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Fraudulent Invoices Hit 29% Of Bahamas Trade

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Marlon Johnson

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Ministry of Finance’s top official yesterday admitted there is “substantial” revenue loss from fraudulent invoices that are impacting up to 29 percent of The Bahamas’ trade.

Marlon Johnson spoke out after Global Financial Integrity (GFI), an advocacy group that acts as a watchdog on “illicit financial flows”, unveiled a report showing The Bahamas has one of the world’s highest rates of customs duty and “border” VAT leakage due to the practice of submitting phony invoices that significantly undervalue import shipments.

Basing its findings on United Nations (UN) and International Monetary Fund (IMF) data, GFI found that more than one-quarter of The Bahamas’ goods trade with advanced economies such as the US and Canada was impacted by such tax evasion practices.

Branding this as “trade misinvoicing”, GFI said: “Several nations have trade misinvoicing levels significantly higher than the global average, including: Sierra Leone (39.8 percent), Georgia (34 percent); Botswana (31.1 percent); Maldives (29.6 percent); Ethiopia (29.3 percent); The Bahamas (29 percent); and Cameroon (26 percent).”

Employing two different evaluation methodologies, the GFI report said one estimated that “underinvoicing” affected almost 64 percent - nearly two-thirds - of incoming import shipments to The Bahamas. With this nation’s total physical goods trade pegged at $4.646bn annually, it added that some $2.994bn was being impacted by fraud-related tax evasion.

The second method, though, showed a much-reduced impact with just $765m worth of goods - some 29 percent - impacted out of $2.635bn in total trade. The latter figure, though, appears questionable given that Department of Statistics data shows The Bahamas imports far more than this sum annually from the US alone.

Still, while unable to validate GFI’s figure, both Mr Johnson and Michael Maura, chief executive of BISX-listed Arawak Port Development Company (APD), the facility through which around 90 percent of New Providence’s imports flow, both conceded that The Bahamas has a “material problem” with the “trade misinvoicing” practices identified by the report.

Mr Johnson revealed that the government’s revenue agencies, especially Customs and the Department of Inland Revenue (DIR), are often “playing a game of cat and mouse” with rogue importers and companies who use fraudulent, phony invoices to undervalue incoming shipments and thus evade a substantial part of their duty/VAT liabilities.

“I’m not familiar with that statistic and that particular report,” the financial secretary told Tribune Business of the GFI findings,” but we do recognise the ongoing challenge with revenue slippage. We recognise we have a load of under-reporting of revenue and evasion mechanisms that are there, and plan to address it in a very material way.

“That’s why the Government, in the recent past, legislated the Revenue Enhancement Unit. It has been enshrined in the law. We are taking some steps to give life to the unit, and that should happen in the next month or so, to take a look at that and the range of other slippage points we suspect exist.”

Mr Johnson said Customs already possesses an investigations unit whose officers can travel to the US to probe suspected fraud and tax evasion, and added that the Department’s new Electronic Single Window (ESW) - which enables goods to be cleared electronically - would significantly enhance its detection and crime-fighting powers.

He added that the ESW will compile “a treasure trove of data” that will allow Customs to analyse import trends, and “sniff out” fraud and tax evasion, by comparing “like products and invoices” submitted by different companies to see if there are any discrepancies.

“We will use Artificial Intelligence, technology and data mining to look for cheats,” Mr Johnson pledged. “I want to assure the public of two things: The Government intends to look at it, and the Government is paying a lot more attention to this issue with the enhanced powers and legislation it has.”

He added that the Government had “various estimates” of the revenue it continues to lose to falsified invoices, but declined to reveal them. “We believe it to be substantial,” he told Tribune Business, “and the deputy prime minister spoke to it a little bit in the Budget speech.

“We believe there’s a bit of gain to be had. I think you will see a lot more of that in the next four to six months, and a much more intelligence-led approach by virtue of the ESW and other mechanisms to address it. We are taking it very seriously, and want to address what we know to be the rates of evasion that we believe are too high.

“We have taken some steps. We have seen some improvement, but believe there is room for improvement still. We believe that with the technological assistance of the ESW, and with enhanced surveillance and intelligence work, we can do a bit better in addressing some of these long-standing practices.”

One such practice is the tactic employed by many Bahamian companies of creating their own US “shell” or dummy companies, which are usually domiciled in Florida. All US-based purchases of supplies and other equipment is routed through these entities, so that the Bahamian business is effectively invoicing itself when importing goods.

This permits the manipulation of invoices, via a form of “transfer pricing”, that enables import shipments to be undervalued and due Customs duty/VAT evaded at the border. Tribune Business sources have suggested that some companies avoid up to one-third of due taxes that should go to the Public Treasury via such mechanisms.

