Magazine article American Banker

Tax Evasion in Import, Export Seen Spurring More Red Tape

Magazine article American Banker

Tax Evasion in Import, Export Seen Spurring More Red Tape

Article excerpt

Bankers may face a big compliance problem in their international trade finance units if two professors' contention that billions of dollars of taxes are being evaded spurs regulatory reform.

According to the professors, there is reason to believe that at least $28 billion of income taxes are being evaded by importers and exporters that either inflate, or deflate, reported prices for international trade.

Since banks help finance a fair portion of international trade with letters of credit and other instruments, they could someday be required to help stop these violations, by reporting suspicious transactions.

"The question is, if a bank knowingly finances the purchase of raw cane sugar at $1,200 a kilo, does that have [regulatory] implications," said John S. Zdanowicz, a finance professor at Florida International University in Miami, who prepared the analysis with associate professor Simon J. Pak.

Billions in Lost Taxes

While banks now face no hard and fast requirement to report the transactions, such a requirement could someday be justified, under the same reasoning that the Bank Secrecy Act employs to require the reporting of suspicious currency transactions, experts say.

The determination by Mr. Zdanowicz and Mr. Pak that billions of dollars worth of tax evasion is likely taking place, first published in the Miami-based newsletter Money Laundering Alert, could bolster the position of any regulators who may want to call for such a rule.

The professors came up with their estimate by using customized computers and software to analyze the huge data base maintained by the Commerce Department of prices paid for U.S. imports and exports.

The professors used these data to figure out an average price paid for each of the 23,000 classes of goods imported and exported between the U.S. and the 235 countries with which it trades.

Inflated Prices

The professors then put themselves into the frame of mind of a tax evader.

One classic way for a business to evade income taxes is to inflate the price paid for imports, perhaps from their own subsidiary, or from a company that has agreed to monkey with the numbers. …

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