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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Sandy Merber and John Raven
Introduction
Customs integrity has acquired a recent, quite new importance in the wake of two converging strategic forces – an extensive set of proposals for the reform of many important border crossing procedures in continuing discussions on a possible Trade Facilitation Agreement in the World Trade Organisation (WTO), and the emphasis on border controls in global anti-terrorist security policies.
While serious and pervasive customs and associated commercial dishonesty is usually a reflection of a much wider cultural environment, customs officers are subject to exceptional temptation because they exercise strong legal, often discretionary powers in respect of two major financial functions – the collection of import duties and taxes and the control of declared export prices as a basis for repatriation of foreign currency receipts.
In many developing countries, customs collections on imports account for a very high proportion of the national revenue. Exports are a key source of scarce hard currency and double invoicing, with the profitable difference accruing to the trader in secure external accounts, is a widespread practice. Customs officers are uniquely placed to control and derive irregular personal benefits from both these cash flows. Traders and agents in corrupt cultures are subject to corresponding pressures to accede to customs illicit demands, or to themselves initiate illegal overtures.
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These malpractices, regrettable enough in the context of a national economy, are now a notable international concern. They pose an increasingly potent threat to the reliable, rapid delivery of raw materials, components, sub-assemblies and products essential for modern globalized trading. They also distort and constrain its naturally free-flowing investment in production and processing facilities in many developing countries. There is, therefore, an urgent and obvious need for effective mechanisms to encourage, receive, record, report on and redress serious complaints of corruption.
All Customs services have extensive legal powers to instigate criminal proceedings against fraudulent traders and also the less formal, but sometimes even more formidable, resources of operational disciplines and penalties, causing commercially unacceptable systematic delays and uncertainties to consignments. As a result, there is little need to enhance Customs power to take action against errant declarants. The real need, rather, is for reliable means of securing a proper response to commercial complaints of Customs wrongdoing.
The revised World Customs Organisation (WCO) Kyoto Convention obliges signatories to arrange that aggrieved traders should have the right to pursue such complaints to an independent tribunal outside the Customs service. This may be very effective in dealing with some exceptional Customs irregularity in a normally law abiding environment, but is of little use in countries where official and judicial corruption is pervasive.
In such circumstances, where recourse to any national tribunal alone could be imprudent, the recent precedent set by Guatemala Customs could be instructive. In their very comprehensive modernization programme Guatemala Customs, with World Bank backing, established an “ombudsman” facility whereby the Guatemalan anti-corruption agency is working jointly with the national chapter of Transparency International.
Requirements
Behavioural reform has two evident requirements: first, some means of attracting and focusing essential political and commercial attention and will and second, a set of practical measures to heighten honesty in day-to-day trading operations.
Political interest and action can be stimulated and directed by some globally recognized means of lodging details of instances of Customs malpractice, for accumulation and regular publication and comment in a form avoiding any possibility of attribution to particular complainants. More could be done if managements of global commercial enterprises could publicize keen interest in such national Customs integrity ratings as a focal factor in their investment and production planning.
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Overall reform, even when international political and business support has been enlisted, will be a prolonged and painstaking process. It will call for and draw strength from progressive extension of adherence to the Kyoto Convention, eventual implementation of a WTO Facilitation Agreement and patient pursuit of capacity building and technical assistance programmes in the hands of the WTO,World Bank and WCO.
The analysis of operational difficulties will be a key practical accompaniment to action to improve any particular national rating in a global Customs integrity index. That analysis will have to be followed by a concerted Customs/trade move to ensure that the most notorious and frequently exploited procedural hot-spots are progressively eliminated or insulated from possible extortion or collusion.
This chapter offers a summary view of the main problems likely to be met and the most likely means of solving them.
Categories
Analysis of main features of corruption at the Customs/trade interface will be greatly assisted by the account and analysis of three case studies – Pakistan, Bolivia and the Philippines – provided by Irene Hors in OECD Technical Paper 175 “Fighting Corruption in Customs” (2001).
