How does a mink coat for under $13.00 sound? Or a dozen men’s jackets for $53.50? Perhaps a pair of women’s shoes for $3.37?
According to research by Steve Zanakis, decision sciences and information systems professor, and John Zdanowicz, finance professor, who has long studied pricing anomalies in international trade, that’s what invoices for these products imported from Greece revealed. And the numbers were just as surprising for items exported to Greece, including telephone sets for $7,586 each and a dozen pair of sunglasses for $7,534.
During a recent visit to Greece, Zanakis briefed congressmen and the deputy minister of finance and his staff about the multi-millions in annual revenue lost by the Greek Treasury from abnormally priced trade transactions between Greece and the United States. He pointed to research results that used 1995 U.S. Department of Commerce data as well as a subsequent study using 2001 data that confirmed the previous findings. Some of this shift may be due to money laundering, terrorist financing, or income tax evasion.
The potential financial impact of reining in the illegal trade between the two countries is staggering.
“I presented our revised study estimates that $200 million was moved illegally in 2001 trades between the two countries,” Zanakis said. “Extrapolated to the total trade of Greece with the world, the $4.3 billion total annual capital flight results in a $1.5 billion annual tax revenue loss. This amount (about one percent of its gross domestic product, or GDP) could substantially reduce the Greek public deficit of 6.1 percent of GDP, which is the highest among the European Union’s member countries.”
According to the researchers, if authorities audited only a very small number of the top 25 export and 25 import income-shifting items flagged by the alert system, they could capture more than fifty percent of all income shifted from these trades.
The Greek media picked up on the story. Detailed coverage of the professors’ studies appeared in two important Greek newspapers in May, 2005. Nea (News), the largest-circulation daily newspaper, devoted a full-page article titled “Tax Evasion of 1.2 Billion Euros via Over-Under Invoicing.” “Electronic Blockage in Tax Evasion,” another full-page article, appeared in Kathimerini (Daily) newspaper, showing women in mink coats.
“Prompted by the publicity, a Greek senator posted an inquiry to the parliament,” Zanakis said.
Zdanowicz and Zanakis’s original article, “Detecting Abnormal Pricing in International Trade: The Greece-USA Case,” written with another co-author, was published in 2003 in Interfaces, the practitioners’ journal of the Institute for Operations Research & Management Sciences (INFORMS).