ResearchPDF Available
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Detecting International Trade Frauds through Mirror Gap Analysis: The Case of Thailand
By Kiattisak Chanjana* (Golden Gate University, School of Law)
Abstract:
This paper aims to design to identify trade fraud risky by commodity codes in Thailand for
the year 2018. Using the export-import mirror gap analysis methodology, we can estimate revenue
losses according to undervaluation of declared imports, misclassification or smuggling in the
amount of more than $3.89 billion USD. This paper also illustrates the existence of these potential
frauds from the Thai Customs regime’s perspective and recent reform and trade facilitation efforts.
Finally, we wish to help incorporate with the Thai Customs and build a good relationship for
screening and addressing this challenging issue.
Keywords: Mirror Gap Analysis, Thailand, International Trade Frauds, Thai Customs
* Kiattisak Chanjana is currently S.J.D. candidate at Golden Gate University, School of Law. His dissertation topic is
“Combating Transnational Organized Crime in Thailand.He also works as police officer in Thailand.
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I. Introduction
This paper aims to examine secondary import and export data reported through the United
Nations’ COMTRADE database, with regard to trade in goods with Thailand, to provide an initial
assessment of trade fraud risk by product category and evaluate lost revenues for the year 2018.
The “Mirror Gap” methodology would apply for analyzing the possible cases of
misclassification, undervaluation, or overvaluation of goods by comparing reported export values
with all trading partners and the declared import values by Thailand. In addition, this paper aims
to place these initial findings in the broader context and overview of the Thai Customs regime to
better understand opportunities for reforming efforts and improving monitoring efforts. This
method is a new concept to identify potential cases of customs fraud by using international trade
statistics. In this paper, the methodology is largely based on the method proposed by Chalendard
et al. (2016), when they presented the cases of customs fraud in the Madagascar circumstance and
other such related policy research papers.
II. Problem Framing
It is worth noting that Customs fraud through Trade Misinvoicing is particularly essential
for developing countries that typically depend more heavily on customs duties, as a proportion of
government revenues rather than developed countries. Trade Misinvoicing is a method of moving
money illegally across borders which involves the deliberate falsification of quantity and volumes
of goods, and/or type of commodity in an international commercial transaction of goods or
services, or misclassification of goods to evade duties, taxes, or transfer illicit financial flows one
country to another.
In general, over invoicing (overvaluation) can be a method of transferring illicit money out
of a country, as the importer may intend to send the difference of the inflated value to offshore and
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unreported banks accounts. This case illustrates losing out on economic value and potential tax
revenues for the money by governments that they may not know how money has been sent out of
the country. On the other hand, under invoicing (undervaluation) is a method in which the importer
undervalues or misclassifies the imported goods to pay a lower tariff rate. In both cases, these
examples can represent lost government revenues by the trade misinvoicing. Due to the collection
of import duties, it is a relatively less resource-intensive method of tax collection than other forms
of taxation. Developing countries that may have limited government resources rely more heavily
on tariff revenues as a percentage of government income than do developed countries. Thus,
developing economies are disproportionately affected by this type of customs fraud and illicit
financial flows that these activities enable.
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III. Economic and Trade Overview of Thailand
The economy of Thailand depends on exports, which account for more than two-thirds of
the country’s gross domestic product (GDP). In 2018, according to the World Bank, Thailand
itself is newly industrialized country, with a GDP of 16.316 trillion bath (US $505 billion), the 8th
largest economy of Asia.
2
According to Thailand’s economic system in 2018, it has an average
inflation of 1.06%
3
and an account surplus of 7.5% of the country’s GDP.
4
However, the Thai
1
Trade Misivoicing, Global Financial Integrity. Accessed May 2020, Available at:
https://gfintegrity.org/issue/trade-misinvoicing/
2
Thailand: Gross Domestic Product, current prices, International Monetary Funds, Available at:
https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weorept.aspx?sy=2017&ey=2017&scsm=1&ssd=1&sor
t=country&ds=.&br=1&pr1.x=27&pr1.y=16&c=578&s=NGDP%2CNGDPD&grp=0&a=
3
Change in Price Level, Bank of Thailand, Available at:
https://www.bot.or.th/Thai/Statistics/Indicators/Docs/tab11.pdf
4
Thai Economic Performance in Q4 and 2012 and outlook for 2013, Office of the Economic and Social
Development Board, Available at:
https://web.archive.org/web/20140313151519/http://www.nesdb.go.th/Portals/0/eco_datas/economic/eco_state/4_55
/Press%20Eng%20Q4-2012.pdf
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economy is expected to post 3.8% growth in 2019.