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Characteristics and remedies
Facilitation payments
Characteristics
“Facilitation payments” generally are defined as small, customary payments to low- level officials for the performance of non-discretionary tasks to which the applicant is entitled under law. Such payments are almost always illegal under local law, but hardly ever the subject of enforcement. And while some of the laws forbidding the bribery of foreign officials exempt “facilitation payments” (e.g., the United States, Canada and Sweden), this exemption does not exist in similar laws of other significant jurisdictions (e.g., the United Kingdom, France and Brazil). The sting of the apparently harmless “facilitation payment” lies in Customs’ ability to use their always extensive regulatory powers to apply a wide range of punitive measures to anyone refusing to offer customary “tea money”.
Such pressures can be disproportionately draconian. If a certain international maritime container service or one of its major customers stands up against this apparently innocuous “facilitation” practice, Customs can submit every future container movement to all the inevitable and contingent handicaps of deliberately unsympathetic physical inspection.
Such practical blackmail, if applied routinely to express and other air cargo carriers, could deprive the commercial community in some developing countries of essential communications and trading facilities.
There is no trade benefit in supporting this system, which is almost exclusively a Customs imposition. If underlying Customs pressures were removed, traders and carriers would be delighted to see the practice disappear overnight.
Many respectable and law-abiding traders, weighing the relatively modest financial effects and widespread prevalence of “facilitation payments” against the brutal operational consequences of refusal, and perhaps conscious of the explicit exception in the anti-bribery laws of their home countries, feel obliged to allow their agents or brokers to absorb costs and responsibilities in tacitly agreed, inflated commissions, fees and charges.
However, increasing enforcement of laws prohibiting the bribery of foreign officials, coupled with inherent limitations of the “facilitation payments” safe harbour, have compelled a growing number of multinational traders and others to severely limit or eliminate entirely the use of such payments by both their employees and agents.
There are no reliable criteria to establish when a payment may be considered to be “small” and therefore meet the first criterion of a true facilitation payment, particularly where the repetitive payment of “small” amounts may aggregate over[Page189:]time to substantial sums. Furthermore, Customs classification and valuation often require the exercise of judgment about which reasonable people may differ, and even compliant, responsible traders sometimes make inadvertent errors in Customs documentation. Thus it is difficult to be certain that a retrospective examination of any particular payment may not be characterized as a payment to exercise discretion or overlook an error. A misstep in either of these areas may turn a “facilitation payment” into a full-fledged bribe, with significant consequences for the reputation and financial well-being of the trader. In this environment, the perpetuation of the routine expectation of “facilitation payments” creates increasingly intolerable tensions for honest traders.
In the numerous countries, where petty corruption is still endemic and Customs officials are systematically underpaid, even the very useful suggestions for assessment and selection of agents provided in Chapter 4 may prove unworkable. Agents will need, as a condition of commercial survival, to get their principals the best routine arrangements with Customs, by keeping disbursements within the usually well-understood schedule of irregular charges. Trader principals are subject to parallel, supporting competitive pressures. Where companies are forced to meet Customs demands through under-the-counter arrangements with agents, they are bound to incur significant additional costs in the form of inflated fees and commissions.
Remedial action
Apart from their many vicious consequences for traders, “facilitation payments” have, for many years, entangled and frustrated trade facilitation itself in the true sense of simpler and more reliable trading.
For example, numerous Customs administrations have imposed and sustained completely ineffective systems of so-called comprehensive physical inspection of import consignments, incompatible with modern trade and transport timings and practices, solely because essential exceptions can be readily and profitably negotiated. The commercial pressures that could otherwise have forced governments to push Customs into basing inspection on selective risk-assessment are diverted and damped down by the potent combination of inadequate salaries and the “facilitation payment” alternative.
