CUSTOMS M ODERNIZATION Public Disclosure Authorized H Andbook

CUSTOMS M ODERNIZATION Public Disclosure Authorized H andbook

# Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

THE WORLD BANK

Customs Modernization Handbook

Editors Luc De Wulf and José B. Sokol

THE WORLD BANK Washington, D.C. © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback @worldbank.org

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The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and Permissions The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]

Photo credits (clockwise): Australian Customs (upper right), Douane Francaise / M. Bonodot © (lower right), Chilean Customs Administration (lower left), Société Générale de Surveillance (upper left and background photo of people), Luc De Wulf (background photo of customs files).

Library of Congress Cataloging-in-Publication Data

Customs modernization handbook / edited by Luc de Wulf, José B. Sokol. p. cm.—(Trade and development series) Includes bibliographic references and index. ISBN-0-8213-5751-4 (pbk.) 1. Customs administration—Developing countries. I. Wulf, Luc de, 1942- II. Sokol, José B. III. Series.

HJ7390.C86 2004 352.4'48'091724—dc22 2004059856 Contents

Foreword ix Acknowledgments xi Abbreviations and Acronyms xiii Overview xvii

PART I: CROSS-CUTTING ISSUES 1

1 STRATEGY FOR CUSTOMS MODERNIZATION 3 Luc De Wulf

2 HUMAN RESOURCES AND ORGANIZATIONAL ISSUES IN CUSTOMS 31 Luc De Wulf

3 LEGAL FRAMEWORK FOR CUSTOMS OPERATIONS AND ENFORCEMENT ISSUES 51 Kunio Mikuriya

4 INTEGRITY IN CUSTOMS 67 Gerard McLinden

5 MANAGING RISK IN THE CUSTOMS CONTEXT 91 David Widdowson

PART II: LESSONS FROM A SELECT SET OF CUSTOMS REFORM INITIATIVES 101

6 POLICY AND OPERATIONAL LESSONS LEARNED FROM EIGHT COUNTRY CASE STUDIES 103 Paul Duran and José B. Sokol

7 TWO DECADES OF WORLD BANK LENDING FOR CUSTOMS REFORM: TRENDS IN PROJECT DESIGN, PROJECT IMPLEMENTATION,AND LESSONS LEARNED 127 Michael Engelschalk and Tuan Minh Le

PART III: GUIDELINES ON ISSUES THAT AFFECT CUSTOMS’ OPERATIONAL TRADE FACILITATION 153

8 CUSTOMS VALUATION IN DEVELOPING COUNTRIES AND THE WORLD TRADE ORGANIZATION VALUATION RULES 155 Adrien Goorman and Luc De Wulf

9 RULES OF ORIGIN, TRADE, AND CUSTOMS 183 Paul Brenton and Hiroshi Imagawa

10 DUTY RELIEF AND EXEMPTION CONTROL 215 Adrien Goorman v vi Contents

11 TRANSIT AND THE SPECIAL CASE OF LANDLOCKED COUNTRIES 243 Jean François Arvis

12 THE ROLE OF CUSTOMS IN CARGO SECURITY 265 Luc De Wulf and Omer Matityahu

13 THE ROLE OF INFORMATION TECHNOLOGY IN CUSTOMS MODERNIZATION 285 Luc De Wulf and Gerard McLinden

LIST OF BOXES, FIGURES, AND TABLES

BOXES 1.1 Morocco Customs Gets Its Staff on Board for the Reform Program 17 1.2 An Example of Regional Leadership: The TTFSE Regional Steering Committee 21 Annex 1.C.1 The Steps to Release Goods From Time of Arrival 25 Annex 1.C.2 The Philippines Time-Release Study: An Example to Follow 26 2.1 Staff Renovation in Bolivian Customs 34 2.2 Denmark: Integration of Customs and Tax Administration 39 2.3 Revenue Targets and Autonomy: Illustrations from Tanzania and Uganda 42 3.1 An Example of Obsolete Customs Legislation 52 3.2 Sample Checklist to Identify Provisions Requiring Amendment or New Legislation under the Revised Kyoto Convention 59 3.3 Morocco’s Adoption of the Convention: A Success Story 60 3.4 Modernization of Customs Legislation in the Russian Federation 65 4.1 Leadership and Commitment: Key Issues and Questions 75 4.2 Regulatory Framework: Key Issues and Questions 76 4.3 Transparency: Key Issues and Questions 77 4.4 Automation: Key Issues and Questions 78 4.5 Modernization of Customs: Key Issues and Questions 79 4.6 Audit and Investigation: Key Issues and Questions 80 4.7 Code of Conduct: Key Issues and Questions 81 4.8 Are Low Salary Levels Really a Factor? 82 4.9 Human Resources: Key Issues and Questions 84 4.10 Morale and Organizational Culture: Key Issues and Questions 85 4.11 Relationship with the Private Sector: Key Issues and Questions 86 4.12 Lessons Learned from Customs Reforms to Control Corrupt Behavior 88 5.1 Managing Risk: Customs Valuation 98 6.1 Implementation of Customs Reform in Mozambique 109 6.2 Information Technology in Turkey 115 6.3 Import Verification in Peru 117 6.4 Customs Cooperation with the Private Sector in Morocco and the Philippines 123 6.5 Addressing Corruption in Uganda’s Independent Revenue Authority 124 7.1 Diagnostic Framework—Three Project-Specific Cases 133 7.2 Inadequacy of Performance Indicators: Project-Specific Cases 136 7.3 Designing a Comprehensive Set of Performance Indicators: The Case of Trade and Transport Facilitation Projects in Southeast Europe 137 7.4 Integrated Approach in Process Management: The Case of the Tunisia Export Development Project 141 7.5 Increased Bank Emphasis on Coordination with Other Donors 142 Contents vii

7.6 Quality of Pre-Project Preparation and Design Matter: Two Project-Specific Cases 146 7.7 What Triggered the Modification of Project Objectives or Components 147 7.8 Implementation Management Issues: The Case of the Senegal Development Management Project 148 8.1 Peru: Import Verification Program 169 8.2 PSI Contract in Madagascar Introduces Targeted and Evolving Verification Services 173 9.1 Example of Restrictive Rules of Origin: The Case of EU Imports of Fish 192 9.2 More Restrictive Rules of Origin: The Case of Clothing Under NAFTA Rules 197 10.1 Duty Relief and Exemption Regimes 216 10.2 The Reform of Duty Relief Regimes in Morocco 221 10.3 Fiji’s Duty Suspension Scheme 222 10.4 The Passbook System in Nepal 223 10.5 The Bangladesh Special Bonded Warehouse Facility 224 10.6 Customs Administration of the Aqaba Export Processing Zone 229 10.7 Thailand’s Move to Open Bond Arrangements 232 10.8 Computer Application for Management of Investment Project Exemptions 237 10.9 Reimbursement of Taxes and Customs Duties on Imported Petroleum Products in Mali 238 11.1 The Genesis of Transit Procedures in the Middle Ages 246 11.2 General Requirements with Respect to Seals 248 11.3 ASYCUDA Customs Operations in Zambia 254 11.4 The SafeTIR 258 11.5 The Unique Consignment Reference Number 259 11.6 TTFSE Indicators 263 12.1 Maritime Security Initiative at Panama Canal Waters 269 13.1 IT System Procurement and Costs: Case Study—Turkey 296 13.2 Morocco Case Study 298 13.3 Customs ICT Deployment Case Study: Turkey 302 13.4 Ghana Gateway Project Case Study 305 13.5 Senegal Case Study 306

FIGURES 1.1 Number of Declarations per Staff per Year in Southeastern Europe, 2002 16 5.1 Facilitation and Control Matrix 92 5.2 Compliance Management Matrix 94 5.3 Risk-Based Compliance Management Pyramid 96 7.1 Institutional Environment Assessment Framework 138 9.1 Regional Trade Agreements in Eastern and Southern Africa 207 11.1 Typical Transit Operation 252 11.2 The Sequence of the TIR Operations 256 13.1 Modern Customs Declaration Processing Environment 292

TABLES Annex 1.A.1 Customs Revenue as a Share of Tax Revenue in Selected Countries, 2001 23 Annex 1.B.1 Collected Tariff Rates for Selected Countries, by World Region, 2001 24 4.1 Customs Functions and Their Vulnerability to Corruption 69 4.2 Strategies to Reduce Corruption in Customs 73 viii Contents

5.1 Compliance Management Styles 95 6.1 Basic Economic Data, 2000 106 6.2 Revenue Performance Before and After Customs Reforms 106 6.3 Revenue Performance Before and After Customs Reforms 120 6.4 Customs Processing Times 121 7.1 Approved Amounts for Customs Components of Technical Assistance Projects, 1982–2002 130 7.2 Distribution of Approved Operations with Customs Component by Project Category, 1982–2002 131 7.3 Pre-Project Diagnostic Analyses in Technical Assistance Projects, 1982–2002 132 7.4 Summary of Objectives 135 7.5 Performance Indicators 136 7.6 Comprehensiveness of Project Design 139 7.7 Summary of Suggested Rating of Outcomes of Customs Activities 143 7.8 Correlation Estimation: A Summary 144 Annex 7.A.1 Distribution of Projects with Customs Components by Region, 1982–2002 149 Annex 8.D.1 PSI Programs Operated by Members of the IFIA PSI Committee 178 9.1 Involvement of Customs in Issuing, Checking, and Providing Information on Preferential Certificates of Origin for Exporters 205 9.2 Resource Implications of Rules of Origin in Preferential Trade Agreements 206 9.3 Overlapping Trade Agreements Cause Problems for Customs 208 Annex 9.A.1 Summary of the Different Approaches to Determining Origin 210 Annex 9.B.1 Rules of Origin in Existing Free Trade and Preferential Trade Agreements 211 11.1 Transportation Costs from Main World Markets for Coastal and Landlocked Countries in Africa 245 11.2 General Provisions Applicable to Customs Transit as Codified by International Conventions 247 11.3 Transit Procedures without Facilitative Measures 249 12.1 Selected Operational Practices to Enhance Cargo Security 276 12.2 Technical Means to Assist Security Checks 277 13.1 Customs Parameters and Information Technology Building Blocks 291 Foreword

The experiences of recent decades have shown that • greater policy and procedural requirements the countries that have most successfully integrated associated with international commitments into the world economy also have tended to record • proliferation of regional and bilateral trade the highest growth rates. This result should not agreements, which significantly increase the come as a surprise. Integration brings with it complexity of administering border formali- improved allocation of resources, intensified com- ties and controls petition, and pressures to raise productivity, as well • heightened security concerns and demands to as exposure to new technologies, designs, and prod- respond to the threats posed by international ucts. With world trade growth expanding more terrorism and transnational organized crime than twice as rapidly as world gross domestic prod- • widespread revenue fraud. uct (GDP) over the past decade, the potential Many customs administrations are struggling to rewards from participating in world trade are con- meet the continually increasing demands and pri- siderable. Increased trade openness, through lower orities placed on them. levels of protection in developed and developing During the last decade many countries devoted countries, has contributed to this outcome. Never- substantial resources to reforming and moderniz- theless, it is widely acknowledged that an open ing their customs administrations, often with trade regime will only foster trade integration when financial and technical support from international a range of complementary policies is in place. financial institutions and bilateral donors. The One of the most important complementary poli- World Bank, the World Customs Organization, cies is to put in place a well functioning customs the International Monetary Fund, the United administration that provides traders with transpar- Nations Conference on Trade and Development ent, predictable, and speedy clearance of goods. (the ASYCUDA program especially), and the Indeed, a poorly functioning customs administra- Regional Development Banks have, for a long tion can effectively negate the improvements that time, been providing such support. As a result, a have been made in other trade-related areas. number of customs administrations have For many countries, achieving efficiency and improved their capacities. Yet, far too many still transparency in customs operations remains a for- operate inefficiently and, to some extent, fail to midable challenge. In 2002, over US$6.3 trillion of fulfill their assigned objectives. Modernization of goods crossed international borders. Each one of customs is therefore likely to remain on the devel- those shipments passed through customs controls opment agenda of many governments, and the at least twice—at entry and at exit. Customs serv- donor community will be called upon to continue ices have often had to cope with these growing its support for customs modernization. trade volumes without any commensurate increase In recognition of this, the Trade Department of in staff or resources. In addition, customs adminis- the World Bank prepared this Customs Moderniza- trations continue to face changes to their operating tion Handbook to provide guidance to the many environment, which emphasize the need to adjust organizations and individuals involved in the prepa- and modernize their processes. These include: ration and implementation of customs moderniza- • more sophisticated and demanding clients, tion projects. The Handbook draws on the lessons for example, traders who have invested learned from past successes and failures, both by the significantly in modern logistics, inventory Bank itself and a range of other organizations. It also control, manufacturing, and information draws on the collective experience of a wide range of systems individuals with extensive practical experience in ix x Foreword

the field. The Handbook is complemented by a 2004 of an organization that plays a crucial role in the World Bank publication of eight case studies of overall trade logistics chain. customs modernization in developing countries— This Handbook is not intended to be encyclope- Customs Modernization Initiatives. These works, in dic. It is deliberately selective. It avoids many tech- conjunction with the recent IMF publication nical issues that are well covered in the many man- Changing Customs, which focuses on the revenue uals and guidelines provided by organizations such mobilization function of customs administrations, as the World Customs Organization. Rather, it provide the necessary tools for initiating and under- focuses on the critical issues that need to be taking the process of customs reform. addressed when designing and implementing effec- The guidelines contained in the Handbook are tive and sustainable modernization projects and aimed at several audiences. First, they are aimed at related initiatives. policymakers and national managers who are called We at the World Bank hope that the Customs upon to take the lead in providing advice and guid- Modernization Handbook will help in the achieve- ance on the direction of reform efforts and securing ment of the objective of helping policymakers to the necessary political support for such initiatives. implement the needed reform and overall modern- Second, they are aimed at project managers, ization that will enable customs to fulfill its role in national as well as from the donor community, who the 21st century. are required to design and implement customs modernization projects. Third, they are aimed at Danny M. Leipziger students of trade facilitation, who will find in the Vice President and Head of the Poverty Handbook the context and operational modalities Reduction and Economic Management Network Acknowledgments

This project would not have been possible without also due to the following colleagues and friends the patience, understanding, and generous support who contributed to making this book possible: and contributions provided by many colleagues Amparo Ballivián (WB), Ed Campos (WB), Patri- and customs experts from national customs organ- cio Castro (IMF), Lee Deegan (Australian Customs, izations, international organizations, and in the previously at the WCO), Antoni Estevadeordal private consultancy business. (IDB), Bruno Favaro (UNCTAD), Odd Fjeldstad Larry Hinkle, Lead Specialist in the Bank’s (Michelsen Institute), Alan Hall (consultant), Africa Region, encouraged the initiation of this Moshe Hirsch (Hebrew University Law School), project, and the Africa Region provided financial Bernard Hoekman (WB), John Holl (consultant), support at its initiation. Ataman Aksoy and Yvonne Irene Hors (OECD), Darryn Jenkins (consultant), Tsikata were instrumental in getting this project Peter Kalil (IDB), Holm Kappler (previously at the launched. WCO), Joe Kelly (HM Customs and Excise), David Uri Dadush, Director of the Trade Department, Kloeden (IMF), Michael Lane (consultant), Patricia gave this project priority status throughout its Laverly (OED), Bob Mall (WCO), Nick Manning development and provided his wisdom and guid- (WB), Fabrice Millet (UNCTAD), Tony Mort ance at the most critical stages. John Panzer, our (consultant), Mark Pearson (COMESA), John Manager in the Trade Department, provided the Raven (ICC), Will Robinson (WCO), Gonzalo team with his unfailingly enthusiastic support and Salinas (WB), Edward Siaw (consultant), Graham leadership and ensured the timely completion of Smith (WB), Frederick Z. Stapenhurst (WB), the project. Kati Suominen (IDB), Victor Thurony (IMF), The staff of the World Customs Organization, Mashiho Yuasa (University of Michigan Law and especially its Deputy Secretary General, School), and Gianni Zanini (WB). Mr. Kunio Mikuriya, who also acted as Peer Our colleagues in the Trade Department of the Reviewer, generously shared their operational expe- World Bank strengthened our team and made sig- rience and their time with the editors and nificant contributions. Special thanks to Michel contributed to several chapters. The staff of the Zarnowiecki who, in addition to being Peer Inter-American Development Bank and of the Reviewer, shared his technical expertise during the International Monetary Fund also supported whole process and significantly improved several the project and provided advice and comments at sections of the handbook. We also extend this various times during the preparation of the book. appreciation to Mr. Gerard McLinden (at the WCO Our special appreciation goes to François Corfmat until early 2004) who not only wrote several chap- from the IMF who was a Peer Reviewer and who ters but also contributed greatly to finalizing the made significant contributions to several chapters. manuscript. Finally, the project also benefited from All generously shared their insights and expertise the patient, professional, and extremely competent during the process of defining the scope of the support provided by Melanie Faltas and Zeba Jetha. project and provided guidance in its preparation. Special acknowledgment goes to Lili Tabada, who The authors of the thirteen chapters contributed undertook an enormous set of responsibilities, their expertise and showed great patience with the including preparing the desktop version, working many demands placed on them by the editors. Our with the publisher, and helping the team with her dear late colleague Jit Gill contributed with his superb editing skills. She excelled in all these tasks advice and comments with characteristic profes- and this project could not have been done without sionalism and personal warmth. Special thanks are her competent participation.

Abbreviations and Acronyms

ACI Advanced Cargo Information CARICOM Caribbean Community ACI Airports Council International CAS Country Assistance Strategy ACP Africa, the Caribbean and the CBI Cross-Border Initiative Pacific CBP US Bureau of Customs and Border ACP Autoridad del Canal de Panamá Protection ACV Agreement on Customs Valuation CCC Customs Cooperation Council ADCS Automated Data Collection System CCO Central Customs Office AfDB African Development Bank CCP Central Control Point AFTA Asian Free Trade Association CEFACT United Nations Centre for Trade AGOA African Growth and Opportunity Facilitation and Electronic Business Act CEPS Customs Excise and Preventive ANZCERTA Australia New Zealand Closer Services Economic Relations Trade CIF Cost, Insurance, and Freight Agreement COMESA Common Market for Eastern and ANZSCEP Agreement between New Zealand Southern Africa and Singapore on a Closer CRO Committee on Rules of Origin Economic Partnership CSD Container Security Device APEC Asia-Pacific Economic Cooperation CSI Container Security Initiative ARA Autonomous Revenue Authority CSTF Cargo Security Task Force ARO Agreement on Rules of Origin C-TPAT Customs–Trade Partnership Against ASAC Aviation Security Advisory Terrorism Committee DF Diagnostic Framework ASEAN Association of Southeast Asian DFID Department for International Nations Development ASEZA Aqaba Special Economic Zone DSS Duty Suspension Scheme Authority DTI Direct Trader Input ASYCUDA Automated System for Customs EAC East African Cooperation Data EBA Everything but Arms ATA Air Transport Association EC European Community BDV Brussels Definition of Value ECA Europe and Central Asia BGMEA Bangladesh Garments ECAC European Civil Aviation Conference Manufacturing and Export ECO Economic Cooperation Association Organization BIR Bureau of Internal Revenue ECOWAS Economic Community of West BIVAC Bureau of Inspection Valuation African States Assessment and Control EDCS Electronic Data Collection System BOC Bureau of Customs EDI Electronic Data Interchange BOT Build-Operate-Transfer EEC European Economic Community BOT Bureau of Trade EFT Electronic Funds Transfer BOO Build, Operate, and Own EFTA European Fair Trade Association CA Crown Agents EPZ Export Processing Zone CACM Central American Common Market EU European Union CAM Customs Assistance Mission FAK Freight of all Kinds xiii xiv Abbreviations and Acronyms

FDI Foreign Direct Investment ILO International Labor Organization FOB Free on Board IMF International Monetary Fund FTA Free Trade Agreement IMO International Maritime FTZ Free Trade Zone Organization GAO General Accounting Office IOC Indian Ocean Commission GATT General Agreement on Tariffs and IRU International Road Transport Trade Union GCMS Ghana Customs Management ISPS International Ship and Port Facility System Security GCNet Ghana Community Network IT Information Technology GDP Gross Domestic Product ITF International Transport Workers GEP Global Economic Prospects Federation GMS Greater Mekong Subregion LDC Least Developed Country GOIEC General Organization for Import MDCS Mobile Data Collection System and Export Control MFN Most Favored Nation GOM Government of Mozambique MODAAC ASYCUDA++ Accounting Module GSP General System of Preferences MODTRS ASYCUDA++ National Transit GST General Sales Tax Module GVC GATT Valuation Code MOF Ministers of Finance HQ Headquarters MOF Ministry of Finance HRO Harmonized Nonpreferential Rules MPF Ministry of Planning and Finance of Origin MTSA Maritime Transport Security Act HS Harmonized Commodity MUB Manufacturing Under Bond Description and Coding System NAFTA North American Free Trade HWP Harmonization Work Program Agreement IACA International Air Carriers NCTS New Computerized Customs Association Transit System IATA International Air Transport NGO Nongovernmental Organization Association NPR Nepalese Rupees ICAC Independent Commission Against NTB Nontariff Barriers Corruption NVOCC Nonvessel Operating Common ICAO International Civil Aviation Carriers Organization OECD Organisation for Economic ICC International Chamber of Co-operation and Development Commerce OED Operations Evaluation ICMP International Customs Department Modernization Process OP Operational Policy ICR Implementation Completion OSC Operation Safe Commerce Report PAD Project Appraisal Document ICS Inspection and Control Services PIN Personal Identification Number ICT Information and Communications PRA Port Risk Assessment Technologies PRSP Poverty Reduction Strategy Paper IDB Inter-American Development Bank PSI Preshipment Inspection IDI Institutional Development Impact PSR Project Status Report IFALPA International Federation of Airline PTA Preferential Trade Agreement Pilots Associations RCDP Russian Customs Development IFIA International Federation of Project Inspection Agencies RFID Radio Frequency Identification IGAD Intergovernmental Authority on RIFF Regional Integration Facilitation Development Forum Abbreviations and Acronyms xv

RMG Ready Made Garments TCCV Technical Committee on Customs RSC Regional Steering Committee Valuation RSO Recognized Security Organization TCRO Technical Committee on Rules of RTCD Road Transit Customs Declaration Origin SAARC South Asian Association for THA Tanzania Harbors Authority Regional Cooperation TI Transparency International SACU Southern African Customs Union TIMS Trade Information Management SAD Single Administrative Document System SADC Southern African Development TIR Transport International Community Routier SADOC Système de l’Administration des TRA Tanzania Revenue Authority Douanes et de l’Office des Changes; TRACECA Transport Corridor Europe Computerized Support for Caucasus Asia Customs Clearance TRIE Transit Routier Inter-États SAL Structural Adjustment Loans and TRIPS Trade-Related Aspects of Credits Intellectual Property Rights SAR Staff Appraisal Report TSA Transportation Security SAT Satisfactory Administration SBW Special Bonded Warehouse TTCA Transit Transport Coordination SCC State Customs Committee Authority SDT Special and Differential Treatment TTFSE Trade and Transport Facilitation in SECI South East Cooperation Initiative Southeast Europe SGS Societé Générale de Surveillance UCR Unique Consignment SITPRO Simplifying International Trade Reference SOLAS International Convention for the UD Utilization Declaration Safety of Life at Sea UDEAC Union Douanière des Etats de SPARTECA South Pacific Regional Trade and l’Afrique Centrale Economic Co-operation Agreement UNCTAD United Nations Conference on SSP Sector Strategy Paper Trade and Development SSP Shipper Security Plan UNECE United Nations Economic SUNAT Superintendencia Nacional de Commission for Europe Administracion Tributaria; Internal UNSAT Unsatisfactory Revenue Service URA Uganda Revenue Authority TA Technical Assistance US United States TAEPD Trade Assistance Evaluation Project UTRA Technical Unit for Restructuring Database Customs TAL Technical Assistance Loan VAT Value Added Tax TAP Temporary Admission for Inward WBCG Walvis Bay Corridor Group Processing WCO World Customs Organization TARIC Tarif Integré de la Communauté; WEF World Economic Forum The Integrated Tariff of the WTO World Trade Organization Community ZRA Zambian Revenue Authority

OVERVIEW

This handbook aims to make a positive contribution nal tariff in 1968 it quickly realized that to fully ben- to the efforts that many countries are undertaking to efit from its common market, it needed to streamline modernize their customs administrations. The customs processes. In the same vein, the World Trade handbook views a competent and well-organized Organization (WTO) in 1996—as part of the Singa- customs service as one that successfully balances its pore agenda—added trade facilitation to its negotia- various responsibilities to ensure a high level of tion agenda realizing that nontariff barriers, to which compliance with revenue objectives and regulatory excessive customs costs belong, are at times more requirements while at the same time intervening as important trade barriers than tariffs and prevent the little as possible in the legitimate movement of achievement of trade liberalization objectives. goods and people across borders. Trade involves goods crossing borders. This The handbook recognizes that conditions differ requires that a number of procedures foreseen in greatly across countries, so that each customs the national legislation be followed. Some of these administration will need to tailor its modernization procedures pertain to issues of security and stan- efforts to national objectives, implementation dards, while others deal with customs. Customs capacities, and resource availability. Nevertheless, procedures are governed by the national legislation meeting the modernization objectives will most and implemented by customs staff that operate likely require the adoption of the core principles mostly under the Ministry of Finance. Conforming discussed in this handbook: adequate use of intelli- to these procedures is not costless, but these costs gence and reliance on risk management; optimal are often excessive. It is not the intention of the use of information and communications technol- handbook to elaborate on inefficiencies nor to ogy (ICT); effective partnership with the private detail all the dysfunctionalities of customs organi- sector, including programs to improve compliance; zations and customs operations, even though some increased cooperation with other border control of these are described in individual chapters, as agencies; and transparency through information on introduction on how best to remedy them. Yet, it is laws, regulations, and administrative guidelines. their persistent recurrence and their impact on a Success in customs modernization is, as impor- country’s competitiveness that prompted traders tantly, tied to the overall trade policy environment. and political leaders to seek out ways to make their Simple, transparent, and harmonized trade policies customs organizations more effective and efficient. reduce administrative complexities, facilitate trans- This handbook aims at assisting them in this ambi- parency, and reduce the incentives and opportuni- tion. It must suffice, therefore, to briefly note the ties for rent-seeking and corruption. Customs main inefficiencies that these reforms aim to modernization, therefore, also needs to be exam- address. First, outdated legislation may not clearly ined from the broader and complementary per- establish the authority of customs, may be out of spective of trade policy reform. tune with international commitment, may provide for inadequate transparency and predictability, and may require complex procedures while preventing Improving Customs Processes Is Part of the Trade full use of information technology and risk analy- Facilitation Agenda sis. Second, customs staff may lack the competence Trade facilitation measures need to complement to interface with traders that operate in a constantly trade liberalization if countries are to increase changing and challenging business. Often their their external competitiveness and become better compensation packages, including career manage- integrated into the world economy. When the ment and training, are inadequate, so that moti- European Community, introduced a common exter- vating and retaining qualified staff is a major xvii xviii Overview

challenge. Third, operational procedures are often Human Resources Policies Need to Be at the excessively and unnecessarily complex and open to Center of Customs Reforms discretionary decisions while exporters have poor access to duty-free inputs. Fourth, customs all too The task of customs has become increasingly diffi- often makes insufficient use of available communi- cult because of the growing complexities of trade cations and information technology, and thus is out policy due to the proliferation of regional and of tune with modern business practices that rely on international trade agreements, the greater sophis- advanced notification, direct trader input, and tication of traders, and the multiple and shifting tracking devices. This increases costs to traders, objectives imposed on customs. Security is now a opens the door to discretionary decisions, and new important challenge. Uniformity of customs undermines oversight and audit activities. Fifth, operations across the territory and across cargo cat- high levels of corruption characterize many a cus- egories is important, and speedy release of goods is toms agency, as is testified to in investors’ surveys crucial to supporting the competitiveness of and corruption indexes. Sixth, smuggling activities traders. There is also a need to adhere to interna- undermine revenue generation and impart unfair tional standards on value and classification, as well advantages to unscrupulous traders, and under- as regional standards on rules of origin. mine the intended protection policies embedded in Good human resources management is the the tariff structure. In sum, customs procedures are linchpin to effective and efficient customs adminis- often excessively time consuming, unpredictable, tration. This is too often neglected. The manage- and weak in their revenue generation function. ment of human resources is multifaceted. It includes recruitment, training, staff compensation and promotion, as well as enforcement. None of Good Diagnostics Are the Key Starting Point these tasks is easy, and often must be implemented Customs operations consist of sets of interlocking in a constrained environment. These difficulties processes. To be efficient and effective they need to be should not discourage the investigation of possible adapted to changing trade practices and modern new initiatives and alternative approaches. How- management approaches as well as reflect the various ever, case studies do suggest that within these con- objectives of the country. Yet, customs practices in straints still much more attention should be given quite a few countries are not well attuned to these to human resources issues. criteria. Rooted in long-standing traditions, they tend To address the constraints imposed on human to delay the clearance of cargo and conduct operations resources reforms by rigid and often outdated civil in a nontransparent manner. Experience shows that service administration policies, many countries effective customs modernization processes generally have pursued drastic organizational changes. For start with good initial diagnostic work to identify the example, Autonomous Revenue Agencies (ARAs) shortcomings of the existing system, to define a strat- have been established to avoid rigid civil service egy for reform, and to mobilize stakeholder support. rules, as well as to provide more financial auton- Successful modernization also requires a comprehen- omy and greater flexibility in operational matters. sive approach, that is, an approach that encompasses However, experience has shown that creating an all aspects of customs administration to address the ARA is no guarantee for success because they have issues identified, as well as an adequate sequencing of too often been focused on providing better staff actions. Strategies need to be realistic and should con- compensation without sufficient attention to the sider the country’s capacity to implement, the time other elements of customs operations that enhance that is required, and the level of stakeholder and polit- effectiveness and efficiency. Also, quite a few ARAs ical support that is needed. failed to maintain, over the longer term, the flexi- These reform efforts also need to be consistent bility and the autonomy with which they were orig- with the trade policies pursued and should have the inally established. capacity to adapt to changing circumstances. For Another mechanism to implement reforms has example, the emphasis on issues such as trade facil- been the pursuit of management contracts with the itation and national security are now more preva- private sector. Management contracts can indeed lent than in the past. improve aspects of customs operations if they are Overview xix well designed and monitored. So far, these manage- Improved Integrity Is Key to Promoting ment contracts have largely been tested in unique Investment and Growth circumstances in countries emerging from severe conflicts (Mozambique and Angola, for example) Customs is frequently perceived as being corrupt. and where institutional capacity was exceedingly To the extent that this is true, this image negatively weak. Engaging private service operators in those affects the overall investment climate of the coun- countries had the advantage of substantially try and the processing of international trade trans- improving revenue performance in the short run actions. Corruption undermines the country’s and under difficult circumstances. The track record external competitiveness and its attractiveness to for transferring management capabilities to nation- domestic and foreign investment. If left unchecked, als, however, is still being tested. Initial reports sug- this image of corruption undermines the growth gest that this has proven more difficult than origi- potential of the country. nally imagined. Customs is vulnerable to corruption because the Changes in the organizational structure of cus- nature of its work grants its officials substantial toms can at times be instrumental to improving authority and responsibility to make decisions that performance, as change can lift important opera- affect the duty and tax liability of traders or the tional constraints. Evidence suggests, however, that admissibility of goods. High tariffs and complex such changes will only have lasting effects if they regulations enhance opportunities and incentives. contribute to good human resources management That many customs staff members are poorly paid and better customs clearance practices. adds to the problem. The adoption of procedures that provide little discretion to customs staff and that have built-in An Adequate Legal Framework Is Important accountability mechanisms reduces both the oppor- The modernization of customs laws and regulations tunity and incentive for corruption. In conjunction and their supporting legal environment is an essen- with improved trade policies, the first line of tial component of the reform effort. In this area, defense against corruption consists of implement- countries can refer to (or adopt) the Revised Kyoto ing modern procedures that reduce face-to-face Convention, which provides both the legal frame- contact between traders and customs officials and work and a range of agreed on standards to improve that reduce the discretionary powers of customs customs operations with a view toward standardiz- officials. In addition, providing adequate staff coming and harmonizing customs policies and proce- pensation, enhancing the risk of detection, and dures worldwide. Countries that are signatories of strengthening the capacity to investigate and prose- the Convention can still tailor their policies and pro- cute breaches of integrity would go a long way cedures in specific ways to meet their unique legal, toward promoting integrity in customs. Most cus- political, cultural, and economic requirements. toms managers are of the opinion that corruption is In many countries the Customs Code needs to be such a prevalent phenomenon today that counter- modernized, especially to exclude noncore customs measures would require the implementation of spe- elements, seek harmonization and compliance with cially designed policy efforts. This is the approach agreed on international commitments, and ensure that is promoted by the World Customs Organiza- transparency and predictability by providing basic tion and is incorporated into the Revised Arusha information on matters such as rules, decisions, Declaration on Integrity in Customs. consultation mechanisms, and adequate appeals In looking to implement the key elements of the processes. A revised Code can also help trade facili- Revised Arusha Declaration, experience suggests tation by supporting the use of risk management that a good starting point is to conduct a compre- practices and by eliminating complex or redundant hensive assessment of the situation to identify the customs formalities that delay clearance and create shortcomings that present opportunities for cor- opportunities for unnecessary discretionary inter- ruption and to establish realistic priorities, as well ventions. Finally, the Code should also grant ade- as practical objectives and activities, all leading to quate authority for customs to achieve its enforce- an integrity plan that should be a part of all com- ment and compliance goals. prehensive customs reform efforts. xx Overview

tion of its objectives. On the basis of the risk assess- Risk Management Underpins Much of Modern ment, a risk containment strategy should be Customs Practices defined. This implies that priorities would be set, In an effort to achieve an appropriate balance operational details would be geared toward these between trade facilitation and regulatory control, priorities, and resources would be effectively and customs administrations are generally abandoning efficiently deployed. If smuggling turns out to be a their traditional, routine “gateway” checks and are major problem, the strategy should reflect this, and now applying the principles of risk management border posts and mobile inspection teams may with varying degrees of sophistication and success. need to be strengthened. If undervaluation is a Organizational risk refers to the possible events major problem, there may be a case for strengthen- and activities that may prevent an organization ing the valuation unit and for increasing the num- from achieving its objectives. Risks facing customs ber of traders subject to post-clearance audit. If the include the potential for noncompliance with cus- risk is that goods tend to be misclassified to attract toms laws as well as the potential failure to facilitate a lower tariff rate or are declared with lower unit international trade. Customs, like any other organi- counts or weights, there may be a need to physically zation, needs to manage its risks and do so while inspect the cargo. In any event, risk management interfering as little as possible with the flow of legit- should ease the controls on the less risky aspects of imate trade. There clearly is a trade-off between trade and should focus on the part that represents control and trade facilitation. Too much of one the greatest risk. This would reflect a balanced makes it difficult to achieve the other. Customs approach between control and trade facilitation. therefore needs to apply a set of management procedures that takes this into account. These proce- Customs Valuation Is a Core Customs Function dures include the identification, analysis, evaluation, and mitigation of the risks that may affect the Customs valuation practices are subject to the achievement of these objectives. WTO Agreement on Customs Valuation (ACV), Basic risk management has always been funda- which mandates that the customs value of mental to customs operations, and has guided the imported goods, to the greatest extent possible, formulation of antismuggling policies, the func- should be the transaction value, that is, the price tioning of border controls to verify the movements paid or payable for the goods. However, valuation of goods and passengers, and the establishment of fraud is frequently reported as a major problem in documentary controls and physical inspection pro- developing countries, and many of them still find cedures. However, in recent times the increasing that implementing the ACV presents one of the complexity, speed, and volume of international most challenging aspects of customs work. Valua- trade, fueled by technological advances that have tion work is particularly difficult in some countries revolutionized global trading practices, have signifi- in which the reliability of commercial invoices cantly affected the way in which customs authorities tends to be poor, and where trade undertaken by implement risk management. This has led many the informal sector and in second-hand goods is customs administrations to adopt a more disci- significant. Also, many countries are still ill plined and structured approach to managing risk. equipped to undertake post-clearance audit. Customs needs to evaluate the risks that are pre- Substantial efforts have so far been made to sented by the nature of its operations. This includes explain the intricacies of the ACV to customs offi- the need for customs to review its operational pro- cials of developing countries. Yet, most observers cedures and assess where breaches of procedures realize that valuation reform, in the absence of are likely to jeopardize the attainment of stated comprehensive customs modernization programs, objectives. Such assessment could be included in is likely to disappoint. A narrow focus on valuation the above-mentioned overall diagnostic exercise. In work will fail if reform takes place within an admin- other words, customs needs to provide a risk map istratively and technically ill-equipped customs. that identifies the potential vulnerabilities of its The reform elements that will benefit valuation processes and determine how its procedures may work must include the streamlining of operational need to be geared toward ensuring better realiza- procedures, the introduction of a modern customs Overview xxi compliance improvement strategy based on a for- However, rules of origin can be designed to restrict malized risk management strategy, the use of post- trade and, therefore, can and have been used clearance audits, the development of a commercial as trade policy instruments. The proliferation of intelligence capacity, and the adoption of appro- free trade agreements with accompanying preferen- priate incentives and disincentives designed to tial rules of origin is increasing the burden on cus- progressively increase the level of voluntary toms in many countries because the clearing of compliance. preferential trade is more complex than nonprefer- Direct technical assistance for improved valua- ential trade. This suggests that the trend toward tion work might be more productive if such assis- more preferential free trade agreements may con- tance were concentrated on the development of flict with trade facilitation. valuation databases, risk management systems, and The determination of the country of origin of post-release review and audit. A valuation database products has, in the last few decades, become more should be established and constantly updated to difficult as technological change, declining trans- provide customs with a practical tool for research port costs, and the process of globalization have led and risk management purposes. The valuation to the splitting up of production chains and the dis- function in Customs could be strengthened by set- tribution of different elements in the production of ting up an appropriate legal framework; establish- a good to different locations. The issue becomes, ing valuation control procedures based on selective which one or more of these stages of production checking, risk analysis and management, and post- define the country of origin of the good? release audit; establishing central and regional val- WTO members have so far failed to reach an uation offices; and providing specialized training. agreement on the definition of rules of origin, The hiring of preshipment inspection (PSI) despite efforts undertaken in the World Customs companies may be useful in assisting customs with Organization (WCO) since 1995. Having harmo- valuation work during its initial reform stages, nized rules of origin for nonpreferential purposes where capacity is being enhanced to carry out the would save time and costs to traders and customs valuation function. However, if PSI services are officers and provide for greater certainty and pre- used, care needs to be exercised to maximize their dictability of trade. Harmonized rules would also utility and to ensure maximum consistency with help avoid trade disputes that arise from uncertain- the WTO valuation principles. This handbook ties in the determination of the country of origin spells out a number of conditions that should be with regard to antidumping and countervailing investigated when considering the adoption of PSI duties, safeguard measures, and government services or when evaluating their contribution. procurement decisions. In general, clear, straightforward, transparent, and predictable rules of origin, which require little or no administrative dis- Rules of Origin Should Be Simplified cretion, will add less of a burden to customs than Determining the country of origin, or the “nation- complex rules. ality,” of imported products is necessary for the application of basic trade policy measures such as Good Duty Relief and Exemption Control Systems tariffs, quantitative restrictions, antidumping and Are Important countervailing duties, and safeguard measures, as well as for requirements relating to origin marking Customs may provide duty relief for some imports. and public procurement, and for statistical pur- This practice is mainly used for the importation of poses. Such objectives are met through the applica- inputs used for the manufacture of export prod- tion of basic or nonpreferential rules of origin. ucts. The justification for doing so is simple. Any Countries that offer zero or reduced duty access to duty paid on these inputs would increase the cost of imports from certain trade partners apply preferen- the exports and make these exports less competi- tial rules of origin. These differ most frequently tive. In fact, following the widely accepted destina- from the nonpreferential ones. Preferential rules tion principle of taxation, only goods destined for are designed to ensure that only goods originating domestic consumption should bear a tax burden. from participating countries enjoy preferences. Duty relief for inputs that are directed toward the xxii Overview

production of exports can be granted in two ways: power resources to the control and monitoring of either a suspense regime is applied and no duties such exemptions. for imported inputs are paid at the point of import; or duties are paid and later refunded, when the Customs Procedures Should Facilitate Transit products into which the inputs are incorporated are exported. The WCO Revised Kyoto Convention Poor transit procedures are a major obstacle to trade provides guidelines on how this should be done and penalize many landlocked developing coun- and these can be reflected in the Customs Code and tries. A transit system aims to facilitate the transport translated in operational guidelines for importers of goods through a customs territory, without levy- and customs staff. However, experience shows that ing duties and taxes in the countries of departure many developing countries have difficulty in prop- and transit, in accordance with the destination prin- erly administering and monitoring duty relief and ciple of taxation that states that indirect taxes should exemption regimes, resulting in abuse, fraud, and only be levied in the country of consumption. The revenue leakage. In the absence of smoothly operat- Customs Code should provide transit-related legis- ing duty relief mechanisms, export manufacturers lation, failing which, transit should be regulated by a have to produce at higher cost than would be the binding agreement between customs and the differ- case if they had full and easy access to production ent parties affected by the transit operation. inputs at world prices. The core provisions of a good transit system Export manufacturers have a preference for include that the shipments be sealed at the point of temporary admission systems, bonded warehouses, departure, that guarantees can be made available to and export processing zones over duty drawback, ensure the payments of duties and taxes if traders especially when tariffs are high, when inflation do not provide proof that the goods have left the erodes the duty refunds, and when interest rates for country, and that customs has an information sys- working capital are high. The prepayment of tem that informs it when the goods have left the import duties on inputs increases the production country so that the guarantee can be released. In costs of the exporter. The drawbacks have all too many countries these core elements are either lack- often been disbursed late, thus substantially erod- ing or weak and should be the focus of any transit ing real value when inflation and financing costs modernization initiative. are high. However, governments in most develop- Trade policies should recognize that customs ing countries require customs to focus on revenue transit is only one part of a wider range of policy collection rather than trade facilitation and, there- issues that affect transit. These other issues pertain fore, tend to prefer drawback to temporary admis- to many other participants and procedures, includ- sion systems. ing cross-border vehicle regulations, visas for truck Managing duty relief schemes in a secure and drivers, insurance, police controls, and the quality cost effective way requires well-defined processes of infrastructure. Even if customs transit proce- and controls. It requires that special mechanisms be dures are made effective and efficient, full trade put in place to ensure that claims for duty relief are facilitation will require that these issues be legitimate and correctly executed, and that goods addressed. The TIR (Transit Routier Interna- admitted under duty suspense regimes are effec- tional—the international road transit procedures) tively incorporated in exports and not diverted for and its network of national guaranteeing associa- home consumption. tions offer the best current reference system. The scope of duty exemptions should be limited Effective and efficient transit facilitation institu- as much as possible as exemptions can be abused, tions such as corridor agreements can promote thus leading to unfair competition and revenue active cooperation between and among transit and losses. Moreover, there are good economic and landlocked countries. Transit agreements are administrative reasons for maintaining duty important in forming and shaping such coopera- exemptions only as required by international con- tion, either at the bilateral, subregional, or regional ventions and for noncommercial goods. Until the level. Transit operations will benefit from good redundant exemptions are eliminated, customs public–private cooperation that can identify defi- should devote adequate technological and man- ciencies in border-crossing procedures. Overview xxiii

bility to facilitate legitimate trade. If applied cor- Security Has Become an Integral rectly, security can enhance facilitation by building Customs Objective business confidence, increasing predictability, and, The emergence of international terrorism has as a consequence, facilitating inward investment. caused security to become a major issue for many However, the international community will need governments, and customs administrations are to monitor how specific security initiatives and increasingly called upon to contribute to national advance notice requirements will affect weaker security objectives. In the past, many customs trading partners, particularly those that use ports administrations performed most of their preven- that are not receiving technical assistance to tive operations as goods arrived at seaports, air- strengthen their security to the satisfaction of the ports, and land borders, based upon an entry decla- ports of destination. These traders may have diffi- ration made at the time of importation. To provide culties in fully complying with the advance notice the level of security that is required, governments requirements. will increasingly depend on information and risk While it is not possible at this time to predict the assessments that are undertaken in advance of the trade-related consequences of the heightened secu- arrival of the cargo in the country of destination. rity agenda, it seems probable that the countries International conventions that apply to sea and air that feel vulnerable to terrorist attack will regard transport provide for agreed upon mechanisms to consignments from certain countries as represent- enhance the security of these modes of transporta- ing a higher risk. In this regard, the level of integration—vehicles, cargo, and personnel—as well as tion of the world economy is such that even how these transport modes are operated. Several countries that are not directly involved in a conflict national governments, particularly that of the or subject to terrorist attack suffer losses in trade United States of America, have issued regulations and welfare as a result of increased security con- and have promoted private–public sector agree- cerns and higher frictional costs of trade. For those ments to enhance security. These, again, are largely countries with a high degree of reliance on trade based on the advance submission of information (ratio of trade to GDP), including many developing and certification that the particular companies countries, the need for concerted action in the adhere to a range of security standards. Such regu- security area becomes a key priority in the develop- lations are constantly being refined and implement agenda. mented. Customs’ skill in assessing the information through analytical processes, deployment of Information and Communications Technology resources, effective communication and decision- Promotes Customs Modernization making, therefore, has become even more important than in the past. An effective customs administration that lever- Protecting society involves protection of the ages technology can benefit from improved trans- entire international trade supply chain from parency, greater efficiency, and enhanced security. the moment the cargo leaves the export country to However, the benefits that could be derived from the moment of arrival at the destination country. greater reliance on ICT has at times been under- This changing environment requires an “all of mined by the failure to streamline customs proce- government” approach. In this way, governments dures, thus creating a process where outdated man- can use customs as a key resource in border secu- ual practices continue alongside computerized rity, using its experience of managing risks and practices. Although ICT for customs administra- knowledge of international trade as an important tion is not a panacea or an end in itself, it can pow- element of national security. Thus, customs can erfully contribute to effective customs administra- usefully complement the contributions made by tion and operations when integrated into a broader other competent agencies, such as immigration, modernization effort. intelligence agencies, and those involved in policing To meet its mission, a customs administration maritime, aviation, and land operations. must effectively integrate modern practices and While security is of great importance to govern- processes with ICT-driven customs management ments and traders, customs has an equal responsi- systems. In doing so, customs should identify xxiv Overview

realistic and practical targets and objectives that are Structure of the Handbook tailored to its own specific circumstances. Desirable ICT solutions are not necessarily the very latest and This volume has three parts. The chapters in Part I most sophisticated ones available, but rather, the cover cross-cutting issues that provide insights to ones that are most appropriate for the country’s the key elements of a successful customs modern- operating environment, resource base, telecommu- ization strategy. The chapters discuss key organiza- nications infrastructure, and realistic development tional issues that any customs service needs to deal ambitions. In any event, the ICT solution chosen with and focus on the legal framework of customs must assist customs in all its core business func- and the issues of integrity and risk management. tions and must provide a platform that enables The chapters in Part II provide lessons from a select achievement of its long-term vision. set of customs reform initiatives as well as from the In its choice of computer solutions, customs has World Bank’s own experience with its support for the option of either developing a national system customs reform. The chapters in Part III succes- that is adapted to national needs, or acquiring an sively discuss and provide guidelines on a number off-the-shelf system. National solutions have the of issues that affect customs operation and trade attraction of perfectly matching the specific facilitation. These are customs valuation, rules of requirements of a given country, of developing origin, duty relief and duty exemption regimes, national computer skills, and of facilitating the sys- transit, security, and the use of ICT. tem’s maintenance and development. Yet, such Each of the 13 chapters begins with a short national solutions tend to be expensive, and it has introduction or background section that is at times proven difficult for customs officials to intended as a reader’s guide to the issues. This is fol- convey to the ICT technicians the complex transac- lowed by an analysis and discussion of the issues, tions that need to be programmed. Off-the-shelf then by the chapter’s main operational conclusions solutions benefit from the fact that the various and recommendations. Some chapters include an modules have been tested and avoid the need to annex with a checklist of issues that need to be “reinvent the wheel.” Where these solutions do not addressed in the areas covered. Sections on further fully satisfy national needs, or where national cus- reading and references follow. The boxes included toms desires a variant of the solution offered, there in the chapters illustrate specific points or describe is the possibility of customizing the solution or of specific cases. Case studies are used to illustrate adding on separate modules that interface with the points made in the chapters; the situation on the off-the-shelf solution. On balance, the handbook ground may have since changed. Their usefulness advocates that policymakers take a hard look at off- rests in illustrating that theory and guidelines can the-shelf solutions before they consider designing a be implemented. Many of these case studies and national solution. boxes were prepared by the editors of the hand- ITC solutions tend to be expensive, even if they book, drawing on papers prepared for this project enhance efficiency. Experience suggests that much and on the literature. is to be gained from a well-balanced financing plan A companion volume titled Customs Modern- for the initial installation, maintenance, and ization Initiatives: Case Studies, edited by Luc De upgrading, as well as financing plans to include Wulf and José B. Sokol, describes in some detail the external and domestic resources. Also, procure- experiences and lessons learned from eight case ment procedures should be transparent and should studies in customs modernization. It complements ensure value for money by carefully weighing both this handbook as it shows how in real life some of the technical and financial proposals. the issues described here were addressed. Part I

Cross-Cutting Issues

1 STRATEGY FOR CUSTOMS MODERNIZATION

Luc De Wulf

TABLE OF CONTENTS Further Reading 29 Objectives of Customs Operations 5 References 30 Contextual Factors Necessary for a Successful Customs Reform 7 BOXES Development of a Customs Modernization 1.1 Morocco Customs Gets Its Staff on Board for Strategy 12 the Reform Program 17 Implementation of a Customs Modernization 1.2 An Example of Regional Leadership: Strategy 20 The TTFSE Regional Steering Operational Conclusions 22 Committee 21 Annex 1.A Customs Revenue as a Share of Tax 1.C.1 The Steps to Release Goods from Revenue in Selected Countries, Time of Arrival 25 2001 23 1.C.2 The Philippines Time-Release Study: Annex 1.B Collected Tariff Rates for Selected An Example to Follow 26 Countries by World Region, 2001 24 FIGURES Annex 1.C Time-Release Methodology 24 1.1 Number of Declarations per Staff per year in Annex 1.D Physical Inspection as an Element of Southeastern Europe, 2002 16 Risk Management 27 Annex 1.E Checklist of Guidelines to Define a Customs Modernization Strategy 29

Research undertaken in recent years by the World brings with it exposure to new technologies, designs, Bank and others shows that participation in world and products. It also enhances competition. With trade tends to boost growth, and that countries that world trade growth expanding more than twice as have integrated rapidly into the world economy also rapidly as growth of world gross domestic product tended to record the highest growth rates.1 This out- (GDP) over the past decade, the potential rewards come should not come as a surprise. Integration from participating in world trade are evident. Such participation is predicated on the availability of good 1. Rapidly integrating countries experienced annual GDP quality products offered at competitive prices. In this growth three percentage points higher than slow integrators. Integration refers to trade integration as well as openness to for- regard, a trade regime that tenders low protection to eign direct investment (World Bank 1996). domestic producers contributes to the enhancement 3 4 Customs Modernization Handbook

of an economy’s competitiveness because it forces The realization that customs services could be domestic producers to align their costs with those in improved has prompted many governments to the rest of the world. Nevertheless, an open trade devote substantial energy and resources to modern- regime will only foster competitiveness when other ization. They have also mobilized external assistance accompanying policies are in place. in this endeavor. In response, bilateral and multilat- Over the past 20 years, average tariffs have been eral development agencies have supported many cut by half in developing countries and nontariff customs reform initiatives. International donors or import barriers have been sharply reduced (World financial institutions such as the European Union Bank 1996). Yet, for many developing countries, this (EU), the International Monetary Fund (IMF), the has not necessarily led to substantial trade integra- Inter-American Development Bank (IDB), the tion. Worse still, the poorest countries in the world, African Development Bank (AfDB), the Asian particularly those of Sub-Saharan Africa, lost mar- Development Bank (AsDB), the United Nations ket share during the 1990s. Such events were in part Conference on Trade and Development (UNCTAD), brought about by the failure of developing countries and the World Bank (WB), have all been engaged in to produce the types of goods that would generate customs strengthening operations. Bilateral donors, the most rapid export growth. Another impediment such as France, the United Kingdom, Japan, and the was the maintenance by other countries of a range United States have also been active in providing such of import barriers to products that Sub-Saharan support. In addition, the World Customs Organiza- African countries produce, including agricultural tion (WCO) has made technical assistance (TA) and textile goods. Import barriers include export available. A number of customs administrations subsidies, high tariffs, and stringent rules of origin have improved their operations by taking advantage (see chapter 9). The issues of the cotton export sub- of this support. Yet, too many still operate ineffi- sidy granted by the United States and other agricul- ciently, adding considerable costs to trading activi- tural export subsidies of the European Union (EU) ties while, at the same time, undermining the growth and United States were a significant reason for the potential of their economies. disappointing results of the World Trade Organiza- This chapter outlines the main features of a cus- tion (WTO) Ministerial Conference in Cancun in toms reform strategy and provides operational 2003. A poorly functioning trade logistics environ- guidelines that are likely to contribute to the suc- ment, as well as the combination of factors that cess of such initiatives. It has been inspired by the make up the transaction costs—the cost of clearing knowledge of good practices; the World Bank’s customs, transport costs, noncustoms trade docu- own TA and project experiences (summarized in mentation requirements, and unenforceability of chapter 8); the approaches presented in a number legal trade documents (World Bank 2003)—also of TA reports that have been produced by diverse contributed to the failure of many developing coun- customs experts and institutions, many of which tries to integrate successfully into the world econ- remain inaccessible to the general public; lessons omy. High transaction costs, of which customs learned from several customs modernization ini- clearance costs are often an important element, may tiatives (chapter 7); and consultations with many thus nullify the cost-reducing impact of trade liber- customs officials and consultants who have alization. Few customs services have managed to assisted in customs modernization initiatives. The provide exporters with the duty-free inputs needed first section reviews the key objectives of customs to keep export prices competitive.2 modernization initiatives. The second section spells out a number of contextual factors that need to be adequately addressed at the outset of a 2. A recent study of trade liberalization for a sample of countries reform process to enhance its chances for success. in Africa concluded “It is in the area of providing exporters with access to low tariffs and tax-free inputs that the progress of the The third section defines the key steps in preparing sample countries has been the most disappointing. The sample a customs modernization strategy. The next sec- countries had made little progress in implementing timely reim- tion elaborates on implementing key issues of the bursements to exporters of either import duties or value added tax (VAT) on inputs.” (Hinkle, Herrou-Aragon, and Kubota strategy. The final section provides some opera- 2003, pp. 82–83.) tional conclusions. Strategy for Customs Modernization 5

Objectives of Customs Operations collect. Collection of VAT on imports constitutes another major source of budget revenue. There- Customs administrations are expected to raise sub- fore, a control mentality that ensures that all stantial revenue, provide domestic producers with duties are assessed and paid has permeated cus- protection, provide supply chain security, prevent toms, irrespective of whether this causes delays the importation of prohibited or unsafe imports in the release of imports. With tariff rates (for example, illegal weapons or out-of-date medi- declining over time, customs revenues as a share cines), and combat the trade of narcotics through of the total budget revenues have also tended to the implementation of laws and regulations that are decline in most countries; but customs revenues in line with WTO commitments. Customs admin- are still a major concern of MOF officials. This istrations are expected to accomplish these objec- priority has been reflected in many past customs tives both effectively (by achieving them) and effi- reforms and TA initiatives. ciently (at the lowest possible cost to the budget • Import tariffs are meant to protect domestic and to the trading community) without compro- producers, who expect customs administrations mising trade facilitation. to ensure that all importers pay the official import taxes to ensure a level playing field. On Evolution of Customs Role average, customs duties amount to 17 percent of the total import value in a sample of African The responsibilities of customs continue to evolve. countries, 12 percent in the Middle East, 10 per- Customs administrations are now increasingly cent in Asia and the Pacific, and 7 percent in the regarded as “the key border agencies” responsible Western Hemisphere (see annex 1.B).4 Increas- for all transactions related to issues arising from the ingly, import tariffs are being seen as an instru- border crossings of goods and people. Some of ment of protection rather than of raising budget these functions are undertaken in close coopera- revenue. This is clearly so in developed countries tion with other national agencies.3 The operational where tariffs provide only a tiny share of total guidelines of customs cannot give equal weight to revenue and on average represent less than all functions constantly; choices and priorities are 1 percent of overall import value. Import tariffs inevitable in light of changing circumstances: in developing countries are high, however, thus hampering trade among developing countries as • Raising revenue has traditionally been high on well as the competitiveness of the countries’ the agenda of governments, represented by the economies (Ebril, Stotsky, and Gropp 1999). Ministry of Finance (MOF), because of the crit- • Trade facilitation has attracted increasing inter- ical importance of import duties as a source of est in recent years as evidenced by the WTO budget revenue for many developing countries. Cancún Agenda and the WCO Revised Kyoto Revenues from import duties for a sample of Convention. This interest has been brought African countries accounted for just under 30 about by an increasing commitment of govern- percent of total tax revenue, on average. In comments to pursue a private sector–oriented parison, this share averaged 22 percent for coun- growth strategy, combined with increased pri- tries in the Middle East, 13 percent for Latin vate sector assertiveness and demands for better American countries, and 15 percent for Asian government services. Cost reductions to the countries (see annex 1.A). While import tariffs trader, derived from easier customs procedures, are widely recognized as more distortionary stem largely from the possibility of reducing sources of revenue than general sales and income taxes, they remain important for historic reasons, and because they are relatively easy to 4. The IMF estimated these collection rates for a slightly different sample of countries for 1995. It appears that the rates fell slightly for the sample countries in Asia and the Pacific, but stag- 3. See, for example, the International Convention on the Har- nated and even rose slightly in Sub-Saharan Africa and Middle monization of Frontier Control of Goods (UNECE 1982) avail- Eastern countries included in the sample (Ebril, Stotsky, and able at http://www.unece.org/trans/conventn/harmone.pdf. Gropp 1999). 6 Customs Modernization Handbook

inventories and the amount of operations capi- continue to require a high level of control over tal, as well as the possibility for traders to satisfy exported goods. increasingly stringent “just in time” require- Second, in all countries, customs will continue ments. to collect trade data for statistical and regulatory • Civil society is demanding better governance purposes. and has identified customs services as particu- Third, customs will continue to be responsible larly prone to harboring corrupt practices. for effective and efficient border management to Targeting customs for improvements fully rec- facilitate trade, a major contributor to the interna- ognizes the fact that the integrity situation tional competitiveness of nations. This will occur reflects the integrity of the greater society to regardless of whether trade facilitation is formally which the administration belongs. incorporated into multilateral trade negotiations. • Over the years, customs administrations have As such, harmonizing, simplifying, and effectively received a mandate to protect society. This has coordinating all national border management been included in the mandate of the WCO, to requirements and commitments will remain prior- reflect the notion that most customs adminis- ity responsibilities of customs. trations are responsible for preventing the cross- Fourth, based on a heightened awareness of the border movement of dangerous and unsafe threat posed by international terrorism and goods. However, the security concern was ele- transnational organized crime, governments will vated to new heights after the events of Septem- require that customs administrations take on a ber 11, 2001. The focus shifted from just imports larger role in ensuring national security and law to the entire supply chain, including exports. enforcement. To that effect, customs administra- New procedures are being introduced and addi- tions are likely to institute a range of changes to sys- tional safety measures are being prepared and tems, procedures, and even administrative respon- implemented. sibilities to increase confidence in the level of control exercised over both imports and exports. Security checks will increasingly take place at the Customs Role and Priorities in the 21st Century point of export in addition to the point of entry. It is difficult to predict the future role of any insti- For customs administrations to effectively man- tution, and there is no one correct or universally age these sometimes apparently contradictory applicable response to anticipated trends in cus- objectives, a wide range of new approaches, systems, toms, as each country will respond in ways that are procedures, and operating methodologies will have best suited to its needs, operating environment, to be developed and implemented. Some of these national priorities, and cultural heritage. However, are already beginning to emerge and are likely to some general issues or themes are emerging that underpin the future shape and role of customs: suggest the future role and priorities of customs. First, in spite of declining tariff rates brought • The primary focus of customs’ attention will about by successive rounds of trade liberalization, shift from physical control over consignments at the revenue mobilization and control functions of the time of importation to post-release verifica- customs are likely to remain substantial, for several tion using audit-based controls. This will reasons: (a) the fiscal dependency on customs rev- require customs to adopt comprehensive com- enues is likely to linger for some time, in light of the pliance improvement strategies designed to pro- difficulty many developing countries encounter in gressively increase confidence in the informa- broadening their tax bases; (b) imports will probation provided by traders and in the accounting bly constitute a major tax base for levying VAT, and systems and processes they maintain. All regula- customs is well positioned to control the goods at tory information is likely to be exchanged the time of importation; (c) customs will remain electronically, and decisions on treatment of the responsible agency to ensure that goods that importsandexportswillbemadeonarisk were imported for other than home consump- assessment basis. The compliance record of indi- tion are not diverted to such consumption; and vidual traders will be a key consideration as will (d) assessing VAT refunds on exported goods will the exchange of information and intelligence. Strategy for Customs Modernization 7

Such an approach will facilitate the re-engineer- create the need for new preferential trade ing of core border management processes and regimes that impose burdens both on customs regulatory requirements. It will also involve a and on trade, and are prone to abuse. new and more coherent relationship with traders, as well as increased cooperation at the Contextual Factors Necessary national, regional, and international levels. for a Successful Customs Reform • Countries will increasingly rely on a single agency to take responsibility for the entire Customs reform involves more than the introduc- border management process. This will involve tion of a set of new techniques for processing cargo the merger of a number of different border and passengers. Customs reform calls for a new management functions under one administra- awareness of the developments in trade, requires tive and policy umbrella. In some cases this will political commitment to push through sometime be achieved administratively, and in others vir- difficult measures, and must start with a good diag- tually, through increased cooperation at the nosis of the present situation. policy and operational level and through the adoption of information and communications Awareness That Customs Operates technology (ICT) infrastructure that will allow in an Increasingly Globalized Environment traders to discharge all their regulatory respon- The increases in world trade of recent decades have sibilities through one single window to the placed increasing demands upon customs.5 In government. 2002, over US$10 trillion worth of goods crossed • Moves to ensure more effective coordination international borders. Every shipment passed between the various government agencies through customs control at least twice, once on charged with regulating cross-border trade and export and once on import, making customs a key achieving meaningful rationalization of regula- factor in the international supply chain and in the tory requirements will require attention at the global economy. Customs needs to adjust to new national, regional, and international levels. ports of entry and additional hours of service, and While many different players are involved, it their job is made more complex by a plethora of seems likely that customs is the only agency with regional and bilateral trade agreements. Frequently, the national and international infrastructure in there is no commensurate increase in customs place to achieve this. staffing and resources to keep pace with the • Customs will increasingly rely on the intensive increased workload and more complex environ- use of modern information technology to pro- ment. Often, customs is not provided with the tech- vide for seamless transmission of data to all nological resources to facilitate and secure interna- interested members of the trading community. tional supply chains, to keep pace with the billions In the future, most customs administrations will of dollars spent by industry. rely on electronic submission of manifests before Faced with these challenges, many customs cargo arrival, on direct trader input of import administrations struggle to meet all of these and export declarations, and on electronic pay- demands and priorities. Often, they focus on rev- ment of duties and taxes. Initiatives that have enue collection and ad hoc priorities that are cham- shown good results so far and that aim at elec- pioned by the most vocal and influential interest tronically connecting all members of the trading groups. Some, however, strive to meet these chal- community, as in Singapore, are likely to spread. lenges head on, and revisit how their administra- This will speed up the granting of regulatory per- tions are designed and how they function. missions and enable the collection of statistics. In view of customs’ unique position at a coun- • Many countries are already members of regional try’s borders, its management must satisfy both groups, a trend that might accelerate in coming domestic and international constituencies. On the years. Such regional groups might promote har- international front travelers, businesses, and inter- monization and simplification of customs pro- national air, sea, and land carriers expect services cedures in accordance with international best practice standards. On the other hand, they 5. This section relies heavily on Lane (1998). 8 Customs Modernization Handbook

that are uniform, predictable, easy to use, and Implementation of these standards and conven- consistent with international standards and con- tions is not a simple task, as illustrated by the argu- ventions. Organizations such as the WCO, the ments and debates at the WCO regarding valuation WTO, UN Economic Commission for Europe and rules of origin issues. These issues are discussed (UNECE), UN Centre for Trade Facilitation and in some detail in chapters 8 and 9. Also, the com- Electronic Business (CEFACT), and UNCTAD have plexity of the HS may give rise to disputes between set standards for the most critical customs func- importers and customs, due to the fact that the pay- tions. The most important ones are the following: ment of duties depends on the classification in the HS-based customs’ tariff. • The Revised Kyoto Convention (International As international trade increases and becomes a Convention on the Simplification and Harmo- more important factor in the economy, the im- nization of Customs Procedures) provides the portance of customs increases and it becomes framework for processing goods in international imperative for customs to administer these commerce (chapter 3). complex agreements uniformly, professionally, • The International Convention on the Harmo- fairly, and transparently. In performing these func- nized Commodity Description and Coding Sys- tions, customs will be dealing with well-trained and tem (referred to as the Harmonized System or well-compensated professionals possessing inter- HS), which was developed and maintained by national experience who are experts in the areas of the WCO, provides the framework for classify- logistics, trade, transport, and law. Multinational ing all merchandise in international trade. companies have invested billions of dollars in • The Agreement on Customs Valuation (ACV), recent years to streamline and secure their interna- developed by the WTO, provides the framework tional supply chains. These modern, sophisticated for determining the customs value of goods in logistics systems provide companies with the capa- international trade (chapter 8). bility to track, trace, and monitor shipments from • The Agreement on Rules of Origin is the WTO the factory door to the retail store. However, the initiative to develop a system for standardizing physical and information flows can be severed by the rules of origin of internationally traded customs at international borders at the point of goods (chapter 9). import or export. A slow, inept, or poorly trained and equipped customs increases transaction costs, The skills of classifying goods, determining value thereby increasing the costs of exported goods to and country of origin, and applying proper proce- the industry and consumers, thus making the dures for processing merchandise are needed by country less competitive. Customs must organize customs to comply with international conventions, itself to be a trade facilitator in a rapidly changing meet the expectations of the international trade world, as well as an efficient provider of budget rev- community, and achieve the organization’s mission enues. This represents a major administrative chal- at the nation’s borders. If customs strays, it violates lenge. international agreements. Such noncompliance may result in additional costs and time delays to Political Support at the Highest Level importers, exporters, carriers, domestic industries, and consumers. Clearance of goods is affected by Most customs administrations have operational factors such as the quality of port facilities and the responsibilities under the government policy set by multitude of organizations and handoffs involved their supervisors, including the MOF, and any in each international trade transaction. Typically, change will require strong government support. customs is seen as responsible for all delays and Demand for reform is unlikely to come from inside wrongdoing at the border, although other agencies the organization as it may require that drastic are involved. The international trade community changes be introduced (Holl 2002). That customs may, ultimately, sanction such failures by transfer- staff are recruited young and often trained in para- ring foreign direct investment (FDI) to other coun- military fashion—a tradition that finds its roots tries where the import–export environment com- in the fact that many customs officials have law plies with international standards. enforcement responsibilities—also generates an Strategy for Customs Modernization 9 environment that discourages challenging existing “lose” in a successful reform may be well connected procedures. Proposed changes may require reduc- as either part of the customs administration man- tions in personnel along with the introduction of agement or sufficiently close to it to slow down the information technology (IT) or, in extreme cases, reform momentum or to influence the design and the removal of the top management of customs or implementation of the reform. If not countered, of customs officials deemed corrupt or inefficient. the influence of these individuals will make the Management contracts or contracting with preship- reform partial, fragmentary, and ineffective. Tradi- ment service providers may also be proposed. tionalism and lethargy are other factors against The focus of the MOFs has always been on rais- change. Only a reform that benefits from full polit- ing more budget revenue. This has often led to the ical support at the highest level of government will stringent control of trade movements, adding costs deliver its expected outcomes. to both honest and potentially dishonest traders. While reducing corruption and facilitating trade Adequate Diagnostic Work were always objectives of MOF-led reforms, these goals were rarely translated into program details Customs reform is not a case of “one size fits all.” and were often set aside in the process of raising rev- The particular objectives of customs administra- enues. These internally driven reforms frequently tions and the maturity of their organizations differ became stale and failed to instill new ways of dealing among countries. Reforms must be tailored to the with the old problems. Few have become sustain- situation at hand. Hence, to fully account for this able. Hence, outside support for reforms is crucial. diversity, it is important that any customs modern- The trading community and civil society often ization project start with a careful and complete lobby for the improvement of services. The trading diagnosis of the existing situation. The absence of community wants to reduce its trading costs and good diagnostic work was identified as a major increase the transparency of its operations while shortcoming in the tax and customs administration civil society wants to eradicate the debilitating projects managed by the World Bank (Barbone, De effects of corruption on social values and economic Wulf, Das-Gupta, and Hanson 2001), and has been performance. As the case studies profiled in chap- confirmed in more recent work, as illustrated in ter 6 indicate, private sector pressure groups have chapter 7. Yet, undertaking a diagnostic exercise in frequently been crucial to fostering customs customs is not an exact science and a flexible reforms and monitoring their progress. Politicians approach may have to be adopted, with the diag- and government officials are more likely to respond nostic tailored to the objective of the exercise. with a firm policy program to local pressure groups There are a number of approaches, tools, and than to administrative initiatives that are often sus- instruments that can be used. pected of being self-serving, that easily get lost in bureaucratic posturing, and that often lead to only Enhancing Revenue Mobilization Enhancing marginal or cosmetic changes.6 revenue mobilization has frequently been the focus The reforms will create winners and losers, and of customs reforms. Diagnostic work has mainly political commitment will be needed to realize the focused on measuring revenue leakages. Both the project. Traders that were accommodated under World Bank and the IMF frequently use this the older rules, as well as customs officials that approach.7 The core indicators used to identify the obtained additional income in “facilitating” trade slack in revenue generation include: (a) collected transactions or in manipulating import and export taxes over imports compared with potential rev- declarations to the advantage of the trader, are enue collections to identify the “gap”; (b) share of likely to object to reform programs that will make total imports exempted from taxes8; and (c) fraud these practices riskier or impossible. Those that

7. For a collection of excellent articles focusing on the mobiliza- 6. The late King Hassan II (1961–99) of Morocco championed tion of revenues see Keen (2003). trade and customs reform in response to presentations made by 8. These were reported at 18 percent of total imports in a sample the professional associations that had most to gain from these of African countries (Hinkle, Herrou-Aragon, and Kubota reforms. 2003). 10 Customs Modernization Handbook

in recording valuation, weight, or rules of origin. This framework guided the Bank’s diagnostic work Less quantifiable indicators of revenue leakage for the Russian Federation Customs Modernization pertain to the possibility of misclassification of Project in 2002. imports as goods that attract lower tariff rates, as well as vagueness in the Customs Code and International Customs Guidelines Prepared by regulations that allow customs officials and traders the International Chamber of Commerce The to make mutually agreeable arrangements. The focus of the guidelines of the International methodology of these diagnostic exercises is neither Chamber of Commerce is clearly on customs standard nor publicly available, but has centered on (International Chamber of Commerce 2002). They a pragmatic analysis of customs processes to iden- present, in a summary format, the key procedures tify possible improvements. The main participants that constitute customs best practices, and assist the in such diagnostic exercises have been MOF offi- analyst in preparing a systematic comparison cials, including customs. Private sector operators between the present state of a given customs have been consulted, but their viewpoint, which is administration and its future operations using not maximizing revenue mobilization, is often these best practices. The explanatory notes are use- missing in official reports and reform programs. ful in providing the background for evaluating the present system. These guidelines constitute a good starting point for any diagnostic study. Using the World Bank Trade Facilitation Toolkit In 2001 the World Bank issued a toolkit for the Covering the Fundamentals Lane’s Customs 9 audit of trade and transport services (Raven 2001). Modernization and the International Trade Super- This toolkit reflects the practical experience gained highway (2002) provides another analytical frame- in a series of Bank missions as well as inquiries con- work for the diagnostic work. The proposed ducted in a number of developing countries, and approach also consists of a set of structured ques- draws on a previous publication. It provides guide- tions organized around a logical framework that lines on how to carry out an audit and analyze and covers fundamentals such as the environment of interpret its findings, and identify remedial actions. customs operation, including its expertise and The audit consists largely of a series of structured integrity; enablers such as managing processes, questions presented to all participants in the trade automation, and the ability to analyze data; and transaction, including customs officials. The re- advanced processes such as enforcement, compli- sponses are to be systematically reviewed under ance and industry partnership, audit and account such headings as integrity, port management, regu- management, and risk management. Lane pro- latory framework, automation, agents’ functions posed a system that would analyze the replies to and attitudes, and so forth. The responses can be these questions and provide guidance on how to drawn upon to prepare a remedial action plan that formulate an implementation program that would is intended for all participants in the trade chain, ensure total compliance and fast release of goods, as including customs, and establishes the conditions well as reduce the cost of customs operations. This for success. Clearly, the aim of this toolkit is to methodology focuses on revenue generation, review all operations that can help or hamper trade trade facilitation, and efficiency of the customs processes, and this goes beyond customs operations. services. The questions are formulated through a A full-fledged diagnosis of the various operations of self-assessment approach, but could also be used by customs will need to draw on other diagnostic tools. outside advisers working in close cooperation with The issues pertaining to the administrative environ- customs officials. ment in revenue mobilization agencies in general are well treated in “A Diagnostic Framework For Pulling Together Key Elements: The WCO Capac- Revenue Administration,” which was designed for ity Building Toolkit The WCO’s Customs Capac- domestic revenue administrations (Gill 2000).10 ity Building Diagnostic Framework is being

9. More recently, The International Chamber of Commerce elaborated Customs Guidelines that are consistent with the 10. This diagnostic tool also inspired the forthcoming WCO toolkit of the World Bank (see www.iccwbo.org). Capacity Building Tool. Strategy for Customs Modernization 11 prepared in response to requests from WCO mem- tion region’s GDP each year (APEC Economic bers for a sound methodology that could lead to Committee 2002). The same report concluded that sustainable improvements in customs administra- customs reforms in Singapore, Thailand, and the tions, particularly those in the developing world. It Philippines are estimated to yield a US$3.9 billion aims at bringing together, into one document, the increase in real annual income. key elements and foundations deemed necessary to In addition to the above estimates, there are a establish an efficient and effective customs admin- number of other benefits related to the economic istration. It will be based on the internationally impact of customs reform and modernization ini- agreed conventions (Kyoto Convention, Arusha tiatives. In the case of the Trade and Transport Declaration, the ACV, and the HS) as well as on the Facilitation in Southeast Europe program (TTFSE), instruments and best-practice approaches for for example, there has been a significant overall modern customs administrations. It will advocate cost savings for trucks waiting at border crossing full adherence to these conventions as a guide to points or inland pilot terminals monitored through the proposed modernization. The framework will the TTFSE since the beginning of the project in include a readiness assessment guide for each of the 2000 (World Bank 2004). At inland pilot terminals, core components of a comprehensive capacity clearance times have, in all the six original mem- building program, and a practical guide on how to bers of the TTFSE, declined substantially. In conduct diagnostic assessments. It advocates that Bulgaria and Bosnia they fell by 60 percent as a the assessment be undertaken by outside advisers result of procedural improvements, preselection of with the active participation of stakeholders, declarations by a specialized unit, and advance pro- including local customs officials. It should lead to cessing of documents that are submitted by fax the formulation of a prioritized action plan. prior to the arrival of goods. The cost savings to transporters can thus be calculated based on the reduction in labor costs related to the lower waiting Customs Blueprints The European Commission time and on greater efficiency in using the trucks. has developed a set of 13 blueprints for assessing The GEP also estimates that every day spent in cus- the state of customs administrations in accession toms adds nearly 1 percent to the cost of goods. In countries. While intended essentially for future developing countries transit costs are routinely two member states, these blueprints can be used to to four times higher than in rich ones. Hence, any carry out a gap analysis in other countries. program that makes transit operations more efficient and reduces clearance times is bound to enhance the country’s competitiveness. Desire to Reduce Trading Costs However, increased security arrangements in the Customs reform and modernization initiatives, wake of September 11 and worldwide worries together with improvements in ports and trade- about terrorism have sharply increased the costs of related institutions, will lead to significant benefits trade transactions. GEP estimates of the trade in reducing trading costs and thus enhancing the effects of September 11 show that world welfare competitiveness of a country, particularly if these declined by US$75 billion per year for each 1 per- initiatives focus on policy reform, technical assis- cent increase in costs to trade from programs tance, and modernization of infrastructure. In aimed at tightening border security. this regard, the World Bank’s Global Economic A number of in-country practices tend to lower Prospects 2004 Report (GEP) estimates that if the the benefits that could be brought about through countries that are currently below the world aver- customs modernization. These include resistance age in trade facilitation capacity could be raised in implementing selectivity, lack of cooperation half way to the average, trade among 75 countries between border crossing agencies, excessive would increase by US$377 billion annually (World turnover of staff in customs, and minimal progress Bank 2003). A recent study estimated that reducing in addressing corruption. Customs modernization the cost of international trade transactions by just initiatives would do well to factor these possible 5 percent by 2006 could add US$154 billion or negative reactions into the design of the reform 0.9 percent to the Asia Pacific Economic Coopera- program. 12 Customs Modernization Handbook

Development of a Customs any customs-related WTO agreement, including Modernization Strategy the ACV. Also, automation initiatives not placed within the context of a comprehensive customs A systematic approach to the design of the mod- reform left an excessively complex and dysfunc- ernization strategy will enhance its chances of suc- tional system. Some reforms failed to mobilize the cess. Proper attention to its content—partial or necessary support of top customs officials, politi- comprehensive, good sequencing, use of perform- cians, or the private sector—the essential element ance indicators, support of stakeholders, availabil- for sustainable modernization. On balance, isolated ity of adequate financial resources for implementa- initiatives without comprehensive planning tend to tion, and improved performance of other border be piecemeal and appear to be costly and unpro- agencies—will substantially benefit the customs ductive, even if they pay for themselves in the short reform process. term. The experience with Bank-supported customs reforms fully supports this observation (see Modernization Program: Comprehensive chapter 7). or Partial? The alternative approach to customs reform is to Most diagnoses of customs services will indicate prepare a comprehensive reform program, with gaps between the present state of affairs and the detailed, coherent, and well-sequenced steps, and a targeted state of affairs. The next step is to address well-designed financing plan. Such reforms have a the problems identified. There are various options better chance of benefiting from the contextual fac- for proceeding. Should a comprehensive process be tors mentioned above. The international donor designed and implemented or should partial or community, frequently called upon to support area-specific measures be taken depending on the reforms, often favors such a comprehensive where successes can be achieved and on the readi- approach and stands ready to assist in phasing in ness of the service? No easy answers can be found the various reform components. Such comprehen- that could fit every circumstance. Yet some guide- sive reform and modernization programs support lines may be useful. staff training in the new procedures, and allow for In practice, many customs reforms have been adequate time to prepare the legal and regulatory attempted using a pragmatic and area-specific environment, simplify customs processes before approach. The general objective appears to have introducing an IT program, and call on outside been to fix some urgent problems without modify- advisers and service providers when necessary. All ing the overall functioning of customs operations. these actions can be dovetailed, thus enhancing the These reform initiatives have absorbed substantial probability of arriving at a mutually supportive sys- domestic and external resources and have been tem that achieves the objectives and is sustainable mostly directed at strengthening budget revenue. over time. The case studies presented in chapters 6 Examples of such reforms are those that have intro- and 7 seem to support this comprehensive duced advanced IT, brought in a valuation system approach. in accordance with the ACV, altered the manage- Recent World Bank projects show that a holistic ment for special import regimes to support export approach to reform can yield substantial results. processes, and reorganized the management Such projects are mainly results oriented, take a structures. very pragmatic approach, and tackle the constraints Some of the partial reform initiatives have been and issues when and where they are encountered. successful. However, most observers agree that For example, for a road project that involves border these initiatives have a poor record in terms of sus- crossings, it is important that the various issues that tainable improvements to the overall efficiency and would affect these crossings be tackled. This effectiveness of customs operations. Where the requires the involvement of other agencies in addi- reforms were not well integrated into the overall tion to customs. This approach can rapidly mobi- customs operations, they had difficulties generat- lize support outside the administration, and can ing a substantial difference in the area where the include other ministries that have the capacity to original reform was targeted. A comprehensive support—or stall—the customs modernization reform, for instance, is necessary in implementing process. Strategy for Customs Modernization 13

Proper Sequencing and Pacing of Reforms risk assessment procedures. When the diagnosis indicates that customs clearing times are pro- Based on the diagnosis, reformers need to identify tracted, due in part to the practice of physically project components and prepare a timetable for inspecting all containers, risk-based inspection their phased introduction. The logical framework processes become part of the answer. However, to detail such a work program is likely to involve 100 percent inspection of imports are at times the following steps that can be managed by an included in the Customs Code and probably stem appropriate computer software program: identify from the view that all importers are equally likely to the objectives; detail the actions needed to reach commit fraud, and that protecting budget revenues each objective, ensure good sequencing, and iden- requires that all cargo be subjected to the same tify the time path; establish performance criteria; inspection process. This practice also maximizes identify the personnel and budgetary resources face-to-face contact between importers and cus- required; identify the individuals to be held toms officials, something that modern customs accountable for implementing these actions; and practices try to avoid. The replacement of the 100 set up a clear monitoring mechanism for people, percent inspection practice with risk-based prac- instruments, and performance criteria. tices is one of the key provisions of the Revised Sequencing the reform measures and defining Kyoto Convention and one that should be incorpo- their timeframe are critical. These measures need to rated in customs modernization initiatives. This be carefully aligned unless delays emerge. For will require the refinement of risk management instance, when the diagnostic review indicates that techniques and adjustment of operational proce- customs processes are complex, involve multiple dures (chapter 5). permissions and signatures, are costly, and delay Program sequencing will need to be geared to the clearance of goods, a total revamping of the the readiness of customs management and staff. It processes is called for. New processes will need to be is argued that sufficient time must be allowed to designed. Implementing them may require that the train staff and prepare the ground for the measures import clearance organization be revamped, proposed. This view supports a slow and gradual responsibilities be redesigned, staff be reassigned, approach to bringing the staff on board. However, and new staff trained. It may also require that slow implementation may erode the momentum of offices be redesigned to accommodate the IT the reform and allow forces that favor the status equipment and reduce the face-to-face contact quo to mobilize. A middle-of-the-road approach is between traders and their representatives, and the probably the best; not too slow so as to not lose customs staff. momentum, and not too fast so as not to result in Only when the new procedures are agreed upon reform measures that cannot be implemented or will it be possible to introduce modern IT support sustained. Local preparedness for the reform as for processing trade transactions. A major failure of reflected in the diagnostic study, together with IT-driven reforms has been that the sequencing political commitment and assertiveness will largely suggested above has often not been respected. Man- determine the desired pace of the reform in any ual and computer-driven processes continue to given country. exist side by side, negating IT’s potential contribu- The reform program needs to take into account tion to streamlining customs procedures. However, which measures may be outside the control of the introduction of IT takes time as software and customs or the MOF. Compensation policies are hardware choices need to be made, and equipment often beyond their reach. At times the diagnostic needs to be procured and installed. In addition, study will show that low salaries in customs consti- staff needs to be trained in the use of the new tech- tute a major obstacle to staff commitment and nology to exploit the data that will become avail- good performance. Customs reform cannot possi- able for policy and enforcement purposes. All this bly alter the overall compensation policy of the requires careful phasing (chapter 13). civil service. Customs then is left with a limited set Another example that illustrates the importance of choices: either do nothing on the compensation of sequencing is one that determines the process package or hope that noncompensation measures steps required for successful implementation of can be introduced to motivate staff. One measure 14 Customs Modernization Handbook

may be to adjust bonus pay, for which some cus- entry. Such transparency benefits the program and toms authorities have considerable latitude. A contributes to its continued support. Obviously, more drastic approach is one that provides for a for indicators to remain relevant, they will need to salary scale in customs that is more generous than keep pace with a sometimes rapidly changing that being offered in the rest of the civil service. environment. Reality, however, suggests that the effectiveness of Indicators are best used to assess progress over customs services, and integrity issues, are unlikely time. They can also be constructed for a single to be satisfactorily addressed as long as low levels country or for a set of countries and compared of staff compensation prevail (chapter 2). across countries to stimulate the ones lagging The approach of the Moroccan customs service behind.11 In some cases, performance targets are with respect to phasing reforms is interesting. included as project covenants. To generate these It had available a comprehensive and detailed indicators, the reform program must strive to customs reform program that was prepared in the develop the statistical capacity to collect the neces- late 1990s with the assistance of outside consultants sary data and promptly transfer them to customs and the IMF. This program was used flexibly, headquarters for analysis. The next sections mainly to provide a systematic sense of direction, describe effectiveness and efficiency indicators that and served as a general guide for policy reform have proven useful in designing customs reform measures that could be implemented. The year-by- programs. year or even the month-by-month reform program, however, was based on an ongoing assess- Effectiveness Indicators Revenue generation. ment of what was feasible in light of staff readiness Many reforms are designed to improve the revenue and progress achieved. This approach was sup- generation performance at customs. Even if ported by a deliberate effort to explain the reforms improving revenue performance were not the to the staff, to gain the staff’s broad adherence to reform’s key objective, the reform’s impact in raising the reform measures, and to give them credit for budget revenue would be closely monitored by the successes achieved. MOF. Examples of such indicators include the following: Clear Performance Indicators • Collected taxes as a share of overall imports or as Performance indicators spell out what the reform a share of imports that do not benefit from spe- program aims to achieve and provide a monitor- cial tax concessions for one reason or another. ing mechanism. The indicators should be designed This statistic needs to be carefully adjusted for with care and attention. The indicators force the tariff changes during the observation period. reform designers to clarify and quantify the pre- Where possible, this share should be compared cise nature of the objectives they want to achieve. with the tax revenues that would have been col- Effectiveness criteria aim to measure whether the lected using the statutory tariff rates to measure objective has been fulfilled; efficiency indicators the gap between the actual and potential track the cost of obtaining the results. The diag- revenue. nostic study should provide baseline data for both • Share of total imports exempted from tariffs and sets of indicators. Comparing the actual observa- duties, or monitoring of special duty regimes tions with the baseline data permits an assessment identified in the diagnostic as prone to fraud of the progress achieved and allows managers to and lax treatment. evaluate whether the program is on track or needs • Violations detected and revenues received by the to be adjusted. Stakeholders, government deci- Treasury as a result of adjusting the customs sionmakers, and private sector users of customs duty liability. services should have access to the evolution of • Volume of contested or overdue import taxes. these indicators while the reform program is being initiated, as well as after. In Morocco, for example, 11. The World Bank–funded TTFSE supports trade facilitation the time-release data is on the Internet and initiatives to Balkan countries. Indicators are constructed for monthly updates are available for each point of each country. Strategy for Customs Modernization 15

Trade facilitation. Examples of trade facilitation space that once the containers are opened and indicators include the following: the items are extracted for inspection, customs or port and transport staff are often unable to • The cargo release-time indicator measures time replace all the contents. This forces the operator spent processing documentation and releasing to find alternative means of onward transporta- goods to the importer (see annex 1.C).12 Correct tion for part of the cargo, in addition to leaving measurement of time spent processing goods the cargo vulnerable to damage and theft. In permits importers to place the blame for slow Morocco, the inspection rate fell from 100 per- release on the institution responsible—customs, cent in 1996 to 10 percent in 2003; the target is port authority, or government agencies in to reduce it further, to 5 percent. Reducing the charge of enforcing agricultural, commercial, or rate of physical inspection cannot be isolated safety standards. The TTFSE uses this indicator from other indicators and should be viewed in in combination with the waiting cost for trucks the context of risk management. (See annex 1.D at the border and estimates the savings that for a further discussion of this issue.) One way result from reducing release time. For instance, a of doing so is to combine the rate of detection of project in Bacau, Romania, reduced clearance irregularity with the rate of inspection. If both time by 50 percent for an estimated annual are well done, the detection rate should go up as savings of US$106 thousand.13 The TTFSE also a percentage of inspection, implying both provides clear targets for each pilot border improved trade facilitation and more effective crossing for this purpose. According to control. UNCTAD studies of Zaire in the 1990s, the • The time invested to produce reliable statistical inventory costs to the consignee due to immobi- import and export data is useful for the pur- lization were estimated at 24 percent of total poses of analyzing trade developments, and for transit cost, adding to 6 percent, 3 percent, and 1 the marketing purposes of the private sector. percent attributable to banking charges, govern- • The number of import declarations that are ment controls, and informal facilitating pay- managed through fast-track procedures for ments, respectively. Not all were due to ineffec- “authorized” importers with good compliance tive customs services, but these estimates give an records might reflect a selective approach to idea of the costs involved because of delays in physical inspection. cargo clearance. See OECD 2003. • Public perception of customs operations (trade • High rates of physical inspection of cargo delay facilitation and integrity) as reflected in customer the clearance of goods, and are also cumber- satisfaction surveys can suggest either worsening 14 some, expensive, and provide temptation to of or improvement in cargo processing. engage in corrupt practices. Modern container stuffing methods are so efficient in economizing Security and Compliance. The criteria can consist of the number and volume of drug seizures; the number of persons arrested, both incoming and outgo- 12. WCO (2002) provides a methodology to identify the bottlenecks of clearance procedures with concrete figures and to meas- ing (including illegal immigrants); and the rate of ure the effects of the introduction of new measures. The World examination compared to rate of detection. Bank is supporting an initiative to design time-release software. Automated Systems for Customs Data (ASYCUDA) and other country-designed software provide time-release data. In Efficiency Criteria Efficiency criteria indicators Morocco, such data are provided for each port of entry and for aim to measure the cost of delivering the service normal and special regimes; data are released monthly on the and are more difficult to quantify and interpret. Yet Internet. In Bolivia, time-release statistics derived from the they are worth compiling because they focus on the ASYCUDA software are prepared for the “Green,”“Yellow,” and “Red” channels and provided for four different phases of the cus- good use of budgetary resources. At the margin, toms clearance process. These results have pointed to the need for efficiency measures may indicate that improving further process simplification and have also highlighted the lack of staff adherence to new processes (Mendoza and Gutierrez 2003). The TTFSE collates data on time release for the pilot 14. The TTFSE program includes an annual user survey of sites of several countries and has ensured comparability of importers and truck drivers that measures the public perception methodology. of corruption and impediments to trade. 13. See www.seerecon.org/ttfse. 16 Customs Modernization Handbook

effectiveness criteria further may be too expensive FIGURE 1.1 Number of Declarations per to pursue. These criteria should pertain as much to Staff per year in Southeast Europe, 2002 the internal costs of customs as to the costs of traders to adhere to customs procedures. The use of Albania criteria to measure the cost for private traders to 600 500 adhere to trade procedures, including customs pro- Montenegro BiH_Fed 400 cedures, is at its beginning stage. A U.K. organiza- 300 tion, Simplifying International Trade (SITPRO), is Yugoslavia 200 BiH_RS 15 extensively testing a methodology to do this. 100 Despite a promising start, the initiative is still too 0 young for its practicality to be judged. Results are Romania Bulgaria also not yet publicly available. The TTFSE has gone farther than any other customs and trade facilitation program in identifying Moldova Croatia efficiency indicators. The indicators include rev- Yugoslav Republic of enue collected by customs staff; total revenue cost Macedonia over revenue collected; salaries over revenue collected; trade volume per number of staff; customs Source: Trade and Transport Facilitation in Southeast declarations per number of staff; and cost per dec- Europe, Regional Steering Committee. laration. The results for each country, adjusted for extraneous factors that affect the absolute values of The Role of Strategic Partners these indicators, are good meters for the direction of the efficient use of resources. Comparisons Customs processes affect the interests of a variety of across countries may indicate the scope of possible stakeholders—customs staff responsible for financ- improvement, but must be done carefully as many ing government expenditure, other government variables do affect the absolute value of these indi- agencies responsible for enforcing regulations per- cators in each country, which are often beyond the taining to safety and phytosanitary standards, secu- control of the customs services. For instance, the rity personnel responsible for keeping out economic cost per declaration16 in Albania in 2002 weapons, and traders who want to have fast and was US$24 compared to US$8 in Bulgaria. This cheap access to their goods. The adherence of each obviously deserves further analysis before conclud- of these stakeholders to the customs reform will ing that Albania’s customs services are three times determine its success. Any strategy should carefully less efficient than Bulgaria’s. More significant as an manage relations with each of these stakeholders, indicator of progress made is that these costs were bring them on board, and solicit their support. substantially higher in 2001: US$33 in Albania and Customs Administrations Staff The success of US$11 in Bulgaria. Similarly, the cost of collection the reform will stand or fall depending on the in 2002 was estimated at 0.85 percent in Croatia cooperation of the staff members or their implicit compared to 2.6 percent in Serbia, down from 1.6 or explicit rejection of the reforms. They should percent and 4.8 percent in 2001, respectively. A fur- “own” the reform. Customs staffs are responsible ther example of how efficiency criteria can be com- for the daily tasks of managing the trade processes. pared across countries is shown in figure 1.1, which They receive the import declaration, verify the data shows the number of declarations per staff per year provided, decide whether to physically inspect the for 10 Southeastern European countries. goods, decide on many of the details that determine the access that exporters have to duty-free importer 15. SITPRO is a U.K. nondepartmental public body for which inputs, and determine the speed with which these the Department of Trade and Industry has responsibility. It operations are undertaken, just to name a few. receives grant-in-aid from the Department of Trade and Indus- try. SITPRO is dedicated to encouraging and helping business trade more effectively and to simplifying the international trading process. Its focus is on the procedures and documentation 16. Total cost of the customs service divided by the number of associated with international trade. declarations. Strategy for Customs Modernization 17

BOX 1.1 Morocco Customs Gets Its Staff on Board for the Reform Program

The staff compensation issue provides a good • Staff members were reclassified according to illustration of Morocco’s efforts to bring its staff their qualifications and the backlog of promo- on board. tions was absorbed. • The bonus system was streamlined and • Management involved staff in the design of attempts are underway to gear them more the reform initiatives instead of relying on out- closely to staff performance. side service providers, and consulted staff on • Staff training was revamped and a detailed overall customs policy orientations. manual of procedures was provided online to • A new Intranet was created to inform staff of all frontline staff. A standard schedule of fines the details of the reform initiatives and how and guidelines that give staff greater assur- this would affect them. The Intranet also ance in their discussions with private sector assisted them in previously complex transac- traders was also posted online. tions such as vacation scheduling. • A staff attitude survey was launched and Source: Steenlandt and De Wulf 2004. measures are being taken to improve areas of staff concern.