Mr Johnson told Tribune Business that Customs was aware of such practices, describing it as “a cat and mouse game” with tax cheats. He added that interviews for 15 new VAT auditors were also scheduled to take place soon as the Government seeks to “enhance compliance on that side”.

Bahamians and residents, though, have also frequently told Tribune Business of the willingness of many Florida-based companies to produce invoices and receipts showing a lower, falsified value for goods purchased in “the Sunshine State” thereby providing a further avenue for tax evasion.

Mr Maura, meanwhile, agreed with Mr Johnson that The Bahamas’ long-standing culture and tradition of false import declarations meant that the Government has a tough task to crack down on the evaders and collect every due cent at a time when the Public Treasury needs all the revenue it can get.

While unable to support GFI’s 29 percent number, the APD chief told Tribune Business: “I do believe that there is a material issue in terms of the fraudulent declarations. The reality is that it doesn’t take much other than for someone to sit at a PC in Fort Lauderdale, attached to a printer, create a company and give whatever they want to be the cost of the end unit, or effectively do the same thing in Nassau.”

Mr Maura added that “part of the justification for the investment” in Customs’ ESW was the creation of an electronic risk management system that would enable the agency to compare like products, prices and invoices supplied by different importers and thus better detect those likely to be evading due taxes.

“I do believe The Bahamas has a long history of intentional misdeclarations of goods at the border, which is why a port of entry needs a robust, fully automated inspection system to inspect containers, open up containers, compare what is inside the container with the invoice,” Mr Maura said.

“We need cargo scanning technology that is current, not 15 years old, and put those containers and pallets through effective scanning so everything declared on that invoice aligns with what is in the shipment. I would agree that it’s a very material problem, and monies need to be invested as they have done with this ESW.”

Comments

DDK 7 months, 3 weeks ago

We are indeed a tiefin nation. Is there a Tiefin 101 in the schools or is it learned in the home? It's certainly prevalent in the government and civil service. Private business loses hundreds of thousands every year to its upright, church-going, bible-toting employees! So those who do not cheat and steal have to pay for those that do. Isn't that the way of the world?

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John 7 months, 3 weeks ago

BTC thought it would have more control over its cell phone recharge when it moved from ‘hard cards’ to electronic Top Up. But in the first years of Top Up, several millions in Top Up credit was unaccounted for. And with customs there have always been the talks of ‘untouchables’ among importers. Persons who have political ties on both sides of the fence or their own connections, even Amy the higher ups in the Customs Department. So when the government continues to mercilessly increase duties and tariffs and VAT, it drives up the costs of 51% of businesses that are attempting to pay while giving those whom are bringing in the 49% of goods and not paying duties and VAT a greater advantage and a greater profit margin. So while government may see increased revenue when it increases its tariffs and duties, the amount of revenue leakage also increases. And today some importers/businesses are finding that fraudulent importers have certain items on ‘lock’, meaning persons are selling the products for less here than you can import it for so they end up purchasing the items locally (from the smugglers) causing the government even more loss of revenue. When BTC had a problem with stolen phone cards, they would try to track down the cards that were selling below face value on the streets. But they found out that many legitimate vendors had forgone profits and reduced the price of their cards to compete with the ‘black market ‘ cards. Then when BTC made the profit margin so small on the cards Crooked vendors could no longer discount the cards for fear of being suspect. Similar today with Top Up.

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Gotoutintime 7 months, 3 weeks ago

Wow--Almost one-third of all invoices are fraudulent. The Pirates have never been expelled form the Bahamas---Sad!!

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bogart 7 months, 3 weeks ago

BUSINESSES IMPORTERS....ELITES.??.........SOOOOO ...OVER THE LAST DECADES.....MORE ........??...25 PAST YEARS......ALTERNATING ....DIFFERENT GUBBERMINTS ...ERRY 5 YEARS...TERM......CONCERNS RAISED OVER ...CUSTOMS DUTIES QUERIED CAUSING SHORTFALLS IN TAXES .....FRAUDELENT DUCKING (CUSTOMS) TAXES........PAST AND PRESENT..........an da pore people still squeezing more an more to pay regressive taxes....

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John 7 months, 2 weeks ago

When there is that level of smuggling/leakage of government revenue, the real cost of living is distorted. Legitimate business cannot put the full mark up on their goods because the tax evading business actually set the market prices, exclusive of the taxes they are not paying. Imaging a company with $1 Million in sales. Assume it is not paying taxes on 50% of the goods it imports. Also it has ways of ducking its utility bills and not paying National Insurance. So its business license tax is also undervalued. At the end of the year this business could realize at least !/4 million in duties/vat it did not pay plus another $50,000-$60,000 in other unpaid taxes and bills. So assuming the company's normal net profit is 10% of sales . So while a competing company that paid all its taxes would realize profits of $100,000.00 this company would realize $300,000.00 in addition to the $100,000.00 legitimate revenue. And in some cases, the legitimate company may not be able to meet its expenses, because the company that is smuggling is undercutting prices so sharply, and may eventually go out of business. A case of bad money chasing away good money. So government must also be wary of how much it increases taxes, especially when it believes there is so much tax evasion in the economy. One strategy that is often used is government would select a basket of items that are easily smuggled and commonly and sharply reduce or eliminate the duty/vat on those items temporarily, say a year or two. So now the stores that were paying duty all along would have an even price advantage and can get a better share of the market.

