in which the value of goods is deliberately underreported.

According to official Cambodian import and export data in 2014, the latest data given in the report, as much as $3.6 billion worth of misinvoiced goods and money transfers were not represented. The authors of the report conceded that this only amounted to a small fraction of illicit activity as it was impossible to track the overall flow of illegal funds across borders.

“GFI continues to regard the magnitude of the illicit financial flows reported here, both low and high, as likely to be conservative,” the report said.

“Moreover, the data available for estimating bilateral trade discrepancies are restricted to merchandise trade alone, excluding trade in services and intangibles, surely a more attractive channel for trade misinvoicing than trade in goods.”

Between 2005 and 2014, the report estimated that illicit financial inflows made up between 17 to 39 percent of total trade, while in 2014 alone, it made up between 4 and 15 percent. The vast majority of illicit financing came from imports into Cambodia, with estimated outflows at a negligible 1 percent.

“This is a staggering figure, underlining the enormous harm done to developing countries by illicit financial flows, however they are generated,” said Raymond Baker, president of GFI. “Maximising domestic resources and achieving sustainable development goals is dependent upon substantially curtailing illicit financial flows.”

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Sihanoukville autonomous port. Photo supplied

Measuring the exact value of lost tax income in Cambodia is difficult given that different goods are taxed at different rates. However, using only the 10 percent value-added tax (VAT) levied on all imports as a baseline, the loss in revenue for 2014 alone would equal to around $360 million, with tax losses at almost $4.5 billion over the last decade, not including other customs duties.

Soeng Sophary, spokesperson for the Ministry of Commerce, claimed that a large part of the illicit financial outflows shown in the report could be attributed to informal money transfers particularly among small- to medium-sized enterprises that conduct cross border commerce in cash.

“A large share of the Cambodian economy still operates in the informal sector and many payment transactions rely on the cash system,” she said. “I think this informal activity has a large impact on financial inflows.”

Sophary downplayed the study’s findings as a sign that cross-border smuggling, misinvoicing and money laundering had increased, claiming that it was only a fraction of the total flow of funds.

“We cannot say we are 100 percent clean or that we have no crime, but I think they are just a small part of the problem and there are many other factors that contribute to the illicit financial flows,” she said.

However, both government figures and the GFI report failed to include previously documented instances of large illicit financial outflows from Cambodia. For example, last year, Cambodia was embroiled in a controversy regarding sand exports to Singapore after a discrepancy of around 70 million tonnes was reported between the two countries from 2007 to 2015.

The difference accounted for nearly $750 million in unreported exports.

Similarly, a recent Post report documented large-scale timber exports to Vietnam despite a ban on logging exports, showing that timber exports to the Kingdom’s neighbour rose from $45.7 million in 2013 to $379 million in 2015.

Cambodia National Rescue Party lawmaker Son Chhay blamed widespread corruption among customs officials for the amount of goods not being registered.

“Look at the way customs officials are operating at the ports and the borders,” he said. “There are so many goods that are not properly registered and the government has not taken action to address that.”

He added that illicit financial inflows mainly originated from China only to be laundered through the country’s booming construction sector and casino industry.

“There are many measures that could be implemented but until the government has the political will to do so, nothing will be done,” he said. “There is money laundering coming in and out without any control and in the past few years there has been so much money coming from China because the Chinese government is fighting corruption there.”

Additional reporting by Hor Kimsay

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Don Rennie's picture

Dear Matthieu and Kimsay,

Excellent story. A similar situation is true in Vietnam.

DR