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The Thai Bath currency ranked as the tenth
most frequently used world payment currency in 2017.
Currently, the Thai government is urging educational institutions to equip their students
with the appropriate, valuable skills to become innovators instead of providing them with the
knowledge to join the conventional workforce. In August 2019, the Thailand Board of Investment
(BOI) signed an agreement with eight of the country’s leading universities aiming at improving
the relationship between the academic and manufacturing sectors in the fields of research, as well
as human capital development to foster innovation and ignite the country’s competitiveness. In
terms of government spending, education received the most significant budget at $12.29 billion
seeking to improve the educational system.
6
The overall R&D expenditure is targeting to further
increase to 1.5 percent of GDP by 2021, regardless of relatively high government spending on
education, the outcome has not been as expected. According to a 2019 report by the World
Economic Forum (WEF) entitled “ASEAN youth: technology, skills and the future of work,” 31.4
percent of youth are either entrepreneurs or work for a start-up
7
Due to the Global
Entrepreneurship Index (GEI) 2018, it ranked Thailand 71st out of 137 countries around the world
and 15th out of 28 countries in the Asia-Pacific region based on its quality of entrepreneurship and
the extent of the entrepreneurial support ecosystem. Moreover, Thai society also encourages
entrepreneurship, making the nation a fertile ground for young Thais to begin start-ups.
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5
Thailand Expected to Post4.1% Growth in 2018Best Economic Performance Since 2012, World Bank,
Available at:
https://www.worldbank.org/en/news/press-release/2018/04/09/thailand-expected-to-post-41-growth-in-2018-best-
economic-performance-since-2012
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Thailand, Market Overview, International Trade Administration, Available at:
https://www.trade.gov/knowledge-product/thailand-market-overview
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Id.
8
Id.
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In terms of market challenges, the Thai military suspended the constitution and took control
over the government by a coup d’état in May 2014. Because of this coup, Thailand has embarked
on a gradual return to democracy. When a new constitutional was drafted successfully and a
constitutional referendum secured approval in August 2016, the current administration held
general elections in March 2019. Although Thailand has worked with a government in transition,
Thailand’s economy remains stable despite its challenges over the past three years.
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This situation
also affects Thai industries with intense competition from both global and domestic suppliers of
goods and services.
10
It is pretty evident that many domestic companies are family businesses that
span by their generations. In contrast, Thai consumers are price conscious and generally served by
local suppliers and low-priced imports. However, U.S. exporters with competitive products for
reasons other than price should desire to work with a local partner to undertake an appropriate
market entry strategy.
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Lets talk about Thailand’s MFN tariff schedule. Half of it includes duties of less than 5
percent, and approximately 30 percent of tariff lines are duty free, including for certain chemicals,
electrics, industrial machinery, and paper. Furthermore, high tariffs in many sectors continue to
hinder access to the Thai market for many U.S. products.
12
Even though Thailand’s MFN-applied
tariff rate averaged 12.5 percent ad valorem in 2017, ad valorem tariffs can be as high as 226
percent; the ad valorem equivalent of some specific tariffs—levied mostly on agricultural
products—is even higher. Also, Thailand is binding all of its tariffs on agricultural products in its
WTO commitments, but only approximately 73.5 percent of its tariff lines on industrial products.
9
Thailand, Market Challenges, International Trade Administration, Available at:
https://www.trade.gov/knowledge-product/thailand-market-challenges
10
Id.
11
Id.
12
Id.
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Significantly, the highest ad valorem tariff rates apply to imports competing with locally-produced
goods, including automobiles and automotive parts, motorcycles, beef, pork, poultry, tea, tobacco,
flowers, wine, beer and spirits, and textiles and apparel.
13
Although Thailand has the new Thai Public Procurement Act, which has been entered into
force since August 2017, corruption and lack of transparency in government procurements are
possibly major concerns for several countries’ companies, especially U.S. companies. Where there
is corruption suspected during the bidding process, government agencies and state enterprises also
reserve the right to accept or reject any or all bids at any time and may also modify the technical
requirements.
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This leads to significant leeway for government agencies and state-owned
enterprises to manage procurements, as denying bidders recourse to challenge procedures. Those
situations above trigger frequent reports that the Thai government makes changes to technical
requirements for a specific purpose during the course of procurements. Although a Thai
government; however, has commitment to transparency in government procurement, U.S.
companies and the Thai media have continued to report allegations of irregularities. Because
Thailand is not party to the World Trade Organization Agreement on Government Procurement;
it obtained observer status in June 2015.
