Money Laundering Typology through Trade Mispricing
"Trade Mispricing" is a common money laundering typology often used by merchandisers which aims to escape taxes of a home country through the formation of "subsidiaries" in other countries. Tax evasion is a predicate offence, and the use of such evaded taxes constitutes money laundering. Also known as transfer pricing manipulation or fraudulent transfer pricing, trade mispricing involves trade between related parties at prices meant to manipulate markets or to deceive tax authorities. Typically, as an illustration, Company ABC manufactures/assembles its product in three different subsidiaries - Subsidiary 1 in the home country; Subsidiary 2 in an offshore location and Subsidiary 3 in a "final market destination" country. Through related-party transactions, Subsidiary 1 sells its products to Subsidiary 2 (a tax haven) at a rediculously low price resulting in low profits being recognized by the company (hence much lower tax being paid to the home country). In its effort to maximise profit within a tax-free location of Subsidiary 2, it sells it products to Subsidiary 3 at a much inflated price. The end results being, the merchandisers "strategically" deflate profits to evade taxes in their home countries and to inflate profits in tax haven locations. It is nonetheless, a money laundering activity and should fall within the anti money laundering and counter financing of terrorism legislation. It has been reported that such money laundering typology is quite common and should be stopped at all costs. Merchandisers and manufacturers are potential players of transfer pricing manipulation. The introduction of the Goods Service Tax or GST would hopefully helps to reduce trade mispricing in the future. A recent initiative by the Transparency International is the establishment of the "Financial Transparency Coalition" where the parties (merchandisers) conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing in an attempt to avoid duties or taxes has taken place and that the transaction is priced using the OECD arms-length principle.
