Dark Money in Indonesia’s Export Channels: What Are Over- and Under-Invoicing?
Dark Money in Indonesia’s Export Channels: What Are Over- and Under-Invoicing?
Jakarta, CNBC Indonesia — President Prabowo Subianto highlighted a major issue in his speech to the House of Representatives, namely the alleged leakage of Indonesia’s export values through under-invoicing practices.
The cumulative value of Indonesia’s export under-invoicing from 1991 to 2024 is said to have reached US$908 billion. The figure is equivalent to around Rp15,980.8 trillion (assuming an exchange rate of Rp17,600 per US$1).
This figure illustrates the significant potential wealth from export activities that are not recorded at their true value.
The issue emerged after Prabowo highlighted under-invoicing, i.e., reporting export values lower than actual conditions. This practice is seen as a gap that deprives the state of revenue, royalties, taxes, and foreign exchange earnings from exports from entering the country optimally.
Under-invoicing is not a stand-alone practice; rather, it is part of a broader practice known as trade misinvoicing.
What is trade misinvoicing?
According to NEXT Indonesia, trade misinvoicing is one form of illicit financial flow in international trade.
In practice, this involves manipulating trade transaction data, especially the figures shown on invoices.
The manipulation can concern value, quantity, or quality of goods or services. In other words, trade documents are created to misrepresent actual conditions.
The practice can be imagined as creating a transaction note that does not reflect reality. The goods shipped may be of high value, but the documents state a lower value. Or conversely, the value may be inflated.
This occurs when exporters or importers report inaccurate data to customs authorities in the course of export and import.
Trade misinvoicing itself is divided into two categories.
- Under-invoicing
The value of the transaction is reported as lower than its actual value. This can reduce tax liabilities, royalties, export duties, or other levies because the basis of calculation has been lowered.
- Over-invoicing
The value of the transaction is reported as higher than its actual value. This can be used to move funds into the country as if the transaction were legitimate.
Both are commonly used to evade taxes, reduce duties, or move funds illegally into or out of the country.
To gauge the potential misinvoicing, one approach used is Gross Excluding Reversals or GER. This methodology is used by Global Financial Integrity to estimate illicit financial flows arising from manipulation of trade values.
It involves comparing the export value reported by one country with the import value reported by the destination country. If the gap is large and recurring, it signals potential manipulation of trade records.
Misinvoicing practices in Indonesia
Indications of misinvoicing practices in Indonesia are visible in discrepancies in coal export records.
In an examination of international trade data compiled by UN Comtrade, NEXT Indonesia notes potential under-invoicing and over-invoicing in Indonesia’s coal exports from 2015-2024.
During that period, potential under-invoicing of Indonesia’s coal exports reached US$13.5 billion.
Meanwhile, potential over-invoicing was US$6.5 billion. Taken together, the total potential misinvoicing of Indonesia’s coal exports reached around US$20.0 billion over a decade.
From these data, the largest misinvoicing value occurred in 2022. That year, potential under-invoicing of coal exports reached US$2.54 billion, while over-invoicing reached US$1.68 billion.
The sharp rise in 2022 occurred during a period when global commodity prices surged.
In such conditions, the gap between values reported in the country of origin and those recorded at the destination can widen further.
For coal, the largest under-invoicing pattern occurred in exports to India. India is Indonesia’s major coal market, accounting for about 27.08% of total Indonesian coal exports from 2020 to 2024.
In this commodity, about 59% of potential under-invoicing is concentrated in exports to India.
Gaps in under-invoicing also appear in many other commodities. The largest figures come from scrap and waste of precious metals, followed by crude oil, coal, palm oil, lignite, footwear, printing machinery, petroleum gas, and fats and oils of animal or vegetable origin.
A similar pattern is seen when tracing by destination country.
In the period 2014-2023, China was the trading partner with the largest under-invoicing value in Indonesia’s export records, amounting to US$53.0 billion or 13.19% of total under-invoicing. The total under-invoicing value for that period was US$401.6 billion.