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proudloudandfnm 7 months, 2 weeks ago

SO eliminate duty.....

What's big deal?

Just do it already....

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Dawes 7 months, 2 weeks ago

Surely Customs can check the price online now to see what the rough selling point is. A bit like they use the blue book for cars. If someone is considerably lower then investigate. First check the online records in Florida for who owns that company and then go further into it. This would take about 10 -15 minutes up to having to look further into it. If you then do find a company guilty fine them and the owners to within an inch of their wealth. This would then cause others to think twice.
Or just do like now and have them pay what they should have paid, so they can then pocket all the extra they made over the year and laugh at us.

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John 7 months, 2 weeks ago

And what is being done to protect government's revenue after it has hit the coffers? Too many times the public is made aware of the stealing or corruption that goes on in government, where millions is stolen or misappropriated. And in most instances the culprits are dismissed but the money never recovered. and sometimes you find that the same people are working back for the ggovernment again, or some quasi corporation or given some contracts and the cycle starts all over again.

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bogart 7 months, 2 weeks ago

TRADE IMPORTING ....BETWEEN ....US AND BAHAMAS.....COUBLE OF BILLION US CURRENCY DOLLARS....Soooooooooooooooo.......Crrrency deposits hundreds of millions of US curremcy......to enable Bahamian dollar to be equal.....NOW........GIVEN SIGNIFICANT OF BAHAMIAN CURRENCY be permitted to ...be CHANGED INTO US TO ALLOW MERCHANT BUSINESSES TO PURCHASE MERCHANDISE...GOODS........AN THEN ......REDUCE THE VALUE OF MERCHANDISE GOODS....(to be reduced dollar value of imports....to lower CUSTOMS DUTIES............In essence..........more US currency ...GOING OUT OF BAHAMAS TO BUY.....AND.......LESS DOLLAR VALUE COMING BACK IN BAHAMAS........WILL EFFECTUALLY UNDERMINE CENTRAL BANK CONTROLS IN HEMMORAGING CENTRAL BANK US DEPOSITS......AND IN EFFECT AFFECTING STABILITY OF CURRENCY .......more going out and less currency value coming back in......via cheating undervining Customs Duties....manipulating currency ...value

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banker 7 months, 2 weeks ago

The reasons for the Florida middleman corporations are a lot more complex than cheating customs. I know businessmen who accumulate American dollars outside the Bahamas for a variety of reasons. When Perry Christie regained Parliament for the PLP, there was a flight of capital based on fear and regression to cronyism and a deteriorating economy.

Other reasons include business continuity. If a huge hurricane hits and the banks are closed, and currency outflows are limited, you want access to hard dollars. Other reasons are payment for schooling for children at good schools in the USA. There is still a central bank cap on tuition payments.

And of course, it is easier to invest in the stock market if your money is in Florida and you won't have to get central bank approval for investment funds. Most of the businesses that I know, do have proxy accounts in Florida. It is not due to criminality, but to bypass the closed economy in the Bahamas as well as personal risk mitigation.

It works the other way as well -- fraudulent invoices with jacked up prices. It is a way to convert Bahamian dollars to American dollars and stash it in a safe place in the USA.

A large portion of the businessmen that were on our book of business, had at least some retirement savings domiciled in the USA. It is just being prudent when our government is not prudent with our money. As a matter of fact, the government could use some of these minds to set the financial house in order. We are currently being underserved with a bunch of amateurs.

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bogart 7 months, 2 weeks ago

EXCELLENT.,!!!..........the amateurs, ....elites, ....connected comingled with the large established businesses ...The one single entry Harbour and the Customs is bizarre in not adding up the correct valuations to apply Customs Duties.....many GOVT Customs Officials are of course very intelligent....Over the years ....the cheating of the Customs Duty making items prices lower....and then businesses...selling on the market ...can vary profit margins...strangelling smaller businesses honest paying duties....businesses...... the majority of the businessmen who are are honest in paying full Customs Duty make less profits..... UNFAIR COMPETITION CHEATING CUSTOMS DUTIES......BUSINESSES IN MARKET.....UNFAIR COMPETITION.....as long as some cheat Customs Duties creates unfair competition....and likely only small businesses operate without legal status without liscences...etc...

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