The undervalue arrangement is highly risky². To avoid trouble the exporter should refrain from using this arrangement. Governments do not encourage exports by undervalue. If an exporter does not violate the foreign exchange control and tax laws of the exporting country and international laws such as copyright and patent, the government of the exporting country usually will not step into the exporter's way in the undervalue arrangement.

    The undervalue arrangement uses two sets of documents. For example, an importer contracted 1,000 pieces of product X at FOB US$8 each for a total of US$8,000. The importer may want to declare 25% only (10% to 50% of contract price is declared usually in the undervalue arrangement) or at US$2 each for a total of US$2,000. One set of documents will show 1,000 pieces of product X at US$2 each for a total of US$2,000, while the other set shows the true value.

    The importer opens an L/C for US$2,000 and remits⁴ the US$6,000 balance by T/T. Following the foreign exchange control procedures on exports, the exporter must surrender a total of US$8,000 inward remittances⁵ to the government. While at the destination port, the importer pays the duties and taxes based on US$2,000, plus the ancillary⁶ expenses required in the arrangement. If the importer is caught at the port of destination, shipments may be seized by the customs.

    The importer has to buy the dollar from the black market and remit³ it by T/T through a third country. Most often the T/T will not reach the exporter on the agreed time. Quite often, the shipment date arrives before the T/T reaches the exporter.