About business opportunities, Thailand promotes a policy of an open, market-oriented
economy, and encourages foreign direct investment as a means of urging economic development,
employment, and technology transfer. Also, Thailand continues to be a prominent destination for
foreign direct investment, and many U.S. multinational and small-and medium-sized companies
alike have invested successfully in the country. Moreover, Thailand still continues to welcome
13
Thailand, Market Challenges, supra note 9.
14
Id.
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investment from all countries and seeks to avoid dependence on any one country as an investment
source.
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Import Markets Import Value (2018)
China share of 20% (49 billion US$)
Japan share of 14.1% (35 billion US$)
USA share of 6.1% (15.2 billion US$)
Malaysia share of 5.35% (13.3 billion US$)
United Arab Emirates share of 4.29% (10.6 billion US$)
Figure 1- Top Import Markets of Thailand, 2018. (Source: TrendEconomy.com)
Top Imports Import Value (2018)
1.) Petroleum oils and oils obtained from bituminous minerals, crude 11.1% ($27 billion)
2.) Electronic integrated circuits and microassemblies 4.75% ($11.8 billion)
3.) Gold (including gold plated with platinum) unwrought or 4.55% ($11.3 billion)
in semi-manufactured forms, or in powder form
4.) Parts and accessories of the motor vehicles of headings 2.76% ($6.89 billion)
87.01 to 87.05.
5.) Transmission apparatus for radio-telephony, radio-telegraphy, 2.56% ($6.38 billion)
radio-broadcasting or television, whether or not incorporating
reception apparatus or sound recording or reproducing apparatus;
television cameras; still image video cameras and other video camera recorders;
digital cameras.
Figure 2- Top Import Markets of Thailand, 2018. (Source: TrendEconomy.com)
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Thailand, Market Opportunities, International Trade Administration, Available at:
https://www.trade.gov/knowledge-product/thailand-market-opportunities
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The two figures above represent the top importing partner and the top imported product
categories for 2018—these figures are only foreseen to grow as Thailand shifts into higher value-
added petroleum and electronic integrated circuits and microassemblies. With the rise in Foreign
Direct Investment-and supplementing trade-expected to enter Thailand, it possibly comes to
increase government revenues from duties and taxation on goods or investment entering the
country. However, if Thai authorities cannot keep their own pace with this increase, many of the
associated benefits could be levied improperly. Like customs operations, if they are unable to
investigate imports efficiently as volume grows, then time lags at customs clearance might impede
overall trade facilitation and growth prospects or further incentive fraudulent activities.
As the HS-4 level will be presented from 2018 data, Customs Fraud’s potential remains
very high.
IV. Customs Environment in Thailand
Back to the past, tax and duty collection in Thailand stemmed from the Sukhothai Period.
The tax collected at that time was called Chang Kob. When the reign turned into the Adyudhaya
Period, Pra Klang Sin Kha (the Royal Warehouse) where was established to collect tax on imports
via the Customs office known as Kha Nhon.
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Thai government then initiated a new system also
known as Chao Pa Si (Monopoly Tax Collector) during the early Rattanakosin Period. Also, a Tax
House was simultaneously established to collect Customs duties and taxes on imports. In King
Rama IV’s reign, the new era of Thai Customs commenced in B.E. 2417 and the Customs House
was established to collect taxes and duties after Thailand had signed and entered into the Bawn-
16
Thai Customs, History, Available at:
http://www.customs.go.th/cont_strc_simple.php?top_menu=menu_about&left_menu=menu_about_160421_01_160
421_04&ini_menu=menu_about_160421_01&ini_content=about_160426_01&lang=en&root_left_menu=menu_ab
out_160421_01&left_menu=menu_about_160421_01_160421_04
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Ring Agreement.
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When the reign turned to King Rama V, Hoe Ratsadakorn Pipat was founded
to deal with all kinds of tax collection and become the present Customs Department’s foundation.
This growth has expanded of Customs business rapidly and created the new Customs office built
to replace the older one in B.E. 2497; and it was known as the Customs Department.
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Once it was
built successfully, the Customs Department’s traditional role in which Thailand has involved the
collection of national revenues.
19
As a modern, global economy nowadays, Customs is responsible
for collecting revenue, but it is no longer the primary source of government income. Customs
administrations encounter increasing international trade volumes without corresponding increases
in resources and greater expectations from business for faster clearance times. Meanwhile, the
governments and society expect Customs to facilitate global trade and effective control on imports,
exports and transit goods. However, a well-functioning, modern Customs in global economy is
still essential.
20
Thai Customs is responsible for controlling the import and export of goods and collecting
all duties and taxes applicable to imports and exports.