Because they are the frontline implementers of the Improving overall compensation is critical. reforms, with manifold contact with traders or When salaries do not cover basic family expenses it their representatives, they impart an image of the is not surprising that staff members might enhance customs administration. (See box 1.1.) their incomes by other, at times illegitimate, means. Customs clearance activities are the responsibil- Recognizing this, several customs reforms have ity of customs officers who largely determine how substantially enhanced salary levels (chapter 2). these activities are undertaken. New procedures can One further example of associating staff closely be provided, automation installed, and integrity to the sometimes controversial aspects of customs proclamations made. However, in the final analysis, reform is the issue of how to make use of the serv- the services will only be as good as the staff that ices of a preshipment inspection (PSI) company provides them. For instance, when staffs reject a without creating the hostile or demoralizing envi- new IT system, they can boycott or even sabotage ronment that such cooperation often brings. Peru its introduction.17 Staffs will tend to buy in to the and Mauritania are good examples of PSI opera- objectives of the reform if they understand in detail tions being broadly accepted by customs staff. Such what this means for customs generally and for contracts function better if they are negotiated and themselves as individuals. Resistance to change fre- undertaken by customs administrations rather quently stems from mistrust and uncertainties; than if they are imposed on customs by the MOF thus, staffs need to be brought on board. For exam- on behalf of the national government (chapter 2). ple, when introducing risk-based inspections and strengthening post-release audits, it will be crucial Ministry of Finance The MOF is an important to show staffs what this will mean in terms of work stakeholder because of its interest in revenue mobi- processes, training, and so forth. However, one lization. Reform must give the ministry confidence should not expect good information to stop all that customs’ revenue generation potential will not opposition to reforms, as there will be winners and be undermined but enhanced. In particular, com- losers in any reform process. puterization brings better control over the documentary processing system, and ensures that all

17. This has occasionally happened with the introduction of transactions are recorded, thus improving the rate customs information systems—communications cables disap- of collection. Customs automation is expensive in peared overnight and power cuts affected computerized data terms of new software and hardware, improved capture at border locations (Central Europe), computer equip- communications equipment, and staff training. The ment was destroyed (Bangladesh in early 1990s), databases and computers were stolen (Africa); at one location the roof of the MOF would be favorably impressed if presented computer room was broken to let rain ruin the IT equipment. with evidence that automation would accelerate 18 Customs Modernization Handbook

customs clearance and thus portray a good image to society. The committee has an oversight respon- the outside world and attract FDI. However, what sibility over the implementation phase of the will convince the MOF to free up adequate budget- reforms. A first outcome was the donation by ary resources will be the assurance that revenue per- the semiconductor and electronics industry of the formance will be enhanced. One example is pro- hardware, telecommunications link to the BOC sys- vided by the Philippines, which freed budgetary tems, and front-end computers for its Automatic resources in 2003 because of the expectations that Export Documentation Systems. In Ghana, the cre- the reforms would lead to substantially higher rev- ation of the Ghana TradeNet (GCNet) benefited enues (Bernardo 2003). Also, the MOF will sub- from close private sector participation. In Turkey, scribe to selective physical inspection of cargo only the private sector built a number of border posts if it is convinced that the post-clearance audit func- and operated them under the Build, Operate, and tions are carefully designed and carried out. The Transfer model. same argument applies to the strict implementation However, not all private sector operators will of the ACV. fully support reforms. Clearly some derive advantages from the opacity within which customs oper- Private Sector Stakeholders Traders are the ations take place. Through bribery, private sector most likely supporters of customs reforms. They operators are at times able to reduce their import are the first to benefit from more transparent and tax burden, thus diminishing the benefits they speedier processes and are also the first to complain expect to derive from a more transparent and faster about ineffective and costly services. Engaging release system. In this connection, Pakistani textile them during the reform design and implementa- and garment exporters did not support the intro- tion and keeping them informed of its progress is duction of transparent methods to calculate draw- crucial. Professional associations have considerable back refunds, as this would eliminate subsidies political clout that not only can be mustered to embedded in the old refund system (OECD 2003). ensure that the budget provides the necessary support, but also can be used to pressure other govern- External Advice ment agencies to align their performances to that of improved customs performances. The private sec- There is much expertise worldwide in managing tor can also monitor progress and direct its focus to good customs services. Donors are eager to offer trade facilitation objectives. It may assist financially advice because improving customs services has a in the implementation of the reforms because it is high priority in their assistance programs. Multilat- among the first beneficiaries, as was the case in the eral and bilateral institutions, as well as private con- Philippines and Turkey. In return for this support, sulting firms, are active in this area. Often, the coor- the private sector can be formally consulted on dination of such advice is inadequate. Customs reform initiatives that would be of particular inter- advisers, coming from a variety of organizations, est. In Southeast Europe, “PRO-Committees” were are frequently unaware of earlier advice given on established in every country, under the South East the same subjects that they are called upon to con- Cooperation Initiative (SECI) and Stability Pact sider. At times their advice is repetitive or, worse umbrellas.18 They regularly review facilitation still, contradictory or inconsistent, thus ensuring issues, make recommendations for changes, and that it will either be ignored or poorly applied. lobby the appropriate government agencies. Obviously, a country may wish to ask for advice on In the Philippines, under the World Economic the same topic from various sources as part of a Forum (WEF) initiative, private sector contacts deliberate strategy, but would often gain if it were were formalized with the creation of a Local Stake- to coordinate such assistance more carefully. More- holders Steering Committee that works closely with over, rather than being demand driven, these the Bureau of Customs (BOC) on behalf of civil capacity building activities are often driven by the donor’s own agenda for geopolitical reasons or for the sake of spending a budget to secure next year’s 18. PRO-Committees consist of representatives of the private sector and the administrations involved in the cross-border allocation. Such support should be mobilized and, movements of goods. more importantly, coordinated by customs. Strategy for Customs Modernization 19

Often, TA is provided under projects aimed at structure is expensive. World Bank projects have the broader trade or transport development agenda. often moved into the tens of millions of dollars and World Bank support has been framed in the context even to more than a hundred million. Reform of civil service reform (Bolivia), export promotion expenditures should ultimately be self-financing (Bangladesh), revenue mobilization (Lebanon), through the improvement of revenue mobilization. or trade and transport facilitation (TTFSE in However, some expenses are exceptionally heavy at the Balkans). However, other support operations the outset of the reform, particularly those related focused single-mindedly on customs reform (sup- to the IT component of a project. Foreign financing port for Russia customs, chapter 7). While the Bank frequently covers these. is organized to lend to individual countries, there Maintaining and upgrading IT equipment is have been initiatives where a series of country proj- expensive, particularly in light of the short and ects were combined under a regional program (the shortening IT cycle. When financing to maintain TTFSE program, for example). This has resulted in and upgrade IT equipment is not adequately economies of scale, closer regional integration, use included in future budgets, it undermines the effi- of peer pressure to promote reforms, and sharing of ciency of the initial investments. In the Philippines, best practice models. It has also proven to be a cost- hardly any maintenance expenses were applied effective way of channeling technical assistance. after the installation of the IT equipment. The fre- The IMF has a long tradition of supporting cus- quent outages experienced led to severe service dis- toms reforms (Keen 2003). The IMF makes diag- ruptions and revenue loss, equivalent to several nostic assessments available, and assists govern- million dollars. The envisaged overhaul will be ments in the preparation and implementation of more expensive and disruptive of operations than reform strategies by providing long-term resident periodic maintenance and upgrading would have technical assistants. The WCO has placed at the dis- been. Similar situations have occurred in other posal of member countries an arsenal of capacity- countries. The key lesson from the experiences of a building initiatives, while the WTO provides sup- number of countries is to build relations with the port for introduction of the ACV. Bilateral agencies international institutions that can contribute to have also been active with advice and by stationing financing the large up-front costs, and to prepare customs experts in developing countries for the budget authorities for the significant annual extended periods of time. budget allocations required for the upkeep of the Providing TA is expensive, not only for the IT infrastructure. development agencies involved, but also for the recipient countries that often have to contribute to Collaboration with Other Government Agencies these assignments and allocate staff in support of the TA. There are indications that some of this Trade relies on the services of a large number of assistance has not been sustainable, in part because agencies and service providers, who are all partici- of a failure to effectively transfer knowledge, or pants in the trade logistics chain. Hence, a reform because what was transferred became inapplicable limited only to customs will be substantially less because customs was not receptive to the changes effective than if other agencies and service proposed.19 Developing countries and develop- providers were to enhance their performance too. ment agencies owe it to themselves to periodically At times, several agencies responsible for quality conduct critical reviews of the impact of their TA, standards undertake separate inspections and take particularly in terms of sustainability. samples to ensure that imports conform to local quality standards. This can add substantially to the Financing Plan cost of imports. A study found that, at least until recently, import verification and standards inspec- A full-fledged customs reform that includes tion (applied to 50 percent of all imports) in Egypt automation upgrades and communications infra- could add 5 to 90 percent to the cost of imports. These costs could have been drastically reduced if, 19. For instance, seminars on WTO valuation requirements are not effective if the customs organizations the participants come among other reforms, the Egyptian standards from are not equipped for the required changes. agency General Organization for Import and 20 Customs Modernization Handbook

Export Control would have accepted quality certifi- duction in Cameroon and Tunisia) clearly illustrate cations delivered by accredited certification compa- the efficiency gains to be obtained by connecting all nies and if local quality standards were aligned to participants in one tight system. internationally recognized ones. (See Nathan Asso- Probably the best way to involve these other ciates 1998 and 1996.) The agency in charge of agencies in customs reforms is to cast the reform nuclear safety is also frequently involved, as are the within the broader context of trade and competi- security forces, which at times insist on participat- tiveness reforms. Customs rarely takes charge of ing in each and every physical inspection of cargo. such reforms, but constitutes a core agency and can In some cases, border police officials insist on either play an active role in outreach to other agencies. In selecting the consignments for inspection by cus- any event, with many agencies involved, the reform toms on the basis of criteria unrelated to customs program should be a genuine government pro- risk management, or re-inspecting every shipment gram, rather than a customs or MOF program. It on the grounds of “fighting corruption in customs” should be one that attracts attention and active (which should be dealt with in another manner leadership from influential members of political anyway), or “combating smuggling” (which is not and civil society. In the absence of such leadership, their mandate). Transport agencies, ports, and air- the benefits of a customs reform will be more lim- ports often also represent weak links in the logistics ited than the economy deserves. chain. In theory, there is no reason why these different Implementation of a Customs agencies, each with their own legitimate concerns, Modernization Strategy could not join forces with customs in applying advanced risk profiling methodologies to reduce Implementing a customs modernization strategy intrusive inspections. The methodology would requires authority, dedication, progress monitor- involve selecting a limited number of shipments for ing, and adjustments to the strategy to take account inspection, focusing on those that present risks, of progress achieved as well as lessons learned. and releasing the others rapidly. In the process, the These elements are not different from those that methodology would institute an effective post- form part of the implementation process of any release audit control. (See chapter 5.) In developing other reform. A few brief suggestions may be in countries there are no examples of such coopera- order. tion yet, but the approach is gaining ground in several transition countries (Serbia for example). Leadership There is also evidence that discussions between customs and these other agencies are often stalled Dedicated leadership will help to ensure that the by jurisdictional rivalry. reform remains on the agenda of the various poli- Efficient customs operations also depend on a cymakers inside and outside customs. With the good legal environment and on the way judgments substantial workload and diverse emergencies that are rendered and enforced, on a banking system customs managers often have to deal with, it may that can provide guarantees and ensure timely pay- be best to assign the management of the reform ments, and on port and warehouse services that program to a dedicated customs official, assisted by operate efficiently if the improvements in time- a small team of experts. However, it is always the release that result from customs reforms are not Director General of Customs who should take the swamped by inefficiency on their part. In addition, lead, with strong support from the government. a good communications system is needed to inter- Foreign technical staff could become part of this connect the various customs offices, and to permit reform management team, but should not take a the gradual integration of the various participants leadership role except in special circumstances. into the trade transaction through the implementa- Their role should be to transfer knowledge, not tion of the “single window” concept. The advances to implement change. The practical shape of the made by Singapore and Mauritius in effecting such direct leadership position needs to adapt to local integration under the TRADENET initiative (also circumstances. Those given this assignment should being rolled out in Ghana and planned for intro- be recognized inside and outside of customs for Strategy for Customs Modernization 21

BOX 1.2 An Example of Regional Leadership: The TTFSE Regional Steering Committee

All the countries that borrowed from the Bank to • exchange information on national strategies, support their trade and transport facilitation including action plans, and review progress projects aimed, under a memorandum of under- • consider new applications for access to the standing signed in Skopje in 2002, to establish a TTFSE. Regional Steering Committee (RSC). The objec- The RSC now meets twice a year. Each coun- tives of the RSC are to: try is represented by a National Coordinator, • exchange information on border-crossing who can be either the Minister of Finance, or the operations Director General of Customs. When the National • review and consider obstacles to trade Coordinator is the Director General of Customs, • provide a forum for sharing results he or she is mandated by the government to • monitor pilot site operations and promote the speak on behalf of all other border agencies. establishment of local cross-border customs The RSC can also establish specialized work- and border agency committees ing groups (for example, IT exchanges of data), • cooperate with national and regional and can organize regional actions (like the joint trade professional committees (the “PRO- U.S. Customs—WCO workshop on risk manage- Committees”) ment in September 2003, or a self-assessment • consider policies and measures to implement on integrity, based on the WCO methodology, international standards in relation to customs in the fall of 2003). personnel (that is, the WCO’s Arusha declaration) Source: Michel Zarnowiecki, The World Bank.

their integrity and expert knowledge of customs this course of action because they focus on achieve- operations, should benefit from the backing of top ments rather than processes. customs management, and should have direct access to management. They should also ensure Involvement of Stakeholders outreach to the other stakeholders (box 1.2). Much is to be gained by keeping in close communication with all stakeholders to ensure that the Flexible Implementation reforms respond to their initial objectives and do not become part of the routine work of customs. The implementation plan is the key tool for moni- Periodic and well-prepared assessment meetings toring the reform process. It will have a detailed that are open to all stakeholders should take place timeline for implementation of the proposed to inform stakeholders of progress made, problems actions and will identify individuals to be held encountered, and measures proposed to address accountable for keeping to this timeline. Keeping slippages and changed circumstances. A periodic the program on track requires the various steps to stakeholder survey should be conducted to assess be monitored, implementation problems to be stakeholders’ satisfaction with the results of the detected early on, and corrective actions taken as reforms. This is the approach utilized by Morocco, necessary. Progress should be regularly communi- which annually undertakes a survey, publishes its cated to the head of customs, to the MOF, and to results, and reports on the measures that customs the Cabinet. Flexibility will be required, because management promises to undertake to address plans never work as scheduled and the unforeseen issues. In Southeast Europe, there is an annual user must be dealt with swiftly. The management team survey designed to measure user satisfaction, evalu- will need to be given sufficient flexibility to reallo- ate the level of corruption, and, in conjunction with cate resources or to have rapid access to managers the border performance indicators, validate and that have the authority to do so. Effectiveness indi- compute average costs and delays along the major cators and efficiency criteria play a crucial role in transport corridors. 22 Customs Modernization Handbook

Operational Conclusions • The reforms must be realistic. They must conform to implementation capacities and to Customs reform has absorbed large amounts of the support they receive at the political level. domestic resources from reforming countries Many experts know how a good customs service as well as TA and financial assistance from the should be run. The art is in drawing on this international donor community. A number of expertise and preparing an ambitious but observers do, however, agree that in many develop- pragmatic reform program that will enhance ing countries customs administrations are in need the effectiveness and efficiency of customs of further modernization and reform to deliver operations. effective and efficient services. Countries need to • Customs reforms need the leadership of cus- achieve adequate customs service standards if they toms’ top management, as well as the support of are to contribute to the competitiveness of the customs staff and other stakeholders. While economy, expand exportation activities, and attract an ownership approach by customs officials is FDI. The main messages of this chapter can be critically important, it is equally critical to bring summarized in the following points: all stakeholders on board at the planning stage • Good customs operations consist of coherent as well as at the implementation stage of the and interlocking sets of processes. Partial reforms. Stakeholders’ voices need to be heard reforms can improve some aspects of the serv- and the program needs to address their con- ices, but sustainable progress will only be cerns. Both the MOF, with its concern for rev- achieved when the reform positively affects the enue mobilization, and the private sector, various key elements of the customs processes. with its concern for trade facilitation, should be Coherence of the reform will be undermined if integral partners in the customs reform process. crucial parts of the customs processes continue Efforts to make them outspoken supporters of to operate under the older, dysfunctional sys- the modernization efforts are likely to prove tems. For instance, implementing the ACV, beneficial. without at the same time having a good post- • Political support for customs is essential for the clearance audit system in place, will not work as reform’s success. Reforming trade processes will intended. Reform projects that overly stress the challenge the status quo, where benefits are pro- implementation of advanced IT without prior vided to some, inside and outside of customs. streamlining of the trade processes themselves Opposition to the reform program is to be will likely fail, too. (Annex 1.E provides a check- expected. In some cases opposition will take the list of issues that deserve attention in preparing political route, in others the boycott route. Only a reform strategy.) support at the highest level will enable customs • Good diagnostic work is essential in identifying management to overcome anticipated obstacles. the shortcomings of the existing system, in Customs managers will need the explicit sup- defining the main strategies of the proposed port of the political leadership as well as access reform, and in mobilizing support. to top leadership. • The reforms should be “owned” by customs, • Using clear performance indicators to monitor whose responsibility it is to ensure the coherence the progress of the reform is essential, not only ofdonorsupport;suchsupportmustbeseenas to evaluating progress, but also to adjusting the temporary and must be delivered in such a way as reform measures to changing circumstances, to contribute to the sustainability of the reform. without losing sight of the big picture. Strategy for Customs Modernization 23

Annex 1.A.1 Customs Revenue as a Share of Tax Revenue in Selected Countries, 2001 (percent of total tax revenue)

Region or Country Region or Country

Africa 28.7 Middle East 22.3 Botswana 37.2 Bahrain 41.4 Burundi 18.4 Egypt 20.0 Cameroon 31.6 Iran, Islamic Rep. of 18.4 Côte d’Ivoire 27.6 Israel 0.9 Ethiopia 29.3 Jordan 20.4 Gambia, The 44.5 Kuwait 71.5 Kenya 16.8 Morocco 20.1 Lesotho 22.8 Oman 10.4 Mauritius 32.8 Pakistan 15.4 Rwanda 30.3 Syrian Arab Rep. 11.7 Sierra Leone 49.8 Tunisia 15.4 South Africa 3.0 Western Hemisphere 13.3 Asia and Pacific 14.9 Argentina 8.0 Fiji 22.7 Bahamas, The 50.1 India 24.1 Bolivia 6.9 Indonesia 4.7 Brazil 5.8 Myanmar 7.2 Colombia 8.5 Papua New Guinea 24.2 Costa Rica 6.6 Philippines 19.6 Ecuador 11.8 Sri Lanka 12.7 El Salvador 10.0 Thailand 3.9 Guatemala 12.4 Nicaragua 10.5 Panama 20.2 Paraguay 17.5 Peru 12.8 Uruguay 4.1 Venezuela, R. B. de 12.9

Note: For some countries, data are from an earlier year. Regional data are unweighted averages of countries in the sample. Source: World Bank estimates, IMF Government Finance Statistics. 24 Customs Modernization Handbook

Annex 1.B.1 Collected Tariff Rates for Selected Countries by World Region, 2001 (percent)

Region or Country CTR Region or Country CTR Region or Country CTR

All countries 9.5 OECD countriesa 1.1 Non-OECD 11.78 Middle East 12.5 Australia 3.5 Africa 16.8 Bahrain 3.6 Austria 0.4 Botswana 15.6 Egypt 18.9 Belgium 0.7 Burundi 16.6 Iran, Islamic Rep. of 28.1 Canada 0.9 Cameroon 26.9 Israel 0.8 Denmark 0.7 Cote d’Ivoire 18.4 Jordan 7.1 Finland 0.4 Ethiopia 15.7 Kuwait 3.2 France 0.5 Gambia, The 14.0 Morocco 16.7 Germany 0.7 Kenya 12.4 Oman 2.6 Greece 0.7 Lesotho 26.3 Pakistan 10.3 Iceland 1.2 Mauritius 10.5 Syrian Arab Rep. 38.9 Ireland 0.4 Rwanda 18.4 Tunisia 7.4 Italy 0.6 Sierra Leone 26.6 Japan 3.6 South Africa 3.2 Western Hemisphere 7.3 Mexico 1.9 Zimbabwe 13.1 Argentina 7.4 Netherlands 0.9 Bahamas, The 21.7 New Zealand 2.0 Asia and Pacific 10.5 Bolivia 4.1 Norway 0.9 Fiji 10.4 Brazil 9.4 Spain 0.2 India 23.3 Colombia 7.3 Sweden 0.6 Indonesia 2.2 Costa Rica 2.1 Switzerland 0.8 Korea, Rep. ofb 4.0 Ecuador 7.5 Turkey 1.4 Malaysia 3.2 El Salvador 4.9 United Kingdom 0.9 Myanmar 35.6 Guatemala 4.5 United States 1.7 Nepal 10.9 Nicaragua 3.1 Papua New Guinea 14.6 Panama 8.1 Philippines 6.0 Paraguay 6.1 Singapore 0.2 Peru 9.3 Sri Lanka 4.9 Uruguay 4.3 Thailand 10.0 Venezuela, R.B. de 10.4

CTR = collected tariff rates. Regional averages are unweighted averages of countries in the sample. Notes: For some countries, data are from an earlier year. For Mexico, free-on-board (FOB) imports were used instead of cost, insurance, and freight (CIF) imports. a. Excluding the Czech Republic, Hungary, Luxembourg, and Poland. b. The Republic of Korea joined the OECD in December 1996. Source: World Bank estimates, IMF Government Finance Statistics, and International Financial Statistics.

Annex 1.C Time-Release years, customs reforms were launched without Methodology proper assessment of their impact. Various customs authorities publish their release times and the One of the most widely used performance indica- WCO has issued a methodology to measure release tors to measure customs effectiveness is the time it times so that the findings are comparable across takes for customs to release goods.20 For many countries. The chain of processes that imports go through 20. This appendix was written by Gael Raballand, Economist, from the time of their arrival in a country to their Trade Department, World Bank. release can be shown in 11 discrete steps Strategy for Customs Modernization 25

BOX 1.C.1 The Steps to Release Goods from Time of Arrival

Steps Customs Participation

1. Arrival of the goods 2. Unloading of the goods 3. Delivery to a customs area, where goods are generally temporarily stored yes 4. Lodgment of the declaration yes 5. Payment of duties and duty discrepancies (can take place after step 9) yes 6. Acceptance of the declaration yes 7. Documentary control yes 8. Physical inspection yes 9. Control of other agencies such as standards or phytosanitary 10. Goods released by customs yes 11. Actual removal from the port, airport, or land border post premises

Source: Author.

(box 1.C.1). This articulation may differ somewhat context of the TTFSE (Trade and Transport Facili- among countries, but almost all the events are pres- tation in Southeast Europe) program. ent in every country. The type of goods being Without distinguishing the causes of the delay in imported also has an effect on the process being the release of goods, the TTFSE, for instance, followed. adopted a “black box” approach, measuring the Measurement of time release is a worthwhile time releases from arrival to physical release. This exercise as it can establish a pre-reform benchmark allows data to be compared across different coun- and thus help in assessing progress made by mod- tries in Southeast Europe, but is best used to com- ernization initiatives. In addition, it permits compare performance over time in a given country or parisons across countries, but only if the methodol- border station. This effectiveness measurement was ogy adopted is identical. complemented by other indicators that measured Two different approaches can be taken regarding the efficiency of customs operations such as the this issue: an overall trade logistics perspective and revenue collected per staff and the number of dec- a more customs-oriented perspective. larations per staff. Another approach for obtaining data on trade facilitation is through firm surveys. Such data are The Trade Logistics Perspective generally less reliable as they reflect subjective opinions about time release rather than objective meas- From the overall trade logistics perspective, it is urements. As a result, a large standard deviation important to take into account the whole process. among respondents results. Moreover, due to the Indeed, from an importer’s point of view, it is the costs of conducting this type of survey, they are overall time that the goods are detained before only available from time to time without any real release that affects the transaction costs. The meas- possibility of comparisons over time. One example urement should consider the time duration from of this type of study is the World Business Environ- arrival of the goods into the border post until they ment Survey.21 are physically released. This would measure the effectiveness of all operators involved in this transaction, including port authorities, warehouse man- 21. The World Business Environment Survey is the only large agement, control agencies, brokers, customs, the source regarding firm surveys’ time-release data. A large-scale survey of more than 10,000 firms was conducted in 80 countries banking sector, and so forth. Such an analysis was in 1999–2000 on many aspects of the regulatory environment undertaken in the Philippines, Japan, and in the (World Bank 2002). 26 Customs Modernization Handbook

The Customs-Oriented Approach between the different customs-related steps. To promote standardization of these measurements, The time-release study could detail the time it takes WCO issued a guide to measure the time release for each of the steps identified in box 1.C.1 for and the World Bank, in partnership with WCO, is which customs bears the sole responsibility. Such a developing software that will provide an objective study would suggest where bottlenecks exist and basis for this measurement (WCO 2002). The new how they can be eased by actions and initiatives in software is expected to be fully compatible with the which customs has primary authority. various automated customs management systems Some estimates of time release related solely to currently in operation. This tool should permit the customs are available, but they cannot be fully measurement of time-release data in a manner that compared across countries because of methodolog- would be fully comparable across countries. ical differences in their compilation. This is generally due to the local nature of customs procedures and a lack of harmonization of the measurement Some Illustrative Results methodologies. For instance, in Bolivia, time measurement starts when the declaration is lodged in Time release may differ among different types of the ASYCUDA system even if the broker could have products, depending on what control agencies are arrived many hours earlier and may have tried to involved, port of entry (airport or seaport), coun- submit his declaration, but with errors. In the case try of origins, and which verification channels of the Philippines, the first step measured is “the (green, yellow, or red) the goods are assigned to arrival to lodgment,” which includes the unloading after risk analysis has been performed. The whole as well as the processing and issuance of the import logistical process can be assessed, and detailed cus- permit by noncustoms agencies. This step is, by far, toms-oriented information can be compiled. the longest step in the Philippine procedure: 60 In the case of the Philippines, the study calculates percent of the total release time in the case of sea- release time for goods that enter using different port and 72 percent in the case of airports is taken verification channels (green, yellow, and red lanes), up by the time lapse between the arrival of the broad commodity classifications, commodity goods and the lodgment at customs. It is unclear value, country of origin, arrival location (port or whether this delay is due to port inefficiency or to airport), mode of payment, VAT exemption, exemp- other controlling agencies’ involvement. tion from payment of duties, lodgment days, mode To disentangle the responsibility of various of lodgment (electronically or not), and period of actors within customs, one could measure the time lodgment (UPECON 2003). (See box 1.C.2.)

BOX 1.C.2 The Philippines Time-Release Study: An Example to Follow

The Philippine customs authority has published This type of study can also raise issues for fur- detailed data on time release. The study distin- ther inquiry. For instance, by country of origin, guishes differences along selectivity status (color Chinese goods should take longer to release lanes), commodity class, commodity value, than goods imported from ASEAN countries due country of origin, arrival location (port or air- to the fact that most Chinese goods enter the port), mode of payment, VAT-exempted or not, red lane and there is preferential treatment for exemption from payment of duties, lodgment imports from ASEAN countries due to member- days, mode of lodgment (electronically or not), ship in the Asian Free Trade Association (AFTA). and period of lodgment within a day. On the contrary, it was found that the time to In most cases, intuitions were confirmed. For clear goods from ASEAN countries is longer than instance, time release in ports is longer than in for goods coming from China (136 hours com- airports, and textile products and motor vehicles pared to 98 hours). The total customs process- are cleared faster than food items (102 and 109 ing time was shorter for Chinese goods in com- hours respectively, compared to 119 hours, parison with ASEAN goods (23 hours instead of probably because of the intervention of control 35 hours). agencies). Source: UPECON 2003. Strategy for Customs Modernization 27

Several other studies suggest that time release Annex 1.D Physical Inspection as differs for different types of products. For agro- an Element of Risk Management products, time release was almost 40 percent Thereisatendencyinrecentcustomsprojectsto longer when controlling agencies (other than cus- use the rate of physical inspections as a short- toms) are involved. The port of entry also affects hand indicator for trade facilitation. Doubtless, time release as airports are usually better organized the trading community likes this indicator and than seaports, and can handle different categories wants to see it drop, as physical inspections can be of cargo that tend to make cargo clearance less intrusive, time consuming, and costly. Yet, the rate complicated. In the case of Tema port in Ghana, it of physical inspections should only be thought of was calculated that 44 percent of the clearances as a valid performance indicator when considered occur within two days whereas at the airport 90 in the wider context of risk management used on percent of the goods were cleared in 24 hours. Even the part of customs. At the margin it is possible to among ports in the same country, time release can have no inspections and maximum trade facilita- differ. In Morocco in September 2003, it was tion, at the cost of serious revenue erosion. This reported that the average time release was 31 min- annex provides some further clarification on the utes at Tangier port, but 50 minutes at Agadir port use of risk management in the context of physical (Morocco government). In Bolivia, it was assessed inspection of cargo, and can also be read as a that between the most efficient border post (Pisiga, complement to chapter 5. A fuller treatment of at the Chilean border), and the least efficient this subject can be found in the WCO Risk (Yacuiba, at the Argentinean border), the average Management Guidelines that can be found at time release was almost 30 times lower in Pisiga www.wcoomd.org. than in Yacuiba (Mendora 2003). On the basis of The rate of physical inspection is only one of a this study, customs authorities identified some set of risk containment strategies and should be administrative measures to streamline the process evaluated in the context of other strategies such as in some border posts. anti-smuggling, valuation, or rules of origin The Bolivia study also identifies differences in inspections. While physical inspection plays a role clearance time by the types of inspections to which in these strategies, much of the risk containment goods are subject. After lodgment declaration, three strategy will depend on other customs interven- possible actions have been defined: green for tions, many of which can take place after the goods immediate release, yellow for documentary control, have been released. and red for physical inspection of goods. From a The rate of physical inspection may be useful as survey conducted from January to June 2003, aver- a performance indicator if applied in conjunction age time release for a cargo assigned to the green with the performance of revenue mobilization. A lane was 39 minutes, 49 minutes for the yellow lane, reduction in the rate of physical inspection that and 71 minutes for the red lane. coincides with a stable or improved revenue performance suggests that trade facilitation (implied by the lower inspection rate) did not come at the Conclusion expense of revenues. It suggests that the inspection Time-release data represent a powerful perform- rate is targeted at the most risky shipments and is ance assessment tool that enable the measurement well executed, involving more than just opening the of the effectiveness of customs services and the tailgate of a container. Inspections, of course, can monitoring of progress. be better conducted if they are fewer and under- They permit the creation of a detailed diagnostic taken by better-trained staff. of the time it takes to process goods and an examination of differences across different types of com- Selectivity in Physical Inspection modities, ports, and import regimes. They may also contribute to the monitoring of the impact of any The use of selectivity for cargo inspection is only an customs reform. In addition, they can help to iden- application of the general principle of selectivity in tify potential corrective actions. control at the border, for documentary control, or 28 Customs Modernization Handbook

for post-clearance audits. The principles involved provisions. Ratings in between convey the degree are the same and consist of establishing a combina- of risk of the transaction to customs objectives tion of risk indicators, weighing them, and, finally, and alerts customs to the degree of care that is applying them systematically to trade transactions recommended to minimize these risks. A refined to select those transactions that are to be subjected search of the risk coefficient can also provide the to a particular type of control. This combination of main reason for the particular risk coefficient risk indicators can be called a risk profile. rating and the particular control that should be The quality of the risk profile depends, of activated. Such controls may include physical course, on the data that are used to draw up the inspection. profile. Intensive use of IT and data mining has, in Using the IT system, customs can gear its level of recent times, greatly enhanced the possibility of inspection to the risk that it is willing to accept in preparing relevant profiles. Modern IT can period- clearing goods. If customs decides that it can accept ically update the risk profiles of transactions to a 5 percent risk that the goods violate a regulatory ensure that profiles adjust to changes in trade pat- prescription, only those transactions that the terns or to seasonality (for example, in Morocco the model suggests would exceed this level of risk will risk profile is adjusted during periods prior to be inspected. Analysis and experience will suggest Ramadan when large amounts of luxury food what overall level of inspection this entails. With products are imported). However, these profiles everything else constant, striving for lower levels of cannot be better than the data on which they are inspection implies accepting higher degrees of risk. based. These data are drawn from customs declara- These tradeoffs can be calculated using modern IT tions (HS, value, origin), tariff rates, and inspection systems. The model that activates the transaction- results. Only when these data are available can a specific selectivity decision can be easily made to systematic risk profile be established. Even then, the interface with the existing automated customs incidence of smuggling and bribery are not repre- management systems, hence making the applica- sented in these databases, suggesting the data’s lim- tion of risk management techniques a matter of itations. Many customs administrations do not customs routine. have these data or do not have them in a format that can be extracted properly. Evaluation of the Selectivity Model Risk coefficients for particular shipments are determined by, among other factors, the classifica- The performance of the selectivity model should be tion of goods, origin of the goods, the traders monitored and evaluated on an ongoing basis. This involved, and the mode of transportation. Certain implies that the inspection reports would be vali- tariff lines attract high duties and there is a risk dated and systematically entered into the IT system that traders will record erroneous classification or and compared to the inspection reports of transac- undervalue the goods to reduce their duty liabil- tions selected on a random basis. Only when the ity. Some goods originate in countries that attract inspections based on the selectivity model yield preferential rates, prompting some traders to fake better results than the inspections based on ran- the origin of their imports. Some countries of ori- dom sampling does the model make a valuable gin or transshipment have a record of providing contribution to risk management. This applies to fraudulent, or doctored invoices. Some traders physical inspections as well as to other control have a documented track record of infractions instruments. while others have given proof of good fiscal behavior and have no or minimal recorded viola- Conclusion tions of the Customs Code (authorized traders). Customs can apply this computer-generated risk The rate of physical inspection may be a useful per- profile to individual shipments and assign a risk formance indicator if used in conjunction with coefficient on a scale of 0 to 100. Zero means that other performance indicators. In all cases, this rate the transaction involves no risk to any of the must be analyzed along with revenue performance customs objectives and 100 means that the trans- during the period when the physical inspection action is certain to contravene some regulatory rates change. Strategy for Customs Modernization 29

Much would be gained if, by focusing on this wants to go, and phase a strategic action plan performance indicator, project managers and poli- that is not a shopping list. cymakers were to address the complex issue of risk • Validate the strategy either at the level of the management more forcefully. Minister of Finance or at other government levels. • Identify signals of political commitment, includ- Annex 1.E Checklist of Guidelines ing a sustainable financing plan (both national to Define a Customs Modernization Strategy budget and donor funding) that will be crucial for the sustainability of the reform. The following guidelines can be useful in develop- • Ensure that all other stakeholders (for example, ing and managing a customs modernization other ministries or agencies and private sector strategy. representatives) are on board.

Identify the Main Components of the Moderniza- Check What the Other Donors Are Doing tion Based on the Findings of the Diagnosis • Develop a matrix of donor intervention and • Determine the focus of the reform, key meas- plans. ures, phasing, and sequence. • Carry out a summary gap analysis in terms of • Identify departments within customs or outside outside support for the reform. agencies affected by the process. • Identify areas that need to be the focus of the • Decide whether the problem involves reorgani- forthcoming initiatives and request for external zation or staffing issues and identify the key support. strategic steps to deal with these organizational • Establish a donor coordination mechanism. and human resources issues. Appoint a Change Management Unit Describe the Enabling Environment • Designate staffs or an organizational unit that • Develop a matrix showing, by core function, will monitor the entire modernization process. who is in charge of which activity. In particular, • Identify a champion that is committed to the the matrix should take into account what activi- reform and is well connected with the various ties are to be undertaken by customs. These stakeholders. should include activities dealing with organiza- • Ensure that staffs responsible for implementing tion, personnel, clearance, brokers, transit, IT, the reform are released from their other duties control, prosecution, transport, insurance, and and have adequate accommodation. financial practice. The matrix should also • Establish a project steering committee, includ- include, in addition to those activities under- ing other donors and private sector representa- taken by customs, those that are undertaken by tives. other government departments and agencies such as finance, commerce, transport, interior, Further Reading industry, health, justice, Chamber of Commerce, The word processed describes informally reproduced works that and foreign affairs, as well as activities under- may not commonly be available through libraries. taken by the private sector and those resulting Inter-American Development Bank. 2001. Customs Best Practices from international agreements. in East Asia and Latin America. Washington, D.C. • Develop a process flow chart showing the inter- Keen, Michael, ed. 2003. Changing Customs: Challenges and Strategies for the Reform of Customs Administration. actions between agencies and points of friction. Washington, D.C.: International Monetary Fund. Lane, Michael. 1998. Customs Modernization and the International Test the Commitment of the Government Trade Superhighway. Westport, Conn.: Quorum Books:. World Customs Organization. 2003. Risk Management Guide. or the Administration Brussels. www.wcoomd.org/ie/En/search/search.html. ———. 2003. “Capacity Building in Customs.” Brussels. • Organize a brainstorming session within cus- Processed. www.wcoomd.org/ie/en/Past_Events/Past_events toms to determine where the administration .html. 30 Customs Modernization Handbook

References Volume I. Prepared for the Government of Egypt. Arlington, Va.: Nathan Associates Inc. http://www.economy.gov.eg/ The word processed describes informally reproduced works that Download/02)%20Quality%20Control%20System/ may not commonly be available through libraries. Quality%20Control%20System-English.pdf. APEC Economic Committee. 2002. “Measuring the Impact of ———. 1998. “Pilot Study for Pre-certification of Imported APEC Trade Facilitation on APEC Economies: A CGE Products.” Study Prepared for The General Organization for Analysis.”Singapore. Export and Import Control. Ministry of Trade and Supply, Barbone, Luca, Luc De Wulf, Arindam Das-Gupta, Anna Government of Egypt. Arlington, Va.: Nathan Associates Inc. Hanson. 2001. “World Bank Projects in the 1990s with Tax www.economy.gov.eg/Download/07)%20Pre-Certification% or Customs Administration Reform Components: A 20of%20Imports/Pre-Certification%20of%20Imports- Review.” Tax Policy and Administration Thematic Group. English.PDF. Washington, D.C.: World Bank. econ.worldbank.org/docs/ OECD. 2003. Trade Facilitation Reforms in the Service of Develop- 964.pdf. ment. Trade Directorate, Trade Committee. Document num- Bernardo, Antonio. 2003. “Trade Enhancement Initiatives in the ber TD/TC/WP (2003) 11/Final. Organisation for Economic Philippine Customs Service.”Presentation at the World Cus- Co-operation and Development: Paris. toms Organization 101st/102nd Session of the Customs Raven, John. 2001. “Trade and Trade Facilitation, A Toolkit for Cooperation Council. June 26–28. Brussels. Audit, Analysis and Remedial Action.” World Bank Discus- Ebril, Liam, Janet Stotsky, and Reint Gropp. 1999. “Revenue sion Paper No. 427. Global Facilitation Partnership Implications of Trade Liberalization.” IMF Occasional Paper for Transportation and Trade. Washington, D.C.: World 180. International Monetary Fund: Washington, D.C. Bank. Gill, J. B. S. 2000.“A Diagnostic Framework For Revenue Admin- Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In Luc istration.”World Bank Technical Paper No. 473. Washington, De Wulf and Jose Sokol, eds. Customs Modernization Initia- D.C.: World Bank. tives: Case Studies. Washington D.C.: World Bank. Hinkle, Lawrence, Alberto Herrou-Aragon, and Keiko Kubota. UNECE (UN Economic Commission for Europe). 1982. “Inter- 2003. “How Far Did Africa’s First Generation Trade Reforms national Convention on the Harmonization of Frontier Go?” Africa Region Working Paper Series, No. 58a. Control of Goods.” Inland Transport Committee. Geneva. Washington, D.C.: The World Bank. www.unece.org/trans/conventn/harmone.pdf. Holl, John. 2002. Customs-related Technical Assistance for Trade UPECON Foundation. 2003.“The Study on Measurement of the Capacity Building. Nathan Associates report prepared for the Time Required for the Release of Goods in the Republic of USAID. Arlington, Va. the Philippines.”Manila. Processed. International Chamber of Commerce. 2002. “Customs Guide- World Bank. 1996. “Global Economic Prospects and the Devel- lines.”www.iccwbo.org. oping Countries: 1996.”Washington, D.C. Keen, Michael, ed. 2003. Changing Customs: Challenges and ———. 2002. World Business Environment Survey. Washington, Strategies for the Reform of Customs Administration. Wash- D.C. www.worldbank.org/privatesector/ic/ic_ica_resources ington, D.C.: International Monetary Fund. .htm. Lane, Michael. 1998. Customs Modernization and the Interna- ———. 2003. Global Economic Prospects 2004: Realizing the tional Trade Superhighway. Westport, Conn.: Quorum Development Promise of the Doha Agenda. Washington, D.C. Books. ———. 2004. “TTFSE Progress Report 2003.”Washington, D.C. Mendoza, Jaime, and Jose Eduardo Gutierrez. 2003.“A Methodol- www.seerecon.org/ttfse ogy to Measure the Time Required for the Release of Goods.” WCO (World Customs Organization). 2002. “Guide to Working Paper 01/03. Aduana Nacional de Bolivia. Bogota. Measure the Time Required for the Release of Moroccan Government. Administration des Douanes et Impôts Goods. Brussels.” www.wcoomd.org/ie/En/Topics_Issues/ Indirects. Délai de dédouanement, available at www.douane. FacilitationCustomsProcedures/facil_time_release_study. gov.ma (click on Universitaire, then Chiffres clés). htm. Nathan Associates. 1996. “Findings, Conclusions and Recom- ———. 2003. Risk Management Guide. Brussels. mendations.” Research of the Quality Control System in Egypt, Zarnowiecki, Michel. The World Bank. 2

HUMAN RESOURCES AND ORGANIZATIONAL ISSUES IN CUSTOMS

Luc De Wulf

TABLE OF CONTENTS Further Reading 49 Human Resources: An Organization Is Only References 49 as Good as Its Staff 32 Customs Organization and Organizational LIST OF BOXES Placement 36 2.1 Staff Renovation in Bolivian Autonomous Revenue Authorities 40 Customs 34 Management Contracts 44 2.2 Denmark: Integration of Customs and Tax Operational Conclusions 46 Administration 39 Annex 2.A Human Resources Checklist 47 2.3 Revenue Targets and Autonomy: Illustrations Annex 2.B Management Contracts Checklist 48 from Tanzania and Uganda 42 Annex 2.C Checklist for Autonomous Revenue Agencies 48

Customs is a unique organization among govern- ronment; protecting (for better or for worse) domes- ment agencies in that it is neither a domestic agency tic industry and collecting revenue to support the nor an international agency. It is poised on the inter- government. It must be aware of the border implica- national borders,1 not only as an expression of a tions of national priorities concerning domestic nation’s sovereignty, but also as the nation’s guard crime,immigration,labor,the economy,and agricul- against external threats to health,safety,and the envi- ture.At the same time,it must maintain an awareness of international issues and their potential impact on

The contributions of Michael Lane and the assistance of Melanie the nation, and it must be knowledgeable about Faltas are gratefully acknowledged. national obligations to trade and transport treaties 1. At a different plane, the “international” position of customs is and conventions. In many ways, customs organiza- due to two factors. It deals with international trade and, in doing tions relate more closely with their counterparts in so, follows internationally agreed on methods, practices, and other countries than they do with other agencies in instruments. It is the commonality of their vocational practices, a shared understanding of concepts, and an obligated harmo- their own government. They frequently look to cus- nization of processes and procedures that makes customs inter- toms administrations internationally and in neigh- national. A substantial part of customs legislation is developed boring countries for assistance and for ideas on how in multilateral organizations like the World Customs Organiza- tion (WCO) in the form of conventions. In many cases, domes- to improve operations or enforcement, as well as to tic legislation conforms to these international conventions. exchange information on emerging threats. 31 32 Customs Modernization Handbook

The first section of this chapter deals with the • training incumbent staff to maintain skill levels modern management of human resources (HR) in • ensuring that the compensation package enables customs. The second section addresses issues related customs to motivate and retain staff to the more traditional customs organization, while • ensuring that poor performance and integrity the third and fourth sections discuss two recent failures are promptly sanctioned. organizational issues that have received considerable attention in recent years: Autonomous Revenue Authorities (ARAs) and management contracts. Staff Profile The final section provides operational conclusions A modern customs administration needs to define and recommendations. The annexes provide check- the profile of its desired staff. The general educa- lists for issues of human resources management, tional background of all staff should be sufficiently management contracts, and ARAs. high to ensure that they can acquire and maintain the skills required by a customs service. Such skills Human Resources: An Organization are bound to change over time and will increasingly Is Only as Good as Its Staff require expertise in accounting, intelligence gather- Good management of human resources is probably ing, finance, investigation, analysis, training, plan- the single most important issue that affects the effi- ning, and HR management. All these functions will ciency and effectiveness of customs, irrespective of increasingly adopt procedures that rely heavily on its organizational structure. This cannot be overem- the use of IT. Modern workflow analysis should be phasized as all aspects of customs management and used to determine the desired distribution of per- customs clearance, including the application and sonnel across the various skill categories. maintenance of modern information technology Some of the major services required of customs, (IT), will require that staff is qualified to operate the and the professional qualifications essential to ful- existing systems efficiently and to prepare the exist- filling these requirements, include the following: ing services for the introduction of new processes and techniques. In doing so, staff must be attuned to • Enforcement of domestic laws and regulations at developments in international trade logistics and borders. These laws and regulations should com- must adjust to shifts in emphasis with respect to ply with all international customs conventions customs’ mandate. and standards to which the country has sub- Historically, customs work consisted of the scribed. Hence, staff should stay informed about manual labor of inspecting cargo, vessels, and pas- developments in international trade negotia- sengers, and patrolling long stretches of border tions and the requirements of globalization. Staff between ports of entry. Customs management was need adequate legal expertise to internalize the close to higher ranking government officials, while developments in the trading and international its staff was often poorly educated, trained, and customs community and to translate them into compensated. This arrangement undermined pro- domestic legislation. fessionalism and integrity in customs. • Implementation of modern customs clearance Increasingly, government services are being held processes. With heavy IT input, modern risk to higher standards. The imperatives of a globalized assessment is based on modern intelligence economy on customs have become clear. A modern gathering techniques to facilitate trade and to be customs administration, responsible for protecting attuned to private sector trade logistics and representing the government at its country’s advances. Expertise is required in IT as is the borders and ports, must use a professional work- ability to perform risk analysis and post- force and an enabling technology to accomplish its clearance audits. mission. Managing human resources at customs • Maintenance of open communications with the can be broken down into several phases: trading community. Customs must ensure that the trading community has full information • defining the desired staff profile regarding its obligations and that the trading • establishing a recruitment process that ensures community’s views are taken into account in that customs has the desired staff on board decisionmaking at customs. Communication Human Resources and Organizational Issues in Customs 33

skills are required, but operational interface with tised jobs. Potential recruits should be subjected to the trading community must be conducted at stringent background investigations performed by arm’s length. trained investigators who might interview neigh- • Enforcement of laws relating to intellectual prop- bors, associates, and previous employers. Checks of erty rights, security, drug trafficking, and, eventu- police records should be performed, as well as credit ally, labor and human rights. While labor and and bank account checks to assess the extent and human rights may not be the national priority, sources of income. Entry requirements would the need to enforce such legislation may emerge include testing for the specific skills and aptitudes. depending on the outcomes of future trade Human resources management staff in customs negotiations. This requires the capacity to inte- could undertake these tasks in-house or could turn grate the agendas of other agencies into customs to recruitment professionals. New recruits should procedures. be advised that a career in customs involves rotation • Collection and dissemination of international to enhance multifunctionality and to avoid the trade statistics requires IT expertise and an development of potentially unsavory relationships awareness of the importance of statistics for eco- with the local trading community.3 New recruits nomic decisionmaking. with no prior experience in customs-related work • Management of customs’ HR requires sound should undergo intense training and testing to pre- human resources management and human pare them for their new assignments. If successful, resources development expertise. they should undergo a probationary period before being confirmed as customs staff. Such probationary periods often last a full year, during which the Recruitment employee can be terminated for unsatisfactory per- Adjusting the existing staff profile to the desired one formance or disciplinary problems without the is frequently a gradual process. As the older staff complex recourse to appeals and administrative tri- retires, new staff has to be recruited not only for bunals. Following this probationary period and sat- replacement but also to provide for any expansion in isfactory performance evaluation, the trainees service. The recruitment effort should be a system- should be confirmed. Relying on transparent per- atic one and could involve the announcement of job formance criteria aids supervisors and enhances the vacancies. Such announcements should clearly state transparency of the recruitment process. the desired qualifications of the new staff, such as Most customs organizations traditionally rely on academic background, previous work experience, the recruitment of young candidates who are then and so forth, and should clearly describe the recruit- schooled in the best practices of the customs service ment process. Transparency in the recruitment through a combination of academic and on-the- process is important as this will set the standard for a job training. However, modern customs practices new career at customs and curb the tendencies for require staff to possess expertise that cannot easily be favoritism and clientelism that often plague recruit- attained through training within the customs ment in the public sector.2 Public advertising of service. Expertise in IT and in accounting, which are vacancies as well as participation in job fairs and vis- increasingly required to perform post-clearance its to schools of higher learning are recommended audits, are only two examples. Recruitment proce- to ensure that qualified people apply for the adver- dures and compensation scales need to be sufficient to attract staff with these specialized skills. When qualified applicants are not available, it is possible at 2. As was the case in the 1880s in the U.S. Customs, it is known times to sidestep these civil service restrictions by that potential candidates for positions in customs in some countries have paid for the appointment at prices that at times were a offering attractive consultant contracts.This practice multiple of the annual salary. In Bolivia, for instance, before the has its downside though,as it could easily demoralize recent reform, some customs officials worked “pro bono” and customs staff in general and could present the prob- compensated themselves in the process of executing their tasks. High-level officials also are known to have interfered frequently lem of staff continuity in specialized assignments. in the appointment of family members or members of their ethnic groups—practices that undermine the recruitment process and create allegiances that are alien to the performance of the 3. In both Zambia and Morocco, for instance, staff rotation has duties of customs officials. become part and parcel of a career in customs. 34 Customs Modernization Handbook

The process of retirement and the recruitment Box 2.1 provides some details of the process fol- of new staff will be a slow one if desired profiles of lowed in Bolivia. new staff differ substantially from the profile of those still on board. At times management may Training want a faster staff reprofiling. This was the case when ARAs were introduced and drastic changes in In-service training should be a major responsibility staffing were undertaken. (Details are provided of the HR team at customs. The demands of global- in the Autonomous Revenue Authorities section.) ization and the rapid adoption of IT in the various

BOX 2.1 Staff Renovation in Bolivian Customs

Prior to reform, staffing at Bolivia’s customs toms officers; quantifying staff requirements, set administration was characterized by a large at slightly over 700 officers, of which 575 posi- number of pro bono personnel working without tions were open for application; and defining a specific position or salary, appointments based job profiles with minimum requirements of edu- on political recommendations rather than on cation, experience other than previous customs individual merit, high turnover of personnel, low experience, and personal qualities. There were salaries, and an absence of training. As part of various evaluations of the candidates: curricular the government’s overall reform of its whole evaluation; technical and psycho-technical eval- administration, customs was selected as a pilot uation based on tests; and integral evaluation on the basis of the recently adopted Civil Service through interview. A minimum score was estab- Statute and Civil Service Program. Human lished for each position. Candidates were also resources management reform was an essential screened to eliminate those who, as former or element in helping customs become an efficient current officers, had been found guilty of violat- and transparent organization, while significantly ing internal customs regulations or of commit- reducing corruption. ting a felony. Once tests were graded, a short list The selection and hiring of personnel was to of applicants to be interviewed was established. be based on transparent and competitive Following completion of the process, a report processes. All positions became open to public that included a short list of candidates with sum- competition; all positions filled by staff who maries of the results obtained in each of the were not competitively selected were given pro- examinations for each finalist was provided to visional status; all pro bono staff positions were customs to assist in making final evaluations. A eliminated. Specialized firms were hired through final evaluation was conducted through a struc- public bidding to undertake the selection tured interview with the purpose of validating process. Customs benefited from the prestige of the information provided by the consulting firm, the independent firms, and misgivings concern- verifying that all requirements had been met, ing the transparency of the process were and determining the candidate’s suitability for a avoided. At the same time the HR Department specific position. The final evaluation was carried developed a new market-based wage system out by a committee selected by the Board of that offered competitive salaries. Directors, which submitted a report that Openings for top and medium level positions included recommendations to the Board of were published on October 30, 1999, and for Directors or General Management. Appointed professional and technical positions on April 16, staff members were required to undergo an 2000. The outcome of the first opening was evaluation period of three months before start- negatively affected by lack of appropriate pub- ing an administrative career. licity and effort (which held the number of appli- All in all the process attracted 12,563 applications below expectations), the wrongful elimi- cants, with 8,763 candidates fulfilling all require- nation of a number of applications for border ments; 2,718 candidates passed the technical positions, and the unreliable software system and psycho-technical tests; and, following inter- used. Because many positions remained unfilled, views, 1,653 were short listed, 87 percent of a third opening for top level and technical per- whom were selected to join the customs admin- sonnel was issued on January 14, 2001. istration. The selection process required a series of prior actions: defining the ideal profile of cus- Source: IDB 2001. Human Resources and Organizational Issues in Customs 35 aspects of customs operations make ongoing train- civil service pay scale. Frequently, fiscal stringency ing an absolute necessity. Experienced customs has caused this pay scale to lag substantially behind officers should be teamed up with professional the prevailing pay scale for equally qualified staff in trainers to offer such training. the private sector. This situation discourages staff In modern Customs, many promotions depend and often leads them to seek out facilitation money. on successful completion of well-defined training It is not unusual for the most valuable staff mem- programs and all staff must undergo annual train- bers to leave the service, often to use their acquired ing, agreed on with the HR department and with knowledge to work as brokers. Inside knowledge of direct supervisors. Supervisors are evaluated with the customs service and familiarity with customs respect to the implementation of the agreed on staff can both facilitate trade formalities for their training of their staff. Special training academies customers, and potentially undermine integrity. can be appointed for this purpose on a national or The integrity risk has led some countries to prevent regional basis. Full advantage should be taken of customs staff from providing customs brokerage the training provided by bilateral agencies, the services for several years after ending employment WCO, and even preshipment inspection (PSI) with customs. companies, whose contracts often specify training A partial solution to the salary scale rigidities is obligations.4 to provide bonuses to staff. While many customs services pay bonuses, only a few pay them in a way that enhances effectiveness and efficiency. To do so, Staff Compensation bonuses must be large enough to begin to bridge Staff compensation is a crucial factor in HR man- the gap between what private sector workers earn agement. It should be sufficiently high to attract and (discounted for the job security in the public sec- retain staff with the necessary qualifications to start tor), and satisfy a number of stringent criteria. work at customs. However, overall staff salaries are Bonuses must have internal and external legiti- often inadequate and the difference between the macy, and be objective, transparent, and easy to compensation of management and lower level staff administer. In addition, they should be SMART, is much narrower than what prevails in the private that is, specific, measurable, achievable, relevant, sector.5 While compensation is not the only moti- and timed (De Wulf 2004). However, ensuring that vating factor for doing a good job, it certainly ranks performance evaluations provide for adequate high.6 Developing esprit de corps and pride in the differentiation of staff performance is not easy. In office are complementary motivators that are often Morocco, for instance, where a fully satisfactory not sufficiently emphasized. In recent years, for note leads to payment of a bonus that equals example, Moroccan customs has paid special atten- 100 percent of base salary, the great majority of tion to this factor and this initiative appears to have staff members receive an evaluation report that had some benefits.7 qualifies them for the maximum bonus amount. In most cases customs does not have much flex- Internal legitimacy requires that customs staff ibility in setting salary levels and must adhere to the perceive the bonus system to be distributed justly, without favoritism, with transparency, and with

4. In Ghana, the service agreements of the companies undertaking possibilities for appeal. External legitimacy refers to Destination Inspection Services include the delivery of a training the acceptability of the bonuses outside customs, a program for the customs staff. That this program was signed with requirement for allocating the necessary budget the Ministry of Trade and Industry and not with customs compli- resources that pay for these bonuses. In the absence cates the integration of the training with other similar customs initiatives. Even worse, it may undermine any initiative of customs of either internal or external legitimacy, the bonus to take full responsibility for its training program. system will not be sustainable. In Ghana, for 5. In Nepal, for instance, salaries of customs staff are only one- instance, the higher salaries that customs staff third those paid in the private sector; the base salary of the received when the ARA was created could not be Director General is only 150 percent higher than the starting salary of a gazetted officer. sustained because of opposition from other civil 6. Interesting background on this issue can be found in Van servants. It would appear that the strict conditions Rijckeghem and Weber (1997). that need to be fulfilled for bonuses to compensate 7. For details see Steenlandt and De Wulf (2004). for low salaries pose substantial challenges for 36 Customs Modernization Handbook

design and implementation, making such systems compensation—will play the determining role in risky and in need of close monitoring. countering integrity problems. However, experi- An alternative to providing substantial bonuses ence has shown that this is not sufficient to com- would be to put revenue staff on a higher pay scale pletely eradicate corrupt practices. Hence, any HR than the rest of the civil service, in light of the cru- policy must clearly spell out how to deal with these cial importance that resource mobilization plays in issues. Chapter 4 deals explicitly with the issue of running the government. Better pay would also integrity in customs, so some brief remarks must protect customs staff somewhat against the tempta- suffice here. Staff should be made fully aware that tions of accepting bribes from traders.8 A higher corrupt practices and slacking behavior will not pay scale would need to be combined with overall be tolerated. Disciplinary actions could be made customs reforms that provide guarantees of explicit in the personnel manual. Such actions enhanced effectiveness and efficiency. could range from admonishment, to skipping Some customs services have adopted a more dras- salary adjustments and bonus payments, to dis- tic solution to the inadequacy of staff compensation missal. Dismissal from the service should not be by creating ARAs that initially paid salaries that were used lightly and safeguards should be put in place competitive with those paid in the private sector, or to ensure that disciplinary actions are meted out in with those given to the best paid civil servants. an unbiased manner. Official reaction to accusa- Performance-related salary increases and promotions of corruption should be prompt, both to clear tions are also important factors for motivating staff. unjustified accusations and to avoid lengthy delays Yet both are often constrained by rigid promotion between offense and penalty. Sanctions that include policies that are commonly applied to all civil ser- dismissal from the service can be a powerful vants and that are highly dependent on seniority. enforcer of discipline when staff compensation is Noteworthy exceptions do exist. In Mozambique, for good and unemployment is high.9 instance, staff performance is assessed on a quarterly basis during the two-year practical training period, Customs Organization and and is closely monitored afterward by an internal Organizational Placement audit. In Angola, an annual appraisal system is intended to match staff skills to job descriptions and A highly motivated and competent staff can make to properly identify candidates for senior positions. almost any organization work and can overcome a The state of infrastructure, both for work and plethora of organizational obstacles; but a good for housing, particularly at outlying customs posts, organizational structure will help greatly. Even a also affects work ethic and morale. Often such perfect model of organizational design and effi- infrastructure has suffered from years of neglect ciency, should it exist, would not survive if the due to budget constraints. The poor outpost hous- employees are not competent, qualified, trained, ing infrastructure in many border posts leads staff and motivated. An ideal organization is not static. to go to great lengths to avoid such postings, which Public and private sector organizations modify often are considered to be unfair hardship or even their structures continually to address new chal- penalty assignments. In Zambia and Tanzania, cus- lenges, changes in workload, geographic expansion, toms reforms included upgrading infrastructure, a competition, the introduction of new technology, feature that was greatly appreciated by staff. and innovation. A customs administration is no exception and often struggles to find an ideal organization to match the constantly changing cus- Integrity and Sanctions toms environment. However, reorganization is not Modern customs clearance practices—based on a panacea. Frequently, it is used as an excuse to dis- intensive use of IT as well as adequate staff guise an inability to identify the root cause of poor performance. Reorganization can be disruptive and 8. Higher salaries for staff often impart greater social responsibility toward the larger family or clan, thereby not reducing, but increasing, the “need” to take bribes to live up to these greater 9. As it is, the punitive mechanism that customs management responsibilities and new status in the traditional hierarchy may employ in some countries is hamstrung by corruption in (Fjeldstad, Kolstad, and Lange 2003). the legal system. Human Resources and Organizational Issues in Customs 37 could divert attention away from the ongoing work exporters, carriers, and customs brokers or for- of the agency. warders also require an independent appeals This section presents the traditional way that process to provide an avenue for appealing decisions customs has been organized together with some that they believe are in error or are inconsistent with minor variations on that theme. international customs practices. This institutional- ized openness to the private sector can help build the necessary trust between the private sector and Internal Organization customs, trust that will benefit all concerned. Traditionally, customs organizations are structured Some customs administrations recognize that a as a department of the Ministry of Finance (MOF) relatively small number of taxpayers are responsible and are fully accountable to the MOF for their for a large share of the total import duties and have operations and results. The overarching responsi- adjusted their internal operations to provide special bility of customs is to raise fiscal revenue as pre- services for large taxpayers. This is in line with the scribed by the budget. In doing so, it should ensure provisions of the Kyoto Convention that permits that customs procedures and policies are uniformly “authorized” importers to obtain faster release of and consistently applied across the various points their cargo; that is, traders that conform to certain of entry and modes of transport. At times, customs criteria of transparency and honesty benefit from has somewhat greater autonomy than other agen- easier customs procedures, with the proviso that cies or other ministerial departments, generally due post-release audits can be undertaken. The Egypt- to its responsibilities as border guard, as well as its ian Model Customs and Tax Center, for instance, is responsibility to deal with noncompliant traders equipped to process all customs and tax declara- and smugglers. Given the nature of its responsibili- tions of a select group of large enterprises (about ties, the organizational structure of customs is 200 at the end of 2003) that account for a large decentralized, consisting of headquarters (HQ) and share of total trade and tax payments. In fact, this regional and local offices. HQ’s responsibility is to center operates a single window for them where develop operational policy and procedures— new and efficient procedures have been introduced. including the use of IT—that aim for effectiveness and efficiency and compliance with international Customs’ Position in the Overall agreements related to the World Trade Organiza- Government Structure tion. HQ monitors the activities of the decentralized offices and is responsible for personnel policy, The MOF has traditionally been the government including recruitment, compensation, training, and organization in which customs resides and that enforcement. Regional offices oversee the activities provides oversight and direction in view of its pri- of the local offices in their jurisdiction, while local mary mission of revenue collection. It has been offices are generally the point of contact with the argued that this does not have to be so, especially in international trading community and other cus- light of customs’ changing responsibilities. Over toms administrations. Essentially, the staff at the time, customs’ role in trade facilitation supersedes local offices decide on the level of verification that that of revenue mobilization in many countries; is required when processing a declaration and and there is an increasing rationale for the Ministry releasing goods, as well as the effectiveness and effi- of Commerce to assume a greater supervisory role ciency of this process (Castro and Walsh 2003). for customs. With enhanced concerns for security, In addition to the traditional departments (legal, the United States has placed customs inside the procedures, valuation, IT, law enforcement, field Department of Homeland Security, while Canada operations, international cooperation, corporate has placed customs within the Public Safety and services, personnel, audit) many modern customs Emergency Preparedness Ministry. In Australia, the administrations are adding a department responsi- Department of Trade and Customs was the first ble for maintaining relations with the private sec- Commonwealth Government department estab- tor—to solicit concerns,explain the procedures,and lished after the Federation of the Australian States provide for an ombudsman when controversies in 1901. Australian customs has since been linked arise with international traders. Importers, with a number of ministerial portfolios—trade, 38 Customs Modernization Handbook

excise, business, consumer affairs, science, industry, the final analysis, deal with many of the same tax commerce, and justice—based on the changing pri- payers (PLS RAMBOLL 2001).11 orities of government. It now lies in the Justice and The PLS RAMBOLL (2001) study reviewed the Customs portfolio, reflecting the government’s experience of Denmark, Canada, Colombia, the desire to ensure effective cooperation between all Netherlands, and Latvia in integrating their tax and federal law enforcement and security agencies.10 customs agencies.12 It notes two different motives The placement of customs under one ministry or for the integration initiatives: to increase the effec- the other is, at the end, a decision that could be tiveness (the Netherlands, Latvia, and Colombia) or reached rationally given the unique administrative the efficiency (Denmark, see box 2.2) of revenue structure and economic circumstances of the coun- collection, or both (Canada). Effectiveness refers to try, as well as the mission assigned to customs by the way the revenue is collected—amounts of rev- the government. One might keep in mind, however, enue raised and the level of fraud, fairness, compli- that the reorganization of departments or the relo- ance, and so forth—while efficiency refers to the cation of the agency to another department or private and public resources spent on each unit of ministry often is a favorite activity of government revenue raised.13 reformers, but one that certainly has, in the absence The reforms in the Netherlands aimed at greater of real reform initiatives, little or no effect other effectiveness.High tax rates in the 1970s resulted in a than guaranteed internal and external disruption. greater incidence of tax avoidance and fraud, while Whatever the organizational context of customs, it prosperity led to a growth in the number of taxpay- is crucial that customs ers. The tax legislation had also become more complex, indicating a need for better taxpayer serv- • operates with adequate funding and staffing ices, which the government believed could be better • operates under correct oversight to ensure that provided with the integration of the revenue and rules and regulations are respected customs departments. The merger of the customs • has a personnel system that enables it to recruit, and tax institutions in Denmark aimed at increased train, and develop a professional workforce and efficiency. It was the flagship of the government’s the authority to remove corrupt or incompetent antibureaucracy reform and enjoyed considerable employees and to keep them removed political support. Before the merger, Denmark had a • operates with adequate autonomy in personnel relatively high number of staff in the tax and cus- and operational matters toms administrations. Reducing the number to a • provides an appeals process for the trade level comparable to those of similar countries, such community as Sweden and Norway, was fundamental to lower- • is held accountable for meeting performance ing collection costs. goals. The merger of the Canadian tax and customs administrations was undertaken to rationalize the Advantages of Merging Customs with Other Revenue Agencies 11. The discussion in this section draws on the findings of this In the 1990s, several countries merged customs with study. other revenue departments,in the hope of enhancing 12. The merger of customs with revenue is also under consider- the efficiency as well as the effectiveness of revenue ation in the United Kingdom. As noted by the press on the Trea- collection. The intuitive reason for such a merger is sury Report on the subject, the main benefit of the merger is that there must be economies of scale to be exploited expected to come from reduced compliance costs for businesses as companies could deal with a single tax authority. by combining the personnel, legal, and administra- 13. This study did not cover the merger of domestic tax offices tive functions of each of these departments,which,in and customs in a number of countries in the Americas, including Argentina, Brazil, Canada, Mexico, Guatemala, Colombia, Honduras, Peru, and República Bolivariana de Venezuela as the business processes of these agencies have converged. The 10. In addition to customs, the Justice and Customs portfolio tendency to unify the tax collection agencies has been stronger includes the Australian Crime Commission, the Australian Fed- in cases where the share of the value added tax (VAT) on imports eral Police, and AUSTRAC (Australia’s anti-money-laundering with respect to total revenues is high and in cases in which regulator and specialist intelligence unit). control of other taxes depends on VAT declarations. Human Resources and Organizational Issues in Customs 39

BOX 2.2 Denmark: Integration of Customs and Tax Administration

The motive behind the integration of the customs • a massive reduction in the number of local and tax administrations in Denmark was to con- offices, merged into a few regional offices siderably increase efficiency. The strategy cen- • the establishment of a flat organizational tered on full integration of the tax and customs structure, which reduced the number of man- administrations at all levels to reduce administra- agement levels and delegated responsibility to tive costs. This strategy was also in line with the lower levels integration into the European Union (EU), which • the implementation of a number of new pub- resulted in the reduction of tariff revenues as a lic management tools, such as contract man- source of fiscal revenues. The strategy included agement between central and regional offices, a number of rationalization measures: contracts between the ministry and the office • a reduction in number of combined staff in managers, focus on core activities and reduc- the two agencies—from 6,742 employees in tion of support activities, and a massive focus 1989 to 5,846 in 1992 and 5,643 in 2000 on value-based management. • the design of an ambitious, integrated IT system, integrating all revenue collection systems into one Source: PLS RAMBOLL 2001

collective revenue administration, partly to make it and the involvement of stakeholders—taxpayers more efficient and partly to improve customer as well as staff of the different agencies. In the service. The merger was also a response to demands Netherlands, the success of the merger was attrib- at that time for a more federal government struc- uted to a large extent to sound preparatory work ture. The reorganization affected virtually all that started in the 1970s.The actual implementation aspects of the political and administrative setup of took five years, from 1987 to 1992. In Colombia, the new organization, to secure maximum advan- however, preparation and political support for the tages and benefits. At the political level, the posts of merger were weak, and the results less than positive. Deputy Minister for Taxation and Deputy Minister In Canada, staffs were intimately consulted and of Customs were merged into one position. New many contributed to drafting new legislation and legislation was introduced to integrate the two sets the rollout of the merger. The presence of a strong, of statutes and to merge existing legislation. The politically well-connected champion heading the former 23 overlapping regions were reduced to 6 merger also helped greatly. consolidated regions performing all functions of Clear from these initiatives is that a merger must the tax and customs administration at the regional fully account for the fact that substantive procedural level. The HQs of the two former departments were differences between the customs and tax depart- consolidated into one, which was organized into a ments create asymmetries that will need to be series of business lines supported by corporate accommodated in the unified institution. Tax col- services. A major staff development program was lection operates on the basis of self-assessment and initiated, while IT and other support systems were after-the-fact control, which allows tax-related data consolidated into joint systems. Until recently, only to be batched. Customs procedures require payment the Customs Border Services remained a separate and control to take place simultaneously, through entity—all other aspects of the work of the former self-assessment combined with post-release audits. departments and regional offices have been organi- Also, customs operations are strictly guided by the zationally and operationally integrated. This orga- need to release cargo promptly, adding a unique nizational structure was revised again in 2004, dimension to the overall customs operation, one when customs was integrated into the Public Safety that is not shared by other tax departments. and Emergency Preparedness Ministry. It is arguable that the effectiveness of the revenue The case studies suggest that the success of any services does not necessarily require a large degree of merger will depend greatly on the preparations pre- integration between the operations of the tax and ceding the merger, the political support it receives, customs authorities.The case studies illustrate that a 40 Customs Modernization Handbook

full merger of the two institutions may, in fact, In sum, the ARA was to be granted greater account- impede the goal of increasing effectiveness. A ability, but was also provided with greater opera- joint focus on the operational aspects, a cross- tional flexibility, and shielded from political or institutional focus on target groups, and coordi- other interference. It would be misleading to say nated legislation and planning may serve the that accountability was totally absent before the purpose of enhanced effectiveness and efficiency. ARAs; however, accountability was either poorly A merger of the physical organizations (shared per- managed or customs was able to deflect accounta- sonnel, organizational culture, infrastructure, and bility by stating the restrictions under which it was IT systems), though, requires tremendous effort on forced to operate. behalf of the political and administrative leadership, The creation of ARAs provided traders and tax- staff, and the stakeholders (vested interests, clients) payers with greater assurance that the new initia- of the agency—an effort that may in the end be tives to improve effectiveness and efficiency were counterproductive. This was the case in Colombia. serious efforts by the government and that they At times it also threatened to imperil the merger in would be rather difficult to undo. Traders and Denmark. Recently, Latvia decided to roll back its taxpayers were thus expected to react with better merger efforts. For this reason, it is vital that govern- compliance. ments are clear on the motive behind the integration ARAs now operate in a number of countries process, and that strategies chosen for implementa- in Latin America and Africa16 and were largely tion are in harmony with the motive. introduced with Department for International Development (DFID), International Monetary Fund (IMF), and World Bank support. Some have Autonomous Revenue Authorities been operational now for more than 10 years. In The emergence of ARAs14 can be traced to the Exec- all these countries, the main reason for introduc- utive Agency model that was introduced in the late ing ARAs was to mobilize a larger share of fiscal 1980s in the United Kingdom.15 Such agencies were revenues. Rampant corruption in the revenue to operate more like private businesses than like departments was often identified as the major rea- government agencies. Government would make son that revenue mobilization was totally inade- policies and assign responsibility for the execution quate, and why efforts to reform the revenue of these policies to agencies that would have greater agencies had yielded no appreciable results. autonomy and accountability in their day-to-day Hence, it may be instructive to review whether the activities. This approach also gave the illusion that experience of establishing ARAs has lived up to government had become smaller, a major objective the initial expectations, and what lessons can be of the political parties in power in those days. The learned from them. In this review the focus is on agency approach was then modified and applied to customs operations, even though these are inti- the departments of the MOF in charge of revenue mately intertwined with the operation of the mobilization. Their proclaimed advantages of ARAs that combine customs with direct and indi- operating along ARA lines were that rect taxation.

• As a single purpose agency, separate from the MOF, it could focus on a single task. Management Structure and Responsibilities • With autonomy, it could free itself from political In all cases, ARAs combine the customs depart- interference in day-to-day activities. ment, the direct taxation department, and the indi- • Freed from civil service constraints, it could rect revenue departments into one authority. In establish its own personnel policies to enhance Latin America, ARAs are headed by a chief executive effectiveness and efficiency.

14. The term Autonomous Revenue Authority is used here, but 16. Colombia, Ethiopia, Ghana, Kenya, Lesotho, Malawi, Mexico, can refer to various degrees of autonomy. Peru, Rwanda, South Africa, Tanzania, Uganda, República 15. Much of the argument developed in this section draws from Bolivariana de Venezuela, Zambia, and Zimbabwe. The degree Talierco (2002), and Fjeldstad, Kolstad, and Lange (2003). of autonomy varies across countries and functions. Human Resources and Organizational Issues in Customs 41 officer (except in Mexico), while in Africa and Asia the community they serve to resist. At the initial most ARAs are headed by a board of directors. stages expatriate managers served as a buffer zone Invariably the Minister of Finance appoints the through which the authority could establish its head of the board, and the board members repre- identity and ethos.17 sent the MOF and other public sector agencies. Some boards (in Zambia, for example) include private sector representatives. In Uganda the Uganda Financial Autonomy Manufacturers Association received a seat on the Greater budget autonomy meant that the ARAs board in 1998. The day-to-day management of the gained some freedom in the use of their budgets ARAs that have a board of directors rests with a without detailed scrutiny from the MOF for each commissioner or the chief executive officer. The expenditure, a stifling practice in many countries. ARA is entrusted with the administration of taxes Also, some have gained greater autonomy in pro- (customs, direct, and indirect), but at times is given curement matters. The size of the ARA and cus- responsibility for tax policy. This mixing of tax pol- toms budget can be set on an annual basis after icy with administration responsibilities has been detailed discussion with the MOF, either as a confusing and has raised conflicts. It was retracted fixed percentage of total revenue or as a variable in several ARAs (in Uganda in 1998, for example). percentage based on revenues collected— The ARAs are given varying amounts of flexibility variables that can be defined at the time of the to run the agencies, particularly with respect to creation of the ARA.18 The latter variant was personnel matters, as well as financial management introduced as an incentive measure. In Peru this and operational issues, including the introduction share was set at 3 percent of customs revenue col- of IT. lections, but customs is also allowed to charge ARA operations are designed to be shielded fees for services. There is no nominal upper limit from political interference to counter the tendency to the total revenue. Customs is free to use the of politicians and government officials to appoint revenue as it likes, but must use one-third for its political supporters and to use and misuse the investment. At times customs receives a premium, information held by tax authorities to advance to be shared between staff and ARAs, for exceed- political, personal, and tribal objectives. Such inter- ing the revenue target. This provides an incentive ference has, in the past, strained the relationship only if the revenue target is set at a realistic level. between the taxpayers and the tax administration In practice this has not always been the case, and in a major way (Talierco 2004, 2002). revenue targets were at times set at unrealistically In several cases governments have chosen to high levels, when the MOF and foreign donors appoint expatriate managers as commissioners of overruled more realistic estimates made by the the ARAs or as deputy commissioners for customs, ARA (box 2.3). ARAs may, however, have a ten- VAT, or direct taxes. This has been the case in dency to underestimate revenue potential to cap- Uganda, Rwanda, and Ethiopia, where a Ghanaian ture bonus payments. When the agreed on budget tax administrator, familiar with the Ghana share is retained from revenues raised (as in the Revenue Authority at times held the post of case of Peru) the budget autonomy is safer than commissioner. when these budget resources must pass through In Zambia, after a few years of tentative reforms budgetary allocations approved by the MOF and four expatriate experts were appointed in 1997 to parliament. head the Zambia Revenue Authority (ZRA). Cur- rently, an expatriate expert again heads the Uganda Revenue Authority. At the outset the practice of asking expatriates to run the ARAs was a means of 17. Comments made by Darryl Jenkins, who for four years was securing technical expertise and management skills Commissioner of the ZRA. not otherwise immediately available in the domes- 18. The Kenya Revenue Authority receives 1.5 percent of collec- tic market. Also, there was, at times, a perceived tions, and an additional 3 percent of the difference between actual collections and the collection target for a three month need to resist pressures for special consideration, period, subject to a maximum of 2 percent of collections which may be hard for managers who are a part of (Talierco 2004). 42 Customs Modernization Handbook

BOX 2.3 Revenue Targets and Autonomy: Illustrations from Tanzania and Uganda

Neither the Tanzania Revenue Authority (TRA) the larger known taxpayers, as reflected in the nor the Uganda Revenue Authority (URA) has establishment of large taxpayers’ departments autonomy in setting revenue targets. This has that draw resources from the other revenue important implications for both staff motivation collecting departments within the revenue and tax collection priorities. Foreign donors, par- authorities. Hence, the targets have substantial ticularly the IMF, are actively involved in setting influence on the way the revenue authority annual revenue targets, as is the MOF. The tax- allocates its internal resources as well as on staff to-GDP targets are announced in the budget morale. speeches, and are written into the Policy Frame- In Uganda, the relations between the MOF work Papers that the government cosigns with and the URA have deteriorated over the years as the IMF. the URA has failed to meet its targets. The MOF While the MOF and the IMF publicly agree and the URA frequently have quite different about revenue targets in both Tanzania and views about revenue collection targets and their Uganda, many staff members of the TRA and analytical basis. On the one hand, the MOF URA complain about their own lack of influence regards itself as the key tax policymaker. On the in setting the revenue targets. Both TRA and other hand, the URA has the administrative URA staff consider the budget targets unrealisti- expertise without which realistic target setting cally high, based on expenditure needs rather and tax policy cannot be accomplished. than revenue potential. Others point out that In contrast, the relations between the MOF the international comparison of tax shares fre- and the TRA seem to be more harmonious. This quently used to argue for the existence of large may be due to the special policy role the untapped revenues, and hence for the legiti- Research and Policy Department plays in the mate expectations of better TRA and URA per- TRA, of setting revenue targets for the revenue formance, has a shaky empirical basis. First, GDP departments once the total tax revenue budget figures themselves are subject to discussion. Sec- has been agreed on with the Ministry. This ond, straight tax share comparisons fail to take arrangement indicates a strengthening of the into account the differences between countries tax bureaucracy at the expense of politicians. with respect to economic structure (for exam- There is, of course, the issue of moral hazard ple, the size of small scale agriculture and the when the tax collection agency becomes extent of the mining sector), income per capita, involved in the process of setting its own per- urbanization, tax policies, and so forth. formance targets. The focus of the MOF and the IMF on short run revenue maximization also translates Source: Fjeldstad, Kolstad, and Lange 2003; directly into a TRA and URA concentration on Therkildsen 2003.

