Abstract
A report by UNCTAD on illicit financial flows claims that misinvoicing of extractive commodity exports accounts for very large illicit financial flows from African countries. The report has received considerable attention, and it is possible that governments may take actions based on the assumption that the claims in the report are true. The present paper analyses these claims, focusing on South African gold exports, which account for the vast majority of the alleged illicit financial flows. Data in the source used for the UNCTAD report (UN Comtrade) are analysed in greater detail than is presented in the UNCTAD report. It is shown that the claims in the UNCTAD report are not supported by the data. It is impossible to prove any misinvoicing and anomalies in the statistics cannot be shown to be due to illicit financial flows. The authors of the report were clearly aware that misinvoicing could not be proved and that there were alternatives, more likely explanations of the statistical anomalies identified. They chose, however, to still present their claims of misinvoicing. UNCTAD produced a report with similar claims in 2016, and those claims were disproved at the time. There is very little evidence of misinvoicing in extractive commodities trade, and mirror trade analysis is in any case of very limited value when it comes to detecting or proving it. The UNCTAD report also uses mirror trade analysis in a highly questionable way that differs from the way it is applied by respected researchers. Different methods are necessary to identify or assess the magnitude of any illicit financial flows associated with the extractive industry. More granular data, supported by an understanding of international trade statistics, the international trading system and trading practices for the commodities concerned are needed in order to arrive at estimates with some degree of accuracy. UNCTAD was given an opportunity to comment on the article and did so. UNCTAD did not dispute the substance of the present article. Unfortunately, UNCTAD has refused to allow Mineral Economics to publish the comments. Nothing in the comments justified any changes in the text of the article.
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Notes
For a detailed and authoritative review of the issues and policies, see United Nations (2017).
Although misinvoicing may of course occur between parties located in the same country, this paper is concerned only with international transactions.
See Östensson (2018) for a more detailed discussion of the sources of error in mirror trade analysis.
I am grateful to one of the peer reviewers for pointing this out.
So this is the most important part of the $88.6 billion that the report presents as the annual capital flight from Africa.
An additional disturbing matter is that the report contains many assertions that cannot be found in the works referenced and which consistently aim to show the extractive industry in a negative light. Apparently, the report has not been subjected to a proper editorial review. Just one example will be provided here: On p. 102, the report states: “It has been shown, for example, that due to smuggling and underreporting, the global production of diamonds was nearly twice as large as previously estimated, although the lack of more recent data limits further investigation of the issue (World Bank 2008).” The estimates in the source relate only to artisanal diamond mining in the Democratic Republic of the Congo and not to global production (World Bank 2008, p. 33, p. 57). The author of the present article has a long list of similar examples and would be happy to share them with interested readers.
The report notes that the results concerning inter-African trade gaps are mainly inconclusive (UNCTAD 2020, p. 57).
Punctuation error in the original.
It should be noted that both transfer mispricing and misinvoicing could in principle be identified this way.
This explanation is less likely in the case of South African exports since they consist mainly of refined gold.
Most gold mining companies undertake hedging operations in order to protect themselves from unexpected price falls. Such operations may result in a realized price that is lower than the prevailing market price at the time of sale.
Such an investigation was suggested by one peer reviewer.
See https://www.lbma.org.uk/good-delivery/good-delivery-rules-and-governance for information about the rules.
The conclusions in the 2016 report, which covered the period up to 2014, were based mainly on a misunderstanding on the part of the authors of the difference between monetary and non-monetary gold. They appear to have believed that the two classifications refer to different commodities (UNCTAD 2016a, pp. 26-27, UNCTAD 2016b, pp. 25-27), whereas in fact the distinction depends on the ownership of the gold, where “monetary gold is gold owned by the authorities (or by others who are subject to the effective control of the authorities) and held as a reserve asset” (OECD, undated).
Later Comtrade data show that gold exports from Togo declined dramatically from 2019.
The authors of both of the earlier reports also misunderstood how Zambian copper exports are traded and reported and claimed that vast amounts of Zambian copper were misinvoiced or smuggled (African Union and United Nations Economic Commission of Africa, 2015, p. 97; UNCTAD 2016a, p. 16; UNCTAD 2016b, p. 15). This error was corrected in the present UNCTAD report (UNCTAD 2020, pp. 62–65).
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Östensson, O. Illicit financial flows and extractive commodities: false claims in an UNCTAD report. Miner Econ 37, 393–407 (2024). https://doi.org/10.1007/s13563-023-00374-2
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DOI: https://doi.org/10.1007/s13563-023-00374-2