An entirely new situation may be created by current, intensifying pressures for global anti-terrorist security policies in which honest, effective border management, including, especially the close control of containerized traffic, is a basic requirement.
ICC is taking every opportunity to bring legitimate security concerns behind a broad, synergetic security/facilitation agenda, in which the elimination of “facilitation payments” should merit early priority. It would be salutary to dispel and counter the assumption underlying the OECD Commentary that these routine payments are too pervasive and deep-rooted to reduce or eliminate.
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In fact, there are many ways, making for efficiency as well as integrity, in which opportunities for such payments can be limited and the disciplinary and regulatory background, against which they are easy to extort, can be improved.
The most common procedural opportunities for exactions are well known and relatively easy to overcome. Cash payment of duties can be switched to bank transfers, deposits and guarantees. Manual handling of paper documents can be replaced by electronic messaging. In surviving documentary systems, the need for signatures, favourite perches for petty peculation, can be minimized and processing arrangements can be altered so that personal contacts between traders/agents and Customs officers are limited to a one-time deposit of all documents needed for release of the goods.
Paper documents and information technology
Paper documents offer special opportunities for irregular payments. Conversely, automation aids rectitude. Well-designed automation ought to get rid of most paper forms, but such dinosaurs as “supporting documents” carried with the goods and presented only at import still haunt even the most advanced Customs computer systems. Customs normally retain the option to require these. While honest administrations with good automated services will usually reduce manual exceptions to a minimum, other services fighting a rear-guard action against computerized reform may find them a highly convenient opportunity for continuing extortion.
Customs should be obliged to give advance, binding rulings on classification and valuation. Complainants who cannot obtain satisfaction for a disputed decision within the Customs hierarchy should be given the opportunity to appeal to a neutral authority outside the Customs service.
Many individual Customs are moving towards such improvements, some in accordance with agreements with the IMF or World Bank, others in response to government recognition that an efficient and honest Customs service is essential to good external trade performance and to attract and retain increasingly selective foreign investment.
The WCO has revised the basic Kyoto Convention to simplify basic Customs procedures and identify all the specific remedial efficiency/integrity measures already mentioned, as well as many others, designed, individually and collectively, to raise service morale as well as functional capability. ICC representatives have played a full part in the Kyoto revision process and are giving strong support to the Convention’s much wider adoption.
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Revised Kyoto International Convention on the simplification and Harmonization of Customs Procedures
Chapter 7
Application Of Information Technology
7.1. Standard
The Customs shall apply information technology to support Customs operations, where it is cost-effective and efficient for the Customs and for the trade. The Customs shall specify the conditions for its application.
7.2. Standard
When introducing computer applications, the Customs shall use relevant internationally accepted standards.
7.3. Standard
The introduction of information technology shall be carried out in consultation with all relevant parties directly affected, to the greatest extent possible.
7.4. Standard
New or revised national legislation shall provide for:
Finally, while it is difficult for individual companies to resist or restrict “facilitation payments”, some traders have been able to make substantial progress. Perhaps the most effective strategy is to adopt a firm policy against making “facilitation” payments, followed up by a number of supportive measures:
Experience, over time, has shown that many companies following such strategies have been able to avoid “facilitation” payments or substantially reduce demands for them. Large enterprises also should take every opportunity to stress the importance of efficient and honest Customs service to inward investment decisions, particularly in developing countries.
Bribery in commercial operations
Here the balance of responsibility often lies with the trader. Customs officers may occasionally make it evident that they are open to irregular payments to accept or condone false statements or declarations. They may, much more frequently, raise issues of value or classification or call for a quite unnecessary physical inspection, knowing that the trader, carrier or agent will well understand that the difficulty can be overcome by a cash adjustment. The majority of fraudulent practices, however, originate with the trader who calculates that the bribe he offers is small in relation to the benefit he expects to obtain in relief from taxation or undeclared foreign currency receipts and all associated competitive advantages.