Greater financial autonomy sometimes frees the the major advantages of ARAs.19 However, not all ARA from strict supervision of procurement. For ARAs have the same powers over their staff. Peru’s instance, in Zambia, prior to the ARA all procure- revenue service SUNAT has full power and needs to ment had to go through the Ministry of Supply, consult with no other authority regarding the with the Tender Board involved for procurements recruitment and firing of its staff. Autonomy over that exceeded a certain limit. The present procure- staffing matters is much more lacking in Ghana. ment regulations for the ARA have abolished the Many ARAs, at their creation, took advantage of the intervention of the Ministry of Supply, but opportunity to renew their staffing. Bolivia took a maintained the requirement to involve the Tender Board for larger contracts. This procedure substantially speeds up the overall procurement process. 19. Nepal is presently considering creating an ARA, first at internal revenue and later at customs. This would, among other benefits, remedy the present situation where the Public Service Commission assumes all personnel responsibility for customs: it Human Resources identifies potential staff, holds entry examinations, selects staff, and allocates them to departments. It is also responsible for pro- Freedom from restrictive civil service rules for motions, the performance appraisal system, filling vacancies, recruitment and compensation of staff is one of and disciplinary matters. Human Resources and Organizational Issues in Customs 43 systematic approach to ensure that its staff corre- that was 10 times that of the civil service. In Ghana sponded to the desired professional and integrity and Uganda, staff salaries were brought in line with profile (see box 2.1). Peru and Tanzania also imple- those paid at the central bank, which in Uganda was mented a drastic policy of staff renewal at the cre- eight to nine times the level of salaries paid in the ation of the ARA. Zambia was less successful as the civil service. Salary adjustments also allowed for new recruits were selected from a list provided by greater differentiation between higher-level and the MOF, so the process was not as free as it could lower-level staff, akin to what is practiced in the have been from regional and ethnic considerations. private sector.20 The Kenya Revenue Authority did forgo the opportunity to change its staff. In Uganda, most of the Lessons from Experience revenue administrations’ staff retained their positions when the URA was created. Staff renewal is Now that ARAs have been operating in the develop- expensive as staff must be bought out (in Peru, for ing world for about 20 years, some factors can be example, staff that resigned received three years isolated that, if given proper attention, contribute compensation for a total of US$1 million, plus to their success. US$1 million of pension improvements) and new staff must be offered competitive compensation. • Political support. The ARAs that proved most Not all ARAs have used their newly gained successful were those that benefited from high- autonomy to embark on a sustained training pro- level political support. Where political support gram, thereby undermining somewhat the quality wavered, the experiments were less successful. enhancement they gained by revamping the • Autonomy. When MOF appointees dominate recruitment procedures. the board of directors, the ARA has less opera- In several cases, the staff renewal process was used tional autonomy, and some degree of micro- to upgrade the overall skill mix of staff. For example, management by the board, including in selec- in 1991, out of 4,000 staff members in Peruvian cus- tion of positions, may emerge (URA, for toms, only 2 percent had a university degree and a example). It would appear that having private considerable proportion were unsalaried assistants, sector representatives on the board makes cus- living solely on tips and gifts. By 2000, 55 percent of toms more attuned to private sector concerns. the staff had university diplomas and the pro bono There is the danger, though, that those private staff category had disappeared. sector representatives are not fully independent of the public sector, and may have been selected for their party or social affiliations. Political Compensation interference is always a risk, particularly with Staff salaries were increased substantially in all respect to staff appointments. With higher staff ARAs with the express objective of being able to compensation such interference becomes more recruit and motivate qualified personnel. This was tempting. Political interference may also take particularly important in attracting staff with place in seeking preferential treatment for indi- expertise in IT, finance and budgeting, investiga- vidual traders and cargo, or in providing exemption, and accounting. Policies with respect to pro- tions (Fjeldstad, Kolstad, and Lange 2003). In motions and salary advances were also made more Uganda, the MOF is seen as dominating the flexible and could be brought in line with staff per- board, thus undermining the autonomy of the formance. Better salaries were also intended to URA (Therkilsen 2003). reduce corruption, as well-paid staff are less likely • Compensation levels. Some ARAs have encoun- to engage in corrupt practices, given the lesser need tered serious difficulties in maintaining their to seek out bribes to supplement their official salaries to sustain their families. Also, when fired 20. At the URA in 2000, the top-level wages were 34 times the for corruption, it is more of a penalty to lose a high lower-level wages, a differentiation that led to resentment when paying job than to lose a poorly paid job. In Peru, a 10 percent bonus was granted and staff focused on the absolute value of these bonuses given to top-level staff, which was a mul- for instance, salaries were increased by a factor of tiple of the total salary of low-level staff (Fjeldstad, Kolstad, and 10, while in Tanzania the salaries were set at a level Lange 2003, p. 15). 44 Customs Modernization Handbook

competitive compensation levels. In Uganda, the Management Contracts premium over civil servants’ salaries fell from a Contracting with private parties to assist govern- multiple of about eight to nine in 1991 to a mul- ments in the collection of taxes is not new.21 His- tiple of four to five at present. In Tanzania, many tory abounds with examples of tax farming, under years of salary freezes also caused an erosion of which the taxation function itself was given under the salary premiums paid to staff. In Ghana, too, contract to a private citizen or a group of citizens. salaries at the ARA have, over the years, not kept Typically the contract was limited in time, granted up with inflation and with the increases in pri- as a favor, and later sold to the highest bidder, who vate sector compensation packages. Much could was entitled to keep any revenues raised above the be gained by having a clear compensation pol- contracted amount. Tax farming occurred in Egypt, icy, the application of which is periodically Rome, Great Britain, and Greece. When first intro- monitored by independent auditors. Also, fraud duced in France during the 13th and 14th cen- that goes beyond “facilitation money” can turies, there were hundreds of tax farms, which hardly be stemmed with good wages, as the size were allocated using competitive auctions. By the of bribes can often represent a multiple of the 1680s, however, there was a single tax farm monop- annual salaries of staff. It is thus important to oly known as La Ferme Générale responsible for ensure that good wages are backed with effective collecting all indirect taxes in France. Historians disciplinary action for poor performance and typically portray the members of La Ferme Générale bribery. In the absence of such discipline, good as massively corrupt and estimate that less than half wages can replace poorly paid corrupt staff by the money collected from French citizens ended up well paid corrupt staff—not much of a gain. in the French treasury. When La Ferme Générale • Revenue generation. Establishing ARAs seems to was abolished in 1791, 30 members were guil- have helped to mobilize larger revenues, certainly lotined, a clear sign of the aversion of the new in the first years of their existence. However, such regime to this type of tax collection.22 Another success has not always been sustained. example of relying on the private sector to assist in • Integrity. Corrupt networks can easily reestab- levying taxes, albeit a much more limited one, is the lish themselves after one year (often at the end practice of contracting preshipment enterprises to of the probationary period for new staff) assist customs in the determination of the value of (Fjeldstad, Kolstad, and Lange 2003). The Com- imports (see chapter 8). missioner of the URA noted in 2003 that Today’s management contracts are quite differ- “corruption is the number one problem.” ent from either of these two practices. They also differ from the Build, Operate, and Transfer The experience so far has shown that providing cus- (BOT) contracts mostly used in infrastructure toms with greater operational autonomy can sub- operations, where private parties invest in and stantially contribute to enhancing its effectiveness manage structures for an agreed on period, and and efficiency. This deserves to be studied as an from the Build, Operate, and Own (BOO) con- option for modernizing customs. However, the tracts under which enterprises run public facilities experience so far also shows that autonomy is only a or public utilities to reap efficiency gains through facilitating condition, not a solution for all prob- the application of management expertise. lems facing customs. Results are best when customs Management contracts in customs services are a uses its autonomy to engage in a full modernization drastic approach to customs modernization, and initiative (such as in Peru), and where autonomy is respected over the years. The results are weakest, and even unsustainable, when customs delays this 21. This section draws heavily on the Mozambique case study by Mwangi (2004); Hubbard,Delay,and Devas (1999); and docu- modernization process. In both Ghana and Uganda, mentation provided by Crown Agents. for instance, the introduction of computerized cus- 22. In 12th century Morocco, the rulers granted tax-farming toms operations and the associated simplification privileges to Christian and Jewish traders, as they were in the of procedures and effective staff training was best position to extract tribute and customs fees from foreign traders, and the ruler trusted them more than his national offi- delayed for more than 10 years after the creation of cials, whom he suspected of massive fraud. This practice contin- the ARAs, and prevented the ARAs from fully reap- ued at least until the 17th century (Administration des Douanes ing the benefits of their greater autonomy. et Impots Indirects 2001, pp. 101, 121). Human Resources and Organizational Issues in Customs 45 have dual objectives. In contrast to tax farming, Unit to Restructure Customs to manage the pro- only the management of the government’s taxation posed reform and the tendering for consultant function is privatized. A contractor’s responsibili- services, as well as to oversee the implementation of ties are twofold: First, it must manage the customs the contract and the necessary changes in customs service and ensure that its major responsibilities are legislation. The Technical Unit was also to coordi- implemented effectively and efficiently; often the nate with all other government agencies involved in prime interest is in revenue generation, but trade trade and customs issues. Following a process of facilitation comes a close second. Second, the con- competitive bidding (25 organizations tendered) tractor is to train national staff to take over the full Crown Agents (CA) was granted a three-year man- set of responsibilities of customs within a given agement contract. The contract specified CA’s time frame. In return, the contractor is paid a fixed responsibilities: compensation, possibly complemented by a performance-related payment. Any evaluation of • take over the complete management of customs such management contracts must keep these dual and bring on board key customs officials to per- objectives in mind—raising revenue and building a form the contracted functions in accordance national customs service. Also, any assessment of with the local employment laws the cost of the management contract must consider • train national customs staff to take over from not only what it costs to run customs during the CA at the end of the contract period of the contract, but what resources would • fully implement customs legislation and have been required to attain these objectives exchange regulation through other, maybe less drastic, approaches. Such • maintain customs’ assets in good order and pre- evaluation is complicated by the fact that the cost pare an effective asset inventory and effectiveness of alternative approaches are not • procure and maintain equipment allocated to observable variables. the reform project. The practice of using management contracts has so far been limited to Mozambique and Angola,23 The initial contract was for US$37 million, 43 per- but it is a customs development model that is cent of which was paid by DFID. At the outset of receiving increasing attention, and several other the reform, CA appointed 60 experienced expatri- countries are actively looking into this approach. ate customs staff to take up managerial and train- The main features of the management contract ing positions. CA gradually introduced its propri- approach is discussed using the Mozambique con- etary customs information system and managed tract as an example, as this is the most complete the restaffing program, redesigned customs proce- application of the management contract approach dures, and assisted in preparing the new legislation. and has been in place long enough to provide use- The contract was extended twice (for three years in ful lessons. 1999 and for two years in 2003, at which time there In the mid-1990s, the government of Mozam- were only 11 CA staff members working on the bique (GOM) saw the need to modernize its Cus- project). The extension of the contract in 2003 toms Services, which, as a result of many decades of specified that CA was to assist in the merging of the civil war, were dysfunctional and thus unable to revenue function of customs, VAT, and direct tax undertake revenue mobilization and trade facilita- by 2005 and in the preparation for the establish- tion responsibilities. Bilateral and multilateral ment of an ARA. The major reason for these exten- development partners supported this initiative and sions was that the national management team was accompanied it with advice and financial resources. still fragile, because a number of management posi- GOM made the bold decision to grant a manage- tions had not yet been filled and the restaffing was ment contract to run customs and to prepare still not complete. Integrity problems were found to national authorities to assume full responsibility be very resilient to change and strict application of for customs operations at the end of the manage- the new customs procedures needed to be more ment contract. In 1995, GOM created a Technical firmly rooted. From both revenue and trade facilitation angles 23. Crown Agents (CA) signed a management contract with the the results achieved have been impressive. However, government of Angola in 2000 and initiated its activities in 2001. the handover to national customs authorities was 46 Customs Modernization Handbook

much slower than expected and corruption prob- exploited to its fullest extent to adjust the contract lems are still a major issue. terms. It is therefore not surprising that the role of performance-related compensation to the contrac- • Revenue performance. Revenues rose from tor was small in the overall compensation agree- US$105 million in 1996—the year before the CA ment. GOM did fully support the project and pro- contract—to US$233 million in 2002, suggest- vided the necessary logistical and moral support ing that the project had essentially paid for itself. and did not interfere with the day-to-day opera- In 1996–99 the average annual revenue increase tions of the customs services. This hands-off over the 1996 revenues was four times the cost of approach enabled the contractors to devote them- the CA project. selves to implementing their commitments. • Release times. Customs release times also gradu- All in all, the management contract approach is ally improved and by 2003 the majority of qual- a bold approach and appears to be a workable one ifying goods were cleared within 48 hours and in circumstances where alternative approaches are most were cleared in 24 hours. In 2000, the aver- less promising and where quick results on the rev- age clearance time was estimated at 18 days, and enue front are highly desirable. However, it is still was still as high as 8 days in mid-2002. All in all, a rather new approach to customs modernization it is estimated that clearance times are now in extraordinary circumstances. The jury is still 40 times faster than before the reforms. out with respect to the sustainability of the • Management handoff. The initial contract seri- reforms and the full transfer to the national cus- ously underestimated the complexity of handing toms. It would appear that eventual new initiatives over customs management, causing several along these lines should be custom designed and contract extensions. Also, the staff renewal should take local circumstances into account, process (80 percent of the staff was to be replaced) including the availability of trained local staff and was delayed because of national legislation and the functioning of customs in premodernization was still not completed by mid-2003. years. These factors will be featured in a good • Corruption. Corruption still plagues the cus- diagnostic analysis that should precede any nego- toms operations, in part because strict adher- tiation with external service providers. Similarly, ence to the new customs procedures is still such diagnostic analysis should define specific inadequate. performance criteria for the service providers. Any contract with service providers should con- The CA contracts in Mozambique and Angola can tain clear milestones for the transfer to national be checked against best practices for management customs authorities, a precondition for sustain- contracts for public service, which specify that pay- ability of the reform. ment to the contractors should be performance related and that interference by the government in Operational Conclusions daily management should be minimal. The com- plexity24 and novelty of the operation, both for The task of customs is becoming increasingly com- GOM and for the contractors; the uncertainty sur- plex given the sharp increase in trade, the greater rounding the whole project; and the multiple sophistication of traders, and the multiple and objectives of the project made it difficult to realisti- shifting objectives imposed on customs. Unifor- cally assess whether the outcomes were achievable. mity of customs operations across the territory and Further complications arose from the poor state of across cargo categories is important, and speedy information systems to provide both before-the- release of goods is crucial to the competitiveness of fact benchmarks and progress indicators. Also, few traders. There is also a need to adhere to interna- contractors were available that could provide assur- tional standards on value and classification, as well ance that they could undertake the task for which as regional standards on rules of origin. It is thus they were bidding, so that competition could not be obvious that customs organizations need to adjust to these challenges, manage staff and procedures 24. The agreed on program plans were made up of 700 specific accordingly, and find the organizational formula but related task areas, some of which had 20 subcomponents. best suited for their particular circumstances. Human Resources and Organizational Issues in Customs 47

Four summary conclusions are in order: the advantage of substantially improving the revenue performance in the short run under dif- • Good HR management is the linchpin to effec- ficult circumstances. The track record for trans- tive and efficient customs management. This is ferring management capabilities to nationals is too often neglected, and the delivery of services, still being tested, but initial reports suggest that in all its dimensions, all too often suffers while this has proven more difficult than initially integrity problems persist. The management of imagined. It certainly has taken more time than human resources is multifaceted. It includes envisioned at the start of the exercise. New man- recruiting, training, staff compensation and agement contracts may pay special attention to promotion, as well as enforcement. None of identifying performance-based remuneration these tasks is easy, and often must be imple- and to building up the necessary information mented in a constrained environment. Budgets systems to monitor the performance indicators. are tight and civil service rules give little leeway • Whatever the organizational model chosen, gov- to the HR staff in customs. These difficulties ernments must provide customs with the should not discourage the investigation of new resources required to permit customs to operate initiatives, and field studies do suggest that effectively and efficiently. within these constraints much more attention should be given to HR issues, and generous pay- Annex 2.A Human Resources offs can be expected. Strengthening the HR Checklist department would often be a good beginning. This chapter makes the point that human resources • Recent examples of ARAs are promising. They management is probably the single most important can free customs from rigid civil service rules, issue affecting the ability of customs to achieve its give them more budgetary and financial auton- assigned objectives effectively and efficiently. omy, and generally provide greater flexibility in Without providing an exhaustive list of issues operational matters. However, experience has that would need to be looked into to assess the shown that creating an ARA is no guarantee for availability of these human resources and the qual- improved customs services. It does not replace a ity of HR management, there are a few priority modernization program that should include, at areas that could be investigated as starting points the very least, the introduction of simplified for more in-depth investigation. procedures, the strict enforcement of integrity policies, and the introduction of advanced IT • Skill mix. Obtain information on the skills and systems. Aside from providing higher wages ini- qualifications of customs staff and compare this tially and weeding out some staff from the old with the skill mix required to enable the imple- system, modern HR policies must be main- mentation of the near- and medium-term mod- tained—otherwise all progress achieved will ernization program. quickly erode. This includes avoiding the ero- • Human Resources Department. Does the HR sion of the compensation premiums granted at Department have a strategic vision? How is it the creation of the ARA. ARAs should also pay staffed? What are its activities in the fields of full attention to training, and have diligent recruitment, training, and career planning? recruitment policies. The institution’s autonomy • Recruitment. What is the present recruitment should also be protected from undue interfer- process? Is customs or a Civil Service Ministry in ence from the MOF. charge? Does customs have a forward-looking • Management contracts can improve customs recruitment program so it can adjust its skill operations if they are well designed and moni- mix over time, and do the present recruitment tored. So far these management contracts have practices enable it to implement this program? largely been tested in special circumstances. In • Training. What is the training program at cus- both Mozambique and Angola, the countries toms? Is there a dedicated training institute? Are emerged from many years of civil strife and from the staff and curriculum attuned to the modern- dysfunctional public administrations. Engaging ization process? Is training provided for staff on private service operators in those countries had board or only for new recruits? 48 Customs Modernization Handbook

• Compensation. Is compensation at customs implemented. This diagnostic assessment guided by the same rules that apply to the rest of should address whether the present situation is the civil service? amenable to correction using the traditional • Level of compensation. How does compensation technical assistance approach, or whether the at customs compare with compensation in the situation warrants a more unconventional rest of the civil service, and with the private sec- approach such as management contracts. tor? Does entry level compensation provide a • A transparent and competitive tendering living wage? process for the management services should be • Bonus and salary supplements. Is there a system opened, and a careful exercise for prequalifica- of bonuses and premiums that supplements tion should be undertaken. basic wages? Are these additional compensation • A good description of the tasks tendered (man- packages distributed equally to all staff or do agement and transferring capacity) should be they provide an incentive for good perform- provided. ance? Is the system of bonuses SMART (spe- • The contract should adhere to well-defined pro- cific, measurable, achievable, relevant, and curement rules, with emphasis on transparency timed)? and clarity of services rendered. • Additional employment benefits. Do staff have • Details on expected performance criteria (rev- access to housing, health care, or pension enue, trade facilitation, efficiency, and effective- benefits? ness) and possible benchmarks should be • Career management. Is advancement based on provided. seniority or performance? What rules exist for • Responsibilities for ultimately transferring man- mobility (geographic and across services)? Are agement functions to nationals should be clearly the rules transparent? defined. • Enforcement of discipline. Is there a clear code of • Availability of financial and oversight support conduct and a stipulated system for sanctions? for the duration of the contract should be inves- What are the internal disciplinary processes and tigated. do they function in a transparent and timely manner? Annex 2.C Checklist for • Staff satisfaction survey. Is there a periodic sur- Autonomous Revenue Agencies vey to assess staff satisfaction? What was management’s reaction to the survey if such a survey The issue is frequently raised as to whether trans- was performed? forming an existing customs organization into an ARA should be considered as part of the solution to modernizing a customs administration in a given Annex 2.B Management Contracts country. When considering this option, it is worth- Checklist while to contemplate the following issue: What Modern management contracts are a relatively new major reasons prevent customs from attaining its approach to customs modernization. Under such objectives as effectively and efficiently as desired? contracts a private firm manages customs and pre- The response to this question will be derived from pares the national customs authorities to take over the diagnostic study. at the end of the contract. These contracts have so The major advantage that an ARA provides is far been largely undertaken in countries recovering greater autonomy in matters of human resources from civil war and where the civil service is (salaries, staff renewal at the outset to ensure that extremely weak. Issues that deserve close attention the desired skill mix is available, career manage- when considering management contracts include ment from recruitment through retirement) and in the following: the determination of its budgetary envelope, and the ease with which these resources can be used • A good diagnostic study should establish the both for recurrent and investment purposes. present practices and the difficulties that To the extent that the shortcomings of a customs prevent modern customs practices from being administration derive from these issues it will be Human Resources and Organizational Issues in Customs 49 important to see if, within the specific country cir- • the likelihood exists that the proposed ARA cumstances, the promises of an ARA can be real- management either has a modernization vision ized. The issues to consider include the following: or will be open to acquiring such a vision.

Clearly, if the motive for the introduction of the • Is the political support present to engage in staff ARA rests solely on the possibility of providing renewal at the outset? This may include declar- higher salaries to ARA staff, it is unlikely that the ing all positions vacant and recruiting new staff creation of an ARA will promote the moderniza- in a transparent manner. tion agenda. • Is it possible to introduce a credible and transparent method to select those that the new Further Reading administration wants to attract? • Are there financial resources available to provide Castro, Patricio, and James T. Walsh. 2003. “The Organization of Customs Administration.” In Michael Keen, ed. Changing termination packages for staff not selected for Customs: Challenges and Strategies for the Reform of Customs the new organization? Administration. Washington, D.C.: International Monetary • What are the chances that a different and higher Fund. De Wulf, Luc. 2004. “Salary Bonuses in Revenue Departments: salary scale will be provided to the staff of the Do They Work?” PREM Note 84. Poverty Reduction and ARA and that this pay differential with the other Economic Management Network. Washington, D.C.: World civil services will be sustained? What is the Bank. power of the civil service unions—or of similar Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton- omy, Incentives and Patronage, A study in Corruption in the organizations—to prevent such differentiation Tanzaniaand Uganda Revenue Authorities.Development Stud- in compensation? ies and Human Rights. Michelsen Institute. Oslo, Norway. • What are the chances that the necessary finan- www.cmi.no/publications/publication.cfm?pubid=1688. Taliercio, Robert. 2004. “Administrative Reform as Credible cial resources will be forthcoming and sustained Commitment: The Impact of Autonomy on Revenue to permit the payment of salary premiums to Authority Performance in Latin America.” World Develop- ARA staff? ment 32(2): 213–32. • Would the MOF be willing to grant the financial autonomy implied by an ARA? Would this References extend to the investment budget? The word processed describes informally reproduced works that • Is there a tradition of micromanagement and may not commonly be available through libraries. Administration des Douanes et Impôts Indirects. 2001. La interference by the MOF that could impede the Douane Marocaine a Travers l’Histoire. Rabat. independence of the ARA? Castro, Patricio, and James T. Walsh. 2003. “The Organization of • What assurance is there that the board of the Customs Administration.” In Michael Keen, ed. Changing Customs, Challenges and Strategies for the Reform of Customs ARA will have sufficient autonomy to make the Administration. Washington, D.C.: International Monetary necessary decisions beneficial to the operation Fund. of the ARA? De Wulf, Luc. 2004. “Salary Bonuses in Revenue Departments: • Is the process of selecting the board and the Do They Work?” PREM Note 84. Poverty Reduction and Economic Management Network. Washington, D.C.: World ARA manager likely to provide good managers? Bank. Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton- omy, Incentives and Patronage, A study in Corruption in the If these shortcomings are derived from other issues Tanzania and Uganda Revenue Authorities.Development such as lack of automation, major integrity prob- Studies and Human Rights, Michelsen Institute, Oslo, Norway. lems, or complex and nontransparent procedures, www.cmi.no/publications/publication.cfm?pubid=1688. Hubbard, Michael, Simon Delay, and Nick Devas. 1999. “Com- then it will be important to see to what extent plex Management Contracts: The Case of Customs Adminis- tration in Mozambique.” Public Administration and Develop- • new and independent management will tackle ment. 19(2):153–163. IDB (Inter-American Development Bank). 2001. “Institutional- these issues izing Human Resources Management in Bolivia’s Customs • international donor organizations are willing to Administration.” In Customs Best Practices in East Asia and assist the ARA in its initial years to engage in Latin America. Washington, D.C. Mwangi, Anthony. 2004. “Mozambique.” In Luc De Wulf and these basic reform issues, either with advice or José B. Sokol, eds. Customs Modernization Initiatives: Case with financial support Studies. Washington, D.C.: World Bank. 50 Customs Modernization Handbook

PLS RAMBOLL. 2001. Supporting Institutional Reforms in Tax ———. 2004. Organizational Design Profiles of Semi-Autonomous and Customs: Integrating Tax and Customs Administrations. Revenue Authorities in Developing Countries. Washington, Study prepared for the World Bank and supported by the D.C.: World Bank. www1.worldbank.org/publicsector/tax/ Danish Governance Trust Fund. Washington, D.C. autonomy.html. www1.worldbank. org/publicsector/tax/Taxandcustoms- Therkildsen, Ole. 2003. “Revenue Authority Autonomy in Sub- finalreport.doc. Saharan Africa: The Case of Uganda.” Paper presented at the Steenlandt, Marcel, and Luc De Wulf. 2004. “Customs Pragma- Workshop on Taxation, Accountability and Poverty at tism and Efficiency: Philosophy of a Successful Reform: the Annual Conference of the Norwegian Association for Morocco.” In Luc De Wulf and Jose Sokol, eds. Customs Development Research (NFU) “Politics and Poverty.” Oslo. Modernization Initiatives: Case Studies. Washington D.C.: October 23–24. World Bank. Van Rijckeghem, C. V., and B. Weber. 1997. “Corruption and the Talierco, Robert. 2002. Designing Performance: The Semi- Rate of Temptation: Do Low Wages in the Civil Service Autonomous Revenue Authorities in Africa and Latin America. Cause Corruption?” Working Paper WP97/73. Washington, draft. Washington, D.C.: World Bank. Processed. D.C.: International Monetary Fund. 3 LEGAL FRAMEWORK FOR CUSTOMS OPERATIONS AND ENFORCEMENT ISSUES

Kunio Mikuriya

TABLE OF CONTENTS LIST OF BOXES The Need for Modern Customs Legislation 52 3.1 An Example of Obsolete Customs The Revised Kyoto Convention 53 Legislation 52 Preparing a Modern Customs Code 57 3.2 Sample Checklist to Identify Provisions Potential Obstacles to Customs Requiring Amendment or New Legislation Modernization 58 under the Revised Kyoto Convention 59 Enforcement of Customs Laws 63 3.3 Morocco’s Adoption of the Convention: A Success Story 60 Model Legislation for International Property Rights 64 3.4 Modernization of Customs Legislation in the Russian Federation 65 Operational Conclusions 64 Further Reading 66 References 66

Customs plays a crucial role in trade operations ness with or to invest in a country in a competitive and revenue collection, and it directly affects the international business environment. It is, therefore, private rights and obligations of citizens. Customs of critical national interest for every country to is also expected to play an active role in protecting maintain its customs activities at high levels of society and national security from cross-border effectiveness buttressed by a legal system that meets movements of prohibited or restricted goods, internationally accepted standards. including illicit drugs, counterfeit goods, endan- In response to dramatic increases in trade volume gered species, and weapons of mass destruction. and heightened requirements for security, many cus- Consequently, customs operations require a solid toms administrations are reviewing their operations legal framework within which duties can be dis- in the context of international standards and best charged. Without an effective legal framework that practices to assess the need for introducing legal guarantees transparent, predictable, and prompt reforms. Modernization of customs laws, regula- customs procedures, the international private sections, and supporting legal systems is essential for tor will find it highly cumbersome to conduct busi- modern customs administrations to cope with the increasing demands for their services. The Inter- national Convention on the Simplification and Many thanks to Ms. Mashiho Yuasa, law student at the Univer- sity of Michigan Law School, for her help in research. Harmonization of Customs Procedures (entered 51 52 Customs Modernization Handbook

BOX 3.1 An Example of Obsolete Customs Legislation

When Yugoslavia broke apart in the early 1990s, traders and novice importers within the same the newly independent republics inherited the amount of time. As a result, officials did not have Yugoslav Customs Code, which was, by socialist the time to properly examine suspicious transac- standards, considered to be relatively user tions, as the prevailing impression was that, as oriented. However, the shortcomings of the all goods should be cleared in five hours, decla- Yugoslav Code became rapidly apparent. rations could be held up by prolonged examina- Designed for foreign trade exchanges largely tion of any one transaction. Worse, the Yugoslav managed by the state or state-run entities, it did Code made it mandatory to inspect every con- not envisage the rapid surge in the number of signment, thus preventing the introduction of operators. Procedures that were designed for selective examinations. established corporations were no longer applica- From the penal side, the code made a distinc- ble. For example, deferred payment was no tion between individuals and legal entities. In longer realistic until the reliability of new market theory, penalties for legal entities that commit- entrants had been assessed. In addition, the old ted customs fraud were higher than those for code was too detailed and quite bureaucratic. It individuals. This did not make much sense in a went to the extent of determining the opening market economy environment, and it led to hours of customs offices, which was unrealistic numerous disputes when the smaller businesses in a rapidly changing economic environment. In started getting involved in duty evasion, as it an attempt to be user friendly, the old code arbi- was not clear if the company or an individual trarily set the maximum time allowed for cus- had committed the offense. toms to clear goods. In the new market economy, customs had to deal with experienced Source: Zarnowiecki 2003.

into force in 1974 and revised in June 1999), also chapter also briefly touches upon other legal known as the Revised Kyoto Convention, provides instruments that complement existing interna- an excellent blueprint for such reforms (WCO 1997). tional legislation. The first section focuses on the The Revised Kyoto Convention was developed to need for modern customs legislation. The second standardize customs policies and procedures world- section provides a brief overview of the Revised wide. It embodies best practices of national legisla- Kyoto Convention. The third section discusses the tion around the world, and its implementation process of preparing a modern Customs Code would enable countries to meet international com- while the fourth section reviews the potential mitments concerning trade and border procedures, obstacles to a modern Customs Code. The fifth including the rules of the World Trade Organization section discusses the process of enforcing customs (WTO).1 At the same time, the Convention enables law. The sixth section focuses on model legislation each country to tailor its policies and procedures to for intellectual property rights. The final section meet its unique legal, political, cultural, and societal summarizes the main operational implications of requirements. Other customs legislation, such as the the chapter. Customs Code of the European Community (the EU Code), is closely aligned with the Convention (European Union 1992). The Need for Modern Customs This chapter discusses the need to modernize Legislation customs legislation in the context of international The realities of modern international trade have legal standards and examines possible difficulties made it necessary to modernize customs legislation in its implementation and enforcement. The in many countries. Outdated customs laws constrain social and economic progress by acting as 1. For example, General Agreement on Tariffs and Trade (GATT) significant nontariff trade barriers (box 3.1). They 1994, Articles V,VIII, and X, and Agreement on Implementation prevent effective revenue collection, discourage for- of Article VII of GATT 1994 (WTO Valuation Agreement). GATT 1994 Article V discusses transit; Article VIII, fees and eign trade and investment, and potentially threaten formalities; and Article X, publication and appeals. social and national security. Legal Framework for Customs Operations and Enforcement Issues 53

Outdated customs legislation typically includes advance rulings, independent audit, appeals one or more of the following characteristics: processes) • provides for modern customs systems and pro- • no comprehensive body of customs-related leg- cedures (risk management, audit-based control, islation that establishes the clear competence of and adequate automation) customs • simplifies customs procedures (simplified decla- • noncore customs elements ration, advance lodgment, and so forth) • inadequate provisions for complying with inter- • encourages cooperation with other customs national commitments, including WTO agree- administrations and with other governmental ments organizations • insufficient transparency and predictability • provides for partnership with the private sector reflected in the failure to provide basic informa- (formal consultations, for example) tion on matters such as rules, decisions, consul- • promotes customs integrity (clear rules that do tation mechanisms, and adequate appeals not allow excessive discretion, unambiguous processes specifications of customs’ officers authority and • complex or redundant customs formalities that obligations, and so forth) delay clearance and create opportunities for • provides for penalties proportional to the grav- unnecessary discretionary interventions ity of the offense (that is, penalties should be • no provision for selective verification of cargo sufficiently strong to deter customs violations based on risk management, resulting in reliance and promote compliance but should not be on the 100 percent examination of consign- unjustly severe, especially when violations are ments, which hinders customs from deploying minor—from the revenue and enforcement per- its limited resources in an efficient and effective spectives—and nondeliberate) manner • is accessible to the public • prohibition of advance lodgment of informa- • meets international standards. tion or goods declaration2 or post-clearance audits3 • no provision for automation or electronic com- The Revised Kyoto Convention munication Since its inception in 1952,4 the World Customs • ambiguous provisions that bestow customs offi- Organization (WCO) has been working to develop cers with excessive discretionary power modern principles that would buttress effective cus- • inadequate authority for customs to achieve its toms administrations by examining customs poli- enforcement and compliance goals. cies and practices worldwide, cooperating with its A solid and modern legal framework is the founda- member administrations, and working with trade tion of effective customs operations. Such a frame- communities and international agencies. The early work should provide for customs-related legislation efforts for simplifying and harmonizing customs to accomplish the following: procedures culminated in the Kyoto Convention, which was adopted by the WCO in 1973 and entered • establishes the competency of customs authori- into force in 1974. Globalization, rapid transforma- ties to administer and enforce customs laws, tion of international trade patterns, and advances in develop administrative regulations, adjudicate information technology (IT) since then have com- or settle cases, and make decisions on customs pelled the WCO and its members to review and administrative matters update the Convention. The resultant revision of • promotes transparency and predictability (for the Convention, known as the Revised Kyoto Con- example, timely dissemination of information, vention, reflects the economic and technological

2. An essential basis for intelligence-based risk management. 4. Established as the Customs Cooperation Council (CCC) in 3. An important element for the effective implementation of the 1952; the current name, the World Customs Organization, was WTO Valuation Agreement. adopted in 1994. 54 Customs Modernization Handbook

changes and incorporates best practices of member The General Annex contains the core customs poli- administrations. The Revised Kyoto Convention cies and procedures, and the Specific Annexes cover was adopted by 114 customs administrations the individual customs procedures and practices attending the WCO’s 94th Session in June 1999. relating to import, export, transit, processing, and enforcement measures. The Convention mandates Elements of the Revised Kyoto Convention countries to accede to the provisions in the General Annex and requires them to automate data systems, The Convention is an international instrument cooperate on trade, implement risk management designed to standardize and harmonize customs techniques, and create a mechanism to maintain policies and procedures worldwide. Customs and update the Convention. The Specific Annexes processes based on national customs legislation contain recommended practices. In addition to that are consistent with the Convention will enable these legal documents, there are detailed guidelines customs to process imports, exports, and interna- and best practices to assist countries in understand- tional travelers more smoothly. Elimination of ing how to implement the Convention. divergent customs procedures and practices around Forty of the contracting parties to the existing the world will permit international businesses to Convention must ratify the Protocol of Amend- meet their customs obligations effortlessly. Addi- ment for the Revised Convention to enter into tionally, the Convention can serve to implement force. Thus far, 35 contracting parties have ratified customs-related principles developed by the WTO, it6 while others are in the process of completing such as Articles V,VIII, and X of the GATT of 1994. 7 The Convention consists of the Body of the their national procedures. Many countries have Convention, the General Annex, and the Specific already reviewed their national legislation based on 5 the Revised Kyoto Convention, without waiting for Annexes. The main Body of the Convention is a its formal entry into force. concise 14-page document that sets forth in its Pre- amble the key principles of modern customs administrations, and refers to the General Annex Overview of the Convention and Specific Annexes that are constituent parts of The Convention presents a comprehensive set of the Convention. The Articles of the Convention over 600 legal provisions outlining basic principles provide clear rules of accession to and administra- 8 for all customs procedures and practices. tion of the Convention. The Preamble of the Con- vention states the following as guiding principles: The General Annex The General Annex stipu- (a) application of customs procedures and prac- lates the core principles for all customs procedures tices in a predictable, consistent, and transpar- and practices to ensure that these are uniformly ent manner applied by customs administrations. These princi- (b) provision of information on customs laws, reg- ples include the following: (a) standardization and ulations, procedures, and practices simplification of goods declaration and supporting (c) adoption of modern techniques, such as risk documents, (b) minimum necessary control, (c) management and maximum practicable use of IT risk management and audit-based control, (d) fast (d) cooperation, where appropriate, with other national authorities, other customs administra- 6. Algeria, Australia, Austria, Belgium, Bulgaria, Canada, China, tions, and the trade community Czech Republic, Denmark, European Community, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Republic (e) implementation of relevant international stan- of Korea, Latvia, Lesotho, Lithuania, Morocco, Netherlands, New dards Zealand, Poland, Slovakia, Slovenia, South Africa, Spain, Sweden, (f) provision of easily accessible administrative and Switzerland, Uganda, United Kingdom, and Zimbabwe. judicial review to affected parties. 7. The Council of the European Union, for its 15 member states, in March 2003, and the President of the United States in May 2003, approved the Convention. 5. The WCO gives the text of the Body of the Convention and 8. These provisions include Standards, Transitional Standards, the General Annex and Specific Annexes on its Web site. The full and Recommended Practices. Standards must be implemented legal text of the Convention and the implementation guidelines within 36 months of ratification, while Transitional Standards can be purchased from the WCO at www.wcoomd.org/ie/ have a 60 month implementation period. Reservations are per- En/Topics_issues. mitted to recommended practices in Specific Annexes. Legal Framework for Customs Operations and Enforcement Issues 55 track procedures for authorized persons and enti- Chapter 4: Duties and Taxes. This chapter out- ties, (e) coordinated interventions with other agen- lines provisions aimed at achieving transparency, cies, (f) maximum use of IT, (g) transparency predictability, and simplification of customs’ rev- and predictability, and (h) availability of appeals enue collection procedures that require national processes. legislation to specify conditions, timing, and meth- The General Annex covers the main customs ods of duty and tax payment.13 It provides for functions in its Definitions, Standards, and Transi- deferred payment and repayment.14 tional Standards, all of which have the same legal Chapter 5: Security. This chapter contains the value. The Convention mandates the acceptance of basic principles necessary to achieve transparency, the General Annex for accession. No reservations predictability, and simplicity of customs practices are permitted. The General Annex is divided into pertaining to security (that is, pledges, guarantees, 10 chapters. and the like to secure correct payment of duties). Chapter 1: General Principles. This chapter National legislation must enumerate the cases in expresses the two driving principles of the Conven- which security is required and must specify the tion, which are the simplification and harmoniza- forms of security and the amount of security.15 It tion of customs procedures. It stipulates that the also advocates that the amount of security must be provisions in the General Annex must be imple- as low as possible and must not exceed the amount mented in national legislation in the simplest possi- that is potentially chargeable for payment of duties ble form and that customs administrations should and taxes. In addition, it recommends that security cooperate with the trade community.9 should be discharged as soon as possible.16 Chapter 2: Definitions. This chapter provides the Chapter 6: Customs Control. This chapter first definition of terms related to the different level of states that all goods entering or leaving customs obligations and the structure of the Convention. territory are under customs’ control.17 It then out- Chapter 3: Clearance of Goods. This chapter artic- lines recommended customs procedures to ulates various provisions aimed at simplifying clear- enhance customs control, based on modern tech- ance procedures.10 It prescribes the obligation of niques and technologies such as the use of risk customs to establish customs offices and designate analysis and risk management, audit-based control, business hours; the qualification of declarants, their cooperation with other customs administrations rights, and their duties; the creation of simplified and the trade community, IT, and e-commerce.18 information requirements for goods declarations Facilitation of international trade is one of the and other documents; and the establishment of most important objectives of the Convention, and expeditious procedures for examination, assess- modern customs procedures are the key to achiev- ment, and collection of duties and taxes, and release ing this goal. Risk management, for example, expe- of goods. It stipulates coordinated intervention with dites the clearance of legitimate shipments while other government agencies and customs agencies11 maintaining appropriate border control by identi- and establishes procedures to be applied in cases of fying high-risk cargo. It entails a shift from inadvertent errors and minor offenses.12 100 percent examination of documents and consignments to selective inspections. Such a program will enable a customs administration to optimize 9. Standards 1.2–3. the use of its resources and allow the establishment 10. For example, Standard 3.12 states that information of a fast-track program in which approved traders required on goods declarations must be limited to data necessary for assessment of duties and taxes, compilation of statis- with good compliance records (as “authorized tics, and application of customs law, and Standard 3.38 limits samples drawn for examination purposes to the smallest possible quantity. 11. Transitional Standard 3.4 outlines joint operations at com- 13. Standards 4.1–3, 5–11, 13. mon borders by neighboring customs administrations, and 14. Standards 4.15–24. Transitional Standard 3.5 advocates coordinated inspections of 15. Standards 5.1–2. goods with other government agencies. 16. Standards 5.6–7. 12. Standard 3.39 stipulates that customs must not impose substantial penalties for inadvertent errors and errors without evi- 17. Standard 6.1. dence of fraud or gross negligence. 18. Standards 6.3–8 and Transitional Standard 6.9. 56 Customs Modernization Handbook

persons”)19 can obtain the release of cargo with their procedures and practices, through the publi- minimum customs intervention. Likewise, the cation of laws, regulations, judicial decisions, and introduction of audit-based control complements administrative rulings. Implementation of the stan- risk management and is an essential element of the dards outlined in this chapter is critical for meeting 25 effective implementation of the WTO Valuation the requirements of Article X of GATT 1994. For Agreement (WTO 1994c and 1994d). Other cus- example, it stipulates that information pertaining toms administrations and the trade community to customs law must be readily available and that are indispensable partners for an effective risk- any changes must be made available well in advance 26 management program because they can be con- of the changes entering into force. Customs sulted about latest trade practices. administrations must provide “as quickly and Chapter 7: Use of Information Technology. Appli- as accurately as possible” specific information cation of IT is another important requirement of requested by an interested party as well as any the General Annex to simplify and harmonize cus- information they consider pertinent to the party 27 toms procedures and facilitate trade. This chapter without sacrificing confidentiality. Adverse cus- obligates customs administrations to apply IT to toms decisions must provide reasons and must support operations where it is cost-effective and effi- advise of the right of appeal. Furthermore, customs cient for customs and for the trade community.20 administrations must issue binding rulings upon 28 The chapter mandates new or revised national legis- request. lation to provide for electronic alternatives to paper- The guidelines to this chapter provide detailed based documentation requirements, electronic as information for administrations to set up their pro- well as paper-based authentication methods, and the cedures for publication of information. They right of customs administrations to retain informa- include quality and clarity of information, trade tion and, as appropriate, share it with other customs consultation, exhibitions, enquiry offices, availabil- administrations through electronic means.21 It also ity of tariff information, liability of information states that customs administrations must develop provided, explanation of the concept of freedom of information technology in consultation with all rel- information, procedures for issue, and notification evant parties.22 The Guidelines for this chapter pro- and annulment of binding rulings by customs. vides some information that might help customs Chapter 10: Appeals in Customs Matters. The determine how to improve the services it provides to right of appeal also ensures transparency and pre- its clients and trading partners through the use of dictability of customs procedures and practices. It information and communication technologies. protects individuals against decisions of customs Chapter 8: Relationship Between Customs and that may not be in compliance with national laws Third Parties. This chapter provides for third par- and regulations. It also safeguards against omis- ties, and states that persons or entities will have the sions by customs. Furthermore, the reviews of chal- option of doing business with customs directly or lenged decisions or omissions and subsequent ver- through a third party.23 Third parties will have the dicts by a competent authority guarantee uniform same rights as parties on whose behalf they act.24 application of the laws and regulations. The provi- Chapter 9: Customs Information, Decisions, and sions in chapter 10 provide for a multistage appeal Rulings. This chapter lists key principles for cus- process and an independent judicial review as a toms to achieve transparency and predictability of final avenue of appeal. Specifically, chapter 10 requires national legislation to provide for a right

19. “Authorized persons who meet criteria specified by the Cus- 25. Article X of GATT 1994, Publication and Administration of toms, including having an appropriate record of compliance Trade Regulations, requires publication before enforcement of with Customs requirements and a satisfactory system for man- all laws, regulations, judicial decisions, and administrative rul- aging their commercial records.”(Transitional Standard 3.32). ings affecting imports and exports as well as measures that 20. Standard 7.1. impose a new or more burdensome requirement, restriction, or 21. Standard 7.4. prohibition on imports, or on the transfer of payments. 22. Standard 7.3. 26. Standards 9.1–2. 23. Standard 8.1. 27. Standards 9.4–6. 24. Standard 8.4. 28. Standards 9.8–9. Legal Framework for Customs Operations and Enforcement Issues 57

of appeal in customs matters and gives anyone Guidelines One of the outstanding features of affected by a customs decision such a right.29 An the Convention is the existence of comprehensive initial appeal will be made to the customs, and the implementation guidelines that have been devel- appellant has a right to further appeal to an inde- oped to provide, in the General Annex and Specific pendent authority and finally to a judicial author- Annexes of the Convention, detailed explanations ity.30 Compliance with the Standards in chapter 10 of all chapters, except for the chapter on Defini- is an essential step toward meeting the require- tions. These guidelines are not part of the legal text ments of Article X of GATT 1994.31 of the Convention, but are rather designed to offer explanations of the provisions of the Convention, Specific Annexes There are 10 Specific Annexes and to provide examples of best practices or meth- covering individual customs procedures and prac- ods of application and future developments. They tices. Acceptance of the Specific Annexes is not must be read in conjunction with the legal text con- obligatory for accession to the Convention. How- tained in each chapter of the annexes. The guide- ever, the WCO recommends that contracting parties lines are constantly updated to provide information at least accept the Specific Annexes on importation on new and modern practices.37 for home use,32 those for export, and those regarding formalities prior to lodgment of goods declara- Preparing a Modern Customs Code tion,33 as well as those for warehouses,34 transit,35 and processing.36 Reservations are permitted in Rec- The Revised Kyoto Convention can serve as a guid- ommended Practices in the Specific Annexes, but ing principle for preparing a modern Customs contracting parties must review their reservations Code. While countries can sign on to the Conven- every three years. tion as a means to modernize a Customs Code, it is, in fact, not the only way to implement a modern one. Another option would be a phased introduction of the principles and practices contained in the 29. Standards 10.1–2. Convention, taking into account the local environ- 30. Standards 10.4–6. ment and capacity. 31. Article X of GATT 1994, Publication and Administration of Trade Regulations, also requires appeal procedures. Members must “maintain or institute judicial, arbitral or administrative Obligations Under the Revised Kyoto Convention tribunals or procedures for the purpose, inter alia, of the prompt review and correction of administrative action relating to Cus- Contracting parties are obligated to bring into toms matters” providing for uniform, impartial, and reasonable administration of laws, decisions, and rulings affecting import force, nationally, the standards, transitional stan- and export. dards, and recommended practices that they have 32. Annex B: The minimum specific requirements for the clear- accepted. Standards must be implemented within ance of goods for home use (chapter 1), the requirements for the 36 months of ratification, while transitional stan- clearance of goods for home use that were exported and are being re-imported in the same state (chapter 2), and the circum- dards have a 60-month implementation period. stances and conditions in which relief from import duties and Such regulations are not necessarily restricted to taxes may be granted for certain goods declared for home use customs legislation and may apply to official notifi- (chapter 3). cations, charters, or ministerial decrees, or similar 33. Annex C deals with outright exportation as opposed to tem- instruments. Customs administrations are obliged porary exportation. to ensure that their regulations are transparent, 34. Annex D: Customs procedures for warehousing (chapter 1) and in free zones (chapter 2). These procedures facilitate trade predictable, consistent, and reliable. by waiving or deferring payments of duties and taxes. Contracting parties’ national legislation must 35. Annex E outlines customs procedures and practices related include at least the basic rules from the General to goods traveling through multiple customs offices within a Annex, with detailed regulations for their imple- single customs territory (national transit) or multiple customs territories (international transit). These provisions on interna- mentation; no reservations are permitted. In tional transit provide for technical and operational means to meet requirements set out in GATT Article V. 36. Annex F describes customs procedures and practices that a 37. For example, the guidelines for chapter 7 were revised in country might use to promote its economy and trade by provid- March 2003 to take account of developments in the area of ing total or partial relief of duties and taxes. information and communication technology since 1999. 58 Customs Modernization Handbook

addition, contracting parties may accept all or a groups within the customs administration, number of Specific Annexes and chapters upon members of the trade community, WCO, the accession to the Convention. The WCO considers it donor community, and so on). Consultations desirable for contracting parties to accept the Spe- with the trade community at this stage are par- cific Annexes on importation, exportation, ware- ticularly important. houses, transit, and processing. Although the • Check whether proper legal authority, such as guidelines are not legally binding, customs admin- the authority to make administrative regulations istrations may adopt and implement those best and the ability to provide technical input to the practices that are most suited to their particular legislative branch, is accorded to the customs environment. administration for the purpose of issuing a new In addition to legislative measures, contracting code. Some customs administrations may need parties must provide facilities, personnel, and to obtain additional or new legal authority to equipment to realize the objectives of the Conven- effectively and efficiently implement the Con- tion. Such infrastructure is indispensable particu- vention. larly in the areas of IT, risk management, and audit- • Use the provisions of the Convention or other based controls. national legislation aligned to the Convention, such as the EU Code as a checklist (for an exam- Practical Guide to the Modernization ple, see box 3.2). It should compare the current of Customs Codes customs laws to the provisions in the General A customs administration might take the following Annex and Specific Annexes and identify provi- steps to prepare for the implementation of the sions that must be added, repealed, replaced, or Convention into its legislation. It could organize a modified. During this stage, it should study the working group, consisting of headquarters and national legislation of other countries and con- field officials, under the presidency of a high rank- sult with other customs agencies to learn from ing official. Typically, some headquarters specialists them. (including IT) would be involved in major policy • Identify provisions that must be enacted as matters (such as procedures, investigations) or statutes by the national legislature. technical matters (such as valuation and origin, as • Identify provisions that are better suited for cus- well as legal matters). This group would meet at the toms regulations, administrative guidelines, very early stages of reform planning, and each official notices, and so forth. member would be expected to provide a list of what • Identify obstacles to successful implementation he or she would like to see in the laws as the out- of a modern code through legislation. come of new legislation, what the current legisla- • Determine how each provision should be imple- tion does not allow, and how he or she would like to mented. It must be recognized that each provi- see customs evolve. At the same time, someone sion can be implemented in a variety of ways. An from the legal department’s staff would review the effort should be made to choose a method of existing laws that affect customs work. It would be implementation that will suit the environment essential to identify, as far upstream as possible, all in which a particular customs authority oper- the legislation relating to other relevant govern- ates. Morocco’s revision of its Customs Code, ment agencies, including those dealing with in line with the Revised Kyoto Convention, offenses that might affect customs operations, and presents a good example of this practice (see to determine whether the legislation would require box 3.3). adjustments to the relevant articles, cross-referencing in the customs law, or repealing. It would also be important to know if the customs law super- Potential Obstacles to Customs sedes other previous legislation. Modernization The customs administration also could do the Customs modernization efforts sometimes fail following: despite the good intentions and hard work of cus- • Obtain support from appropriate quarters (the toms administrations. Certainly, the customs com- executive and legislative branches, various munity and the international donor community Legal Framework for Customs Operations and Enforcement Issues 59

BOX 3.2 Sample Checklist to Identify Provisions Requiring Amendment or New Legislation under the Revised Kyoto Convention

Under the Revised Kyoto Convention it is possi- other government departments to be consulted, ble to have in place a sample checklist that iden- and any other concerns should also be listed. tifies provisions requiring amendment or new 3.35 Transitional Standard. “If the goods legislation. The following two provisions provide must be inspected by other competent authori- a good example for a sample checklist: ties and the Customs also schedules an examina- 3.34 Standard. “When scheduling examination, the Customs shall ensure that the inspections, priority shall be given to the examination tions are coordinated and, if possible, carried of live animals and perishable goods and to out at the same time.” other goods that Customs accept are urgently While the ideal situation is a single examina- required.” tion coordinated and conducted by the authori- This provision requires that customs must ties concerned at the same time, this provision examine urgent required goods without delay to does not require customs to take special actions avoid loss or deterioration of the goods. To fulfill to ensure this situation. It requires that customs this requirement, customs should, subject to the establish effective communications with other availability of resources, examine perishable competent authorities and where possible to goods, live animals, or goods that are urgently carry out their examination at the same time as required, outside their normal hours of business the other authorities. However, in the interest of or at a place other than the customs office cost-effectiveness and efficiency to both govern- where the goods declaration was lodged. In this ments and the trade, customs may give consid- regard, the national statutes and regulations eration to re-engineering its clearance process, that deal with the subject matter of the standard which could result in the establishment of an should be listed. It would also be important to inspection service or compliance verification write down whether the existing statute or regu- process that is integrated with that of the other lation must be modified or replaced or whether competent authorities. new legislation is necessary. Useful resources, Source: WCO 2000.

have learned the lesson that “one-size-fits-all” created by judicial decisions over time. Under the solutions do not work. Successful modernization of civil law system, legislation tends to be drafted in customs legislation requires attention to the unique the form of broad statements of principles whereas political and legal tradition, social and cultural cli- common law legislation tends to be much more mate, and administrative or organizational struc- detailed. However, these sweeping characteriza- ture in which a particular customs administration tions are generally of limited use. To draft new, operates. successful customs laws that are amenable to the unique legal tradition of a country, the drafter must look more closely at the country’s traditional Legal Tradition drafting style, organization of laws (for example, a Legal research by Victor Thuronyi (1996) has iden- single code vs. separate laws), practices of adminis- tified integration as one of four essential criteria trative and judicial interpretation, and choice of for well-drafted legislation. Thuronyi defines inte- legal instruments. gration as “the consistency of the law with the legal system and drafting style of the country” (p. 72). Drafting Styles Indeed, when drafting new legislation, the drafter must be mindful of the legal tradition of the coun- Thuronyi insists that a country’s laws must be “con- try. At the most general level, legal systems are clas- sistent in appearance and style in order to facilitate sified in two broad groups: civil law and common understanding and interpretation of the laws and law. Civil law is based on written legal codes to maintain the dignity of the legislative process” arrived at through legislation, edicts, and so forth, (Thuronyi 1996, p. 89). At the same time, when whereas common law is based on the precedents drafting new customs legislation the drafter should 60 Customs Modernization Handbook

BOX 3.3 Morocco’s Adoption of the Convention: A Success Story

Morocco revised its customs law in 1997 and ments to review their border procedures. The has become one of the first countries to adopt Moroccan Customs began the process by first the Revised Kyoto Convention. The Moroccan implementing essential provisions within the Customs Administration attributes its successes Customs Code and then proceeding to supple- to (a) its efforts to analyze and understand its ment them with explanations and clarifications operating environment, to form partnerships in the form of administrative instructions such with the trade community, and to cooperate as circulars and notes. The Moroccan customs and consult with other government agencies; law provides for close cooperation with other (b) a pragmatic approach aimed not only at relevant government agencies. This is particu- developing a new law, but also at avoiding pit- larly vital in health and agricultural controls and falls common in any procedural improvement; enforcement and information exchanges and (c) involvement of all customs staff mem- among law enforcement organizations. The bers. Its efforts raised awareness among the staff customs law defines the principle of coopera- that the legislation’s ultimate goal was to tion whereas regulations specify terms and con- improve its procedures to fulfill its missions, ditions for such cooperation. including economic development. For some years the Moroccan Customs has The Moroccan Customs Administration been pursuing a decentralization policy, giving aimed to adapt its legislation to national and regional authorities the power to make certain international environments. The latest review of decisions without consulting headquarters. A customs legislation was no exception. The strong communication network was built to give administration consulted all relevant ministerial frontline officers all the instruments, including departments and private sector representatives. authorizations, and instructions necessary to As a result, the Moroccan customs legislation is deal with a wide range of customs matters. Only in harmony with all other national legislation. when cases of major importance arise, when For example, customs penal provisions are con- interpretation of legislative texts is required, or sistent with the national penal code and include when arbitration is requested, is the central a number of common principles such as the administration consulted. When a case requires principles of good faith, extenuating circum- legislative interpretation, customs prepares a stances, and supervisory authorities of adminis- general note to ensure consistent application of trative officers. the law nationwide. The Moroccan Customs took leadership in implementing the Revised Kyoto Convention, Source: Steenlandt and De Wulf 2004. and encouraged other government depart-

conscientiously consider the advantages and disad- such as frontline customs officials and traders, can vantages of the country’s traditional drafting style, understand it. Simultaneously, customs law should for possible improvement. For example, statutes in be precise to minimize opportunities for excessive the English-speaking world have a reputation for administrative and judicial discretion. being excessively complex and difficult to understand. This is partly because drafters in these coun- Organization tries have inherited the traditional style of legislative language used in the United Kingdom in the A single consolidated Customs Code—a document 19th century (Turnbull 1993). However, the com- containing all the customs laws—has many advan- plexity of the legislative language was also a result tages over customs laws spread over many docu- of a strong need for precision. Turnbull believes ments. For example, such a code promotes compli- that precision can be accomplished without unduly ance because it is easier for a trader to find sacrificing simplicity and clarity. Simple clarity and applicable laws and regulations in a single code precision are both extremely important for a coun- than in multiple documents (Thuronyi 1996). It try’s customs legislation to achieve transparency also helps to maintain consistency within the cus- and predictability. A customs law must be simple toms laws because legislators are more likely to and clear so that nonlegislators and nonlawyers, work under a common guiding principle within a Legal Framework for Customs Operations and Enforcement Issues 61 single code. A code is also easier to amend than pret them narrowly. In contrast, statutes in civil law multiple laws because “amendments are automati- countries are broad, outlining general principles cally consolidated into” the code itself (Renton only and leaving details for other mechanisms, 1975, pp. 76–84). This is desirable because it is hard including the courts, to fill in. Such generalizations to determine precisely what the law is if amend- are of limited use because, in reality, some civil law ments do not repeal or replace previous laws clearly countries have statutes that are as detailed as those (Thuronyi 1996). in common law countries (Turnbull 1993). How- However, a truly consolidated Customs Code is ever, it is prudent to understand how officials and perhaps a rarity. Many countries organize laws judges traditionally apply customs laws in a given related to customs into two major legal documents: country and to attempt to draft new customs legis- one dealing with the tariffs, duties, and taxes, and lation accordingly. The drafter should learn how another concerning customs procedures.38 Many customs officials and judges interpret a provision of customs-related laws and regulations are also the customs law, whether a legislative or adminis- found in the laws enacted to promulgate interna- trative guideline is available, whether precedents tional treaties and agreements.39 Moreover, it is are relied upon, and whether officials and judges almost inevitable for provisions relevant to the cus- enjoy a certain degree of discretionary power. toms administration to be contained in separate However, the drafter should be cognizant of weak- laws, because in practice customs has authority to nesses of the traditional approach. Customs offi- enforce legislation other than revenue laws (see cials should not be allowed excessive discretion in Enforcement of Customs Laws in this chapter). interpreting customs laws because transparency Furthermore, because many of the legal provisions and predictability of the customs procedures can- relevant to customs are procedural they are almost not be achieved under such circumstances. Cus- inevitably included, at least in part, in the general toms laws also require some degree of flexibility. rules for criminal or administrative procedure, Excessively rigid applications of customs laws rather than in a Customs Code. Thus, even if a Cus- would result in unnecessary steps in customs pro- toms Code is organized to include customs-related cedures, particularly in relation to minor violations provisions on as comprehensive a basis as feasible, or disputes, and would burden traders, customs, there will inevitably be a need for coordination and judicial systems. with provisions that are found outside this code. Separate laws can be organized in an effective manner by cross-referencing and eliminating duplicate Choice of Legal Instruments provisions (Thuronyi 1996). Particular attention A wide variety of legal instruments are available for must be paid when provisions related to a single WCO member countries to implement modern cus- customs duty or procedure are included in more toms principles. A government can enact customs than one piece of legislation or placed within non- legislation as statute, administrative guidance, offi- customs law, because such provisions are difficult cial notification, charter, ministerial decree, sched- to comply with, enforce, and amend. ule, and so on. For example, Moroccan customs laws are organized in two documents. The first document Administrative and Judicial Interpretation is the Code on Customs and Indirect Taxation,com- It is generally agreed that statutes under common posed of decrees and decisions by the Minister of law tradition are detailed and that the courts inter- Finance. The second document is the Customs and Indirect Taxation Regulation that explains customs legislation and regulations and contains all the Notes 38. For example, the EU has the Common Customs Code and and Circulars. Implementation Regulations dealing with Customs procedures and the European Union Tariff Code. Each member country has Selecting an appropriate legal instrument to its own laws on customs enforcement, penalties, and appeals match the purpose of a given provision is impor- processes. tant. Thuronyi (1996, p. 86) states that it is not 39. Japan, EU, and others, for example. When a provision of a “appropriate to try to provide all the necessary convention or other international agreement cannot be implemented within the Common Customs Code, the EU makes an details” in a statute because (a) it would make the entry into the code referring to the provision. statute “unduly lengthy and difficult to understand,” 62 Customs Modernization Handbook

(b) the legislature “cannot foresee all situations,” expedited clearance privileges. Before deciding and (c) statutes are more difficult to modify than which measure to implement, however, the capaci- other legal instruments. Furthermore, customs ties of the customs organization, including its com- agencies are often a more suitable entity to make mercial integrity and efficiency, must be examined detailed rules because they have information and carefully (Raven 2001). expertise, they are less vulnerable to political and other outside pressures, and they can react more Interaction with Other Government Entities quickly to new problems (Stein, Mitchell, and Mezines 2003). Some advocate that details should Customs often enforces a wide range of laws not be crystallized in the form of statutes because besides customs law. For example, the United States the resulting rigidity is potentially harmful to the Customs and Border Protection enforces numerous practices of fair and speedy agencies (Jackson laws and international treaties and agreements 1941). in diverse fields from agriculture to national In general,essential provisions must be enacted as defense.40 Customs also routinely cooperates with laws while details that require frequent amending are other government agencies, sometimes sharing better suited for administrative regulations. How- facilities at national borders. Therefore, successful ever, it should be noted that such determinations customs legislation must provide for the interde- largely depend on “the practice in the particular pendence of multiple government entities. Consul- country and on politics” (Thuronyi 1996, tations between customs and other departments pp. 86–87). For example, Thuronyi states that how are vitally important to eliminate duplicate and much power over detail the legislature is willing to inconsistent legislation. To achieve simplification of delegate to an administrative agency often dictates customs and other border procedures, it is desir- the choice of legal instruments. Time is also one of able for customs to enforce laws on border proce- the most obvious determinants for whether a given dures or for customs to cooperate closely with detail is included in a statute because the total time other concerned departments and agencies.41 Oth- available to the legislature for lawmaking is limited erwise, border controls by multiple government (Jackson 1941, p. 14). Finally, Thuronyi points out organizations are likely to result in ineffective and that leaving details on which consensus is hard to inefficient border procedures and corruption. reach to administrative regulations is a political tac- Customs in some market transition economies in tic employed to ease passage of a bill. which borders had been managed by military force with little external trade have experienced such difficulties. Cooperation is particularly important Determination of Which Principles to Implement when laws are being made on border procedures in and How to Implement Them which customs generally lacks expertise, such as A customs administration must decide carefully agricultural or health inspections. On such occa- which reform principles to implement. A modern sions, customs might get involved to ensure simple, reform principle can be implemented in a variety of coordinated border inspections. ways; however, not all options suit the operating environment of the particular customs administration. For example, trade facilitation through a 40. According to its Web site, the United States Customs and Border Protection enforces laws on agriculture, alien and natu- paperless customs procedure may be promoted by ralization, banks and banking, census, commerce and trade, an incentive to use e-documents or by a mandate conservation, copyrights, crimes and criminal procedures, cus- accompanied by a sanction. The choice between toms duties, food and drugs, foreign relations, internal revenue, these two options should be based on careful intoxicating liquors, money and finance, navigation, patents, postal service, public building and property, public land, rail- consideration of the e-commerce environment in roads, shipping, telegraphs and telephones, territories and insu- which a particular customs administration finds lar possessions, transportation, war and national defense, and itself. A high level of compliance may be achieved international treaties, statutes, and agreements (United States Customs and Border Protection 2003). by a system of penalties for customs violation alone 41. Raven (2001) states that it has been generally accepted that or in conjunction with more subtle incentive meas- convergence of frontier controls in a single administrative ures such as the granting, denial, or withdrawal of agency, usually customs, is highly beneficial. Legal Framework for Customs Operations and Enforcement Issues 63

Translation • restraint of assets • exchange of information When drawing on a model code, the drafter must • inquiries on behalf of other customs adminis- be careful of the hazards of translation. Frequently, trations. a legal concept does not accurately translate from one language or legal system to another. The target Proponents for greater enforcement authority and culture might not have an equivalent legal concept. responsibility for customs offer two reasons: (a) For example, not all languages have an equivalent efficiency and effectiveness and (b) morale of cus- word for “audit.” The drafting team should take toms officers. First, customs is uniquely situated to care to understand what a particular concept re- enforce customs and other laws in border regions presents in the original language and provide a because it has the infrastructure to examine goods description, definition, or explanation to prevent and people that move across the borders. It also has misunderstandings. familiarity with cross-border activities. Risk management tools, information technology, and coop- Enforcement of Customs Laws eration with other government agencies and other customs administrations would enhance customs’ Every customs administration has enforcement abilities to enforce customs and other laws at the duties. However, the scope of the responsibility borders because these tools would enable the agen- and authority differs widely from one administra- cies to assess threats and deal proactively with pos- tion to another. Some customs agencies have vast sible violations. Therefore, it is efficient and effec- powers to enforce customs laws and regulations. In tive to assign appropriate authority to customs some countries, customs derives enforcement agencies to enforce customs and other laws related powers from its penal codes, and these powers are to cross-border violations. not confined to matters related to customs law. At Second, the advocates of a substantial enforce- the other end of the spectrum, some customs ment role for customs also claim that customs offi- agencies play more limited roles. They enforce the cers should be given the authority to search, detain, customs law related only to revenue collection by arrest, seize, and investigate people, goods, and “the inspection of goods and the classification and means of transportation as related to actual or sus- valuation of merchandise” (Lane 1998, p. 78). pected customs violations because limiting cus- Because of the increasing need to fight customs toms’ enforcement powers to revenue collection fraud (intellectual property rights violations, rev- would demoralize customs officers (Zarnowiecki enue fraud, and transshipment, for example), nar- 2003). They believe the practice of handing over the cotics trafficking, money laundering, and export investigation to another government agency such violation (trafficking in weapons and munitions, as the police would discourage customs officers among others), those customs agencies with lim- from discovering violations at the borders in the ited powers might require a greater range of first place because this would, in many cases, result enforcement authority. in a loss of incentives, such as additional salary ben- The WCO’s Expert Working Group on commer- efits and social recognition, for customs officers. cial fraud recommends the following set of enforce- They fear that such demoralization would decrease ment powers (WCO 2004a): customs’ effectiveness and weaken customs’ • examination (compliance with the customs law) integrity. • right of search (illegal importation and exporta- The Revised Kyoto Convention deals with tion) enforcement issues specifically in Annex H, which • sampling sets out standards and recommended practices to • seizure ensure fairness, speed, consistency, transparency, • right to access documents and predictability of enforcement of customs • post-import and post-export audit laws while aiming for minimal disruption to • detention or arrest trade and travel. The annex deals with the defini- • charge tion and investigation of breaches of the customs • prosecution law and with customs’ role in the administrative 64 Customs Modernization Handbook

settlement of offenses. This annex, however, does (IPR) Model Legislation is being developed to help not cover all the activities that customs usually member administrations enact border measures engages in when dealing with customs and other designed to protect intellectual property rights, cross-border offenses because many of those activi- without interfering with legitimate trade (WCO ties are beyond customs laws and regulations. 2004b).44 This model legislation is intended to pro- Investigation and administrative settlement, how- vide guidance to those customs administrations ever, are two topics in this area that must be covered that are implementing intellectual property rights specifically in the customs legislation. The Conven- legislation for the first time and to those conduct- tion does not limit the powers granted to customs ing legislative reviews or reforms. It will help cus- under individual national legislation. Instead, it toms meet the standards set in the TRIPS Agree- acknowledges diversity in the scope of customs ment. However, the IPR Model Legislation is not enforcement powers among its member nations. binding upon members and goes beyond the mini- Specifically, which enforcement powers to grant mum standards required in the TRIPS Agreement. to customs officers must be determined in light The WCO first developed the IPR Model Legisla- of the country’s constitution, legal system, and tion in 1988. Since then the model legislation has institutions. Yet, regardless of the number of undergone two revisions, and the WCO aims to enforcement authorities and their scope of respon- keep it up-to-date through regular revisions, incor- sibilities, it is important for each customs adminis- porating best practice and keeping in line with the tration to use risk management tools, information suggestions of the World Intellectual Property technology, and cooperation with other govern- Organization. Box 3.4 describes the process of ment agencies and other customs administrations modernizing the Russian Federation customs to achieve fair, speedy, and consistent customs legislation. enforcement in accordance with the principles of the Convention. The WCO offers information and Operational Conclusions training in customs enforcement and is a good source of information on enforcement moderniza- Several key operational implications derived from tion and reforms.42 this chapter stand out.

Model Legislation for International • Customs’ efforts to modernize legislation should Property Rights strive to achieve international legal standards. The Revised Kyoto Convention embodies best The Revised Kyoto Convention is the most compre- practices of national legislation around the hensive international instrument designed to har- world. In particular, it enables each country to monize and simplify customs procedures and prac- meet international commitments concerning tices. However, there are other instruments devised trade and border procedures, including the to support the Convention. The WCO is continu- agreed on rules of the WTO. It also enables each ally developing new tools and initiatives to respond country to tailor its policies and procedures to to changes surrounding customs operations. Such meet its legal, political, cultural, and societal tools and initiatives are designed to be compatible requirements. with and complementary to the Convention. • Implementing a Customs Code aligned with the It is necessary for customs laws and institutions principles of the Revised Kyoto Convention to keep pace with the government’s international would allow for sufficient transparency and pre- commitments. One such example is the enforce- dictability based on providing basic information ment of intellectual property rights, required by the on matters such as rules, decisions, consultation Agreement on Trade-Related Aspects of Intellectual mechanisms, and adequate appeals processes. It Property Rights (TRIPS Agreement) (WTO would eliminate complex or redundant customs 1994b).43 The WCO Intellectual Property Rights formalities that delay clearance and create

42. World Customs Organization, www.wcoomd.org. 43. Articles of TRIPS relevant to customs are 51–60 in Section 4 44. The latest text is available on the WCO IPR-related Web site Special Requirements Related to Border Measures. http://www.wcoipr.org. Legal Framework for Customs Operations and Enforcement Issues 65

BOX 3.4 Modernization of Customs Legislation in the Russian Federation

In 1993, the Russian Federation committed itself The legal and enforcement powers of customs to unifying its customs legislation and imple- are clearly spelled out while the conditions to menting the rules accepted worldwide. In 2003 speed up the customs procedures (pre-entry dec- a new Customs Code was adopted; it entered laration, specific simplified procedures, use of a into force on January 1, 2004. The new law is single classification code, and so forth) have been based on the Revised Kyoto Convention, as well clarified. The new code envisages a broad applica- as on customs legislation of Russia’s key trading tion of IT, electronic customs control, and cus- partners. toms clearance. The process of streamlining and In the new Customs Code, account has been simplifying customs formalities was conditioned taken of the WTO requirements stipulated in by the shift from full physical examination of all Article I “General Most-Favored-Nation Treat- goods to a system of selective inspections based ment,” Article V “Freedom of Transit,” Article VII on risk assessment and risk analysis. This shift is “Valuation for Customs Purposes,” Article VIII expected to facilitate international trade and pro- “Fees and Formalities connected with Importa- vide reliable customs control while ensuring effi- tion and Exportation,” Article X “Publication and cient handling of customs resources. Implemen- Administration of Trade Regulations” of the tation of the code is expected to change the GATT, TRIPS, the Agreement on Rules of Origin, relationship between customs and the business and the Agreement on Implementation of community, which will increasingly be based on Article VII. the principle of cooperation and consultation. The new Customs Code aims to eliminate This approach is consistent with the new concept excessive administrative restrictions on foreign of governing the state, that is, a dialogue between trade, establish clear and consistent rules for the government and the business community, economic operators with regard to transborder and reflects the approach recommended by the movement of goods, as well as reduce the WCO. The approach permits the exercise of pub- administrative discretion of customs officials and lic control while taking into account the needs of the inordinate number of bylaws and adminis- the business community and ensuring openness trative instructions, which had had a negative and transparency of the legislation. impact on the clarity and transparency of cus- While this legislation is a considerable step in toms operations. The final draft of the code was the right direction, the code still contains ambi- prepared in close cooperation with the business guities that could lead to substantial discretion community. A review of an initial draft of the in customs operations. How it will actually be new code was initiated by the Russian Union of implemented needs to be observed carefully by Entrepreneurs. A working group consisting of both the customs administration and the trade representatives from the business community, community. Based on the experience of imple- the State Customs Committee, the Ministry of menting a new Customs Code, there might arise Finance, and the Ministry of Economy devel- a need to adjust or improve the Customs Code oped joint proposals for amendments to the itself or the way it is implemented. It is therefore final reading of the draft code in the Duma. This critical to maintain consultations between the process made it possible for the different groups customs administration and the trade commu- to compromise on many issues. The state has nity to follow the implementation procedures taken significant innovative measures to meet recommended by the Customs Code. the needs of traders, as well as those of ordinary Source: Based on contributions from Leonid citizens, crossing the border. Lozbenko, First Deputy Chairman, State Customs Committee of the Russian Federation 2003. opportunities for unnecessary discretionary discretionary powers; and grant adequate interventions. Also, the legislation would provide authority for the customs administration to for selective verification of cargo based on risk achieve its enforcement and compliance goals. management. It would allow for advance lodg- • Governments need to have in place a development of information or goods declarations and ment strategy that provides a clear view of the post-clearance audits. It would also ensure the customs administration’s role, particularly tak- legal framework for automation, including that ing into account how it will address these needs of electronic communication; avoid ambiguous while achieving and maintaining international provisions that give customs officers excessive standards in its customs legislation. 66 Customs Modernization Handbook

• As a practical way to modernize the Customs Lane, Michael. 1998. Customs Modernization and the Interna- Code, it is critical for a customs administration tional Trade Superhighway. Westport, Conn.: Quorum Books. to maintain consultations with the trade com- Raven, John. 2001. Trade and Transport Facilitation. Discussion munity. Paper No. 427. Washington, D.C.: World Bank. • The provisions of the Revised Kyoto Convention Renton, David. 1975. The Preparation of Legislation: Report of a Committee Appointed by the Lord President of the Council. can be used as a checklist to make a point-by- House of Commons. Preparation of Legislation Committee point comparison between best practices and Sessional Papers. Volume xii, Cmnd. 6053, pp. 76–84; what exists in the current code. It is also highly London: HMSO. recommended that the national legislation of Steenlandt, Marcel, and Luc De Wulf. Custom Pragmatism and Efficiency: Philosophy of a Successful Reform. Morocco. other countries be studied and that other cus- Stein, Jacob A., Glenn A. Mitchell, and Basil J. Mezines. 1977. toms agencies be consulted to learn from their Administrative Law. Washington, D.C.: Matthew Bender. experience. Once the gaps in the current code Thuronyi, Victor. 1996. “Drafting Tax Legislation.” In Victor Thuronyi, ed. Tax Law Design and Drafting. Washington, are identified, the remedies to the problem— D.C.: International Monetary Fund. based on international standards and tailored to Turnbull, Ian. 1993. Plain Language and Drafting in General country-specific needs—should be proposed as Principles. Australian Office of Parliamentary Counsel. Canberra. www.opc.gov.au/plain/docs/plain_draftin_ new legislation. principles.doc. • To be functional and effective, the proposed leg- United States Customs and Border Protection. 2003. Summary islation must fit into the local culture and the of Laws Enforced by CBP. Washington, D.C.: United States national legislative framework, and should be Department of Homeland Security. www.Customs.ustreas .gov/xp/cgov/toolbox/legal/summary_laws_enforced. supported by sufficient judicial capacity. WCO (World Customs Organization). 1997. Text of the Revised • Modern customs legislation should strive to put Kyoto Convention. Brussels. www.wcoomd.org/ie/En/ in place a comprehensive body of customs- Topics_Issues/FacilitationCustomsProcedures/Kyoto_New/ Content/content.html. related laws that establish the clear competence ———. 2000. “The Revised Kyoto Convention, General Annex and enforcement powers of customs. Guidelines, Chapter 3 Clearance and other formalities, Part 6 Checking the Goods declaration.”Brussels. Further Reading ———. 2004a. “Commercial Fraud Manual for Senior Customs Officials.”Brussels. Lane, Michael. 1998. Customs Modernization and the Interna- ———. 2004b. “Model Provisions for National Legislation to tional Trade Superhighway. Westport, Conn.: Quorum Implement Fair and Effective Border Measures Consistent Books. with Agreement on Trade-related Aspects of Intellectual Thuronyi, Victor. 1996. “Drafting Tax Legislation.” In Victor Property Rights.”www.wcoipr.org. Thuronyi, ed. Tax Law Design and Drafting. Washington, WTO (World Trade Organization).1994a.“Agreement on Imple- D.C.: International Monetary Fund. mentation of Article VII of the General Agreement on Tariffs World Customs Organization. 1997. Text of the Revised Kyoto and Trade.” Geneva. www.wto.org/english/docs_e/legal_e/ Convention. Brussels. www.wcoomd.org/ie/En/Topics_Issues/ 20-val.pdf. FacilitationCustomsProcedures/Kyoto_New/Content/ ———.1994b. “Annex 1C: Agreement on Trade-Related Aspects content.html. of Intellectual Property Rights.” Legal Instruments—Results of the Uruguay Round. Vol. 31, 22I.L.M. 81. Geneva. References www.wto.org/english/docs_e/legal_e/27-trips.pdf. ———. 1994c. “Decision on Texts Relating to Minimum Values De Wulf, Luc, and José B. Sokol, eds. Custom Modernization and Imports by Sole Agents, Sole Distributors and Sole Initiatives: Case Studies. Washington, D. C.: World Bank. Concessionaires.”WTO Document LT/UR/D-4/1. Geneva. European Union. 1992. Council Regulation (EEC) No 2913/92 ———. 1994d. “Decision Regarding Cases Where Customs of 12 October 1992 establishing the Community Customs Administrations Have Reasons to Doubt the Truth or Accu- Code. Brussels. europa.eu.int/smartapi/cgi/sga_doc? racy of the Declared Value.” WTO Document LT/UR/D-4/2. smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc= Geneva. 31992R2913&model=guicheti. Zarnowiecki, Michel. 2003. “Managing Integrity in Customs.” Jackson, Justice Robert H. 1941. Attorney General’s Report on the Prepared for the International Anti-Corruption Conference. Administrative Procedure Act. Washington, D.C.: United May 29–30. Seoul, Korea. States Department of Justice. 4

INTEGRITY IN CUSTOMS

Gerard McLinden

TABLE OF CONTENTS 4.3 Transparency: Key Issues and Questions 77 Consequences of Corruption in Customs 68 4.4 Automation: Key Issues and Types of Corruption in Customs 70 Questions 78 The International Customs Response 72 4.5 Modernization of Customs: Key Issues Operational Conclusions 87 and Questions 79 Further Reading 88 4.6 Audit and Investigation: Key Issues and References 89 Questions 80 4.7 Code of Conduct: Key Issues and LIST OF TABLES Questions 81 4.8 Are Low Salary Levels Really a 4.1 Customs Functions and Their Vulnerability to Factor? 82 Corruption 69 4.9 Human Resources: Key Issues and 4.2 Strategies to Reduce Corruption Questions 84 in Customs 73 4.10 Morale and Organizational Culture: Key Issues and Questions 85 LIST OF BOXES 4.11 Relationship with the Private Sector: 4.1 Leadership and Commitment: Key Issues Key Issues and Questions 86 and Questions 75 4.12 Lessons Learned from Customs Reforms to 4.2 Regulatory Framework: Key Issues and Control Corrupt Behavior 88 Questions 76

In many developing countries, high levels of corrup- This chapter describes the scope and nature of tion drastically reduce the effectiveness of key public the corruption problem in customs and identifies a sector agencies. Customs administrations are no range of practical approaches that can be employed exception and are frequently cited as among the most to address it. The chapter is designed to provide a corrupt of all government agencies. Given the vitally comprehensive framework for analyzing the poten- important role customs plays in revenue collection, tial effectiveness of a range of anticorruption trade facilitation, national security, and the protec- strategies and provides practical guidance and tion of society,the presence of corruption in customs advice to customs officials, consultants, donors, can severely limit a nation’s economic and social and other stakeholders engaged in the identifica- prospects and national development ambitions. tion and implementation of sound anticorruption and integrity development strategies. Attempts to deal with corruption in the past have The author gratefully acknowledges the contribution of Michel Zarnowiecki. often been frustrated by well-intentioned but totally 67 68 Customs Modernization Handbook

ineffective calls for the adoption of industrial coun- multinational companies are increasingly subjected tries’ standards of administrative honesty, effective- to international competition, the presence of wide- ness, and efficiency or, perhaps, the adoption of spread corruption in customs can act as a major dis- quick fix solutions designed to work around rather incentive to foreign investment. In addition, corrup- than deal with the problem. Recourse to preship- tion in customs takes on new significance in the ment inspection services has at times been inspired current environment of heightened concern about by such motives. To effectively tackle the problem of the security of international trade. Sophisticated sys- corruption in customs, a comprehensive and sus- tems and procedures designed to detect weapons of tainable approach that addresses the underlying mass destruction will offer little protection if they can causes and consequences is required. There are no be circumvented simply by bribing customs officials. quick fix solutions. Rather, a pragmatic and In many developing countries, customs’ collec- situation-specific approach is necessary—one that tions continue to represent a large portion of gov- draws on the lessons learned from previous efforts ernment revenue. Figures provided by the WCO around the world and that takes into account the suggest that in many countries customs collects fundamental issues of motive and opportunity. over 50 percent of all government revenue (WCO The first section of this chapter provides an intro- 2003a), and delays in the processing of imports and duction to the nature of the corruption problem in exports can cause significant losses, increase the customs and describes some important considera- cost of doing business, affect the competitiveness of tions to take into account when framing an effective a country’s firms, and scare away foreign invest- anticorruption strategy for customs. It also provides ment. The presence of widespread corruption can, an overall framework based principally on the work therefore, destroy the legitimacy of a customs of scholars such as Robert Klitgaard. The second sec- administration and severely limit its capacity to tion reviews the international customs community’s contribute to government objectives. The adverse response to the problem and outlines a comprehen- effects of corruption within a customs administra- sive 10-point framework for tackling corruption, as tion include the following: contained in the World Customs Organization’s • a reduction in public trust and confidence in (WCO’s) Arusha Declaration on Integrity in Cus- government institutions toms. The section also provides some practical • significant revenue leakage guidelines on how to develop, implement, and mon- • a reduction in the level of trust and cooperation itor a national customs integrity action plan and between customs and other government agen- how to establish a process and sustainable culture of cies and between customs and relevant counter- continuous improvement. A series of key issues and parts in other countries questions are included in a simple checklist for each • low staff morale and esprit de corps (although of the 10 points (see boxes 4.1–4.7 and 4.9–4.11). this is both an effect and a cause) The final section presents the key operational con- • a reduction in the level of voluntary compliance clusions derived from the chapter. with customs laws and regulations by the business sector Consequences of Corruption • a reduction in national security and community in Customs protection • the maintenance of unnecessary barriers to Customs plays a central role in every international international trade and economic growth trade transaction and is often the first window • increased costs, which are often borne by the through which the world views a country. The impli- poorest sectors of the community. cations of corruption in customs on a nation’s capacity to benefit from the expansion of the global econ- Most, if not all, customs functions are susceptible to omy are obvious. Data obtained from the World corruption; however, the following activities are fre- Bank’s Investment Climate Surveys indicate that 40 quently cited as being particularly vulnerable as they percent of firms included in the 80-country survey provide both a motive for unscrupulous traders to rate Customs/Trade regulation as a major or moder- circumvent customs regulatory requirements and an ate constraint to business investment (World Bank opportunity for corrupt customs officials to seek 2003). As business and investment decisions by bribes. Table 4.1 lists a number of areas and examples Integrity in Customs 69

TABLE 4.1 Customs Functions and Their Vulnerability to Corruption

Selected Customs Functions Examples of Integrity Violations

Processing of import, export, and Soliciting or accepting payment to transit declarations • accelerate the processing of documents • ignore the fact that some cargo listed on the manifest was not declared • certify the exportation of fictitious exports or provide for a wrong HS classification • permit goods in transit to be released for domestic consumption.

Assessment of origin, value, and Soliciting or accepting payments to classification of goods • permit under-invoicing of goods • not challenge the declaration of goods under a different HS that attracts a lower tariff rate • accept a false country of origin declaration, thus permitting the importer to benefit from a preferential tariff regime.

Physical inspection, examination, and Soliciting or accepting staff who would release of cargo • ensure that an inspecting officer is chosen who will take an accommodating approach to the inspection • skip the inspection • influence the findings of the inspection • simply speed up the inspection.

Administration of concessions, Soliciting or accepting payment to suspense and exemption schemes, • permit traders to release, for domestic consumption and and drawback schemes without paying the required import duties, goods that entered under suspense regimes or goods made with inputs that entered under such regimes • obtain a release of the bond that is to protect customs revenues in cases of temporary admission of imports without adequate documentation • permit traders to claim excessive input coefficients for exports produced with inputs that benefited from the suspense regimes • permit traders to claim drawbacks for fictitious exports • permit importers to transfer imports that benefited from duty relief to nonauthorized users or for nonintended purposes, or permitting them to import such goods in excess of the amounts agreed to.

Conduct of post-clearance audits Soliciting or accepting payments to influence the outcome of the audit findings.

Issuing of import licenses, warehouse Soliciting or accepting payments to obtain these licenses and approvals, and authorized trader certificates without proper justification. status approvals

Processing of urgent consignments Soliciting or accepting payments to obtain preferential treatment or speedy clearance.

Source: Author. 70 Customs Modernization Handbook

where corruption can take place in customs. This list often pursued by relatively junior civil servants who is not intended to be exhaustive. may be grossly underpaid and who depend on small Customs is vulnerable to corruption because the but illegal rents to feed and house their families and nature of its work puts its officials, even at junior pay for their children’s education. This corresponds levels, in situations in which they have sole author- closely with Hors’ concept of routine corruption.2 ity and responsibility; in which they are authorized Grand corruption usually involves more senior offi- to make important decisions on the level of duty or cials and significant amounts of money. Like Hors, taxes or admissibility of imports and exports; and TI recognizes that different strategies are required to in which careful supervision and accountability is deal with the two types of corruption. difficult. In addition, they work face-to-face with Without attempting to be exhaustive, it is useful members of the trading community who have a to consider a further classification of corruption strong incentive to influence the decisions made by that has practical applications to the customs work- customs officials. High tariffs and complex regula- ing environment, namely, bribery, nepotism, and tions offer significant incentives for traders to try to misappropriation (Nye 1977). reduce import charges and speed up transactions. Bribery in the customs context includes the pay- That many officials are poorly paid is often a strong ment of money to secure or facilitate the issuance incentive to accept or solicit bribes in the execution or processing of licenses, clearances, and authori- of their duties. ties; payment to alter or reduce duty or taxation liabilities; payment to ensure that officials turn a blind Types of Corruption in Customs eye to illegal activities; and payment or kickbacks provided after the fact, to ensure that an individual Irene Hors, of the Organisation for Economic successfully obtains a lucrative exemption from Co-operation and Development (OECD) Develop- normal administrative formalities. Customs offi- ment Centre, has identified three types of corrup- cials often have discretion over such disbursements tion that typically occur in the customs working and may be tempted to corruptly charge monopoly environment and suggests that the strategies neces- rents. For example, in the Philippines prior to the sary to deal with the three types of corruption vary reforms of the late 1990s, customs officials seemed significantly (Hors 2001): to consider that they had the right to obtain com- • routine corruption, in which private operators pensation for their services. Businesses had become pay bribes to obtain the speedy completion of accustomed to giving small bribes as part of their routine customs procedures standard operating procedures. It was generally • fraudulent corruption, in which the trader or accepted that it was necessary to pay someone to agent asks customs officials to turn a blind eye to “facilitate” even fully legitimate transactions, and to certain illegal practices to reduce taxation liabil- have the services of someone personally friendly ity or fiscal obligations with customs to avoid harassment. In Bolivia, • criminal corruption, in which criminal opera- before the reform of the late 1990s, many customs tors pay bribes to conduct a totally illegal but staff worked pro bono and had to find compensa- lucrative operation, such as drug trafficking or tion by soliciting and accepting facilitation the abuse of export promotion schemes. money—an officially sanctioned bribery system.