21
There is the Customs Acts B.E. 2469
(1926) is the principal legislation for the administration of customs duties.
22
To register as an
importer or exporter in Thailand, a company is required to have a company’s registration in
Thailand (or a copy of the company’s overseas registration certified by Public Notary) and a VAT
registration certificate in Thailand.
23
However, a registered importer or exporter company can
appoint a customs broker to act on its behalf.
17
Thai Customs, History, supra note 16.
18
Id.
19
Id.
20
Id.
21
A Reference Guide to Custom and Trade Compliance in Asia Pacific 2017 (PWC,175-186, 175) Available
at: https://www.pwchk.com/en/tax/reference-guide-customs-trade.pdf
22
Id. at 176.
23
Id, at 178.
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When the goods arriving in Thailand, Customs procedures in any manner are similar to
those of most other territories. As an importer, he is required to file an entry form together with
other requisite documents including a bill of lading, invoice, and packing list via the e-Customs
system.
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A company can get access to the e-Customs system once they are registered as an
importer or exporter. Importer duties and other relevant payable taxes (e.g. VAT and excise tax)
are due upon the arrival of the vessel carrying the imported goods and goods that may be stored in
a bonded warehouse.
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Landed and storage charges must be paid before the goods are released.
About import restrictions into Thailand, most goods can be freely imported into Thailand,
except for those listed as “prohibited” (such as goods carrying the Thai national flag, narcotics and
fake currencies) or “restricted” (such as certain drugs, foods, cosmetics, hazardous substances,
weapons, explosives, and wild fauna).
26
Moreover, applications for import and export
requirements such as licenses for monitored goods must be submitted to Ministered of Commerce
and other relevant issuing authorities together with the required documents (e.g. supplier order,
order confirmation and invoice) before importation.
27
The license may be valid for a fixed duration
or for a single importation. The issuing authorities may include, but not limited to, the Food and
Drug Administration, Department of Agriculture, Department of Fisheries and Department of
Industrial Works. There are over forty agencies involved in the licensing of goods and it is the
importers’ as well as the exporters’ responsibility to obtain the appropriate license.
28
On the other hand, on October 16, 2015, the Ministry of Commerce (MOC) issued a new
notification specifying dual-use items as goods requiring permission and subject to export
24
A Reference Guide to Custom and Trade Compliance in Asia Pacific 2017, supra note 21 at 178.
25
Id.
26
Id.
27
Id.
28
Id.
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measures.
29
The notification is scheduled to take effect on January 1, 2018. There are two lists that
are introduced by the regulation. One of Thailand’s dual use items (DUI) based on the EU’s list
and the other of around 1,800 goods based on their HS codes at the eight-digit level based on
Thailand’s adoption of HS 2012.
30
Under the first list (DUI list), exporters must obtain an export
license for goods on this list or for goods likely to be involved in the development of Weapons of
Mass Destruction (WMDs).
31
For goods on the second list, exporters are obligated to register and
follow specific self-certification procedures at the Department of Foreign Trade, Ministry of
Commerce. Most industries will be affected, but the most likely to be impacted include electronics,
semiconductors, computers, chemicals and pharmaceuticals, medical, automotive, steel, and
telecommunications.
32
Although this Ministry of Commerce Notification was issued according to
the Export and Import of Goods Act B.E. 2522, there is a draft Trade Control on Weapons of Mass
Destruction related Items (TCWMD) Act which is currently under the Council of State’s
consideration.
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At this stage, it is not certain whether and when the TCWMD would become
effective. If so, there could be some changes regarding sub-legislation (e.g., the MOC Notification)
on DUI export control.
34
For classification, the current Customs Tariff Nomenclature of Thailand is based on the
World Customs Organization Harmonized System (HS) Convention.
35
The harmonized tariff
schedule of Thailand that was enforced under the Customs Tariff Decree B.E. 2530 (1987) came
into force on January 1, 1988. It replaced the Customs Co-operation Council Nomenclature
(CCCN) which had been adopted since 1960. There was a new Customs Tariff Decree (No.6) B.E.
29
A Reference Guide to Custom and Trade Compliance in Asia Pacific 2017, supra note 21 at 179.
30
Id.
31
Id.
32
Id. at 180.
33
Id.
34
Id.
35
Id. at 182.
12
2559, effective on January 1, 2017 which repealed and replaced Part 2: Customs import duty rates
of Customs Tariff Decree B.E. 2530 (1987) which was amended by Customs Tariff Decree (No.5)
B.E. 255 (2012). The change/update was a result of the change of HS version from 2012 to 2017.
Thailand has adopted the ASEAN harmonized Tariff Nomenclature (AHTN) 2017, effective from
January 1, 2017.