Under-valuation is the most usual offence and causes the greatest difficulty for revenue authorities and so governments. The IMF too, as lender and adviser, fights strongly against consequent erosion of national tax bases and has devoted much attention and considerable research to quantifying and reducing associated revenue losses.
The WCO is well aware of the importance of this issue for the majority of its members. It has chosen valuation as a priority and focus in its wider strategy for capacity building.The ICC also has strong interest in securing improvements in trade behaviour in valuation and other especially sensitive procedures where Customs, in many countries, have most cause to suspect and criticize the business sector. Constant disputes and suspicions are a major obstacle to the introduction of automation, risk-assessment and associated simplified procedures for the honest and compliant trader.
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Sustained, all too often justified, mutual mistrust in daily contacts at the Customs/trade operational interface, in the many countries where import duties and taxes still loom large in national revenues, has obvious corrosive consequences for the entire government/business relationship. While the root of “facilitation payments” lies in low-level extortion, commercial fraud usually stems from deliberate, often substantial, bribery, in which the initiative lies with the trader, his agent or the carrier.
Under the heading of relative honesty, or mitigated dishonesty, one can cite the normal trader faced with a notoriously inefficient, poorly paid Customs officer, already exacting and receiving “facilitation payments”, who may or may not wish to inspect, and so delay and possibly expose to extra damage and pilferage, overdue, perfectly legal, containerized consignments, presented on the basis of absolutely correct declarations as to value, provenance and the nature of the goods themselves. This trader may be understood, if not forgiven, if he offers an extra payment to ensure that he can by-pass a patently ineffective, because superficial, Customs inspection of a consignment he knows to be innocent.
Criminal actions
The situation is sadly different for a trader seeking to use illicit means to achieve obviously illicit ends. A common example would be bribing a Customs officer to accept a false invoice value, overstated for purposes of acquiring and hiding hard currency earnings on export consignments or understated for the purpose of evading full import duties and taxes. Another would be payment to secure agreement to misdeclaration of the classification of a consignment in order to reduce assessment for tax or duty.
Some of these practices, already criminal in themselves, can open the door to offences reaching far beyond commercial fraud. The Customs officer who accepts a bribe to refrain from inspecting what he believes is an innocent container may, for all he knows, be opening his border to illicit drug dealers or arms smugglers. The severe disciplinary or penal consequences of such misbehaviour, which sometimes prevail, even in services where “facilitation payments” are commonplace, is another reason why, in fraudulent irregularities, Customs officers are more often guilty of accepting bribes than proposing them.
It is worth noting, however, that this category of dishonesty is most likely to flourish in social and economic cultures where commercial and administrative standards are equally low. Prudent, if dishonestly inclined businessmen are unlikely to risk making an illegal proposition to Customs unless they have a reasonable chance of finding a willing partner.
Moreover, it is inevitable that a Customs force which turns a blind eye to, or even favours, unofficial payments for routine services will be much more open to fraudulent practices than an administration where no such arrangements are permitted. It is easier to conceal discords against an already noisy background.
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While this is a category of Customs dishonesty in which the main responsibility and opportunity for detection and repression lies with administrations themselves, all relevant trade bodies, including ICC, have obligations parallel with those of individual Customs services and the World Customs Organisation.
Here also trade and Customs can and should march side-by-side in a range of precautionary and protective strategies and measures. The continued activity of what are often global criminals, using the same transport and other operational services as legitimate traders, constitutes a patent threat to good governance and, by stimulating regulatory complexities and controls, imposes unwelcome and costly constraints at many key points in international commerce.
ICC has a special interest in fighting commercial fraud, because this is where Customs in many countries have most cause to suspect and criticize the business sector and question its ethical qualities and standards.
It is important to note that, while Customs services, in any country are strictly national, the trading community usually contains a growing proportion of external, internationally active, traders, carriers and other service industries, using very high quality automated operational systems and practising the highest professional standards of financial probity. Cooperation between the WCO and ICC, drawing on such commercial resources and influence, to improve valuation standards and outcomes could be a key element in a much wider reform and modernization policy.