1 Nepotism in the customs context can include Transparency International (TI) takes a different such behavior as the selection, transfer, or promo- approach and divides corruption into two broad tion of individuals or groups on the basis of an types: petty corruption and grand corruption (TI existing relationship rather than on merit; the 1997). Petty corruption is described as “survival” awarding of lucrative customs appointments; and corruption—a form of corruption that is most the allocation of scarce government resources to individuals on a nonmerit basis. Nepotism is most 1. Transparency International is a nonprofit organization based in Berlin with chapters in more than 60 countries. Its focus is on 2. The terms “routine” and “petty” are used to describe a partic- corruption prevention at the international and local levels. Its ular form of corruption that is prevalent in many countries. The Corruption Perception Index is the most comprehensive quanti- impact of such corruption is, however, far from inconsequential tative indicator of cross-country corruption available. and is frequently extremely damaging and difficult to control. Integrity in Customs 71 often seen in the customs administrations of ful to accept such payments, in some countries this microstates or in larger administrations that have practice is so widespread and such a central ele- border posts that are geographically remote from ment of the working relationship between customs headquarters. Under such circumstances, customs officials and members of the business community officials often develop close bonds with members of that it has become a quasi-accepted practice. Fre- the small communities in which they live and work quently, the proceeds of the facilitation payments and find it extremely difficult to maintain an arms- are pooled and shared among colleagues and length relationship with members of their extended supervisors, often according to a well-specified family or with members of the social or ethnic formula. groups to which they belong. Misappropriation includes a wide range of An Analytical Framework for Understanding behavior such as theft, embezzlement, falsification Corruption of records, and fraud. It can be seen at the individual, group, or organizational level. While this form A useful analytical framework to analyze corrup- 3 of corruption has been reported in many industri- tion is proposed by Robert Klitgaard (1988). alized countries, it is also a common factor in Klitgaard suggests that corruption is most likely to the customs administrations of many developing occur when agents (individuals or groups) enjoy countries in which administrative controls or monopoly power over clients, when agents enjoy checks and balances are not always present and discretionary power over the provision of goods or where systems to ensure appropriate supervision services, and when the level of accountability is low. and audit of financial transactions are not well According to this framework, the probability of developed. corruption occurring follows a simple equation: Corrupt behavior can range from the individual Corruption Monopoly Discretion to the widespread and systemic. Many observers Accountability note that corruption in customs is often well (C M D A) organized into networks, with members of the net- This framework has particular relevance for the works sharing the obligation of distributing the customs environment where, due to an administra- profits from corrupt practices with colleagues and tive monopoly, customs administrations are often superiors. This safeguards and protects the network the only agency with responsibility for certain from outside intervention and disruption, render- administrative and regulatory functions; where ing its eradication extremely difficult. Corruption customs officials, at even relatively junior levels, can be initiated by either the client or the agent (it enjoy considerable discretionary decisionmaking takes two to tango); can entail acts of omission or power, and discharge important administrative commission; can involve illicit or licit services; and functions; and where the level of supervision and can be practiced both inside and outside the organ- accountability is often poor. ization (Klitgaard 1993, p. 221). Klitgaard’s framework has been influential in shaping the direction of the anticorruption efforts Definition of Corruption in several countries and has been used extensively in the development of the WCO’s Revised Arusha The World Bank and the WCO define corruption Declaration on Integrity in Customs, as well as simply as “the misuse of public power for private in a range of the WCO’s integrity-related tools. benefit” (World Bank 2000). This definition focuses on the departure from, or contravention of, some form of public duty, and the provision or 3. Klitgaard’s conclusions accord closely with those of Irene receipt of some form of improper inducement. Hors of the OECD Development Centre. Hors, drawing on the lessons learned from the anticorruption and modernization Criminal and fraudulent corruption mostly takes efforts in the customs administrations of three countries, con- place in secrecy, or at least without official sanction. cluded that the customs working environment is vulnerable to Routine or petty corruption, however, is often prac- corruption because there is (a) a discretionary interface between customs officials and private sector operators, (b) a possibility ticed with little secrecy. It goes by such names as for customs officials to operate within a network of accomplices, “facilitation money” or “tea money.” While unlaw- and (c) a lack of official controls. 72 Customs Modernization Handbook

Klitgaard’s framework provides an overall concep- corruption in customs had been slow. In reaction, tual basis for examining the critical issues involved the WCO called for a comprehensive review of the in developing a sound anticorruption strategy. Arusha Declaration and its practical implementa- Inspired by this framework, Klitgaard proposes tion in member administrations. This led to the the following range of corrective strategies. His preparation of the Revised Arusha Declaration that strategies consist of five distinct but related steps. was unanimously endorsed by the WCO Council in These include June 2003. The Revised Arusha Declaration on Integrity in • changing administrative systems to remove the Customs consists of 10 distinct but related ele- corruption-inducing combination of monopoly ments considered essential for the development power combined with officer discretion plus and implementation of a comprehensive and sus- limited accountability tainable anticorruption and integrity enhancement • selecting agents (in this case, customs officials) program. It is consistent with the framework pro- for incorruptibility as well as job-specific skills vided by Klitgaard and is closely aligned with a and educational qualifications range of internationally agreed on customs instru- • changing the rewards and penalties mix facing ments, standards, and best practice approaches, agents and clients including the Revised Kyoto Convention. It is also • increasing the likelihood that corruption will be designed to strike an appropriate balance between detected and punished the positive strategies (reform and modernization, • altering attitudes toward corruption. leadership, progressive human resources [HR] management policies, and so forth) favored by Klitgaard’s strategies and examples of their practi- many within the international customs community cal application in the customs environment are and the repressive strategies (sanctions, controls, illustrated in table 4.2. investigation, prosecution) promoted by others. The 10 elements of the Revised Declaration follow: The International Customs • Leadership and Commitment Response • Regulatory Framework The vast majority of literature available on institu- • Transparency tional or administrative corruption in developing • Automation countries can be described as problem reporting • Reform and Modernization rather than problem solving. Beyond advocating the • Audit and Investigation introduction of effective and efficient customs pro- • Code of Conduct cedures, there is little material available that pro- • Human Resources Management vides practical solutions to the problems associated • Morale and Organizational Culture with predicting, controlling, and eliminating cor- • Relationship with the Private Sector. ruption in public administration, particularly in the customs environment. In response to this, and in Collectively, these 10 key elements are designed to recognition of the fact that customs is often cited as reduce monopoly power and the inappropriate use one of the most corrupt sectors of government, the of official discretion, and at the same time increase international customs community, through the the level of practical accountability. They link WCO, commenced work in the mid to late 1980s to directly to Klitgaard’s equation and strategies out- formulate a comprehensive integrity and anticor- lined earlier in this chapter. In developing the ruption strategy. This work resulted in 1992 in the Revised Arusha Declaration, the WCO was con- unanimous adoption by World Trade Organization scious of the different social, political, and eco- (WTO) members of the Arusha Declaration on nomic circumstances faced by its member adminis- Integrity in Customs. Since that time, the Arusha trations. It therefore deliberately designed the Declaration has become the principal anticorrup- Declaration to be nonprescriptive in nature. In tion framework for the WCO’s 162 member cus- other words, the Declaration provides a compre- toms administrations. But progress with stemming hensive conceptual framework, but the actual Integrity in Customs 73

TABLE 4.2 Strategies to Reduce Corruption in Customs

Strategy Practical Activities

Change administrative systems • Reengineer administrative systems or procedures to enhance trans- to remove the corruption- parency and predictability inducing combination of • Introduce competition or contestability in the provision of key monopoly power combined services with officer discretion plus • Contract out selected customs functions limited accountability • Introduce self-assessment to shift the onus of responsibility for compliance to client groups • Introduce automation to limit official discretion and face-to-face contact between officials and clients, enhance transparency, and streamline customs procedures • Implement job rotation and staff mobility schemes • Increase transparency by publishing the criteria upon which officials are entitled to exercise official delegations Select customs officials for • Widen the selection criteria for customs recruitment to include incorruptibility as well as job- integrity-related factors specific skills and technical • Introduce merit as the key criteria for recruitment and promotion competence • Carefully screen potential employees, including references from previous employers or educational establishments and background checks of potential criminal record • Recruit senior officials who are known for their integrity from other agencies and the private sector Change the rewards and • Evaluate the present remuneration levels and conditions of penalties mix facing agents employment to ensure competitive conditions and clients • Provide nonsalary benefits that are difficult to obtain elsewhere • Restructure bonus or rewards systems to reinforce positive behaviors and, where needed, increase these rewards • Introduce performance management and appraisal systems • Encourage and reward officials who identify vulnerabilities in administrative systems and procedures • Increase penalties to provide a disincentive to engage in corrupt behavior • Ensure that penalties are calibrated to correspond to the offense • Ensure that all officials, regardless of rank, are subject to the same penalties Increase the likelihood that • Undertake a thorough analysis of customs’ administrative systems corruption will be detected and controls to identify vulnerable points • Rely on client and general public for information • Assess issues such as internal controls, reporting relationships, staff competence, official delegations, and decisionmaking powers • Identify which positions and activities carry an inherent risk of corruption and the adequacy of controls or safeguards in place • Establish internal audit and investigation units to thoroughly investigate any information provided or allegations made • Encourage officials and clients to report corruption to independent anticorruption agencies, and ensure confidentiality and anonymity for the information provided • Ensure that punishments are meted out promptly, and vindicate staff from unjustified accusations; sanctions should be commensurate with the severity of the violation and sanctions should be made public to serve as examples for others Alter attitudes of staff and • Instill esprit de corps in customs that will raise the moral costs of traders toward corruption corruption • Implement or improve professional development and training • Introduce and promote a code of conduct; make this code widely available to staff and the public; consider making staff sign this code of conduct (upon recruitment or anniversary of appointment) • Ensure that managers and supervisors lead by example • Introduce a zero tolerance policy for acceptance of gifts • Publicize the names of officials found guilty of corruption

Source: Author, based on Klitgaard 1988. 74 Customs Modernization Handbook

implementation of each key element is up to indi- bility, particularly with the private sector. An ade- vidual customs administrations. quate political framework, strong commitment A similar, nonprescriptive philosophy has been from the government, and support from the busi- employed for all other WCO integrity-related ness community are essential. In Bolivia, Morocco, materials, tools and training, and technical assis- and Peru, strong political backing for the reform tance programs that were developed as part of the from the highest political authority and unwaver- WCO Integrity Action Plan. For example, to assist ing support from the business community were key member administrations to implement the provi- factors in decreasing corruption. Feedback is also sions of the Revised Arusha Declaration and to needed, and can be provided by performance indi- develop a culture of continuous improvement, the cators, user surveys,5 and through consultation WCO has developed an Integrity Development with the business community. Guide, established an Integrity Resource Center, Experience in several countries suggests, how- prepared a Model Code of Ethics and Conduct, and ever, that where corruption in customs has been a conducts a range of national and regional integrity long-term feature of the customs–business envi- seminars, workshops, and training programs. In all ronment it is extremely difficult for managers and of these tools or programs, the onus is on individ- supervisors to take a strong stance against staff ual customs administrations to develop and imple- engaged in corrupt practices that they themselves ment realistic programs that are based on their own were engaged in at earlier periods in their careers. needs and circumstances.4 In such cases it may be useful to examine the feasi- A summary of the Revised Arusha Declaration’s bility of introducing a limited official amnesty. 10 key elements, together with a list of recom- Such an approach must, however, be introduced as mended actions, follows. Where possible, discus- part of a comprehensive anticorruption strategy sion of the key elements has been complemented by and should incorporate stiff new penalties for the introduction of country examples emanating future breaches of integrity. Likewise, it should be from the experiences of the World Bank and other accompanied by a widely publicized zero tolerance international organizations. policy and a commitment to investigate and prose- cute any future allegations of corruption. Care must be taken to ensure that officials understand Leadership and Commitment that the amnesty is a “once only” opportunity to A firm commitment at the highest political level to clear the slate. maintaining a high standard of integrity through- Government actions are essential to demon- out customs is particularly important in societies strating a commitment to combat corruption. Such where corruption is a widespread or systemic prob- actions may include the establishment of ombuds- lem. The government needs to be aware of the steps men, supreme audit bodies, and anticorruption that customs is taking, and customs should ensure agencies. Such action however, can only become that the government receives regular updates on effective if laws are enforced adequately. In Hong progress through publications, briefings, verifiable Kong (China), the Independent Commission performance indicators, and through the media. Against Corruption was successful because the Effective integrity programs also require a high agency was provided with independence, signifi- level of management support and leadership. It is cant financing, direct citizen oversight, and consid- important to set up clearly defined supervisory and erable legal powers. decisionmaking structures and obligations. Box 4.1 reviews important questions to consider A strong champion at both the political and cus- regarding top level commitment to eradicating toms management levels is essential. Frequent corruption. changes at the top of the administration prevent a clear signal from being sent out, and damage credi-

5. See www.seerecon.org/RegionalInitiatives/TTFSE/ for a description of performance indicators and surveys used in 4. All WCO integrity-related tools are available on the WCO Southeast Europe under the World Bank–supported Trade and Web site www.wcoomd.org. Transport Facilitation program. Integrity in Customs 75

BOX 4.1 Leadership and Commitment: Key Issues and Questions

Has high-level multipartisan support and politi- Are periodic surveys conducted to assess cal commitment to the fight against corruption stakeholders’ perceptions of customs’ commit- been obtained? ment to integrity? Have the government and customs adminis- Does customs lead or participate in wider tration adopted a zero tolerance policy? all-of-government integrity initiatives? Are “big fish” as well as small ones investi- Is appropriate priority afforded to the anticor- gated and prosecuted? ruption strategy in corporate vision, mission, val- Are clear responsibilities, obligations, and ues, resource allocation processes, and strategic accountability for all customs managers, supervi- planning documents? sors, and staff established and understood? Has the use of an official amnesty been con- Is promotion to managerial positions depen- sidered? dent on integrity performance? Do senior managers and supervisors lead by Source: Based on WCO 2003b. example?

Regulatory Framework toms should maintain a close relationship with other responsible agencies, for example, through Customs administrations should simplify their regular interdepartmental liaison processes. A key laws, regulations, administrative guidelines, and initiative is the adoption of risk management prin- procedures so that customs duty assessment and ciples to ensure that trade and travel risks are clearance can proceed without undue delay and red assessed, and to identify and investigate integrity tape. This often involves changing or restructuring risks within the organization (see annex 1.D for current systems and procedures to reduce or elimi- further comments on this subject). nate pointless bureaucratic processes. In many Box 4.2 presents key questions for assessing cus- cases this will involve elimination of nontariff regu- toms’ regulatory framework with regard to pro- lations, unnecessary steps, or duplication in admin- moting integrity. istrative procedures. Possible strategies to minimize regulation include the adoption of internationally agreed on Transparency standards, including the Harmonized System (HS) Tariff Convention, WTO Valuation Agreement, Air Transparency is a key issue for all customs adminis- Transport Association (ATA) Carnet Convention or trations. Increasing accountability and maintaining Istanbul Convention, WTO Trade-Related Aspects an open and honest relationship with clients and of Intellectual Property Rights (TRIPS) Agreement, stakeholders is crucial to maintaining public trust and WCO Revised Kyoto Convention on the and confidence in the performance of customs Harmonization and Simplification of Customs functions. Clients must be able to expect a high Procedures. In this regard, Bolivia, Cameroon, degree of certainty in their dealings with customs Morocco, Mozambique, Peru, and Turkey have all authorities. This can only be achieved when cus- adopted new Customs Codes that have allowed the toms laws, regulations, procedures, and administra- introduction of new and simplified procedures tive guidelines are made public, are easily accessi- more in line with evolving business practices. ble, and are applied in a consistent manner. Any Barriers to the free flow of goods, such as nontariff deviations from laws, regulations, and discre- regulations on quotas, import licenses, and per- tionary power should be justified and documented mits, should also be reduced or rationalized to the for later review. In Pakistan, the lack of trans- fullest extent. Where possible, the number of tariff parency in the design of a customs reform project rates should be moderated. where no diagnostic report was made public, and The rationalization of both tariff and nontariff the lack of participation by supporting interests, barriers extends beyond the policy responsibility of clearly contributed to the project’s failure to achieve the customs administration. In this respect, cus- its initial objectives (Hors 2001). 76 Customs Modernization Handbook

BOX 4.2 Regulatory Framework: Key Issues and Questions

Have customs laws, regulations, administrative Have internationally agreed on conventions, guidelines, and procedures been reviewed, har- instruments, and accepted standards including monized, and simplified to reduce unnecessary the Revised Kyoto Convention, the WCO HS duplication and red tape? Convention, the WTO Valuation Agreement, the Has a process of continuous review and ATA Carnet Convention, and the WTO TRIPS improvement of systems and procedures been Agreement, been implemented? introduced? Do regional customs unions and economic Have tariff rates been moderated and the groups adopt internationally agreed on stan- number of different rates of duty rationalized? dards and work toward regional harmonization Has a formal process for the review and of systems and procedures? rationalization of exemptions and concessions Does the administration actively participate been introduced? in international benchmarking and information Has a program of consultation and coopera- sharing initiatives? tion with other government agencies been established to examine means of rationalizing Source: Based on WCO 2003b. regulatory requirements?

Administrative or judicial review should be avail- cators, including detailed and regularly updated able. In the first instance, such a review should be clearance times. In Peru, customs uses its Web site made on an internal basis. However, clients should to make available to users and to the public in gen- also have access to an independent, external review. eral, information on customs rules and regulations, In developing or implementing appeal or review and all its activities and programs, including the mechanisms, an appropriate balance should be details of various customs declarations processed. struck between the need to make the process inex- In Turkey, legislative arrangements are updated on pensive, timely, and accessible and the need to customs’ official Web site and traders are provided ensure that it is not used inappropriately for frivo- with guidance on the formal procedures to be used lous appeals. Client service charters are a way to for seeking advanced rulings on tariff and valua- increase accountability and demonstrate customs’ tion. Internal transparency standards can be commitment to provide quality service to clients. enhanced by maintaining a tracking and analysis Service standards should be challenging but realistic system for compliments or complaints, ensuring and should be fully supported by the organization’s that any complaints are examined and dealt with systems and procedures. Achieving a consistently promptly, as in Morocco, and that an audit trail high degree of transparency is not an easy task but it exists to enable monitoring of the exercise of officer is vital to the development of a comprehensive discretion. integrity program. Box 4.3 provides examples of questions to raise The experience of the Zambian Revenue when assessing the transparency of customs. Authority (ZRA) provides a practical example of what can be achieved when a commitment to Automation increased levels of integrity is made. The ZRA has introduced a number of positive initiatives Computerization of core customs processes can designed to increase clients’ awareness of customs improve efficiency and effectiveness and remove rules and regulations. These include publication of opportunities for corruption. Well-designed and information brochures and posters, development implemented systems can minimize unnecessary of a public Web site, and regular participation in face-to-face contact between officials and clients public radio programs. In Morocco, the customs and reduce opportunities for the improper exercise Web site contains the essential rules and regulations of discretion. Automated systems can also be con- governing customs operations as well as data on figured to maximize the level of accountability and international trade and various performance indi- provide a reliable audit trail for later evaluation and Integrity in Customs 77

BOX 4.3 Transparency: Key Issues and Questions

Have customs laws, regulations, procedures, and Have Customs Service Charters and perform- administrative guidelines been made public and ance targets been established that are challeng- are they easily accessible? ing but realistic and is the administration’s per- Has the basis upon which customs officials formance reported to the public? are entitled to exercise their discretionary power Does the administration use a range of media been defined and are variations recorded for to publicize information, including brochures, later review and monitoring? posters, Web site, and the mass media? Have administrative and judicial appeal Are all fees and charges publicized? mechanisms been established that allow cus- Have help desks been established to assist toms decisions to be challenged? clients in complying with customs requirements? Have advance tariff and valuation rulings systems been implemented? Source: Based on WCO 2003b.

review. Automation can be used to eliminate the Tight security checks should be undertaken and most vulnerable points in manual systems. appropriate supervision and accountability systems Automation, however, is unlikely to assist the anti- established, particularly when external consultants corruption effort if it is not combined with other or contractors are involved. Where sensitive infor- reform measures. For example, the introduction of mation is stored on automated systems a suitable an automated entry processing system will certainly audit trail needs to be established to protect the reduce the opportunities for customs officials to information and identify any officials who may seek illegal payments for making certain decisions; access information for private or inappropriate but it may also simply result in shifting the point of purposes. corruption to a part of the process that is not auto- Customs must respond to changing interna- mated. By way of example, in the case of cargo tional trade practices that increasingly involve the clearance, the point of collection of illegal fees use of electronic commerce. The electronic service could simply shift from the duty assessment phase delivery of customs functions improves efficiencies to the cargo examination or delivery phase. within the organization and the trading commu- Automated systems can be vulnerable to attack nity and provides a mechanism to reduce the and manipulation from both inside and outside the opportunity and incentives to engage in corrupt organization. This is a particular threat in many behavior. The experience of the Philippine Bureau developing countries where access to skilled and of Customs is illustrative of the capacity of automa- professional IT experts may be extremely limited. tion to drastically improve efficiency and eliminate For instance, field work of World Bank staff high- opportunities for corruption. Prior to automation, light some of these. In one case, the system of ran- processing customs declarations involved the dom allocation had been implemented to break the submission of numerous documents logged in 20 unhealthy relationship that had developed between separate registers, more than 90 separate steps, and traders and officers; but customs staff learned how more than 40 signatures. Automation, coupled with to manipulate the system by running the software a range of supporting reforms, has resulted in a until a “suitable” officer was selected. In another significant reduction in clearance times. It has case, the main software introduced to handle the also significantly reduced the opportunities for processing of declarations and computation of face-to-face contact between customs officials duties was manipulated by officers to maintain and traders and the inappropriate use of official parallel registers. In another case, cars exiting the discretion. port illegally were found to possess fake declara- Important questions to consider in reviewing tion forms, produced using official systems and the role of automation in corruption prevention procedures. efforts are in box 4.4. 78 Customs Modernization Handbook

BOX 4.4 Automation: Key Issues and Questions

Have automated systems for declaration pro- • accommodate automated payment or elec- cessing and cargo reporting been introduced tronic funds transfer systems? based on the IT guidelines contained in the Is the IT infrastructure appropriately managed Revised Kyoto Convention and the WCO Data and has adequate provision been made for Model? ongoing hardware and software maintenance Have the systems been designed to do the and replacement? following: Have appropriate provisions been made to • incorporate appropriate risk assessment and secure the systems from internal or external selectivity capabilities manipulation? • minimize the need for officials to exercise dis- Have appropriate provisions been made to cretionary authority ensure the effective integration of manual and • minimize face-to-face contact between cus- automated systems? toms officials and traders • record any variations or exercise of discre- Source: Based on WCO 2003b. tionary powers for later review and audit

Reform and Modernization sive diagnosis of its needs and should be tailored to the individual circumstances and aspirations of the Corruption typically occurs in situations where administration concerned. A sound reform and outdated and inefficient practices are employed modernization program should focus on simplify- and where private sector operators have an incen- ing and harmonizing systems and procedures, be tive to attempt to avoid slow or burdensome proce- comprehensive in nature, address all customs roles dures by offering bribes and paying facilitation fees. and responsibilities, involve all key stakeholders, Customs administrations should reengineer or focus on developing local ownership, be sustainable reform and modernize systems and procedures to in the longer term, and have sufficient resources to eliminate any perceived advantages that might be ensure effective implementation. The preparation obtained through circumventing official require- of a corruption risk map can be a useful element of ments. Such reform and modernization initiatives this process. should be comprehensive in nature and should Customs administrations should be regarded by focus on all aspects of customs operations and per- governments as important national assets and tools formance. for trade facilitation, revenue collection, commu- This conclusion was also reached by Hors in nity protection, and national security. Comprehen- summarizing the outcome of a series of studies into sive reform and modernization programs should the reform initiatives that had been undertaken by focus on achieving improved performance in each three customs administrations. She suggests that of the following core customs areas: there is a need to identify those points in the customs system that provide special opportunities for corruption and to eliminate or reengineer customs • Leadership and strategic planning systems and procedures to reduce the opportunities • Organizational and institutional framework for corruption and provide less incentive for pri- • Resources (human, financial, and physical) vate sector personnel to pay bribes to customs offi- • External cooperation and partnership cials (Hors 2001). The International Chamber of • Good governance Commerce (ICC) also notes that increasing overall • Customs systems and procedures efficiency and effectiveness is the most appropriate • Legal framework approach to tackling corruption in customs admin- • Change management and continuous improve- istrations (ICC 1997). ment Reform and modernization of a customs • Information technology administration should be based on a comprehen- • Management information and statistics. Integrity in Customs 79

In Bolivia, Cameroon, Morocco, Mozambique, vided, they will offer little deterrence if the proba- Peru, the Philippines, Turkey, and Uganda, the bility of detection and prosecution is low. Internal reform programs generally covered issues relating and external audits can review processes and pro- to all components of customs administration, cedures with the aim of focusing on high risk including the legal framework, systems and proce- areas. Audits also provide an independent opinion dures, IT, strategic management, personnel, and regarding the efficiency and effectiveness of cus- organizational structure. toms procedures and controls. The audit process The Peruvian Customs provides an excellent should include internal check programs, random example of what can be achieved through the sampling, and on-the-spot checks. To prevent col- implementation of a comprehensive reform and lusion between customs officials and clients and to modernization program. In 1963, Peruvian Cus- avoid clients anticipating customs actions, a task toms was characterized by corruption and incom- force comprising staff from different work areas petence. The reform process involved firing corrupt may be set up to conduct unannounced special employees, conducting tests of competence, train- operations or checks at various high risk customs ing, hiring new professionals, establishing stan- posts at irregular intervals. On-the-spot inspec- dards for cargo clearance, tariff simplification, and tions should be conducted frequently enough to establishing reduced duty rates. Over a five-year provide a real deterrent to corrupt behavior. period, staffing was reduced by 30 percent and The development of a comprehensive risk map, cargo clearance time was reduced from 15–30 days which identifies functional areas and processes that to 1–2 days. As a result, imports doubled and rev- are most vulnerable to corruption, can usefully enue collections quadrupled (Lane 1998). In the guide the audit opportunities. The risk map should case of Morocco, improving integrity was not be administration-specific and cover all functional included as a specific priority in their reform and areas and key processes. Staff closely involved in modernization program, but rather, was achieved each of the functional areas should participate in as a positive byproduct of the program. the preparation of the risk map. Likewise, private Box 4.5 reviews questions crucial to determining sector operators should be consulted to identify the role of modernization in battling corruption in their perspective on the most vulnerable parts of customs. the customs system, the key concept being that the staff and clients most closely involved in particular customs processes are best equipped to identify Audit and Investigation particular vulnerabilities and to devise corrective Mechanisms to detect corruption and identify and strategies. reduce organizational vulnerabilities are primary The organization should have the necessary elements of any effective corruption prevention resources to follow up and investigate any allega- strategy. Regardless of the severity of penalties pro- tions or information provided. Mechanisms should

BOX 4.5 Modernization of Customs: Key Issues and Questions

Is customs regarded by the government and the • based on an accurate diagnosis of needs business sector as a key national asset and tool • focused on simplifying and harmonizing sys- for trade facilitation, revenue collection, com- tems and procedures munity protection, and national security? • well supported by all stakeholders including Is customs ranked high on the list of govern- staff ment priorities for international donor assis- • effectively coordinated and managed at the tance? local level Has a comprehensive and long term reform • based on sound performance data and objec- and modernization program been established tive performance measures? that is • adequately resourced, with roles and responsi- Source: Based on WCO 2003b. bilities clearly defined 80 Customs Modernization Handbook

BOX 4.6 Audit and Investigation: Key Issues and Questions

Have effective monitoring and control mecha- Has an internal investigation or internal affairs nisms been established, including internal audit unit been established to promptly investigate functions and internal check responsibilities? allegations of corruption? Is the administration subject to regular and Has a detailed risk map of the administration professional external audits? been developed to identify particular vulnerabili- Does the administration develop and main- ties and devise appropriate corrective strategies? tain a strategic audit plan that identifies priorities Does the administration make use of the and ensures that audit findings and recommen- appropriate independent anticorruption author- dations are implemented? ities to deal with large-scale cases or allegations Are staff working in audit and investigation against senior officials? areas appropriately qualified to undertake their tasks? Source: Based on WCO 2003b.

also be in place to encourage staff and stakeholders also relies on external audit, which is provided by to report corrupt practices, including confidential- the Australian National Audit Office. ity provisions. For example, there should be a chan- Box 4.6 outlines important questions about nel for staff to report corrupt practices directly to the role of audit and investigation in eliminating the most senior level, bypassing their immediate corruption. supervisors. Along these lines, in 2002 the Com- missioner of the Ugandan Revenue Authority Code of Conduct established a confidential e-mail address and tele- A key element of any sound integrity program phone number to allow staff to report corrupt must be the development, issuance, and acceptance practices and officials. Customs managers and of a comprehensive code of conduct that sets out, clients should promote recourse to independent in very practical and unambiguous terms, the stan- anticorruption agencies as a means of demonstrat- dards of behavior and conduct required of employ- ing the organization’s commitment to tackling cor- ees and all customs officials. An effective code of ruption. In recent years the Hong Kong Customs conduct also provides a guide to solving ethical and Excise Department has worked closely with issues for those working in customs and those who the Independent Commission against Corruption have dealings with customs officials. The content of (ICAC) to strengthen the level of integrity within the code should be regularly reinforced to staff.6 the organization. In addition to investigating serious allegations against customs personnel, ICAC To assist customs administrations in developing appropriate codes of conduct, the WCO has pre- has provided training to customs officials and has 7 done much to increase the level of public confi- pared a Model Code of Ethics and Conduct that dence in the customs administration. sets out the following key elements: Staff allocated to audit and investigation work should be appropriately skilled and qualified for the 6. Within the framework of the Free Trade Area of the Americas, role they are to perform. In recognition of the skill trade ministers discussed customs-related issues in Latin requirements necessary to undertake effective inter- America and the Caribbean. Participants followed up on work undertaken since 2001 on a new code of conduct for the region, nal audit and investigative work, the Australian Cus- which was designed to be more robust than existing codes toms Service outsourced its internal audit function around the world. The code seeks to be wide in scope and defi- to a private audit company. Likewise, an experi- nite in its provisions and places emphasis on prevention rather than punishment. The code also establishes an independent enced former Australian Federal Police officer was monitoring authority and provides a role for civil society. The selected to head its Internal Affairs Unit. The organ- Inter-American Development Bank, which is financing the ization does, however, maintain effective control initiative, is requiring all Latin American countries without a through a national audit committee made up of code of conduct for customs officers to implement this new code. It has already been implemented in Honduras, Paraguay, members of the senior management team and St. Vincent and the Grenadines, Dominica, and Grenada. through the development of an annual audit plan See www.regionaladuanas.org that specifies the priorities for the coming year. It 7. See the WCO Web site at www.wcoomd.org. Integrity in Customs 81

• Personal responsibility. Explains the personal purchasing government property such as seized responsibilities and obligations that all officials or forfeited goods. have to comply with the provisions of the code. • Work environment. Explains the need to foster a • Compliance with the law. Explains the need for healthy, safe, and productive working environ- officials to operate within the appropriate legal ment and covers issues such as fairness and framework. nondiscrimination, occupational health and • Relations with the public. Explains the need for safety, misuse of drugs and alcohol, smoking, officials to maintain professional standards of standards of dress, and security. service and behavior in their dealings with the public. Several customs administrations, including the • Acceptance of gifts, rewards, hospitality, and dis- Czech Republic and Turkey, have used the WCO’s counts. Explains the rules and circumstances Model Code of Conduct to develop their own codes associated with the acceptance and rejection of of conduct. offers of gifts, rewards, hospitality, travel, and Issues and questions regarding the role of a code discounts. of conduct are contained in box 4.7. • Avoiding conflicts of interest. Explains the rules associated with officials participating in com- Human Resources Management mercial enterprises, holding shares, being involved in government contracts and tender- Staff remuneration and career management are key ing, and engaging in other paid employment. HR issues that can seriously affect integrity in • Political activities. Explains the rules associated customs. with officials engaging in political activities such as fundraising, elections, and commenting on Staff Remuneration A key element in any effec- government decisions and policy. tive integrity strategy is managing the personal • Conduct in money matters. Explains the rules integrity of staff. People management is just as associated with managing private financial mat- important as the reform of systems and procedures. ters and the handling of official funds. Human resources (HR) policies should not only be • Confidentiality and use of official information. aimed at recruiting and firing staff, but also Explains the rules for the care of official infor- improving staff skills and providing a work envi- mation, documents, records, and so forth, ronment that recognizes and supports the efforts of whether paper-based or stored electronically. staff. (See chapter 2 for further information on HR • Use of official property and services. Explains the management issues in customs.) rules associated with the use and care of official Providing appropriate conditions of employ- assets and property. ment and, in particular, remuneration that includes • Private purchases of government property by staff. bonuses and rewards for good performance, and Explains the rules associated with officials that can sustain a reasonable standard of living, are

BOX 4.7 Code of Conduct: Key Issues and Questions

Has a comprehensive code of conduct compati- Is prompt and appropriate action taken to ble with the WCO model been adopted? redress any breaches of the code that are identi- Are the contents of the code clear and unam- fied? biguous and the penalties for noncompliance Has a periodic review process been estab- understood by staff? lished? Are all managers and supervisors required to Were staff and clients consulted during the lead by example or is there “one rule for us and development of the code? another for you?” Are all staff required to read, understand, and Source: Based on WCO 2003b. endorse the code? 82 Customs Modernization Handbook

BOX 4.8 Are Low Salary Levels Really a Factor?

Based on the results of a study into the customs Fjeldstad, Kolstad, and Lange (2003), drawing administrations of three developing countries, on the experiences of Uganda and Tanzania, Irene Hors of the OECD Development Centre where wage rates and conditions of employment identified low salary levels as a contributing fac- were increased significantly following the adop- tor in the development of corruption within one tion of the ARA model, suggest that even with rel- East Asian customs administration. She noted atively high wages and good working conditions that salary levels for junior officials had not taken corruption may continue to thrive as pay rates can account of inflation and increases in the cost of never effectively compensate officials for the living, and that employees living within their amount they can gain through bribery. Moreover, salaries simply could not rent houses or educate if wage increases are granted but subsequently their children. She did, however, question the not maintained in real terms, then the increases link between remuneration and corruption at may in fact result in less effort and more corrup- higher levels in the customs hierarchy. In this tion than if wages had remained constant. respect she noted that among senior officials, Increased pay may also imply more extensive who sometimes enjoyed relatively generous lev- social obligations resulting in a net loss to the els of salary and working conditions, ostenta- employee. Likewise, in the civil service context, tious living and extravagant expenditures had wage increases in one department could result in become the norm and that the officials’ behav- officials in other agencies viewing their own ior had become conditioned by the behavior of remuneration as unfair with detrimental conse- a wider elite, which customarily indulged in ille- quences for wider civil service morale. They gal activities and paraded excessive riches. She conclude that without extensive and effective concluded by noting that there is probably a monitoring and an overall program of moderniza- continuum of gradually changing situations tion, wage increases may simply produce a highly between officers who are practically obliged to paid but also highly corrupt administration. engage in corruption to provide for basic needs and those who are drawn to bribery by the pres- Sources: Hors 2001; Fjeldstad, Kolstad, and sures of social emulation and greed. Lange 2003.

crucial. Indeed, severe penalties applied to breaches While the research on the long-term impact of of a code of conduct are more likely to be accepted public sector salaries is inconclusive, there is little in circumstances where the difficult working envi- doubt that staff will identify and exploit the many ronment and required levels of integrity are recog- opportunities for illegal rent-seeking if customs nized in the base level of remuneration. However, officials are not provided with sufficient remunera- levels of remuneration all too frequently are tion to provide a basic standard of living for them- extremely low in customs. In Cambodia, for selves and their families. This is particularly the instance, the average annual civil service salary, at case for customs officials engaged in preventive, US$0.60 per day, is well below private sector pay, enforcement, or audit activities where discretionary even for unskilled workers, and creates severe pres- powers are significant and the environment is not sures to engage in additional income-generating conducive to effective supervision and accountabil- activities just to meet basic household expenditures ity. In addition, remuneration should be geared to (World Bank 2001). take into account the sometimes dangerous and In recent years, several countries have estab- difficult working conditions and associated hard- lished Autonomous Revenue Agencies (ARAs) as a ships faced by customs officials, particularly in means of improving the efficiency and effectiveness remote border stations.8 Anticorruption programs of customs, and in the process have significantly that fail to address this issue are likely to fail in the increased the level of remuneration paid to revenue longer term. In essence, better salaries can begin to officials without having to increase salaries in other sectors of public administration. However, in several instances these higher remuneration levels 8. For example, in many former socialist countries, border police could not be maintained. (See chapter 2 and officers are paid on average 30 percent more than customs offi- box 4.8.) cials performing similar duties. Integrity in Customs 83 address corruption problems that stem from need conclusion, therefore, is that the operational but not from greed. environment for customs work, rather than individual officials, determines the level of corruption. Recruitment and Staff Selection Recruitment Care needs to be taken when introducing new and staff selection procedures should be based on legislation and HR management policies to ensure merit and should focus on selecting staff for their that increased managerial freedom to hire and incorruptibility as well as their academic, profes- fire is not used to enable politically motivated sional, or technical competence. The importance of firings or to introduce a level of job insecurity appropriate recruitment and selection policies is that simply encourages officials to seek short- clearly demonstrated in surveys conducted by the term financial gain rather than build long-term World Bank in Albania, Georgia, and Latvia. The careers. surveys demonstrate that bureaucrats are willing to pay for appointment to agencies that are regarded Mobility and Random Job Assignments Enhanc- as the most corrupt, and for promotion or deploying staff mobility can substantially augment ment to positions in which they are able to obtain integrity. Job segregation can also be limited so illegal rents based on the exercise of official discre- that a number of officials are able to discharge the tion.9 The administrative processes associated with same discretionary functions. This will ensure that recruitment and promotion should be fair, objec- clients do not have to deal with only one official tive, and free of bias. Recruitment and promotion who can abuse discretionary power. In cases where committees should be composed of independent examinations or inspections need to be under- members selected from different areas of the taken, allocation to individual officials may be organization. Such an approach reduces the made on a random rather than on a commodity, chances of nepotism and corruption. industry, or geographic basis. The performance of Some countries and customs administrations examinations or inspections can also be subject to have adopted drastic measures to improve the regular peer and independent reviews. Many quality and integrity of their staffs, including firing countries do, however, face significant difficulties a significant percentage of officials. Evidence sug- in introducing staff rotation or mobility schemes. gests, however, that while such drastic approaches Issues such as cost, available housing, and educa- can deliver short-term gains, the benefits are tion opportunities at regional offices or remote invariably short lived if not supported by wider border posts prevent the introduction of appro- reform initiatives. Moreover, the maintenance of priate mobility schemes. In such cases it is impor- such policies is resource intensive and difficult to tant to look at opportunities for job segregation sustain in the longer term. An additional factor and mobility within the regional office or border that needs to be considered is the impact that the post. departure of a large number of experienced offi- Training Education and training play a major cials will have on the wider customs–business rela- role in the fight against corruption in two ways. tionship. Experience in several countries suggests First, they provide staff with appropriate profes- that many customs officials sacked in large-scale sional development, thus increasing technical staffing purges readily find work on the other competence and reducing reliance on informal side of the counter working for customs brokers on-the-job training. While on-the-job training is and in the import/export sector leading to an 10 important, care needs to be taken to ensure that it is extension of existing unofficial networks. The both positive and structured and does not inadver- tently reinforce certain inappropriate practices that 9. World Bank surveys of 218 public officials in Latvia, 350 public officials in Georgia, and 97 public officials in Albania (Kauf- have developed over time. Second, education and man, Pradhan, and Ryterman 1998). training provide regular opportunities for the 10. In addition, the firing of large numbers of staff and their organization to reinforce the integrity and anticor- replacement by a group of new and more qualified officials has ruption message. This is particularly appropriate sometimes resulted in the reemergence of corruption on a more sophisticated scale and increased incentives to bribe based on when an organization is introducing a formal code insecurity of employment tenure. of conduct. 84 Customs Modernization Handbook

BOX 4.9 Human Resources: Key Issues and Questions

Has a comprehensive and strategically focused Have all high-risk positions and functions HR management strategy been introduced been identified and systems and proce- incorporating sound polices on dures modified to limit the exercise of official • recruiting and retaining the right people discretion? • developing and improving professional com- Are appropriate informal and formal training petencies and skills and professional development opportunities • recognizing and supporting integrity efforts? provided to build technical competence and Is staff remuneration comparable to similar pub- promote integrity? lic or private sector positions and sufficient to Are the administration’s code of conduct and allow a reasonable standard of living? the individual responsibilities of officials regularly Have procedures been established that can reinforced during training and professional identify and support staff with financial difficul- development programs? ties? Has a performance appraisal system been Are objective and merit-based selection implemented that is fair, regular, monitored, processes employed that identify personal and periodically reviewed? integrity as well as academic or technical com- Are managers and supervisors required to petence? actively manage staff performance and perform- Are procedures in place to ensure appropriate ance issues? security vetting for potential staff during recruit- Are managers and supervisors held responsi- ment, and for existing staff periodically? ble for the integrity performance of officers Are selection committees impartial and made under their control? up of officials from different work areas? Source: Based on WCO 2003b. Has a staff transfer or rotation policy been implemented with clear and unambiguous rules on the regular movement of staff from high-risk positions?

Performance Evaluation A performance appraisal Morale and Organizational Culture and management system concerns the day-to-day Corruption is most likely to occur in organiza- management of people and their performance. tionsinwhichmoraleorespritdecorpsis low and Regular appraisals tied to compensation reviews customs personnel do not have pride in the repu- encourage staff to take responsibility for maintain- tation of their administration. Customs employ- ing high levels of integrity. Performance appraisal ees are more likely to act with integrity when can encourage staff to participate in activities morale is high, if HR management practices are designed to reduce or control corruption, and seen as being fair, and if there are reasonable reward those who have been able to identify meth- opportunities for career development and pro- ods by which corruption can occur and for suggest- gression for all well-performing officials.11 ing improved control mechanisms. The reward sys- Employees at all levels should be actively involved tem may include nonmonetary rewards such as in the anticorruption program and should be transfer, training, travel, praise, and publicity to encouraged to accept an appropriate level of further encourage positive behavior. The appraisal responsibility for the integrity of their adminis- system should be designed to optimize staff per- tration. Integrity must be regarded as everyone’s formance in the long term. Performance appraisal responsibility and obligation. should be undertaken on a regular basis. Manage- ment should be held accountable for the performance of staff and should actively handle perform- 11. It is often suggested that experienced customs officials who ance issues. are prevented from further career advancement or promotion by, for example, the lack of prescribed academic qualifications Box 4.9 contains issues and questions critical to are the most likely to engage in corrupt behavior and, due to the HR function’s role in promoting integrity. their extensive experience, the most unlikely to be detected. Integrity in Customs 85

Corruption is often not restricted to customs, network during times of need. The majority of but a phenomenon that is prevalent in the society those engaging in corrupt behavior, however, do so as a whole. Integrity campaigns in customs must be for self-serving reasons, and rarely to benefit oth- fully cognizant of this and are likely to be most effi- ers. This fact is not lost on the majority of countries cient if they are part of a nationwide anticorrup- and cultures, which decry most forms of bribery, tion effort. Such campaigns will raise the moral fraud, extortion, embezzlement, and most forms of costs of corruption, but will require that appropri- kickbacks on public contracts (Klitgaard 1988). ate changes in the organizational culture be imple- In crafting an appropriate anticorruption pro- mented for the changes to last. gram it does, however, seem prudent to consider Certainly, while politicians and senior customs the impact of social norms and cultural traditions officials regularly denounce corruption in all its and to incorporate specific strategies to deal with forms and openly describe it as a significant obsta- any particular issues that are identified. For exam- cle to development, there is often a huge gulf ple, in a number of small Pacific Island states where between the rhetoric and reality. Some observers familial and community links are particularly note that corrupt practices are often not linked to strong, a customs IT system was introduced that shame and people who engage in them conduct automatically allocated declaration processing, their activities with a clear conscience. Moreover, cargo examination, and customs broker inquiries there may be no social stigma for being dismissed on a random basis, thus preventing any potential from one’s position due to corruption. The issue of embarrassment that might ensue from officials culture and its acceptance of corruption extends having to deal with members of their own linguistic beyond individual customs administrations to or cultural group. whole societies and regions. It is frequently argued Box 4.10 reviews key questions regarding the that the traditional social norms that govern the place morale has in promoting integrity. conduct of public office in industrialized countries are quite different from those that govern the Relationship with Private Sector behavior of officials in many developing countries. In many developing countries there exists a gap Client groups can play an important role in con- between law (as imposed by Western and Alien trolling corruption. After all, many forms of cor- standards) and informal social norms (sanctioned ruption require the active involvement of external by prevailing social ethics) i.e., there is a divergence partners such as importers, exporters, transport between the attitudes, aims, and methods of gov- providers, and customs brokers. Therefore, an ernment of a country and those of the society in effective anticorruption strategy will need to secure which they operate (Caiden and Caiden 1977). the active and wholehearted support of the busi- Many traditional societies value kinship and rec- ness sector. Experience has shown, however, that iprocity, which serve important social functions, such cooperation is often difficult to obtain and such as the provision of an informal insurance even more difficult to sustain as long as individual

BOX 4.10 Morale and Organizational Culture: Key Issues and Questions

Are staff encouraged to participate in project Is customs regarded as a good employer? teams to identify high-risk areas and suggest Do customs officials take pride in working for changes to existing systems and work practices? customs? Are staff satisfaction surveys conducted? Are Has effective whistle blower legislation been the results analyzed and acted upon? introduced to protect officials who report cor- Are all breaches of integrity dealt with rupt behavior? promptly and investigation results made available to staff and the public? Source: Based on WCO 2003b. Is the administration willing to undertake a process of self-assessment and participate in international integrity activities and initiatives? 86 Customs Modernization Handbook

traders are willing to pay a bribe to obtain a com- Joint customs–business anticorruption task mercial advantage relative to their competitors. forces and committees could be excellent means of Customs brokers, who assist importers and achieving the desired level of cooperation and com- exporters in working through a range of complex mitment in the fight against corruption. Such com- administrative regulations and procedures, are usu- mittees provide an important vehicle for customs ally the main points of contact with customs. In the administrations to clearly communicate the stan- absence of modern customs systems and proce- dards of behavior expected of clients and for clients dures, brokers are required to work on a day-to-day to provide practical examples of the administra- basis with customs officials. They are often the con- tion’s most vulnerable points. They can also estab- duits through which bribes are demanded and lish practical mechanisms that encourage traders to paid, and added to the brokerage fees. Anecdotal report customs officials who demand bribes. Clear evidence suggests that brokers regularly inflate the performance standards and client service charters amount of the bribes paid and reimbursed by their may provide a useful starting point and a practical clients, and keep the excess for themselves. This monitoring mechanism. The Indian Customs’ Cen- practice provides brokers with a strong economic tral Board of Customs and Excise has established a incentive to perpetuate a cycle of corruption. special vigilance Web site to allow clients to report The need for the business sector to take respon- complaints or allegations of misconduct. Each sibility for its own ethics is acknowledged by the complaint or allegation is directed to an appropri- ICC Rules of Conduct. Article 5 of the ICC Rules ate senior manager for action, and time frames for sets out the principles governing the responsibili- resolution are established and monitored. While ties of enterprises in relation to official corruption functioning as a mechanism to register complaints (ICC 1999). It states that the Board of Directors or with respect to customs operations, the mechanism other bodies with ultimate responsibility for the can be made to serve as a platform for public– enterprise should take reasonable steps, including private sector dialogue. the establishment and maintenance of proper sys- Box 4.11 presents key questions concerning tems of control, aimed at preventing any pay- integrity and the relationship between the private ments being made by or on behalf of the enter- sector and customs. prise that contravene the Rules of Conduct; periodically review compliance with the Rules of Implementation of the Strategy Conduct and establish appropriate reports for the purpose of such review; and take appropriate The WCO has developed a road map for assessing action against any director or employee contra- the quality of the integrity programs employed by vening the Rules of Conduct. Directors of multi- customs administrations. The WCO’s Integrity national companies should also monitor the Development Guide provides an ongoing process extent to which management ensures that, of review and improvement of integrity strategies throughout the enterprise, staff adhere to the and includes a component of self-assessment and OECD anticorruption convention. action planning.

BOX 4.11 Relationship with the Private Sector: Key Issues and Questions

Has a client service charter incorporating objec- Has a communication strategy been devel- tive performance standards been established? oped that supports the prompt provision of Have formal cooperative agreements and information and promotes the achievements of practical consultative mechanisms been estab- customs? lished to foster open, transparent, productive Are private sector operators encouraged to relationships with the private sector? report incidences of corruption? If allegations Has a joint customs–business task force been are made, are the sources protected? established to address integrity issues and identify practical solutions? Source: Based on WCO 2003b. Integrity in Customs 87

As a starting point it is particularly useful to requires governments and the business community undertake a comprehensive assessment of the cur- to tackle the problem in a meaningful way. The rent situation.12 Once a comprehensive diagnostic international customs community has acknowl- assessment has been conducted, it is then necessary edged the problem and has developed a range of to establish priorities and agree on the content of a tools and programs to deal with it in a positive and national integrity action plan. Priorities can be pragmatic way. The Revised Arusha Declaration on established based on the following criteria: impor- Integrity in Customs sets out a comprehensive tance, urgency, consequence of failure, probability approach to dealing with the problem and has been of obtaining executive and staff commitment, endorsed by the 162 members of the WCO. impact, national and international obligations, ease In looking to implement the 10 key elements of of implementation, and cost. Once the priority- the Revised Arusha Convention, experience sug- setting process has been completed it is useful to gests that a good starting point is the performance develop a detailed implementation plan with realis- of a comprehensive assessment of the current situa- tic time frames for implementation, responsible tion. The key issues and questions contained in this officials, and verifiable performance indicators or chapter provide a practical guide or checklist for measures. this process (see boxes 4.1–4.7 and 4.9–4.11). Once To ensure that the results of the action planning the assessment is complete it is then helpful to process are well understood and accepted by senior establish realistic priorities and agree on a series of executives and embraced by the majority of the practical objectives and activities. These then form organization’s staff, it is important to develop prac- the basis of a national integrity action plan. tical information as well as a comprehensive mar- Customs officials at all levels need to be involved in keting strategy. The action plan must be closely the diagnostic process, the identification of priori- monitored to assist customs administrations in ties, and the development of the action plan. The assessing and adjusting their individual integrity plan should outline a range of specific objectives, strategies. The action plan can best be monitored key activities, responsible officials, and verifiable through the use of performance indicators. These performance indicators or measures of success. could include the following: results of client and Customs administrations do not, however, oper- stakeholder satisfaction surveys, number of com- ate in a vacuum. They typically take policy and plaints or allegations against customs personnel, operational direction from the government of the number of successful investigations or prosecu- day and interact with a wide range of stakeholders tions for integrity breeches, positive or negative from both the public and private sectors. Much media coverage of integrity in customs, reports by can therefore be gained by taking a whole-of- international agencies, number and nature of government approach to fighting corruption and ombudsman complaints, number of complaints by by aligning the customs strategy with existing or the traveling public and customs brokers or future national anticorruption campaigns. How- importers, results of internal and external audits, ever, if this is not possible, customs must be pre- achievement of performance targets or client char- pared to act independently and decisively to control ter standards, and increases or decreases in opera- and minimize corruption. tional performance statistics. Most corrupt transactions that occur within the customs environment involve the active or passive participation of the private sector. The private sec- Operational Conclusions tor must, therefore, be actively involved in and There is little doubt that the customs working envi- committed to identifying and implementing prac- ronment makes it vulnerable to corruption. How- tical solutions. ever, the critically important role played by customs A vitally important element of such a strategy is the comprehensive reform and modernization of 12. To assist this process, the WCO has developed a series of customs to eliminate the incentive for private sec- detailed diagnostic questions relating to each of the 10 elements tor operators to seek means of circumventing nor- of the Revised Arusha Declaration. These questions are incorporated in the WCO’s Integrity Development Guide, which is avail- mal regulatory requirements. In this sense, the able on the organization’s Web site www.wcoomd.org. Revised Kyoto Convention is one of the most 88 Customs Modernization Handbook

effective tools available to address corruption prob- In conclusion, the effective control and elimina- lems in customs. Its provisions provide for less dis- tion of corruption in customs is not an easy task. cretion and greater accountability. The adoption of No quick fix solutions currently exist. To achieve an integrity strategy without modernized customs sustainable results, customs administrations need procedures will only provide a short-term remedy to do the following: and will not be sustainable in the longer term. Indeed, many senior customs officials are con- • obtain the wholehearted support of their gov- vinced that if a customs service adopts modern ernments, the business community, and a range procedures in line with the Revised Kyoto Conven- of other stakeholders tion, makes effective use of IT, pays its staff a com- • undertake a comprehensive diagnosis of their petitive wage, and enjoys a cooperative relationship current integrity problems and strategies with the private sector, then it has done much of • collect appropriate baseline data and establish the work required to ensure integrity. realistic verifiable performance indicators An anticorruption strategy in customs must be • develop a comprehensive integrity action plan developed as a coherent package of mutually sus- based on each of the 10 elements of the Revised taining measures. The motives for engaging in cor- Arusha Declaration ruption are complex; therefore, strategies should be • continually evaluate and review results and designed to address both motive and opportunity. establish an ongoing improvement process It is important to strike a balance between positive • commit to sharing the results of their efforts preventive strategies and repressive ones. In any • most important, assign appropriate responsibil- case, customs administrations must focus on the ity for the administration’s anticorruption pro- thorough investigation of allegations of corruption gram to all managers, officials, and clients. and the enforcement of penalties irrespective of the position or influence of the individuals involved. The strategies contained in box 4.12 draw on les- Further Reading sons learned from several customs reform pro- Andvig, J. C., and O. Fjeldstad. 2000. Research on Corruption: grams undertaken throughout the world, and A Policy Oriented Survey. Chr Michelsen Institute and demonstrate the need to address both motive and Norwegian Institute of International Affairs. Oslo. www.cmi .no/research/project.cfm?proid=272. opportunity for corruption through a comprehen- Hors, Irene. 2001. Fighting Corruption in Customs Administra- sive strategy. tion: What Can We Learn from Recent Experiences. OECD

BOX 4.12 Lessons Learned from Customs Reforms to Control Corrupt Behavior

The primary lesson learned from customs reform and opportunity for corruption. As summarized in transition countries and other parts of the below, these lessons of experience have been world is that efforts to control the potentially incorporated in Bank projects through the inte- corrupt behavior of customs officials require a grated strategy to promote integrity. comprehensive strategy to reduce the motive

Measures Addressing Motive Measures Addressing Opportunity • Elite ethos and esprit de corps • Lower rates, less exemption • Positive career development • Computerization • Incentives for high performance • Inspection based on risk analysis • Competitive pay and transparent • Arms-length transactions and reduction in reward system discretionary authority • Stronger supervision and controls • Transparent clearance requirements • Sanctions for corruption • Rotation of officers • Independent appeals mechanism • Functional organization • Stakeholder surveys • Internal anticorruption strategy and audit

Source: Gill 2001. Integrity in Customs 89

Development Centre, Technical Paper No. 175. Paris: OECD. ICC (International Chamber of Commerce). 1997. “Interna- www.oecd.org/dataoecd/60/28/1899689.pdf. tional Customs Guidelines.” ICC Publication No. 587 (E). ICC (International Chamber of Commerce). 1997. International New York: ICC Publishing. Customs Guidelines. ICC Publication No. 587 (E). New York: ———. 1999. Fighting Bribery: A Corporate Practices Manual. ICC Publishing. www.iccwbo.org New York: ICC Publishing. Kaufmann, D. 1999. “Economic Reforms: Necessary But Not Kaufman, Daniel, Sanjay Pradhan, and Randi Ryterman. 1998. Sufficient to Curb Corruption?” In R. Stapenhurst, and S. J. “New Frontiers in Diagnosing and Combating corruption.” Kpundeh, Curbing Corruption: Toward a Model for Building PREM Note No. 7. Washington, D.C.: World Bank. National Integrity. Economic Development Institute. Klitgaard, R. 1988. Controlling Corruption. Berkeley: University Washington, D.C.: World Bank. of California Press. Klitgaard, R. 1998. Controlling Corruption. Berkeley: University ———. 1993.“Gifts and Bribes.”In R. J. Zeckhauser, ed. Strategy of California Press. and Choice. Cambridge: MIT Press. Sparrow, Michael. 2000. The Regulatory Craft. Washington, D.C.: Lane, M. H. 1998. “Customs and Corruption.” Working paper. Brookings Institution Press. Transparency International. Processed. Nye, J. S. 1977. “Corruption and Political Development: A Cost Benefit Analysis.” American Political Science Review LXI(2): 417–427. References TI (Transparency International). 1997. TI Sourcebook— Confronting Corruption: The Elements of a National Integrity The word processed describes informally reproduced works that System. Berlin. www.transparency.org/sourcebook/. may not commonly be available through libraries. World Bank. 2000. Helping Countries Combat Corruption. Oper- Caiden, G. E., and N. J. Caiden. 1977. “Administrative Corrup- ational Core Services, Poverty Reduction and Economic tion.” Public Administration Review 37(3): 301–309. Management Network. Washington, D.C. Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton- ———. 2001. “Cambodia Integration and Competitiveness omy, Incentives, and Patronage: A Study in Corruption in the Study.” International Trade Department. Prepared for the Tanzania and Uganda Revenue Authorities.Development Integrated Framework for Trade-Related Technical Assis- Studies and Human Rights. Oslo, Norway: Michelsen tance. Poverty Reduction and Economic Management Institute. Network. Washington, D.C. Gill, J.B.S. 2001. Customs: Developing an Integrated Anti- ———. 2003. Investment Climate Survey Database. Corruption Strategy. World Bank Institute. Draft Mono- Washington, D.C. graph. Washington, D.C.: The World Bank. WCO (World Customs Organization). 2003a. Annual Survey to Hors, Irene. 2001. “Fighting Corruption in Customs Adminis- Determine the Percentage of Government Revenue Provided by tration: What Can We Learn from Recent Experiences?” Customs Duties. Document No. NC0665. Brussels. OECD Development Centre Technical Paper No. 175. Paris: ———. 2003b. “Integrity Development Guide; Self-Assessment OECD. and Evaluation.”Brussels.

5 MANAGING RISK IN THE CUSTOMS CONTEXT

David Widdowson

TABLE OF CONTENTS LIST OF TABLES The Importance of Managing Risk 92 5.1 Compliance Management Styles 95 Facilitation and Control 92 Achieving a Balanced Approach 93 LIST OF FIGURES Managing Compliance 93 5.1 Facilitation and Control Matrix 92 Putting the Theory into Practice 94 5.2 Compliance Management Matrix 94 Compliance Assessment and Trade 5.3 Risk-Based Compliance Management Facilitation 97 Pyramid 96 Risk Management: An Example 98 Conclusion 98 LIST OF BOXES References 99 5.1 Managing Risk: Customs Valuation 98

In recent years the international trading environ- This chapter examines the basic principles of risk ment has been transformed dramatically in terms of management and identifies practical ways of put- the manner in which goods are carried and traded, ting the theory into practice. The first section dis- the speed of such transactions, and the sheer vol- cusses the importance of managing risk in customs. ume of goods now being traded around the globe. The second section examines the two key objectives This, together with mounting pressure from the of customs—facilitation and control. The third sec- international trading community to minimize gov- tion identifies risk management as the means of ernment intervention, has caused customs authori- achieving a balanced approach to facilitation and ties to place an increasing emphasis on the facilita- control. The fourth section deals with managing tion of trade. compliance and describes a risk-based compliance In an effort to achieve an appropriate balance management strategy. The fifth section concentrates between trade facilitation and regulatory control, on putting the theory to practice and thus draws customs administrations are generally abandoning together the various elements of a risk management their traditional, routine “gateway” checks and are style to provide a structured approach to the now applying the principles of risk management, management of compliance. The sixth section links with varying degrees of sophistication and success. compliance assessment with trade facilitation. The next section provides an example of risk manage- David Widdowson is Chief Executive Officer, Centre for Cus- ment. The final section summarizes the chapter’s toms and Excise Studies and Adjunct Professor, School of Law, University of Canberra, Australia. main conclusions.

91 92 Customs Modernization Handbook

The Importance of Managing Risk Facilitation and Control The concept of organizational risk refers to the pos- The two key objectives of customs are commonly sibility of events and activities occurring that may referred to as “facilitation” and “control.”In seeking prevent an organization from achieving its objec- to achieve an appropriate balance between trade tives. Customs authorities are required to achieve facilitation and regulatory control, customs must two primary objectives—provide the international simultaneously manage two risks—the potential trading community with an appropriate level of failure to facilitate international trade and the facilitation, and ensure compliance with regulatory potential for noncompliance with customs laws. requirements. Risks facing customs include the The application of risk management principles potential for noncompliance with customs laws provides the means of achieving this balance. such as licensing requirements, valuation provi- Note that the phrase “facilitation and control” sions, rules of origin, duty exemption regimes, trade has been used in this context, rather than the restrictions, and security regulations, as well as the phrase “facilitation versus control.” It is a com- potential failure to facilitate international trade. monly held belief that facilitation and control sit Customs, like any other organization, needs to at opposite ends of a continuum, and it is not manage its risks. This requires the systematic ap- uncommon for commentators to refer to the plication of management procedures designed to apparent “paradox” of achieving both facilitation reduce those risks to ensure that its objectives are and control. It is often assumed that, as the level of achieved as efficiently and effectively as possible. facilitation increases, the level of control decreases. Such procedures include the identification, analy- Similarly, where regulatory controls are tightened, sis, evaluation, treatment, monitoring, and review it is commonly assumed that facilitation must of risks that may affect the achievement of these suffer. This is an extremely simplistic view, as it objectives. assumes that the only way a process may be facili- Sound risk management is fundamental to effec- tated is by loosening the reins of control. Such a tive customs operations, and it would be true to say contention is fundamentally flawed, because the that all administrations apply some form of risk concepts of facilitation and control represent two management, either formal or informal. Drawing distinct variables, as depicted in the matrix in on intelligence, information, and experience, cus- figure 5.1. toms has always adopted procedures designed to The top left quadrant of the matrix (high con- identify illegal activity in an effort to reduce its risks. trol, low facilitation) represents a high-control The more traditional procedures include physical regime in which customs requirements are strin- border controls over the movement of goods and gent, to the detriment of facilitation. This may be people consisting of documentary checks and phys- described as the red tape approach, which is often ical inspections aimed at detecting illicit trade. The introduction of such controls constitutes a form of risk management, but not necessarily an effective or FIGURE 5.1 Facilitation and Control Matrix efficient one. High Recently, the increasing complexity, speed, and volume of international trade, fueled by the technological advances that have revolutionized global Red Tape Balanced Approach Approach trading practices, have significantly affected the way customs authorities carry out their responsibilities. As a consequence, many administrations Control have implemented a more disciplined and struc- Crisis Laisser-Faire Management tured approach to managing risk. This has also Approach Approach helped them to increase the efficiency of their operations and to streamline their processes and procedures, minimizing intervention in trade transac- Low High Facilitation tions and reducing the regulatory burden on the commercial sector. Source: Author. Managing Risk in the Customs Context 93 representative of a risk-averse management style. some form of risk management. For example, rec- In most modern societies such an approach is likely ognizing that risk is the chance of something hap- to attract a great deal of public criticism and com- pening that will have an impact on organizational plaint, due to the increasing expectations of the objectives, a regulatory strategy that achieves trading community that customs intervention some degree of control, however small, represents a should be minimized. method of treating potential noncompliance with The bottom left quadrant (low control, low customs laws. Equally, a strategy that achieves some facilitation) depicts the approach of an administra- degree of facilitation represents a method of tion that exercises little control and achieves equally treating the potential failure to facilitate trade. This little in the way of facilitation. This crisis manage- relationship is depicted in the three-dimensional ment approach is one that benefits neither the Compliance Management Matrix in figure 5.2. government nor the trading community. The bottom right quadrant (low control, high facilitation) represents an approach in which facili- Managing Compliance tation is the order of the day, but with it comes little The customs role is, therefore, to manage com- in the way of customs control. This laisser-faire pliance with the law in a way that ensures the approach would be an appropriate method of man- facilitation of trade. To achieve this, many aging compliance in an idyllic world in which the administrations have already implemented com- trading community complies fully without any pliance management strategies that are based on threat or inducement from government, because the principles of risk management. such an environment would present no risk of The Compliance Management Matrix provides noncompliance. a useful conceptualization of the interrelationship Finally, the top right quadrant (high control, between facilitation, regulatory control, and risk high facilitation) represents a balanced approach to management. The next step is to identify the com- both regulatory control and trade facilitation, ponents of a risk-based compliance management resulting in high levels of both. This approach to strategy. compliance management maximizes the benefits to The underlying elements of such a strategy are both customs and the international trading com- summarized in table 5.1, which compares key munity. It is this approach that administrations elements of a risk-management style of compliance should be seeking to achieve. management with the more traditional gatekeeper style, which is typically characterized by indiscrimi- Achieving a Balanced Approach nate customs intervention or a regime of 100 percent Effective application of the principles of risk man- checks. Similarly, payment of duties and other taxes agement is the key to achieving an appropriate bal- is a prerequisite for customs clearance under the ance between facilitation and control. As the use gatekeeper model, and such clearance is invariably of risk management becomes more effective withheld until all formalities and real-time transac- (for example, more systematic and sophisticated), tional checks are completed. A risk management an appropriate balance between facilitation and approach, however, is characterized by the identifi- control becomes more achievable. Thus, those cation of potentially high-risk areas, with resources administrations that are able to achieve high levels being directed toward such areas and minimal inter- of both facilitation and control (the balanced vention in similarly identified low-risk areas. Such approach quadrant of the Facilitation and Control regimes adopt strategies that break the nexus Matrix) do so through the effective use of risk between physical control over goods and a trader’s management. Similarly, administrations in a state revenue liability, and permit customs clearance to be of total crisis management (that is, zero facilitation, granted prior to the arrival of cargo. zero control) would essentially be adopting a com- The various elements of each style of compliance pliance management strategy that is devoid of risk management can be broadly grouped into four management. main categories—a country’s legislative framework, However, any movement away from a state of the administrative framework of a country’s cus- total crisis management implies the existence of toms organization, the type of risk management 94 Customs Modernization Handbook

FIGURE 5.2 Compliance Management Matrix

High

Balanced Approach

Red Tape Approach Laisser-Faire Approach High High

Control Risk Management

Crisis Management Facilitation

Low

Source: Author.

framework adopted by a country’s customs organi- and revenue liability, sufficient scope is likely to exist zation, and the available technological framework. for administratively flexible solutions to be imple- Collectively, the four categories represent key deter- mented. minants of the manner in which the movement of Underpinned by the relevant legal provisions,the cargo may be expedited across a country’s borders, various elements of the administrative and risk and the way that customs control may be exercised management frameworks employed by customs over such cargo. essentially reflect the underlying style of compliance An appropriate legislative framework is an essen- management being pursued by the administration, tial element of any regulatory regime, because the with an increasing use of risk management princi- primary role of customs is to ensure compliance ples as the administration moves away from the with the law. Regardless of the compliance manage- traditional, risk-averse gatekeeper style of compli- ment approach that it is supporting, the legislative ance management to a more risk-based approach. framework must provide the necessary basis in law The available technological framework repre- for the achievement of the range of administrative sents an enabler that, while not critical to the and risk management strategies that the adminis- achievement of a risk management style, serves to tration has chosen to adopt. For example, an appro- significantly enhance an administration’s ability to priate basis in law must exist to enable customs to adopt such a style. break the nexus between its physical control over internationally traded goods and the revenue liabil- Putting the Theory into Practice ity (that is, customs duty and other taxes) that such goods may attract. This does not necessarily imply, The Risk-Based Compliance Management Pyramid however, that such a differentiation must be explic- (figure 5.3) draws together the various elements of itly addressed in the relevant statutory provisions. a risk management style (that is, those on the right For example, if the legislation itself is silent on the side of table 5.1) to provide a structured approach relationship between customs control over cargo to the management of compliance. It provides a Managing Risk in the Customs Context 95

TABLE 5.1 Compliance Management Styles

Traditional Gatekeeper Style ↔ Risk Management Style

Legislative base provides for a “one size fits ↔ Legislative base provides for flexibility and all” approach to compliance management tailored solutions to enable relevant risk management and administrative strategies to be implemented Onus for achieving regulatory compliance is ↔ Legislative base recognizes responsibilities placed solely on the trading community for both government and the trading Legislative

Framework community in achieving regulatory compliance Sanctions for noncompliers ↔ Sanctions for noncompliers “One size fits all” compliance strategy ↔ Strategy dependent on level of risk Control focus ↔ Balance between regulatory control and trade facilitation Enforcement focus ↔ Dual enforcement–client service focus Unilateral approach ↔ Consultative, cooperative approach Focus on assessing the veracity of ↔ Focus on assessing the integrity of trader transactions systems and procedures Inflexible procedures ↔ Administrative discretion Focus on real-time intervention and ↔ Increased focus on post-transaction compliance assessment compliance assessment Administrative Framework Lack of or ineffective appeal mechanisms ↔ Effective appeal mechanisms Indiscriminate intervention or 100 percent ↔ Focus on high-risk areas, with minimal check intervention in low-risk areas Physical control focus ↔ Information management focus Focus on identifying noncompliance ↔ Focus on identifying both compliance and noncompliance Post-arrival import clearance ↔ Pre-arrival import clearance

Framework Physical control maintained pending ↔ Breaks nexus between physical control

Risk Management revenue payment and revenue liability No special benefits for recognized compliers ↔ Rewards for recognized compliers

Risk Management Enablers

Legislative provisions provide the trading community with electronic as well as paper-based reporting, storage, and authentication options. Such provisions should enable regulators to rely on commercially generated data to the greatest extent possible. Appropriate communications and information technology infrastructure to provide for automated processing and clearance arrangements. Regulators should seek to achieve maximum integration with commercial systems. IT Framework Consultative business process reengineering prior to automation.

Source: Author.

logical framework for demonstrating how various service strategies (the second tier), including effec- types of risk-based strategies, including nonen- tive consultation arrangements and clear adminis- forcement strategies such as self-assessment, may be trative guidelines. Such strategies are necessary to used to effectively manage compliance. provide the commercial sector with the means to Fundamental to this approach is the need to pro- achieve certainty and clarity in assessing liabilities vide the commercial sector with the ability to com- and entitlements. ply with customs requirements. This involves estab- At the third tier of the pyramid, the elements of lishing an effective legislative base (the first tier of compliance assessment come into play, including the pyramid) and an appropriate range of client risk-based physical and documentary checks, 96 Customs Modernization Handbook

FIGURE 5.3 Risk-Based Compliance Management Pyramid

Modification of Ayres Penalty and Braithwaite (1992) Enforcement Pyramid

Formal Warning

Simplified procedures Increased self-assessment Intervention by exception Reduced regulatory scrutiny Persuasion Periodic payment arrangements Less onerous reporting requirements

Risk-based Procedures: Enforce noncompliance Reward compliance Balance between control and facilitation using administrative using administrative Focus on identifying compliance and discretion discretion noncompliance Information management focus Pre-arrival assessment, clearance, and release Real-time intervention in high-risk cases Enforcement/ Post-transaction focus in majority of cases Audits of industry systems and procedures Recognition Investigation where noncompliance suspected Compliance Assessment Consultation and cooperation Clear administrative guidelines Formal rulings Education and awareness Client Service Technical assistance and advice Appeal mechanisms

Recognizes respective responsibilities of government and industry Legislative Base Provides for electronic communication Establishes sanctions for noncompliers Enables flexibility and tailored solutions Breaks nexus between goods and revenue liability

Source: Author.

audits, and investigations. Such activities are els of facilitation (see Industry Panel on Customs designed to determine whether a trader is in com- Audit Reforms 1995 and Sparrow 2000). pliance with customs law, and these are discussed in In assessing the level of compliance, customs will more detail in the next section. encounter two situations: compliance and noncom- At the peak of the pyramid are strategies to pliance. The noncompliance spectrum will range address both identified noncompliers and recog- from innocent mistakes to blatant fraud. If the error nized compliers. Strategies for the identified non- nears the fraudulent end of the spectrum, some compliers include a range of enforcement tech- form of sanction will need to apply, including niques (see Ayres and Braithwaite 1992), while administrative penalties or, in more severe cases, strategies for the recognized compliers include prosecution and license revocation. increased levels of self-assessment, reduced regula- Before determining the need for, or nature of, a tory scrutiny, less onerous reporting requirements, sanction, however, it is important to identify the periodic payment arrangements, and increased lev- true nature of the risk by establishing why the error Managing Risk in the Customs Context 97 has occurred. For example, the error may be the This principle applies to a range of customs con- result of a control problem within the company due trols, including physical control over goods, infor- to flawed systems and procedures, or it may be the mation requirements, timing and method of result of a deliberate attempt to defraud. It also may reporting, and timing and form of revenue collec- be that the relevant legislation is unclear or the tion. The use of documentary controls (informa- administrative requirements are ambiguous. The tion management) to monitor and assess compli- type of mitigation strategy that customs should ance generally represents a far less intrusive and employ to ensure future compliance will depend on hence more facilitative approach than the use of the nature of the identified risk. Unless the error is physical controls. Similarly, post-transaction audit found to be intentional, it may be appropriate to generally represents a more facilitative method of address systemic problems within the company, or verification than checks undertaken at the time of to provide the company (or perhaps an entire importation or exportation. industry sector) with advice on compliance issues, For many developing countries, however, the or provide formal clarification of the law through task of introducing risk-based strategies can be binding rulings or other means (Widdowson 1998). daunting, particularly for those administrations In this regard, it is important to recognize that that do not yet have the capacity to undertake post- different solutions will be required to address hon- transaction audits, or that currently rely heavily on est mistakes on the one hand, and deliberate manual processing systems. While it is clear that attempts to evade duty on the other. For example, such impediments will limit the effectiveness of any industry familiarization seminars and information risk-based strategies, applying a risk management brochures may adequately address errors that result approach to existing manual systems will prove far from a lack of understanding of the relevant regula- more effective and efficient than continuing to tory provisions. However, if someone is actively apply a gatekeeper approach to those same systems. seeking to commit revenue fraud, seminars and For example, despite the fact that an administration information brochures will have absolutely no may undertake all customs examinations and impact on their activities. Indeed, such members of assessments at the time of importation, there is nev- the trading community are likely to have an excel- ertheless an opportunity to replace an indiscrimi- lent understanding of their obligations and entitle- nate or random method of examining goods with ments. To treat the risks posed by such individuals one that takes account of the potential risks. Simi- (or organizations, for that matter), a rigorous larly, it is quite possible to apply documentary enforcement approach is likely to be required. checks prior to the arrival of goods despite the fact that manual methods of processing are employed. A case in point is Sri Lanka, which was successful Compliance Assessment in introducing pre-arrival screening and clearance and Trade Facilitation for air express consignments prior to the availability In applying the principles of risk management to of its automated systems. This consisted of a combi- the day-to-day activities of customs, one of the most nation of manual documentary assessment, selec- critical areas is that of compliance assessment— tive examination, and the establishment of x-ray determining whether an entity or transaction is in facilities to address the potential risk of misdescrip- compliance with regulatory requirements. This rep- tion. Consolidated manifests were manually sub- resents the third tier of the Compliance Manage- mitted to customs prior to aircraft arrival, together ment Pyramid in figure 5.3. When developing with advance copies of air waybills and invoices. strategies to assess compliance, it is important to These were manually screened by customs to iden- consider a key principle of the Revised Kyoto Con- tify potentially high-risk shipments (based on intel- vention—that customs control should be limited to ligence, emerging trends, the previous compliance what is necessary to ensure compliance with the record of consignees and consignors, and so on). customs law (WCO 1999). Administrative regimes Any consignments that were considered to be high should be as simple as practicable, and should pro- risk were identified for further examination upon vide the trading community with cost-efficient arrival, together with certain dutiable and restricted ways of demonstrating compliance with the law. goods that were held pending formal clearance. All 98 Customs Modernization Handbook

BOX 5.1 Managing Risk: Customs Valuation

Following its adoption of the WTO Valuation whether it is an acceptable risk—that is, does Agreement, customs needs to ensure that customs need to do anything about it? (Some importers comply with the new provisions. Its prefer to use the term risk assessment in lieu of task is therefore one of compliance management. risk evaluation. Others use the term risk assess- To effectively manage compliance, it decides to ment to describe the combined process of risk follow the principles of risk management, which analysis and risk evaluation.) require it to identify, analyze, evaluate, and treat Customs decides to treat the risk, and deter- risks to the achievement of its objectives. In this mines that the best way is to target shipments case, the overriding risk is that traders fail to that are likely to include undeclared assists. comply with the valuation provisions. Based on its research, customs identifies a num- To accurately identify the risk, customs consid- ber of criteria or risk indicators (for example, type ers in further detail what could happen that may of goods, supplier, consignee, origin) that, col- result in incorrect valuation, and how such an lectively, are likely to indicate a potential nonde- event could occur. One such risk is undervalua- claration of assists. When combined, these indi- tion due to certain traders deliberately failing to cators represent a risk profile that customs uses declare the cost of assists (includes materials, to select suspected high-risk consignments. Such tooling, or other costs provided by an importer selectivity ensures that low-risk consignments are to a foreign producer). Customs then analyzes facilitated. the risk by determining the likelihood of it occurring and the consequence if it was to occur. Its Source: Author. next step is to evaluate the risk by determining

other consignments (that is, low-risk shipments) operate under less onerous regulatory requirements were available for delivery on arrival. and may anticipate little in the way of customs Administrations that have adopted a risk-based intervention, and therefore receive relatively high approach to compliance management, regardless of levels of trade facilitation. Transactions of high-risk whether their systems are automated, are also selec- traders, however, are more likely to be selected for tive in their use of the broad range of controls that higher levels of customs intervention and control. are available to them. In being selective, they recog- Customs intervention for high-risk traders may nize that individual members of the trading com- include documentary checks or physical examina- munity present customs with varying levels of risk tions at the time of importation or exportation, in terms of potential noncompliance with relevant higher levels of audit activity, physical controls at laws. For example, traders with a good record of manufacturing premises, and relatively high secu- compliance are unlikely to require the same level of rity bonds. In all cases, however, the level and type scrutiny as those with a history of poor compliance. of intervention should be based on the level of iden- Consequently, if a trader is judged to be relatively tified risk. low risk, customs may reduce its level of regulatory scrutiny and place greater reliance on the company’s Risk Management: An Example self-assessment of compliance.1 This particularly Sometimes confusion arises over the terms used to effective strategy is a commonly used method of describe the management of risk, and often terms recognition, and forms the right half of the peak of are used interchangeably. The simple scenario in the Compliance Management Pyramid. box 5.1 of a country that recently accepted the WTO Risk-based compliance management results in a obligation on valuation is designed to clarify the situation where low-risk traders are permitted to more common terms.

Conclusion 1. Allowing low-risk traders to self-assess their revenue liability does not imply that no customs checks will be made. It does, Effective risk management is central to modern cus- however, imply that a decision to clear the goods will generally be made on the basis of the traders’ own assessment of their liability toms operations, and provides the means to achieve or entitlement. an appropriate balance between trade facilitation Managing Risk in the Customs Context 99 and regulatory control. The principles of risk References management can be applied by all administrations, Ayres, Ian, and John Braithwaite. 1992. Responsive Regulation: regardless of whether they operate manual or Transcending the Deregulation Debate. New York: Oxford automated systems, if they adopt strategies that University Press. incorporate the key elements of a risk-based Industry Panel on Customs Audit Reforms. 1995. Looking to the Future—Compliance Improvement, Report of the Industry approach to compliance management. Panel on Customs Audit Reforms. Canberra: Australian Cus- To manage risk effectively, administrations must toms Service. gain a clear understanding of the nature of risks to Sparrow, Malcolm. 2000. The Regulatory Craft. Washington, D.C.: Brookings Institution Press. the achievement of their objectives and devise Widdowson, David. 1998. “Managing Compliance: More Carrot, practical methods of mitigating those risks. Finally, Less Stick.” In Chris Evans and Abe Greenbaum, eds. Tax there needs to be a demonstrated commitment Administration: Facing the Challenges of the Future. Sydney: Prospect. from the highest level of the organization to support World Customs Organization. 1999. International Convention on the transition to a risk-based approach to compli- the Harmonization and Simplification of Customs Procedures ance management. (as amended), General Annex, Standard 6.2. Brussels.

Part II

Lessons from a Select Set of Customs Reform Initiatives

101

POLICY AND OPERATIONAL LESSONS LEARNED FROM EIGHT COUNTRY CASE STUDIES

Paul Duran and José B. Sokol

TABLE OF CONTENTS 6.3 Revenue Performance Before and After Customs Reforms 120 Main Characteristics of the Countries Case Study 105 6.4 Customs Processing Times 121 Customs Reform Experiences 108 Components of Customs Reforms 111 LIST OF BOXES Outcomes of the Reform Programs 119 6.1 Implementation of Customs Reform in Lessons Learned 124 Mozambique 109 Further Reading 126 6.2 Information Technology in Turkey 115 References 126 6.3 Import Verification in Peru 117 6.4 Customs Cooperation with the Private Sector LIST OF TABLES in Morocco and the Philippines 123 6.1 Basic Economic Data, 2000 106 6.5 Addressing Corruption in Uganda’s 6.2 Revenue Performance Before and After Independent Revenue Authority 124 Customs Reforms 106

The focus of this chapter is the customs reform country case studies were assigned to customs and modernization programs in eight developing experts and consultants who either participated in countries—Bolivia, Ghana, Morocco, Mozambique, the reform processes in the countries reviewed or Peru, the Philippines, Turkey, and Uganda1—with a who, in their professional experience, had accumu- view to drawing lessons that could be useful in for- lated significant technical knowledge of customs mulating reform programs for other countries. The reform and modernization processes in a worldwide context.

1. The country case studies were performed by the following Countries were selected that would present ini- consultants: Bolivia (Flavio Escobar), Morocco (Marcel Steen- tiatives from different continents, with their respec- landt and Luc De Wulf), Mozambique (Anthony Mwangi), Peru tive special reform outlooks, and that would yield (Adrien Goorman), the Philippines (Guillermo L. Parayno Jr.), interesting insights. Turkey (M. Bahri Oktem), and Uganda (Luc De Wulf). The Ghana report (Luc De Wulf) was commissioned by the World Initiated within the framework of an institu- Development Report team of the World Bank. tional reform covering the entire government and

103 104 Customs Modernization Handbook

with strong leadership provided by the vice presi- ment of an independent Modernization Project dent, customs reform in Bolivia aimed at its total Unit with strong political support and steady man- transformation. One of the key elements of the agement was a critical element in the effective coor- reform was complete staff renewal designed to rid dination of automation activities. the service of deeply embedded corruption. In Uganda, customs reform has been a long- The study of the Ghana experience is quite dif- term process. Started in 1990–91, its main aim was ferent from the other country studies. It was under- to strengthen revenue mobilization and to combat taken initially as a case study of reform that would corruption. improve the investment climate. It clearly illustrates In addition to the experiences of the country how introducing information technology (IT)— studies, reference is occasionally made to the expe- even in the absence of a comprehensive customs riences of interesting customs reform and modern- reform—can strengthen revenue mobilization and ization processes in countries of Southeastern speed up the clearance of cargo. Europe,2 where the Bank supported border infra- While not codified in a detailed action plan, structure and institutional modernization to facili- Morocco’s program of customs reform and mod- tate legitimate trade and fight smuggling and cor- ernization reflected a comprehensive vision and ruption. Such efforts address customs reform from covered all aspects of customs from its organization the perspective of the end-user—the trading to its operation. Reform actions were undertaken in community—and cover a broad spectrum of activ- a deliberate and pragmatic process. ities, including interagency cooperation, enforce- In Mozambique, the most significant character- ment, private sector relations, infrastructure reha- istic of the reform was the willingness to rely exten- bilitation, and revenue collection. Corruption sively on external consultants for management and issues are addressed through procedural and orga- implementation of the reform, and for the valua- nizational reforms. tion of imports and exports for customs purposes. The country case studies were undertaken based This unusual approach was adopted in the midst of on a common approach to ensure comprehensive- rebuilding a government service that was totally ness and comparability. Five areas of the reform destroyed after many years of war. process were targeted: In Peru, customs reform and modernization was high on the agenda of the president, who pro- • The background of the reform and moderniza- vided strong political support throughout the tion process, its economic and institutional con- reform process. Customs was vested with full own- text, factors leading to reform decisions, sup- ership, and maintained the necessary continuity to porters, objectives and design, and financial and see the process through to its completion. technical support. Decisive factors in the success of the reform in • Issues in the reform process. the Philippines during 1992–98 included strong • The reform measures themselves, covering top-level political backing; strong, able, and sus- legislation; management changes; staff-related tained operational leadership; ownership of the questions such as pay, selection, training, reform by the head of customs; and support that integrity, and corruption; information technol- included some funding by private sector users of ogy; valuation; experience with preshipment customs services. Among its weaknesses was a fail- inspection; special import regimes; and selectiv- ure of commitment from the staff arising in part ity in pre- and post-release control. from inadequate compensation—a problem that • Reform outcomes including impact on fiscal could not be addressed because the Philippine performance, trade facilitation, anticorruption, Bureau of Customs lacked authority and funding. staffing and workload, and conformance to inter- Customs reform and modernization efforts in national standards. Where available, quantitative Turkey were dominated by two goals: bringing customs legislation and administrative structures in 2. The Trade and Transport Facilitation in Southeast Europe line with European Union (EU) standards in the Program (TTFSE) is an integrated approach to customs and border management issues, involving eight countries (Albania, context of a customs union with the EU, and the Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, automation of customs procedures. The establish- Moldova, Romania, and Serbia and Montenegro). Policy and Operational Lessons Learned from Eight Country Case Studies 105

performance indicators receive attention as do Main Characteristics of the user reactions. Countries Case Study • The lessons that each of these studies contain The design, enactment, and implementation of and the judgment pertaining to the sustainabil- major customs reforms in the countries reviewed ity of these modernization initiatives. were influenced by concerns within the countries for improving economic management and increas- Reform and modernization in the case study ing the incomes of their population, ongoing eco- countries aimed at transforming customs into a nomic reform efforts, and the possibility of professional administration. Whereas most coun- expanding trade links with other countries. tries pursued several objectives encompassing facilitating trade, raising revenue, and protecting the economy against harmful practices, in others the Economic and Population Characteristics scope was more limited with emphasis on a partic- Wide differences were recorded in the countries ular area. In all cases, reform efforts were supported reviewed in terms of the size of their economies, by external technical and financial assistance. population, level of development, and recent eco- To provide a firm foundation to the reform nomic performance (see table 6.1). Yet these factors process, most countries adopted a new Customs did not influence any country’s commitment to Code, adapting legal provisions to the needs of reform or its pace. Gross domestic product (GDP) international trade practices and the application levels range from close to US$200 billion for Turkey of IT. The reform of customs services included to less than US$4 billion for Mozambique. With changes in the structure, organization, or status of 77 million inhabitants, the Philippines has the customs administrations. In several countries, cus- largest population of all eight countries reviewed, toms was given administrative autonomy, which followed by Turkey with 65 million. Bolivia is the provided flexibility in adopting a structure and in smallest of the group with 8 million inhabitants. developing procedures most suited to discharging In terms of GDP per capita, Mozambique lies at its tasks. In a few countries, customs also obtained the lower end of all countries reviewed with US$216, financial autonomy. Turkey at the highest end with US$3,052. A wide To distill the experiences of the countries variance of growth rates was also recorded. In some reviewed into usable lessons, this chapter is organ- countries, the reforms contributed to higher growth ized as follows: The first section provides back- rates during 1996–2001 than those achieved during ground information on the economic perform- 1990–95. Mozambique grew at 9.0 percent per year ance, economic policies, and reforms, relative on average, followed by Uganda at 5.8 percent, and size, and degree of integration of the countries Morocco at 4.1 percent. Peru and Turkey had the reviewed. The second section gives an indication of lowest growth rates of all, at 2.2 percent. the principal reform objectives, their main design features, and the donor financial and technical assistance that supported them. The third section Fiscal Performance contains a detailed review of the reform compo- Reliance on import taxes3 as a source of revenue nents, covering the Customs Code, management was relatively higher for most countries prior to the changes, personnel issues (including integrity), IT, introduction of the reforms (see table 6.2), with customs control, and measures for trade facilitation import taxes as a share of tax revenue amounting to and for safeguarding revenues. The fourth section more than 30 percent in five countries and around evaluates the outcome of the reforms, assessing 20 percent in two. Customs duties as a share of tax their impact on customs in the areas of revenue generation, enforcement, integrity, customs clear- 3. Customs revenue is the sum of import values multiplied by ance time, and the reaction of users of customs’ tax rates applicable to imports, less tax exemptions (some man- services. Finally, the fifth section derives the lessons dated by international agreements, others by local legislation, for of country experiences and identifies factors that example, certain sectors, new investment, or other). Revenue changes when either tax rates or import values change. The lat- are critical for designing and undertaking success- ter changes because of changes in GDP, import prices, institu- ful reform programs. tional valuation capacity, and contraband volumes. 106 Customs Modernization Handbook

TABLE 6.1 Basic Economic Data, 2000

GDP Growth (Annual average in percent) GDP Population GDP per Capita Country (Millions of US$) (Millions) (US$) 1990–95 1996–2001 Bolivia 8,356 8 1,003 4.2 3.1 Ghana 4,977 19 340 4.3 4.2 Morocco 33,345 29 1,162 1.6 4.1 Mozambique 3,813 18 216 3.1 9.0 Peru 53,466 26 2,061 3.8 2.2 Philippines 74,733 77 975 2.8 3.5 Turkey 199,267 65 3,052 4.3 2.2 Uganda 5,891 22 265 7.0 5.8

Source: World Bank data.