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Technically, although an offence against the customs law is a criminal offence, practically,
legal procedures are usually related to the recovery of tax arrears and fines. Offence include
noncompliance with customs procedures, false declarations, and the most serious offence is the
smuggling and evasion of customs duties.
37
Statutory penalties are as prescribed by relevant
provisions of the Customs Act. Where Customs and the offender agree to settle the case at the
Customs level (i.e., waiver of prosecution), the penalties will be in accordance with the settlement
criteria as prescribed by the Director-General of the Customs Department.
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This is typically two
times of the customs duty amount and one times of the VAT evaded. For import licensing and
smuggling, the penalty can be based on a multiple of the value of the goods. Particularly, failure
to provide import licenses is subject to the value of the goods plus the duty payable and VAT
payable. In the case of smuggling, the penalty is two times the value of the goods including duty,
and one time of the value of the VAT, excise, interior and other applicable taxes. Further, the goods
shall be surrendered to the State.
39
36
A Reference Guide to Custom and Trade Compliance in Asia Pacific 2017, supra note 21 at 183.
37
Id. at 185.
38
Id.
39
Id.
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V. The Mirror Gap Methodology
General Scope
The Mirror Gap Analysis is a method used for comparing between reported export values
and reported import values. For the purpose of this analysis, we used data that was reported into
the United Nations COMTRADE database, limited to Trade in Goods with Thailand. However,
the United Nations COMTRADE database currently for which the most recent and complete data
of 2017 was available at the HS-2, HS-4, and HS-6 levels of commodity classification. I would
use the database from TrendEconomy for the year 2018.
The methodology utilized here is depended largely upon previously useful examples set by
Chalendard, et al. (2016), the United Nations Department of Economic and Social Affairs’
guidelines on analyzing bilateral trade asymmetries, and Cantens’ WCO research paper “Mirror
Analysis and Revenue Fraud” (2015). In fact, there are some limitations to gathering and using via
this methodology, as there may produce skepticism why trade statistics do not match perfectly
between exporters and importers. Since the purpose of this paper is only to provide an initial
assumption and assessment on the risk of customs fraud; however, time and resource constraints
have been simplified clearly for making certain assumptions.
Limitations and Assumptions
The data reported into UN COMTRADE and WITS are secondary source that are reported
by each country on total quantities, weights and values of goods. By Cantens’ pointing out, many
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reasons could be shown why mirror analysis results in asymmetrical values while comparing
between import and export values:
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The data used could be subject to time lags, wherein exports from one country for
one year arrive in the destination country in the following year. However, we
intended to avoid this limitation and error by using complete data from 2018 of
WITS by using complete data from 2018.
Also, incorrect tariff classifications could be reasons for discrepancies between
exporting and importing countries. In this situation, goods would be classified for
export under one classification, only to be reclassified upon entry into the
destination country under a more specific or appropriate heading. To partially
explain this, goods at the HS-4 level of specificity have been chosen, in order to
provide some detailed level of analysis when intending to avoid incorrect
classification errors that may be possible to happen under more specific heading
(i.e HS-6 level). Although it should be noted that even in cases of incorrect
classifications—therefore constitution misclassification—the product codes should
be treated properly as more questionable for the purposes of risk indexing, since
there is no way to examine the exact cause using secondary either like UN
COMTRADE or WITS.
40
THOMAS CANTENS, Mirror Analysis and Revenue Fraud, (World Customs Organization. WCO Research
Paper No. 35, April 2015) Available at: http://www.wcoomd.org/en/topics/research/activities-and-
programmes/~/media/9F730547EF794600ADB7B2012BB5EE63.ashx
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However, differences in transport and insurance costs may also lead to the value
gap, since exports are generally reported into COMTRADE using Free on Board
(FOB) and imports are generally reported using Cost Insurance Freight (CIF)-like
figures. Some data user might expect the reported export value to be naturally
lower than the reported import value, within the FOB/CIF margin. To compensate
for this, we have assumed an FOB/CIF margin of 7% for Thailand when calculating
the adjusted export value for This means that comparison purposes. This is based
on the 2016 OECD statistics database on the International Transport and Insurance
Costs of Merchandise Trade (ITIC).
41
In conclusion, the mirror gap analysis can potentially investigate fraud relating to
type, quantity, value and origin, with the assumption that the data provided are
correct. However, there are limitations that the analysis is limited by the aggregated
values for each product and country, and therefore cannot identify or compare data
between specific declarations and operators. For any further analysis, identifying
risky operators and specific commodities would require local data from the customs
authority to compare with COMTRADE reported figures. This analysis can only
identify the risky commodity codes under which fraudulent transactions may occur,
in order to conduct future research and targeted reform efforts to deal with the risk
of losing gain revenue.
