Bogus export-import prices may hint at tax evasion, analysis finds
By Jonathan Weisman
Washington Post
WASHINGTON — Razor blades imported from Britain for $113 apiece. Tweezers from Japan for $4,896 each. Cut rubies from Myanmar for $38,192 per carat. And for U.S. trading partners, the deals of the century: car seats exported to Belgium for $1.66 each, missile launchers to Israel for $52 a shot, wristwatches encased in precious metals to Colombia for $8.68 a pop.
Lurking in reams of 2001 government trade data are thousands of such wildly mispriced transactions, and those trades may hint at corporate tax evasion and criminal money laundering on a grand scale, according to two academic researchers who have been mining the data for more than a decade.
Simon J. Pak, a finance professor at Pennsylvania State University Great Valley, and John S. Zdanowicz, the director of the Center for Banking and Financial Institutions at Florida International University, recently released their latest analysis of overpriced U.S. imports and underpriced exports, estimating that corporations manipulated international trades last year to shave $53.1 billion from their tax bills.
That is a 19 percent increase from the tax cheating that Pak and Zdanowicz believe they uncovered in 2000, and an 89 percent increase from 1993.
For a decade, government officials and fellow academics have questioned such eye-popping numbers. One senior Treasury analyst bluntly dismissed the tax-avoidance totals as "much too large." Some of those outlandish prices were surely simple typographical or categorizing errors on customs forms, the Treasury official and other tax and trade experts say.
The U.S. Customs Service is the only government agency that has been seriously studying the pricing schemes to prosecute money laundering and tax evasion. Customs uses its own research along with expert testimony from Pak and Zdanowicz.
But even skeptics are beginning to concede that although their numbers may be inflated, Pak and Zdanowicz are on to something: Overpricing imports or underpricing exports is a relatively easy way to shift large amounts of taxable income out of the United States, or ill-gotten gains into the country.
After the 9/11 attacks, the techniques have been recognized as a potential mechanism to finance terrorism. "We do not cast wary glances at their stuff," Customs Service spokesman Dean Boyd said of the analysis. "It's very serious, because you can do this with any commodity."
The Customs Service recently shifted millions of dollars into its own effort, the Numerically Integrated Profiling System, to expand its focus on terrorism financing. The General Accounting Office, which in 1995 drafted a generally disparaging report that attributed wild price fluctuations to recording errors, is examining the issue again, this time analyzing the mispricing of commodities as a means to mask money laundering and terrorism financing.
The Treasury Department and the IRS, though still skeptical, are taking a second look at Pak and Zdanowicz's computer program and the validity of their findings, in part because Sen. Byron Dorgan, D-N.D., secured a $2 million grant for the researchers to force the government to take their work seriously. Pak and Zdanowicz do not have access to the names of the companies that do the trading, but, Dorgan noted, the IRS does.
Other academics are expressing more interest. Deborah Swenson, an economist at the University of California-Davis, combed through export data for a paper published last year and she, too, found that trade prices seemed to fluctuate not according to the world market but according to tax-rate changes. In other words, U.S. companies appeared to be manipulating the prices of imports from their foreign subsidiaries to maximize tax advantages.
"The interest is definitely growing," said Mihir Desai, an economist at Harvard Business School who is studying how corporations shift income to avoid taxation.
It is relatively simple. For example: A Japanese automaker manufactures a car radio for $100, but its U.S. subsidiary buys it for $199, then sells it for $200. The company's bottom line hasn't changed, but the taxable profit in the United States is now just $1 instead of $100. A tax bill that would have been $34 is reduced to 34 cents.
Conversely, if a U.S. manufacturer exports a bulldozer to its Colombian subsidiary for $1,742; the Colombian company sells it to a buyer for $28,000. The U.S. company's cost of producing the bulldozer can be written off its income taxes, but the profit from the sale would reside in Colombia. That profit would be subject to U.S. taxes only after it is "repatriated" across the border, presumably in a bad economic year when the company's taxable U.S. income is low or nonexistent.
The same kinds of schemes can move vast amounts of money worldwide virtually undetected.
After the Treasury Department linked three Yemeni honey companies to Osama bin Laden's terrorism-financing operation, Pak and Zdanowicz examined the U.S.-Middle East honey trade. Their found that in 2000, someone shipped 182,509 kilograms of honey to Yemen for $2.63 per kilogram, a price 38 percent higher than the average honey price of $1.91 a kilogram.
At that rate, the honey exporter would have received $131,406 in excess proceeds just as the Sept. 11 hijackers took up residence in the United States. Where that money went is unknown.
Other cases are not so shrouded in mystery. In 1999, the owners of an Argentine export company pleaded guilty to U.S. charges connected to a $130 million money-laundering scheme involving wildly inflated gold shipments to the United States. In 1997, a Los Angeles herbal-product importer in Los Angeles pleaded guilty to evading $39 million in taxes.