TABLE 6.2 Revenue Performance Before and After Customs Reforms

Bolivia Ghanaa Morocco Mozambique Peru Philippines Turkey Uganda

(Percent of Tax Revenue) Customs duties Before reforms 10.5 16.9 17.0 22.5 10.7 26.9 3.7 10.0 After reforms (2001) 8.2 14.1 14.2 17.2 11.6 10.9 1.0 12.9 Import Taxes Before reforms 39.8 38.4 45.4 31.6 20.6 35.3 15.3 22.3 After reforms (2001) 34.4 35.2 42.2 45.4 37.2 20.5 14.0 33.7

(Percent of GDP) Tax revenue Before reforms 11.5 16.3 21.6 9.8 10.8 14.7 15.2 7.8 After reforms (2001) 13.2 20.2 22.7 11.5 12.3 14.0 22.3 12.3 Customs duties Before reforms 1.2 2.8 3.7 2.2 1.2 4.0 0.6 0.8 After reforms (2001) 1.1 2.9 3.2 2.0 1.4 1.5 0.2 1.6 Import taxes Before reforms 4.6 6.2 9.8 3.1 2.6 5.2 2.3 1.7 After reforms (2001) 4.5 7.1 9.6 5.3 4.4 2.9 3.1 4.1

Note: Period before reform refers to following years: Bolivia, 1996; Ghana, 2000; Morocco, 1996; Mozambique, 1996; Peru, 1990; the Philippines, 1991; Turkey, 1994; and Uganda, 1990–91. a. For Ghana, the year after reforms is 2003. Sources: De Wulf and Sokol 2004. Data provided by national customs; World Bank database; International Monetary Fund International Financial Statistics; and Government Finance Statistics Yearbook, various issues; and IMF, various Country Reports.

revenue lies between about 4 percent and 27 per- Philippines, and Turkey (table 6.2). Following the cent. The tax-revenue-to-GDP ratio is in the range reform, the tax-revenue-to-GDP ratio increased in of about 8 percent to 22 percent. all countries, except the Philippines. Moreover, At the outset of the reforms, tax revenue was import taxes became an important tax handle in rather low as illustrated by tax-to-GDP ratios of most countries. less than 10 percent in Uganda and Mozambique, During the period from the outset of the reforms and in the low to mid-teens in Peru, Bolivia, the through 2001, the import-tax-to-tax-revenue ratio Policy and Operational Lessons Learned from Eight Country Case Studies 107 rose sharply in a number of countries (to 34 percent In 1990, Peru carried out a complete overhaul of in Uganda, 45 percent in Mozambique, and 37 per- the central government and all public institutions, cent in Peru) owing to the introduction of the value including customs. In Turkey, customs reform was added tax (VAT). The fall of this ratio in other part of the reform requirements for membership in countries (to 34 percent in Bolivia and 21 percent in the customs union with the EU. The reorganization the Philippines) reflected the sharp drop of customs of customs was also an integral element of Turkey’s duties in tax revenue, resulting from customs duty government-wide administrative reform. rate cuts. In Morocco, customs modernization was directed at enhancing the country’s external competitiveness, a clearly perceived necessary condition Overall Reform Context to fulfill the country’s ambition of fuller integration In several countries, the implementation of cus- of its economy into the world economy, as reflected toms reforms was coordinated with trade liberal- in its broader commitments under the WTO and ization policies, themselves often part of a broader the association agreement with the EU. In South- economic reform program. Between 1988 and east Europe, customs reform under the TTFSE pro- 1991, Bolivia reduced its general import tariff rate gram was designed to combat corruption and from 20 percent to 5 percent on capital goods and smuggling, and improve border processing and 10 percent on other goods. In Peru, the average decrease delays. The ultimate objective was to nominal tariff declined from 46.5 percent in 1990 achieve compatibility with EU standards, thus facil- to 13.5 percent in 1997 and 11 percent in 2000. The itating the accession process. In Mozambique, cus- acceleration of trade reform in the Philippines toms reform became part of the government’s effort reflected the country’s compliance with commit- to reconstruct its war-torn economy and resulting ments under the World Trade Organization total lack of effective administrative capacity. (WTO), and the regional groups Asia-Pacific Eco- In Mozambique, Morocco, the Philippines, and nomic Cooperation (APEC) and Asian Free Trade Uganda,5 customs was the single targeted institu- Association (AFTA). Uganda moved to two tion for reform. In Ghana, customs modernization nonzero rates of 7 percent and 15 percent in 1995. was part of the government trade policy reforms In Mozambique, the average tariff rate declined being enacted to implement the government vision from 15.7 percent in 1998 to 13.0 percent in 2001. for a Ghana that is open to the rest of the world. In Bolivia, Peru, and Turkey, customs reforms formed part of a broad program of policy and institutional reform that covered other government Regional and Preferential Arrangements units or even the whole administration. Reform All case study countries are members of one or more was either directed at the general structure of gov- regional or bilateral preferential arrangements in the ernment or focused on specific aspects, such as perform of a customs union or full-fledged or partial sonnel management. In Bolivia, personnel manage- free trade arrangement. In some countries, mem- ment reform was part of an administration-wide bership in a regional arrangement has been a posi- civil service reform, with customs selected as the tive factor providing an impetus for customs reform initial reform area. Other aspects of the reform either through the adoption of modern regulations touching on the administrative structure of cus- as in the case of Turkey, or of best practices jointly toms were also part of the administration-wide with other countries, such as the Philippines in reform program, including contraband control.4 APEC or Southeast European countries in the EU. The management of effective transit trade 4. To control contraband, most customs administrations have a requires good cooperation between the various police-like law enforcement unit. Some countries delegate this function to law enforcement agencies, such as the general police countries affected. A regional approach to this force or special border police (Chile and Argentina, for example). The control of contraband poses many complex issues, including determining the best arrangements to address it, the optimal number of personnel to be assigned to the task in rela- 5. In Uganda, the reform created an Autonomous Revenue tion to import volume and kilometers of borders, and so forth, Agency (ARA) that encompasses Customs and Domestic Taxa- which are beyond the scope of this review. tion as two separate departments. 108 Customs Modernization Handbook

matter has many advantages. For example, Mozam- private sector. The latter consisted of often unreli- bique is a member of the Cross-Border Initiative able or unknown operators and the customs (CBI) and Southern African Development Com- administrations did not have the resources, organi- munity (SADC), both of which provide for free zation, or training to manage that fundamental trade among members except for raw materials. change. In Ghana, customs clearance procedures Mozambique has entered into several bilateral pref- were time consuming, error prone, and did not erential trade agreements, especially with African provide a transparent method to audit whether, in countries, and trade protocols governing transit fact, all cargo had been declared. trade. Turkey has signed free trade agreements with the European Free Trade Association (EFTA) and a Customs Reform Objectives number of central and eastern European countries similar to EU agreements with those countries. In The main reform objectives included strengthen- Southeast Europe, the reintroduction of the Trans- ing revenue-generating capacity, enhancing trade port International Routier (TIR) regime across Ser- facilitation, and combating smuggling and cor- bia was a key element of trade facilitation. ruption. Most countries pursued several objec- A problem in the implementation of the Com- tives, although in some the initial emphasis on one mon Market for Eastern and Southern Africa objective shifted during the reform process as (COMESA) in Uganda is a result of the incidence of sufficient progress was achieved and its urgency fraud in the certificates of origin and the low level declined. Among the factors determining the of effective cooperation of customs authorities in choice of objectives were the initial state of customs the various countries that substantially increases services and the economic policy objectives of the the cost of transit. Ongoing discussions with Kenya government, especially in the fiscal and trade policy and Tanzania to revive the East African Commu- areas. nity could help alleviate problems for Uganda’s In countries with a comprehensive reform importers at the Kenyan and Tanzanian borders. program, the objective was to set up a fully professional, efficient, and integrated administration, which would become an effective instrument of Customs Reform Experiences fiscal and trade policies by ensuring proper revenue Before undertaking the reforms reviewed here, cus- collection, minimizing trade costs, and protecting toms administrations in the sample countries the economy from harmful practices. These were shared a number of weaknesses. In general, clear- the broad reform objectives instituted in Mozam- ance procedures were tedious and costly in terms of bique, Morocco, Peru, and the Philippines. While at required documentation and procedures, resulting the beginning of the reform process the primary in lengthy clearance times. Clearance procedures objective in the Philippines may have been revenue often included redundant verifications and multi- generation, improving trade facilitation and the ple steps that lacked business rationale and whose business and investment environment by stream- objectives were overtaken by modern business lining the customs bureaucracy gained prominence practices. Also, in most cases all shipments were in the reform. In Turkey, the aim of the reform was subject to physical inspection, and procedures were to enhance trade facilitation and contribute to largely paper-based and inadequately supported by Turkey’s integration into the European Commu- customs IT. In several countries (Bolivia, Mozam- nity (EC). This was also the case in Southeast bique, the Philippines, and Uganda) corruption Europe. In Uganda, the reform focused primarily and smuggling were major problems. In Southeast on increasing government revenue and combating Europe, as in most transition countries, the situa- corruption, with less emphasis on trade facilitation. tion was further complicated by the need to move In Peru and the Philippines, the reform was customs from its traditional role in a socialist envi- triggered by declining or stagnating government ronment of statistical regulation and passenger revenues. The revenue-related problems became control to a more trade-oriented activity. This was a particularly severe in Peru, which was then facing serious challenge, as the administrations had to an economic crisis, and in the Philippines, where cope, in a very short time, with a rapidly expanding there were serious revenue leakages. In other cases Policy and Operational Lessons Learned from Eight Country Case Studies 109 the severity of corruption was the main driver for Fund (IMF) and the World Bank in Mozambique reform (in Bolivia), or a strong contributing factor (see box 6.1). Easing constraints on trade imposed to the decision to reform (in Mozambique, the by customs led representatives of the trading com- Philippines, and Uganda). In some countries, munity to place trade facilitation high on the broader institutional changes or external require- agenda of the customs reform in Morocco and in ments led to customs reform, such as the economic Turkey. In Ghana the customs modernization programs supported by the International Monetary process arose because of lagging foreign direct

BOX 6.1 Implementation of Customs Reform in Mozambique

Faced with the run down state of customs the of the project, such as those related to revenue Mozambican authorities chose to enter into a gains and expected staff replacement needs, managing contract with an outside agency to were too aggressive. By the end of the contract rebuild its customs department. The authorities some of the anticipated outcomes had not been were fully aware that it would be difficult to achieved, as the newly appointed Mozambican break out of the grip of firmly entrenched smug- senior managers were not ready to assume their gling rings from within. Under these circum- full managerial responsibilities. Also, some of the stances, and with a view to supplementing the operational procedures and information systems shortage of domestic experienced staff, the were not sufficiently established. Technical Unit for Restructuring Customs (UTRA) Following a comprehensive contract compli- invited external service providers to manage ance review carried out by DFID, the govern- customs and implement key parts of the cus- ment approved an initial six-month contract toms reform process initiated in 1995. The out- extension, followed by a further contract of side agency had both short-term objectives three years through mid-2003 to consolidate the aimed at increasing recurrent revenue collec- reform. During the extension, the role of CA tion, and long-term goals focused on capacity changed from execution to supervision and building. The outside agency’s major assign- mentoring, except in the areas of intelligence, ment was to take over the complete manage- staff irregularities, audit, and anticorruption. CA ment of customs, including training, appointing was to advance the improvements made in cus- key customs officials to perform the contracted toms services and introduce the necessary sys- functions, supervising external trade operations tems and procedures. The number of CA con- subject to customs legislation, preventing fraud sultants was to be reduced from 47 in mid-2000 and evasion of taxes, and procuring and main- to 11 in mid-2003. Since then, a further exten- taining equipment assigned to the reform proj- sion through mid-2005 was agreed on, as more ect, such as data processing software and hard- time was needed for the handover of responsi- ware. However, the authorities went into these bilities to senior managers. Despite limited arrangements with a gradual approach. progress in reducing corruption and a further Through an international bidding process, need to tackle smuggling on a sustainable basis, Crown Agents (CA) was awarded a three-year the role of CA is generally seen as beneficial in contract covering 1997–99. Operational man- implementing customs reform and reorganiza- agement began in May 1997 following agree- tion. The test of the overall success of engaging ment on proposed work plans for each of the an external manager will be provided by the sus- areas to be implemented during the contract. A tainability of customs operations carried out by a senior consultant of CA was appointed Dele- domestically run agency once CA’s intervention gated Manager of Customs. The process of is fully phased out. change management implemented by CA was The above experience underlines the impor- overseen by a steering committee made up of tance of having both a full diagnostic as well as representatives of UTRA, IMF, World Bank, and a detailed feasibility study of the management the Department for International Development tasks entrusted to an outside agency before a (DFID), which was supporting the project with contract is agreed on. This would reduce the financial and technical assistance. In addition, possible need for repeated extensions, while a there were annual reviews of progress to meas- somewhat more flexible contract length could ure the project against original objectives. How- be useful for tasks related to capacity building. ever, the envisaged timetable for phasing out the contribution to be made by CA proved opti- Source: Mwangi 2004. mistic, in part because the original assumptions 110 Customs Modernization Handbook

investment despite the fact that much of the policy objective supported by numerous external organi- reforms had been accomplished. In all cases, trade zations (EU, Stability Pact, South East Cooperation facilitation initiatives were subjected to the require- Initiative). It resulted in a comprehensive project ment that the role of customs in revenue genera- design. It included the private sector and involved tion was not to be undermined. other agencies operating in the border areas. In Ghana, the reforms were driven by a vision of con- verting Ghana into a gateway for West Africa to the Sponsorship and Political Backing rest of the world. The impetus for the reform differed across coun- In some countries the reform entailed providing tries. In several countries it originated from the greater operational autonomy to customs. In highest authorities, which in some cases provided Uganda, the reform centered on the activities of the strong and sustained political backing. In Peru and independent Uganda Revenue Authorty (URA), the Philippines, the reforms were direct initiatives which was created in 1991 and endowed with sub- of the presidents, who protected the reform and its stantial management flexibility to improve staff leadership against political and administrative quality, compensation, and discipline. In Peru, obstacles. In Bolivia, the leadership of the institu- SUNAT (the merged Inland Revenue and Customs tional reform program covering customs was Administration agency) focused on effective man- vested in the vice president. In Morocco, support agement of human, budgetary, and physical measures for foreign trade, including improving resources; and the introduction and implementa- customs, had been called for by the late King tion of modern administrative and control proce- Hassan II and demanded by the trading commu- dures and systems. In Turkey, the customs modern- nity; the reforms benefited from strong support ization project was directed at harmonizing from the King. In Uganda, the main reform spon- procedures and regulations in line with those in sor was the Minister of Finance (MOF), while the effect in the EU, and at upgrading computer support State Minister for Customs played the leading role for customs operations to enhance overall efficiency. in spearheading the reform in Turkey. In Ghana, There were notable differences among countries the reform drive benefited from the strong personal in the design and implementation of the reforms. support of the Minister of Trade, while the MOF In Morocco, Peru, and the Philippines, the reforms supported it because of the prospects it offered to were under full control of the customs administra- strengthen the Customs Service and raise larger tion. In other countries special units were set up to budget revenues. formulate and implement the reform, for example, the Technical Unit for Restructuring Customs (UTRA) in Mozambique. In Bolivia, the reform Design program was conceived by a group of high-ranking In Bolivia, Peru, the Philippines, and Turkey, the officials, including the Minister of the Treasury, but reforms were part of a comprehensive master plan implemented by customs. In Southeast Europe, a that covered all aspects of customs operations and Regional Steering Committee that comprised a administration, including the overhaul of systems National Coordinator per country further super- and procedures, in-depth reform of services with vised the reform process. Each National Coordina- upgrading and redeployment of staff, automation tor (usually the MOF or the Director General of of the clearing process, post-release control and Customs) was nominated by the government to audit processes, and extensive IT use. In other represent all the agencies and bodies involved in countries the approach was pragmatic, moving cross-border trade. forward with successive measures with either full The customs reforms were usually carried out or limited coverage of reform components. In over several years. In most countries a frontloading Morocco, the reform was not contained in a master of major institutional changes was followed by a plan, but proceeded on the basis of a pragmatic period of consolidation during which the changes approach with measures that were implemented in were fully absorbed and their implementation care- a piecemeal fashion, building upon successes fully monitored, while accompanied by further achieved. In Southeast Europe, the customs reform reforms, as in Peru. In others, reforms were more package was totally integrated in a trade facilitation gradual and phased in over time, as in Mozambique, Policy and Operational Lessons Learned from Eight Country Case Studies 111 where a major overhaul of customs staff was and 1999 that financed nearly every step of the cus- undertaken. toms reform program. Also, IDB experts assisted in the design, implementation, and monitoring of the program. In Uganda, DFID supported setting up Donor Assistance URA, including providing an external adviser All reforms in the country case studies were sup- with line managerial responsibilities. Although ported by external assistance, but the scope of this Morocco’s reform benefited from the outset from assistance varied substantially across countries. In technical assistance provided by the French govern- all countries except Uganda and Peru, the IMF and ment and the IMF, it financed the implementation the World Bank provided technical assistance, of its reforms with domestic resources. advising on certain aspects or on overall reform requirements. In Turkey and the Philippines, World Bank support focused on IT and automation of Components of Customs Reforms procedures, in addition to advice on the whole The reform programs generally covered issues reform process. In Turkey, World Bank financing related to all components of customs administra- covered the costs of automation studies, their tion, including the legal framework, management, implementation, and equipment acquisition. The human resources, IT, and customs procedures, par- IMF supported the reform initiative by posting a ticularly those related to valuation and physical resident adviser in the organizational structure of inspection. customs in 1996–97 and by assisting in the selection and supervision of an IT adviser for the World Bank–financed project in 1997–99. In the Philip- Customs Code pines, the World Bank financed the services of UNCTAD (United Nations Conference on Trade In all countries, except Ghana, Uganda, and the and Development) for the implementation of the Philippines, a new Customs Code covering proce- new customs information systems (ASYCUDA++) dures, customs services, and status of personnel and of the computer hardware. In addition, the was adopted to provide a firm foundation to the IMF proposed an 11-point action program for reform process. In Morocco, the Customs Code was reform in 1991, which was followed up by posting revised at the end of the 1990s and was made fully two resident advisers. In Southeast Europe, the consistent with the Revised Kyoto Convention.6 In TTFSE projects were cofinanced by the Bank and some countries the reform program replaced an old the United States, with the Bank funding the infra- and obsolete code that had become an obstacle to structure and IT components, and U.S. Customs the introduction of new procedures more in tune providing technical assistance. In Ghana, customs with changed business practices. Implementing modernization formed part of World Bank support regulations and other legislative changes, including for the Ghana Gateway Project. those in the Penal Code, were introduced. In South- In Mozambique, the World Bank provided east Europe, new customs legislation was intro- financing for UTRA while the IMF provided a legal duced to replace the overregulating socialist laws.7 specialist. Mozambique also received significant grant support from the United Kingdom’s DFID for engaging Crown Agents in the implementation 6. The Morocco Code revisions include a clarification that per- of its whole reform process, including the assump- mits risk-based verification instead of 100 percent physical verification, and a provision for minor sanctions for inadvertent tion of executive functions. In Bolivia, where the errors in the customs declaration. Also, a variety of regulations design of the reforms benefited from IMF assis- that were issued over the years were consolidated in the new tance, the World Bank financed the new human code. resources administration. Bolivia also received 7. While at first the legislative changes consisted of copying the EU Customs Code, it rapidly became obvious that the code was Inter-American Development Bank (IDB) financ- not addressing matters pertaining to national sovereignty such ing for a new technology system, while the Nordic as enforcement, organization, and penal provisions and thus was Fund for Development and several European coun- not applicable on its own. In addition, there were serious discrepancies between the EU-inspired customs legislation and the tries provided grants. The reform in Peru was sup- rest of the countries’ laws and regulatory frameworks, which led ported by several IDB loans spread between 1991 to its inapplicability, especially in the enforcement area. 112 Customs Modernization Handbook

In the Philippines,a large number of laws and reg- trade taxes. Subsequently, further measures were ulations were issued, mainly in the areas of the auto- taken to strengthen management and its independ- mated customs operating system,the control system, ence in response to a perceived decline in perform- and the structure of the customs department. In ance. These measures included the appointment of Turkey, the EC Customs Code, which also covered a new board and senior managers, and a clarifica- customs administrative procedures, became part of tion of the relationship between the board, man- the domestic legislation. Following the adoption in agement, and the Ministry of Finance. URA was no Peru of a new general customs law, subsequent leg- longer responsible for advising the government on islative changes were consolidated and the general tax policy issues, but was charged with advising the customs law was updated in 1996. In Uganda, the MOF on the revenue implications and tax adminis- East African Customs Act from the 1960s remained tration aspects of tax policy changes. in effect. The authorities have accepted the Revised In Macedonia, the placement of customs under Kyoto Convention, which implies that they have to the Ministry of Finance (customs previously adjust the existing legislation. reported to parliament and the government) was inefficient at first as there was no integration with the ministry, only the addition of an extra layer of Customs Management bureaucracy. All reform plans provided for management In Peru, full autonomy allowed customs to changes, changes in the status of the customs adopt a structure and develop its own procedures administration and its personnel, and changes in to discharge its tasks with clearly established func- the structure or organization of the services con- tions for each organizational subdivision and unit.8 cerned. Staffing changes were the key elements in The reforms in Bolivia, Peru, and Uganda included some programs. a large-scale personnel changeover. In these three In Morocco, management changes focused on a countries the reforms provided for greater budget- functional and territorial reorganization, includ- ary autonomy, as they were given (or promised) a ing the redistribution of tasks between central share of customs revenue to cover operating and and regional authorities, and a more pronounced capital outlays independent of the government decentralization. This reorganization is being budget. While URA’s budget was to receive 2–4 per- assessed on an ongoing basis and adjusted in a flex- cent of collected revenues, the actual budget alloca- ible manner. With the shift away from physical tion was lower. inspection to post-release control, staff have been In Turkey, a number of inefficient offices were reassigned and trained for new assignments. closed, customs and enforcement services were inte- ThereforminMozambiquereflectedabold grated under single regional directorates, and oper- approach. Given that customs and most of the civil ational responsibilities were delegated to regional administration were severely dysfunctional follow- and local offices, while a number of regional direc- ing years of civil strife, the government assigned torates were eliminated. In the Philippines, a group most of the key operational management functions responsible for the development of IT in customs to external consultants (see box 6.1). The program was set up, and a valuation center and library were called for significant staff renewal. In addition, a spe- created charged with the development, mainte- cialist valuation team was set up, supported by a soft- nance, and dissemination of the department’s data- ware valuation module and a visiting control team. base on values. In Ghana, the customs management In Bolivia, Peru, and Uganda, management system that had been designed for Mauritius and reforms included granting administrative and that was smoothly interfacing with the initial management autonomy to customs, and providing TradeNet 9 from Singapore was adopted. As part of greater autonomy on matters of personnel policy, recruitment, training, and, subject to approval, remuneration. In Uganda, the Uganda Revenue 8. Customs prepares proposals for customs legislation changes; it has no role in tax legislation and policy. Authority (URA) was created in 1991 as an inde- 9. The Singapore TradeNet links multiple parties involved in pendent authority with the responsibility of col- external trade, including 34 government agencies, to a single lecting and accounting for all domestic and foreign point of transaction for most trade-related transactions. Policy and Operational Lessons Learned from Eight Country Case Studies 113 the arrangement, a company was created and salary bonuses, which was based on meeting rev- charged with the implementation of the TradeNet enue targets, did not achieve its objective, as and the Ghana Customs Management System bonuses were either not paid out despite meeting (GCMS) for the Customs Excise and Preventive the revenue target, or because the target was set at Services (CEPS). However, CEPS remains a rather unrealistic levels. In Ghana, a similar situation pre- outmoded and inefficient organization. Its organi- vailed. When the independent revenue authority zational structure reflects serious shortcomings that was created, salaries were set at highly competitive prevent it from fully internalizing the ongoing levels, but the premium over general civil service reforms and taking advantage of the possibilities salaries eroded over time. offered by the modern customs process in place. In Mozambique, new salary levels in customs In most transition countries (despite statistical were made comparable with those prevailing in the data pointing to an overabundance of clearance private sector. Part of the remuneration consisted stations) the tendency was to maintain as many of a variable customs allowance based on perform- clearance offices as possible because of political ance and merit. Also, a pension plan was intro- pressures and vested interests. duced and the health insurance system improved. In Bolivia, where salary increases ranged from 22 percent to 73 percent, there were also monetary Human Resources incentives for group performance. In Peru, pro- The experiences recorded in all case study countries ductivity bonuses were linked to expected results have shown that customs reform can only succeed established in an operational plan, with individual with competent staff who internalize the objectives shares based on performance. The strict applica- of the reform. It was also generally acknowledged tion of civil service salaries to customs staff that adequate compensation was necessary to moti- prevented any overall salary adjustment from vate staff and tackle the thorny issue of integrity. being introduced in Morocco, the Philippines, or The integrity issue has serious implications for staff Turkey during the reform process. However, there recruitment policies, training, and compensation. was greater flexibility in terms of providing The scope of human resources reform in the coun- overtime compensation, or year-end bonuses. In tries reviewed also depended on the degree of Morocco the prevailing, rather generous, bonus autonomy granted to customs administrations in system was made more egalitarian and was personnel policy matters. Human resources issues extended to include staff involved in front-line are addressed in detail in chapter 2. activities. Salary increases have been a critical element of Most reforms recognized that training must be most reform initiatives. Better pay allowed the provided on a continuous basis to update staff on recruitment and retention of competent staff, ongoing developments in the customs administra- enhanced operational efficiency, and countered the tion, including the elements of reform and modern- need to supplement low official salaries through ization programs being implemented. In all coun- corrupt practices. Salaries were raised at the outset tries, except the Philippines, training was included of the reform in Bolivia, Mozambique, Peru, and in the reform program, although with varying Uganda, with the largest increase made in Peru degrees of coverage. In Bolivia, Mozambique, and (600 percent), where salary levels of financial insti- Peru, where preshipment inspection (PSI) compa- tutions were matched and the salary scale was nies were hired, the PSI companies were required to shifted from the public to the private sector. Upon offer training in the area of valuation. In Bolivia, gaining autonomy, Uganda’s URA raised salaries to new staff regulations required a minimum of a level compatible with that of the highest paid civil annual training, which was taken into account for servants—those at the Central Bank—and a com- performance evaluations. In Morocco, the training prehensive set of performance bonuses was intro- academy was restructured. However, because of a duced. However, real salaries slipped because of general hiring freeze the academy is largely used for inflation. By 2002, URA’s remuneration ranked continuing education of customs staff and training only 17th at the national level, some 40 percent of staff from French-speaking Sub-Saharan customs lower than that at the Central Bank. The system of administrations. 114 Customs Modernization Handbook

In Albania, the EU-supported Customs Assis- Declaration and signed on to the Maputo Declara- tance Mission (CAM-A) developed a comprehensive tion on customs integrity.10 staff management policy that included recruitment, career development, performance evaluation, and Information Technology reward systems. Initially run by CAM-A, the system was subsequently handed over to customs manage- In most of the case study countries, reliance on ment and proved to be sustainable. computerized processes was low. In some countries, customs administrations lacked substantive IT support (Bolivia and Mozambique) or operated Integrity and Corruption Issues systems that had nearly outlived their usefulness Integrity and corruption issues were central in (Morocco) or were inadequate (Turkey and Bolivia, Mozambique, Peru, the Philippines, and Uganda), with the result that many operations were Uganda. Most reform initiatives recognized that still undertaken manually, with all the inefficiencies efforts to address corruption would benefit from associated with such work processes. simplified and streamlined procedures that would Upgrading IT and increasing its use significantly lead to increased transparency in customs opera- have been critical customs reform components tions and fewer contacts between traders and staff. because they make it possible to establish an auto- Reliance on IT to manage customs processes mated clearance process from submission of the reduced the scope for discretion as it cut down on cargo manifest and customs declaration to the face-to-face relations between importers and cus- release of goods. IT also facilitates the implementa- toms officials. In addition, several countries put in tion of control systems based on risk-assessment, place specific measures to enhance integrity. allowing selectivity in physical inspections, post- Integrity issues are discussed in more detail in release controls and audits, and a tightening of chapter 4. revenue control. Upgraded IT also contributes to A Code of Conduct or Code of Ethics was intro- shortening the time of customs clearance and duced in Bolivia, Mozambique, Peru, and Turkey. improves the efficiency of operations. A detailed In Bolivia and Mozambique, staff is required to discussion of the basic characteristics required for sign an integrity commitment. The URA requires good customs IT is included in chapter 13. management staff to complete an assets declaration Peru developed an integrated computerized sys- form and to notify URA of all substantial changes tem encompassing all customs operations and in asset ownership. Other initiatives undertaken by regimes, control functions, statistics, and manage- Uganda are outlined in box 6.5 in the context of ment. The clearance process was fully automated, results of the reform. Similarly, the Peruvian including selection of inspections and post-release customs authorities can request presentation of a checking. Significant progress was also achieved in sworn declaration of income and assets. In Turkey, Morocco, the Philippines, and Turkey. In 1996, a circular on ethical conduct was issued in 2001. It Morocco restructured its information directorate clearly defines bribery and spells out how staff as part of the reform program and gradually intro- should react when faced with corrupt practices. duced the main customs functions and operations The World Customs Organization (WCO) Model into its computer system. A major renewal of the Code of Conduct largely inspired Turkey’s code. computer system is scheduled during 2003–2004. In the Philippines, a series of legislative changes The systems in place became outdated and the were introduced to enhance detection capabilities hardware became increasingly difficult to maintain; and chances of successful prosecution in corrup- a totally upgraded system is now being rolled out. tion cases. Procedures to detect staff misconduct were improved in Mozambique as well. In Bolivia and Peru, the recruitment process includes back- 10. For details see chapter 4. To strengthen customs’ integrity, ground checks of applicants with a view to ensur- the Arusha Declaration calls for a simplified trade regime, ing honesty. streamlined and transparent procedures, automated processes, appropriate personnel policies, and effective audits. To assist As members of the WCO, all case study coun- member countries, a work group developed an Integrity Action tries are signatories of the 1993 WCO Arusha Plan adopted in 1999. Policy and Operational Lessons Learned from Eight Country Case Studies 115

BOX 6.2 Information Technology in Turkey

The computerization of customs offices and electronic data interchange (EDI), and the Inter- automation of customs procedures was a key net. Started at the Istanbul Customs Directorate component of Turkey’s customs modernization in August 1999, applications of EDI rose rapidly, program. Automation activities were coordi- representing some 50 percent of all electronic nated by an independent Modernization Project declarations in mid-2003. All automated cus- Unit set up in 1997, with a senior official respon- toms offices are connected with each other and sible for technical aspects. customs headquarters via local area and wide A software system named BILGE (Computer- area networks. ized Customs Activities) was developed on the In addition to customs transactions, foreign basis of SOFIX software purchased from France, trade regulations and data related to customs which was adapted to the needs of Turkey’s cus- performance are entered into BILGE. Export and toms. The system consists of four modules: a import declaration details are provided electron- summary declaration module, a detailed decla- ically to the State Institute of Statistics, allowing ration module, an accounting module, and an for timely compilation of trade statistics. Com- integrated tariff module. In a successful pilot prehensive training on the computerized cus- operation, BILGE was initially installed at the toms procedures was offered to customs officials Istanbul Customs Directorate in July 1998. Since and to some 15,000 traders free of charge. then, BILGE has been set up at 65 customs Other software systems used by customs in offices, realizing some 99 percent of all transac- Turkey include Vehicle Tracking Program, tions. Procedures carried out electronically using TIR/Transit Control, and Customs Data Ware- BILGE include cargo, import, and export decla- house. Customs Data Warehouse stores all infor- rations; transit and warehousing procedures; tax mation from BILGE and other systems, and feeds collections; and risk analysis and control meth- into a customs valuation database. ods. Declarations can be registered with customs through kiosks located at customs offices, Source: Oktem 2004.

In the Philippines, where the tax computerization ASYCUDA++, with UNCTAD providing im- program provided strong impetus to the reform, proved training. many procedures were brought into the automated Beginning in 1998, the Mozambique customs customs operating system. By 1997 nearly all seg- administration gradually introduced the Trade ments of the clearance process had been auto- Information Management System software (owned mated, assisted by a risk assessment and selectivity by CA, which was managing customs at the time) program made possible by using UNCTAD’s ASY- to support its customs clearance processes. The roll CUDA++ software. In Turkey, the automation of out program of the various process functions customs operations was a key component of cus- accommodated the capabilities of staff to adopt the toms modernization (see box 6.2). process. Since the end of 1999, clearance of goods Since the initiation of its reform program in has been computerized throughout the country. In 1991, Uganda has gradually upgraded its customs Ghana, the Ghana Community Network (GCNet) IT through various stages. The installation of was, from the outset, the cornerstone of a vision to ASYCUDA version 2 software, begun in 1997, connect all members of the trading community in allowed randomly selected officials to execute the an electronic data exchange system. The software in physical cargo verification and helped in the com- place had been grossly underutilized and poorly pilation of statistics, but proved difficult for data maintained, adding little value to the current pro- retrieval and did not provide risk management. As cedures. The rollout of advanced EDI (Electronic is often the case in the process of implementing Data Interchange) and a new computerized cus- computerized customs management systems, staff toms management system was initially plagued trained in the operation of these systems were with problems, but these were eventually addressed assigned to other tasks, preventing customs from and legislation to permit automation of the cus- reaping the full benefits of automation. In light of toms operation was enacted in July 2002. The sys- these experiences, the URA recently installed the tem is now fully operational. 116 Customs Modernization Handbook

Valuation Issues particularly in developing a valuation database. In general, recourse to PSI companies was initiated to Proper valuation is essential for the predictability safeguard revenue since revenue leakages were often and transparency of customs transactions. All case related to undervaluation and fraud. This was study countries are members of the WTO and thus intended to be a temporary measure to allow cus- have committed themselves to implement the WTO toms administrations to build up their capacity. Ser- valuation principles under the WTO Agreement on vices of PSI companies typically include import ver- Customs Valuation (ACV). Most of the countries ification covering quantity, quality, value, and reviewed officially adopted the ACV during their customs classification. customs reform. The Philippines began imple- There are differences among countries in the menting the ACV in 2000, following the conclusion evaluation of PSI services. While in several coun- of its reform program. The ACV requires customs tries the revenue generation and dissuasion of fraud officers to change their valuation procedures and experiences appear to have been positive, the PSI renders challenging invoice prices more difficult companies’ performance in improving national than under prior valuation practices. Reform pro- capacity in customs valuation has often been ques- grams, therefore, call for a strengthening of cus- tioned.13 Lack of cooperation between PSI compa- toms capabilities in valuation assessment. Because nies and customs departments was noted in the ACV requires that priority be given to adopting Uganda, where customs often relies on a parallel the transaction value for customs valuation pur- value database rather than on current PSI data. poses, customs officers now have to gather more Insufficient use of the information generated by PSI evidence or justification if they are to challenge the providers undermined the effectiveness of their declared or invoice value.11 services in the absence of a systematic reconcilia- Implementing the ACV has proven to be diffi- tion between PSI data and that used to calculate cult in a number of countries. Implementation import duties. It was often not clear what use problems include the frequent use of false invoices was made of the PSI-provided information. Peru that grossly undervalue the merchandise and insuf- is an exception as PSI valuation information is ficient training of staff to challenge the invoices.12 fully used by customs. The PSI company operat- Also, the growing trade in second-hand goods as ing in Mozambique also assisted customs staff well as trade undertaken by the informal sector, in training on transaction value and delivered a where poor or no records are kept, renders post- software module on valuation. A problem noted in clearance inspections impractical. In practice, sev- the Philippines was the circumvention of PSI- eral customs administrations continue to rely, to conducted inspections.14 various degrees, on price lists that are rarely shared The reform program strengthened the valuation with the trading community and that, at times, are function in customs departments, including by set- inadequately updated. ting up value databanks. In Peru, a databank set up In all case study countries, the reform program in 1992 was developed on the basis of inspection paid attention to the valuation function. To assist in certificates and verification reports issued by the the valuation of imports, Bolivia, Mozambique, PSI provider. A valuation unit was also established Peru, and the Philippines resorted to the services of PSI companies. Elements of Peru’s program of 13. There are both advantages and disadvantages of hiring PSI PSI-assisted import verification are provided in companies. It is the duty of the government authorities to clearly box 6.3. Uganda first adopted a PSI program but define their roles and responsibilities, as well as to closely moni- later discontinued these services for a variety of rea- tor performance. A related issue is at which stage in the valua- sons, including claims that the PSI company did not tion process should PSI companies enter? In most countries they enter at the first stage, that is, assisting in or undertaking valua- provide the staff training agreed to in the contract, tion activities. In Mexico, however, they enter at the second stage, after a customs officer has valued and classified the goods. Hence, they check the importer’s declaration and the customs 11. For an in-depth discussion of valuation, as well as for more officer’s effectiveness and honesty. details on this issue, see chapter 8. 14. Such actions may involve splitting up or undervaluing ship- 12. Invoices are the easiest documents to forge. Unlike bills, ments to remain below the threshold set for inspections, and bonds, shares, or any other securities or lending instruments, abusive recourse to suspense regimes such as transit and tempo- invoices have no security measures. rary admission (Parayno 2004). Policy and Operational Lessons Learned from Eight Country Case Studies 117

BOX 6.3 Import Verification in Peru

At the outset of its customs reform in 1991, Peru based on inspection of the shipment and price introduced the Import Verification Program comparisons. The importer can either declare (IVP). The government resorted to external assis- the transaction value or the observed value. Rea- tance in view of customs’ failure to effectively sonable doubt can be generated when the conduct the verification of import shipments for declared value is lower than the observed value purposes of assessing duties to be collected. This in the report. While the verification reports con- action was also seen as a way to outsource an tain the tariff code, the importer can declare a administrative function to the private sector, in different code, with discrepancies resolved by line with the reform’s objectives. Under the IVP, customs. About 80–85 percent of import ship- importers are required to submit shipments for ments are subject to PSI intervention; imports verification by an authorized PSI company valued below US$5,000 and some other cate- before the goods are shipped from the country gories are exempt. The cost of the IVP amounts of exportation. Between 1991 and 1999, when to some US$45 million per year. the Brussels Definition of Value was in effect, the The IVP has made valuable contributions to verification resulted in a certificate of inspection- improving customs in Peru. In addition to pro- covering the nature, quantity, value, and tariff viding duty assessments at the beginning of the classification of the goods. These data were to reform when customs capacity was deficient, it be declared by the importer and formed the provided most of the price information that basis for the payment of duties. Customs verified allowed customs to create and build up its valua- the consistency of the import shipment with the tion data bank, had a dissuasive impact on fraud, data on the certificate of inspection. and contributed to the training of valuation offi- When implementation of the ACV under the cers. Between 1992 and 2002, some 1.3 million WTO became effective in 2000, PSI services inspection certificates and verification reports were used to provide an indicator of risk rather were issued by the PSI companies; these reports than a dutiable value. Accordingly, under IVP were the main source of the 40,000 entries con- procedures, instead of certifying the usual com- tained in the data bank as of March 2002. petitive price, PSI companies issue verification reports in which they state the observed value Source: Goorman 2004.

in Mozambique, while that in Morocco was rein- imports, resulting in major clearance delays. All forced. In Uganda, the staff responsible for valua- customs reform and modernization programs now tion has been given special training, and steps are aim to reduce the frequency of physical inspections under way in Turkey to extend the electronic data- to streamline and shorten the clearance process. In base to customs valuation information. In several some countries, the new Customs Code sets a countries, declared values are investigated under maximum share of shipments subject to physical risk-based post-release verification systems, mak- control (20 percent in Bolivia and 15 percent in ing use of valuation databases, price reference data Peru). In Turkey, customs endeavors to reduce the including information from other declarations and physical inspection rate to 15 percent for imports. supplier catalogues, statistical analyses, surveys, and In Southeast Europe, 100 percent inspection was international market studies. However, in Ghana, mandated by law. Even when the legislation was given CEPS’ limited capacity in customs valuation, amended, customs continued to carry out system- strengthening customs valuation has become a key atic inspections, largely for fear that subsequent and immediate priority to support customs officers reexaminations by the police of the same consign- in charge of documenting compliance checks. In ments would lead to the detection of unspotted the meantime, the services of four destination irregularities. This stalled the proper deployment of inspection companies are being relied upon. service examinations for many years. A system of risk assessments provides the basis for selectivity in physical inspections. Risk criteria Physical Inspections typically include the origin of goods, importer Before the reforms, most countries performed 100 track record, type of goods, trade patterns, misclas- percent physical inspection on all incoming sification incentives, and shipment value. The 118 Customs Modernization Handbook

system chooses shipments for one of the three alization measures would tend to reduce revenues established color-coded channels. Goods selected from international trade transactions, a special for the red channel undergo physical and docu- effort was made to enhance the revenue-generating ments inspection, those designated to the yellow or capabilities of customs. Improvement of proce- orange channel are subject only to document con- dures and simplification of formalities have trol, while goods assigned to the green channel ben- reduced the frequency of physical inspections, efit from immediate release. while automation of operations has streamlined A risk assessment module of the computer soft- overall customs procedures. These measures are in ware system automated the selection process in line with the overall Revised Kyoto Convention Peru, the Philippines, and Turkey. In cooperation objectives of simplification and harmonization of with the PSI company, customs in Mozambique customs procedures. The continued implementa- moved to a risk-based approach to select goods for tion of the convention’s objectives will reduce the inspection. A small percentage of goods were still incidence of smuggling, enhance overall integrity, randomly selected for inspection.15 When selectiv- lead to increased budget revenue, and reduce trans- ity was introduced in Turkey in 1998, goods directed action costs for traders. to the yellow channel could still be made subject to Efforts to upgrade staff integrity and qualifica- physical inspection depending on the judgment of tions brought about in part by more selective the customs officer. Before the initiation of the recruitment and improved training, and strength- reform program in the Philippines, it was decided ening and expanding of post-release controls and that inspections abroad by the PSI company con- audits to keep smuggling in check, would con- stituted sufficient compliance with inspection tribute to safeguarding revenue. requirements. This was followed by the introduc- In several countries, customs clearance is now tion of selectivity in physical inspections, which conducted under automated uniform procedures, became effective early under the reform program. from manifest submission to the release of ship- Selective controls were one of the first elements of ment. Peru has put in place an advance clearing the reform program introduced in Morocco and system for importers in good standing. In Turkey, have greatly contributed to the drastic reduction of simplified procedures were introduced, including clearance time. In Bolivia, the selection of ship- a waiver of some document requirements (sales ments for physical inspections is totally random. invoice, certificate of origin, and movement certifi- Customs management in Uganda is working on the cate) for companies satisfying certain conditions. In introduction of a risk-based inspection system. Uganda, further streamlining took place in Ghana’s risk assessment system results in the great early 2002, including processing of trucks, forward- majority of goods being selected for physical ing of border documentation to the central inspection. This is, to a large extent, due to the broad customs office, a single verification of shipments, categories of goods that are subjected to mandatory inspection of second-hand cars, and the gradual inspection by the Ghana Standards Board. introduction of Direct Trader Input (DTI). In Morocco, procedures for the temporary admissions regime were substantially improved. In Macedonia, Revenue and Trade Facilitation the management of licenses and quotas is handled The challenge faced by all case study countries has by customs through a totally transparent World been to achieve the trade facilitation objective Wide Web application based on a first-come first- without undermining the revenue mobilization served principle that eliminates negotiations function of customs services, which is the most between importers and government officials. important motive for undertaking the customs For most countries the development of a strong reforms. As there were indications that trade liber- audit system constitutes a major instrument in safeguarding revenue. This requires the enhancement of intelligence and information gathering and 15. Random selection of shipments for physical inspection analysis, which also helps to combat smuggling. In under a system of general risk-based selection is used to test the robustness of the system, especially the effectiveness of selected Peru, an intelligence unit was included in the struc- risk factors. ture of the audit department, while in Uganda the Policy and Operational Lessons Learned from Eight Country Case Studies 119 program called for increased support for the affect the contribution of trade taxes to budget rev- investigation department. In Morocco, the reform enue. Anticipating that the share of trade taxes in program also recognized the need for a significant the overall revenue structure is likely to fall as a upgrading of intelligence activities. In Morocco proportion of total revenue as a country’s taxable and Uganda, a territorial redeployment of man- economic base expands, and certainly with trade power with more efficient control procedures and liberalization, most countries have also strength- increased checkpoints was part of the restructuring ened their domestic tax systems mainly by intro- of customs services with a view to combating the ducing a VAT. circumvention of customs border controls. Tariff reductions made in conjunction with cus- A new payment control system in Peru provides toms reform positively affected trade, but initially tight control of payments made electronically or had an adverse impact on customs duties in the otherwise. In the Philippines, the establishment of a countries reviewed. The reform often replaced sales data security system ensures the protection of pay- taxes by the VAT. Higher VAT rates accompanied ments of duties to banks and their transmission to the cuts in import tariffs, and raised import rev- customs. Also, the introduction of online release enues other than customs duties for a given level of systems helps avoid the illegal release of shipments imports. from customs custody by using spurious docu- The actual outcome of the reforms indicates that ments. In Mozambique, measures to safeguard rev- the import taxes-to-GDP ratio increased the most enue include a tightening of duty exemptions con- in Ghana, Mozambique, Peru, and Uganda, while trols, a closer monitoring of movements in and out registering the largest decline in the Philippines of free zones supported by computerized records, (see table 6.3). In Mozambique and Peru, the and the enforcement of security arrangements improved revenue performance resulted from the for temporary admission regimes. In addition, new increase in the ratio of import taxes other than cus- transit procedures have been introduced and guar- toms duties to imports, assisted in Peru by a higher antee centers established. imports-to-GDP ratio. In Turkey, the rise in the import taxes-to-GDP ratio, which was more limited, reflected a substantial increase in the import Outcomes of the Reform Programs ratio in the face of a limited reduction in import Under ideal circumstances, effectiveness and effi- tariffs. In Uganda, all factors, including an increase ciency indicators should be used to measure in the ratio to imports of customs duties and other whether the reforms have achieved their objectives. import taxes, and a higher imports-to-GDP ratio, Partial indicators were used and these measure the made positive contributions. In Ghana, the increase impact of the modernization efforts on revenue in the import taxes-to-GDP ratio was fully due to a generation and on customs clearance time for rising import taxes-to-imports ratio while the imports. Surveys of customer satisfaction could imports-to-GDP ratio declined. Clearance times also be used as important gauges of success. and revenue performance exceeded expectations from early 2001 to mid-2003. The Treasury has benefited from accelerating revenues and more Fiscal Performance rapid access to tax payments. The impact of customs reforms on tax revenue is an When measured in relation to GDP,the decline in outcome of two separate factors. First, streamlined receipts from customs duties in Bolivia, Morocco, customs clearance procedures, together with and Turkey, as well as the increases in Peru and strengthened enforcement and higher compliance, Uganda, amounted to less than 1 percentage point. In can lead to higher collection rates for a given level the Philippines, the drop was 2.5 percentage points of of imports by reducing revenue-reducing acts of GDP,largely due to a reduction in tariff rates. corruption and smuggling opportunities. Second, good customs procedures, combined with trade Enforcement liberalization measures, reduce the cost of imports and will lead to higher imports for a given level of There are indications that important progress has GDP. The combined effect of these two factors will been achieved in reducing smuggling in Peru and 120 Customs Modernization Handbook

TABLE 6.3 Revenue and Import Performance Before and After Customs Reforms

Bolivia Ghanaa Morocco Mozambique Peru Philippines Turkey Uganda

(Percent of Imports)

Customs duties Before reforms 5.4 4.6 13.5 8.0 12.3 13.9 3.2 3.4 After reforms (2001) 5.1 6.2 9.5 7.5 10.6 3.4 0.8 5.4 Import Taxes Before reforms 20.5 10.5 36.2 11.2 23.0 18.2 13.0 7.5 After reforms (2001) 21.4 15.4 28.4 19.7 33.1 6.4 10.9 14.2

(Percent of GDP) Imports Before reforms 22.4 59.6 27.0 27.6 11.1 28.6 17.8 23.4 After reforms (2001) 21.2 46.2 33.7 26.6 13.3 45.3 28.4 29.1 Customs duties Before reforms 1.2 2.8 3.7 2.2 1.2 4.0 0.6 0.8 After reforms (2001) 1.1 2.9 3.2 2.0 1.4 1.5 0.2 1.6 Import taxes Before reforms 4.6 6.2 9.8 3.1 2.6 5.2 2.3 1.7 After reforms (2001) 4.5 7.1 9.6 5.3 4.4 2.9 3.1 4.1

Note: Period before reform refers to following years: Bolivia, 1996; Ghana, 2000; Morocco, 1996; Mozambique, 1996; Peru, 1990; the Philippines, 1991; Turkey, 1994; Uganda, 1990–91. a. For Ghana, the year after reforms is 2003. Sources: Luc De Wulf and José B. Sokol 2004; data provided by national customs; World Bank database; International Monetary Fund; International Finance Statistics; Government Finance Statistics; Balance of Payments; and Direction of Trade Statistics Yearbook, various issues; and International Monetary Fund, various country reports.

Uganda. Such efforts have been less successful in combat smuggling are taken by customs in coopera- Bolivia and Mozambique. To enhance enforcement tion with other public and private entities, including a number of initiatives have been pursued, including the national department for fraud prevention and preventive inspections; expanded audit units; coop- border control. Customs also more than doubled eration with other authorities, including the police the number of auditors in recent years. Although and private entities; and improved intelligence and there are signs in Uganda that fraud is declining, the information. In some countries the lack of a central incidence of fraud remains high. A detailed audit database for enforcement purposes and the difficul- suggests that up to 70 percent of the sampled ties in adapting inspections to automated clearance invoices are false or spurious, substantially compli- procedures have impaired enforcement efforts. cating the assessment of correct customs duties. In Bolivia the reforms helped reduce smuggling, Also, the removal of PSI intervention in 2000 was especially of commodities of mass consumption; not accompanied by a strengthening of valuation however, problems remain in small-scale smuggling, capabilities. which benefited from much softer enforcement In Turkey, control units are concerned that rules. At the same time, under the new enforcement reduced physical controls could weaken enforce- system in Mozambique, seizures of illegally ment because of insufficient access by enforcement imported goods have increased substantially. There staff to the central customs database and difficulties is a commonly shared perception that smuggling in adapting inspection to automated clearance pro- has increased because of the growing importance of cedures. Regional directorates also seem to lack the the informal sector in cross-border activities. In proper sources of data for customs valuation. In Peru, preventive inspections and other actions to Morocco, efforts are continuing to centralize and Policy and Operational Lessons Learned from Eight Country Case Studies 121 streamline intelligence gathering and processing. In inspection is a major factor explaining the shorten- Southeast Europe, where customs had traditionally ing of customs clearance time. Obviously, cargo no other responsibility than manning approved that is channeled through the green line will clear border crossings, enforcement was considered for a faster than other cargo. Note, however, that the data long time to be the exclusive prerogative of the bor- reviewed are not fully comparable among countries der police. This resulted in the misconception that due to differences in recording methodologies and the border police were in fact in charge of monitor- the precise sequence of transactions required ing customs activities to detect corrupt practices. It before cargo clearance. Although customs clearance destroyed cooperation between the two agencies, has become faster, the period between the arrival of and created an unhealthy climate of suspicion that goods in port and their exit is often still excessively further encouraged customs to compensate for long because of the time needed for other proce- frustration through increased corruption. The situ- dures, including health, safety, and quality controls, ation gradually changed when legislation was and because of slow port operations. amended and when political decisionmakers During the first half of 2003, customs clearance in became more aware of the new role of customs in a Bolivia required 53 hours on average from the time market economy environment. of registration of the import declaration to the exit of the goods from the customs warehouse. Excluding the time elapsed between the inspection and control Clearance Time and the View of Traders and the exit of the shipment, the average time Customs clearance time has been reduced in all case amounted to 37 hours. Although data on release study countries (table 6.4). Selectivity in physical times are not published, they are readily available to

TABLE 6.4 Customs Processing Times (hours and minutes per shipment)

Green Yellow Red General Channela Channel Channel Period

Bolivia 53:06 39:25 49:05 70:48 Jan.–June 2003 Ghana KIA Airport 75 percent clearance the same day Ghana Tema Port 44 percent clearance in two days Morocco 0:37 March 2003 Mozambique 8 days mid-2002 Peru 1:00–2:00 12:00 24:00 2002 The Philippines 18:20 22:50 19:29 Dec. 1997 Turkey In 24 hours: 71.5 percent of imports 2002 In 48 hours: 82.5 percent of imports Uganda Up to one week Under simplified procedures: Single item cargo: one day 2002 Mixed cargo: three days

Note: Customs processing time is the clearance time for imports through single window facility; not including operations before and after single window formalities. The data reviewed are not fully comparable among countries in view of differences in recording methodologies and the precise sequence of transactions required before cargo clearance. For detailed information on clearance times see annex 1.C. a. While it appears that it takes 39 hours to clear merchandise that has been slated for green channel, the clearance time for this channel is zero. Once the system assigns green to an import declaration, it immediately clears it with no further ado. That is precisely the essence of the green channel. Thirty-nine hours is the average time that the importer or its customs agent takes from the moment he or she registers the declaration in the system until it picks up the merchandise, but it has nothing to do with the time that customs takes to authorize the goods. Source: Customs authorities; De Wulf and Sokol 2004. 122 Customs Modernization Handbook

the authorities, underlining the effectiveness of the between one and two days, 45 percent take between ASYCUDA++ program in compiling the data, which two and five days, and 11 percent of clearances take include a detailed breakdown of the time required more than five days (often problematic cargo). Cus- for the various steps of the clearance process and for toms documents review takes on average 15 min- each of the color channels. utes instead of 24 hours while bank payments only Morocco’s customs reduced clearance time take 10 minutes compared to a few hours before on average from one hour and 45 minutes in GCNet was fully operational. December 2001 to 37 minutes in March 2003. Reactions to customs reforms from the users of However, because of controls and procedures insti- customs services have generally been favorable. tuted by other agencies, a container requires on There has been widespread agreement that overall average more than 10 days before it can leave the customs performance has improved, and that the port area. Morocco is the only one of the case study incidence of corruption has declined. In some countries reviewed that systematically publishes countries the initial opposition of traders to reform such data on its own. By introducing transparency disappeared and gave way to approval when gains in the availability of customs data it not only puts from the reform became noticeable. In countries pressure on its own operations to further improve where customs sought closer cooperation with the efficiency, but also clarifies the role of the other private sector, the new openness was widely appre- agencies in overall clearance delays. This may lead ciated. However, users emphasize that customs them to introduce speedier work procedures. modernization is an ongoing process that needs to Substantial progress has also been reported in continue and keep up with modern trade practices. Mozambique. By mid-2002, the time between filing In Southeast Europe, a new partnership between a declaration and the posting of the release permit customs and the private sector materialized had been brought down to 8 days from 18 days as through the creation of “Pro-Committees,” which recently as 2000, and 20 days before the reform. were supported through SECI and the Stability Customs clearance in Peru now averages between Pact. 24 hours for the red channel to 12 hours for the In Bolivia, users feel that in some sectors the orange channel, and one to two hours for green incidence of physical inspections is still high and channel passage. In the Philippines, the average small-scale smuggling remains widespread. They clearance time ranges from 18 hours to 23 hours for would like to see improved coordination between imports with DTI, depending on the channel. In customs and warehouse operators, and extended Turkey, 72 percent of imports are cleared within 24 hours for customs operations. In Morocco, the hours, and 83 percent within 48 hours. With the willingness to listen and the new openness of the introduction of simplified procedures in Uganda, Customs Directorate in reporting on customs customs clearance for single item cargo takes one reforms has been greatly appreciated by the trade day and for mixed cargo three days. community, and is reflected in periodic customer In Southeast Europe, clearance times were surveys, the results of which are published. (More halved on average following two years of project detail on the cooperation between customs and the implementation. From a high of up to five hours private sector in Morocco is in box 6.4.) Traders in of average waiting time for trucks at the borders Mozambique agree that the reforms have made next to the Balkans, implementation of the TTFSE substantial progress, but are looking forward to program allowed for a significantly reduced wait- the promised introduction of electronic customs ing time compared to—a still high—two hours declarations and duty payments. The practice crossing. of customs to consult with them is very much In Ghana, average clearance times at the KIA appreciated. airport have dropped from three days to four hours Following initial opposition by vested public and and customs document reviews, which used to take private sector interests in Peru, both have come to 24 hours, now take minutes on average. At the view the reform as highly successful in the areas Tema port, clearance times have been reduced from of trade facilitation and revenue generation. With a week on average to days. Currently 14 percent of respect to the reforms undertaken in the Philippines, goods are cleared on the same day, 30 percent take press reports were generally favorable and trade Policy and Operational Lessons Learned from Eight Country Case Studies 123

BOX 6.4 Customs Cooperation with the Private Sector in Morocco and the Philippines

A significant factor in the successful implementa- resentatives. The management of the temporary tion of customs reform in Morocco was the admission system and drawback systems are active participation of private sector partners in only two examples of this fruitful dialogue. In the preparation of the reforms, and the open- the same spirit, customs has established a spe- ness of customs to private sector concerns, cialized service of business advice to enterprises, reflecting a dedication to transparency, effi- and provides direct assistance by telephone and ciency, and partnership. This openness, focusing electronically. on quality service delivery and willingness to lis- Even though there was no consultation on ten to the concerns of traders, has been widely reform measures in the Philippines, the business appreciated by economic agents. sector provided substantial material and finan- During the preparations for the implementa- cial assistance to customs in the reform process, tion of the ACV in 1998, customs was particu- including setting up an online system for secur- larly concerned that traders were fully informed ing final release of shipments from ports and of the new approach to customs valuation. Cus- warehouses, and introducing encryption tech- toms provided full information on the new prin- nology for the electronic transmission of pay- ciples and the risk assessment–based verification ments data and the advance submission of process that it would adopt, thereby facilitating manifest information. It also participated in the transition to the ACV. In general, customs managing a number of steps in customs clear- placed great emphasis on trade facilitation ance operations. measures in line with the Revised Kyoto Conven- tion. Changes in procedures were introduced Source: Steenlandt and De Wulf 2004; following consultations with private sector rep- Parayno 2004.

representatives registered their satisfaction with the ization had the wherewithal to effect such a drastic improvement in customs operations. However, by transformation of trade and customs procedures. the late 1990s the much-hailed results of the reforms had not been sustained and customs services were Anticorruption Measures again criticized as inefficient and corrupt. One reason for this backtracking was the erosion of political In several countries where the incidence of corrup- support for the reforms. At present, efforts are under tion was high, targeted measures under the reform way to restore the previous degree of satisfaction programs have resulted in reduced corruption and with the reform outcomes. In Turkey, in a small sur- enhanced staff integrity. Greater reliance on com- vey of traders, 70 percent recorded that they were puter support in customs operations has resulted in satisfied with the progress made in modernizing greater transparency in those operations. In Peru, customs clearance processes. In Uganda, relations Mozambique, and especially Bolivia, staff renewal between customs and the private sector are seen as at the outset of the program enabled customs to satisfactory and cooperation has improved as a remove corrupt personnel. The more limited staf- result of the reforms. Private sector operators would fing changes in Uganda, together with the rather welcome further progress, particularly in the areas of timid use of other instruments to fight corruption, transparent use of price lists for valuation, the intro- may have contributed to more modest progress duction of customs clearance at the border or in in improving integrity than in other countries ports in Kenya and Tanzania rather than in Kam- (box 6.5). pala, and greater emphasis on risk-based control In Bolivia, where the eradication of corruption procedures. was central to government reform, the nearly com- In Ghana, the reforms showed that private– plete changeover of staff resulting from subjecting public sector partnerships work. GCNet anchored all staff to new competitive recruitment was the the reforms and ensured continuity and focus on first step in the reform process. At the time of the the reform objectives during a period of political review it was estimated that 90 percent of the staff transition, and at a time when no other local organ- was new. There is a widespread view that this has 124 Customs Modernization Handbook

BOX 6.5 Addressing Corruption in Uganda’s Independent Revenue Authority

Efforts to fight corruption were high on the More recently URA launched other initiatives reform agenda at the creation of the URA. There in the anticorruption campaign and created an was a general perception, shared by its manage- Ethics and Integrity Committee, elected ethics ment and by private sector operators, that the counselors who would be responsible for a series incidence of corruption in customs staff was high. of anticorruption initiatives, and started working The anticorruption campaign in customs was in on a code of ethics (which is still in the draft line with efforts to stem corruption in the public stage and could benefit from application of the sector, efforts that led to the creation of a Min- WCO Model Integrity Code). The URA Commis- istry of Integrity headed by a forceful minister. sioner made a well-publicized initiative to rein- The anticorruption campaign in URA had sev- vigorate the anticorruption campaign. (He eral aspects. At the outset, URA provided salaries promised strong measures, including firing com- that competed with the best of the public sector bined with the possibility to submit voluntary or even those of the private sector. Alone among resignations with impunity, and a confidential government units and autonomous agencies, e-mail address and telephone number to report URA requires all staff members to fill out an corruption.) Responses to these initiatives would “Asset Declaration Form,” to be updated for sig- benefit from greater follow up. Yet, some early nificant changes in family status or in asset own- success was achieved when several URA man- ership. Automation of customs processes was agers were arrested for fraudulently benefiting strengthened and recently ASYCUDA++ was from a drawback scheme. introduced. An anticorruption campaign is publicized in customs offices with “in your face” Source: De Wulf 2004. messages (for example, “Corruption Stops Here” signs posted at the doors of managers).

substantially contributed to lowering corruption. Lessons Learned With improved procedures to detect staff miscon- Several factors played a key role in ensuring the duct, Mozambique has stepped up the number of success of the reforms in the case countries studied. cases investigated and resulting staff dismissals. In These are summarized in chapter 1 and discussed the recruitment of senior managers and of those here. appointed to sensitive positions, background and Good customs operations consist of coherent integrity checks are undertaken. With the targeted and interlocking sets of processes. An overall cus- upgrading in quality of staff under the reform, toms reform program has a greater chance of yield- 60 percent of the initial staff has been removed, ing effective and sustainable results than partial thus providing the opportunity to strengthen reforms. In countries with successful reforms, feasi- integrity. However, the incidence of staff miscon- ble measures were successively and progressively duct remains high and the process of disciplinary introduced within an overall vision to establish a action lengthy. modern customs organization. At the outset of the reform program in Peru, Political support was essential for the success of about 60 percent of the staff was removed through the reforms. Continuity in leadership is important “voluntary departure,”while those not leaving were in carrying out reforms; continuity in management subjected to external tests, and corrupt personnel is important in sustaining them. Strong and stable were dismissed. The modernization of customs in leadership with an opportunity to see the imple- the Philippines initially was successful in stemming mentation through to completion proved to be corruption, but since the late 1990s the situation essential for success. reversed itself and traders again came to view cus- Sustainability requires continued political com- toms as one of the most corrupt public services in mitment. Even when successful reforms become the country. Policy and Operational Lessons Learned from Eight Country Case Studies 125 firmly embedded in a country’s administrative and Customs reforms need the support of customs institutional framework, their endurance is subject staff and other stakeholders. Just as the autonomy to risks. These include changes in policy direction, of customs administrations can facilitate the imple- weakening of political support, and changes in the mentation of reforms, it can also strengthen the reform leadership or management of customs, all dedication of staff to high performance standards. of which can stall the reform or reverse its course. The administrative autonomy of customs also con- Other risks include lack of political commitment, tributes to the achievement of reform objectives. inadequate funding for staff compensation and Ideally, customs administrations should receive as the maintenance of IT infrastructure, changing much autonomy as possible in their administration customs-funding rules, and political interference in and operations, and should be provided with an personnel management. When reforms clearly ben- adequate budget to effectively and efficiently efit both private traders and the Treasury, they cre- undertake their functions. They should also be pro- ate their own advocates, thus reducing the chances vided with clear evaluation criteria. of backsliding. The personnel policies of customs were a The reform must be realistic and consist of major factor in enhancing quality and integrity of reform measures that can be implemented. The staff. Personnel reform contributed to successful early strengthening and stepped up application of customs modernization programs, particularly IT-based customs processing is essential for a suc- in countries that proceeded with a large-scale cessful reform. Full automation of clearance proce- changeover of personnel and where existing staff dures and the establishment of risk-based control had to go through the same recruitment process as and audit systems critically depend on the proper new applicants and were also offered incentives use of IT. These actions set the stage for streamlin- to leave. Salary upgrades were designed to attract ing and simplifying customs procedures to speed and maintain qualified personnel, as well as to up the clearance process and reduce physical strengthen integrity and financial autonomy. A inspections. They also help reduce contacts major element of these new policies was also the between customs staff and traders, thus reducing introduction of WTO-compatible declaration pro- the possibility of discretionary and accommodat- cessing fees, which enabled customs to earmark suf- ing decisions that engender corruption. ficient resources to maintain their new, modernized A good funding strategy is needed to ensure the systems. success of a reform. Donor support and coordina- Cooperation between customs and private section was critical for launching and implementing tor operators was a significant factor in the success the reforms in all of the eight case study countries. of the reform programs. The change in the orienta- Domestic funding, complementing foreign financ- tion of customs from a nearly exclusive emphasis ing, was also important in ensuring the success of on its role as enforcer and collector to one of the reforms. This was even more acute in countries provider of services, incorporating effective service where a culture of management by objective had to delivery with its revenue mobilization responsibili- be substituted for that of management by institu- ties, requires strong support from the trade tion. Donor coordination at the diagnostic level is community. Such support can be sustained by a also important. deliberate outreach program to the private sector, Coordination with other agencies is essential to including periodic high-level consultative meet- reap the full benefits of the reforms. In no case was ings. However, the full transparency of regulations, it possible to document that trade facilitation was performance indicators, and statistics, will be most able to extend effectively beyond customs, but important in convincing the trade community. some reform initiatives explicitly include such Using clear performance indicators to monitor objectives in medium- to long-term work pro- the progress of reform is essential not only to eval- grams. Such coordination with other agencies is uate progress, but also to adjust the reform meas- essential so that inefficiencies in obtaining import ures to changing circumstances without losing authorizations related to health, safety, and other sight of the big picture. Customs clearance time was purposes—which can significantly delay the pro- reduced in all the case study countries reviewed. cessing of trade operations—can be rooted out. Green channel designations as well as the incidence 126 Customs Modernization Handbook

of physical inspections are good indicators for References monitoring clearance time and must be evaluated De Wulf, Luc. 2004.“Uganda.”In Luc De Wulf and José B. Sokol, within the context of the application of risk man- eds. Customs Modernization Initiatives: Case Studies. Wash- agement principles. ington, D.C.: The World Bank. Goorman, Adrien. 2004. “Peru.” In Luc De Wulf and José B. Sokol, eds. Customs Modernization Initiatives: Case Studies. Further Reading Washington, D.C.: The World Bank. Mwangi, Anthony. 2004. “Mozambique.” In Luc De Wulf and The various case studies referred to in this chapter are pub- José B. Sokol, eds. Customs Modernization Initiatives: Case lished in Luc De Wulf and José B. Sokol, eds. 2004. Customs Studies. Washington, D.C.: The World Bank. Modernization Initiatives: Case Studies. Washington, D.C.: Oktem, M. Bahri. 2004. “Turkey.” In Luc De Wulf and José B. The World Bank, which is issued as a companion volume to Sokol, eds. Customs Modernization Initiatives: Case Studies. this publication. Washington, D.C.: The World Bank. Molnar, Eva. and Lauri Ojala. 2003. “Transport and Trade Facili- Parayno, Guillermo L. Jr. 2004. “The Philippines.” In Luc tation Issues in the CIS-7, Kazakhstan and Turkmenistan.” De Wulf and José B. Sokol, eds. Customs Modernization Washington, D.C.: The World Bank. Initiatives: Case Studies. Washington, D.C.: The World Bank. World Bank. 2002. “Trade and Transport Facilitation in South- Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In Luc east Europe Program.”Washington, D.C. www.seerecon.org/ De Wulf and José B. Sokol, eds. Custom Modernization Ini- ttfse. tiatives: Case Studies. Washington, D.C.: The World Bank. 7 TWO DECADES OF WORLD BANK LENDING FOR CUSTOMS REFORM: TRENDS IN PROJECT DESIGN, PROJECT IMPLEMENTATION, and lessons learned

Michael Engelschalk and Tuan Minh Le

TABLE OF CONTENTS LIST OF TABLES Bank Assistance in Customs-Related 7.1 Approved Amounts for Customs Components Projects 128 of Technical Assistance Projects, Pre-Project Diagnostic Work and Project 1982–2002 130 Design 129 7.2 Distribution of Approved Operations with Project Implementation and Outcomes 142 Customs Component by Project Category, Main Conclusions and Lessons for Future 1982–2002 131 Bank Operations to Support Customs 7.3 Pre-Project Diagnostic Analyses in Modernization 145 Technical Assistance Projects, Annex 7.A. Distribution of Projects with 1982–2002 132 Customs Components by Region, 7.4 Summary of Objectives 135 1982–2002 149 7.5 Performance Indicators 136 Annex 7.B. Selected Criteria for OED Project 7.6 Comprehensiveness of Project Evaluations 150 Design 139 Annex 7.C. Correlation Estimation 150 7.7 Summary of Suggested Rating of Outcomes Annex 7.D. Reforming Tax Systems: The World of Customs Activities 143 Bank Record in the 1990s 151 7.8 Correlation Estimation: Further Reading 152 A Summary 144 References 152 7.A.1 Distribution of Projects with Customs Components by Region, 1982–2002 149 The authors gratefully acknowledge the research assistance provided by Patricia Laverley (OED PK) and Gonzalo Salinas LIST OF FIGURES (OEDCR). They wish to thank Yvonne M. Tsikata (OEDCR), Gianni Zanini (WBIPR), and Michel Zarnowiecki (ECSIE) for 7.1 Institutional Environment Assessment their valuable comments and suggestions received over the Framework 138 course of the development of this chapter. 127 128 Customs Modernization Handbook

LIST OF BOXES 7.5 Increased Bank Emphasis on Coordination with Other Donors 142 7.1 Diagnostic Framework—Three Project- Specific Cases 133 7.6 Quality of Pre-Project Preparation and Design Matter: Two Project-Specific 7.2 Inadequacy of Performance Indicators: Cases 146 Project-Specific Cases 136 7.7 What Triggered the Modification of Project 7.3 Designing a Comprehensive Set of Objectives or Components 147 Performance Indicators: The Case of Trade and Transport Facilitation Projects in 7.8 Implementation Management Issues: The Case Southeast Europe 137 of the Senegal Development Management Project 148 7.4 Integrated Approach in Process Management: The Case of the Tunisia Export Development Project 141

Over the past 20 years the World Bank has provided section discusses the design and process issues of substantial support for reforming customs admin- projects with customs reform activities and draws istrations in developing countries. While this sup- key lessons for future Bank operations to support port was seldom provided in the form of customs- customs modernization. specific technical assistance operations, many projects in trade facilitation, infrastructure, and Bank Assistance in Customs- public sector included customs reform compo- Related Projects nents. In addressing customs reforms, the Bank has accumulated a significant amount of knowledge The World Bank has been active in providing sup- and experience, which should be used in designing port for customs reforms in all geographical new projects as well as in improving existing ones. regions. A variety of lending instruments was used The chapter is structured as follows: The first for these assistance projects, and the distribution of section, Bank Assistance in Customs-Related projects differed across region. Projects, summarizes the level, format, and regional distribution of World Bank lending for customs Rationale and Lending Instruments reform. The analysis is based on the project database (Trade Assistance Evaluation Project World Bank customs modernization activities have Database—TAEPD) compiled by the World Bank’s generally been part of broader reform programs to Operations Evaluation Department (OED) and facilitate trade, support general revenue mobiliza- project-specific documentation including staff tion, enhance public finance management, appraisal reports (SARs), project appraisal docu- strengthen public sector human resources manage- ments (PADs), implementation completion reports ment, support infrastructure development, or (ICRs), and OED evaluation summaries.1 The sec- enhance competitiveness. In many cases, customs is ond section, Pre-Project Diagnostic Work and just a small component in a complex reform pro- Project Design, provides a detailed discussion of gram.2 At the other extreme, in very few cases, such issues, trends, and patterns in setting objectives, as the Russian Customs Development Project selecting performance indicators, and defining (RCDP), customs reform has been the sole focus of project activities. The third section, Project Imple- an operation. mentation and Outcomes, identifies key problems in diagnostic work, project design, implementation management, and supervision that affect final proj- 2. A typical example is the Economic Recovery Credit Project ect outcomes and sustainability. The concluding (Chad), which lists among its various objectives “reinforcement of the Customs Office through training programs and the provision of equipment and materials.” The project document, however, does not offer any specific plan for implementation nor 1. See also, Operations Policy and Country Services 2003, and does it offer a detailed cost allocation among different compo- OED 2004. nents of the project. Two Decades of World Bank Lending for Customs Reform 129

Customs reform components are embedded Implementation and Control Project, Cambodia in investment and technical assistance loans (TALs) Economic Rehabilitation Credit Project) or as well as in structural adjustment loans and credits strengthening the role of government in quality (SALs). In the case of a technical assistance (TA) control of imports (Senegal Agricultural Sector operation, the project document specifies the Adjustment Credit Project). For the purpose of this allocation of funds to each particular project com- chapter, we do not particularly analyze the 79 SALs ponent. Structural adjustment operations are in the database because SAL conditionalities are generally designed to provide financial support for difficult to monitor in their linkage with TA pro- a policy program such as in fiscal reform or public vided, and the Bank’s expertise is in general not resource management. The operations do not explicitly tested in SALs. require an in-depth specification of project compo- Table 7.1 shows the allocation of approved TA nents nor do they specify the allocation of the operations (approximately US$309 million in total) funds to different components. Given the different toward customs-specific components by period nature of SALs, the following analysis focuses solely and by region. The RCDP by itself attracted on the Bank’s TA components to distill lessons for US$140 million—more than 45 percent of the total future customs modernization activities. of financing for Bank customs-related projects. With or without the RCDP, Europe and Central Scope and Distribution of Bank Assistance Asia (ECA) countries far outweighed any other region in attracting Bank funds. The ECA region During 1982–2002, the Bank engaged in 117 proj- attracted about US$213 million with the RCDP ects with a customs reform component; 38 of these included (approximately 69 percent of the total were TA projects and 29 were SALs. Annex 7.A customs-related TA lending of US$309 million), summarizes the distribution of these projects and US$73 million without the RCDP (or 43 per- across regions and periods. cent of total lending). In the SALs with customs components, two- Table 7.2 depicts the distribution of the 38 TA thirds of the policy reforms retained were trade operations with customs components by five proj- related, while one-third were public finance related. ect categories: customs-specific, trade-related, infra- With respect to the customs-related components, structure, public finance, and others. The single cus- 75 percent aimed at process simplification, 16 per- toms-specific project, the RCDP, drew the highest cent at improvements in legislation, and 9 percent share of the total approved loans for customs com- at human resources development. ponents (45 percent), whereas the customs activities The customs-related conditionalities and scope embedded in infrastructure projects obtained the of activities included in the SALs vary widely from lowest share (3 percent of the total amount of cus- the very specific to the most ambitious. Some SALs toms loans with the RCDP,and 5 percent of the total developed specific conditionalities related to spe- without it). Public finance reform projects attracted cific customs procedures and operations (Georgia the second highest share (32 and 59 percent of the Third Structural Adjustment Credit Project, Jordan total approved loans for customs, with and without Third Economic Reform and Development Loan the RCDP, respectively), followed by trade-related Project, and Morocco Policy Reform Support Loan projects (16 percent and 30 percent with and with- Project), specific aspects of human resources man- out the RCDP). Except for the RCDP,public finance agement and training (Haiti Second Technical and trade-related projects are ranked second and Assistance Project, Tunisia Development of the third, respectively, in terms of average customs proj- Capacity to Administer Foreign Trade), revision of ect amounts (column 4) and the share of customs the Customs Code (Nigeria Trade and Investment operations in the total Bank-approved operations Policy Loan Project), and targets for simplification by project category (column 5). of procedures to facilitate trade (Morocco Second Industrial and Trade Policy Adjustment Loan Project). Some SALs imposed broad and ambitious Pre-Project Diagnostic Work and Project Design conditions for customs modernization, such as strengthening customs administration (Sao Tome Bank project documents provide detailed informa- and Principe Strengthening Planning Budgeting tion on the pre-project diagnostics and project 130 Customs Modernization Handbook

TABLE 7.1 Approved Amounts for Customs Components of Technical Assistance Projects, 1982–2002 (amounts in US$ million; shares in percent)

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002 Amount Amount Amount Amount Amount Region Approved Share Approved Share Approved Share Approved Share Approved Share

Sub- Saharan Africa 0.24 8 8.63 86 5.29 7 11.67 5 25.8 8 East Asia and Pacific 20.3 26 1.1 1 21.4 7 Europe and Central Asiaa 0.3 3 48.2 62 164.5 75 213.0 69 Latin America and Caribbean 2.6 92 1.15 11 22.0 10 25.7 8 Middle East and North Africa 3.82 5 9.0 4 12.8 4 South Asia 10.45 5 10.5 3 Total 2.8 100 10.1 100 77.6 100 218.7 100 309.2 100

a. The RCDP was approved in 2002 in the amount of US$140 million. Source: Authors based on World Bank database.

design. To track the evolution in pre-project diag- Basically, a comprehensive diagnosis should use nostics, the 1982–2002 review period is divided both quantitative and qualitative indicators and into two subperiods, 1982–93 and 1994–2002. The look at the effectiveness and efficiency of the institu- rationale for the time breaking point is two-fold: tion, institutional design and management, and the Because the OED database does not have any institutional and economic environment of the cus- investment or TA projects with customs compo- toms administration. nents during 1982–84, the natural break point that The review of Bank operations reveals, however, evenly divides the 1985–2002 period is 1993–94. that a significant number of TA operations lack Also, a number of projects with substantial customs substantive diagnostic analysis. While the level components, such as Turkey Public Financial Man- and comprehensiveness of pre-project diagnosis agement, RCDP, and Trade and Transport Facilita- depend on the scope of the project envisaged, an tion in Southeast Europe (TTFSE), were approved institutional analysis is essential even for small proj- after 1993, and this offers an opportunity to analyze ects that address only specific elements of customs any shift in the Bank’s approach to assistance of management and operations. However, out of a customs reforms. total of 38 TA projects with a customs reform component in the OED database, only 20 projects (or Pre-Project Diagnostic Framework less than 53 percent) were designed on the basis of Proper pre-project preparation and diagnostic work an institutional diagnosis. Across the projects that are critical for devising reform options, and were designed following a pre-project diagnosis, the determining project priorities and appropriate approach to identifying institutional weaknesses, as sequencing of activities. Several tools are available to well as reform needs and priorities, differed widely. support pre-project diagnostic work (see chapter 1). This indicates that project preparation and design Two Decades of World Bank Lending for Customs Reform 131

TABLE 7.2 Distribution of Approved Operations with Customs Component by Project Category, 1982–2002 (amounts in US$ million; shares in percent)

Share of Total Customs Amount Operations Approved Approved in Total Share in Total (Customs Amount Average Approved Amount Allocated and Non- Number Allocated Customs Operations for Customs Customs of for Amount by Project With Without Project Activities) Projects Customs per Project Category RCDPa RCDPb Category [1] [2] [3] [4]=[3]/[2] [5]=[3]/[1] [6] [7]

Customs- specific (RCDP) 140.0 1 140.0 140.0 100.0 45.0 Trade-related 277.8 14 50.9 3.6 18.0 16.0 30.0 Infrastructure 210.5 5 8.6 1.7 4.0 3.0 5.0 Public finance 229.2 7 100.0 14.3 44.0 32.0 59.0 Others 127.9 11 9.6 0.9 8.0 3.0 6.0 Total (with RCDP) 985.4 38 309.2 8.1 31.0 100.0 Total (without RCDP) 845.4 37 169.2 4.6 20.0 100.0

a. The share is estimated in the total approved operations for customs including the RCDP (US$309.2 million). b. The share is estimated in the total approved operations for customs without the RCDP (US$169.2 million). Source: Authors based on World Bank database. were largely ad hoc and lacked a common method- customs reform strategy, organizational structure ological framework. Table 7.3 summarizes the and functions, implementation of the harmonized scope of the diagnostic analysis of the 20 projects system, customs rules and procedures, the status of with a pre-project diagnosis.3 Box 7.1 offers three automation, and office facilities. The depth of the project-specific cases. analysis was, however, not uniform across projects While all 20 projects provided some kind of and assessment areas. For example, almost all proj- qualitative diagnostics, in very few cases was a ects with diagnostics examined the existing cus- quantitative analysis carried out to probe the toms laws and regulations (95 percent), while a sig- strengths and weaknesses of customs administra- nificantly lower share analyzed more specific issues tions, especially regarding effectiveness, efficiency, such as the implementation of the harmonized sys- and integrity. However, pre-project diagnostics tem (60 percent) or the complexity of rules or pro- improved over time, especially in the case of the cedures (70 percent). The fact that a substantial most recent projects (those projects approved in share of project preparation activities (65 percent) the late 1990s and early 2000s). included a diagnosis of the existing IT infrastruc- Customs reform covers much more than just ture and automation plans reflects the generally customs administration. More than half the proj- high share of IT-related costs in the customs com- ects in the sample evaluated the legislative frame- ponents of the TA projects.4 Interestingly, there was work for customs operations, ongoing or planned far less analysis of the system of inspection of goods

4. For example, the share of IT costs in customs modernization 3. The structure of table 7.3 follows Lane’s (1998) framework for in the Philippines Tax Computerization Project and in the the assessment of fundamentals in customs administration as Turkey Public Finance Management Project account for approx- well as Gill’s (2000) diagnostic guidelines for revenue adminis- imately 52 percent and 82 percent of the total costs of the tration. customs components, respectively. 132 Customs Modernization Handbook

TABLE 7.3 Pre-Project Diagnostic Analyses in Technical Assistance Projects, 1982–2002 (number of projects, shares in percent)

1982–93 1994–2002 1982–2002 Number Number Number of of of Projects Sharea Projects Shareb Projects Sharec

Total Number of Projects with Diagnostic Analyses 3 17 20 Diagnostic Areas Institutional Environment Assessment General diagnostics of customs laws and regulations 3 100 16 94 19 95 Planned or ongoing customs reform strategy 3 100 16 94 19 95 Customs administration indicators Effectiveness Service time indicators 0 0 9 53 9 45 Organizational structure and functions 1 33 13 76 14 70 Availability of risk management practice 1 33 3 18 4 20 Number of arriving passengers 1 33 0 0 1 5 Tonnage cleared 1 33 0 0 1 5 Ratio of taxes and duties collected to GDP (buoyancy) 1 33 4 24 5 25 Revenues-collected-to-potential-revenue ratio 1 33 0 0 1 5 Efficiency Estimated administration costs per transaction 1 33 0 0 1 5 Implementation of harmonized system (HS classification system) 0 0 12 71 12 60 Number of office staff 2 67 2 12 4 20 Size of trade 1 33 5 29 6 30 Valuation procedures 0 0 3 18 3 15 Complexity of rules or procedures 2 67 12 71 14 70 Automated customs procedures 2 67 11 65 13 65 Customs Expertise (Human Resources Development) Recruitment processes (selection of administration management) 1 33 2 12 3 15 Training (formal or on-the-job) 1 33 8 47 9 45 Integrity Office facilities 2 67 11 65 13 65 Code of conduct (code published or discussed) 0 0 4 24 4 20 Availability of merit-based promotion 0 0 3 18 3 15 Pay and benefits 2 67 3 18 5 25 Internal control and audit 0 0 2 12 2 10 Description and evaluation of methods to detect corruption and ensure integrity 0 0 9 53 9 45

a. Share of the total number of TA projects with diagnostic analysis for 1982–93 (3 projects total). b. Share of the total number of TA projects with diagnostics for 1994–2002 (17 projects total). c. Share of the total number of TA projects with diagnostics for 1982–2002 (20 projects total). Source: Authors based on World Bank database. Two Decades of World Bank Lending for Customs Reform 133

BOX 7.1 Diagnostic Framework—Three Project-Specific Cases

The Tanzania Tax Administration Project describes the status of computerization in cus- (approved fiscal year 1999; total approved toms and the tax administration. It also supple- amount US$40 million) confined its diagnostics ments the analysis of the institutional capacity to the qualitative analysis of the problems or with statistics on performance of customs and weaknesses in the customs administration, but the tax administration. The specific statistics on did not offer detailed quantitative assessments of customs include number of staff, taxes collected its efficiency and effectiveness. The project specif- by the Bureau of Customs (BOC), expenses, ically assessed institutional weaknesses related number of passengers (total and per BOC staff), to poor management, weaknesses in human net tonnage cleared (total and per BOC staff), resources development, cumbersome documen- trade flows (imports and exports values), and tary requirements coupled with bureaucratic and tax efforts (defined as the share of tax collection discretionary paper-based procedures, lack of in gross domestic product). physical infrastructure and equipment, out- For the RCDP, the Bank project team devel- moded legislative or regulatory base with inade- oped jointly with IMF customs experts a project- quate authority and penalty structures, and inef- specific diagnostic questionnaire. It was sent to fective enforcement practices that rely largely on the State Customs Committee (SCC) before the physical inspection despite the use of a preship- beginning of the actual project design work. ment inspection (PSI) company. Information provided by the SCC was analyzed The Philippines Tax Computerization Pro- before the pre-appraisal of the project, and was ject (approved fiscal year 1993; total approved supplemented by additional pre-project diagnos- amount US$63 million) and the Russia Customs tic work, using the diagnostic tools designed by Development Project (approved fiscal year the World Customs Organization (WCO) and the 2003; total approved amount US$140 million) European Union (EU) Blueprints for Customs offer examples of more comprehensive diagnos- Administrations, in addition to Gill’s diagnostic tics. The diagnosis in the Philippines Tax Com- toolkit. Pre-project diagnosis covered all relevant puterization Project was based on an Inter- areas ranging from the analysis of the project national Monetary Fund (IMF) analysis for a environment, commitment to reform, and stake- customs reform action plan. Additional diagnos- holder needs and expectations to an assessment tic work initiated by the Bank resulted in supple- of the needs for legal and regulatory changes, ments to the IMF recommendations for the institutional effectiveness and efficiency, human action plan. The project analyzes the existing resources and training issues, and integrity revenue system and the institutional capacity of problems. the revenue administration. It studies the historical background and the overall reform context Sources: World Bank 1993b, 1999b, 2003. of the computerization project, as well as

and the application of a risk-based inspection sys- coping with incentives and opportunities for cor- tem, although this is an important element of the ruption. Instead, many projects limited their diag- overall computerization strategy (only 20 percent nostics to a general description of the availability of of projects assessed the existing risk management methods to detect corruption (45 percent), and a practices). In assessing the customs environment, description of office facilities (65 percent). In assess- the majority of projects eluded the diagnostics of ing the expertise or status of human resources valuation procedures, which was carried out in development, projects largely focused on training only 15 percent of project preparations. (45 percent) but bypassed the critical issue of Integrity and human resources management recruitment processes, especially the process of received relatively light treatment. Few projects management recruitment (15 percent). explicitly analyzed the availability and quality of a Project sustainability has to be an important part code of conduct (20 percent), merit-based promo- of pre-project diagnosis. Several issues arise here. In tion (15 percent), or pay and benefit packages addition to the government’s commitment to (25 percent). Only 10 percent of the projects offered implement the project, clarity is needed on how the a diagnostic of the internal control and audit sys- operating costs of the agency will be financed after tems, which form the core institutional settings for the project closes. This is particularly important 134 Customs Modernization Handbook

for projects with a substantial IT component, proj- functions (76 percent versus 33 percent), status of ects with substantial investment in infrastructure, the implementation of the harmonized system (71 and projects supporting the introduction of a spe- percent versus none), and complexity of rules and cial bonus and incentive system for customs staff. In procedures (71 percent versus 67 percent). In addi- the case of the Philippines Tax Computerization tion, the second subperiod marked a substantial Project, for example, the project team did not evolution in the integrity assessment.5 address the issue of the cost of ongoing maintenance and IT system upgrades until the project clo- What are Customs Projects Trying to Achieve? sure discussion. Government guarantees to allocate An Analysis of Project Objectives adequate funds to the BOC for replacing outdated hardware could not be obtained and the status of Table 7.4 summarizes the customs-related objec- computerization deteriorated significantly after the tives of the 38 TA projects reviewed. There are three close of the project. broad project objectives for customs administra- The ability of the customs agency to attract and tion reform: revenue mobilization, minimization of retain qualified staff is another key issue for the burden on trade, and national security. More spe- sustainability of a customs reform project. It will cific project objectives relate to specific project depend on the human resources management components or reflect a narrower project focus and flexibility of the customs agency, in particular the are basically subcomponents of the three major flexibility to create a sufficient number of expert functions of customs. They include objectives such positions and to offer adequate compensation as strengthening integrity or improving services to packages. Reform efforts to create a more profes- the trader community. Many projects list a number sional customs agency cannot be successful if the of detailed objectives instead of aiming at generally agency does not have the flexibility to attract the strengthening one or several of the core functions necessary number of qualified and motivated staff. of customs. Some projects simply pursue the broad This has to be confirmed before the final design of objective of strengthening the customs agency the project. without mentioning specific effectiveness, effi- Most of the projects reviewed neglected the ciency, or integrity objectives. quantitative diagnostics of effectiveness in customs Minimizing the burden on trade emerged as the administration. In addition, only one out of twenty main target of the 38 projects; more than half the projects with a diagnostic component analyzed the projects during 1982–2002 broadly had trade facili- customs administration’s cost per transaction, a tation as the core project objective. Ten projects critical indicator for efficiency in customs adminis- identified revenue enhancement as the main objec- trations. On the other hand, there was a clear evolu- tive. No project incorporated national security in its tion in the diagnostic work. Out of 26 TA projects objectives, which is understandable given that undertaken during the period 1994–2002, 17 proj- national security is not part of the Bank’s mandate. ects conducted some kind of diagnostics. This is in The cross-period comparison shows that the sharp contrast with the insignificant share of proj- definition of broader project objectives of trade ects with diagnostics during 1982–93, where only facilitation or revenue enhancement became more three out of twelve TA projects had any kind of pre- widespread in recent years compared to earlier Bank project diagnosis. The juxtaposition of the shares of projects.While only 25 percent of projects identified projects with individual indicators in the total trade facilitation as their main objective during 1985 number of projects with diagnostics in each sub- to 1993, this share jumped to 65 percent for projects period reveals an improved quality of the diagnostics, except for the area of efficiency assessment. The diagnostics undertaken during 1994–2002 5. Projects with pre-project diagnostics during 1982–93 seemed to focus more on the quantitative assessment of effectiveness in were significantly more comprehensive in probing customs administration. Nevertheless, one should be aware of the fundamental issues of customs operation and the major caveat in this cross-period comparison: the skewed management, particularly service time indicators distribution of the number of projects with pre-project diagnostics toward the second period, and the very small sample of just (53 percent in the second subperiod compared to three projects with pre-project diagnostics in the first period none in the first), organizational structure and tend to overestimate the diagnostics shares in the first period. Two Decades of World Bank Lending for Customs Reform 135

TABLE 7.4 Summary of Objectives (shares in percent)

Period 1982–93 1994–2002 1982–2002 Number Number Number of of of Objective Projects Sharea Projects Shareb Projects Sharec

Revenue enhancement 1 8 9 35 10 26 Trade facilitation 3 25 17 65 20 53 Security 0 0 0 0 0 0 Strengthening customs agency 8 67 19 73 27 71 Integrity 1 8 3 12 4 11 Improving compliance 1 8 11 42 12 32 Improving trader services 0 0 13 50 13 34 Participation of stakeholders 0 0 0 0 0 0

a. Share of TA projects during 1982–93 reviewed (12 projects). b. Share of TA projects during 1994–2002 reviewed (26 projects). c. Share of TA projects during 1982–2002 reviewed (38 projects). Source: Authors based on World Bank database. designed between 1994 and 2002. Similarly, only 8 ularly the trader community, as sufficiently impor- percent of projects designed between 1982 and tant to be highlighted as a separate project objective. 1993 specified revenue enhancement as a core project objective. The related share was 35 percent for Measuring Performance: The Design of Perfor- projects designed between 1994 and 2002. Bank TA mance Indicators projects thus seem to reflect and react to the growing awareness in recent years among policymakers Table 7.5 summarizes the coverage of benchmarks in developing countries of the importance of trade or performance indicators used to monitor imple- facilitation in general and the importance of cus- mentation of the objectives as set out in the proj- toms reform for trade facilitation. ects.7 The fact that the majority of projects (27 out of Measuring performance was particularly weak 38 projects, or 71 percent) during 1982–2002 listed in the case of projects designed before 1994. Only a the global—and somewhat vague—objective of single project designed between 1982 and 1993 “strengthening of the customs agency” as a key proj- listed any performance indicators. Performance ect objective indicates a certain reluctance to com- measurement was limited to only two indicators, mit to more specific and measurable outcomes.6 the release or import clearance time and the annual However, more recent Bank projects designed number of declarations per customs staff. Among between 1994 and 2002 witnessed a dramatic more recent Bank projects, the RCDP, the Turkey change in the identification of more specific project Public Finance Management Project, the Tunisia objectives. Moreover, while no project set the Export Development Project, and the Trade and improvement of services to the trader community Transport Facilitation Projects in Southeastern as one of its targets during 1982–93, it became a key Europe are the ones with the most comprehensive objective for half of the 26 TA projects during sets of performance indicators. 1994–2002. No project identified mobilizing the The selection of performance indicators voice and participation of the private sector, partic- depends on the objectives and coverage of the TA

6. Of the 27 TA projects that included the objective of strength- 7. The listing is based on the set of indicators established in the ening the customs agency, seven listed this objective as the single Turkey Finance Management Project and in the seven Trade and objective for their customs administration reform components. Transport Facilitation projects in Southeastern Europe. 136 Customs Modernization Handbook

TABLE 7.5 Performance Indicators

Period 1982–93 1994–2002 1982–2002 Number of Number of Number of Indicator Projects Projects Projects

Revenue collected per customs staff 0 8 8 Total customs agency costs compared to revenue collected 0 7 7 Salaries compared to revenue collected 0 7 7 Trade volume per number of staff 0 8 8 Annual number of declarations per

Efficiency-Intended customs staff 1 9 10 Release time (import clearance time) 1 12 13 Physical inspection and introduction of risk management 0 14 14 Trade community information 0 4 4 Irregularities per number of examinations 0 8 8 Surveyed occurrence of corruption/ integrity 0 2 2 More effective physical inspections 0 4 4 Rejection of incomplete or inaccurate declarations 0 1 1 Timely and accurate production of Effectiveness-Intended Resultstrade Results statistics 0 2 2

Source: Authors based on World Bank database.

BOX 7.2 Inadequacy of Performance Indicators: Project-Specific Cases

The majority of the TA projects reviewed did not tor for the component “Resource mobilization” include any indicators for measuring project per- of the Armenia Second Structural Adjustment formance. For instance, the lack of performance Technical Assistance Credit (approved fiscal year indicators was highlighted in the OED evalua- 1998; total approved amount US$5 million). tion of the Philippines Tax Computerization Pro- The project included isolated efforts to comput- ject, which had a substantial customs reform erize the State Tax Inspectorate and the Customs component. A number of other projects did not Department, but there was no ongoing or provide an adequate set of performance indica- planned strategy for comprehensive reform of tors corresponding to the project objectives and the customs administration. The project was not activities. An additional problem faced in project based on a diagnostic analysis to make sure that supervision was the fact that project documents the proposed activity would have a tangible frequently did not offer any explicit time line for impact on revenue collection. As a consequence, achieving the implementation benchmark. the indicator is vague, mixes project output and The abstract below from the table entitled outcome, and does not specify when the bench- “Key performance indicators” shows the indica- mark would be reached.