41
Statistics Directorate Committee on Statistics and Statistical Policy, Estimating CIF-FOB Margins on
International Merchandise Trade Flows (OECD Headquarters, Paris, March 21-24, 2016) Available at:
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=STD/CSSP/WPTGS(2016)8&docLanguag
e=En
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Data Preparation and Analytical Process
After collecting all the data, I have put them in a spreadsheet program to summarize
reported exports by all partners countries to Thailand for the year 2018, by product code at the HS-
4-digit level of specificity. Then, I took the reported values by Thailand, aggregates for all trading
partners, for the same product codes at the HS-4 level of specificity and matched them for
comparison. If there was no data available for comparing either export or import for the same
product code, that the product code was then removed from the dataset and set aside for future
analysis. When I was able to pair export and import aggregates by commodity code, I then added
the 7% FOB/CIF margin to the reported export value to arrive at an adjusted export value compared
to the reported import values. For the tariff rates, I used the WTO Tariff Download Facility, to
obtain the average Most Favored Nation (MFN) tariff rate by four-digit commodity code and added
those into the model.
42
After building the model, I subsequently used the following calculations
proposed by Chalendard, et al., in their 2016 white paper to arrive at our findings as to the extent
of possible fraud:
Calculations
Trade Gap = Reported Export Value (USD) – Reported Import Value (USD)
Weight Gap = Reported Export Weight – Reported Import Weight
Value Ratio = Reported Import Value (USD) / Reported Export Value (USD)
Weight Ratio = Reported Import Weight / Reported Export Weight
42
Tariff Download Facility. World Trade Organization. Available at:
http://tariffdata.wto.org/ReportersAndProducts.aspx
17
Density Value = Value Ratio / Weight Ratio
(1) In the above calculations, the Weight Gap and Trade Gap (Export minus Import or “X-
M” Gap) are the raw quantitative estimates of the fraud. A positive X-M value suggests
possible undervaluation, while a negative X-M gap indicates misclassification.
(2) The three ratio indicators are, meant to weight the potential fraud and provide a relative
estimate of its extent.
(3) Once we have calculated the values, we can combine the different indicators to classify
goods by potential fraud type and identify the products that are at highest risk of fraud.
Classifying by Fraud Type
While a simple calculation of the X-M gap can illustrate the quantitative value and a quick
determination of over or undervaluation, it is necessary to consider the weight ratios and possible
combinations that indicate harder to spot fraud, such as smuggling and misclassification. For this
analysis, we will use the Chalendard (2016) model that looked at the various combination of ratio
weights and the type of fraud that these may indicate.
Fraud Type Indicator Ratios
Table 1- Fraud Type Indicators by Ratio (Chalendard, 2016)
Trade Weight
Ratio
Trade Value Ratio
Trade Ratio
< 1
= 1
> 1
< 1
M-, S, U
< 1
18
=1
U
> 1
M+, U
M+
M+, SO, U
< 1
S, M-
= 1
=1
E
> 1
M+, SO
< 1
> 1
=1
O
> 1
M+, SO, O
List of Abbreviations
Table 2- Abbreviations used for Fraud Types
Meaning
Impossible
Inconsistent
Expected
Misclassification: the product is declared under another (hence, incorrect)
heading
Misclassification: under this heading, some products are misclassified
overvaluation
Smuggling into country of import
Smuggling into country of origin/export
Undervaluation
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After calculating the gap and ratio indicators, I also apply the rules found above in Table 1
to examine which product codes fit into each category. For the purposes of this method analysis, I
have assumed a 10% percent margin of error in determining if a value is acceptably close to a
perfect match 1:1 ratio. The meaning is where the expected classification requires a value equal to
1, I have actually adjusted the tolerance to anything between 0.90 and 1.10. This is done to result
in issues like potential spoilage, losses during storage, transportation. etc.
43
However, it should be
kept in mind that I have already added in a 7% assumption for FOB/CIF margins prior to
calculating the values. This would bring the total margin of error for determining fraud risk to
18%. This procedure will represent a moderate to conservative threshold for determining fraud
type and can be adjusted based off risk tolerance as I refine the conciseness of the model—if I was
to add FOB/CIF estimates by product code and exchange rates variations.
