This study investigates the causes and consequences of import and export smuggling and estimates its relative size in Iran from 1970 to 2002. Multiple Indicators–Multiple Causes (MIMIC) modeling and trade misinvoicing are used to compute the latent variable of smuggling. The results indicate that the penalty rate for smuggling and the quality of economic and political institutions reduce smuggling, while tariffs and black market premia increase the incentives for illegal trade. More trade openness is associated with greater illegal trade in the case of Iran. On average, smuggling in Iran has been approximately 13% of total trade.