Expected Key Performance Monitoring Indicators Critical Assumptions Outcomes/Impact Indicators and Supervision and Risks

Customs declaration Customs declarations and Customs department Implementation capacity process fully payments processed records of Customs department computerized and using computerized system payment system improved

Sources: World Bank 1997a, 2000g. Two Decades of World Bank Lending for Customs Reform 137

BOX 7.3 Designing a Comprehensive Set of Performance Indicators: The Case of Trade and Transport Facilitation Projects in Southeast Europe

Seven countries in Southeast Europe (Albania, of irregularities in total number of examinations) Bulgaria, Bosnia and Herzegovina, Croatia, and those to monitor efficiency and effective- Macedonia, Federal Republic of Yugoslavia, and ness-intended results (for example, average rev- Romania) participate in the regional program for enue collection per customs staff, share of Trade and Transport Facilitation. The program is salaries in revenue collection, average annual aimed at modernizing customs administrations number of declarations per customs staff). and other border control agencies. To facilitate The fact that the TTFSE program included all coordination, a Regional Steering Committee border inspection agencies permitted the design (RSC) was established. Customs reform was iden- of indicators that measure not only customs tified as a core requirement to support EU acces- clearance time, but also total clearance time at sion, and organizational reforms were combined the border. Projects focusing exclusively on cus- with the provision of infrastructure. EU customs toms operations will find it more difficult to work reform blueprints and accession requirements with these indicators. However, customs gener- provided the basis for the TA program. ally has a lead responsibility for coordination A template of a comprehensive set of per- with other agencies in efforts to reduce import formance indicators was developed and uni- clearance time, and customs reform projects formly applied to pilot ports in all participat- with a trade facilitation objective may find it use- ing countries (with the sole exception of the ful to monitor the development of overall import indicator on surveyed occurrence of corruption, clearance time throughout the implementation which was only measured by one participating period of the project. This can be done by country—Albania). All indicators were devised adding to the list of customs-specific key per- on the basis of the existing situation in 1999 and formance indicators a small number of broader specified for the subsequent four years. They trade facilitation indicators, to be monitored for included benchmarks for pilot sites clearance information purposes only. This has been done performance (for example, import clearance before, in the RCDP, for example. time in minutes, percentage of physical examination, proportion of times that trucks are Sources: World Bank 2000a, 2000b, 2000c, cleared in less than 15 minutes, share of number 2000d, 2000h, 2001, 2002a, 2002b.

project. The broader and more comprehensive a out of 17 TA projects with performance indicators, customs reform project is designed to be , the more more than half measured certain aspects of the comprehensive the set of performance indicators improvement in customs service (or effectiveness- needs to be. A narrow set of indicators, therefore, intended results) and efficiency in using customs can be perfectly justified in the case of a limited TA staff for processing declarations. Thirteen projects project with narrow focus and objectives. However, presented benchmarks for the release or import of the 38 TA projects under review, only 17 (or clearance time, and 14 focused on the introduction approximately 45 percent) had any benchmarks for of risk management practices, while 10 focused on monitoring and evaluating project implementation the indicator of annual number of declarations per and results. A majority of projects were designed customs staff (efficiency-intended results). A num- without an appropriate set of performance indica- ber of other good efficiency indicators—specifically, tors, and there was a wide variation across projects average revenue collection per customs staff, average in terms of indicator coverage. Chapter 1 of this costs of customs administration in terms of revenues book suggests a number of good indicators for collected by customs, salaries-to-revenues-collected monitoring revenue enhancement. Box 7.2 pro- ratio, and trade-volume-to-staff ratio—attracted vides some examples of incomplete sets of per- fewer than half of the Technical Assistance Loans formance indicators, while box 7.3 highlights a (TALs) with performance indicators. An even longer good practice in designing a comprehensive set of list of critical indicators on effectiveness—such as indicators. trader service, number of irregularities-to-number Table 7.5 shows that only a small set of the indica- of examinations ratio,and rejection of incomplete or tors on efficiency and effectiveness attracted the focal inaccurate declarations—attracted a substantially attention of the project teams. During 1982–2002, low number of projects; this may reflect the lack of 138 Customs Modernization Handbook

FIGURE 7.1 Institutional Environment Assessment Framework

Implement

Risk Management

Processes Audit

Advanced Informed Compliance

Improve Enforcement

Ensure Integrity Analyze Data

Enablers

Customs Expertise Automate

Fundamentals Environmental Assessment Manage Processes

Source: Lane 1998.

effectiveness assessment in the pre-project diagnos- International Trade Superhighway (1998), Lane tics. It is critical to note that although a significant develops a comprehensive and practical framework number of projects (10 out of 38 TA projects under for customs reforms. The framework shows a pyra- review) set the objective for revenue enhancement midal structure with the base consisting of the (see table 7.4), none ever established a benchmark reform fundamentals (environment, customs for monitoring. expertise, and integrity) and enablers (analyze data, automate, manage processes), the middle level Key Features of Project Design incorporating advanced processes (risk management, audit, compliance, and enforcement), and Customs modernization is a complex and continu- the top containing implementation processes (fig- ous process. It requires long-term commitments ure 7.1).9 In this chapter, we apply this analytical and a proper strategy for capacity building, which framework to survey the design of the Bank’s TA involves the development of systems, procedures, projects between 1982 and 2002. and processes, as well as staff competencies. The Table 7.6 summarizes the scope of customs mod- Revised Kyoto Convention on simplification and ernization activities in Bank TA projects. It not only harmonization of customs procedures has sketched lists project areas and activities but also includes the vision of a modern customs organization and key issues in project implementation such as has provided guidelines for a customs reform strat- sequencing, implementation plan, and coordination 8 egy. In his book Customs Modernization and the between customs administration and other related institutions. The past two decades have seen a steady 8. The WCO developed the original Convention in 1974 and evolution in the Bank’s strategy to modernize cus- revised it in 1999 to adapt to the changing nature of global trade toms: The project scope became consistently more through the 1980s and 1990s. The Convention, formally referred to as the International Convention on the Simplification and Harmonization of Customs Procedures, contains the basic prin- 9. One of the Bank’s projects, the Ghana Trade and Investment ciples for a modern customs administration and offers a blue- Gateway Project, used this framework in formulating its cus- print for customs reform. toms reforms activities. Two Decades of World Bank Lending for Customs Reform 139

TABLE 7.6 Comprehensiveness of Project Design

1982–93 1994–2002 1982–2002 Number Number Number of of of Projects Sharea Projects Shareb Projects Sharec

Legislative Environment New codes or legislationd 0 0 15 58 15 39 New tariff structuree 1 8 11 42 12 32 Valuationf 18312411 Part of planned or ongoing customs reform strategy 3 25 16 62 19 50 Process Management Process simplification 5 42 22 85 27 71 Coordination with other import clearance agencies 0 0 14 54 14 37 Automation 8 67 24 92 32 84 Risk management 3 25 18 69 21 55 Management/Human Resources Development Recruitment procedures 0 0 6 23 6 16 Training 7 58 20 77 27 71 Salaries 1 8 10 38 11 29 Promotion 1 8 4 15 5 13 Penalty 0 0 4 15 4 11 Code of conductg 00415411 Other aspects of integrity (facilities, auditing) 1 8 13 50 14 37 Customs and revenue department integrationh 0 02825 Informing or educating stakeholders 1 8 15 58 16 42 Analysis of data for better compliance and facilitation 0 0 12 46 12 32 Change Management Sustainability Benefit package or policy to retain good staff 0 0 3 12 3 8 Government budget commitmenti 00935924 Implementation plan specified 4 33 16 62 20 53 Sequencing (explicitly or adequately presented) 1 8 3 12 4 11 Monitoring and evaluation (performance indicators) 1 8 16 62 17 45 Project appraisal (financial and economic appraisal) 2 17 14 54 16 42 Bank’s cooperation with other donors in project preparation or implementation envisaged 2 17 15 58 17 45 Project supervision or management staffing involving IMF, WCO, or UN Conference on Trade and Development 2 17 14 54 16 42

a. Share of total TA projects reviewed during 1982–93 (12 projects). b. Share of total TA projects reviewed during 1994–2002 (26 projects). c. Share of total TA projects reviewed during 1982–2002 (38 projects). d. New code or legislation is part of the project or is issued in other related programs. e. New simplified tariff structure is part of the project or adopted in a related program. f. Including any mention of revising valuation system or of the role of PSI or the shift to ACV. g. Issued as part of the reviewed project or in a related effort to modernize customs administrations. h. The integration has either taken place or is part of the reviewed project. Two projects in the sample began when the customs and revenue departments were merged. i. Government commitments include the budget, political will, or regional trade liberalization (for example, the Southeast European countries involved in Trade and Transport Facilitation projects). Source: Authors based on World Bank database. 140 Customs Modernization Handbook

comprehensive during 1994–2002 compared to It is interesting to note that just half of the proj- 1982–93. Despite this trend toward a more compre- ects linked the customs component with a planned hensive approach, projects did not always give suffi- or ongoing customs reform strategy. This may be cient importance to certain core reform issues. Key explained to some extent by the fact that in other reform issues that were often neglected are improve- cases, the government had not been ready to ment of the legislative framework for customs oper- embark on comprehensive customs reforms. ations, change management, efficient coordination Except for the RCDP, no project referred to the between customs agencies and other import clear- original WCO or Revised Kyoto Convention in its ance agencies, integrity, and sequencing in project proposed customs reform activities. The proposed implementation. reform procedures focused primarily on process The majority of projects failed to focus suffi- simplification—including the introduction of ciently on change management issues. Administra- post-release audits and account management tive reforms can only succeed in a legal and (71 percent), automation (84 percent), and training regulatory environment that permits their full (71 percent). Despite the high emphasis on implementation. A typical example is the introduc- automation, just slightly more than half of all proj- tion of a risk-based selective physical control sys- ects targeted the introduction of risk management tem and of post-release audits, which in many (55 percent); this implies that the objective of countries are not possible under the existing Cus- automation was not always well defined and suffi- toms Code. However, only 15 out of the 38 TA proj- ciently linked to other critical reform components. ects in the sample (39 percent) mentioned the need An interesting fact is that few projects addressed the for modernizing and revising customs legislation. issue that customs is only one of several agencies Most projects did not cover valuation issues in their involved in the import clearance process. The design: valuation was mentioned in only 11 percent impact of customs reform measures on the effec- of the projects, which means that the Tokyo Round tiveness of the overall import clearance process can and the GATT Agreement on Customs Valuation be strengthened considerably by either supporting (ACV) of 1980 were generally neglected.10 Interest- additional complementary reforms in other import ingly, no projects in the database included a PSI- clearance agencies or at least supporting better related component (either strengthening a PSI coordination between the agencies involved in regime or phasing out PSI) in their design, import clearance. However, only 14 out of the 38 although PSI regimes were in place in some of the projects reviewed emphasized the need for simulta- client countries at the time of project design (the neous reforms of these institutions and better coor- Philippines and Tanzania, for example).11 dination of the clearance process. Box 7.4 presents There were few projects targeted at change man- the case of the Tunisia Export Development Pro- agement and sustainability. For example, only three ject, which highlights an integrated approach for projects (8 percent) planned to design a benefit streamlining the interagency coordination for han- package or policy to retain good staff. The RCDP is dling imports and exports. This was also a major distinguished as a project that dealt with this issue objective in the Ghana Trade and Investment most thoroughly. The human resources compo- Gateway Project.12 nent of the project emphasized developing and The analysis also shows an imbalance in the cov- implementing proposals for improving the remu- erage of the various human resources management neration and nonmonetary benefits of customs issues. While more than two-thirds of the TA proj- staff and managers—the purpose was to improve ects covered training needs, most projects missed the capacity of the State Customs Committee other critical human resources–related determi- (SCC) to recruit and retain qualified staff. nants of both success and sustainability of customs reforms such as recruitment procedures (only listed 10. The ACV aims for a fair, uniform, and neutral set of stan- in 16 percent of the TA projects), salary and benefit dards for valuation to avoid the use of arbitrary or fictitious structure (29 percent), or career management values. 11. The Tanzania Tax Administration Project identified the existing issues related to PSI in its diagnostics, but it emphasized the PSI-related activities only during supervision missions. 12. See De Wulf (2004). Two Decades of World Bank Lending for Customs Reform 141

BOX 7.4 Integrated Approach in Process Management: The Case of the Tunisia Export Development Project

The customs reform component in this Bank-sup- figure 1—to a new direct connection–based ported project (approved fiscal year 1999; total interrelation among the trade stakeholders (see approved amount US$34.7 million) is targeted at box figure 2). promoting trade in general and export in partic- The customs reform component was ular, while revenue enhancement is not a specific designed in three subsequent phases. The first reform objective. The reforms combine the intro- phase targets the simplification of procedures duction of Electronic Data Interchange (EDI) with for submission of shipping manifests. The sec- process simplification, cooperation and partner- ond phase promotes real time automated pro- ship, risk management, and human resources cessing in responses to customs declarations. development. It was proposed that the EDI server Also, post-event auditing techniques and risk be developed as a center to transform the exist- management are to be adopted. The third phase ing complex web of manually-based cross- focuses on training customs officers to enable connected exchange of information through them to uniformly implement new procedures forms and messages among trade stakeholders and regulations. (customs, banks, shipping agents, traders, customs brokers, freight forwarders, Ministry of Source: World Bank 1999c. Commerce, and Port Authority)—shown in box

Trade document processing—present Trade document processing—after imple- situation mentation of the component

Customs Customs Freight Freight Forwarders Forwarders Shipping Shipping Agents Agents Ministry of Ministry of Commerce Commerce Traders Traders EDI Server Port Port Authority Authority Customs Customs Brokers Brokers

Cargo Banks Cargo Banks Box figure 1 Handling Box figure 2 Handling

(13 percent).13 Considering that according to cus- in their design; similarly, just 37 percent of the tomer surveys customs administrations figure projects dealt with the introduction or improve- among the most corrupt government institutions ment of the internal audit system. in many countries, insufficient attention was given While more than half the projects under review to integrity issues, which were not specifically (53 percent) specified implementation plans, only addressed in the majority of projects. It was largely 11 percent offered explicit and adequate sequenc- assumed that modernization of customs proce- ing of the reform activities. Very few projects actu- dures would benefit integrity. Only 11 percent of ally provide an appropriate time line for implemen- the total TA projects reviewed included a revision tation. A lack of focus on preparing an appropriate of disciplinary measures and penalties to fight cor- implementation plan can cause serious sequencing ruption and the development of a code of conduct mistakes. In the Lebanon Revenue Enhancement and Fiscal Management Technical Assistance Pro- ject, for example, phase one of the ASYCUDA 13. It is conceivable that the issue of salary cannot be easily resolved in isolation from overall civil service reforms or estab- implementation was scheduled before the begin- lishment of semi-autonomous revenue agencies. ning of the business reengineering exercise, and 142 Customs Modernization Handbook

BOX 7.5 Increased Bank Emphasis on Coordination with Other Donors

Trade and Transport Facilitation Projects in ect design stage throughout the implementa- Southeast Europe. The customs modernization tion stage. The Bank engaged the Fiscal Affairs component in these projects was proposed as Department (FAD) of the IMF to help with the the least costly approach to complement the implementation of the technical components of ongoing EU-supported customs reforms in these the customs modernization plan. FAD super- countries. The component used grants from the vised the customs administration adviser, the World Bank, EU, and the United States for most information technology adviser appointed technical assistance. In the case of Bosnia and under the loan agreement, and the short-term Herzegovina, the EU was committed to provid- advisers appointed to provide specific technical ing all technical support for customs reforms. assistance. It was also agreed that FAD would Donors were active in supporting the imple- make regular inspection missions (approxi- mentation and supervision of the projects. In mately every six months) and assist in assessing particular, all donor representatives participated the pilot customs operation. in the Regional Steering Committee (RSC) as Bangladesh Export Diversification Project observers in overseeing the overall implementa- (approved fiscal year 1999; approved amount tion of the program. The active participation of US$32 million). The government convinced the the donors was to ensure that the customs mod- WCO that sufficient reform readiness existed to ernization component would take full account of launch a WCO Customs Reform and Moderniza- the ongoing reform efforts. In addition, the tion Program for Bangladesh as part of the United Nations Economic Commission for Export Diversification Project. The project Europe (UN-ECE) provided a secretary for each planned to engage the WCO in customs admin- country RSC member to support the implemen- istration staff training and UNCTAD in installa- tation of the program. tion of ASYCUDA++ and related training. Turkey Public Financial Management Pro- ject (approved fiscal year 1996; approved Sources: World Bank 1995, 1999a, 2000a, amount US$62 million). The Bank and the IMF 2000b, 2000c, 2000d, 2000h, 2001, 2002b. demonstrated close coordination from the proj-

training for ASYCUDA implementation was sup- during 1982–93 to 58 percent during the posed to start only nine months after the launch of 1994–2002 (see box 7.5 for project-specific cases). the first phase of ASYCUDA (World Bank 1994). A cross-period comparison reveals consistent Project Implementation progress in project design, however. While almost and Outcomes all projects designed between 1982 and 1993 neglected the need for improving the legal and reg- This section reviews 22 complete TA projects with ulatory environment for customs operations, atten- customs components. Outcomes of the project tion to such issues surged between 1994 and 2002. implementation are presented and followed by an A substantially higher share of projects designed in analysis of the factors that affect the outcomes and the later period also paid sufficient attention to impacts of these projects. such crucial reform activities as process simplification (85 percent), automation (92 percent), and Project Implementation, Outcomes, and Issues risk management (69 percent). Projects designed between 1994 and 2002 showed a significantly Evaluation work has two dimensions. The first improved coverage of issues of coordination with deals with the lessons learned, and design and per- other import clearance agencies, integrity, project formance indicators are emphasized. A second evaluation, and customer service. Finally, the phase should deal with the outcomes of projects Bank’s emphasis on cooperation, to various extents, reviewed, identifying elements that affect such out- with other donors in project preparation or imple- comes. Of the 38 TA projects reviewed that were mentation increased dramatically from 17 percent approved by the World Bank between 1982 and Two Decades of World Bank Lending for Customs Reform 143

TABLE 7.7 Summary of Suggested Rating of Outcomes of Customs Activities (percent)

Closed Projects Ongoing Projects

Projects with rated customs outcomes 77 50 Moderately satisfactory (SAT) or better ratinga 50 38 Moderately unsatisfactory (UNSAT) or lower ratingb 27 12 Projects with unrated customs outcomesc 23 50 Total 100 100

a. Including High SAT, SAT, and Moderately SAT. b. Including Moderately UNSAT, UNSAT, and Highly UNSAT. c. Ratings could not be done due to various reasons, specifically lack of evaluation documents at the time the chapter was written; insufficient information from available documents; or customs component dropped during the implementation stage (for example, Ghana Economic Management Support Project). Source: Authors based on World Bank database.

2002, 22 have been closed and permit a review of tial number of projects are not ready for such an implementation and outcomes.14 This analysis is evaluation, as they either were just newly approved based primarily on implementation complementa- and launched, or did not have sufficiently detailed tion reports (ICRs) and OED evaluation reports, reports on their implementation by the time this and to some extent, on project status reports chapter was prepared. (PSRs).15 ICRs and OED evaluation reports use a Table 7.7 summarizes our suggested rating of uniform set of criteria for evaluation and cover pre- customs components for both closed and active project preparation, design, implementation, insti- projects in the form of relative frequency. The tutional development impact, sustainability, and results indicate that while the majority of rated cus- performance by the Bank and the borrower. An toms activities were or are being satisfactorily overview of specific definitions of criteria for OED implemented, a significant number of projects evaluation reports is provided in annex 7.B. received low ratings. We have also attempted to evaluate the imple- To analyze the links between customs compo- mentation of customs components of ongoing nent outcomes and general issues of Bank quality at projects. Our suggested rating of ongoing customs entry, and Bank and borrower performance, we reform activities is based largely on internal docu- attempted to estimate a number of correlation ments such as mid-term reviews, internal memos, coefficients.16 At the preliminary level, we estimate supervision reports, and PSRs. However, a substan- the correlation between the suggested rating of customs activities and the OED general rating of overall projects (panel A, table 7.8). Then we estimate 14. Our evaluation of the outcomes of the customs components are suggested in the sense that the evaluation is derived from the the correlation of the suggested customs rating description of the implementation and outcomes of those com- with the rating of quality of diagnostics and per- ponents made in ICRs, OED evaluation, and PSRs. Our sugges- formance indicators—two proxies for the quality at tive rating does not reflect the official rating by either the regions or OED. The rating is applicable to the outcomes of the customs components against their performance indicators if they are 16. Quality at entry reflects the quality of the project design. The available or against their objectives as established in project doc- factors to be considered and rated include project concept, uments. objectives, and approach during identification. The design is 15. Regions prepare ICRs for each lending operation using rated from various perspectives consisting of technical, eco- information and data from project preparation and appraisal as nomic and financial, environmental, poverty reduction and well as supervision reports. One of the objectives of ICRs is to social, institutional, financial management, readiness of imple- “reinforce self-evaluations, including development impact mentation, and assessment of risk and sustainability aspects. For assessment, by the Bank and borrowers” (Operations Policy and a detailed description of the concept and criteria for rating of Country Services 2003, p. 2). OED, however, provides independ- quality at entry, see “OED Evaluation Tools and Approaches” at ent evaluation after the close of the project. www.worldbank.org/oed/oed_approach_summary.html. 144 Customs Modernization Handbook

TABLE 7.8 Correlation Estimation: A Summary A. Correlation coefficients between suggested rating of customs outcomes and OED selective rating of projects overall (OED rating on both customs and noncustoms outcomes)

General Project Bank Quality Bank Bank Borrower Outcomes at Entry Supervision Overall Overall

Customs outcome 0.38 0.23 0.51 0.50 0.33

B. Correlation coefficients between suggested rating of customs outcomes and quality of diagnostics and performance indicators for customs components

Performance Indicators for Diagnostics for Customs Components Customs Components

Customs outcomes 0.54 0.67

Source: Authors based on World Bank database.

entry—for the exclusive customs components Factors Affecting Outcomes and Impact (panel B, table 7.8). Annex 7.C explains the The outcomes and the institutional development methodology and data for the correlation analysis. impact of a project are dependent upon various Table 7.8 shows positive but relatively weak correla- factors, which, for the purpose of this analysis, tion between the rating of the customs components are grouped into three major categories: (a) pre- and the OED general rating of the overall projects, project diagnostics and design, (b) appropriate Bank quality at entry, and borrower performance project objectives and components, and (c) imple- (the correlations range from 0.2 to 0.38). The coef- mentation and change management strategy. Some ficients of correlation between the customs compo- issues related to the sustainability of project out- nent rating and Bank overall supervision and comes are incorporated in the third category. performance are somewhat higher (0.51 and 0.5, respectively).17 The estimates may have been Pre-Project Diagnostics and Design Problems confounded by noncustoms components of proj- The ICR and OED evaluation reports pinpointed a ects, especially for the cases in which customs mod- number of pre-project preparation and design ernization is just a small part. problems leading to unsatisfactory implementation There is a relatively strong link between the qual- of some projects. These problems can be catego- ity of diagnostics and design of customs activities rized as follows: and their outcomes. Panel B, table 7.8 shows significant correlation between the suggested rating of • Noncomprehensive and isolated reform activities. outcomes of customs components and the two The review of the 38 TA projects indicates that proxies for quality at entry of the customs compo- the inclusion of customs components was nents, specifically the quality of diagnostics and per- largely consistent with the World Bank Country formance indicators (0.54 and 0.67, respectively). Assistance Strategies, or overall government The results reaffirm the chain of impact from the development strategies, or both. However, some quality of pre-project diagnostics to design to projects were targeted only at certain processes implementation of customs modernization activi- or organizational or human resources manage- ties embedded in the Bank-funded projects. ment issues without explicit coordination with specific planned or ongoing customs reforms in 17. The results obscure the fact that there is strong correlation the borrowing country. Only 6 of the 22 com- between outcomes of overall projects and their quality of design, pleted projects, to different extents, linked the Bank supervision, and Bank and borrower performance. For example, the correlation between general outcomes of projects customs components with the countries’ overall and overall Bank quality at entry is robust at 0.9. customs reforms. Such a piecemeal and isolated Two Decades of World Bank Lending for Customs Reform 145

approach partly reflects the underestimation of project design. The second is triggered during the complexity of customs modernization, the implementation and becomes necessary to adjust lack of recognition of existing institutional bar- for poor component design. For the success and riers to reforms, and a lack of experience in sustainability of a project, problems of the second designing customs reform projects. type should be avoided, but it is nonetheless better • Design mismatch between proposed reform activi- to make necessary modifications to project compo- ties and level of funding, and insufficient coordi- nents than to stick to an original bad design. Box 7.7 nation with other donors. Some projects proved illustrates some specific issues that have caused the to be too ambitious in their coverage in the face change of project objectives or components. of a clear lack of funding. Project design and implementation became troublesome, especially Project Implementation and Change Manage- when there were no apparent efforts to coordi- ment The following main reasons have been nate the technical assistance with other donors identified for failures in project implementation or to incorporate the project into a long-term and change management to sustain the outcomes Bank assistance strategy. Donor coordination of the project: (a) weak project management (by was exercised in only 5 of the 22 closed projects. the Bank and the client government) and supervi- • Mismatch between project design and government sion;19 (b) lack of ownership, commitment, and interest. In some cases, the government’s objec- accountability; (c) inadequate coordination with tives and interests were not properly taken into other donors; and (d) lack of a change manage- account in the project preparation and design. ment strategy for sustainability. Box 7.8 illustrates A government commitment to support the major implementation management problems. reforms was assumed, but assumptions in certain instances did not reflect the reality. As a Main Conclusions and Lessons for result, lack of government commitment nega- Future Bank Operations to Support tively affected the project even in the earliest Customs Modernization stages of implementation. • Hurried preparation without proper analysis. A Customs reform has been addressed in Bank proj- number of projects were designed without diag- ects from very different angles. Customs reform has nostic analysis or failed to pay attention to the been covered as one of many elements of invest- proper sequencing of activities. ment and technical assistance or structural adjustment projects. Support for customs reform has Box 7.6 illustrates the problems with some been granted in the context of a broader public sec- project-specific cases. tor reform objective recognizing that customs is a major and powerful government institution, which Amendments to Objectives and Components in many countries faces serious integrity problems. The review of the 22 closed TA projects reveals that, Even with the reduction of trade taxes and tariff while a large majority of projects (65 percent) did rates, customs remains a key institution for secur- not change specified objectives, more than half ing revenue collection, given its crucial role in (approximately 55 percent) revised their compo- administering the VAT. Customs reform has also nents.18 The revision of objectives or reshuffle of been included in trade facilitation operations, given funding or modification of components of a project its importance in the export and import process. does not necessarily mean that the project design Finally, customs reforms have been included in was inappropriate. There are basically two types of infrastructure improvement projects, in particular developments leading to a change in the set objec- port rehabilitation projects, to support the main tives or components. The first includes unexpected objectives of these projects. changes in the project environment regardless of the quality of the pre-project diagnostics and the 19. The review of the completed projects indicate some typical problems in the borrower’s performance in customs moderniza- 18. The shares are estimated on the basis of a subsample of 20 tion, including the lack of coordination between customs and complete projects because the ICRs for two projects were still in other related agencies, and frequent change of customs manage- progress when the chapter was written. ment that puts continuity in efforts for reform at risk. 146 Customs Modernization Handbook

BOX 7.6 Quality of Pre-Project Preparation and Design Matter: Two Project-Specific Cases

Argentina Public Sector Management Techni- The Philippines Tax Computerization Pro- cal Assistance Project (approved FY86; ject (Customs reform component approved loan approved loan amount US$18.5 million; cus- amount: US$20.3 million; suggested customs toms reform component approved loan outcome rating: SAT). The quality at entry for all amount: US$ 2.4 million; suggested customs project components was rated as unsatisfactory. outcome rating: UNSAT). This project illustrates Although the final outcome of the project for the mismatch between ambitious design and the customs modernization component was funding level. While all ratings of the project as a rated as satisfactory, the ICR and OED high- whole were favorable—except for the unsatisfac- lighted the following shortcomings in designing tory rating of the borrower’s performance—the the customs activities: customs component clearly failed. The ICR lists a • Underestimated the difficulties of customs soft- number of problems: ware development and maintenance ventures • Defined project objective—strengthening the for the BOC. The Staff Appraisal Report (SAR) capacity of the National Customs Administra- failed to diagnose properly the risk in the over- tion to collect import duties and export taxes, all project implementation. It discounted the to simplify export procedures, and to provide a risk that the project might not be able to retain statistical base for monitoring exports—were adequately trained and qualified staff; instead, overly ambitious while the level of commitment it predicted that massive training programs to real reform of the customs system was not would lessen the risk. In addition, the SAR apparent at the time. Funding was insufficient underestimated the institutional constraints with just US$900,000, and the project was (civil service salaries, for example) to the proj- prepared without a clear mandate in govern- ect implementation and sustainability. ment to carry out profound reforms. • The SAR did not include performance bench- • Lack of clarity of the initially proposed list of marks. activities, substantive disagreements as to the • The SAR underestimated the change manage- appropriate direction for activities, and an ment needed for an agency modernization early decision to use the French model as a ref- effort of this large scale. Specifically, the SAR erence for the reform of the Argentine Cus- did not explicitly link the project with the need toms Administration, which met serious resist- for each agency to modernize, reorganize, and ance from within the Coordinating Unit reengineer business processes prior to com- indicate a lack of careful preparation of the puterization. Nor did it recognize the need to proposed activities and costs. The project fail- improve the quality and efficiency of commu- ure was attributed to the narrowing of the nication among the Bureau of Internal Rev- scope of the project component to diagnostic enue, BOC, and the Department of Finance. It activities and the preparation of a new pro- is particularly interesting that these problems gram on the modernization and reorganiza- occurred in the design process, even though tion of Customs. A majority of funds were the diagnostics clearly identified problems therefore reallocated. Ultimately, the project with administration and communication. managed to absorb only US$77,616 for the automation of the National Customs Adminis- Sources: World Bank 1993a, 2000f, 2000g. tration.

Comprehensive capacity-building projects tar- ment, and procedural issues of other than the target geting customs administrations specifically are the elements are interrelated with, and dependent for exception and not the rule in Bank operations. their good operation on, a coherent set of process Bank projects tend to focus both in the pre-project changes. Thus, these projects ran the risk of under- diagnostics as well as in the project design on estimating the complexity of customs reform and specific elements of customs organization, manage- the comprehensiveness in the reform approach ment, or processes. Project staff appeared insuffi- required to achieve sustainable results. A partial ciently aware that organizational design, manage- approach to customs reform, therefore, jeopardizes Two Decades of World Bank Lending for Customs Reform 147

BOX 7.7 What Triggered the Modification of Project Objectives or Components

Tanzania Port Modernization Project II during the implementation to reflect the new (approved fiscal year 1990; approved amount environment and to compensate for an omission US$37 million; customs reform component of a key project component in the project approved loan amount: US$2.0 million;, sug- design. Specifically, in 1994, following the estab- gested customs outcome rating: SAT). The main lishment of a Customs Restructuring Technical original objective of the project was to expand Unit (UTRA) in the Ministry of Planning and the physical, managerial, and operational capa- Finance, the Customs and Trade Facilitation bilities of the Tanzania Harbors Authority (THA) Activity, which was under the Small Ports and to meet the traffic volume expected in the Coastal Shipping Component, emerged as a 1990s. The project was intended to provide tech- separate component managed directly by nical assistance to customs for introducing a UTRA. The restructuring of customs operations simplified documentation process, computeriza- required adequate staff training. However, a tion, and training of customs officers. The training component was omitted in the project project, however, revised its objectives for two design stage and therefore was added during reasons—the establishment of a new semi- project implementation. The modification con- autonomous revenue agency, the Tanzania Rev- tributed to the success of the customs compo- enue Authority (TRA), and the promotion of nent. All key performance benchmarks for cus- regional integration that triggered the need to toms as projected in the last Project Supervision provide support for customs and transit controls. Report were achieved, and import duty rates of With the establishment of the TRA in 1994, the collection increased from 6 percent in 1996 to Development Credit Agreement in 1995 added a 11 percent in 1999. sentence highlighting the need for strengthen- The Philippines Tax Computerization Proj- ing and streamlining the TRA. In addition, the ect. The project added one objective to meet project added an additional component for the new emerging demand for better communi- reforming the customs wing in the TRA, focusing cations: A system called FINLINK was set up for on rehabilitation and strengthening of border the Department of Finance to communicate stations and their computerization. with other government agencies responsible for Mozambique First Road and Coastal tax collection and fiscal management (Bureau of Shipping Project (approved fiscal year 1992; Internal Revenue, BOC, Bureau of Trade, Central amount approved: US$74.3 million; customs Bank, Land Registration Authority, and others). reform component approved loan amount: US$0.8 million; suggested customs outcome rat- Sources: World Bank 2000e, 2000f, 2000g, ing: SAT). The project modified its components 2000i.

the expected efficiency and effectiveness gains in 1990s, and there are a number of more recent cus- customs operations, and places sustainability at toms reform projects that can serve as guides to risk. Other weaknesses in the projects reviewed are good practice. related to the ad hoc nature of the diagnostic work, In 1999 the Bank’s Tax Policy and Tax Adminis- the insufficient attention given to performance tration Thematic Group published a Policy Research indicators, inadequate attention to proper sequenc- Working Paper on “Reforming Tax Systems: The ing of project components, and commitment of World Bank Records in the 1990s.” This paper government to provide adequate funding to sustain includes a number of suggestions to improve Bank the project’s achievements, particularly with assistance for revenue administration reform,cover- respect to IT maintenance and upgrading. Projects ing both tax and customs administrations. The too often considered customs as an isolated link in suggestions given in this paper remain relevant and the trade logistics chain, so that progress achieved are repeated in annex 7.D. Based on this review it is in customs often did not translate to overall trade now possible to add several other customs-specific facilitation given the dysfunctionalities of other recommendations: trade-related agencies and infrastructure services. The review highlights that project preparation • When preparing a customs reform TA project, and design have substantially improved in the the standards of the Revised Kyoto Convention 148 Customs Modernization Handbook

BOX 7.8 Implementation Management Issues: The Case of the Senegal Development Management Project

The Senegal project (approved fiscal year 1988; significant differences in the understanding of approved amount US$17 million; customs the project objectives. reform component approved loan amount: Poor quality of supervision assessment. US$2.2 million; suggested customs outcome rat- Weak supervision failed to catch problems and ing: UNSAT) failed in all rating criteria in both to suggest timely modifications. In fact, supervi- ICR and OED evaluations. For the customs- sion ratings on development objectives and specific component, the training of customs staff institutional development remained high in spite was conducted in an ad hoc manner in the of serious problems. absence of a needs assessment and a coherent Inadequate action by Bank management. policy to link training to job effectiveness. In During the implementation, Bank management addition to other design problems, especially ignored warnings from staff pointing at the lack the mismatch between the scope of the project of commitment of the government of Senegal; and borrower commitment, multiple—and and failed to object to the continued favorable combined—shortcomings led to the poor pro- ratings on development objectives and institu- ject outcomes: tional performance, while it became obvious Frequent changes in project management that progress was slow and limited. and poor supervision coordination. Over the eight-and-half-years of the project, six different Sources: World Bank 1997b. OED Evaluation task managers were responsible for the project Summary 2004. and 11 supervision missions were made with

should be used to the extent possible as bench- supported by the project are linked to a more marks for expected project results. As discussed general and long-term customs reform strategy, in chapter 3, the Revised Kyoto Convention pro- and that the implementation of this component vides important guidelines for the design and is adequately monitored. operation of a modern and efficient customs • The Bank had until recently limited in-house organization. expertise and staff capacity to prepare and • Diagnostic work would benefit from drawing on supervise customs reform projects. Cooperation existing tools for the assessment of strengths and with other multilateral agencies with specific weaknesses of customs administrations. expertise in customs reform, in particular the • A comprehensive set of performance indicators IMF and WCO, should be strengthened to facili- with practical benchmarks must be developed to tate high quality project preparation and super- monitor project implementation. These indica- vision. In fiscal year 2004, the Bank strengthened tors should cover both efficiency and effective- its in-house expertise in the customs area. ness of customs reform activities. • To improve the chances of achieving sustainable • Customs is only one of several import and outcomes, government commitment to finance export clearance agencies. Reform projects follow-up costs after project closure, relating to should make an extra effort to include these IT and infrastructure maintenance and replace- other agencies in the analysis and investigate the ment costs in particular, should be sought early possibilities of streamlining the overall clearance in the project preparation stage. process. Improving the coordination between • Considering the high incidence of corruption in customs and other agencies would be a critical customs administrations, special attention must cost effective approach to enhance the clearance be given to designing an anticorruption strategy process and to strengthen enforcement. as part of a comprehensive customs reform TA • Specific, partial customs reform components of project. Yet it should be recognized that integrity broader, noncustoms-focused TA projects can is not built by standalone integrity actions. be justified. However, the project preparation Integrity is largely the outcome of the efficient and design need to make sure that a sufficiently application of good procedures consistent with comprehensive institutional diagnosis has been the Revised Kyoto Convention. Integrity-specific carried out, that the specific reform activities modules of the project design need to be Two Decades of World Bank Lending for Customs Reform 149

dovetailed to this overall customs modernization • The definition of an exit strategy is important to model, and can make a substantial contribution. ensure sustainability of the reform. Once the • The importance of change management should moneys of an operation are fully disbursed, the not be underestimated and a sufficiently high Bank signs off and no additional resources for budget should be allocated to change manage- ensuring sustainability materialize. Therefore, it ment activities. is critical to build bridges with the private sector • The borrower’s political commitment at the top to ensure sustainability of the reform process. and commitment by the customs administration should be more clearly sought and expressed. • Donor coordination in the design stage of a cus- Annex 7.A Distribution of Projects toms modernization and reform process has a with Customs Components by very high payoff. Region, 1982–2002

Table 7.A.1 Distribution of Projects with Customs Components by Region, 1982–2002 (shares in percent)

Distribution of Technical Assistance Projects

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002 Number of Number of Number of Number of Number of Region Projects Share Projects Share Projects Share Projects Share Projects Share

Sub-Saharan Africa 1 33 5 71 3 38 2 10 11 29 East Asia and Pacific 1 13 1 5 2 5 Europe and Central Asia 1 14 3 38 12 60 16 42 Latin America and Caribbean 2 67 1 14 2 10 5 13 Middle East and North Africa 1 13 1 5 2 5 South Asia 2 10 2 5 Total 3 100 7 100 8 100 20 100 38 100

Distribution of Structural Adjustment Projects

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002 Number of Number of Number of Number of Number of Region Projects Share Projects Share Projects Share Projects Share Projects Share

Sub-Saharan Africa 1 20 7 37 13 45 8 31 29 37 East Asia and Pacific 1 20 1 5 3 10 1 4 6 8 Europe and Central Asia 2 7 10 38 12 15 Latin America and Caribbean 8 42 7 24 2 8 17 22 Middle East and North Africa 2 40 2 11 3 10 5 19 12 15 South Asia 1 20 1 5 1 3 3 4 Total 5 100 19 100 29 100 26 100 79 100

Source: Authors’ calculations. 150 Customs Modernization Handbook

Annex 7.B Selected Criteria for Annex 7.C Correlation Estimation OED Project Evaluations The correlation coefficient measures the associa- The following is a summary of the indicators use by tion between two variables. It is unit free and hence OED (see OED 2004) for evaluating projects after insensitive to the unit of measurement of the two completion, using an objectives-based approach. variables. The following formula is used to calcu- Relevance of Objectives. The extent to which the late the coefficient of correlation between x and y project’s objectives are consistent with the country’s for a sample. current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sec- Where, is the sample covariance between x and y, tor Strategy Papers, Operational Policies). and is estimated as Efficacy. The extent to which the project’s objectives were achieved, or expected to be achieved, taking into account their relative importance. Efficiency. The extent to which the project (N is the number of observations in the sample, achieved, or is expected to achieve, a return higher and , are the means of x and y respectively.) than the opportunity cost of capital at least cost The standard deviations of x and y, respectively, compared to alternatives. are and . Note, a sample standard deviation of a Outcomes. The extent to which the project’s variable (x, for example) is the square root of sam- major relevant objectives were achieved, or are ple variance estimated as follows: expected to be achieved, efficiently. Sustainability. The resilience to risk of net benefit flows over time. Institutional Development Impact. The extent to which a project improves the ability of a country or region to make more efficient, equitable, and sus- To specify the relationship between outcomes of tainable use of its human, financial, and natural customs components and selected OED ratings of resources through (a) better definition, stability, the general quality at entry and overall project transparency, enforceability, and predictability of implementation as well as the impact of quality of institutional arrangements or (b) better alignment pre-project design and design of specific customs of the mission and capacity of an organization with modernization activities on customs outcomes, we its mandate, which derives from these institutional estimate a series of correlation. The data include (a) arrangements, or both. IDI includes both intended our suggested rating of outcomes of customs com- and unintended effects of a project. ponents and quality of diagnostics and performance Bank Performance. The extent to which services indicators applicable to the customs components, provided by the Bank ensured quality at entry and and (b) OED rating of overall outcomes of projects, supported implementation through appropriate Bank quality at entry, Bank supervision, and overall supervision (including ensuring adequate transi- Bank and borrower performance. tion arrangements for regular operation of the Our ratings of the outcomes of customs compo- project). nents, the customs diagnostics, and performance Borrower Performance. The extent to which the indicators are suggested on the basis of the project borrower assumed ownership and responsibility to documents and any available Bank midterm review, ensure quality of preparation and implementation, internal memos, supervision report, project and complied with covenants and agreements, appraisal documents, ICR, or OED evaluation doc- toward the achievement of development objectives uments. The set of correlations between customs and sustainability. outcomes and the OED overall project rating is Two Decades of World Bank Lending for Customs Reform 151 estimated from the sample of 22 completed pro- implementation capacity. Alternative designs jects. However, the correlation between customs and sequencing should be analyzed and their outcomes and quality of customs diagnostics and rationale provided. performance indicators is estimated from the 5. To generate long-term lessons, projects should combined set of completed and ongoing proj- specify hypotheses being tested. ects. Projects with nonrated customs components are removed from the samples used to estimate correlation. Performance Indicators There are six levels of rating applicable for 6. A standard set of outcome performance (effec- correlation estimation: highly satisfactory, satisfac- tiveness, efficiency, accountability) indicators tory, moderately satisfactory, moderately unsatis- for tax and customs administrators should be factory, unsatisfactory, and highly unsatisfactory. specified, to be drawn on for all projects. To estimate correlations, we assign numeric codes 7. Diagnostic work should give rise to pre-project to the ratings that range from 1 to 6, with 6 given to base values of performance indicators for out- a highly satisfactory rating and 1 given to a highly come assessment. unsatisfactory rating. The coding is set consistently 8. Outcome performance indicators for projects across all variables. should not only permit project performance to be tracked, but should be chosen to permit Annex 7.D Reforming Tax Systems: hypotheses to be evaluated. The World Bank Record in the 9. The use of taxpayer surveys should be an 1990s integral part of both diagnostic work and performance appraisal if not precluded by cost The following excerpt from Barbone and others considerations. (1999) provides suggestions for improving World 10. Standard guidelines for quantitative input, Bank assistance for revenue administration reform. process, and output indicators should be laid The suggestions are relevant for both tax and cus- down and mandated. toms reform projects.

Diagnosis Appraisal 1. Pre-project diagnostic work should be based 11. A standard, quantitative appraisal framework on a comprehensive framework that pays suffi- or tool needs to be developed for tax adminis- cient attention to institutions in addition to tration projects. If possible, this should be traditional concerns of tax administrators. Ide- linked to an economic impact assessment, and ally, a single but flexible framework should be a model such as the 1-2-3 model developed by adopted throughout the Bank. DEC should be incorporated in this tool. 2. Diagnostic performance measurement should 12. The tool should be designed to allow for risk be done, where possible, quantitatively accord- assessment and sensitivity to key parameters ing to standard indicators and against prefer- like shadow values. ably cross-country benchmarks. 3. Pre-project work should also include a review Post-Project Evaluation (or citation) of the key determinants of good administration and project implementation. 13. The use of performance indicators specified in the project is essential if the evaluation is to have comparability across projects. Design 14. The assignment of outcome, sustainability, 4. Project design should be based on a strategic institutional development, and Bank–borrower vision of the administration, and pay adequate performance rankings should, as far as possi- attention to good governance, but should, nev- ble, be based on the quantitative indicators ertheless, be limited in scope given a country’s specified. 152 Customs Modernization Handbook

15. To facilitate the knowledge-gathering and Operations Policy and Country Services. 2003. Guidelines for hypothesis-testing role of projects (lessons Preparing Implementation Completion Reports. Washington, learned), greater involvement of academic con- D.C.: The World Bank. World Bank. 1993a.“Argentina Public Sector Management Tech- sultants could be desirable in diagnostic, nical Assistance Project.” ICR Report No. 12124. June 30. design, and evaluation phases. Washington, D.C. ——— 1993b. “The Philippines Tax Computerization Project.” Staff Apraisal Report, No. 11355-PH. Washington, D.C. ——— 1994. “Lebanese Republic Revenue Enhancement and Further Reading Fiscal Management Technical Assistance Project.” Report Barbone, Luca, Arindam Das-Gupta, Luc De Wulf, and Anna No. P-6374-LEB. June 10. Washington, D.C. Hansson. 1999. “Reforming Tax Systems: The World Bank ——— 1995. “Republic of Turkey— Public Financial Manage- Record in the 1990s.” Policy Research Working Paper 2237. ment Project.” Report No. 14656-TU, vol. 3. Washington, Washington, D.C.: The World Bank. D.C. European Commission Directorate General XXI, Taxation and ——— 1997a. “Armenia—Second Structural Adjustment Tech- Customs Union. 1998. Blueprints to Improve the Operational nical Assistance Credit.” Project Information Document No. Capacity of Customs Administrations of Candidate Countries. 5430. Washington, D.C. Brussels: European Commission. ——— 1997b. “Senegal—Development Management Project.” Gill, Jit B. S. 2000. “A Diagnostic Framework for Revenue Report No. 17247. Washington, D.C. Administration.” World Bank Technical Paper No. 472. ——— 1998. “Senegal Development Management Project.” Washington D.C.: The World Bank. Available at www1. OED Evaluation Summary. February 24. Washington, D.C. worldbank.org/publicsector/tax/DiagnosticFramework.pdf. ——— 1999a. “Bangladesh—Export Diversification Project.” Lane, Michael H. 1998. Customs Modernization and the Interna- Report No. 19250. Washington, D.C. tional Trade Superhighway. Westport, Conn.: Quorum ——— 1999b. “Tanzania—Tax Administration Project.” Report Books. No. 17713. Washington, D.C. OED. 2004. OED Evaluation Tools and Approaches. Washington ——— 1999c. “Tunisia—Export Development Project.” Report D.C.: The World Bank. Available at www.worldbank.org/ No. 18778. Washington, D.C. oed/oed_approach_summary.html ——— 2000a. “Albania—Trade and Transport Facilitation in Operations Policy and Country Services. 2003. Guidelines for Southeast Europe Project.” Report No. 20828. Washington, Preparing Implementation Completion Reports. Washington D.C. D.C.: The World Bank. Available at http://opcs.worldbank. ——— 2000b. “Bulgaria—Trade and Transport Facilitation in org/opcil/icrguide.html. Southeast Europe Project.” Report No. 20036. Washington, Raven, John. 2001. Trade and Transport Facilitation—A Toolkit D.C. for Audit, Analysis and Remedial Action. Washington, D.C.: ——— 2000c. “Croatia—Trade and Transport Facilitation in The World Bank. Available at www.worldbank.org/trans- Southeast Europe Project.” Report No. 20459. Washington, port/publicat/twu-46.pdf. D.C. World Customs Organization. 1998. “Integrity and Customs ——— 2000d. “Macedonia—Trade and Transport Facilitation Administration: A Self-Assessment Guide, ‘Putting the WCO in Southeast Europe Project.” Report No. 20493. Washing- Arusha Declaration into Action.’” Malacca, Malaysia. ton, D.C. ——— 2000e. “Mozambique First Roads and Coastal Shipping Project.”Report No. 20682. June 29. Washington, D.C. References ——— 2000f. “Philippines Tax Computerization Project.” ICR Report No. 20554. June 29. Washington, D.C. Barbone, Luca, Arindam Das-Gupta, Luc De Wulf, and Anna ——— 2000g. “Philippines Tax Computerization Project.” OED Hansson. 1999. “Reforming Tax Systems: The World Bank Evaluation Report: August 16. Washington, D.C. Record in the 1990s.” Policy Research Working Paper 2237. ——— 2000h. “Romania—Trade and Transport Facilitation in Washington, D.C.: The World Bank. Southeast Europe Project.” Report No. 20407. Washington, De Wulf, Luc. 2004.“TradeNet in Ghana: Best Practice in the Use D.C. of Information Technology.” In Luc De Wulf and José B. ——— 2000i. “Tanzania Port Modernization Project II.” Report Sokol, eds. Customs Modernization Initiatives. Washington, No. 21559. December 28. Washington, D.C. D.C.: The World Bank. ——— 2001. “Bosnia and Herzegovina—Trade and Transport Gill, Jit B. S. 2000. “A Diagnostic Framework for Revenue Facilitation in Southeast Europe Project.” Report No. 20714. Administration.” World Bank Technical Paper No. 472. Washington, D.C. Washington D.C.: The World Bank. Available at www1. ——— 2002a. “Russian Federation—Customs Development worldbank.org/publicsector/tax/DiagnosticFramework.pdf. Project.”Report No. 24232. Washington, D.C. Lane, Michael. 1998. Customs Modernization and the Interna- ——— 2002b.“Yugoslavia—Trade and Transport Facilitation in tional Trade Superhighway. Westport, Conn.: Quorum Southeast Europe Project.” Report No. 23888. Washington, Books. D.C. Operations Evaluation Department. 2004.“Evaluation Tools and ——— 2003. “Russian Federation Customs Development Pro- Approaches.” Washington, D.C.: The World Bank. www. ject.” PAD Report No. 24690-RU. March 12. Washington, worldbank.org/oed/oed_approach_summary.html. D.C. Part III

Guidelines on Issues that Affect Customs’ Operational Trade Facilitation

153

CUSTOMS VALUATION IN DEVELOPING COUNTRIES AND THE WORLD TRADE ORGANIZATION VALUATION RULES

Adrien Goorman and Luc De Wulf

TABLE OF CONTENTS Ministerial Decision on Implementation-Related Issues and Significance and Historic Overview of Customs Concerns 177 Valuation 156 Annex 8.D PSI Programs Operated by Members The Agreement on Customs Valuation: An of the IFIA PSI Committee 178 Introduction 158 Annex 8.E Checklist for Customs Valuations 180 ACV Implementation in Developing Countries 161 Further Reading 180 Toward Better Customs Valuation Practices 163 References 180 Preshipment Inspection Companies and Other Related Services Programs 168 LIST OF TABLES Operational Conclusions 174 8.D.1 PSI Programs Operated by Members of the Annex 8.A Decision Regarding Cases Where IFIA PSI Committee 178 Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value 175 LIST OF BOXES Annex 8.B Agreement on Customs Valuation: 8.1 Peru: Import Verification Program 169 Implementation Requirements 175 8.2 PSI Contract in Madagascar Introduces Annex 8.C Implementation Issues Related to Targeted and Evolving Verification WTO Bodies Under the Doha Services 173

The lack of understanding of customs valuation principal factors minimizing the efficiency of the and of its supporting procedures are two of the customs administrations in many developing countries. The absence of effective customs valua- Special thanks for the valuable comments received from Ms. Lee tion systems affects the outcome of a country’s cus- Deegan of the Australian Customs and previously of the World Customs Organization. toms and trade policies, endangers its revenue 155 156 Customs Modernization Handbook

mobilization performance, and aggravates integrity of duty is calculated.1 While these rates are unam- issues. Customs valuation systems have been the biguously fixed by statute in a tariff schedule, the subject of international agreements because they declared value of imported goods may differ from can constitute barriers to trade. The World Trade transaction to transaction. This has three impor- Organization (WTO) Agreement on Customs Valu- tant implications for tariff policy. First, an importer ation (ACV) mandates the use of the ACV for all may engage in underinvoicing and not declare the WTO members. The ACV establishes that the cus- full value of the shipment to reduce his duty liabili- toms value of imported goods, to the greatest ties. Unless the underinvoicing is detected, govern- extent possible, is the transaction value, that is, the ment revenue is lost, and the importer receives an price actually paid or payable for the goods. Despite unfair advantage compared to its competitors. Sec- receiving substantial technical assistance (TA), ond, governments can take advantage of the valua- many developing countries have not succeeded tion system to increase or decrease duty liabilities in adequately implementing the WTO valuation for revenue or protective purposes, thereby offset- standard. ting tariff concessions made under multilateral or A full appreciation of the central issue of this bilateral trade agreements. Third, undervaluation chapter—the difficulties that many develop- and overvaluation are used for capital flight. ing countries find in implementing the ACV, For these reasons, a valuation standard is needed together with measures that could overcome these both at national and international levels to ensure difficulties—requires a good understanding of the that the correct duty is levied and a level playing complex nature of customs valuation and the con- field exists for all importers. It is also needed to straints developing countries face in the practice of enhance transparency and predictability of interna- customs valuation. This chapter, therefore, briefly tional transactions. Good valuation standards and notes the nature and significance of customs valu- practices enhance trade facilitation and contribute ation systems and practices and their international to the preparation of good trade statistics. standardization. It provides insights into the difficulties experienced by developing countries in cus- International Valuation Standards toms valuation and in implementing the ACV. It also examines the type of measures that could Customs valuation systems have been the subject of contribute to effective valuation of import ship- a number of international harmonization and stan- ments. The first section highlights the significance dardization efforts. International efforts toward of customs valuation and its historical develop- harmonization began in the early 20th century, but ment. The second section reviews the main char- significant results did not come until the 1947 Gen- acteristics of the ACV. The third section deals with eral Agreement on Tariffs and Trade (GATT). This the problem of ACV implementation in develop- Agreement was followed by the 1950 Convention ing countries. The fourth section proposes meas- on the Valuation of Goods for Customs Purposes, ures to address these problems. The fifth section establishing the Brussels Definition of Value (BDV) reviews the role of PSI services and other pro- and the 1979 Agreement on Implementation of grams in the customs valuation area. The final sec- Article VII of the GATT (ACV), resulting from the tion provides the key operational conclusions of Tokyo Round. At the 1994 Uruguay Round, a deci- the chapter. sion (based on Article 17 of the GATT Valuation Agreement) was reached regarding the cases where customs administrations have reasons to doubt the truth or accuracy of the declared value. Significance and Historic Overview of Customs Valuation Most import tariffs are based on ad valorem duties, 1. When tariffs are based on specific duty rates, that is, a given that is, a rate expressed as a percentage of the value amount of duty per unit of good, value does not have an impact on the duty. Thus, value determination is not needed for assess- of the imported good. Customs valuation is the ing duties, although valuation is required for statistical purposes determination of the amount upon which the rate and for nonduty charges. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 157

Valuation Principles: Article VII of the GATT The trading countries (the United States and New first significant international agreement on customs Zealand, among others) did not adopt the BDV and valuation was reached at the 1947 GATT negotia- continued to apply their own systems, largely based tions that established principles to be adhered to by on the positive concept of value. Some others trading partners. These principles, embodied in adopted the BDV when it was extended to cover GATT’s Article VII, emphasize that customs value FOB countries (Australia, for example) whereas should not be arbitrary, fictitious, or based on value Canada continued to use a fair market value in the of indigenous goods. It should be real and based on export country, leading it to undertake investiga- the actual value of the imported goods or like goods. tions in the country of export. Moreover, the Customs value should derive from a sale or offer of BDV itself was not always applied uniformly, sale in the ordinary course of business under fully and exporters complained about discretionary and competitive conditions. If the actual value is not unjustified rejection of the invoice price and uplift- ascertainable, customs value should be based on the ing of the declared value by customs. In addition, nearest ascertainable equivalent of such value using many countries relied on reference prices for protec- prescribed criteria. These principles have remained tive purposes and for facilitating customs clearance the basis for customs valuation since then. without endangering budget revenues. Negotiations on customs valuation were therefore included in the Brussels Definition of Value The first interna- negotiations on nontariff barriers at the Tokyo tional standard based on the GATT valuation prin- Round GATT negotiations (1973–1979). ciples, the BDV, was introduced in 1950. The BDV The Tokyo Round and the Agreement on is based on the concept of “normal price”—the Customs Valuation The purpose of the negotia- price that the goods would obtain under open mar- tions on customs valuation at the Tokyo Round was ket conditions between unrelated buyers and sellers to arrive at a fair, uniform, and neutral standard of under specified conditions of time and place. In value that precludes the use of arbitrary or ficti- practice, as the bulk of imports are the subject of a tious values, conforms to commercial realities, and bona fide sale effected in conditions consistent with does not act as a barrier to trade.2 Following diffi- the terms of the definition, the transaction or cult negotiations between industrialized and devel- invoice price can be taken as a valid basis for valua- oping countries, agreement was reached on a new tion for the majority of imports. The BDV recom- valuation standard, the Agreement on Implementa- mends that the invoice price be used to the greatest tion of Article VII of the GATT.3 extent possible. Where the invoice price cannot be Developing countries entered the negotiations used, such as with transactions that are not at arm’s by fully supporting the EEC valuation draft pro- length, with goods on consignment, with importa- posals, mainly based on the BDV. But the EEC, fol- tions by agents and concessionaries, or when the lowing separate understandings with the United declared price is suspiciously low, customs can use States, dropped its support for the BDV and opted another suitable basis to construe the normal price, for the positive concept of valuation. This concept using available information and taking into provided that, with few exceptions, the value account the actual conditions relating to the trans- should be determined on the basis of the price action being valued. This flexibility is severely actually paid or payable for the imported goods. restricted under the ACV. The exceptions were listed, as were the five alter- BDV acceptance represented substantial progress nate methods that were to be applied in strict toward the international standardization of valua- hierarchical order when the primary method, the tion systems. By 1970, about 100 countries applied transaction value, could not be applied. the BDV (many on a de facto basis), and several economic associations had adopted it as their valuation standard—the European Economic Community 2. The Tokyo Round objective was to achieve the expansion and ever greater liberalization of world trade through the progressive (EEC), Customs Union of Central African States dismantling of obstacles to trade. (UDEAC), and Caribbean Common Market 3. Generally referred to as the GATT Valuation Code (GVC) (CARICOM). However, a number of important until the Uruguay Round, and since then as the ACV. 158 Customs Modernization Handbook

Developing countries objected strongly to the tory for all World Trade Organization (WTO) new proposal, particularly to its failure to provide members.4 Developing countries that had not yet sufficient authority to customs to reject transaction adopted the ACV were given five years to introduce prices that were substantially out of line with those it, or until January 1, 2000, at the latest, under the related to transactions in like goods when the differ- SDT provisions of the ACV. For countries joining ence is not accounted for. They argued that the draft the WTO at a later date, the five-year period begins agreement would not enable them to take action from their date of accession to the WTO. The WTO against underinvoicing, which was more prevalent Committee on Customs Valuation may agree to an in their countries than in developed ones. They also extension at a country’s request. argued that adopting the ACV would increase the Since the conclusion of the Uruguay Round, 58 risk of fraud and would result in revenue losses. developing countries have requested the five-year These objections were partly addressed by introduc- implementation delay.5 Of these, only two intro- ing provisions for special and differential treatment duced the ACV before 2000. The delay period (SDT). The most important provision allowed the expired for 29 countries on January 1, 2000, and for countries more time to fully implement the ACV. 25 more during 2000 and 2001. Twenty-two coun- However, as membership in the GATT did not tries had been either granted an extension to the require member countries to implement the indi- five-year delay or their request for extension was vidual GATT codes, there was no obligation for under consideration, and 13 countries imple- members to introduce the valuation code. mented the ACV (with reservation as to the use of minimum values).6 In addition, 23 countries, The Uruguay Round and the Decision on Shifting mostly among the poorer of the developing coun- the Burden of Proof tries, neither invoked the five-year delay, nor notified the WTO about the passing of legislation. It The Uruguay Round negotiations led to the adop- thus appears that many developing countries have tion of the “Decision regarding cases where customs problems with implementation of the ACV despite administrations have reasons to doubt the truth or substantial TA received. accuracy of the declared value” (Decision 6.1 based on Article 17, see annex 8.A). That decision came to be known as the SBP (shifting the burden of proof) The Agreement on Customs and was appended to the ACV to clarify the intent of Valuation: An Introduction the original valuation provisions. The SBP determines that in cases where customs has reasonable The ACV establishes that customs value should, to doubts as to the truth or accuracy of the importer’s the greatest extent possible, be based on transaction declaration, the burden of proof could be shifted to value, that is, the price actually paid or payable for the importer to prove that the declared value repre- the goods being valued, subject to certain adjust- sents the total amount actually paid or payable for ments. Where the transaction value cannot be used the goods. In this process customs discusses with the because there is no transaction value or the importer their reasons for doubting the declared price has been influenced by certain conditions or value, allows the importer to respond, and informs the importer of their final decision. The decision may be that customs still has reasonable doubts, that is, it deems that the customs value of the goods can- 4. Upon creation of the WTO (1994 Marrakesh Agreement), all WTO members were required to subscribe to all WTO Agree- not be determined on the basis of the transaction ments, including the ACV. value, and thus proceeds to use the alternate valua- 5. From data obtained from various undated documents from tion methods of the ACV,which must be followed in the WTO Committee on Customs Valuation concerning the sta- strict order. tus of implementation of the ACV, including the extension situation as of August 31, 2002. 6. Several developing countries also had reservations related to State of Implementation the reversal of the order of Articles 5 and 6, the deductive and computed value methods (52 countries as of October 2001), and All industrialized countries apply the ACV. The the three-year delay for application of the computed value Uruguay Round made its implementation manda- method (46 countries as of October 2001). Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 159 restrictions, the ACV provides five alternate meth- • The fallback method (Article 7—Fifth Alternate ods, to be applied in prescribed order. In summary, Method). If the customs value of the imported the ACV evaluation methods are as follows: goods cannot be determined on the basis of any of the previous methods, it shall be determined using • The transaction value (Article 1—Primary “reasonable means consistent with the principles Method). The price actually paid or payable for of the ACV.”This implies that the previous meth- the goods when sold for export to the country of ods should be applied in a flexible way. Article 7 importation, subject to adjustments for certain prohibits the determination of value on the basis of costs and considerations in accordance with Article 8 of the ACV. The possible adjustments (a) the selling price of goods produced in the include commissions, containers, packing, importing country certain goods and services, royalties, and license (b) a system based on acceptance of the higher fees. Buying commissions are not to be in- of two alternative values cluded, and legitimate discounts to sole agents (c) the price of goods on the domestic market and sole concessionaries are to be accepted. of the exporting country Article 1 also stipulates that if the buyer and (d) the cost of production other than the com- seller are related in business, this does not in puted value as determined in line with the itself constitute grounds for rejecting the trans- computed value method action value. Such value needs to be accepted (e) the price of the goods for export to a coun- provided that the relationship did not influence try other than the importing one the price. (f) minimum values • The transaction value of identical goods (Article (g) arbitrary or fictitious values. 2—First Alternate Method). The transaction The ACV includes provisions concerning the treat- value of identical goods sold for export to the ment of transport and insurance costs, currency same country of importation at or about the conversion, right of appeal, publication of laws and same time, under a sale at the same commercial regulations concerning customs valuation, and level and in substantially the same quantity, as prompt clearance procedures. It also stipulates that the goods being valued. upon written request the importer has the right to a • The transaction value of similar goods (Article written explanation as to how the customs value was 3—Second Alternate Method). The transaction determined. It states that nothing in the ACV shall value of similar goods sold for export to the be construed as restricting the right of customs same country of importation at or about the administrations to satisfy themselves as to the truth same time and under the same conditions as or accuracy of any statement, document, or declara- those for identical goods but with different tion presented for valuation purposes. Provision is definitional standards. also made for administration, consultation, and dis- • The deductive method (Article 5—Third Alternate pute settlement, and for the establishment of two Method). Under this method, the customs value committees to oversee its implementation: the is based on the unit price at which the imported Committee on Customs Valuation at the WTO, and goods or identical or similar goods are sold in the Technical Committee on Customs Valuation the greatest aggregate quantity in an unrelated under the auspices of the WCO. party transaction, subject to the deduction of profits and certain costs and expenses incurred Special Provisions for Developing Countries after importation. • The computed value method (Article 6—Fourth The ACV contains special provisions for developing Alternate Method). The value consists of the sum countries. These stipulate that under certain condi- of the costs of materials and manufacturing, tions developing countries may do the following: profits, and general expenses equal to that usually reflected in sales of goods of the same class • delay ACV application for a maximum of five by producers in the exporting country for years and, under specified conditions, request an export to the importing country. extension of that period 160 Customs Modernization Handbook

• delay application of the computed value method Valuation Procedures and Control The valua- for a period of three years following their appli- tion function should be fully integrated into cus- cation of all other provisions toms’ overall operational structure and practices. • using officially established minimum values, This implies the following: make a reservation to retain such values on a limited and transitional basis • It is the importer’s responsibility to declare the • make a reservation to allow importers to reverse import value in accordance with the ACV. the order of application of the deductive • Value checks should be limited and selective method and the computed method of valuation, at the time of clearance, and shipments should dependent on the approval of the customs not be retained because of value disputes, but administration cleared with reservation as to value and under • make a reservation to value imported goods security for additional duties that may be at subject to processing after importation on the stake. basis of the deductive method, whether or not • Selective post-release verification and audit will the importer so requests. be applied with selection of goods or importer based on information from the risk manage- An associated decision stipulates that developing ment system. countries experiencing problems with importa- • Customs needs to maintain a comprehensive tions into their countries by sole agents and conces- information system and database. Information sionaries may request a study of this question. The and data are needed to help detect cases of ACV also details the procedures that should be underinvoicing or overinvoicing, to compare followed in cases where customs administrations values for application of Article 2 (identical have reasons to doubt the truth or accuracy of the goods) and Article 3 (similar goods), to develop declared value. The texts make it clear that these and update the risk analysis and management procedures should not prejudice the legitimate system, and to enable the central and regional interests of traders. offices to respond to queries from the clearance offices.

Implementation Requirements Implementation of the ACV requires the establish- Organizational Structure and Training ment of a legislative and regulatory framework; The recommended organizational structure for a mechanism for judicial review; administrative valuation requires the establishment of a central procedures; organizational structure; and training. valuation office complemented with regional and These requirements are summarized below and local offices as needed in relation to country size presented in more detail in annex 8.B. and the overall customs department organization. The central valuation office is to be responsible for Legislation and Regulations ACV provisions establishing valuation policy, developing proce- must be incorporated into the national legisla- dures, supervising correct and uniform implemen- tion. While legislative practice in a country tation by all offices, ensuring adequate training, may dictate the actual form of including the provi- and monitoring international developments in val- sions, the valuation legislation should be compre- uation. It should develop a value database and hensive, covering the ACV and its Interpretative could be made responsible for the value-related risk Notes as well as a number of specific provisions management system. The local and regional offices such as those concerning exchange rate conver- have an operational role. The complexity of the sion, right of appeal, release of goods before final ACV and the control strategy (post-clearance determination of value, and treatment of trans- review and audit) require the services of valuation portation and insurance costs (FOB or CIF specialists trained in value legislation and proce- system). dures and auditing of company accounts. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 161

ACV Implementation in responsibility is revenue performance, and whose Developing Countries job security is dependent on it. The heavy dependence on customs revenue (see annex 1.A) certainly Many developing countries face serious difficulties has a bearing on their concerns that ACV imple- in implementing the ACV. The major ones are mentation might lead to potentially significant rev- discussed here. enue losses.7 For technical reasons the value of the ACV is Lack of Ownership lower than that of the BDV because it excludes As noted, empirical evidence indicates that the con- buying commissions (when undertaken by the cerns of developing countries regarding the valua- importer) and advertising from the dutiable value, tion system to be adopted in the WTO were not and requires customs to accept legitimate discounts given to sole concessionaries, sole distributors, and fully taken into account, and were even largely 8 ignored. For instance, commitments made by the sole agents. countries’ Ministers of Commerce, who represent their countries at the WTO, were often poorly com- High Tariff Rates municated to the countries’ Ministers of Finance, who are responsible for implementing the ACV. As While tariff rates have been lowered in many a result, the ACV was poorly internalized. The SDT countries within the context of multilateral and provided some flexibility as to the timetable for regional agreements, their average level remains ACV introduction, but was widely perceived as substantially higher in developing countries than inadequate in taking into account the special diffi- in developed ones. Data for 2001 show that in the culties of developing countries. Furthermore, poor Organisation for Economic Co-operation and internalization is also often reflected in inaccurate Development (OECD) countries, average import or incomplete incorporation of the ACV provisions duties amounted to 1.1 percent of the import into domestic legislation, resulting in the system no longer being WTO-compliant. This is the case, for 7. In March 1990, a Preferential Trade Area (PTA) proposal for instance, when the WTO requirement that the changes to the ACV stated that ACV implementation would importers have the right to launch a complaint cause customs revenue to decline by nearly 10 percent unless the through their trade representative to the WTO is ACV was amended along the lines proposed by the 17 PTA member countries (WTO 1990). A 1996 informal study made by omitted. the Indian customs administration estimated revenue losses of Rs. 100 billion (about US$2.8 billion) on account of undervaluation. This study was the basis for setting up a new Directorate Revenue Loss of Valuation in India in 1997 (Source: personal communication with Indian Delegation at WTO). A 2002 report on valuation Developing countries are deeply concerned with fraud in China mentions 12 cases in which a total of US$1.5 mil- revenue loss. Low taxpayer compliance and admin- lion was lost (Source: Indian Delegation at WTO). Representa- istrative inadequacies in customs make it difficult tives of PSI companies confirmed that in their experience fake invoicing and undervaluation of shipments to developing coun- to effectively check underinvoicing. Underinvoic- tries occurs frequently. ing becomes attractive to the importer because of 8. A WCO study suggested that the adoption of the ACV by the high level of taxes levied at the import stage. Organisation for Economic Co-operation and Development There is no empirical proof that supports this con- countries led to slightly lower customs value and customs duties compared with the BDV. (See Customs Cooperation Council cern and knowledgeable observers point to coun- 1985.) Australia estimated the reduction in revenue to be equiv- tries that have implemented the ACV without alent to a general reduction in duty rates of 2 percentage points. suffering revenue losses. It is also difficult to deter- The EEC reported shrinkage in the overall taxable base, but of mine such losses under the ACV because countries no particular significance to revenue. Finland estimated the loss of revenue to be less than 1 percent of all ad valorem duties and that have officially subscribed to it adopt valuation taxes levied by customs. Spain projected losses of 4 percent in practices that deviate substantially from pure ACV the most sensitive commodity areas, but lower overall losses. ones, precisely to protect revenues. This issue fre- Canada negotiated GATT tariff rate adjustments needed to maintain tariff protection of certain industries at the prevailing quently reappears at ACV discussions, reflecting levels, but expected no significant revenue losses. New Zealand the concerns of customs managers whose main reported a loss of 0.25 percent of customs revenue. 162 Customs Modernization Handbook

value compared to 11.8 percent in non–OECD dealt with not as a valuation matter but as a fraud countries. For developing countries, the average investigation activity also presents implementation collected tariff fell in the range of 7 percent to problems. 17 percent. Even when the average tariff rate of a Applying the alternate methods of the ACV in given country is relatively low, tariff peaks create strict order is burdensome,costly,and time consum- incentives to undervalue imports of these goods. ing. It requires updated information on values of To the extent that the avoidance of high duty identical and similar goods, and information that is rates tends to contribute to tax evasion practices, not readily available or that requires complicated underinvoicing becomes more attractive to calculations. To apply the computed value would importers in developing countries than else- require investigations in exporting countries, a pro- where. cedure that is simply not feasible in most developing countries because of lack of budgetary resources and staff. Strict application of these rules would lead Less Compliant Trading Environment to clearance delays, particularly in cases where post- Often large shares of imports are accounted for by clearance audits are not yet in place. As a result, an informal sector that uses unreliable invoices, has many developing countries resort to the fallback poor bookkeeping standards or maintains no method for a substantial part of their imports. bookkeeping at all, has no fixed business address, or Clearly, this is far from an ideal situation for a valua- has frequent changes in the name of their busi- tion system that was supposed to facilitate trade.9 nesses. Under these circumstances, valuation con- The main developing country limitations stem trol based on post-release audit is hardly applicable. from the following: Customs officials in many countries are aware of the ease with which import invoices are falsified at • inadequate value data and poor means of infor- the point of export or even produced in the desti- mation gathering and communication that nation country. Some of these falsified invoices are result in customs having little or no access to easy to detect. Others display a high degree of price information and little means to verify sophistication and are prepared by medium- and declared values large-scale importers. Only a well-developed cus- • heavy administrative constraints such as lack of toms organization has a chance of detecting such qualified personnel; poor or nonexistent training fraud. Overreliance on invoices is often seen as facilities; and public service salaries, substantially complicating efforts to address the underinvoicing lower than those in the private sector, that often issue. do not pay a living wage, or are insufficient to attract the best • limited and often ill-managed computerization Administrative Limitations with only statistical functions, or nonautomated The administrative capacity to effectively imple- clearance processes with too many manual func- ment the ACV system is lacking in many develop- tions and excessive room for discretion ing countries. The enormous variety of goods • inadequate organization and poor management traded, widely differing prices for similar goods, resulting in unavailability of operating manuals, continuously changing prices, as well as different poor hierarchical supervision, and weak or non- levels of transaction and sale conditions complicate existent internal audits, as well as inadequate the correct valuation of imports. Much of the infor- management information systems, and unavail- mation needed to value a transaction is not readily ability of basic equipment available because it remains with the foreign supplier. For instance, cross-checking the outgoing 9. A 1999 World Bank publication had the following comments: invoices of the seller (exporter) with the incoming “The prescribed Customs valuation system is inappropriate for invoices of the buyer (importer) or performing the problems the least developed countries face, incorrect as a simple checks such as determining the existence of solution to their Customs valuation problems, incomplete as a solution to their Customs system problems. It is also incompati- the exporter is normally not possible or excessively ble with the resources they have at their disposal.” (Finger and cumbersome. That valuation fraud needs to be Schuler 1999, p. 24). Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 163

• complex SBP procedures—in case of reasonable on export value between exporting and importing doubt about the declared value, customs has to countries. (See annex 8.C.)11 Implementation of request further explanations and documents this decision together with the submitted pro- from the importer in support of the declared posal is being negotiated or further studied in value, notify the importer in writing if the appropriate WTO bodies. requested, allow the importer to respond, and communicate its final decision in writing. Toward Better Customs Valuation These differences have led to less than proper Practices implementation in some of the countries that have There are a number of policies and approaches that introduced the ACV. Empirical evidence confirms could lead to better customs valuation practices in that customs frequently does not comply with the developing countries. These would also protect rev- requirement of informing importers on what enue, provide for increased transparency, and min- grounds they dispute declared value, nor do they imize interference with trade flows. Some measures provide written justification for their claims. In would require consideration at WTO and WCO other cases customs somehow misleads importers, levels, others would require TA, while the most telling them that if they do not increase declared important ones would require actions by the con- values, the goods will not be released. This leads to cerned governments. conditional release and importers often have difficulties getting back their deposits. Altogether, there is a situation where importers know that their Addressing Ownership Questions declared value will almost inevitably be challenged, so they are encouraged to underdeclare; The lack of developing country ACV ownership and customs considers that all imports are there- arising from the historic neglect of their concerns fore undervalued. This vicious circle should be cannot be fully overcome. However, there are ways broken, but little effort has been made so far in to repair some of the damage. At the Uruguay that direction. A frequent error made in many Round negotiations, developing countries pressed countries is the idea that physical examination is for change with some results, including the SBP.This essential to verify value. In fact, valuation owes process should be continued. One way to do so little to examinations, except in a few obvious cases would be for the developing countries to clearly for- where the characteristics of the goods are not mulate their challenges in implementing the ACV at adequately or sufficiently described in the docu- the next WTO trade negotiations and to suggest mentation.10 This affects the risk-management practical approaches for implementing the spirit of approach to customs. the ACV. This could be initiated by identifying possibilities where customs authorities could assist each other with data exchanges and modernization Doha Ministerial Conference Developing country action for changing the ACV 11. Decision 8.3 “underlines the importance of strengthening has continued within the framework of the WTO. cooperation between the customs administrations of Members Proposals for amendments to the ACV to better in the prevention of customs fraud. In this regard, it is agreed adapt it to the developing countries’ trading envi- that, further to the 1994 Ministerial Decision Regarding Cases Where Customs Administrations Have Reasons to Doubt the ronment and administrative realities were submit- Truth or Accuracy of the Declared Value, when the customs ted to the Ministerial Conference at Doha (Novem- administration of an importing Member has reasonable ber 2001). The Doha Ministerial Conference issued grounds to doubt the truth or accuracy of the declared value, it may seek assistance from the customs administration of an the Decision on Implementation-Related Issues and exporting Member on the value of the good concerned. In such Concerns that covers the exchange of information cases, the exporting Member shall offer cooperation and assistance, consistent with its domestic laws and procedures, including furnishing information on the export value of the good concerned. Any information provided in this context shall be 10. For example, when a tariff heading corresponds to brands of treated in accordance with Article 10 of the Customs Valuation significantly different values. Agreement.”WTO (2001, pp. 5–6). 164 Customs Modernization Handbook

initiatives. Acting on proposals formulated at the For a comprehensive modernization program along Doha Conference should complement this. It would those lines to succeed, strong and sustained support be essential for industrialized country WTO mem- from senior levels of government is essential. bers to recognize that developing countries face real Furthermore, such programs should ideally be TA- problems in implementing ACV provisions. oriented and implemented with the assistance of organizations experienced in undertaking customs administration reform projects. Some governments Reforming the Tariff and Trade Regime have also elected to temporarily use PSI services or Incentives to underinvoice or otherwise evade PSI-like services to assist with price information duties originate mainly from high tariff levels and gathering and also with the development of a data- trade restrictions. Lower import taxes and a more base during the first years of the customs adminis- liberal import regime would alleviate the problem tration’s implementation program. of underinvoicing and resulting revenue loss. Strengthening the indirect tax regime (value added Strengthening the Organization and Infrastructure tax or VAT) could help make up for revenue loss for Valuation arising from lower tariffs. VAT is also levied at the import stage and runs the risk of undervaluation, Effective ACV implementation requires an effi- but any revenue loss can usually be recaptured cient customs administration, and any initiative to when these transactions are taxed at later stages of modernize customs should take this into account. the production and distribution chain through When there are delays in undertaking comprehen- inland revenue or customs post-clearance audit. sive reform, the valuation function still can and However, when these goods are not included in should be strengthened. Such a thrust requires the future taxed transactions (informal trade, for following: example), the sales tax proceeds are not recovered. • provision of the necessary legislative framework, including in the area of foreign exchange conver- Modernizing Customs Administration sion rates, treatment of transport and insurance The key action needed in modernizing a customs costs (CIF or FOB system), right of appeal, and administration consists of designing and imple- so forth menting a comprehensive customs modernization • development of value declaration and checking program. Customs valuation does not operate in iso- procedures, including self-assessment, selective lation from the overall customs operational and checking, risk analysis and management, post- management system.The ability to effectively under- clearance review, and audit take a valuation function is directly related to the • setting up a central valuation office and regional administration’s overall quality. A modernization valuation offices, including post-clearance review program should include the following key elements: or audit unit(s) • training of valuation officers in the ACV system • streamlining and computerizing operational and in post-release review and audit procedures procedures • establishment of a value information system and • introducing modern clearance strategies, that is, database. selective checking based on risk analysis and management, and post-clearance review Providing importers with an advance ruling on val- • professionalizing customs through appropriate uation can also speed up the valuation procedure. personnel recruitment, development, and man- Such a ruling can be obtained in advance when agement policies; better salaries; adequate and the importer submits transaction-related docu- sustained training; and internal controls mentation to customs. Once granted a ruling, the • introducing modern forms of organization and importer notes the registration number of the rul- management based on administrative, finan- ing on his declaration at the importation stage, and cial, and technical autonomy, coupled with no further valuation work needs to be undertaken, accountability. thus speeding up the clearance procedure. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 165

Establishing a Value Database market research, and various other sources. Good examples of such databases are the ones Effective ACV implementation also requires cus- that the Peruvian and Pakistani customs author- toms to have information on prices to permit it to ities have on the Internet. eliminate reasonable doubt on the accuracy of • Certificates of verification from the PSI service declared values and to derive the import value providers. This could be a good reference for the using the alternate valuation methods provided in PSI-user countries. Countries using PSI services the ACV. It is sometimes argued that when customs may want to build support for the creation of a deals with an almost fully compliant trading envi- valuation database into their PSI contract. ronment in which the few cases of fake invoicing • International databanks, already existing or being can be dealt with outside the valuation system developed, in particular by information technol- (such as fraud cases) there would be no need for a ogy companies that specialize in establishing data valuation database. Yet quite a few developed coun- warehouses on world prices. Diligent use of Inter- tries still feel the need to equip their services with a net sites can provide valuable data that could valuation database. For developing countries in provide useful valuation-related information.13 which, for a substantial share of imports, the Customs can even make available to the import- invoice prices cannot be accepted out of hand as the ing community the references to the sites they true representation of the price actually paid or consult, as in Pakistan. Developed countries that payable for the goods, the development of a com- operate databanks for valuation purposes could puterized database is a priority, without which assist developing ones by providing information proper operation of the ACV system cannot be from their databases. expected. A valuation database used as a source of • Increased use of electronic data interchange sug- information and guidance is compatible with ACV gests that there exists technology to obtain valua- implementation; and the possibility of undertaking tion information.14 Use of this procedure would this on a regional basis should be explored.12 provide internationally recognized and standard Indeed, a database would allow customs to make product descriptions. It is tied to prices at a more informed decisions and thus would enhance given stage in the distribution cycle. This its capability to properly implement the ACV.How- approach could also detect counterfeit products ever, experience has shown that these databases (using the barcode of the original product but tend to evolve into minimum price lists, which is made by unlicensed producers, and thus obviously contrary to the ACV. cheaper) that could rightfully be valued at the The WCO is now preparing a document that price of the original product. Uganda has initi- will provide guidelines for the development and ated some research on this topic. This approach, use of a national valuation database as a risk assess- based on the use of bar codes and electronic ment tool. Some observers suggest that such a data- chips that use radio frequency identification base could focus on the 100 most important (RFID) technology to keep track of items and imported items, and thus would cover the largest automatically discriminate between various share of total imports. The creation of such a data- types of information through a wireless base should be within the means of nearly all devel- exchange of data between the built-in memory oping countries. Possible sources for building up a and the Reader (also called IC tags), deserves database include the following:

13. Customs in Pakistan makes available to the public a list of • Reliable, scrutinized, recent import declarations. “Price Related Links” that give Web sites that customs consults This is the primary source for building a data- to obtain information on import values. See www.cbr.gov.pk/ base and should be supplemented with data newcu/portals.htm. The same Web site provides weekly updates from price lists, catalogues, trade publications, on Assessed Values Evidences by detailed Harmonized System classification. Another source for price data is www. pricesaroundasia.com where subscribers can obtain price searches. Obviously these sources must be used cautiously. 12. These issues were discussed at a symposium held at the 14. The WCO Customs Data Model that defines a customs WCO in April 2003; the report is on the WCO Web site www. data set for electronic transmission includes information on wcoomd.org. valuation. 166 Customs Modernization Handbook

further experimentation and the lessons learned strategy to supplement a customs modernization would need to be disseminated. effort. Representatives of developing countries’ customs administrations strongly endorsed the mutual Exchanging Information with Exporting Countries’ assistance approach for valuation issues. However, Customs Administrations customs representatives from industrialized coun- At the Doha Ministerial Conference a proposal was tries were not supportive of this approach outside of submitted for a multilateral solution within the criminal investigations or where important national framework of the ACV that would enable customs revenue implications were involved. They asserted administrations of importing countries to seek and that they are not allowed to provide such data, that obtain information on export values contained in the burden of doing so would be excessive, and that exporters’ declarations, in doubtful cases.15 A previ- the value of the data they could provide would be of ous attempt to commit WCO members to assisting no great assistance anyway. each other in the areas of prevention, investigation, A number of industrial countries noted that their and repression16 has not been successful to date as domestic legislation (confidentiality laws, secrecy only 28 members ratified the provisions relating to laws) prevents their customs authorities from rou- valuation fraud. Most of industrialized countries tinely providing such information or that the legis- have not done so. The Doha proposal intended to lation contains outright prohibitions for such infor- match the ACV obligation with a binding obliga- mation to be provided outside of criminal cases. tion on member countries to render assistance to This information is usually under the purview of verify customs value in doubtful cases. other agencies that often refuse to share it. The Doha Ministerial Conference agreed that They also noted their concern that an avalanche customs administrations may seek assistance from of requests would place an undue burden on the customs administrations of an exporting mem- customs to provide the information to the import- ber on the value of the goods concerned, and that ing country. Some customs administrations may the exporting member shall offer cooperation and not have the necessary resources to meet such assistance, consistent with domestic laws and pro- demands. To counter such fears the WCO prepared, cedures, including furnishing information on the in 2002, a Draft Guide to the Exchange of Customs export value of the goods concerned. As a result of Valuation Information to seek a way forward on the these discussions, the WTO Committee on Cus- problems identified with the exchange of valuation toms Valuation and the WCO Technical Committee information. The guide provides a checklist for on Customs Valuation were mandated to identify valuation verification actions to be taken by an and assess practical measures to address the con- importing customs administration before request- cerns expressed by several developing countries ing information from the exporting one. The steps regarding the accuracy of the declared value, are demanding and would ensure that such including the exchange of information and guide- requests would neither be frivolous nor substitute lines for the use of a valuation database.17 for diligent customs work in the country requesting It is clear from discussions at the WTO Commit- such information. The guide was adopted by the teeonCustomsValuationaswellasfromdebatesat Technical Committee on Customs Valuation in the WCO Policy Commission that there are major early 2003. The guide was also submitted to the difficulties with implementing the exchange of valu- WTO Committee on Customs Valuation as a prac- ation information. In December 2002, the WCO tical measure to address the valuation concerns of Policy Committee Meeting examined how assistance developing countries. in valuation exchange could be used as a short-term The value data at the disposal of the exporting country are also not reliable and not subject to the same level of scrutiny as in the importing country. 15. The proposal was submitted by India and supported by sev- Some countries keep export value information only eral developing countries. for statistical purposes and not on the transaction- 16. WCO 1977. by-transaction basis required for the purpose of the 17. Ministerial Conference, Fourth Session, November 14, 2001: Decisions on Implementation-related Issues and Concerns, and mutual assistance request that would allow cross- Ministerial Declaration. See WTO 2002. matching the data. Also, the information would not Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 167 be helpful in cases of collusion between importer importers, while other countries use this mecha- and exporter. The fact that the declared export nism to protect national production. value does not match the declared import value ACV provisions allow the use of minimum val- would not necessarily suggest fraud unless the ues on a limited and temporary basis. Would the exporting country authorities verify the informa- trading world be better off if greater latitude was tion. Representatives of industrial countries argue allowed for a wider use of administered minimum that this would result in shifting the burden of values or reference price systems, rather than imple- investigation to the exporting country, something mentation of a transaction-based value system, they cannot agree with. To counter their position, which it cannot do properly? Some observers reply some have argued that the fiscal authorities care- positively—certainly for standardized imports (raw fully verify most exporter values when VAT credits material, vehicles, and so forth) that rely on world and refunds are involved. Better coordination prices that are readily available or on widely used between customs and VAT refund authorities could price lists (used cars, for example). The option of lead to more reliable data. making such lists available to the trading commu- In conclusion and for the reasons mentioned nity could be considered, but this would require above, most industrial countries stated that high levels of transparency in establishing these lists they would comply with requests for mutual as there is the danger that traders will try to influ- assistance with respect to valuation issues on a ence the lists for protective purposes. Such lists case-by-case basis, mainly in the context of bilateral would have to be periodically reviewed with full assistance agreements. Prospects for establishing a disclosure of how the data were collected. An workable multilateral system of exchange of infor- interagency group could be involved in the prepara- mation on declared export values that could be tion of the lists, and an independent contract group used for ACV-based customs valuation in import- could be charged with its maintenance. (See Finger ing countries therefore do not look very promising and Schuler 1999.) This initiative merits further dis- in the immediate future.18 More promising are the cussion in international forums. agreements made between members that operate under customs unions or economic unions. These Technical Assistance agreements could build on established mutual trust Substantial TA has been provided to prepare and procedures, and could be inspired by the WCO developing countries for the introduction of the Model Bilateral Agreement on Mutual Assistance. ACV, especially by the WTO and WCO. During The assistance received by the Botswana Depart- 1998–2001, the WTO held a total of 47 missions in ment of Customs and Excise in valuation matters developing countries for this purpose. From 1996 from its neighbors is such an example. to 2001 the WCO conducted 50 valuation missions in developing countries. These missions have been Minimum Values and Reference Prices helpful in providing customs officers and senior managers with a good understanding of the ACV Many developing countries use minimum values to system and its implementation requirements. How- cope with import valuation problems in cases of ever, while a good understanding is a necessary fraud-sensitive goods and border traffic regulation. condition for ACV implementation, customs valu- In those cases, invoices are either not available or ation work is only as good as the overall quality of reliable, and post-clearance verification is impracti- the customs administration. As such, training cus- cal. Some countries also use such procedures to cir- toms officers in ACV provisions will have limited cumvent collusion between customs officers and results if customs is not fully computerized, if adequate valuation data are not available, if laws and

18. The WCO Council adopted a new International Convention regulations remain complex and uncoordinated, if on Mutual Administrative Assistance in Customs Matters in discretionary decisionmaking by officers remains June 2003. It includes the provision that stipulates assistance in the rule and not the exception, and if problems of providing information for the assessment of import or export integrity persist. Unless an enabling environment is duties and taxes. As this convention is yet to be ratified, it would be premature to see how it could actually address the concerns created in which valuation training can be put to of the developing countries. good use, much of the TA effort will be lost. 168 Customs Modernization Handbook

Much could be gained if institutions that pro- members and exporter members to ensure that the vide TA were to better coordinate their efforts. But principles and obligations of GATT 1994 apply to there is no escaping the fact that it is the responsi- the activities of PSI entities. It also provides for the bility of the TA beneficiary countries to orient TA speedy, effective, and equitable resolution of dis- toward overall modernization of customs services putes between exporters and PSI entities that arise as a precondition for effective ACV implementa- under the agreement.19 tion. Political commitment to this endeavor is Box 8.1 describes Peru’s use of a PSI company absolutely necessary and will require donors to be for its import verification program. involved in the modernization process. In the PSI intervention for customs purposes has been meantime, TA should focus on the development of a controversial issue. Proponents argue that PSI value databases, specialist training, risk analysis and intervention deters fraud in international transac- management, valuation-specific training, and post- tions and reduces opportunities for malpractice clearance review and audit. and corruption in customs administrations. In their view, the cost is justified because of the positive impact on revenue collection and the reduced distortions in trade transactions. Critics contend Preshipment Inspection Companies and Other Related Services that Programs • inspection of shipments at export is a burden on Preshipment inspection (PSI) companies have been exporters and importers, creating delays and providing services in the customs area since the additional costs mid-1970s. These services were initially performed • there is no guarantee that goods imported are for central banks, to help them address the issue of the same as goods inspected, as changes can capital flight resulting from overinvoicing of occur following inspection because of practical imports. With increased liberalization of capital problems related to complete sealing of all flows, the focus of PSI services has gradually shifted inspected shipments toward revenue issues. Currently the main objec- • the requirement for exporters to entrust sensi- tives of PSI programs in the customs area are to tive information about their transactions to PSI control overinvoicing and underinvoicing of companies is an intrusion into commercial con- imports; to provide governments with accurate fidentiality information on importers’ import transactions and • the scarce foreign exchange spent on PSI could tax liabilities; and, in some cases, to control misap- be better used to finance customs reforms. Gov- propriation of donor funds provided for import ernments should compare the costs of hiring a support. PSI company to how customs could improve its At present, some 40 countries, many of them operations if given this amount of additional among the least developed countries, use PSI serv- resources ices (annex 8.D and table 8.D.1). The International • inspection results are erratic and untrustworthy. Federation of Inspection Agencies (IFIA), a worldwide association of inspection companies, pro- Still other critics argue that PSI agents abroad are no motes internationally accepted standards and more above integrity problems than local customs methods, and provides documentation and qualifi- officers and that PSI companies often use undue cations of companies and personnel. The WTO influence and financial incentives to obtain Agreement on Preshipment Inspection, negotiated under the Uruguay Round, recognizes the need of developing countries to have recourse to PSI for as 19. This concerns matters in carrying out PSI, inspection stan- long as necessary to verify quality, quantity, or price dards, transparency in procedures, protection of confidentiality of imported goods. Mindful that such a program in business information, maximum times for carrying out PSI must be carried out without giving rise to unneces- operations, price verification, methodology, and appeals procedure. The agreement also stipulates obligations for exporting sary delays or unequal treatment, the agreement countries relating to nondiscrimination, publicity of laws and establishes rights and obligations of both user regulations, and provision of TA to user members. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 169

BOX 8.1 Peru: Import Verification Program

In the context of Peru’s 1990 customs reform, an Valuation Department and can be appealed to Import Verification Program (IVP) was initiated the Customs Court, and then to the Fiscal Tri- that required importers to obtain a certificate of bunal (entirely independent of customs), which inspection issued by an authorized PSI company will decide the final outcome. before the goods were to be shipped from the The services of four PSI companies were ini- country of exportation. This measure was aimed tially retained (in 1996 one was dropped). They at assisting customs in the verification of import were required to present a training program to shipments for purposes of duty assessment and customs personnel and to assist in the creation collection. Even though the Peruvian Customs has of the value database, as well as to provide cus- strengthened its valuation capacity, the PSI con- toms with monthly statistics to permit the moni- tract has been annually renewed. (See Goorman toring, control, and evaluation of the company’s 2004.) Customs considers this arrangement to be activities and performance. satisfactory despite periodic challenges. Inspection Fees, Importers Choice, and Imports Core Provisions. The IVP required that the PSI Exempted from the Program. Since 1999 in Peru, company certify the nature, quality, and value of the inspection fee for all goods has been 0.5 per- the goods in accordance with national legisla- cent of the value of inspected shipments, with a tion and physically seal the cargo container after minimum US$ 250 per inspection. The fees are inspection. Originally customs was required to paid by the importer directly to the PSI compa- assess duties using the data specified in the nies. Importers are free to choose any of the inspection certificate; but since accepting the approved companies to inspect their import obligation of the ACV in 2000, customs has used transactions. Customs must inform importers of the PSI information as an indicator of risk and their obligations to adhere to the provisions of importers are no longer required to use the PSI the IVP. Exemptions from the program include value in their declaration. Customs can use this imports with a value of less than US$5,000 indication in conjunction with its risk manage- (a recent measure requires inspection for goods ment system or valuation database for further sensitive to fraud when the value exceeds investigation or post-clearance control. Before US$2,000), goods imported under the tempo- releasing the goods, customs verifies that the rary admission regime, donations under certain nature and the quality of the goods correspond conditions, embassy imports, and postal ship- to what is declared in the inspection certificate ments without commercial value. About 80 per- and that the tariff classification is correct. If cent to 85 percent of imports are subject to there is a discrepancy between the data in the inspection. According to data from the PSI com- inspection certificate and the findings of the ver- panies, in only 0.17 percent of the total import ification, customs permits release of the goods inspections undertaken did customs state irregu- and submits the case, duly substantiated, to the larities in quantity, quality, or value. National Valuation Department within 48 hours. The discrepancy will be decided by the National Source: Goorman 2004.

contracts.20 Hiring PSI companies is often charac- stances, including the cases where government serv- terized as counterproductive to customs reform, if ices have been devastated by conflicts and no PSI services are used to substitute for efforts to expertise is available, the use of PSI services for a improve customs services.21 Based on these argu- short time is an advantage for some developing ments and experiences, many knowledgeable countries. observers point out that under certain circum- Traditional PSI Programs Under traditional PSI programs, the company 20. A notorious case was the PSI contract granted by Pakistan in the early 1990s that led to a management overhaul of the PSI inspects the goods in the exporting country before company involved. they are shipped to the importing country; checks 21. See Low (1995). Low explains what PSI is, how it works, how their quality, quantity, price, and tariff classification; it can benefit user countries, its drawbacks and pitfalls, and and,in some programs,computes the duties and taxes under what conditions it can benefit user countries. The paper contains various case studies and recommendations regarding due. The company issues a verification report, which the design, implementation, and monitoring of PSI programs. is provided to the importer and included in the 170 Customs Modernization Handbook

customs declaration at import. The importer can rely differs from the importer declared price, it may on the report or decline to do so in the process of provide customs with “reasons to doubt the accu- customs valuation and calculation of duty payment. racy of the declared value.” This may be used as a Use of PSI certificates varies greatly among countries. risk indicator to question the applicability of the When determining the final customs value, where transaction value method of valuation and, follow- justified, customs can also disregard the PSI report on ing the procedures spelled out in the ACV, in deal- price. ing with cases of underinvoicing. Price information PSI programs typically cover all imports except from the PSI company, moreover, can be used as a for low value shipments (the threshold is US$5,000, reference to complement import histories for but may be as low as US$2,000), and some other establishing and updating the country’s valuation categories such as duty-exempted goods, imports database. The whole process provides customs with for defense, diplomatic supplies, and personal information that normally would not be readily effects. PSI arrangements often contain provisions available to their countries as long as they do not for customs officers’ training and for assistance in have a well-established valuation practice. The use the construction of a valuation database. The PSI of PSI services in Peru is reviewed in box 4.1. cost depends on the range of services being provided and might be borne by governments or Evaluation of Effectiveness of Traditional importers. It falls in the range of 0.6 percent to PSI Services 1 percent of the value of the inspected shipments, and is usually borne by importers. Most PSI services were introduced to assist customs Under the BDV-based valuation system, PSI organizations in improving revenue collection and price verification was aimed at verifying that the streamlining the processing of foreign trade opera- invoice price corresponded to an open market price tions (Anson, Cadot, and Olarreaga 2003).23 This in line with the valuation norm. Customs at that support would provide the time needed for a time often used the prices recommended by the PSI government to strengthen its customs administra- companies to determine the customs value. Under tion. However, PSI services have largely been used the ACV, customs cannot automatically determine without measurable improvements in customs dutiable value on the basis of prices recommended administration. This has frequently resulted in by a PSI company. PSI price verification concen- automatic renewal of PSI contracts. This should trates on comparing the invoiced price with the not be seen as a failure of the PSI program itself, price of identical or similar goods being offered for which had a limited and mainly short-term objec- export from the same country of exportation at or tive that did not include building customs capacity. about the same time. When such prices are not It should be seen, however, as a failure of the available, PSI companies draw on information government to implement the necessary reform to from prices charged to different export markets take over the valuation function with confidence. (third-country export prices). However, as all WCO The usefulness, efficiency, and effectiveness of PSI countries are committed to implementing the ACV, services need to be judged against results in revenue which prohibits the use of third-country export collection, trade facilitation, and their collateral prices for customs valuation, such PSI information impact on customs administration. However, can only be used as test values or advisory opinions the evaluation of PSI programs remains unclear. in checking the truth or accuracy of the importer’s declared value.22 When the PSI-verified price 23. The paper proposes a new econometric approach to evaluate the impact of PSI services on revenue collection and fraud. It 22. When the WTO PSI Agreement was negotiated, all PSI user shows that theoretically PSI intervention has an ambivalent countries were using the BDV system, which does not preclude effect on customs fraud, and that for the cases reviewed the find- use of third-country export prices in determining customs ings were not consistent. Yang (2003) presents evidence that if value. To accommodate this situation, negotiators added a foot- PSI is introduced as an isolated initiative, smugglers will find note to the PSI Agreement, clarifying that PSI-using countries ways to reduce their duty burden, either by splitting up ship- are to be bound by the obligations imposed by the ACV when ments to stay below the threshold set for PSI inspection or using opinions or prices given by PSI companies for determin- importing through export processing zones, where leakage con- ing customs value. See Rege 2002. trols may be loose. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 171

Obviously, the costs at which these results are destination without inspection, except in a achieved are not immaterial to the analysis. restricted number of cases.