VI. Analysis and Results
This portion of the report, I am to present the mirror gap (trade gap) analysis results due to
the product category at HS4 level. According to the aforementioned methodology above, positive
trade gap (X-M) indicates an undervaluation and negative trade gap means a probable
misclassification. Based on both of these cases, the government loses revenue. However, there are
some other fraud ways that the government loses revenue. I will begin the presentation of my
analysis findings by providing a summary of the overall loss in the calculation year 2018.
43
CYRIL CHALENDARD ET AL, The Use of Detailed Statistical Data in Customs Reform The Case of
Madagascar, Policy Research Working Paper, World Bank Group, April 2016) Available at:
http://documents.worldbank.org/curated/en/512741468196174563/The-use-of-detailed-statistical-data-in-customs-
reform-the-case-of-Madagascar
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Major Category Revenue Loss
Following table illustrates the revenue loss of for the Undervaluation and Misclassification
for the year 2018:
Table 3- Undervaluation and Misclassification loss
Major Category Revenue Loss
Amount in USD Billion
Undervaluation
0.056
Misclassification
3.86
For Thailand, we see the revenue loss for misclassification is much higher that the loss for
undervaluation. However, the misclassification might include the smuggling in or out from
Thailand and overvaluation of imports to siphon off fund from Thailand. I now show the top 10
product categories for each revenue loss category.
Table 4- Top 10 loss product categories undervaluation related revenue loss.
THA. No.
Undervaluation Categories
HS4 Product
Codes
Loss in $ 1000
Million
1
Rice
1006
5.61
2
Natural rubber
4001
4.60
3
New pneumatic tyres, of rubber
4011
4.50
4
Petroleum oils
2710
2.89
5
Prepared or preserved fish
1604
2.79
6
Prepared or preserved meat, meat offal
1602
2.65
7
Fruit, fresh; n.e.c. in chapter 08
0810
1.53
8
Waters, including mineral
2202
.,44
9
Polyacetals, other polyethers
3907
1.36
21
10
Starches; inulin
1108
1.31
Table 5- Top 10 loss product categories misclassification related revenue loss.
THA. No.
Misclassification Categories
HS4 Product
Codes
Loss in $1000
Million
1
Milk and cream
0402
32.02
2
Molluscs
0307
31.72
3
Fish fillets and other fish meat
0304
29.59
4
Fish; frozen, excluding fish fillets
0303
23.54
5
Fish; fresh or chilled, excluding fish fillets
0302
22.57
6
Pig fat, free of lean meat, and poultry fat
0209
15.60
7
Edible offal of bovine animals, swine
0206
13.81
8
Meat of sheep or goats; fresh, chilled
0204
5.48
9
Meat of bovine animals; fresh or chilled
0201
2.98
10
Horses, asses, mules and hinnies; live
0101
0.90
Revenue Loss by Smuggling or Undervaluation
Following table shows the product categories which cause revenue loss for either smuggling or
undervaluation:
Table 6- Revenue Loss by Smuggling or undervaluation
THA. No.
Smuggling or Undervaluation
HS4 Product
Codes
Loss in $ 1000
Million
22
1
Rice
1106
5.60
2
Natural rubber, balata, gutta-percha
4001
4,60
3
New pneumatic tyres, of rubber
4011
4,49
4
Prepared or preserved fish; caviar
1604
2.79
5
Prepared or preserved meat, meat offal
1602
2.65
6
Fruit, fresh; n.e.c. in chapter 08
0810
1.53
7
Waters, including mineral
2202
1.44
8
Polyacetals, other polyethers
3907
1.36
9
Starches; inulin
1108
1.31
10
Synthetic rubber and factice
4002
1.26
Into the above table, we are able to see that there are some unique goods to the table 3. This
is to prove that while the product categories shown in table 3 are subject to undervaluation, the
category of products in the table 4 are subject to both smuggling and undervaluation. Also, these
categories might be subject to the type of misclassification that indicates the classification in the
wrong category.
Revenue Loss by Smuggling or Overvaluation
In developing countries, the illicit transfer is commonly made for money by making import
high valued. It works for the importer who will show higher import value and transfer money
abroad. But in reality, the value of the import is not higher enough for getting reported. By the
mirror analysis using the calculation, by comparing between the import and export, I experience
that top 10 product categories. In the following table below, I would demonstrate the table:
23
Table 7- Revenue Loss by Smuggling or overvaluation
THA. No.
