Financial Transparency Coalition

This post is the third in a three-part series on policy solutions to confront trade mispricing from Mexico and the War on Drugs. It is adapted, with permission, from this feature article originally published by Policy Matters Journal. You can read the first and second posts.

In the United States, the War on Drugs has focused mainly on stemming the demand in the north and stifling the supply from the south. This effort has largely failed because the demand for illegal drugs is so large that narcotics dealers are willing to take significant risks to enter the North American drug market. A more effective method for fighting the War on Drugs would make it difficult for the cartels to hide or use the monetary proceeds from selling narcotics, thus making it unprofitable for them to do so.

Much of the analysis of Illicit Financial Flows and the U.S.-Mexico narcotics issue focuses on the incentives driving illicit actors. The literature has not directed sufficient focus on the incentives driving government and law enforcement officials on both sides of the border. However, until policy changes are made in both countries to change incentives faced by governments, illicit actors will continue to successfully employ trade mispricing as their method of choice to launder their money.

Reform in both the United States and Mexico should concentrate on two areas of the government: the respective tax and customs authorities. One reform that would help curb trade mispricing would be an information-sharing mechanism for tax authorities in the U.S. and Mexico to communicate suspicious cross-border transactions, specifically those involving the purchase and sale of goods and services across the border. The primary goal of this communication would be to ensure that the same information is being reported to each authority regarding the same transaction. This would also require greater communication between tax authorities and customs authorities, who themselves help monitor invoicing.

A second possible reform involves taking greater measures to ensure that border and customs agents on both sides of the border inspect more closely the invoices of each shipment crossing the border. If they inspect a shipment and the amount of goods on the invoice does not match the amount of goods in the shipment itself, they need both the power to question that disparity and the incentive to find it. Some of this could be achieved with greater education of customs officials so that they understand trade mispricing in practice and how and why we need to fight it.

A third reform, which the Financial Transparency Coalition has advocated, would curtail trade mispricing by altering the incentives for the trade partners themselves. Under this proposal, parties selling goods or services across borders would sign a statement in the invoice certifying that no trade mispricing has taken place in the transaction. As Raymond Baker, Director of Global Financial Integrity, has pointed out, “some exporters and importers will readily violate such a clause. But there are not many multinational corporations that will run such transactions through their tax planning departments for the prohibited tax manipulations and then ask their people to sign a statement saying they did no such thing.”

These are not impossible reforms and they would go a long way toward curbing money laundered across the U.S.-Mexico border. Once the profits from the drug trade become more difficult to keep and use, the incentive to engage in the drug trade will also dry up. This provides the United States and Mexico with a clear path toward winning not just a simple victory in the War on Drugs, but a victory that can change the very dynamic of the war.

Will Gray is a graduate student at the George Mason University’s School of Public Policy.

This article was edited by Ann Hollingshead and Jonathan Peterson.