Impact on Customs Administration The use of Revenue Impact The revenue impact of PSI PSI services can demoralize customs personnel, interventions is difficult to measure because the and cause them to not cooperate with PSI compa- introduction of PSI often coincided with the lower- nies. This may be related to the fact that most PSI ing of trade taxes and other aspects of trade liberal- contracts are entered into by the Ministry of ization. Separating the effects on revenues from Finance without the full support of customs. PSI each of these factors is nearly impossible, even may also negatively affect customs modernization though PSI companies provide detailed statistics efforts as work undertaken by PSI companies indicating the impact that could have resulted from reduces the pressure to reform and to gain the acting on the information provided. Also, the pos- needed experience in valuation. This may also sible deterrent effect of the existence of PSI is not result in some customs administrations tending to measurable, but could be substantial. The impacts neglect valuation work. Although training pro- on fiscal revenues as a result of PSI programs have vided by these companies under some arrange- been mixed, and in many countries disappointing. ments has been helpful, it is not a substitute for One reason could be the fact that PSI information the hands-on experience and responsibility that the has at times not been systematically used in the officers would develop in valuation work in the process of determining import values. Customs absence of PSI companies. Experience has shown officers have also expressed doubts about the infor- that PSI companies are usually not good at training mational value of some PSI data. In many countries and at the transfer of technology. there is a lack of serious monitoring and follow-up of information provided by PSI companies, and no Impact on Traders’ Behavior There is no clear after-the-fact reconciliation is undertaken. indication so far that the repeated increases of import values brought about by customs’ relying Trade Facilitation It is not clear how far PSI serv- on PSI interventions has significantly changed the ices facilitate trade in terms of reduced clearance proclivity of some importers to try to underinvoice times and more streamlined customs processing of their imports. While some importers appear to import shipments. Much of the evidence in this learn by doing and less frequently undervalue their respect is anecdotal. There have been claims of imports, the practice in some countries of not delays caused in the country of exportation, dupli- penalizing traders for it, does not give importers an cation of controls, and errors caused by the PSI incentive to declare the full transaction value of companies; but there have also been reports of their imports. speedier clearances and less hassles with corrupt Conditions to be Examined When Considering customs officers. Recourse to PSI Services Experience in some Detailed measurements on PSI trade facilitation countries shows that reliance on PSI services could have only been made in a few cases. A World Bank be useful, if carefully integrated in a customs mod- paper reported that the PSI program introduced in ernization program, or if the inability of customs to Indonesia in 1985 led to a significant reduction in assume the valuation function is compensated for. the clearance time for containers. After the begin- PSI can play a role in ensuring proper duty assess- ning of the program, the percentage of containers ment and collection during the first years of cus- that cleared customs in less than four days rose from toms reform while capacity is being built. Based on 13 percent to 63 percent. Similar results were broad experience with PSI services, the following obtained under the Philippines PSI program. In capture some conditions to be examined when both Indonesia and the Philippines, the PSI pro- considering recourse to PSI services or when evalu- gram was only part of a wider trade facilitation pro- ating such programs: gram. Some of the program’s success was due to the sealing of full container loads by PSI companies at • Contract only with PSI companies that have a the point of embarkation and the requirement that good reputation. IFIA provides a Code of Con- customs let these shipments proceed to their final duct for the PSI companies. 172 Customs Modernization Handbook

• Select PSI service providers, and renew their including the number of inspections, irregulari- contracts, through transparent competitive bid- ties addressed, adjustments to value made, and ding procedures.24 resulting additional assessments; and complaints • Contract with a single PSI company for a period received. of only a few years and, if it is so decided, renew • Record the PSI inspection reports in the cus- the contract under competitive conditions. toms declaration and record them in the auto- Avoid split contracts, because multiple compa- mated customs management system. Reconcile nies are more complex to supervise, contracting the findings of PSI inspection reports with cus- costs tend to be more expensive, and the indi- toms declarations and values retained for the vidual companies are less carefully supervised by calculation of duties and taxes. This process their respective headquarters for whom they should explain the reasons for deviations represent smaller profit opportunities. Also, split detected. contracts may cause importers to adjust their • Apply the penalties provided in the law for import pattern so as to benefit from the most offenses of undervaluation so as to enhance helpful inspection services providers. Better to importers’ compliance. keep to a single contractor for a fixed time • Specify an arbitration or appeals procedure to period and adhere to competitive bidding for provide importers with an avenue to contest PSI the renewal of the contract. assessments. • Have PSI contracts be fully endorsed by cus- • Create a steering committee (located outside toms, not imposed on customs by the Ministry customs, but with customs participation) to of Finance or the central bank. oversee PSI activities. Periodic reports should be • Link the PSI contracts with a customs modern- made available to civil society. ization project that clearly delineates the respec- • Possibly articulate an exit strategy to ensure a tive responsibilities of customs and the PSI smooth transition of the functions that were per- company. formed by the PSI service to customs. Following • Make the PSI contract explicit: services to be ren- exit, PSI companies could be retained to assist in dered (price, classification, duties paid, special dealing with fraud-sensitive goods, or in other import regimes); time limit without automatic cases where valuation poses particular problems. extensions; list of goods to be inspected with • Introduce a publicity campaign to inform exceptions detailed; assistance to customs in set- traders and the public about PSI systems. ting up a valuation database; clear performance criteria to allow the government to verify PSI New Trends in the Provision of Customs performance, with penalties for failing to adhere Valuation Services to the criteria; commitments to train customs staff and to transfer technology; required reports Along with the migration of many developing countries from the BDV system to the ACV system, the private sector that used to offer PSI services 24. Bidding documents should detail services to be procured, started seeking ways to move away from the tradi- request price proposals, instruct the bidder to spell out its prior qualifying experience to undertake the task, and specify the exit tional PSI schemes. The new direction includes strategy. The evaluation criteria and weights to be assigned more selective programs that rely on selective should be made available beforehand to bidders. An evaluation checking, risk analysis, and post-clearance audits. committee should be established with representatives from con- To what extent these new services will be successful cerned government agencies and with private sector representatives involved in trade. Its composition should be made public remains to be seen. The trend is for private sector prior to issuing the bidding documents. Companies should be service providers to focus on the following issues: prohibited from contacting individual committee members from the time of publication of the tender to announcement of the results. The committee should communicate the results of • Development of risk assessment tools to assist the technical and financial evaluation to all bidders, and it customs in implementing a selective approach to should be published in the local press. If the tender document verification so as to focus on the riskier foreign calls for the committee to submit a recommendation to a higher authority, the recommendation should be made public before trade transactions, a key element to faster clear- the final decision. ance of goods. (See annex 1.D for a description.) Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 173

• Specification that the services provided will goods have cleared customs. Mexico initiated decline over time and that the company will such a service in 2003. assist customs to take over at an agreed on pace. • Assistance to customs in support services, The recent PSI contract in Madagascar specifies including information technology. such provisions and will constitute a test for this new approach (see box 8.2). There has been limited experience with these more • Valuation verification service and development selective programs, so the jury is still out. They are of valuation databases. The purpose is to pro- likely to be less expensive than traditional PSI serv- vide customs with information that will allow it ices because they are more limited in scope and to challenge import values and to further carry focus better on risky imports. To adhere to the out valuation in full compliance with ACV rules. contract terms, these programs will require the The building and updating of a database on effective transfer of skills and technology. Their import values are an important part of this success will also depend on capacity building in process. Such information is essential to apply- customs, particularly in the areas of gathering ing alternate methods of valuation when reason- price information and creating valuation data- able doubt is being raised with regard to the bases, the implementation of the ACV, implement- transaction value of the goods being imported. ing selectivity in applying the control mechanisms • Support for post-clearance audits where the PSI available, and developing post-clearance audit company, upon the request of the customs capacity. Close monitoring of these new services department, provides intelligence information is needed to evaluate their effect on customs regarding shipments selected for audit after the modernization.

BOX 8.2 PSI Contract in Madagascar Introduces Targeted and Evolving Verification Services

In early 2003 the Republic of Madagascar reduced to 65 per cent to 70 percent and then entered into a four year PSI contract with Société to 30 percent in year four with transaction val- Générale de Surveillance (SGS). This contract ues identified by customs to be validated by provides for a gradual transfer of capacity to SGS. SGS will provide a valuation reference sys- manage the inspection, valuation, and classifica- tem to guide customs’ own valuation assess- tion functions to the customs authorities. This ment. Customs staffs will be trained in post- transfer is made possible through the extensive clearance controls. use of risk management techniques and tools. Tariff Classification. From 100 percent of Inspection. During the first six months of the imports over US$3,000 in the first year, the share program, SGS will inspect 100 percent of goods of transactions subjected to customs classifica- (with a value exceeding US$3,000) destined to tion inspection will rapidly decrease in years two Madagascar, prior to their shipment. This share and three, to eventually reach 40 percent. Dur- is to be reduced to an average of 45 percent ing the last year of the contract tariff classification during the second year and to 10 percent in the will be wholly the responsibility of customs. third and final year of the contract. This reduc- The program includes immediate implemen- tion process will be monitored closely by cus- tation of a risk management system, extensive toms and SGS to ensure that the program’s training, and close cooperation between the PSI effectiveness remains unaffected. SGS will assist company and the authorities. To maximize the the authorities in setting up a “second inspec- effectiveness of the program and to ensure sys- tion” program of a small percentage of ship- tematic feedback of information, the authorities ments at arrival to maximize the results of will reconcile the SGS information with that used inspections conducted by customs, an inspec- in their assessments prior to final clearance of tion that will be transferred over time to a spe- goods. This should minimize the risk of the PSI cial audit unit of the Ministry of Finance. option not being used. Valuation. During the first two years of the contract all transactions above US$3,000 will be subjected to this validation process. During year Source: Communication from the Customs three, the share of transactions validated will be Department of Madagascar. 174 Customs Modernization Handbook

International Value Databases provides developing countries with a tool to deal with underinvoicing, the procedure is complicated In recent years a number of information technology and leaves the ACV ill-adapted to the countries’ companies have specialized in developing data needs. The countries lack ownership of the ACV warehouses on world prices and systems to label system. Moreover, implementation of the ACV and track internationally traded goods. The pro- requires price information that they do not have grams could provide price information to buyers and that is costly to obtain. Finally, a transaction and sellers worldwide via online access to databases. value system can only be introduced effectively in Prices are obtained and updated through an inter- a well-organized and trained administration that national network of representatives and agents. The is largely computerized and where information suppliers can update the specifications and prices of flows are smooth and adequate. This is not the case their products online. The data provided could be with many developing countries and causes con- used in a manner consistent with WTO valuation cerns about possible revenue loss in implementing rules. The cost at which information could be made the ACV. available to customs is not clear. There are a number of measures that could con- Another initiative, based on barcodes designed tribute to proper implementation of the ACV: for tracking goods in international trade, provides an attractive option. While not specifically designed • Governments should realize that piecemeal TA for customs valuation purposes, this approach for customs valuation without comprehensive could provide customs officials with valuable price customs modernization programs is likely to information if price information was added to the disappoint. It would be illusory to expect good typical product-specific data. This approach was valuation practices in an administratively and tested in one country and provided customs with technically ill-equipped customs department. relevant price information for 80 percent of con- Reforms should encompass the streamlining of sumer goods. Experiments are continuing, based operational procedures; the introduction of a on data provided by a retail sales outfit from a modern customs control strategy based on neighboring country. Further testing and research selective checking, risk management, and post- are needed to find out how readily available these clearance audit; professionalizing of the service databases are, and at what cost; assess how this through appropriate personnel development method can assist customs officers in reaching con- and management policies, better salaries, and clusions regarding the existence or not of the “rea- sustained training; and the introduction of sonable doubt” required by the ACV to reject the modern forms of organization based on greater price; and determine how this would compare with autonomy coupled with accountability and the newer PSI services. As noted, the use of IC tags transparency. in this respect could also be explored. • A greater part of TA should be redirected toward comprehensive customs modernization projects. Operational Conclusions Valuation-specific TA needs to be concentrated Developing countries originally objected to intro- on the development of valuation databases, risk ducing the ACV because it complicates efforts to analysis and management systems, and post- address underinvoicing issues in a commercial clearance review and audit. environment that is very different from the com- • The valuation function should be strengthened mercial environment existing in industrialized by setting up an appropriate legal framework; countries. Developing countries face the problem establishing valuation control procedures based of the informal sector and the lack of compliance on selective checking, risk analysis and manage- even with larger known traders. At the Uruguay ment, and post-clearance audit; establishing Round, a decision was appended to the ACV that central and regional valuation offices; and spe- provides for shifting the burden of proof to the cialized training. importer when serious doubts exist regarding the • A valuation database should be established and accuracy of the declared value. While this decision constantly updated. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 175

• Advance rulings on valuation should be intro- Taking into account Article 17 of the Agreement, duced whenever possible, so as to speed up the paragraph 6 of Annex III to the Agreement, and the clearance process and give importers assurance relevant decisions of the Technical Committee on of the tariff and tax burden. Customs Valuation; • Hiring of PSI companies may be useful to assist Decides as follows: customs in certain circumstances. The objective is to facilitate valuation work during the initial When a declaration has been presented and where reform stages as capacity is being built up to the customs administration has reason to doubt the carry out the valuation function. However, if truth or accuracy of the particulars or of documents and when PSI services are used, care needs to be produced in support of this declaration, the cus- exercised to make good use of these services to toms administration may ask the importer to pro- complement a sustainable customs moderniza- vide further explanation, including providing docu- tion. Otherwise, governments should reconsider ments or other evidence, that the declared value recourse to such services. represents the total amount actually paid or payable • When using private sector services, countries for the imported goods, adjusted in accordance with should take full advantage of the recent the provisions of Article 8. If, after receiving further programs that concentrate on selective price information, or in the absence of a response, the verification, the building up of valuation data- customs administration still has reasonable doubts bases, the development of risk management as to the truth or accuracy of the declared value, it systems, and other important services. These may, bearing in mind the provisions of Article 11, be appear better focused on the crucial needs of deemed that the customs value of the imported ACV implementation than older programs, and goods cannot be determined under the provisions are less costly. of Article 1. Before making a final decision, the customs administration shall communicate to the importer, if requested, its grounds for doubting the Annex 8.A Decision Regarding truth or accuracy of the particulars or documents Cases Where Customs Administra- produced and the importer shall be given a reason- tions Have Reasons to Doubt able opportunity to respond. When a final decision the Truth Or Accuracy of the is made, the customs administration shall commu- Declared Value nicate to the importer in writing its decision and the grounds thereof. Ministers invite the Committee on Customs Valua- It is entirely appropriate in applying the Agree- tion established under the Agreement on Imple- ment for one Member to assist another Member on mentation of Article VII of GATT 1994 (viz.Agree- mutually agreed terms. ment on Customs Valuation) to take the following decision: Source: WTO 1994. The Committee on Customs Valuation Reaffirming that the transaction value is the pri- Annex 8.B Agreement on Customs mary basis of valuation under the Agreement on Valuation: Implementation Implementation of Article VII of GATT 1994 (here- Requirements inafter referred to as the ‘Agreement’); Implementation of the ACV requires the establish- Recognizing that the customs administration ment of a legislative and regulatory framework, a may have to address cases where it has reason to mechanism for judicial review, administrative pro- doubt the truth or accuracy of the particulars or of cedures, organizational structure, and training. documents produced by traders in support of a declared value; Legislation and Regulations Emphasizing that in so doing the customs administration should not prejudice the legitimate The provisions of the ACV need to be incorporated commercial interests of traders; in national law. While legislative practice in the 176 Customs Modernization Handbook

country may dictate the actual form, the valuation Valuation procedures as complex as the ACV legislation should be comprehensive, covering the require, as a minimum, the following: ACV and its interpretative notes, as well as a num- Value declaration self-assessment. The importer ber of specific provisions, including the following: needs to be made responsible for determining the Exchange rate. How and when the exchange rate value in accordance with the ACV. The importer for conversion of values expressed in foreign cur- must declare the essential elements affecting the rency shall be published, and whether the rate at dutiable value in a value declaration form, to be the time of exportation or at the time of importa- presented or lodged electronically with the import tion needs to be considered. declaration. Right of appeal. The agreement requires that Limited and selective checking at time of clearance members provide for the right of the importer to (local office). Checking at the time of clearance for appeal, in relation to the determination of customs most imports should be limited to determining the value, and provide for final appeal to the judiciary. acceptability and validity of the declaration, and on A fair and independent review mechanism needs to the basis of available information, identifying be established within the customs administration whether additional action is required, such as physi- in the first instance, with further right to an appeals cal inspection or submission of the matter to the tribunal (if available) or to the judicial authority in regional or central valuation office.25 In computer- the second or third instance. ized systems, selection for inspection or other action Release of goods before final determination of will normally be made by the systems on the basis of value. The legislation must allow the importer to a risk management program. Shipments should not withdraw goods from customs control in situations be retained because of value disputes, but cleared in which final determination of the customs value with reservation as to the value and under security is delayed, provided the importer posts a guarantee for additional duties that may be at stake. to cover the duty liability that may result from the Selective post-clearance release verification and review. audit (regional office). As a general principle, valua- Transportation and insurance costs. National leg- tion control should concentrate on post-clearance islation needs to determine whether these costs are verification and audit. The present days’ volume of to be included in, or excluded from, the dutiable trade and the complexity of customs valuation value (CIF or FOB basis of valuation). make effective valuation at the point of importa- Reasons to doubt. Nothing in the ACV shall be tion impossible. Post-clearance checks should be construed as restricting or calling into question the carried out by the regional office, or in some coun- rights of customs administrations to satisfy them- tries, the central valuation office. The selection of selves as to the truth or accuracy of any statement, declarations for post-clearance verification or audit document, or declaration presented for customs should be based on information from the risk man- valuation purposes. agement system. Action may consist of documentary verification, or may include a physical inspection, or consist of accounts-based checking at the Valuation Procedures and Control importer’s premises to examine in detail the condi- The complexity of the valuation norm and its tions of the transaction. application to actual transactions makes it neces- Value information system and database. Informa- sary for customs to judiciously organize the valuation and data are needed for the following: tion function in terms of policies, procedures, and organizational setup. Customs valuation does not • to enable customs to detect cases of underin- operate in isolation of the overall clearance and voicing or overinvoicing control system, but is a core element of it. The quality of customs valuation depends on the quality of 25. Valuation does not require physical inspection in most cases. the customs administration overall, and the degree However, inspection may be needed to ensure correct identification of the type, brand name, model, serial number, and other to which it uses information technology applica- characteristics of the goods, so as to allow for correct identifica- tions and implements modern control strategies. tion when a verification or audit is done later. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 177

• to allow comparison of values for application of Annex 8.C Implementation Issues ACV Articles 2 (identical goods) and 3 (similar Related to WTO Bodies Under the goods) Doha Ministerial Decision on • to develop and update a risk analysis and man- Implementation-Related Issues agement system and Concerns • to enable the central and regional offices to Paragraph 8.3: Agreement on Implementation of respond to queries from the clearance offices. Article VII of GATT 1994 (Customs Valuation) The primary source of information for the value Ministerial Decision: database is the price obtained from reliable, scruti- The Ministerial Conference decides as follows: nized, recent import declarations. This informa- 8.3 Underlines the importance of strengthening tion needs to be supplemented with data from cooperation between the customs administrations price lists, catalogues, market research, and various of Members in the prevention of customs fraud. In other sources. The information from the database this regard, it is agreed that, further to the 1994 should not be taken at face value, but used for Ministerial Decision Regarding Cases Where Cus- guidance in examining transactions. Taking the toms Administrations Have Reasons to Doubt the data from the value database strictly would be Truth or Accuracy of the Declared Value, when the inconsistent with the ACV and unacceptable as a customs administration of an importing Member valuation system. has reasonable grounds to doubt the truth or accuracy of the declared value, it may seek assistance from the customs administration of an exporting Organizational Setup and Training Member on the value of the good concerned. In such cases, the exporting Member shall offer coop- Effective organization for valuation requires the eration and assistance, consistent with its domestic establishment of a central valuation office, comple- laws and procedures, including furnishing infor- mented with regional and local offices as needed mation on the export value of the good concerned. based on the size of the country and the overall Any information provided in this context shall be organization of the customs department. The cen- treated in accordance with Article 10 of the Cus- tral valuation office, unit, or division at headquar- toms Valuation Agreement. Furthermore, recogniz- ters is responsible for valuation policy, developing ing the legitimate concerns expressed by the cus- procedures, supervising the correct and uniform toms administrations of several importing implementation by regional and local offices, Members on the accuracy of the declared value, the ensuring adequate human resources and their Committee on Customs Valuation is directed to training, monitoring international developments identify and assess practical means to address such concerning valuation, serving as the importer’s concerns, including the exchange of information final internal appeal stage on disputed value deci- on export values and to report to the General sions, and maintaining relationships with relevant Council by the end of 2002 at the latest. institutions (WCO, for example). Local and Consideration by the Customs Valuation regional offices have an operational role as Committee: described in the section on “Valuation Procedures This issue was considered by the Customs Valua- and Control.” The central office should develop the tion Committee, which reported to the General value database and the risk management system. Council in December 2002 (G/VAL/50), inter alia, The complexity of the ACV and the control strategy that the Committee would require technical input (post-clearance audit) require valuation specialists and advice to further evaluate all submissions and trained in value legislation and procedures and views, which it had requested from the Technical auditing of company accounts.26 Committee on Customs Valuation (TCCV), and that the TCCV was to conclude its examination and report to the Committee by 15 May 2003 in order 26. For more detailed information, see WCO (1996). that the Committee might consider the technical 178 Customs Modernization Handbook

inputs and advice provided. The Committee cussed at the Committee’s meeting on 23 May. The requested the General Council to take note of the Committee agreed that its incoming Chairman progress to date, to allow it to continue to work would consult informally on how further work under the existing mandate, and to establish an should proceed and, in the meantime, suspended its appropriate time for reporting on the matter. consideration of this item.The Chairman is consult- Consideration by the General Council in ing with delegations and will report to the Commit- December 2002: tee on the outcome of the consultations, at which The General Council considered the Commit- time the Committee will decide on how to complete tee’s report in December 2002 (WT/GC/M/77). its mandate, including reporting to the General Following the discussion on the report, the General Council. Council took note of the report and of the progress to date and authorized the Committee to continue its work under the existing mandate and to report Source: WTO document WT/MIN(01)/17 back to the General Council once its work had been of November 20, 2001, WTO document WT/ completed. GC/M/77 of February 13, 2003, Committee on Follow up: Customs Valuation Documents G/VAL/50 of The TCCV submitted its response to the Com- December 11, 2002 and G/VAL/54 of May 16 mittee on 15 May 2003 (G/VAL/54), which was dis- 2003.

Annex 8.D PSI Programs Operated by Members of the IFIA PSI Committee

TABLE 8.D.1 PSI Programs Operated by Members of the IFIA PSI Committee (as of January 21, 2004)

IFIA PSI Members Under Basis of Country Type Contracta Contract Split

Angola Customs BIVAC – Bangladesh Customs BIVAC, BSI-Inspectorate, Intertek Geographical Benin Customs BIVAC – Burkina Faso Customs SGS – Burundi Forex/Customs SGS, Baltic Control Importers’ choice Cambodia Customs SGS – Cameroon Customs SGS – Central African Rep. Customs BIVAC – Chad Customs BIVAC – Comoros Customs COTECNA – Congo Customs BIVAC Côte D’Ivoire Customs BIVAC, COTECNA Customs regimeb Dem. Rep. of Congo Forex/Customs SGS – Ecuador Customs BIVAC, COTECNA, Intertek, SGS Importers’ choice Ethiopia Forex/Customs SGS – Air & land freight/sea Ghanac Customs BIVAC, COTECNA & othersd freight. Guinea Customs SGS – BIVAC, BSI-INSPECTORATE, Importers’ choice Indiae Quality/quantity SGS & othersc Quality/quantity/ Open to any surveyor licensed to Importers’/exporters’ Indonesiaf classification operate in country of supplyc choice Quality/quantity/ Indonesiag classification SGS – BIVAC, COTECNA, BSI- INSPECTORATE, Intertek, Iran, Islamic Rep. of h Quality/quantity OMIC, SGS and othersc Importers’ choice Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 179

TABLE 8.D.1 (Continued)

IFIA PSI Members Under Basis of Country Type Contracta Contract Split

BIVAC, BSI-INSPECTORATE, – Iran, Islamic Rep. of Customs OMIC, SGS, Intertek Kenya Customs COTECNA, BIVAC Geographical Liberia Customs BIVAC – Madagascar Customs SGS – Malawi Forex/Customs Intertek – Mauritania Customs SGS – Mali Forex/Customs Cotecna – Mexicoi Customs BIVAC, Intertek, SGS Importers’ choice Mozambique Customs Intertek – Niger Customs COTECNA – Nigeria Forex/Customs COTECNA, Intertek, SGS Geographical Peru Customs BIVAC, COTECNA, SGS Importers’ choice Rwanda Customs Intertek – Senegal Customs COTECNA – Sierra Leone Customs BIVAC – Tanzania Customs COTECNA – Togo Customs COTECNA – Control Union Intl., Intertek, Uzbekistan Forex/Customs OMIC, SGS Importers’/exporters’ choice Venezuela, R. B. de Customs BIVAC, COTECNA, Intertek, SGS Importers’ choice Zanzibarj Forex SGS –

Source: International Federation of Inspection Agencies (IFIA) 2004 www.ifia-ac.org/. BIVAC = Bureau of Inspection, Valuation, Assessment and Control. BSI = British Standard Institute. OMIC = Overseas Merchandise Inspection Corporation. SGS = Societe Generale de Surveillance. Forex = Foreign Exchange. – = no split. a. Nonmembers of the IFIA PSI Committee are also operating in Iran and India. b. BIVAC for goods entered into direct consumption; COTECNA for goods entered for customs suspense regimes. c. PSI consists of valuation and classification by BIVAC or COTECNA. Physical inspection is carried out on arrival in Ghana by local companies that are joint ventures with BIVAC and COTECNA, respectively. d. Others = Nonmembers of the IFIA PSI Committee also operating for Ghana, India, Indonesia, and Iran. Verification by BIVAC for goods entered into direct consumption; COTECNA for goods entered for customs suspense regimes. e. Only covers quality and quantity of importers’ contractual specifications. f. Only covers waste and used equipment. g. Only covers nitrocellulose, steel, and textiles. h. Voluntary program at importers’ discretion (for trade facilitation); may be undertaken simultaneously with the quality–quantity program. i. Only covers goods of certain categories and origins published in Article 10 of the “Agreement on Automatic imported Advice”; are subject to PSI if their unit value is below estimated prices published by the government. j. Only covers certain imports at the discretion of the government. 180 Customs Modernization Handbook

Annex 8.E Checklist for Customs that there is no deterrent), and are they being Valuations effectively applied? • Is the valuation legislation fully in line with the WTO ACV? Further Reading • Has sufficient training been given to both cus- Finger, Michael J., and Philip Schuler. 1999. “Implementation of toms and importers, or their agents (brokers), to Uruguay Round Commitments: The Development make them fully understand and properly im- Challenge.” Policy Research Working Paper No. 2215. plement the ACV? Washington, D.C.: The World Bank. International Trade Center, and Commonwealth Secretariat. • Are value checks at the time of importation lim- 2001. “Frequently Asked Questions on Customs Valuation.” ited and selective, and is selection based on a risk Geneva. analysis and management system? Low, Patrick. 1995. “Pre-Shipment Inspection Services.” World Bank Discussion Paper No. 278. Washington, D.C.: The • Is the valuation practice consistent with the World Bank. requirements of the ACV, in particular: Rege, Vinod. 2002. “Customs Valuation and Customs Reform.” In Bernard Hoekman, Aaditya Mattoo, and Philip English, – Does customs apply the transaction value of eds. Development, Trade, and the WTO: A Handbook. the imported goods as the primary method of Washington, D.C.: The World Bank. valuation, and if the transaction value cannot WCO (World Customs Organization). 1996. “Brief Guide to the Customs Valuation Code.” Brussels: WCO. be accepted, does it apply the subsequent val- ——. 1997. Compendium: Customs Valuation, with Amending uation methods in strict hierarchical order? Supplements. Brussels: WCO. – If customs has reasonable doubt about the ——. Various Years. Legal Texts on Customs Valuation. See WCO Web site at www.WCOOMD.org/. declared value and deems that the transaction World Trade Organization. Various years. Customs Valuation value method cannot be used, does it properly Agreement, technical information, discussion papers, min- consult with the importer and give the utes of meetings, working documents, decisions and recom- importer the opportunity to respond to cus- mendations, and other work of the Committee on Customs Valuation. See WTO Web site at http://www.wto.org/. toms’ decision? ——. 1993. Agreement on Pre-Shipment Inspection. Geneva. – Does the importer have a right to appeal the www.wto.org/english/docs_e/legal_e/21-psi.pdf decision of customs on the customs value, with first appeal to a higher administrative authority or an independent body, and final References appeal to a judicial authority? The word processed describes informally reproduced works that may not commonly be available through libraries. • If the determination of the value cannot be Anson, José, Olivier Cadot, and Marcelo Olarreaga. 2003. “Tariff made at the time of importation, is a mecha- Evasion and Customs Corruption. Does Pre-Shipment nism in place to release the goods provisionally, Inspection Help?” Policy Research Working Paper No. 3156. and solve the valuation questions after release? Washington, D.C.: The World Bank. Customs Cooperation Council. 1985. Customs Valuation, Eco- • Is there a central valuation office at customs nomic Considerations. Document 31906E. Brussels. headquarters, responsible for developing pro- Finger, Michael J., and Philip Schuler. 1999. “Implementation of cedures, supervising the correct and uniform Uruguay Round Commitments: The Development Chal- lenge.” Policy Research Working Paper No. 2215. Washing- implementation of the ACV, ensuring adequate ton, D.C.: The World Bank. training, and developing or maintaining a cen- Goorman, Adrien. 2004. “Peru.” In Luc De Wulf and José B. tral valuation database? Sokol, eds. Customs Modernization Initiatives. Washington, D.C.: The World Bank. • Does customs have adequate numbers of staff Low, Patrick. 1995. “Pre-Shipment Inspection Services.” World specially trained in customs valuation and Bank Discussion Paper No. 278. Washington, D.C.: The auditing of company accounts? World Bank. • Does customs use a computerized database that Rege, Vinod. 2002. “Customs Valuation and Customs Reform.” In Bernard Hoekman, Aaditya Mattoo, and Philip English, is updated continuously and in a timely manner? eds., Development, Trade, and the WTO: A Handbook. Wash- • When using PSI services, are these services mon- ington, D.C.: The World Bank. itored against established criteria? WCO (World Customs Organization). 1977. The Inter- national Convention on Mutual Administrative Assistance • Are the penalties for undervaluation adequate, for the Prevention, Investigation and Repression of are they realistic (neither too high, nor so low Customs Offences. Signed in Nairobi on June 9, 1977. Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 181

www.wcoomd.org/ie/EN/Recommendations/naireng. ——. 2001. “Implementation-Related Issues and Concerns.” pdf. WTO Document WT/MIN(01)/17. November 20. ——. 1996. Brief Guide to the Customs Valuation Agreement. ——. 2002. Compilation of Discussions in Various WTO Bodies Brussels. on Implementation-Related Issues Concerning Customs WTO (World Trade Organization). 1990. GATT Document Valuation—Background Note by the Secretariat. Document MTN.GNG/NG8/W/73. Geneva. G/VAL/W/97 of March 26, 2002. Geneva. ——. 1993. Agreement on Pre-Shipment Inspection. Geneva. Yang, Dean. 2003. “How Easily Do Lawbreakers Adapt to www.wto.org/english/docs_e/legal_e/21-psi.pdf Increased Enforcement? Philippine Smugglers’ Responses to ——. 1994. Agreement on Customs Valuation. Decision 6.1. a Common Customs Reform.” University of Michigan. Geneva. Processed.

RULES OF ORIGIN, TRADE, AND CUSTOMS

Paul Brenton and Hiroshi Imagawa

TABLE OF CONTENTS LIST OF TABLES Defining Origin 184 9.1 Involvement of Customs in Issuing, Checking, Methods for Determining Substantial and Providing Information on Preferential Transformation 185 Certificates of Origin for Exporters 205 Status of the Harmonization Work Program 9.2 Resource Implications of Rules of Origin in for Nonpreferential Rules of Origin 187 Preferential Trade Agreements 206 The Definition of Preferential Rules 9.3 Resource Implications of Rules of Origin in of Origin 191 Preferential Trade Agreements 208 Rules of Origin in Existing Free Trade and 9.A.1 Summary of the Different Approaches to Preferential Trade Agreements 197 Determining Origin 210 The Economic Implications of Rules 9.B.1 Rules of Origin in Existing Free Trade and of Origin 199 Preferential Trade Agreements 211 Rules of Origin and the Utilization of Trade Preferences 200 LIST OF FIGURES Rules of Origin and Economic Development 202 9.1 Regional Trade Agreements in Eastern and Southern Africa 207 Customs and the Costs of Administering Preferential Rules of Origin 204 The Doha Round and Rules of Origin 208 LIST OF BOXES Key Operational Conclusions 209 9.1 Example of Restrictive Rules of Origin: The Annex 9.A Summary of the Different Approaches Case of EU Imports of Fish 192 to Determining Origin 210 9.2 More Restrictive Rules of Origin: The Case of Annex 9.B Rules of Origin in Existing Free Trade Clothing Under NAFTA Rules 197 and Preferential Trade Agreements 211 Further Reading 212 References 212

This chapter has benefited from the comments and suggestions Determining the country of origin or “nationality” of Antoni Estevadeordal, Moshe Hirsch, Holm Kappler, Kunio of imported products is a requirement for applying Mikuriya, Mark Pearson, and Kati Suominen, to whom the basic trade policy measures such as tariffs, quanti- authors are most grateful. This paper reflects the views of the authors and should not in any way be attributed to the organiza- tative restrictions, antidumping and countervailing tions with which they are or have been affiliated. duties, and safeguard measures as well as for 183 184 Customs Modernization Handbook

requirements relating to origin marking, public impact that rules of origin can have. It concentrates procurement, and for statistical purposes. Such on the implications of rules of origin for customs, objectives are met through the application of basic drawing on a recent survey of customs administra- or nonpreferential rules of origin. Countries that tions throughout the world. The main conclusion is offer zero or reduced duty access to imports from that the specification and implementation of rules certain trade partners will apply another and often of origin can have significant effects both on different set of preferential rules of origin to deter- traders and on the work of customs. Complex rules mine the eligibility of products to receive preferen- of origin that differ across countries and agree- tial access. The justification for preferential rules of ments can be a significant constraint on trade and origin is to prevent trade deflection, or simple a substantial burden on customs and on the transshipment, whereby products from nonpre- improvement of trade facilitation. The nature of ferred countries are redirected through a free trade the rules of origin can act to undermine the stated partner to avoid the payment of customs duties. intentions of preferential trade agreements. Hence the role of preferential rules of origin is to The first section of this chapter explains what ensure that only goods originating in participating is meant by origin. The second section examines countries enjoy preferences. Therefore, preferential methods for determining substantial transforma- rules of origin are integral parts of preferential tion. The third section discusses the current situa- trade agreements such as bilateral and regional free tion with regard to nonpreferential rules of origin, trade agreements and the nonreciprocal prefer- where a concerted attempt (yet to bear fruit) has ences that industrial countries offer to developing been made to harmonize the rules regarding wholly countries. obtained products and substantial transformation. The nature of rules of origin and their applica- The fourth section elaborates on the definition of tion can have profound implications for trade flows preferential rules of origin for which, to date, there and for the work of customs. Rules of origin can be has been no attempt to achieve harmonization and designed in such a way as to restrict trade and for which there are no real and effective multilateral therefore can and have been used as trade policy disciplines. The fifth section looks at the rules of instruments. The proliferation of free trade agree- origin in existing free trade and preferential trade ments with accompanying preferential rules of ori- agreements. The sixth section reviews the economic gin is increasing the burdens on customs in many implications of rules of origin. The seventh section countries with consequent implications for trade discusses the links between the rules of origin and facilitation. Perhaps surprisingly, given their poten- the use of trade preferences. The eighth section tial to influence trade flows, rules of origin is one analyzes the use of the rules of origin as a tool of area of trade policy that has been subject to very lit- economic development. The ninth section deals tle discipline during the almost 50 years of the mul- with the costs of administering preferential rules of tilateral rules–based system governed by the origin by customs. The tenth section looks at the General Agreement on Tariffs and Trade (GATT) Doha Round and the rules of origin. The final sec- and more recently the World Trade Organization tion provides some operational conclusions. (WTO). It is also worth noting that during this period the determination of the country of origin Defining Origin of products has become more difficult as technological change, declining transport costs, and the When a product is produced in a single stage or is process of globalization have led to the splitting up wholly obtained in one country the origin of the of production chains and the distribution of differ- product is relatively easy to establish. This applies ent elements in the production of a good to differ- mainly to natural products and goods made ent locations. The issue becomes which one or entirely from them and hence products that do not more of these stages of production define the coun- contain imported parts or materials. Proof that the try of origin of the good. product was produced or obtained in the preferen- This chapter seeks to summarize the key issues tial trade partner is normally sufficient. For all relating to both preferential and nonpreferential other cases in which two or more countries have rules of origin and to highlight the economic taken part in the production of the good, the rules Rules of Origin, Trade, and Customs 185 of origin define the methods by which it can be Machinery, plant or laboratory equipment, determined in which country the particular prod- whether or not electrically heated (excluding uct has undergone sufficient working or processing furnaces, ovens and other equipment of heading or has been subject to a substantial transformation 8514), for the treatment of materials by a (in general these terms can be used interchange- process involving a change of temperature such ably). A substantial transformation is one that con- as heating, cooking, roasting, distilling, rectify- veys to the product its essential character. ing, sterilizing, pasteurizing, steaming, drying, evaporating, vaporizing, condensing or cooling, Methods for Determining other than machinery or plant of a kind used for Substantial Transformation domestic purposes; instantaneous or storage water heaters, non-electric (HS 8419). Unfortunately, there is no simple and standard rule of origin that can be identified as determining the However, the HS was not designed specifically as nationality of a product. The International Con- a vehicle for conferring country of origin; its pur- vention on the Simplification and Harmonization pose is to provide a unified commodity classifica- of Customs Procedures (the Revised Kyoto Con- tion for defining tariff schedules and for the collec- vention) defines (in Annex D1 to the convention) tion of statistics. Thus, in particular cases it can be the three main techniques for the determination of argued that change of tariff heading will not iden- origin: change of tariff classification, value-added, tify substantial transformation, while in other cases and specific manufacturing process. substantial transformation can occur without change of tariff heading. As a result, schemes using the change of tariff heading criterion usually pro- Change of Tariff Classification vide for a wide range of exceptions so that other Origin is granted if the exported product falls into a criteria must be satisfied to confer origin. different part of the tariff classification to any The change of tariff classification can provide both imported inputs that are used in its production. a positive test of origin, by stating the tariff classifica- This tariff-shift method forms the basis of the tion of imported inputs that can be used in the pro- efforts by the World Customs Organization (WCO) duction of the exported good (for example, those in a to harmonize nonpreferential rules of origin. different heading), and a negative test by stating cases Application of this approach has been enabled where change of tariff classification will not confer by the widespread adoption of the Harmonized origin. For example, in the North American Free System (HS) whereby the majority of countries Trade Agreement (NAFTA) the rule of origin for throughout the world (more than 190) are now Tomato Ketchup, which is defined at the subheading classifying goods according to the same harmo- or six-digit level of the HS, states that a change to nized categories. There is, however, the issue of the Ketchup (HS 210320) from imported inputs of any level of the classification at which change is chapter will confer origin except subheading 200290 required. Typically it is specified that the change (Tomato Paste). In other words, any ketchup made should take place at the heading level (that is, at the from imported fresh tomatoes will confer origin but four-digit level of the HS).1 The following are ketchup made from tomato paste imported from out- examples of simple HS headings: side the area will not qualify for preferential treatment even though the basic change of tariff classification • beer made from malt (HS 2203) requirement has been satisfied.2 In European Union • umbrellas and sun umbrellas (HS 6601). (EU) preferential rules of origin, bread, biscuits and pastry products (HS 1905) can be made from any The following is an example of a more sophisti- imported products except those of chapter 11, which cated heading: includes flour, the basic input to these products.

1. The Harmonized System comprises 96 chapters (two-digit 2. The apparent reason for this rule in NAFTA is to protect pro- level), 1,241 headings (four-digit level), and around 5,000 sub- ducers of tomato paste in Mexico from competition from pro- headings (six-digit level). ducers in Chile. See Palmeter (1997). 186 Customs Modernization Handbook

The World Trade Organization (WTO) Agree- sensitive to changes in the factors determining ment on Rules of Origin (the Origin Agreement or production cost differentials across countries, such ARO) stipulates that preferential and nonpreferen- as exchange rates, wages, and commodity prices. tial rules of origin should be based on a positive For example, operations that confer origin in one standard. However, it allows the use of negative location may not do so in another because of dif- standards (a definition of what does not confer ori- ferences in wage costs. An operation that confers gin) if they “clarify a positive standard.”The latter is origin today may not do so tomorrow if exchange sufficiently vague as to have had very little impact rates change. so that EU and NAFTA rules of origin, for example, are rife with negative standards. Specific Manufacturing Process Thus, while in principle the change of tariff classification can provide for a simple uniform This criterion delineates for each product or prod- method of determining origin, in practice instead uct group certain manufacturing or processing of a general rule there are often many individual operations that define origin (positive test), or rules. Nevertheless, the change of tariff classifica- manufacturing or processing procedures that do tion rule, once defined, is clear, unambiguous, not confer origin (negative test). The formulation and easy for traders to learn. It is relatively of these rules can require the use of certain origi- straightforward to implement. In terms of docu- nating inputs or prohibit the use of certain non- mentary requirements it requires that traders originating inputs. For example, EU rules of origin keep records that show the tariff classification of for clothing products stipulate “manufacture from the final product and all the imported inputs. yarn,” while the rule for tube or pipe fittings of This may be undemanding if the exporter directly stainless steel stipulates “turning, drilling, reaming, imports the inputs but may be more difficult if threading, deburring and sandblasting of forged they are purchased from intermediaries in the blanks.”3 domestic market. The main advantage of specific manufacturing process rules is that once defined they are clear and unambiguous so that from the outset produc- Value-Added ers are able to clearly identify whether their prod- When the value-added in a particular country uct is originating or not. However, there are also a exceeds a specified percentage, the goods are number of drawbacks with this system, including defined as originating in that country. This crite- obsolescence following changes in technology rion can be defined in two ways, either as the mini- and the documentary requirements, such as an mum percentage of the value of the product that up-to-date inventory of production processes, must be added in the country of origin or as the which may be burdensome and difficult to comply maximum percentage of imported inputs in total with. inputs or in the value of the product. Table 9.A.1 in annex 9.A summarizes the main As in the case of change of tariff classification, advantages and disadvantages of these different the value-added rule has the advantage of being methods of determining sufficient processing or clear, simple, and unambiguous in its definition. substantial transformation. No one rule domi- However, in actual application the value-added nates others as a mechanism for formally identify- rule can become complex and uncertain. First, ing the nationality of all products. Each has its there is the issue of the valuation of materials, advantages and disadvantages. However, it is clear which may be based upon ex-works, FOB, CIF, or that different rules of origin can lead to different into-factory prices. Each method of valuation will determinations of origin. For example, in the case give a different, here ascending, value of nonorigi- of nonpreferential rules of origin, the United nating materials. Second, the application of this States changed its rules for textile and clothing method can be costly for firms who will require sophisticated accounting systems and the ability to 3. The rule for this product also requires that the total value of resolve often complex accounting questions. the forged blanks should not exceed 35 percent of the ex-works Finally, under the value-added method origin is price of the product. Rules of Origin, Trade, and Customs 187 products in 1996 in a way that changed the origin Status of the Harmonization Work of products previously deemed as being of Euro- Program for Nonpreferential pean origin as originating in Asian countries and Rules of Origin hence subject to quantitative restrictions under Harmonization of rules of origin has long been a the Agreement on Textiles and Clothing. These dream of customs and trade officials. Under the changes also required that products such as silk General Agreement on Tariffs and Trade (GATT, scarves previously labeled “made in Italy” had to established 1947) the contracting parties to the be relabeled “made in Pakistan,” with implications GATT were free to determine their own rules of for the purchasing decisions of consumers who origin. Nevertheless, records show that the GATT take the country of origin indicated on such labels first considered the harmonization of rules of ori- as an indicator of quality (Dehousse, Ghemar, and gin in 1951. Two years later, in 1953, following a Vincent 2002). recommendation from the International Chamber In the late 1980s, the EU changed its nonprefer- of Commerce for the adoption of a common ential rules of origin for photocopiers to ensure definition of nationality of manufactured goods, that the operations carried out in the United States a GATT working party was established on the by a subsidiary of a Japanese company did not con- “Nationality of Imported Goods” and examined fer origin to the U.S. The products concerned were both the definition of origin and proof of origin. deemed to be originating in Japan and subject to Despite the fact that these early GATT attempts antidumping duties (Hirsch 2002). Under prefer- were not successful, the WCO took a significant step ential schemes, producers who are eligible for pref- forward through the establishment of the Interna- erential access to different markets under different tional Convention on the Simplification and Har- schemes with different rules of origin may find that monization of Customs Procedures (the Revised their product qualifies under some schemes but not Kyoto Convention) that came into force in 1974. others. For example, a company in a developing Annexes D.1 to D.3 to the convention deal with country may find that its product qualifies for pref- rules of origin, including administrative matters. erential access to the EU market under the EU’s Although not many members have ratified these General System of Preferences (GSP) scheme but annexes,4 the annexes have been influential because that the exact same product does not satisfy the they set out the first international standards or rules of origin of the U.S. GSP scheme. models in the field of origin. For instance, a number While it is difficult to derive specific recommen- of existing preferential and nonpreferential rules of dations with regard to the best approach to the origin, including those of non-contracting parties design of rules of origin, certain general proposi- to the Revised Kyoto Convention, have adopted tions can be made which apply to both preferential similar or almost identical definitions of wholly and nonpreferential rules of origin: obtained goods as those set out in Annex D.1. But with regard to manufactured goods, that annex does • Rules of origin should be simple but precise, not provide a single set of standard rules of origin transparent, predictable, and stable. Rules of concerning the criteria for identifying a substantial origin should avoid or minimize scope for inter- transformation. Instead, it explains the most com- pretation and administrative discretion. monly used criteria—change in tariff classification, • Rules of origin should be designed to have the value-added, and specific manufacturing or pro- least trade distorting impact and should not cessing operations—and suggests recommended become a disguised nontariff barrier to trade. practices with regard to their use. Nevertheless, each Protectionist lobbying should not compromise the specification of the rules of origin. • As much as possible the rules should be consis- 4. There are 31 annexes to the Revised Kyoto Convention. Con- tracting parties to the convention do not have to accept all the tent across products and across agreements. The annexes, but they are required to notify the Secretary General of greater the inconsistencies, the greater the com- the WCO that they accept one or more annexes. Out of the plexity of the system of rules of origin both for 63 current contracting parties to the convention, 26 members have accepted Annex D.1, 25 have accepted Annex D.2, and companies and for officials administering the 8 have accepted Annex D.3). A particular annex enters into force various trade schemes. when at least five members ratify or accede to that annex. 188 Customs Modernization Handbook

administration has remained free to choose any one predictability) to govern the application of rules or combination of those criteria and to specify those of origin. Another compromise agreement was criteria how they wish. reached prior to the Brussels Ministerial Meeting in With regard to the change of tariff classification December 1990 that the harmonized rules of origin rule, the underlying technical constraint to harmo- should cover nonpreferential trade only. A nonbind- nization in the past was the absence of a common ing common declaration with regard to preferential internationally agreed on tool for classifying prod- rules of origin was agreed to at this meeting. This ucts. Different countries could classify the same contained a number of general exhortations to good in different ways. A major breakthrough came members to make their preferential rules clear, to in 1988 with the entry into force of the Harmo- base them on a positive standard, to publish them in nized System so that all major trading nations now accordance with GATT rules, and to assert that use the same classification system for coding prod- changes should not be applied retroactively and that ucts for customs and for statistical purposes.5 judicial review should be available. However, because of the trade policy implications The outcome of these negotiations was com- (antidumping measures, for example), attempts to piled as an Agreement on Rules of Origin annexed harmonize rules of origin only occurred following to the Marrakesh Agreement Establishing the inclusion of the issue on the negotiating agenda of World Trade Organization, which entered into a large-scale multilateral trade negotiation, the force in January 1995. The Origin Agreement man- Uruguay Round of GATT negotiations. dated the Technical Committee on Rules of Origin (TCRO) under the auspices of the WCO and the Committee on Rules of Origin (CRO) under the The Uruguay Round and the Agreement WTO to undertake a Harmonization Work Pro- on Rules of Origin gram (HWP) for nonpreferential rules of origin, to During the June 1989 Uruguay Round meetings, be completed within a three-year period. Under the Japan proposed to negotiate the harmonization of Origin Agreement, members are obliged to adhere preferential and nonpreferential rules of origin, as to the following disciplines after the implementa- well as a mechanism for notification, consultation, tion of the results of the HWP (Article 3: Disci- and dispute settlement. This was motivated, among plines after the Transition Period): other things, by a series of trade disputes during the 1980s between Japan and other East Asian coun- • Rules of origin are applied equally for all pur- tries, on the one hand, and their major trading poses (for example, application of most favored partners, on the other. Some of these trade disputes nation [MFN] treatment, antidumping and stemmed from the application of rules of origin in countervailing duties, safeguard measures, ori- conjunction with antidumping proceedings. While gin marking requirements, any discriminatory the United States endorsed the idea to include this quantitative restrictions or tariff quotas, govern- issue on the Uruguay Round agenda, the European ment procurement, trade statistics). Community and the European Free Trade Associa- • Rules of origin determine origin of goods either tion (EFTA) countries were initially reluctant. They by definition of wholly obtained goods or the considered the issue better suited to the more tech- substantial transformation criteria. nical WCO and believed that the discussion should • Rules of origin observe national treatment and not address the rules of origin used under preferen- MFN requirements. tial arrangements (Croome 1995). • Rules of origin must be administered in a con- In February 1990, agreement was reached that the sistent, uniform, impartial, and reasonable negotiating group should define policy principles manner. (for example, nondiscrimination, transparency, • Laws, regulations, judicial decisions, and administrative rulings of general application relating to rules of origin must be published. 5. The HS is used by over 190 countries and customs or eco- • Origin assessments must be provided, upon nomic unions (including 112 contracting parties to the HS Con- vention), representing about 98 percent of world trade (as of the request, within 150 days (and be valid for three time of writing). years). Rules of Origin, Trade, and Customs 189

• Changes in rules of origin are not to be applied General Council has mainly argued about the so- retroactively. called “implications issue” as to whether the har- • Any administrative action regarding the deter- monized nonpreferential rules of origin (HRO) mination of origin is subject to possible review. should be applied on a mandatory basis to other • Confidentiality of information must be observed. WTO instruments, in particular antidumping and countervailing duty proceedings.10 Despite all its efforts, the WTO has not been able to complete the The Harmonization Work Program and the Draft Harmonized Nonpreferential Rules of Origin HWP; the deadline has been exceeded several times. Imagawa and Vermulst, in Rules of Origin in a Glob- What are the underlying factors that have hin- alized World: A Work in Progress (2003) studied the dered the completion of the HWP? The process of issue of the HWP and rules of origin, and this harmonization has required the standardization of forms the basis of the following discussion. definitions, rules, and practices that differ across From its inaugural session in February 1995, the countries and regions. This has required a consen- TCRO undertook technical work, developing defi- sus-building approach that has been time consum- nitions of wholly obtained goods and minimal ing because the issues were highly technical and the operations or processes and elaborating upon sub- work involved was extremely voluminous and labor stantial transformation criteria. At the same time, intensive; the disparity among delegations with the Geneva-based CRO has carried out the policy regard to technical arguments on certain crucial work, including endorsing the results of the product-specific and other issues was deeply rooted TCRO’s technical review. It took nearly four years in national industrial and trade policy, so members (and 20 formal and informal sessions) for the had to be ready to change the national policy in TCRO to complete its technical review. A key fea- question if they accepted an alternative position. ture of this process was discussion of the rules on a The Origin Agreement itself (Article 9.2c) required product-by-product basis, as dictated by the Origin that the harmonization work of the TCRO be “con- 6 Agreement. The work of the TCRO was submitted ducted on a product sector basis, as represented by to the CRO in May 1999. The TCRO agreed to various chapters or sections of the HS nomencla- product-specific rules for over 500 of 1,241 head- ture.” This reflects the view of those who believe 7 ings; 486 issues were referred to the CRO. The that such an approach is necessary to achieve non- CRO has continued the HWP based on the results preferential origin rules that are “objective, under- of the TCRO’s technical review and has substan- standable and predictable,” the objectives defined 8 tially narrowed the number of outstanding issues. in the Origin Agreement. However, it appears that In September 2002, 94 core policy issues were when negotiations are conducted on a product-by- referred to the WTO General Council and negotia- product basis it is inevitable that specific domestic 9 tions at the ambassadorial level still continue. The interest groups will become involved, ensuring that different countries adopt different and often en- 6. The Origin Agreement denies the possibility of a conceptual trenched positions. definition of substantial transformation in terms of a simple It is important to note that most of the core rule, based, it seems, on the assumption that such a rule would lack precision and would be difficult to implement. Instead, the problems relating to product-specific rules that are TCRO is mandated to “consider” use of change of tariff sub- still to be resolved relate to products of particular heading or heading on a product basis (Art. 9.2(c)(ii)), although relevance in the exports of developing countries. Of the supplementary use of other methods is provided for. the 94 remaining key product-specific issues, 69 (or 7. The scope of an issue varies from one split (sub) heading to 75 percent) are concerned with agricultural prod- several HS chapters. Consequently, the fact that 486 issues exist does not mean that there are unresolved product-specific rules ucts (45) and textiles and clothing (24) (WTO for 486 headings. 8. By the end of 2002, 349 issues out of 486 had been resolved by 10. According to the WTO Secretariat, strong support has the CRO (WTO 2002c). emerged among delegations for the notion that “whenever there 9. The CRO was to complete its work by year end 2001. The dead- is a mandatory legal requirement in the determination of origin line was initially extended to July 2003 for 94 core policy issues and in the WTO Agreement other than the Agreement on Rules of December 2003 for the remaining technical work. These deadlines Origin, the harmonized rules of origin must be used” (see WCO were extended to July 2004 and December 2004, respectively. 2003). 190 Customs Modernization Handbook

2002c). These are products that are subject to the Implementing the HRO: Implications highest levels of protection in industrialized coun- The benefits of harmonized rules of origin to the tries. Only 10 percent of the outstanding issues globalized world economy cannot be overstated. concern engineering products, which dominate the The application of a single set of rules of origin exports of the industrialized countries. for the various nonpreferential purposes would save The draft HRO consists of Definitions, General time and cost to traders and customs officers all over Rules, and two appendixes. When the HWP is com- the world. It would add to the certainty and pre- pleted, the results will be annexed to the Origin dictability of trade by ensuring consistency of origin Agreement as an integral part thereof (Article 9.4). determination across countries and across time. Definitions and General Rules are general provi- Harmonized nonpreferential rules of origin would sions governing the entire HRO. Appendix 1 sets also help to avoid potential trade disputes arising out two rules and definitions for wholly obtained from uncertainties in the determination of the coun- goods, which evolved from the current Kyoto defi- try of origin with regard to antidumping and coun- nitions. It consists of two parts: goods wholly tervailing duties, safeguard measures, origin marking obtained in one country and products taken from requirements, quantitative restrictions or tariff rate outside the country (such as from the high seas). It quotas, and government procurement decisions. is the latter group that is still under discussion in The WTO Secretariat has been notified that, as the WTO. Appendix 2 consists of product-specific of the time of writing, 41 WTO members do not rules of origin for goods that are not wholly use nonpreferential rules of origin in their customs obtained (there is a sequential application of these and trading systems.11 When the HRO are estab- two appendixes with Appendix 1 having prece- lished as an integral part of the ARO, these mem- dence over Appendix 2). Seven rules, which are to bers will be expected to reform their legislative and be applied for the purposes of Appendix 2 only, administrative systems as follows: have been proposed and largely agreed on. Rule 3 is the core (Determination of Origin) and sets out a Legislative Matters series of provisions to be applied in sequence. • For those countries that do not have nonprefer- In these rules product-specific requirements are ential rules of origin, there will be a need to set out for each HS heading or subheading. Two adopt and implement the HRO. types of rules are specified, primary and residual • For those countries that have one or more non- rules. Primary rules, in the form of change-in-tariff- preferential rules of origin, those rules will have classification, value-added, or specific-process rules, to be aligned to the HRO and implemented. or a combination of these rules, are applied first • Because the TCRO preferred not to harmonize (there is a sequential application between the pri- the procedural matters of the HRO, each country mary and residual rules). There is no precedence will need to establish or modify its national rules among these different primary rules, that is, the pri- to implement the HRO according to domestic mary rules are considered to be equal. Regardless of legislative or administrative procedures. the placement of the rules, that is, at the chapter, heading, or subheading level of the HS, there is no Organizational Structure hierarchy among them. The residual rules deter- • For those countries that do not have central and mine the country of origin of a good that fails to regional units responsible for the HRO, a proper meet the primary rule, such as a change of heading organizational structure to implement the HRO rule. It is worth noting that while preferential rules will become necessary. of origin lead to either a “yes” (qualified) or “no” (not qualified) answer, under the HRO a decision defining the country of origin must ultimately be 11. These members are: Bolivia; Brazil; Brunei Darussalam; Burundi; Chad; Chile; Costa Rica; Cyprus; Dominica; Dominican made; there will be no good for which the country Republic; El Salvador; Fiji; Guatemala; Haiti; Honduras; Iceland; of origin cannot be determined. Residual rules do India; Indonesia; Jamaica; Kenya; Macao, China; Malaysia; Mal- have a hierarchical structure, with those defined for dives; Malta; Mauritius; Mongolia; Namibia; Nicaragua; Oman; Pakistan; Panama; Papua New Guinea; Paraguay; Philippines; specific products at the chapter level taking prece- Singapore; Suriname; Thailand; Trinidad and Tobago; Uganda; dence over the general residual rules. United Arab Emirates; and Uruguay (WTO 2002b). Rules of Origin, Trade, and Customs 191

Capacity Building and Dissemination insufficient. It is in this context that the chapter of Information now proceeds to a more detailed discussion of the • For those countries that do not have nonprefer- preferential rules of origin and their impact on ential rules of origin, extensive training and trade and customs. orientation programs for customs officials, trade officials, and traders must be planned and con- The Definition of Preferential ducted in time for the implementation of the Rules of Origin HRO. Therefore, international organizations, such as the WCO, and donor countries might Preferential rules of origin define the conditions wish to take this need into account in their plan- that a product must satisfy to be deemed as origi- ning activities. nating in a country that is eligible for preferential • For those countries that have one or more non- access to a partner’s market and has not simply preferential rules of origin, the changes between been transshipped from a nonqualifying country or present and future rules need to be communi- been subject to only minimal processing. In prac- cated to customs officials, trade officials, and tice, the greater the level of work that is required by traders. the rules of origin, the more difficult it is to satisfy those rules and the more restrictive those rules are in constraining market access relative to what is The Harmonization of Nonpreferential Rules required simply to prevent trade deflection. This is of Origin: Conclusions particularly true for small less-diversified develop- After nearly a decade of negotiations, an increasing economies. Thus, the higher the amount of ingly defined shape of the HRO has emerged. The domestic value-added required by a value-added HRO are guided by the clear principles laid down rule, the more difficult it will be to comply with, in the ARO. From the technical point of view, it because there will be less scope for the use of has been observed that members cannot pursue imported parts and materials. A rule of origin that absolute consistency between product-specific prevents the use of imported flour in the produc- rules of origin as long as the results of the HWP are tion of pastry products such as biscuits, for exam- the fruit of compromise. However, such a fact does ple, will be excessively restrictive for countries that not undermine the benefit of having harmonized do not have a competitive milling industry. nonpreferential rules of origin. Transparency and Preferential rules of origin often differ from consistency in origin determination cannot be nonpreferential rules. In the main it is the require- ensured without a clear standard. Nevertheless, the ments relating to specific processing that vary and existence of a far-from-perfect standard is better are usually more demanding in preferential trade than the absence of any standard whatsoever, as agreements. However, there are also cases, some of shown by the benefits of introducing the HS, which them initially rather surprising, where rules relat- has led to the benefits of a “common language” for ing to what would appear to be wholly obtained purposes of classification. Thus, whatever the products are more restrictive in preferential trade applicable rules of origin are, once harmonized, agreements. (See box 9.1 for such an example.) those rules are the same both in the exporting and in the importing country. In a highly intercon- Methods for Determining Sufficient Processing nected world there can be substantial benefits from having a single set of rules applied in all WTO With regard to requirements relating to sufficient member countries. processing, change of tariff classification is used in A further advantage of harmonized nonprefer- the vast majority of current preferential trade ential rules of origin would be that they would pro- agreements and is featured in both EU agreements vide a benchmark by which to assess rules of origin and NAFTA. WTO research shows that of 87 free applied on preferential trade flows. Countries seek- trade agreements (FTAs) and other preferential ing rules of origin that deviate from the nonprefer- trade agreements investigated, 83 used change of ential rules could be asked by partners to explicitly tariff classification in the determination of origin justify why the nonpreferential rules of origin are (WTO 2002a). Most agreements specify that the 192 Customs Modernization Handbook

BOX 9.1 Example of Restrictive Rules of Origin: The Case of EU Imports of Fish

On the face of it, determining the origin of fish, Under the EU’s Cotonou Agreement, which fresh or chilled, would appear to be straightfor- gives preferential access to the EU market to ward with origin being conferred to the country countries in Africa, the Caribbean, and the whose trawler caught the fish; there is, after all, Pacific (ACP), the rules of origin for fish are no apparent import content in the fish. How- slightly different and a little more liberal than ever, in practice the determination of origin for those for GSP countries: fish caught outside territorial waters but within • The vessel must be registered in the EU or any the exclusive economic zone of a country can be ACP state. complex. To receive preferential access to the EU • The vessel must sail under the flag of any ACP under the GSP, all of the following conditions country or the EU. must be satisfied: • The vessel must be at least 50 percent owned • The vessel must be registered in the benefici- by nationals of any ACP or EU state, and the ary country or in the EU. chairman and the majority of the board mem- • The vessel must sail under the flag of the ben- bers must be nationals of any of those eficiary country or of a member state of the countries. EU. • Under certain conditions the EU will accept • The vessel must be at least 60 percent owned vessels chartered or leased by the ACP state by nationals of the beneficiary country or the under the Cotonou Agreement. EU or by companies with a head office in • Under Cotonou, 50 percent of the crew, the either the beneficiary country or an EU state of master, and officers must be nationals of any which the chairman and a majority of the ACP state or the EU. board members are nationals. So identifying the nationality of a fish can be • The master and the officers must be nationals a complex task. of the beneficiary country or an EU member and at least 75 percent of the crew must be Source: Official Journal of the European nationals of the beneficiary country or the EU. Communities 2000.

change should take place at the heading level (that change of tariff classification, but the level at which is at the four-digit level), although in many agree- change is required varies across products. This typi- ments, especially those involving the EU and in cally leads to considerable complications for cus- NAFTA, the tariff shift requirement varies across toms officials in the determination of origin in pref- different products. For example, other research erential agreements. In contrast, many of the shows that in NAFTA, while around 40 percent of agreements involving developing countries tend to tariff lines require change of tariff heading, for provide general rules of origin and eschew the most tariff lines (54 percent) it is change of chapter detailed product-by-product approach adopted by (two-digit level) that is required (Estevadeordal the EU and NAFTA. Further, in EU agreements and Suominen 2003). The requirement of change and in NAFTA for certain products, rules will be of chapter is more restrictive than change of head- stipulated that require satisfaction of more than one ing. For a small number of products in NAFTA it is method to confer origin. This is clearly more restric- only change of subheading that is required. tive than a requirement to satisfy a single method. While change of tariff heading is used in the For example, in NAFTA rules of origin, the require- majority of preferential trade agreements, it is sel- ment for passenger motor vehicles (HS 870321) is a dom the only method applied. It is also important change to subheading 8703.21 from any other head- to note that in some agreements, for example, those ing, provided there is a regional value content of not involving the EU, change of tariff classification is less than 50 percent under the net cost method. applied to some products while the other methods In some agreements for certain products, two or (value-added rules and specific technical processes) more methods will be stipulated and satisfaction of will be applied to other products. In the NAFTA any one of the methods will be sufficient to confer rules of origin, all rules tend to require at least origin. For example, in the EU rules of origin, the Rules of Origin, Trade, and Customs 193 requirements for wooden office furniture (HS low labor cost locations, which will find it more dif- 940330) are ficult to add the necessary value relative to higher cost locations, and is likely to cause particular • Manufacture in which all the material used is problems of compliance for companies in develop- classified within a heading other than that of the ing countries that lack the sophisticated accounting product, or systems necessary under this method. • Manufacture in which the value of all the mate- Rules based on specific manufacturing processes rials used does not exceed 40 percent of the ex- are widely used (in 74 of the 83 preferential trade works price of the product. agreements analyzed by the WTO [2002a], often in Providing alternative means of satisfying origin conjunction with change of tariff classification or requirements is more liberal and will facilitate trade the value-added criterion or both, and are a partic- under preferential trade agreements. ular feature of the rules applied to the textiles and With regard to the value-added requirements, clothing sectors. the WTO concludes that on average a threshold on Two examples of rules of origin and their impli- domestic content of between 40 and 60 percent is cations for conferring origin follow: the norm, with the average import requirement • A producer imports cotton fabric (HS5208), being between 60 and 40 percent (WTO 2002a). In which is then dyed, cut, and made up into cotton the EU agreements there are various thresholds on shirts (HS6105). The value of the imported import content ranging from 30 to 50 percent. In materials amounts to 65 percent of the value of NAFTA there is a domestic content requirement of the shirts. In this case the product would be orig- either 50 or 60 percent according to the method inating under the change of tariff heading rule. used to value the product. A value-added require- The product would not be originating under a ment of 50 percent can be very demanding in the value-added rule requiring an import content of globalized world of today in which production has no more than 60 percent (or a domestic content become split across, often many, countries. A fur- of more than 40 percent). A specific manufactur- ther feature of globalization is that in a range of ing process requirement, that the product be products such as clothing products, computers, manufactured from yarn (the production stage and telecommunications equipment, much of the before fabric), would mean that the product value-added lies in the intermediate products. High would not be originating.12 value-added requirements, therefore, become par- • A doll (HS9502) is made from imported plastics ticularly difficult for developing countries to satisfy and imported ready-made garments and because it is the final labor-intensive stage that they footwear. The value of the imported materials host. In this way restrictive rules of origin act to amounts to 50 percent of the value of the doll. In constrain specialization at the country level. this case the doll would be originating under a In general, these percentage value rules are value-added rule requiring an import content of rarely applied as the sole test of origin and are no more than 60 percent but would not be origi- typically applied with the change of tariff classifi- nating under the change of tariff heading because cation. Exceptions are Australia New Zealand garments and accessories for dolls are normally Closer Economic Relations Trade Agreement classified under the same tariff heading as dolls. (ANZCERTA), South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA), Most preferential trade agreements also specify a and AFTA, which have percentage requirements range of operations that are deemed to be insuffi- without any additional need for change of tariff cient working or processing to confer origin. Typi- heading, although all three agreements do require cally these include simple packaging operations, that the last process of manufacture be undertaken in the exporting country. 12. This yarn-forward rule is common in EU agreements for all As noted, under the value-added method origin clothing products. The United States typically applies an even is sensitive to changes in factors such as exchange stricter process rule that the clothing be made from fibers, meaning that both spinning into yarn and weaving into fabric as rates, wages, and commodity prices. This means well as the making up into clothing are required in the exporting that the value-added method will tend to penalize country to confer origin on the product. 194 Customs Modernization Handbook

such as bottling, placing in boxes, bags, and cases, the stage of fibers)—can be treated as originating in and simple fixing on cards and boards; simple mix- the beneficiary country. Thus, originating fabrics ing of products and simple assembly of parts; and can be imported from the EU and used in the pro- operations to ensure the preservation of products duction of shirts, which will qualify for preferential during transport and storage. These requirements access to the EU. However, the EU is often not the act to ensure that these basic operations do not least-cost supplier of inputs, so the benefits of this confer origin even if the basic rule of origin, such as type of cumulation can be limited. If the extra cost change of tariff heading, has been satisfied. of using EU-sourced inputs rather than the lowest cost inputs from elsewhere exceeds the available benefit from preferential access, then cumulation Additional Features of Preferential Rules of Origin will have no effect and there will be no improve- There are several other typical features of the rules ment in market access. of origin of preferential trade schemes that can Next, there can be diagonal cumulation on a influence whether origin is conferred on a product regional basis so that qualifying materials from and hence determine the impact of the scheme on anywhere in the specified region can be used with- trade flows. These are cumulation, tolerance rules, out undermining preferential access. In other and absorption. The treatment of duty drawback words, parts and materials from anywhere in the and of outward processing outside the free trade or region that qualify as originating can be used in the preferential trade partners can also be important. manufacture of a final product that can then be exported with preferences to the partner country Cumulation The basic rules of origin define the market. Diagonal cumulation is widely used in processing that has to be done in the individual EU agreements but is not applied by NAFTA. In beneficiary or partner to confer origin. Cumulation Europe, a pan-European system of rules of origin is an instrument allowing producers to import with diagonal cumulation has been developed that materials from a specific country or regional group governs EU free trade agreements with the EFTA of countries without undermining the origin of the countries and countries in Central and Eastern final product. In effect, the imported materials Europe. Diagonal cumulation is allowed under from the identified countries are treated as being of the EU’s GSP scheme but within a limited set of domestic origin of the country requesting preferen- regional groups that have pursued their own tial access. There are three types of cumulation— regional trade agreements. For example, under the bilateral, diagonal (or partial), and full. EU’s GSP scheme, diagonal cumulation can take The most basic form of cumulation is bilateral place within four regional groupings: Association cumulation, which applies to materials provided by of Southeast Asian Nations (ASEAN), Central either of two partners of a preferential trade agree- American Common Market (CACM), the Andean ment. In this case, originating inputs—that is, Community, and South Asian Association for materials—that have been produced in accordance Regional Cooperation (SAARC). Diagonal cumula- with the relevant rules of origin, imported from the tion allows originating materials from regional partner, qualify as originating materials when used partners to be further processed in another country in a country’s exports to that partner. For example, in the group and treated as if the materials were under the EU’s GSP scheme, the rule of origin for originating in the country where the processing is cotton shirts states that origin is conferred to a ben- undertaken.13 However, this flexibility in sourcing eficiary country if the shirt is manufactured from is constrained by the further requirement that the yarn. That is, nonoriginating yarn may be imported value added in the final stage of production exceed but the weaving into fabric and the cutting and the making up into a shirt must take place in the beneficiary. The EU’s GSP scheme allows for bilateral 13. For both bilateral and regional cumulation there can be an cumulation so that fabric that originates in the additional requirement that the processing carried out be more EU—that is, fabric that has been produced in than “insufficient working or processing.” This is typical in EU agreements but not those of other countries, and requires that accordance with the rule of origin for fabric (in the more than packing, mixing, cleaning, preserving, and simple case of the EU scheme, it has been produced from assembly of parts take place. Rules of Origin, Trade, and Customs 195 the highest customs value of any of the inputs used cumulation, by requiring more stages of produc- from countries in the regional grouping. Thus, for tion or higher value-added to be undertaken in the example, with diagonal cumulation shirt producers lower cost country, may make it more difficult for in Cambodia can use fabrics from Indonesia (pro- the products produced by outsourcing to qualify viding they are originating, that is, produced from for preferential access. However, the documentary the stage of fibers) and still receive duty-free access requirements of full cumulation can be more oner- to the EU, but the value-added in Cambodia must ous than those required under diagonal cumula- exceed the value of the imported fabric from tion. Detailed information from suppliers of inputs Indonesia. Similarly, producers in Nepal can may be required under full cumulation while the import originating fabric from India and still qual- certificates of origin, which accompany imported ify for preferential access to the EU if the value materials, may suffice to show conformity under added in Nepal is sufficient. diagonal cumulation. For this reason it is desirable However, UNCTAD and The Commonwealth that traders be offered the opportunity to use either Secretariat (2001) show how the value-added diagonal or full cumulation. requirement mentioned above can render regional Under full cumulation, all the processing carried cumulation of little value. For example, value- out in participating countries is assessed in decid- added in the making up of clothing in Bangladesh ing whether there has been substantial transforma- ranges from 25 to 35 percent of the value of the tion. Hence, full cumulation provides for deeper product so that the import content of the fabric integration among participating countries. Full from India is around 65 to 75 percent. In this case cumulation is rare and is currently applied in the the value-added requirement placed on regional EU agreements with the EFTA countries; in the EU cumulation is not met and origin of the made-up agreements with Algeria, Morocco, and Tunisia; clothing is not conferred on Bangladesh but on and under the Cotonou Agreements between the India. Regional cumulation still allows clothing EU and the ACP countries. It is also available in the produced in Bangladesh from Indian fabrics prefer- GSP schemes of Japan and the United States; ential access to the EU but not at the zero rate (for among countries within specified groupings; and which Bangladesh is eligible) but at the rate for on a global basis among all developing country which India is eligible, which is a 20 percent reduc- beneficiaries in the schemes of Australia, Canada, tion from the MFN rate. Thus, instead of the zero and New Zealand; as well as in ANZCERTA and duty, which is in principle available to Bangladesh SPARTECA. under the Everything but Arms (EBA) initiative, a For example, a clothing product made in one tariff of over 9 percent would be levied on these country from fabric produced in a regional partner, exports from Bangladesh to the EU. which in turn was made from nonoriginating yarn, Finally, there can be full cumulation whereby any would be eligible for duty-free access to the EU processing activities carried out in any participat- under full cumulation but not under diagonal ing country in a regional group can be counted as cumulation because the fabric would not be qualifying content regardless of whether the pro- deemed originating (the rule of origin for the fabric cessing is sufficient to confer originating status to requires manufacture from fibers). the materials themselves. In certain GSP schemes, A second example follows: Country A provides cumulation is permitted across all developing parts (say chassis for bicycles) to country B, which country beneficiaries. Full cumulation allows for are then processed (painted and prepared) and sent more fragmentation of production processes to country C for final assembly using other locally among the members of the regional group and so produced parts (tires and seat) before being stimulates increased economic linkages and trade exported to country D. Countries B, C, and D par- within the region. Under full cumulation it may be ticipate in the same FTA; country A is not a mem- easier for more developed, higher labor cost coun- ber. The value of the final product (bicycle) tries to outsource labor intensive low-tech produc- exported from country C to country D comprises tion stages to less developed, lower wage partners 25 percent of parts from country A, 25 percent of while maintaining the preferential status of the value-added in country B, and 50 percent of parts goods produced in low-cost locations. Diagonal and value-added in country C. The value of parts 196 Customs Modernization Handbook

from country A comprises 50 percent of the value ing sector were often different and generally less of the intermediate product exported from country favorable than the general rules on tolerance. In B to country C. If there were a 40 percent maxi- many cases the rule is applied in terms of the maximum import content for all products, the bicycle mum weight rather than value of nonoriginating exported from country C to D would qualify for materials that are tolerated, and in cases where the preferential access under full cumulation (only the value threshold is maintained it is set at a lower 25 percent of parts from country A is nonoriginat- level than in the general rule. ing). However, it would not qualify under diagonal cumulation (the value of nonoriginating materials Absorption (or Roll-Up) Principle The absorp- in the product exported by country B exceeds 40 tion principle provides that parts or materials that percent). This intermediate product would not be have acquired originating status by satisfying the rel- treated as originating, and the total of nonoriginat- evant rules of origin for that product can be treated ing materials in the final product is now calculated as being of domestic origin in any further processing as 50 percent of the final price of the bicycle (the and transformation. This is of particular relevance to value from both countries A and B). the value-added test. For example, in the production of a particular part, origin is conferred because Tolerance or De Minimis Tolerance or de min- imported materials constitute 20 percent of the final imis rules allow a certain percentage of nonorigi- price of the part and are less than the maximum 30 nating materials to be used without affecting the percent import content rule of origin. This part will origin of the final product. Thus, the tolerance rule then be treated as 100 percent originating when can act to make it easier for products with nonorig- incorporated into a final product. The 20 percent inating inputs to qualify for preferences under the import content of the part is not taken into account change of tariff heading and specific manufactur- when assessing the import content of the final prod- ing process rules. This provision does not affect the uct. The converse of this is that if the part does not value-added rules. The tolerance rule does not act satisfy the relevant rule of origin, it is deemed to be to lower the limitation on the value of imported 100 percent nonoriginating (so-called “roll-down”). materials. The nonoriginating materials will always Ideally, if the part or materials do not satisfy the rele- be counted in import value content calculations. vant rule of origin, the portion of value added Under NAFTA, nonoriginating materials can be domestically should still be counted in the determi- used even if the rule on sufficient processing is not nation of the origin of the final product. fulfilled, provided their value does not exceed 7 percent of the value of the final product. Under the EU’s GSP scheme, the threshold is 10 percent, Duty Drawback Provisions relating to duty draw- but under the Cotonou Agreement between the EU back can lead to the repayment of duties on non- and the ACP countries the tolerance rule allows originating inputs used in the production of a final 15 percent of nonoriginating materials that would product exported to a free trade or preferential otherwise not be accepted to be used. For example, trade partner. Some agreements contain explicit in the case of the doll given above in which the use no-drawback rules that will affect decisions relating of dolls clothing accessories denied origin to the to the sourcing of inputs by firms exporting within final product under the change of heading rule the trade area and will switch the previous incen- (because the accessories are classified under the tives for the use of imported inputs from nonpar- same heading), origin would have been conferred ticipating countries toward the use of originating under the EU GSP if the value of the dolls’ clothing inputs from participating ones. Increasingly impor- and accessories was less than 10 percent of the value tant are rules concerning territoriality and the treat- of the doll. ment of outward processing by companies located Thus, the tolerance rule can act to make it easier within the free trade area to locations outside it. for products with nonoriginating inputs to qualify These rules determine whether processing outside for preferences under the change of tariff heading the area undermines the originating status of the and specific manufacturing process rules. However, final product exported from one partner to the tolerance rules applied to the textiles and cloth- another. Rules of Origin, Trade, and Customs 197

Rules of Origin in Existing Free the EU and NAFTA. A key feature of the EU and Trade and Preferential Trade NAFTA models of rules of origin is that the rules are Agreements specified at a detailed level on a product-by-product Table 9.B.1 in annex 9.B provides a simplified look basis. The recent Japan–Singapore agreement also at the key features of the rules of origin applied in a follows this approach. The U.S.–Singapore FTA has number of regional and bilateral trade schemes. rules of origin that are similar to those of NAFTA, The table contrasts the nature of the rules applied which means that product-specific and sometimes as well as the use of cumulation mechanisms, toler- complex rules are used. The annexes specifying these ance rules, and absorption. rules of origin can be massive. In the U.S.–Singapore Table 9.B.1 shows that all three methods of deter- agreement there are over 240 pages of product- mining origin are employed in agreements involving specific rules of origin. Box 9.2 provides a further

