US TAX COFFERS LOSE $640 BILLION OF TAXABLE PROFITS DUE TO TRADE-BASED TAX EVASION AND MONEY LAUNDERING IN 2021, SAYS SĒK STRATEGIES

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May 04, 2022, 07:55 ET

WASHINGTON, May 4, 2022 /PRNewswire/ -- Plastic buckets exported to United Kingdom for $.01 each seems like a bargain, while single line telephones imported from China for $505.03 each is steep pricing. It is also unclear how non-industrial diamonds can be exported to France for $2.32 per carat but imported from South Africa for $929,390.82 per carat. In fact, these are examples of abnormally priced goods both exported and imported by US companies or criminals that illustrate complex tax avoidance or money laundering strategies – strategies which have cost the US government more than $640.36 billion in taxable income during 2021, according to in-depth data analysis of customs data commissioned by Sēk Strategies and published May 3, 2022. The study was conducted by John Zdanowicz, Ph.D., President of International Trade Alert and Professor Emeritus of Finance at Florida International University.

"Also called false invoicing, it is the scheme criminals use to launder money and move proceeds from illegal activities, such as drug profits, out of the United States undetected. It may also facilitate income tax evasion, bribery in violation of the Foreign Corrupt Practices Act, and the financing of terrorist activities," said Eryn Schornick, Founder & Principal of Sēk Strategies. "The staggering amount of abnormal prices in international trade shows how billions of dollars are moved out of the US each year. The scale of lost taxable income and taxes is footed by ordinary taxpayers. Governments and regulators across the world must act to combat these schemes which are used by criminals and kleptocrats from rogue governments," said Schornick.

According to John Zdanowicz, the concept is simple, "buy nothing for something or sell something for nothing."

Here is how it works: A US company or criminal imports products from a subsidiary or colluding partner at extremely high prices (buying nothing for something) increasing its cost of goods sold, thus decreasing its taxable income and tax obligation. Meanwhile the money itself moves offshore undetected. Working from the other end of the transaction, a US company or criminal can also shift money and taxable income out of the US by exporting products to a subsidiary or colluding partner at extremely low prices (selling something for nothing) which under reports revenues.

Other examples Zdanowicz cites include:

Rubies – Cut Not Set imported from Mozambique for $14,355.71 per carat
Mufflers & Exhaust Pipes imported from Germany for $1.039.09
Smart Cards – Recorded imported from Korea for $7,008.36
Rubies, Emeralds & Sapphires exported to Thailand for $2.71 per carat
Radiators for Tractors exported to Brazil for $.20
Steering Wheels and Columns exported to China for $.08

China tops the list of countries with the highest amount of estimated US tax losses and money laundering due to abnormal trade pricing in 2021.

International Trade Alert's evaluation, an in-depth computer analysis, included every import transaction and every export transaction for every product and for every country, during 2021.

According to Zdanowicz, losses in US tax revenues will continue to be a growing problem. The 2021 figure shows a 15% increase over the $556.51 billion moved out of the US by illicit financial flows in international trade in 2020.

"Criminals and tax evaders have discovered that moving money through the banking system is risky, especially with the new reporting requirements for financial institution under the Patriots Act and other banking regulations," Zdanowicz said. "However, moving money is virtually undetectable in international trade. Some companies avoid taxes by moving their corporate headquarters offshore through tax inversions. Manipulating their international trade prices allows companies to remain in the US but move their taxable income offshore," said Zdanowicz.

Zdanowicz developed and perfected the sophisticated computer software necessary to analyze every US trade transaction contained in the US Department of Commerce Merchandise Trade database and detect every abnormally priced import and export transaction. Zdanowicz stated that the abnormal transactions he discovered are "hidden in plain sight."

Notes

The executive summary of the Trade-Based Tax Evasion and Money Laundering report can be viewed here
February 2022 recommendations by Sēk Strategies to the Financial Crimes Enforcement Network's (FinCEN) review of the US Bank Secrecy Act regulations and guidance with input from International Trade Alert can be viewed here
In his study, Zdanowicz assumed that import and export prices were abnormal if they deviated above or below the interquartile range of prices, as defined in the 1994 "Intercompany Transfer Pricing Regulations Under Section 482" of the Internal Revenue Service tax code.

SOURCE Sēk Strategies