Smuggling or Overvaluation
HS4 Product
Codes
Loss in $ 1000
Million
1
Natural rubber, balata, gutta-percha
4001
4.60
2
New pneumatic tyres, of rubber
4011
4.49
3
Prepared or preserved fish; caviar
1604
2.79
4
Prepared or preserved meat
1602
2.65
5
Fruit, fresh; n.e.c. in chapter 08
0810
1.53
6
Waters, including mineral
2202
1.44
7
Polyacetals, other polyethers
3907
1.36
8
Starches; inulin
1108
1.31
9
Synthetic rubber and factice
4002
1.26
10
Preparations of a kind used in animal
feeding
2309
1.20
Revenue Loss only by Overvaluation
To pay attention to dealing with illicit money flow through Thailand, I will present the next
table below by using overvaluation import. This table will show you a construction of using the
conditions of calculation in which the trade value ratio and trade ratio is greater than 1 but the trade
weight ratio is close to unity. However, the value ratio greater that 1 means the export value is
lower that the import value and trade weight value close to unity means the weights of the export
and import are equal. Following table below will present the product categories in the mentioned
conditions:
24
Table 8- Revenue Loss only by Overvaluation
THA. No.
Overvaluation
HS4 Product
Codes
Loss in $ 1000
Million
1
Petroleum oils and oils
2710
2.89
2
Oils and other products
2707
0.37
3
Plastics; plates, sheets, film, foil and strip
3920
0.23
4
Phenols; monophenols, polyphenols
2907
0.18
5
Base metal mountings, fittings
8302
0.16
6
Glassware of a kind used for table, kitchen
7013
0.043
7
Cellulose and its chemical derivatives
3912
0.038
8
Vegetables; fresh or chilled
0709
0.038
9
Ethers, ether-alcohols, ether-phenols
2909
0.037
10
Stranded wire, ropes, cables, plaited bands
7312
0.031
Revenue Loss for Smuggling or Misclassification
Now I will present the revenue loss for the misclassification in another product category or
the smuggling into the importing country.
Table 9- Revenue Loss for Smuggling or Misclassification
THA. No.
Misclassification
HS4 Product
Codes
Loss in $ 1000
Million
1
Petroleum oils and oils
2710
2.89
2
Oils and other products of the distillation
2707
0.37
3
Plastics; plates, sheets, film, foil and strip
3920
0.25
25
4
Phenols; monophenols, polyphenols
2907
0.18
5
Base metal mountings, fittings
8320
0.16
6
Glassware of a kind used for table, kitchen
7013
0.04
7
Cellulose and its chemical derivatives
3912
0.038
8
Vegetables, fresh or chilled
0709
0.037
9
Ethers, ether-alcohols, ether-phenols
2909
0.036
10
Stranded wire, ropes, cables, plaited bands
7312
0.031
The product categories are related mostly to household items and equipment. However,
Petroleum oils and oils that revenue always lose from these goods and can be mostly likely for the
misclassification but for the product such as vegetables, plastics, etc. are possibly smuggled into
the country and the government its revenue.
VII. Conclusion and Recommendations
Conclusion
As we have been through the mirror gap analysis and the presentation of data finding, this
methodology can help estimate risky commodity classification and assume the extent of customs
fraud in Thailand. In 2018, there still appeared a considerable asymmetry in reported trade data at
the HS-4 level as this level equips with trade in goods, despite passing reforms and improving
customs operations and monitoring. These developments may gradually change of collecting
revenue by government. However, according to assessments above, revenues were not kept
appropriately presented by undervaluation, misclassification, and smuggling worth up to $ 3.89
billion USD. It would call for attention of customs with value gap because the revenue in this
situation they have never imagined before. If there is no a clear picture of origin fraud and reexport
26
activities, the authorities may not predict how much they could loss revenue in the future. All of
this means for finding understanding of the nature that they cannot get the revenues back
immediately, it will encourage continued evasion of import duties and allow for illicit financial
circulation into and out of Thailand, particularly acting for lost financial gain to develop their
countries.
Recommendations for the Way Ahead and to Transnational Organized Crimes
- For more thorough analysis, it should incorporate differential tax and tariff rates as well.
-The data form UN COMTRADE should update recently for the purpose of further
analysis.
- This method plays a significant role as watchlist that authorities can use for tracking to
investigate and screen the organized criminal groups that attempt to operate their business as
normal person. However, between the COVID-19 pandemic spreading globally criminals could
take advantage doing their business around us like sale of goods but having low quality.
44
However, some fraud types can be construed as corruption, money laundering, and smuggling as
criminals may ask for assistance from state authorities to avoid arresting or investigating.
Therefore, these situations should not be overlooked.
44
WILLIAM M. ARKIN, Trump’s Secret New Watchlist Lets His Administration Track Americans, (MSN, May
18, 2020) Available at:
https://www.msn.com/en-us/news/us/trump-s-secret-new-watchlist-lets-his-administration-track-americans/ar-
BB14f6Wd?ocid=msedgdhp
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