There are many developing countries in which global enterprises, many of which are ICC members, together with supportive local companies from relevant national ICC Committees, could form a core of honest traders with substantial unblemished valuation records. Customs, once reassured by an established, resulting high-level of compliance and reliability in valuation experience, could be encouraged to rely on modern risk-assessment systems and follow the EU Commission lead in giving special status to Authorised Economic Operators, entitled to a range of trade- facilitation improvements, such as cargo release on the basis of advance control data and reliance for duty payments on post entry audit, that can only operate in a context of mutual confidence.
Continued interest in and support for the existing ICC Code of Conduct, against the background of a much wider development of corporate ethics, should help convince Customs that most participants in international trade are well aware of their responsibilities and observe the highest standards of business behaviour.
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Organized crime and terrorism
This category of criminal offences is in no way related to business operations. It is the meeting place of corrupt, or corrupted, Customs officers and smugglers, money launderers and terrorists.
Here again, new and very powerful security forces could produce some important innovations and improvements. In promoting the Secure Supply Chain concept, aiming at watertight control mechanisms, and invoking a rapid spread of Customs-to-Customs mutual assistance agreements, governments in major trading nations are seeking voluntary arrangements for commercial origin-destination cooperation going well beyond bare legal obligations.
The ICC is leading an active and constructive business response to these requirements which may well provide new opportunities for building more effective barriers to criminal extortion and bribery in all aspects of international trade transactions.
A rough initial view of Customs integrity “performance” can be provided by reference to the ICC Integrity Toolkit (www.iccwbo.org/policy/customs).
This brings together those items in the more comprehensive ICC Customs Guidelines that are particularly relevant to honest administration.
They include recruitment, salary levels, complaint and appeal provisions, consultation, automation, risk assessment and elimination of cash payments. These are accompanied, in the Toolkit, by Explanatory Notes listing the importance of these factors to governments, business and Customs themselves.
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ICC Integrity Toolkit: an overview
“Experience has shown that there are certain features of Customs management and operation that are particularly important in encouraging and sustaining integrity. The Toolkit identifies these through the choice of relevant Guidelines and their associated Explanatory Notes that add useful detail and outline the benefits, often linking integrity to efficiency, that adoption of the Guidelines can bring to governments, business and Customs themselves.
The Guidelines grouped under the general heading of “Workforce and structure” are clearly relevant to integrity. Guideline 3 (Customs Workforce) sets some basic requirements in salary levels, recruitment, promotion and career management. Guideline 4 (Customs Integrity) instances the need for an internal security unit to supervise staff standards, known and readily accessible to the trade community. Guideline 5 (Customs Employee Identification) helps ensure public confidence in Customs by stipulating reliable means of identification.
A further set of Guidelines focus on procedural elements that reduce special openings and opportunities for malpractice, bearing in mind that dishonest traders normally seek and reward Customs to obtain their collusion in fraudulent arrangements.”(From www.iccwbo.org/policy/customs)
Any Customs service that meets all these requirements is very unlikely to have a serious integrity problem either in respect of its own staff or from any external pressures towards dishonesty.
The WCO has produced a much more detailed Self-assessment Guide, (www.wcoomd.org), for member administrations. This contains useful check-lists under such pertinent heads as quality of regulation, transparency, automation, staff rotation, accountability, audit and internal investigation, morale and organizational culture, recruitment and selection, code of conduct, professional development, remuneration and relations with the trade. While this guide is intended primarily for Customs services, it is also a most useful basis for external efforts to assess Customs integrity standards and to identify the most relevant points at which to exercise influence and focus appropriate assistance and support.
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Therefore, companies should:
Sandy Merber is Chairman of the ICC Commission on Customs and Trade Regulations.
John Raven is Adviser to the ICC Commission on Customs and Trade Regulations.