At the end of January, the Kenya Sugar Board, acting on a tip off, seized and impounded over 1,800 bags of illegally imported sugar. Arrests were made and the board vowed to begin a country-wide crackdown on other cartels who smuggle tons of sugar into the country each year.
This could not come soon enough. The impacts of smuggling sugar - whose prices can easily undercut that of legitimate products - on
And the problem has been worsening - of that
In fact, the problem is so ubiquitous that nearly one out of every
This creates a huge loss of tax revenue to an already cash-stricken government. At average tariff and VAT rates, proper reporting of smuggled imports would have added
Perhaps of even greater concern, however, is smuggling's impact on domestic industry within the country. Smuggled goods can be turned around and sold on the black market for prices up to 30% lower than their competitors.
If its impact on the sugar industry is any indication of the damage smuggling can do to the broader economy,
Smuggled in plain sight
The first step in doing this would be to ask where these goods coming from. Recent seizures of sugar suggest that smuggled goods don't necessarily come from
The really pressing question, however, is how these smugglers manage to slip billions of dollars worth of goods through Kenyan ports under the noses of customs officials in the first place.
Instead, the billions in smuggled goods are almost all "smuggled" in the plain sight of authorities. Through a process called 're-invoicing', importers deliberately alter their export and import invoices to change the values at which the goods are declared to customs.
Goods destined for
What's worse is that re-invoicing is completely legal in many countries, and some companies even exist to guide traders through the process, operating out of shady locales such as the Seychelles, the
These service providers help traders use anonymous shell companies and secret bank accounts to avoid taxes and sneak goods or illicit money into or out of countries such as
Furthermore, customs officials often have no way of knowing when traders are manipulating prices. The importer's invoice for the goods and proof of payment to a tax haven shell company appear completely legitimate, giving an unknowing customs official no grounds on which to challenge the listed value.
The financial secrecy of the tax havens enabling re-invoicing meanwhile makes this sort of foul play even more difficult to detect - even if a sceptical customs official identifies an invoice as incriminatingly under-valued, it is almost impossible to tie the importer to their offshore shell company or bank account.
Schemes such as this are also used to extract wealth from
The real culprits
In most cases of smuggling, blame is often focused entirely on petty corruption within the customs administration. But while sneaking in contraband and unreported goods is a lot easier if you can pay a small bribe to have a customs officer look the other way, this is only a small part of the problem.
Although corruption in government, and more specifically customs, facilitates smuggling, the true culprits of the vast smuggling problem crippling the economies of
Unless global efforts are taken to end financial secrecy and eliminate anonymous shell companies, problems of smuggling and other forms of illicit flows of goods and capital cannot possibly be curtailed.
Prior to joining GFI, Brian worked for microfinance institutions in both
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