BOX 9.2 More Restrictive Rules of Origin: The Case of Clothing Under NAFTA Rules

The following example is for men’s or boys’ 540782 through 540784, 540792 through overcoats made of wool (HS620111). 540794, 540822 through 540824 (excluding “A change to subheading 620111 from any tariff item 540822aa, 540823aa or 540824aa), other chapter, except from heading 5106 540832 through 540834, 551219, 551229, through 5113, 5204 through 5212, 5307 551299, 551321 through 551349, 551421 through 5308 or 5310 through 5311, Chapter 54 through 551599, 551612 through 551614, or heading 5508 through 5516, 5801 through 551622 through 551624, 551632 through 5802 or 6001 through 6006, provided that: 551634, 551642 through 551644, 551692 The good is both cut and sewn or otherwise through 551694, 600110, 600192, 600531 assembled in the territory of one or more of the through 600544 or 600610 through 600644.” Parties.” This stipulates that the visible lining used The basic rule of origin stipulates change of must be produced from yarn and finished in chapter but then provides a list of headings and either party. This rule may well have been intro- chapters from which inputs cannot be used. duced to constrain the impact of the tolerance Thus, in effect the overcoat must be manufac- rule that would normally allow 7 percent of the tured from the stage of wool fibers forward, weight of the article to be of nonoriginating because neither imported woolen yarn materials. In overcoats and suits the lining is (HS5106–5110) nor imported woolen fabric probably less than 7 percent of the total weight. (HS5111–5113) can be used. However, the rule Finally, it is interesting to note that the rules also states that imported cotton thread of origin also provide a number of very specific (HS5204) and imported thread of man-made exemptions to the rules of origin for materials fibers (HS54) cannot be used to sew the coat that are in short supply or not produced in the together. This rule in itself is restrictive; however, United States, reflecting firm-specific lobbying the rule for this product is further complicated to overcome the restrictiveness of these rules of by requirements relating to the visible lining: origin when the original NAFTA rules of origin “Except for fabrics classified in 54082210, were defined. The most specific example is 54082311, 54082321, and 54082410, the fab- where apparel is deemed to be originating if rics identified in the following sub-headings and assembled from imported inputs of headings, when used as visible lining material in “Fabrics of subheading 511111 or 511119, if certain men’s and women’s suits, suit-type jack- hand-woven, with a loom width of less than 76 ets, skirts, overcoats, car coats, anoraks, wind- cm, woven in the United Kingdom in accor- breakers, and similar articles, must be formed dance with the rules and regulations of the Har- from yarn and finished in the territory of a party: ris Tweed Association, Ltd., and so certified by 5111 through 5112, 520831 through 520859, the Association;. . .” 520931 through 520959, 521031 through So, the job of business and of the relevant 521059, 521131 through 521159, 521213 officials to check consistency with such rules are through 521215, 521223 through 521225, clearly not simple ones. 540742 through 540744, 540752 through Source: U.S. International Trade Commission 540754, 540761, 540772 through 540774, 2004. 198 Customs Modernization Handbook

example of complex and restrictive rules from the representatives of concerned industries” (Palmeter NAFTA rules of origin for clothing products. 1997, p. 353). Other interests, such as consumers of This detailed product-specific approach to rules the relevant product, are effectively excluded from of origin of the EU and NAFTA can be contrasted discussion concerning the rules of origin. Those with most of the agreements involving developing who lobby hardest for trade policy interventions are countries, such as AFTA, Common Market for East- not altruistic and their objectives with regard to ern and Southern Africa (COMESA), and Mercado rules of origin are likely to be to restrict competi- Comun del Sur (MERCOSUR), where general rules tion from imports and to expand their own exports are typically specified and there are no, or very few, within a free trade area at the expense of third- product-specific rules of origin. This suggests that country suppliers. Such objectives can be more domestic industry did not play a significant role in effectively pursued when policy is determined in an the specification of these rules. Some agreements, environment that lacks transparency and openness, such as AFTA,rely solely on the value-added method. as can easily occur when rules of origin are deter- The COMESA rules of origin require satisfaction of a mined in a product-by-product manner. value criterion (either the CIF value of imports must From a trade policy perspective, the restrictive- not exceed 60 percent of the value of all materials ness of a value-added rule, in terms of its impact on used, or domestic value-added should be at least 35 trade, is clearer and more apparent than the change percent of the ex-factory cost of the goods)14 or a of tariff classification and specific manufacturing change of tariff heading.15 process rules. It is relatively straightforward to What are the merits of these different ap- compare alternative proposals concerning a value- proaches to the specification of preferential rules of added rule. The extent of protection engendered by origin? Specifying detailed product-by-product complex and technical rules of origin that differ rules can lead to precise rules that leave little across products is much more difficult to detect. scope for interpretation. Indeed, some argue that a This asymmetry of information is one reason those product-by-product approach based upon input groups seeking protection will push for complex from domestic producers is the best way to deal rules of origin and why the change of tariff classifi- with the specification of rules of origin. However, as cation and specific manufacturing process rules the examples in this chapter show, product-specific may be more susceptible to capture by protectionist rules can become complex and restrictive, reflecting domestic interest groups (Hirsch 2002). that a product-by-product approach offers oppor- Thus, it is apparent that adopting a product-by- tunities for sectoral interests to influence the speci- product approach to rules of origin will tend to lead fication of rules of origin in a way that is not to rules that are more restrictive than is necessary to directly related to their function of identifying the prevent trade deflection—that is, protectionist rules nationality of products and of preventing trade of origin—and can lead to an overly complex sys- deflection. The more complex and the more techni- tem that is difficult to implement by traders and cal the rules become, the greater the scope for the adds considerably to the burden of customs. participation of domestic industries in setting However, it appears that more general rules of restrictive rules of origin (Hoekman 1993). Indeed origin can lead to greater scope for interpretation, “the formulation of product-specific rules of origin as noted by Izam (2003), for example, with regard is, by its nature, very much out of the practical to the rules of origin in the Latin American Integra- control of generalists, which is to say government tion Association. In Asia there are some suggestions officials at the policy level, and very much in the of underutilization of AFTA preferences reflecting practical control of specialists, which is to say the uncertainties concerning the rules of origin. It appears that the rules of origin may be subject to different interpretations in different ASEAN coun- 14. The COMESA agreement also specifies that a range of goods tries leading to inconsistent application of the rules deemed to be of particular importance to economic develop- throughout the region.16 Nevertheless, this suggests ment need only satisfy a 25 percent domestic value-added criterion. 15. At the present time, however, the change of tariff heading provision is not being implemented. 16. Pricewaterhouse Coopers (2002). Rules of Origin, Trade, and Customs 199 the need for more effective coordination between nal cumulation in the Pan-European Area of Cumu- customs and other relevant authorities in different lation encompassing EFTA, Central and Eastern partners to clarify existing rules and regulations European and Balkan countries, while there is full rather than formulating more restrictive rules of cumulation among the African and Caribbean origin. It is also important that alternative rules be countries under the Cotonou Agreement. Similarly, considered so that producers are allowed some flex- for tolerance rules, which are widely applied in ibility in proving origin. Hence, providing produc- agreements that are not based on the sole use of the ers with the option of satisfying either a value- value-added method, there are considerable differ- added rule or a change of tariff classification rule is ences across agreements—even those involving the likely to be trade facilitating. same country. Under the EU–Mexico Free Trade In table 9.B.1 the column showing the use of Agreement, nonoriginating materials of up to 10 the value-added methods highlights the variation in percent of the value of the final product can be used, the permitted amount of nonoriginating import while under the agreement between the EU and content across the different agreements. In the South Africa the level of tolerance is set at 15 per- Canada–Chile agreement, for example, products are cent. Different rules of tolerance are often estab- typically subject to a change of tariff classification lished for certain sectors, especially textiles and (the level of change required varies by product) and clothing.17 Table 9.B.1 also shows the widespread a domestic value-added requirement that varies use of the absorption principle. between 25 and 60 percent (according to the prod- Thus, this simple and brief look at the nature of uct and the method of valuation used). In the the rules of origin applied in a number of existing U.S.–Chile agreement, where the rules are similar to free and preferential trade agreements highlights those of NAFTA but not identical for all products, that the methods of defining origin and provisions the required domestic content is between 35 and relating to cumulation, tolerance, and absorption 55 percent. Under the Canada–Chile agreement, for are widely applied. However, there is little com- example, plastic products (HS39) must satisfy monality across agreements in the precise nature of requirements of change of tariff heading and the rules that are adopted. In general, recent agree- between 50 percent and 60 percent of domestic ments involving the EU and the United States are value-added (depending on the method of valua- based upon detailed, often complex, product- tion). Under the U.S.–Chile agreement most plastic specific rules of origin. The restrictiveness of these products need only satisfy the requirement of rules would appear to vary across sectors. For change of subheading to be originating. To be origi- example, the rules for clothing products requiring nating under the U.S.–Chile agreement nonelectri- production from yarn can be particularly difficult cal engineering products (HS84) must satisfy a to satisfy for small less-developed economies. As change of subheading and a domestic value content such, the impact of these agreements will not be of between 35 and 45 percent (according to method uniform across sectors. of valuation), while under the Canada–Chile agreement such products need satisfy change of subhead- The Economic Implications of Rules ing but only a 25 to 35 percent content requirement of Origin (depending on valuation method). Thus, certain products produced in Chile that are granted duty- The specification and implementation of rules of free access to Canada may not receive such treat- origin can be a major determinant of the impact of ment in the United States due to the more liberal free trade and preferential trade agreements. In rules of origin applied in the Canada–Chile agree- practice, rules of origin are controversial because ment for those products, while other products may the available evidence, discussed in the next satisfy U.S. rules of origin requirements but not those of Canada. Table 9.B.1 also shows that all the agreements 17. Nevertheless, the tolerance rule may be important because in contain provisions regarding cumulation but also NAFTA there are chapter-specific rules for clothing products relating to the originating status of “visible linings” that appear that there is considerable variation in the nature of to be motivated to limit the impact of the tolerance rule. See cumulation. For example, the EU allows for diago- box 9.2 for details. 200 Customs Modernization Handbook

section, suggests that the use of preferences tends to use of nonqualifying fabrics, and there may be sub- be substantially less than full. That is, a substantial stantial costs in changing suppliers of fabrics. proportion of actual exports that are eligible for These problems will be exacerbated in sectors preferences do not enter the partner’s market with where economies of scale are important. A pro- zero or reduced duties but actually pay the MFN ducer that supplies both preferential and nonpref- tariff. erential trade partners, or faces different rules of Compliance with rules of origin can affect the origin in different preferential partners, will have to sourcing and investment decisions of companies.18 produce with a different input mix for different If the optimal input mix for a firm involves the use markets if the producer is to receive preferential of imported inputs that are proscribed by the rules access. This may undermine the benefits from of origin of a free trade agreement in which the lower average costs that would arise if total produc- country participates, the rules of origin will reduce tion were to be based on a single set of material the value of the available preferences. The firm will inputs and a single production process. have to shift from the lowest to a higher cost source Rules of origin may be an important factor of inputs in the domestic economy that will reduce determining the investment decisions of multi- the benefits of exporting under a lower tariff. In national firms. Such firms often rely on imported the extreme, if the cost difference exceeds the size inputs from broad international networks that are of the tariff preference, the firm will prefer to vital to support the firm-specific advantages they source internationally and to pay the MFN tariff. possess, such as a technological advantage in the The ability to cumulate inputs from a partner production of certain inputs. More generally, if the under bilateral, diagonal, or full cumulation will nature and application of a given set of rules of ori- tend, in increasing order, to open the possibilities gin increases a degree of uncertainty concerning for identifying low cost sources of inputs that do the extent to which preferential access will actually not compromise the qualifying nature of the final be provided, the level of investment will be less product. Nevertheless, if the lowest cost supplier is than if such uncertainty were reduced. not a member of the area of cumulation, the benefits of the preferential scheme will always be less Rules of Origin and the Utilization than indicated by the size of the preferential tariff. of Trade Preferences Rules of origin can also distort the relative prospects of similar firms within a country. For Difficulties that may arise in satisfying the rules of example, a clothing producer in, say, Moldova may origin and the costs of proving conformity with have established an efficient manufacturing process those rules are suggested by the relatively low uti- on the basis of importing fabrics from Turkey. A lization rates that are observed in preferential trade less efficient producer who uses imported EU fab- schemes.19 Sapir (1998) showed that 79 percent of rics may be able to expand production on the basis EU dutiable imports from GSP beneficiaries in 1994 of preferential access to the EU market under the qualified for preferential access to the EU market, GSP (with bilateral cumulation). The more effi- yet only 38 percent actually entered the EU market cient firm may not be able to expand because its with a duty less than the MFN rate. The reasons for product does not qualify for preferences due to the this difference were the effects of rules of origin and tariff quotas for particular products, which set limits on the amount of imports that can receive beneficial access to the EU market. It also reflects the 18. Economists have generally given little attention to rules of origin within the voluminous literature on free trade areas. The treatment of textiles and clothing products, which key initial contributions on rules of origin are Krueger (1997) accounted for over 70 percent of EU imports from and Krishna and Krueger (1995), who demonstrate how rules of origin can act as “hidden protectionism” and induce a switch in demand in free trade partners from low-cost external inputs to higher-cost partner inputs to ensure that final products actually 19. For many years UNCTAD has been highlighting the rela- receive duty-free access. Falvey and Reed (1998) show how rules tively low levels of utilization of preferences granted by devel- of origin can be used to protect a domestic industry from oped countries to developing countries. For a recent discussion unwanted competition based from a partner, even in conditions of utilization rates of GSP schemes and rules of origin, see where trade deflection is unlikely. Inama (2002). Rules of Origin, Trade, and Customs 201 countries covered by the GSP but where the utiliza- margin of preferences. In 2001 around 70 percent tion rate (the ratio of imports receiving preferences of exports to Canada from the LDCs that were eli- to eligible imports) was only 31 percent. In 2001 the gible for preferences actually benefited from prefer- utilization rate for least developed countries (LDCs) ential access.20 stood at 47 percent. It is important to stress that the Under the EU’s EBA Agreement for the LDCs, utilization rate of preferences measures the propor- which offers duty-free access for all products, tion of exports to the EU that are recorded at the almost all of Cambodia’s exports to the EU are eli- border as requesting preferences, so the low level of gible for zero duty preferences, yet in 2001 only utilization cannot reflect the inability of the recipi- 36 percent of those exports obtained duty-free ents to meet other requirements to access the EU access. Brenton (2003) shows that this lack of use of market, such as health and safety or sanitary preferences meant that on average Cambodia’s requirements or deficiencies in their infrastructure, exports to the EU paid a tariff equivalent to 7.7 per- as is sometimes suggested. Lack of infrastructure cent of the value of total exports. Again, the main might explain why there is a very muted response suspect for this underutilization of trade prefer- from trade to preferences but cannot explain why at ences is the rules of origin, particularly because the border some products that are eligible for pref- Cambodia specializes in the production of clothing erences do not request them. products for which EU rules of origin are very It is worth noting here that the coverage rate of restrictive, requiring production from yarn. the EU scheme is comprehensive; over 99 percent Brenton and Manchin (2003) show that a large of imports from developing countries of products amount of EU imports of clothing products from that are subject to duties in the EU are eligible for Eastern European countries made from EU- preferences. The striking feature of the EU scheme produced fabrics still enter the EU market under an is the low utilization of these preferences. The U.S. alternative customs regime—outward processing— GSP scheme in contrast has a much higher utiliza- even though there is no fiscal incentive to do so tion rate (over 76 percent in 1998 and as high as because EU tariffs have been removed under free 96 percent for LDCs in 2001), but is much less trade agreements. This probably reflects the costs comprehensive in terms of coverage (only about and uncertainties in proving origin that would be half of dutiable imports from developing coun- necessary under the normal preferential customs tries are eligible for preferences). This is because procedures. textiles and clothing products are essentially In recent developments the United States has excluded from the U.S. GSP scheme. They are introduced the African Growth and Opportunity included in the EU scheme, but only a small pro- Act (AGOA), extending the number of products portion of imports covered actually receive any eligible for duty-free access to the United States preferences. However, an important feature of the under the GSP. These products include clothing. U.S. scheme is that there are preferences on mineral However, AGOA eligibility does not automati- fuels for LDCs, whereas in the EU there are zero cally imply that those countries are entitled to the duties on imports of oil. UNCTAD reports that provisions on clothing. Countries must first when mineral products are excluded, the utilization be approved based upon the implementation of rate for LDCs falls below 50 percent. Also impor- what are deemed to be effective enforcement tant is that under the U.S. scheme the preferences mechanisms. Under the GSP there is a standard are 100 percent, that is, products granted preferen- value-added requirement of 35 percent with cumu- tial access pay no duty. Under the EU GSP scheme lation permitted between (certain) members of there is a range of “sensitive products” for which regional groups, including the Andean Commu- preferences for nonLDCs are partial. Under the nity, ASEAN, Southern African Development current scheme there is a reduction of 3.5 percent- Community (SADC), Caribbean Community age points, although for textiles and clothing the (CARICOM), and the West African Monetary reduction is only 20 percent of the MFN rate. Union. AGOA extends the GSP rules by allowing Hence, the low utilization rate of the EU may reflect that the costs of satisfying the origin rules, or of 20. The data in this paragraph come from UNCTAD and the proving conformity with them, or both, exceed the Commonwealth Secretariat 2001 and UNCTAD 2003. 202 Customs Modernization Handbook

for full cumulation between any Sub-Saharan such as textiles, became more restrictive and that countries and also for bilateral cumulation with the as a result the use of the available preferences United States, with inputs from the latter limited to declined. Estevadeordal and Suominen (2004) 15 percent of the value-added. However, the rules introduce a synthetic measure of the restrictive- of origin for clothing are different (textile products ness of rules of origin into a standard gravity remain effectively excluded from preferences). model of bilateral trade flows. Their econometric The rules of origin for clothing stipulate the analysis leads them to conclude that restrictive making up or assembly in one or more beneficiary product-specific rules of origin undermine overall countries but require the use of fabrics made and trade between partners and that provisions such as cut in the United States from yarns and thread cumulation and de minimis rules, which act to formed in the United States. Fabrics made in bene- increase the flexibility of application of a given set ficiary countries from yarns formed in those coun- of processing requirements, serve to boost intra- tries or the United States can be used, provided that regional trade. Applying this approach at the sec- imports of the finished products into the United toral level finds support for the hypothesis that the States do not exceed a current limit of 4.2 percent restrictiveness of rules of origin for final goods of total United States imports of clothing, rising to stimulates trade in intermediate products between 7 percent over the period to 2008.21 Finally, there is preferential partners. Cadot and others (2002), a special provision that allows the use of fabric using a similar measure of the restrictiveness of from any country, again subject to approval, quan- NAFTA rules of origin, find that for sectors where titative limits, and initially for only least developed tariff cuts are larger than average, the rules of ori- Sub-Saharan African countries but now granted to gin are more restrictive and the utilization rate of certain higher income countries such as Namibia preferences by Mexican exporters lower than aver- and Kenya. However, this provision is only available age. They conclude that rules of origin are the until the end of September 2007. This provision prime culprit for the very modest impact of provides for liberal rules of origin. NAFTA on Mexican exports identified by other Mattoo, Roy, and Subramanian (2002) show researchers. how the basic AGOA rules of origin for clothing severely constrain the benefits of AGOA and that Rules of Origin and Economic the general use of more liberal rules could Development increase the gains to beneficiary countries by as much as a factor of five. Further, recent trends in Can and should rules of origin be used as tools to U.S. imports from AGOA beneficiaries strongly stimulate economic development within a regional suggest that restrictive rules of origin can severely grouping? The Draft Ministerial Text for the constrain trade. Between 1999 and 2002, U.S. Cancún meeting of the WTO members as part of imports of clothing from those countries that the Doha Development Round of trade negotia- have been able to source fabrics from any country tions proposes, under provisions for special and increased by 92 percent. U.S. imports of clothing differential treatment, that “developing and least- from those countries that have been eligible for developed country Members shall have the right to the preferences for clothing but have faced the adopt preferential rules of origin designed to more restrictive rules of origin (essentially Mauri- achieve trade policy objectives relating to their tius and South Africa) have increased by only rapid economic development, particularly through 23 percent. generating regional trade.” Strict rules of origin are Systematic empirical analysis linking restrictive viewed by some as a mechanism for encouraging rules of origin directly to trade outcomes is the development of integrated production struc- currently limited. Estevadeordal and Miller (2002) tures within developing countries to maximize the show how in the transition from the U.S.–Canada impact on employment and to ensure that not just FTA to NAFTA, rules of origin for certain sectors, low value-added activities are undertaken in the developing countries.

21. It does not appear as if this quota is, or is likely to be, There are problems with this view. First, such binding. rules discriminate against small countries where Rules of Origin, Trade, and Customs 203 the possibilities for local sourcing are limited or requirements and with much higher domestic nonexistent. Because most developing countries value-added and lower permitted import con- are small countries, they are particularly disad- tents. The rules became much more similar to vantaged by restrictive rules of origin relative to those of the EU and of NAFTA, reflecting in part larger countries. Second, there is no evidence that the influence of the recently negotiated EU–South strict rules of origin over the past 30 years have Africa agreement and the rules of origin govern- done anything to stimulate the development of ing EU preferences to ACP countries: “The integrated production structures in developing EU–South Africa rules were often invoked by spe- countries. In fact, such arguments have become cial interests in South Africa as models for SADC. redundant in light of technological changes and Such claims were too often accepted at face value global trade liberalization that have led to the and not recognized as self-interested pleading for fragmentation of production processes and the protection by already heavily protected domestic development of global networks of sourcing. producers. There were few questions about the Globalization and the splitting up of the produc- appropriateness of the underlying economic tion chain does not allow the luxury of being able model (whatever it might be) for SADC” (Flatters to establish integrated production structures and Kirk 2003, p. 7). within countries. Strict rules of origin act to con- Flatters (2002) also points out that in the SADC strain the ability of firms to integrate into these case it has also been argued that customs adminis- global and regional production networks and in trations in the region are weak and this makes it effect act to dampen the location of any value- likely that low-cost products from Asia could enter added activities. In the modern world, flexibility through porous borders and then claim tariff pref- in the sourcing of inputs is a key element in inter- erences when exported to another member state. It national competitiveness. Thus, it is quite feasible is then suggested that restrictive rules of origin are that restrictive rules of origin, rather than stimu- required to prevent this from happening. However, lating economic development, will raise costs of there is no reason to expect that weak customs production by constraining access to cheap inputs administrations should be better able to enforce and undermine the ability of local firms to com- strict rules of origin than less restrictive rules. In pete in overseas markets. fact, in many cases the rules of origin become so Flatters (2002) and Flatters and Kirk (2003) doc- strict that no producers in the region can satisfy ument the evolution of the rules of origin in SADC, them so that no discretion from customs is and highlight these points. They show that the required—preferences are not granted. This, of adoption of restrictive rules of origin is more likely course, means that the preferential trade agreement to constrain than to stimulate regional economic has no impact. A better approach is to adopt eco- development. This example provides a salutary les- nomically sensible rules of origin and a program to son of how sectoral interests and misperceptions of improve administrative capacities in customs. the role and impact of rules of origin can act to Clearly designed safeguard measures can also be undermine regional trade agreements. adopted to deal with surges of imports entering via SADC initially agreed to simple, general, and partner countries. consistent rules of origin similar to those of To conclude, rules of origin are an inefficient neighboring and overlapping COMESA. The ini- tool in achieving development objectives. Better tial rules required a change of tariff heading, a policies are available. Rules of origin should be minimum of 35 percent of value-added within the used as a mechanism for preventing trade deflec- region, or a maximum import content of 60 per- tion. Restrictive rules of origin that go beyond this cent of the value of total inputs. Simple packaging function and that seek to force use of local content and so forth were defined to be insufficient to are more likely to be counterproductive by under- confer origin. However, these rules were subse- mining the competitiveness of downstream indus- quently revised and are now characterized by tries (Flatters 2001). If the objective is to stimulate more restrictive sector- and product-specific rules regional trade, this is best achieved by adopting with the change of tariff heading requirement simple, clear, consistent, and predictable rules of being supplanted by detailed technical process origin that avoid administrative discretion and 204 Customs Modernization Handbook

onerous burdens on customs and that minimize the The costs of complying with the certification costs to businesses in complying with them. requirements of rules of origin will tend to vary across different agreements depending upon the precise requirements that are specified. With regard Customs and the Costs of to issuing and inspecting the preferential certificate Administering Preferential Rules of Origin of origin, EU agreements, MERCOSUR, AFTA, and Japan–Singapore all mandate that certificates must Customs is typically responsible for implementing be verified and endorsed by a recognized official the system of rules of origin. Customs usually has body, such as customs or the Ministry of Trade. In the responsibility to check the certificate of origin; certain cases private entities can be involved pro- customs can also be involved in the issuing of vided they are approved and monitored by the gov- origin certificates for local exporters. Rules of ori- ernment. In contrast, agreements involving the gin, while an essential element of free trade agree- United States provide for self-certification by the ments, add considerable complexity to the trading exporter. The authorities of the exporting country system for traders, customs officials, and trade pol- are not involved and are not responsible for the icy officials. For companies there is not only the accuracy of the information provided in the certifi- issue of complying with the rules on sufficient pro- cates. In principal this should reduce the adminis- cessing but also the cost of obtaining the certificate trative burden of complying with the rules of ori- of origin, including any delays that arise in obtain- gin. Further, under NAFTA a certificate of origin ing the certificate. The costs of proving origin is valid for multiple shipments of identical goods involve satisfying a number of administrative pro- within a one-year period, while in most other cedures to provide the documentation that is agreements a separate certificate of origin is re- required and the costs of maintaining systems that quired for each shipment. EU agreements, however, accurately account for imported inputs from dif- do allow for exporters whom the authorities ferent sources to prove consistency with the rules. approve and who make regular shipments to make The ability to prove origin may well require the use an invoice declaration of origin. of, what are for small companies in developing and Under NAFTA, both the importer and exporter transition economies, sophisticated and expensive are required to keep relevant records. Both exporter accounting procedures. Without such procedures and importer must keep the certificate of origin it is difficult for companies to show precisely the and the supporting documentation for five years. If geographical breakdown of the inputs they have customs wishes to make inquiries concerning a used. particular shipment or shipments under NAFTA, There is limited information on these costs but they are directed to the exporter of the product. In the available studies suggest that the costs of pro- cases where the exporter cannot substantiate a viding the appropriate documentation to prove ori- claim for preferential access, the importer becomes gin can be around 2 to 3 percent or more of the liable for the duty. In cases in which fraud is sus- value of the export shipment for companies in pected, liability extends to both exporters and 22 developed countries. The costs of proving origin importers, whereas prior to NAFTA importers bore may be even higher, and possibly prohibitive, in all financial and legal liability for compliance with countries where customs mechanisms are poorly customs rules. Under EU agreements it is the developed. Thus, even if producers can satisfy the importer who is legally liable for any penalties for rules of origin by meeting the technical require- tax evasion should it be subsequently found that a ments, they may not request preferential access product was not eligible for preferential access.23 because the costs of proving origin are high relative Under the EU’s GSP, the EU also holds the govern- to the duty reduction that is available. ment of the exporting country responsible for

22. See Cadot and others (2002) and Herin (1986). The Herin 23. Because it is the importer who bears the risk regarding the study also found that the costs for EFTA producers of proving accuracy of the certificate of origin, the preferential tariff may origin led to one-quarter of EFTA exports to the EU paying the not be claimed. A recent study suggests that this is an important applied MFN duties. concern of EU importers (Cerrex 2002). Rules of Origin, Trade, and Customs 205 administrative cooperation, with suspension and Checking the Authenticity and Validity removal of GSP preferences the ultimate sanction of Certificates of Origin for inadequate cooperation. The EU insists that Table 9.1 shows the proportion of respondents con- government bodies issue the certificates of origin firming the involvement of their customs authori- because it “considers that a certificate of origin is a ties in issuing certificates of origin for products blank check, which will be drawn on the EC exported from their customs territory, in checking budget” (European Commission 2003). the validity and authenticity of certificates of origin An important feature of most preferential trade on products exported, in checking the accuracy of schemes is the requirement of direct consignment such certificates, and in responding to requests or direct transport. This stipulates that goods for from other customs authorities for information which preferences are requested must be shipped regarding such certificates of origin. directly to the destination market and that if they About two-thirds of the customs administra- are in transit through another country, documen- tions that responded confirmed that their adminis- tary evidence may be requested to show that the trations were responsible for issuing certificates of goods remained under the supervision of the cus- origin to exporters under at least one trade scheme. toms authorities of the country of transit, did not The vast majority of customs administrations are enter the domestic market there, and did not involved in checking the validity and authenticity undergo operations other than unloading and of certificates of origin for exports and in confirm- reloading. In practice it may be very difficult to ing the accuracy of the country indicated as the ori- obtain the necessary documentation from foreign gin of the product. Those administrations not customs. involved are typically those in which the certificate To understand better the implications for cus- of origin is based upon self-certification. Finally, a toms of rules of origin, especially preferential rules further task for customs in administering preferen- of origin, the WCO and the World Bank recently tial rules of origin is in responding to requests for instituted a postal survey of customs agencies. information on origin matters from other customs Questionnaires were sent to all 161 members of the administrations, again reflecting the involvement WCO, with 63 completed questionnaires being of public authorities in matters relating to origin returned, a response rate of 39 percent. The major- documentation in most preferential trade schemes. ity of responses (43) came from developing coun- This information confirms that in most countries tries. Responses were received from countries of all customs plays a key role in administering systems continents. The questionnaire sought information of rules of origin on exports as well as imports. on the role of customs in issuing and checking cer- Customs clearance for exports from many coun- tificates of origin and requested the views of cus- tries is influenced by the need for the customs toms officials on their experiences of administering authorities to check preferential origin informa- rules of origin. The following summarizes the main tion. An important exception arises in schemes that conclusions drawn from these responses from cus- allow for self-certification by exporters. toms administrations.

TABLE 9.1 Involvement of Customs in Issuing, Checking, and Providing Information on Preferential Certificates of Origin for Exporters

Customs Role Proportion of Responses (percent)

Issues certificates of origin to exporters 66 Checks the validity and authenticity of the certificate of origin for export 88 Checks the accuracy of the indication of origin for export 90 Provides origin information to requesting administrations 91

Source: World Customs Organization and World Bank Survey of Customs Directorates 2003. 206 Customs Modernization Handbook

Difficulties arise for businesses and for customs These responses support the argument that the when the same product has different countries of requirements generated by rules of origin under origin depending upon the market, and the rules of preferential trade agreements have important origin of the market, for which it is destined. For implications for customs and for trade facilitation. example, at present clothing companies in certain Preferential trade agreements increase the burden African countries can obtain duty-free access to the on customs. This burden will be greater the more U.S. market under AGOA (with liberal rules of ori- complicated the rules of origin and the more man- gin), but exactly the same product will be denied power resources that are required to check con- duty-free access to the EU under the EBA Agree- formity with those rules of origin. It is interesting ment (because of the requirement that the product to note that 42 percent of all respondents and more be manufactured from yarn under the EU rules of than half (55 percent) of administrations in devel- origin). A company in Singapore could find that its oping countries could foresee additional preferen- product can enter ASEAN markets duty free, by sat- tial rules of origin coming into operation within isfying the maximum import content requirement the next 12 months. This reflects the proliferating of 60 percent, but does not satisfy the origin rules number of free trade agreements. It also, however, of the Singapore–Japan agreement. This consider- implies a trend toward an increasing burden on ably complicates production and investment deci- customs and, given the above finding, additional sions. It also increases the burden on customs in resources will be required to effectively implement clearing exports because shipments from the same these new agreements if trade facilitation is not to establishment of the same product but to different be compromised. markets will need to be individually assessed. Overlapping Rules of Origin From Multiple FTAs Labor Requirements to Deal with Preferential Most countries are party to more than one prefer- Rules of Origin ential trade agreement. In certain cases the same Table 9.2 shows that 52 percent of those customs offi- countries are partners in different trade agree- cials who responded accepted that the clearance of ments. For example, the developing countries in exports for preferential access overseas requires more Sub-Saharan Africa can now export to the EU and manpower and that almost three-quarters of respon- receive preferential access under the Cotonou dents believe that clearance of preferential imports Agreement or under EBA, which is a part of the requires more manpower to deal with issues arising GSP. These two schemes have rules of origin that from the preferential rules of origin. One element of differ in certain key respects. There is full cumula- this is likely to be that in most trade agreements tion between ACP countries under the Cotonou proof of origin is required for every single shipment. rules of origin but only bilateral cumulation with Of the respondents to the survey,88 percent reported the EU is possible under the GSP rules of origin. As that proof of origin must be presented for each and noted earlier, the de minimis or tolerance levels dif- every shipment. Thus, even identical shipments fer between the two schemes. (See Brenton 2003 for made at different times still require individual more details.) In Southern Africa, countries such as certificates of origin, which may then be checked by Namibia and Swaziland are members of both customs for validity, authenticity, and accuracy. SADC and COMESA, which have different rules of

TABLE 9.2 Resource Implications of Rules of Origin in Preferential Trade Agreements

Responses Agreeing, “Customs Clearance for Goods Under Preferential Schemes Need More Manpower to Deal With Preferential Rules of Origin Requirements” (percent)

For exports 52 For imports 73

Source: World Customs Organization and World Bank Survey of Customs Directorates 2003. Rules of Origin, Trade, and Customs 207

FIGURE 9.1 Regional Trade Agreements in Eastern and Southern Africa

COMESA

Egypt IGAD

Djibouti Burundi* Eritrea Rwanda* Ethiopia Somalia Sudan Kenya* Uganda* Angola Dem. Rep. EAC Congo. SADC

Comoros* Mauritius* Madagascar* Tanzania* Seychelles* Malawi* Reunion Zambia* Mozambique Zimbabwe* IOC Botswana Namibia* Lesotho Swaziland* South Africa

SACU

COMESA Common Market for Eastern and Southern Africa EAC East African Cooperation IGAD Intergovernmental Authority on Development IOC Indian Ocean Commission SACU Southern African Customs Union SADC Southern African Development Community *RIFF Regional Integration Facilitation Forum Source: World Bank staff. origin. Indeed, as Figure 9.1 shows, the issue of minimize the problems caused by overlapping membership in multiple trade agreements and rules of origin. overlapping rules of origin is a major feature of regional trade agreements in Africa. Implementation Difficulties of the Table 9.3 shows the views of respondents to the Value-Added Criterion questionnaire on whether such overlapping rules of origin cause particular difficulties for customs. More than 75 percent of the respondents reported Almost half the respondents said that in their that, of the different methods of conferring origin, experience overlapping rules of origin were a the value-added criterion was particularly difficult problem. Of respondents in Africa, two-thirds to implement. This is a striking result but one that agreed that problems arose from the presence of is understandable given the heavy demands on data overlapping rules of origin. This suggests that and calculations made by value-added rules. Value- there would be gains from some coordination of added rules lack predictability because changes in rules of origin across regional trade agreements factors outside the firm, such as exchange rates, can with common members. Further, it suggests that a lead to different determinations of origin. This is movement toward simple and clear rules of origin important because, as shown in table 9.B.1, the vast in preferential trade agreements would help majority of trade agreements use the value-added 208 Customs Modernization Handbook

TABLE 9.3 Overlapping Trade Agreements Cause Problems for Customs

Proportion of Respondents Agreeing That in Their Experience “Overlapping Rules of Origin for FTAs Cause Problems” (percent)

All respondents 48 Respondents in Sub-Saharan Africa 67

Source: World Customs Organization and World Bank Survey of Customs Directorates 2003.

criterion for at least some product codes. However, eral rather than product-specific rules appears to be the restrictiveness of value-added rules is more most appropriate for preferential rules of origin apparent than for other methods, which tend to be applied by and applied to developing countries. more prone to capture by domestic protectionist Less complicated rules of origin encourage trade interests. Nevertheless, trade within regional or between regional partners by reducing the preferential agreements could be facilitated by a transactions costs of undertaking such trade rela- review of value-added rules with a view to simplify- tive to more complex and restrictive rules of origin. ing their implementation, for example, through The Doha Round and Rules agreement on standard formulas to be used in cal- of Origin culation, and perhaps by providing for alternative means of conferring origin, such as through change Rules of origin are not directly mentioned in the of tariff classification. ministerial text that launched the Doha Develop- These responses from customs administrations ment Round, although ministers have called for confirm what may be obvious to some, but is completion of the HWP for nonpreferential rules of clearly worth stating, that implementing preferen- origin. As noted, there has been some discussion of tial trade agreements increases the burden on cus- rules of origin in the context of special and differen- toms. Limited resources and weak administrative tial treatment in using preferential rules of origin to capacity in many developing countries mean that achieve development objectives through generating there are inevitable repercussions for trade facilita- regional trade. As discussed earlier, rules of origin tion arising from these trade agreements. At the are unlikely to be appropriate measures for attaining very least, when designing trade agreements the such objectives and their use could well be counter- participants should bear in mind the implications productive. Although rules of origin are not explic- for customs and that if such agreements are to be itly on the agenda in the Doha negotiations, it is effective in stimulating trade, issues of administra- clear that the outcome of these negotiations could tive capacity in customs need to be considered. have important implications for rules of origin and Complicated systems of rules of origin increase the at the same time that the rules of origin that coun- complexity of customs procedures and the burden tries have adopted will have important implications upon origin certifying institutions. In a period in for the impact of any agreement. which increasing emphasis has been placed upon For example, progress in clarifying the applica- trade facilitation and the improvement of efficiency tion of antidumping measures and the effective in customs and other trade-related institutions, the liberalization of all remaining quotas on textiles and difficulties that preferential rules of origin create clothing products, as mandated under the Uruguay for firms and the relevant authorities in developing Round Agreement on Textiles and Clothing, could countries is an important consideration. facilitate progress in the harmonization of nonpref- In general, clear, straightforward, transparent, erential rules of origin because these trade policy and predictable rules of origin that require little or instruments have been at the heart of disputes con- no administrative discretion will add less of a bur- cerning the determination of nonpreferential ori- den to customs than complex rules. In this regard, gin. Preferential rules of origin have important if the objective is to stimulate trade, the use of gen- implications for the impact of any MFN tariff cuts Rules of Origin, Trade, and Customs 209 that are agreed on between preferential partners. As Within preferential trade areas, complex and tariffs are cut, margins of preference decline and the restrictive rules of origin act to dampen the potential threat of trade deflection diminishes. increase in competition for final producers within a Given the additional administrative costs of proving country from suppliers in partner countries and preferential origin, it is likely that rules of origin for stimulate intra-area exports of intermediate prod- products with a margin of preference of less than 3 ucts by diverting demand away from third-country percent are unnecessary, because in their absence suppliers. Such rules typically emerge when the there will be no trade deflection. process by which they are determined lacks trans- Restrictive rules of origin constrain the ability of parency and openness and does not have wide- developing countries to benefit from preferences. spread participation and in particular is dominated This is important in the context of ongoing discus- by input from domestic industry. If the purpose set sions over special and differential treatment for for preferential rules of origin is simply to prevent developing countries and concerns regarding the trade deflection, a simple and more liberal set of erosion of the preferences currently granted to such rules of origin implemented through general rather countries by rich, industrialized countries. On the than product-specific rules would be the result. In one hand, this becomes all the more important as the current globalized world market such rules are margins of preference decline. On the other, where more likely to stimulate trade and investment in the restrictive rules of origin prevent the full use of region by providing producers as much flexibility preferences, the impact of MFN tariff reductions as possible in sourcing their inputs without com- on preference-receiving countries is ambiguous. promising the ability to prevent transshipment of Countries with low levels of preference utilization goods from third countries that are not members of could gain because the benefits of MFN tariff the agreement. reduction could exceed any losses due to preference What is important is that the purpose set for the erosion. For example, it was noted earlier that only rules of origin is clearly specified and is consistent 36 percent of Cambodia’s exports to the EU are with the objectives that have been set for the partic- actually granted the zero duty access for which they ular trade agreement or policy. If the objective is to are eligible. This implies that MFN tariff reductions foster trade and development, this is best achieved will benefit 64 percent of current exports while through simple and liberal rules of origin rather preference erosion will have an impact on only just than using rules of origin as opaque measures of over one-third of Cambodia’s exports to the EU. trade protection. In this way the rules of origin are Either way, it is clear that the liberalization of a key trade policy issue and their determination industrialized country rules of origin under the should be open and transparent with participation GSP, particularly those governing imports of tex- from all affected groups. The rules of origin are a tiles and clothing and food products, would have major factor determining whether preferential important beneficial impacts for developing coun- trade agreements work in achieving their objec- tries such as Cambodia. More liberal rules of origin tives. The analysis of this chapter leads to the fol- would help mitigate the impact of MFN tariff lowing broad conclusions: reductions on those products currently receiving preferences and help developing countries fully uti- • Restrictive rules of origin constrain internalize the preferences that are available to them. The tional specialization and discriminate against analysis included in this chapter would suggest a small low-income countries where the possibili- simple and clear set of rules of origin that are com- ties for local sourcing are limited. Simple, con- mon across preference-granting countries. sistent, and predictable rules of origin are more likely to foster the growth of trade and development. Rules of origin that vary across prod- Key Operational Conclusions ucts and agreements add considerably to the The nature of rules of origin will typically reflect complexity and costs of participating in and the purpose that is set for them, the transparency of administering trade agreements. The burden of the process by which they are determined, and the such costs falls particularly heavily upon small composition of the group involved in that process. and medium-sized firms and upon firms in 210 Customs Modernization Handbook

Annex 9.A Summary of the Different Approaches to Determining Origin

Rule Advantages Disadvantages Key Issues

Change of tariff Consistency with Harmonized System Level of classification at classification in the nonpreferential rules not designed for which change Harmonized System of origin. conferring origin; as required—the higher Once defined, the rule is a result there are the level, the more clear, unambiguous, often many restrictive. and easy to learn. individual product- Can be positive (which Relatively straightfor- specific rules, which imported inputs can ward to implement. can be influenced by be used) or negative domestic industries. (defining cases Documentary require- where change of ments may be classification will not difficult to comply confer origin) testa— with. negative test more Conflicts over the restrictive. classification of goods can introduce uncertainty over market access.

Value-added Clear, simple to specify, Complex to apply— The level of value- and unambiguous. requires firms to have added required to Allows for general rather sophisticated confer origin. than product-specific accounting systems. The valuation method rules. Uncertainty due to for imported sensitivity to changes materials—methods in exchange rates, that assign a higher wages, commodity value (for example, prices, and so forth. CIF) will be more restrictive on the use of imported inputs.

Specific manufacturing Once defined, clear and Documentary require- The formulation of the process unambiguous. ments can be specific processes Provides for certainty if burdensome and required—the more rules can be complied difficult to comply procedures required, with. with. the more restrictive. Leads to product- Should test be negative specific rules. (processes or inputs Domestic industries that cannot be used) can influence the or positive (what can specification of the be used)? Negative rules. test more restrictive. Can quickly become obsolete due to technological progress and therefore require frequent modification.

a. A positive determination of origin typically takes the form of “change from any other heading,” as opposed to a negative determination of origin, such as “change from any other heading except for the headings of chapter XX.” It is worth noting that change of tariff classification, particularly with a negative determination of origin, can be specified to have an effect identical to that of a specific manufacturing process. See box 9.2 for an example. Source: Authors. Annex 9.B Rules of Origin in Existing Free Trade and Preferential Trade Agreements

Value-Added

Change of Tariff Implied Classification Domestic or Import Specific (principal, Import Content Content Manufacturing Tolerance secondary level) (percent) (percent) Process Cumulation (percent) Absorption

Agreements Involving the EU EU Pan Euro Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Bilateral, diagonal Yes 10b Yes EU GSP Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Bilateral, diagonala Yes 10b Yes EU Cotonou Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Full Yes 15b Yes EU–Chile Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Bilateral Yes 10 Yes EU–Mexico Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Bilateral Yes 10 Yes EU–South Africa Yes (4,2) Yes—Import (50 to 30) 50 to 30 Yes Bilateral, diagonal Yes 15b Yes (ACP), full (SACU) Agreements in the Americas and with the United States NAFTA Yes (2,4,6) Yes—Domestic (60 to 50) 50 to 40 Yes Bilateral Yes 7b Yese Canada–Chile Yes Yes—Domestic (60 to 25) 75 to 40 Yes Bilateral Yes 9 Yes U.S.–Israel Yes—Domestic (35) 65 Bilateralc NA Yes Agreements in Asia and Pacific and with Asian countries AFTA Yes—Import (60)d 60 Diagonal NA Yes ANZCERTA Yes—Domestic (50)d 50 Full NA Singapore–Japan Yes (4) Yes—Domestic (60) 40 Yes Full Yes Yes Singapore–New Zealand (ANZSCEP) Yes—Domestic (40)d 60 Bilateral NA Singapore–U.S. Yes (2,4,6) Yes—Domestic (55 to 35) 65 to 45 Yes Bilateral Yes 10b No Agreements Among Developing Countries CACM Yes (4) Bilateral CARICOM Yes (4) Bilateral No No Yes—Import (60), COMESA Yes (4) Domestic (35) 60 Full No Yes MERCOSUR Yes (4) Yes—Domestic (60) 40 Bilateral No Yese

NA = Not applicable; ACP = Africa, the Caribbean and the Pacific; AFTA = Asian Free Trade Association; ANZCERTA = Australia New Zealand Closer Economic Relations Trade Agreement; ANZSCEP = Agreement between New Zealand and Singapore on a Closer Economic Partnership; ASEAN = Association of Southeast Asian Nations; CACM = Central American Common Market; CARICOM = Caribbean Community; COMESA = Common Market for Eastern and Southern Africa; GSP = General System of Preferences; MERCOSUR = Mercado Comun del Sur; NAFTA = North American Free Trade Agreement; SAARC = South Asian Association for Regional Cooperation; SACU = Southern African Customs Union; Note: In the column “Change of Tariff Classification” the numbers in brackets give the digit level at which change may be required.; a. Within Andean, ASEAN, CACM, SAARC only and subject to a 50 percent value-added requirement in the country of export. b. Alternative rules for textiles and clothing products, often in terms of weight rather than value. Sectoral exemptions are common. For example, the EU–South Africa agreement excludes certain meat products, fish, and alcoholic beverages and tobacco from the general tolerance rule. Under NAFTA, tolerance does not cover dairy products, citrus fruits and juices, and certain machinery, such as air conditioners, among others.; c. Up to a maximum of 15 percent of the value of the product, with the additional requirement that the last stage of manufacture be performed in the exporting country, excluding automotive products.; d. With the additional requirement that the last stage of manufacture be performed in the exporting country.; e. Excluding automotive products; Sources: WTO 2002a,

211 Estevadeordal and Suominen 2003, and individual agreements. 212 Customs Modernization Handbook

low-income countries. Complex systems of rules required should, as much as possible, be com- of origin add to the burdens of customs and may mon across products. Change at the heading compromise progress on trade facilitation. level seems most appropriate as a principal rule. • Cumulation mechanisms are important. Full • Preferences granted by Organisation for Eco- cumulation provides for deeper integration and nomic Co-operation and Development coun- allows for more advanced countries to outsource tries would be more effective in stimulating labor-intensive production stages to low-wage exports from developing countries if they were partners. Full cumulation allows low-income governed by less restrictive rules of origin. Ide- countries the greatest flexibility in sourcing ally, rules of origin for these schemes should be inputs. Nevertheless, the sometimes-onerous common. The WTO provides an appropriate documentary requirements and administrative forum by which to achieve this objective. Pro- difficulties that can be associated with full cumu- ducers in developing countries should be able to lation suggest that diagonal cumulation should gain preferential access to all industrialized also be permitted. country markets if their product satisfies a sin- • The value-added criterion appears to be particu- gle origin test. larly difficult to implement from the perspective • Restrictive rules of origin should not be used as of customs. Agreement on a standard formula tools for achieving economic development for calculation would be particularly helpful. objectives, as they are likely to be counterpro- Providing traders with alternative means of ductive. The potential benefits of trade agree- proving origin could be an important way of ments among developing countries can be sub- increasing flexibility in trade agreements. stantially undermined if those agreements • Harmonization of nonpreferential rules of origin, contain restrictive rules of origin. and consolidation, if not harmonization, of pref- • Bilateral agreements between a member of an erential rules would bring substantial gains in existing regional trade agreement and a third terms of increasing the predictability of condi- country should provide for an alternative tions under which companies trade and in reduc- approach to allow for the benefits of both diago- ing the burden on customs in administering both nal and full cumulation with the other members the multilateral and preferential trade agreements. of that regional group.

The analysis leads to the following recommen- Further Reading dations: Flatters, F., and R. Kirk. 2003.“Rules of Origin as Tools of Devel- opment? Some Lessons from SADC.” Presented at Institut • Specifying generally applicable rules of origin, National de la Recherche Agronomique Conference on Rules with a limited number of clearly defined and jus- of Origin. Paris. May. www.inra.fr/Internet/Departements/ ESR/UR/lea/actualites/ROO2003/articles/flatters.pdf. tified exceptions, is appropriate if the objective is Garay, S., Luis Jorge, and Rafael Cornejo . 2002. “Rules of Ori- to stimulate integration and minimize the bur- gin and Trade Preferences.” In Bernard Hoekman, Philip dens on firms and customs in complying with English, and Aaditya Mattoo, eds. Development, Trade, and the WTO, a Handbook. Washington, D.C.: The World and administering the rules. Unnecessary use of Bank. a detailed product-by-product approach to rules Harilal, K., and P. Beena. 2003. “The WTO Agreement on Rules of origin is likely to lead to complex and restric- of Origin: Implications for South Asia.” Working Paper 353. Trivendrum, India: Centre for Development Studies. tive rules of origin and to constrain integration. http://www.cds.edu/download_files/353.pdf • Producers should be provided with flexibility in Hirsch, M. 2002. “International Trade Law, Political Economy meeting origin rules, for example, by specifying and Rules of Origin: A Plea for a Reform of the WTO that either a change of tariff requirement24 or a Regime on Rules of Origin.” Journal of World Trade 36(2): 171–88. value-added rule can be satisfied. • When change of tariff classification is used, the level of the classification at which change is References The word processed describes informally reproduced works that may not commonly be available through libraries. 24. Or, to a very limited extent, specific manufacturing processes Brenton, P. 2003. “Integrating the Least Developed Countries or operations. into the World Trading System: The Current Impact of EU Rules of Origin, Trade, and Customs 213

Preferences Under Everything But Arms.” Journal of World Inama, S. 2002. “Market Access for LDCs: Issues to be Trade 37(3): 623–46. Addressed.” Journal of World Trade 36(1): 85–116. Brenton, P., and Manchin, M. 2003. “Making EU Trade Agree- Izam, M. 2003.“Rules of Origin and Trade Facilitation in Prefer- ments Work: The Role of Rules of Origin.” The World Econ- ential Trade Agreements in Latin America.” Paper pre- omy 26(5): 755–69. sented at International Forum on Trade Facilitation. Geneva. Cadot, O., J. de Melo, A. Estevadeordal, A. Suwa-Eisenmann, and May 14–15. http://www.unece.org/trade/forums/forum03/ B. Tumurchudur. 2002. “Assessing the Effect of NAFTA’s presentations/ventura_en.pdf. Rules of Origin.” Research Unit Working Paper 0306. Labo- Krishna, K., and A. Krueger. 1995. “Implementing Free Trade ratoire d’Economie Appliquée, Institut National de la Areas: Rules of Origin and Hidden Protection.”NBER Work- Recherche Agronomique—France. ing Paper 4983. Cambridge, Mass.: National Bureau of Eco- Cerrex. 2002. “The Usage of the EU Trade Preferences (GSP and nomic Research. Lome).”Study prepared for DFID. London. Processed. Krueger, A. 1997. “Free Trade Agreements Versus Customs Croome, J. 1995. Reshaping the World Trading System—A History Unions.” Journal of Development Economics 54(1): 169–187. of the Uruguay Round. Geneva: World Trade Organization. Mattoo, A., D. Roy, and A. Subramanian. 2002. “The Africa Dehousse, F., K. Ghemar, and P. Vincent. 2002. “The EU-US Growth and Opportunity Act and its Rules of Origin: Dispute Concerning the New American Rules of Origin for Generosity Undermined?” The World Economy 26(6): Textile Products.” Journal of World Trade 36(1): 67–84. 829–51. Estevadeordal, A., and E. Miller. 2002. “Rules of Origin and the Official Journal of the European Communities. 2000. L317. Vol- Pattern of Trade Between US and Canada.” Washington, ume 43. December 15. http://europa.eu.int/eur-lex/en/ D.C.: Inter-American Development Bank. archive/2000/l_31720001215en.html. Estevadeordal, A., and K. Suominen. 2003. “Rules of Origin in Palmeter D. 1997. “Rules of Origin in Regional Trade Agree- FTAs in Europe and the Americas: Issues and Implications ments.”In P.Demaret, J. F. Bellis, and G. Garcia Jimenez, eds. for the EU-MERCOSUR Inter-Regional Association Agree- Regionalism and Multilateralism after the Uruguay Round: ment.” In G. Valladao and R. Bouzas, eds., Market Access for Convergence, Divergence, and Interaction. Brussels: European Goods and Services in the EU-Mercosur Negotiations. Paris: Interuniversity Press. Chaire Mercosur de Sciences Po. Pricewaterhouse Coopers. 2002. “Strengthening the AFTA Rules ———. 2004. “Rules of Origin: A World Map and Trade of Origin.” Presentation to the 10th Meeting of the ASEAN Effects.” In A. Estevadeordal, O. Cadot, A. Suwa-Eisenmann, Directors-General of Customs, Singapore. and T. Verdier, eds. The Origin of Goods: Rules of Origin Sapir, A. 1998. “The Political Economy of EC Regionalism.” in Preferential Trade Agreements. Inter-American Develop- European Economic Review 42(3-5): 717–732. ment Bank and Centre for Economic Policy Research. UNCTAD (United Nations Conference on Trade and Develop- Forthcoming. ment). 2003. “Main Recent Initiatives in Favour of Least European Commission. 2003. The European Community’s Rules Developed Countries in the Area of Preferential Market of Origin for the Generalised System of Preferences: A Guide for Access: Preliminary Impact Assessment.” Note for the 50th Traders. Brussels. http://europa.eu.int/comm/taxation_ Session of the Trade and Development Board. October 6–17. customs/customs/origin/gsp/index_en.htm. Document TD/B/50/5. Geneva: UNCTAD Secretariat. Falvey, R. and G. Reed. 1998. “Economic Effects of Rules of Ori- UNCTAD and the Commonwealth Secretariat. 2001. “Duty and gin.” Weltwirtschaftliches Archiv 134: 209–229. Quota Free Market Access for LDCs: An Analysis of Quad Flatters, F. 2001. “The SADC Trade Protocol: Which Way Initiatives.” London and Geneva. http://www.unctad.org/en/ Ahead?” Southern African Update 10: 1–4. docs/poditctabm7.en.pdf. ———. 2002. “SADC Rules of Origin: Undermining Regional U.S. International Trade Commission. 2004.“Harmonized Tariff Free Trade.” Paper presented at the Trade and Industrial Schedule of the United States. General Notes.” Washington, Policy Secretariat Forum. Johannesburg. September. D.C. http://hotdocs.usitc.gov/tariff_chapters_current/ Flatters, F., and R. Kirk. 2003.“Rules of Origin as Tools of Devel- 0410gn.pdf. opment? Some Lessons from SADC.” Presented at Institut World Customs Organization. 2003. “Report of the 21st Session National de la Recherche Agronomique Conference on Rules of the Technical Committee on Rules of Origin.” Document of Origin. Paris. May. OC0085E2. February 24–25. Brussels. Herin, J. 1986. Rules of Origin and Differences Between Tariff WTO (World Trade Organization). 2002a. “Committee on Levels in EFTA and in the EC. Geneva: EFTA Secretariat. Regional Trade Agreements — Rules of Origin Regimes in Hirsch, M. 2002. “International Trade Law, Political Economy Regional Trade Agreements—Background Survey by the and Rules of Origin: A Plea for a Reform of the WTO Secretariat.”Document WT/REG/W/45. April 5. Geneva. Regime on Rules of Origin.” Journal of World Trade 36(2): ———. 2002b.“Committee on Rules of Origin—Eighth Annual 171–88. Review of the Implementation and Operation of the Agree- Hoekman, B. 1993. “Rules of Origin for Goods and Services: ment on Rules of Origin—Note by the Secretariat.” Conceptual and Economic Considerations.” Journal of World Document G/RO/55. December 3. Geneva. Trade 27(4): 81–99. ———. 2002c. “Committee on Rules of Origin—Report by the Imagawa, H. and E. Vermulst. 2003. Rules of Origin in a Chairman of the Committee on Rules of Origin to the Globalized World: A Work in Progress.New York:Kluwer. General Council.”Document G/RO/52. July 15. Geneva. Forthcoming.

10 DUTY RELIEF AND EXEMPTION CONTROL

Adrien Goorman

TABLE OF CONTENTS 10.2 The Reform of Duty Relief Regimes in Morocco 221 Duty Relief for Inward Processing 216 10.3 Fiji’s Duty Suspension Scheme 222 Warehousing, Temporary Admission, and Transit 230 10.4 The Passbook System in Nepal 223 Exemptions 233 10.5 The Bangladesh Special Bonded Warehouse Facility 224 Operational Conclusions and Guidelines 238 10.6 Customs Administration of the Aqaba Export Annex 10.A Checklist for Duty Relief and Processing Zone 229 Exemption Control 240 10.7 Thailand’s Move to Open Bond Further Reading 241 Arrangements 232 References 241 10.8 Computer Application for Management of Investment Project Exemptions 237 LIST OF BOXES 10.9 Reimbursement of Taxes and Customs Duties on Imported Petroleum Products 10.1 Duty Relief and Exemption in Mali 238 Regimes 216

This chapter deals with two aspects of customs processing zones, temporary admission for re- administration that are of considerable economic, exportation in the same state, customs warehous- fiscal, and administrative importance—adminis- ing, and transit. It also refers to the regime under tration and control of duty relief regimes for tem- which duties paid on importation are refunded porarily imported goods, and administration and when the goods are re-exported (drawback).1 control of all other duty exemptions. Exemption control refers to the mechanisms Duty relief refers to the customs regimes under used by customs to administer and monitor full or which goods are imported with suspension of duty partial duty exemptions unrelated to exportation payment pending their re-exportation. Such duty relief might be for temporary admission for inward processing, manufacturing under bond, export 1. The duty relief regimes are often referred to as duty suspension regimes, economic regimes, or special customs regimes. There is no uniformity in the use of the terms “relief” and “exemption” Adrien Goorman is an independent customs administration among customs laws and practitioners. In the Revised Kyoto Con- consultant, former Deputy Division Chief, Tax Administration vention the term “duty relief” refers to what is generally known as Division of the Fiscal Affairs Department of the International exemption, while each duty suspension regime is dealt with under Monetary Fund. This chapter has benefited greatly from cooper- its individual name—inward processing, drawback, free zones, ation with the Inter-American Development Bank. customs warehousing, temporary admission, and so on. 215 216 Customs Modernization Handbook

BOX 10.1 Duty Relief and Exemption Regimes

Duty relief concerns the exemption from duties policy objectives or result from international and taxes on temporary imported goods or, if conventions and agreements. duties and taxes were paid on their importation, International conventions the refund of these duties and taxes upon re- Embassies and international organizations exportation. Government social and economic objectives Goods imported for re-exportation after processing Government imports Temporary admission for inward processing Fiscal incentives to investment (TAP) Foreign financed projects Manufacturing under bond (MUB) Relief goods Drawback Charitable, religious, educational, cultural, Export processing zone (EPZ) and other social purposes Warehousing, temporary admission, and transit Noncommercial imports Customs warehousing Migrant workers, persons settling or resettling Temporary admission for exportation in the in the country same state Baggage allowances Transit Samples of no commercial value Inherited goods, gifts, trophies, medals, prizes, Exemption involves importation under full or and so forth partial waiver of import duties for reasons unre- Other noncommercial imports. lated to exportation or re-exportation. These exemptions exist for a variety of government Source: Author.

or re-exportation. The main exemption categories tive aspects of outright exemptions. The final sec- concern investment incentives; imports for the gov- tion summarizes the operational conclusions and ernment, foreign-financed projects, and diplomatic guidelines. Annex 10.A provides a checklist for duty representations; imports of relief goods; and relief and exemption control. imports for institutions with charitable, cultural, A systematic classification of the main duty educational, or religious purposes. relief and exemption regimes in operation around Experience shows that many developing coun- the world is presented in box 10.1. tries have difficulty properly administering and monitoring duty relief regimes and exemption Duty Relief for Inward Processing regimes. This has resulted in abuse, fraud, and revenue leakage. In the absence of smoothly operating This section first reviews the economic rationale duty relief mechanisms, export manufacturers have for duty relief for inward processing, identifies the to produce at higher cost than would be the case if main approaches to duty relief, discusses adminis- they had full and easy access to production inputs trative issues relevant to all duty relief systems, then at world prices. Therefore, their competitiveness in reviews administrative aspects of the main systems export markets is impaired. one by one.2 The chapter gives an overview of the main duty relief and exemption regimes, and summarizes Economic Rationale their economic rationale, as well as the main requirements for effective administration. The Governments levy duties on the importation of chapter also reviews the experiences relating to the goods to collect fiscal revenue or protect industrial implementation of various systems in a number of activity. When the inputs are imported for the countries and provides guidelines for best practice. manufacture of export products, the duties paid on The first section reviews the regimes for duty relief for inward processing. The second section con- 2. The standards and guidelines of the Revised Kyoto Conven- centrates on duty relief for goods temporarily tion with respect to the duty relief regimes are included in the Convention as follows: temporary admission for inward imported for reasons other than processing. The processing, Specific Annex F.1 on Inward Processing, Specific third section deals with economic and administra- Annex D.2 on Free Zones, and Specific Annex F.3 on drawback. Duty Relief and Exemption Control 217 them increase the cost of production and, there- In today’s highly competitive economic environ- fore, make it more difficult for the exporters to sell ment, exporters are compelled to attain a high their products abroad. The objective of duty relief degree of efficiency in production and to cut pro- is to remove this tariff burden and to give exporters duction and marketing costs to the minimum if access to industrial inputs at world prices. This is they are to survive in export markets. Therefore, it done through exempting the inputs at the stage of is important that policymakers and customs man- importation, or refunding the duties paid at the agers make available to the export sector duty relief time of importation, when the products in which systems that provide full (100 percent) relief from the inputs are incorporated are exported. Customs the duty burden on industrial inputs. It is also laws make provisions for these regimes and estab- important for policymakers and customs managers lish regulations for their administration and to create the conditions for effective administration control. of these regimes. For customs administrators The economic justification for relieving export whose responsibility it is to collect import duties producers of the payment of duties on imported according to the tariff schedule, the implementa- inputs rests on the destination principle of taxation of duty relief regimes clearly establishes a tion, under which no indirect taxes should be levied problem of customs control. Customs must estab- on goods that are not destined for domestic con- lish mechanisms to ensure that claims for duty sumption. Following this principle, there is no relief are legitimate and correctly executed. ground for levying import duties, for instance, on goods in international transit, or on materials Prior Exemption versus Drawback and components imported for incorporation into manufactured products that are subsequently There are two basic approaches to providing duty exported.3 The failure to relieve export producers relief for inward processing: (a) exempting goods from import duties would effectively establish a tax from the payment of the duties at the time they are on exports, increase their cost, and reduce the com- imported, conditional upon their re-exportation petitiveness of domestic manufacturers in export after processing (often referred to as temporary markets. admission); and (b) drawback, which is the pay- In line with the destination principle, the refund ment of duties on the imported goods, with refund of duties paid on the importation of industrial of the duties upon re-exportation of the goods after inputs incorporated in export products is accept- processing. Prior exemption exists in different able under, and fully compliant with, World Trade forms, including temporary admission for inward Organization (WTO) rules provided the refund processing (TAP), manufacturing under bond does not exceed the actual amount of duties paid. A (MUB), passbook system, variations on or combi- refund that exceeds that amount would be equiva- nations of these forms, and export processing zones lent to an export subsidy and would violate the (EPZs). WTO rules on Export Subsidies and Countervail- While prior exemption systems and drawback ing Duties. have the same objective, there are differences in the Clearly, providing duty relief is only a second way they operate, in the benefits they provide to the best alternative to a free trade regime. Free trade manufacturer, and in the control measures customs eliminates the need for schemes to insulate may want to put in place to protect revenue. One exporters and obviates the administrative require- system may be better suited to a particular exporter ments that are often difficult to meet. Most coun- than another. In general, exporters prefer prior tries do not have a free trade regime, however, and exemption to drawback, but prior exemption car- can relieve export products from the burden of ries greater revenue risk for the government because import duties and taxes only through the imple- of the possibility of diversion of the imported mentation of one or more of the duty relief systems. goods, or the products made from them, to the local market without duty payment. Drawback involves less risk to revenue, but one disadvantage is that the 3. Some countries charge a transit fee, which may have the char- manufacturer must pay the duties and taxes first acter of, for instance, a service charge for using the national road system. and then wait (often for a considerable period 218 Customs Modernization Handbook

of time) before the refund is made, which reduces developments, has led to a rapid expansion of the company’s working capital. Delays and uncer- international trade and to cutthroat competition in tainties about repayments under the drawback sys- export markets. Trends in trade and industry, tem may also act as a disincentive to exporters, and including the need for rapid delivery of goods, just- may lead them to factor the delays and uncertainties in-time inventory, and the use of technology, have into their cost and price calculations, thereby reduc- forced many customs administrations, in both ing their competitiveness abroad. industrialized and developing countries, to adopt It is in the interest of the export sector that all modern customs control strategies. Such strategies manufacturers (from the large enterprise exporting are based on risk assessment and management, the bulk of its production to the occasional export selective checking, post-importation audit, and processor) have access to one or more schemes that extensive use of information technology. They con- fit the type of business and provide full relief at centrate more on overall assessment of the traders’ minimum administrative and operational cost. level of compliance than on verification of individ- Therefore, the best policy is to make both prior ual transactions. For companies judged to represent exemptions, in one or more of its forms, and draw- a low risk, customs reduces its level of regulatory back available. If there is economic justification for scrutiny and relies more on the company’s self- establishing free zones, EPZs should be made avail- assessment of customs compliance. Thus, low-risk able. However, EPZs are established on the basis of traders can operate under less onerous reporting a broader set of objectives and conditions, and and procedural arrangements, which largely facili- involve a much bigger undertaking than other prior tates their import and export business. Experience exemption regimes and drawback. They may not be shows that such strategies not only substantially an appropriate solution in many cases. facilitate trade, but are also far more effective in The availability in the domestic market of sub- protecting revenue than the old systems. stitute goods—materials that are identical in The ability to implement modern customs con- description, quality, and technical characteristics to trol strategies differs from country to country. the imported materials—should not be a determin- Among the factors that influence that ability are the ing factor in whether to give export manufacturers degree to which traders keep records and accounts, access to duty relief systems. Even though the use of which is essential for accounts-based control to be imported materials may limit the development of meaningful; the overall degree of modernization of domestic backward linkages, duty relief remains the trading sector, which may determine the extent consistent with the policy objective of giving export to which customs can interact electronically with manufacturers access to production inputs at world traders in connection with their foreign trade oper- prices. ations; the level of trade liberalization (tariff level, openness of the economy), which may cause the trading sector to be more or less tax-compliant; and Administration: From Physical Control to Audits the degree to which human, financial, and physical Traditionally, customs procedures to administer, resources are made available to the customs depart- control, and enforce duty relief schemes, as with ment, which will help determine its ability to other aspects of customs control, have relied heav- respond to the needs of the modern economy. ily on physical control. Physical control allows cus- Depending on these factors, some countries may toms to monitor the movement of imported mate- have to rely on a higher level of physical control rials into the manufacturer’s warehouse, the use of than others, until such time as the customs depart- the materials in producing goods for export, the ment has built up sufficient capacity to rely mainly quantities produced, and the removal of finished on accounts-based controls, and the trade regime goods from the factory for exportation. Physical and trading environment are conducive to such an controls are burdensome to both customs and approach. manufacturers, and economically inefficient com- Regardless of their degree of modernization, cus- pared to accounts-based controls. toms administrations should adhere to the interna- Over the last few decades the worldwide liberal- tional standards and guidelines for administration ization of trade, combined with rapid technological of the duty relief systems included in the Revised Duty Relief and Exemption Control 219

Kyoto Convention. These standards and guidelines As the system is administratively demanding, it are taken into account in the discussion, proposals, normally is not a practical solution for manufac- and guidelines that follow. No attempt is made to turers that export only a small part of their produc- cover all the provisions of the Revised Kyoto Con- tion, or export only occasionally. Such manufactur- vention. Rather, the discussion concentrates on ers should have access to a simpler system of principles and practical measures for the design and temporary admission or a smoothly operating sys- effective implementation of the duty relief regimes, tem of drawback. and the experience of some countries in this arena. Operational and Administrative Requirements and Procedures The main requirements for Temporary Admission for Inward Processing effective operation and administration of the TAP TAP is the regime under which materials can be regime include the following: imported, conditionally relieved from payment of import duties and taxes, on the basis that they are • Authorization. Manufacturers wanting to import intended for manufacturing, processing, or repair, under TAP need to register for the system at and subsequent exportation. The products result- customs. Authorization from customs is needed ing from the processing under certain conditions for follow-up and control purposes. Upon the may also be obtained from materials other than first application under the TAP regime, customs those imported for inward processing. (See Equiva- may visit the plant to check that records and lence and Prior Equivalence below.) The TAP systems are adequate for customs purposes and regime also covers contract or “job” processing, to find out more about the import and export whereby the foreign customer remains the owner of trade. the imported goods. TAP is being implemented in • Security. The manufacturer will have to estab- many developed countries and in a number of lish security for the duty in the form of a bond developing countries. to secure duty payment in case of abuse or fraud. The bond can be waived for established Issues Effective implementation of TAP requires and solvent companies that pose no revenue a well-developed customs administration. Manu- risk. facturers exporting a given minimum percentage of • Rate of yield. The ratio of imported materials their production on a regular basis can request used in one unit of output needs to be deter- advance authorization for operating under the TAP mined and agreed on between the manufacturer regime. They may have to post a bond to secure the and the customs administration, and updated customs duties and are required to keep prescribed periodically and each time that manufacturing books and accounts to document the materials processes or tariff rates are changed. imported and the final products made of them. The • Importation. The manufacturer may import rate of yield (ratio of imported materials used in the goods to be processed directly or buy them one unit of output) needs to be determined and from another TAP-authorized trader. On agreed on between the manufacturer and the cus- importing directly, the manufacturer declares toms administration, and updated when manufac- the goods for the TAP regime and the goods are turing processes or tariff rates change. A control released to the importer with suspension of the mechanism needs to be set up by customs, in coop- duties and taxes. When buying from another eration with the producer, to periodically verify the TAP-authorized trader, the manufacturer needs percentage of total production exported and the to provide its TAP registration number to the percentage sold in the local market, and to deter- supplier, and the manufacturer takes over the mine the amount of suspended duties and taxes to responsibility for the suspended duties and be cleared (for the goods exported) and the amount taxes from the supplier. of duties and taxes to be paid (for the goods sold in • Exportation and discharge of responsibility. The the local market). This requires detailed accounting manufacturer clears its responsibility for the and careful verification by officers skilled in audit- unpaid duties and taxes mainly through expor- ing manufacturers’ accounts. tation of the processed goods. Exportation 220 Customs Modernization Handbook

includes direct exportation, sales to duty-free which may be called the Inward Processing unit shops, sales by duty-free shops, sales to persons or Duty Relief unit, for example. The unit entitled to diplomatic privileges, and use as reviews applications, gives authorizations for the stores for bunkers on ships traveling to destina- TAP regime, reviews input–output ratios (rates tions abroad. Furthermore, the responsibility for of yield), and monitors the performance of the the unpaid duties can also be cleared by putting manufacturer on the basis of periodic returns, the goods in a customs warehouse or an EPZ, periodic visits, and audits of its accounts. Addi- transferring the goods to another temporary tional units at the customs offices in the main importation regime, selling the goods to another industrial centers may need to be established to TAP trader, and any other export-equivalent monitor and audit the manufacturing compa- procedures provided for in the national customs nies approved under the system in these centers. legislation. Staff involved with the TAP should be ade- • Diversion of goods to local market. Diversion of quately trained, particularly with respect to goods to free circulation beyond the authorized auditing. quantity results in payment of the suspended • Computerization. The TAP control system duties. Interest may be charged for the late pay- should be computerized to allow for accurate ment. Byproducts, scrap, and waste from the follow-up on temporarily imported materials processing are normally subject to payment of and the exported goods made from them; mon- duty unless they are exported (national legisla- itoring of the manufacturer’s duty suspension tion may differ). account; and calculating and updating rates of • Periodic returns. The manufacturer files peri- yield as a basis for calculating the use of materi- odic returns to the duty relief unit at customs als in finished products. (Examples of comput- showing the goods imported under the TAP erized support for duty relief administration are regime or purchased from other TAP traders, included in boxes 10.2 and 10.3.) and the destination of the goods after processing. There are two principal ways of accounting The requirements can be simplified for (a) traders and controlling. One method is the matching of importing only occasionally for export processing, export documents with specific import docu- for instance when the total value of imports for ments. This is a traditional and complicated processing in a calendar year does not exceed a method, which should be avoided. The other given amount, or the goods are imported for repair; method is to make a single, global declaration and (b) operations that do not change the tariff for the total quantity of materials imported dur- classification of the goods, such as simple opera- ing a given period and the total quantity of final tions to ensure preservation, or improve presenta- goods delivered for export and to the local mar- tion and marketability, or prepare the goods for ket in the same period. Global declaration is the distribution or sale. only method that allows for effective implemen- In such cases, no prior registration for the sys- tation of the system, and is the recommended tem would be needed, but authorization would method. be given for each importation at the customs office. • Prescribed books and records. The manufacturer The authorization form would identify the needs to maintain records and accounts of raw imported goods, the process, the processed prod- materials imported and duties and taxes ucts, the rate of yield, and the re-exportation time suspended; materials stored; materials used in limit. production; final goods produced; quantities exported; quantities sold in the local market; Equivalence and Prior Equivalence The prod- and byproducts, scrap, and waste resulting ucts resulting from manufacturing or processing, from the process. The records must enable called compensating products, need not be customs to monitor the goods under temporary obtained solely from goods admitted for inward admission. processing, because it may be necessary for the • Customs duty relief unit. Customs monitors and manufacturer to substitute goods of national origin controls the TAP system through a special unit, or that were previously imported with payment of Duty Relief and Exemption Control 221

BOX 10.2 The Reform of Duty Relief Regimes in Morocco

Inward processing is an indispensable aspect of cent of the accounts were regularized, thanks to the Moroccan economy. In 2002, duty relief the use of an automated mechanism for identify- regimes accounted for over 50 percent of for- ing anomalies and fraudulent activities, and the eign trade transactions. About 82 percent of the development of a procedure for identifying ficti- duty relief was under the TAP regime. tious companies. A study of industrial sectors For many years the management of the duty and research in the field led to the sanctioning of relief regimes was disorganized and opaque, fictitious and fraudulent accounts. until it became totally unmanageable. In 1996 In addition to these two measures, special more than 70,000 accounts, some established as efforts were made to improve service to the far back as 1985, were waiting to be regularized. trading sector, including the reduction of clear- These delays were due to complicated, bureau- ance times to less than one hour, and the design cratic, and rigorous procedures involving exces- of automated programs for the duty relief sive paperwork and meticulous recording and regimes. This gives operators online information accounting. All import and export shipments about progress in the processing of their decla- were examined and many samples were drawn. rations, their customs account situation, and Traders suffered large operational delays, and their guarantee situation, as well as providing a substantial funds were tied up in government virtual window through which they can execute accounts through delayed refund of security their clearance operations. deposits. In recent years, Moroccan customs manage- A decision was made to implement two ment has concentrated on motivating personnel measures: complete reform of the procedures, and stimulating innovation. Results are already and the regularization of the delays. The TAP visible, for instance in the introduction of a per- regime was revised in close cooperation with the sonalized management system for the duty relief industrial sector. The procedural reform intro- operations. This system responds to the needs of duced less rigorous and less cumbersome both trade facilitation and revenue control, and requirements and allowed for more operational is fully integrated with the enterprises’ methods flexibility, including the acceptability of different of management. Already about 30 enterprises types of guarantee, allowances in calculating the make use of this arrangement. Study and rate of yield, and the option to sell part of the research for other improvements are ongoing. production in the local market with duty payment but without interest. By 2003, over 90 per- Source: Steenlandt and De Wulf 2004.

duties and taxes. Such substitute goods need to be goods produced by TAP-approved manufacturers equivalent to the goods imported for inward pro- for export.4 cessing that they replace. Equivalence is the procedure that allows the Illustration of Successful TAP Reform As inward manufacturer to use substitute goods in place of processing is an important activity in the Moroccan TAP goods, as long as the substitute goods are in economy, the duty relief regimes are an indispensa- free circulation in the customs territory and can be ble aspect of the strategy to attract investors. considered equivalent to the TAP goods. To be equivalent, the substitute goods must be of the 4. Such systems are available, for instance, in Brazil, Chile, and same kind, technical specification, and commercial the EU. This facility can be useful to the export manufacturer in quality as the TAP goods. They must be mutually several ways: The manufacturer can respond to urgent export interchangeable. orders when insufficient TAP goods are in stock. When it is diffi- Prior export equivalence allows the exportation cult to apportion imports in advance to TAP and free circulation, the manufacturer can import all goods to free circulation of products made from equivalent goods to take initially and when it has exports, it can import TAP-equivalent place before the TAP goods are imported. Several goods to replace the goods used from the duty-paid stock. When countries allow for duty-free importation of mate- the manufacturer has underestimated its TAP needs, it can supply export markets with products made from free circulation rials of the same kind, technical specification, and materials, and then import TAP-equivalent goods to replenish quality as local materials that were incorporated in the duty-paid stock. 222 Customs Modernization Handbook

BOX 10.3 Fiji’s Duty Suspension Scheme

Fiji’s DSS was developed to facilitate and encour- would enable them to import for two months age exportation by giving exporters access to using the credits. manufacturing inputs at world prices. Specially developed software has been cre- The DSS is managed by a private sector–run ated for customs as an attachment to the ASY- organization—The Exporters Club—on behalf of CUDA system. The software enables the Fiji Islands Revenue and Customs Authority. Exporters Club to manage the day-to-day opera- Members must be in the business of import- tions of the program and customs to audit ing materials for transformation into products for arrangements with individual members. Mem- export. The Exporters Club assesses the qualifica- bers have access to their own data, but cannot tions of applicants, recommends a list of materi- access the details of other members. als to be imported and subsequently used in the The Exporters Club is a nonprofit organization production of exports, calculates advance credits owned by eight peak industry groups involved in and Entitlement Proportion (EP) ratios, and promoting exports. A board manages the Club, advises customs when all requirements are met. representing the owners and the Customs Ser- The exporter receives credits for every dollar vice. In addition to the abovementioned respon- of exports achieved under the system. It can use sibilities, the Club monitors the performance of these credits to import approved materials duty each club member. This is done by a computer- free. The credit is based on the EP, that is, the ized system that calculates the amount of credits proportion of imported goods required to pro- earned and automatically reduces these credits duce one unit of the export product. As long as when products are imported. To cover the cost the company operates within its EP ratio, it can of operations, the Club charges an application continue to import approved goods duty free. and assessment fee, an annual subscription fee, The EP is calculated initially when companies and an activity fee. enter the scheme, using the company’s import and export history and an audited set of Source: T. O’Connor, Director General of Cus- accounts. For the first export operation, compa- toms, Fiji Islands Revenue and Customs Author- nies can be provided with advance credits that ity. Note prepared for this chapter (June 2003).

Box 10.2 summarizes the problems that had built ber of Asian countries including India, Bangladesh, up over the years in the management of the relief and Nepal. It operates using a ledger (the passbook) systems and the kind of reforms undertaken by the through which both the trader and customs keep government to solve these problems and establish track of the quantity and value of materials far more efficient management of the TAP regime. imported and the processed goods exported.5 The ledger also keeps the trader’s security account. For a Variations on the TAP Procedure Fiji’s duty sus- description of how it operates in Nepal, see pension scheme. The Fiji duty suspension scheme box 10.4. (DSS), introduced in 2002, is an inward processing Manufacturing under bond. The customs regu- system that aims at the full relief of the import tar- lations of many countries incorporate provisions iff and tax burden on export products. The system for manufacturing under bond (MUB) to provide has some unique features of design, management, duty relief to export manufacturers. The system is and operation. Since its inception, Fiji’s DSS has in operation in numerous countries including been successful in achieving the stated objectives. It Bangladesh, Canada, India, Nepal, Tanzania, and is managed by a private sector organization, known the United States. This system is similar to TAP. as The Exporters Club, on behalf of the Fiji Islands Revenue and Customs Authority. The system has a hybrid character with features of both the TAP and 5. The passbook system in Bangladesh is difficult to monitor, as exports and imports are recorded in different passbooks if they drawback mechanisms. For more detail, see the are effected through different customs houses. Also, the descrip- summary description in box 10.3. tion of the imports does not follow the Harmonized System Passbook. The passbook system is a mechanism classification, complicating the task of audits. A Bank project is financing the automation of the Warehouse and Bond system. for providing duty relief under the conditional Once implemented, this will gradually replace the passbook exemption system, which has been used in a num- system. Duty Relief and Exemption Control 223

BOX 10.4 The Passbook System in Nepal

Following years of disappointment with the fail- goods, the deposit corresponding to quantity of ures of a drawback system, Nepal introduced the inputs incorporated in the exported goods is passbook system in 2001. Under this system, released. For regular importers–exporters, the export manufacturers are relieved from the duty released amount is not refunded but used as a burden on materials imported for processing or deposit for subsequent imports of materials. transformation into products to be exported or Excess amounts of deposit not used within one sold in the local market for foreign currency. The month are refunded. Failure to export within system is available only for operations that add at 12 months after importation of the materials least 20 percent of value to the imported goods. results in payment of the duties and a 10 per- The rate of yield, that is, the quantity of imported cent penalty. The Department of Customs speci- materials used in the production of one unit of fies the customs offices through which the export product, needs to be approved by the trader can import the materials and export the Technical Committee of the Department of processed goods under the system. Any particu- Industry. The exportation or sale needs to hap- lar company can import only through one given pen within 12 months following importation. customs office. Such restrictions have created On importation, the quantity, value, and problems for some traders, but overall, the sys- duties and taxes suspended are recorded in the tem has performed well. Traders have been gen- passbook. Security in the form of a cash deposit erally more satisfied with the passbook system is required to cover duties and taxes suspended, than with the drawback system. and credit for the deposit is given in the passbook. On proof of exportation of the processed Source: Author.

Like TAP, it allows manufacturers to import raw the minimum percentage of production required to materials without duty payment. On exportation of be exported. the manufactured products, the duties on the cor- Many developing countries have had difficulty responding amount of raw materials are cleared. monitoring that all imported inputs are actually The MUB system is especially useful for the assem- used in the manufacture of export goods and not bly of goods made entirely from imported dutiable diverted to other industrial uses, and that all fin- components, or goods using a high content of ished products are actually exported. Furthermore, imported dutiable inputs. In these cases, the savings the legal and administrative requirements imposed in financing costs relating to duty payments can be on MUB users often are excessive and costly. In substantial. some cases, the license for operating the bonded Considering that the primary objective of warehouse needs to be renewed every year. The user authorizing MUB is to promote exports, rather can access the raw materials only when customs than to postpone the payment of customs duty on opens the warehouse, and procedures involve too the imported materials and components, there is much paperwork and bureaucratic hassle. no advantage in allowing manufacture under bond The operational and administrative require- if most of the production is sold in the local mar- ments and procedures for the MUB regime are ket. However, it may be necessary for the manufac- broadly similar to those discussed under the TAP turer to sell parts of the goods produced in the regime. Traditionally, MUB programs have relied domestic market.6 The government must decide more heavily on strict physical controls than the TAP regime, but here, too, physical control is grad- 6. This would be the case, for instance, when some of the pro- ually being replaced by accounts-based control. In duction does not come up to the quality required on the inter- most developing countries, physical controls are national market, but there may be a local demand for such prod- still heavily relied on. ucts; or when the company is not able to sell its entire production in export markets and finds it uneconomical to Such controls may involve supervision of the restrict production to the quantity it can sell abroad; or when an transfer of the imported materials from the docks export order is cancelled; or, finally, when the product manufac- to the bonded warehouse; joint control by customs tured in bond is in strong demand in the domestic market and would have to be imported if the bonded factory is not allowed and the manufacturer of access to the warehouse; to sell to the local market. control over access to the raw materials, finished 224 Customs Modernization Handbook

goods, and any intermediate materials including Computerizing MUB control can greatly wastes stored in the warehouse; and physical super- improve the quality of control and the efficiency of vision of the exportation or other means of dis- the whole operation at savings for both the manu- posal of the finished products and other goods aris- facturer and the customs administration. Comput- ing from processing under bond. erization allows for such functions as the electronic Control can be exercised through simpler proce- tracking of goods moving into and out of the dures similar to the TAP procedures that, while bonded warehouse; calculating and updating rates protecting the interest of revenue, also facilitate of yield, and on that basis calculating the utilization trade. In brief, this would involve a security to proof materials in finished products; and producing tect revenue; a formula expressing the rate of yield; accurate accounts of imported materials, goods prescribed accounts of production operations, that produced, and goods exported. is, raw materials received and used and final prod- The facility operating in Bangladesh provides a ucts manufactured and exported; accounts-based good example of the revenue risk involved in the customs verification; and periodic unscheduled duty relief systems and how the risk can be visits to the factory to ensure that accounts are cor- addressed by establishing computerized customs rectly kept. control (see box 10.5).

BOX 10.5 The Bangladesh Special Bonded Warehouse Facility

In Bangladesh, the Ready Made Garments (RMG) and the necessary export entry is made in the sector is significant and relies heavily on the use of passbooks. It is the bonder’s responsibility to the special bonded warehouse (SBW) facility. Raw match import accounts with export accounts in materials used in the production of RMG prod- the passbook. ucts are imported duty-free into SBW, manufac- The system is not foolproof and there are tured into finished articles of clothing, and reports of significant revenue loss due to illegal exported. There are some 3,400 SBWs, located diversion of finished products to the local mar- mainly in Dhaka and in the Chittagong port area. ket. A recent investigation of a single fraud case Another, approximately 700, backward linkage or revealed that a bonder had falsified export docu- supply industries operate a different kind of ware- ments and the entries in the passbook, leading house and supply inputs, such as packing, thread, to a loss in customs revenue of US$3.2 million. embroidery, and labels to the RMG export trade. A key component of the customs moderniza- These supplies are treated as exports. tion project that started in 1999 is to address the The Commissioner of Customs, following the loss of revenue created by the operation of the approval of the facility and the posting of a bond SBW facilities. The main initiatives include cen- that must cover the duty liability on the goods tralized management of the SBW facilities, warehoused, issues licenses to the SBW. The relicensing of the SBW operators (which reduced bonder is issued passbooks, one for the bond the number of licenses by 20 percent), and the operator, and one for customs at the port of electronic tracking of the goods using the import–export for recording goods both ASYCUDA++ computer system. This enables cus- imported into and exported out of the bonded toms to retrieve accurate accounts of total warehouse. A bonder can import raw materials imports and exports of any individual SBW oper- duty-free up to 75 percent of the value of the ator and to reconcile the movement of goods total export. At the time of import the bonder into and out of a bonded warehouse, reducing submits a utilization declaration (UD) issued by its reliance on the passbook system. In the the Bangladesh Garments Manufacturing and future, this reconciliation is expected to benefit Export Association, along with other import doc- from a new software program that takes the uments. The quantities imported are recorded in ASYCUDA++ import and export data and uses the bonder’s and customs’ passbooks, which act the UD formula for calculating the utilization of as a record of stock going into the SBW. There- raw materials to finished articles, thus automati- after, the bonder accepts delivery of the raw cally tracking the goods flow and highlighting materials for transfer to the warehouse. After potential inconsistencies. completion of the manufacture of finished products, the bonder presents all documents for Source: Thomas, January 2003. Note pre- export together with the UD for a second time, pared for this chapter. World Bank staff. Duty Relief and Exemption Control 225

Drawback permits refund only for the central government duties and not of the state taxes and duties Drawback is the refund of import duties and taxes levied on the inputs. paid on imported materials that are used in the • Processing or service fees reduce the drawback manufacture of goods that are then exported.7 at times. For instance, Tanzania used to charge a Drawback is not an export subsidy and is compli- processing fee of 4 percent of the refund. ant with WTO rules insofar as the refund does not • Bureaucratic requirements, ill-conceived proce- exceed the amount of duties and taxes paid on dures, or inefficient customs administration (or importation of the materials.8 all three) result in undue costs to the exporter through delays in the payment of the refund, Issues Drawback is in operation in many coun- service charges, or other direct or indirect tries, usually along with one or more systems that administrative costs. are based on temporary admission. While the prin- • Payment delays often are excessive, or payment ciple of drawback is the same everywhere, there are simply is not made, a problem occurring partic- substantial differences among countries in the scope ularly in countries where refunds are to be made of drawback allowed, and in the administrative rules out of a special annual budget line for drawback. and procedures by which the system operates and is When payments are finally made, inflation may implemented. In some countries drawback seems to have substantially reduced the value of the be considered as a privilege or a benefit to the drawback payments, thus increasing the export manufacturer, rather than the refund of what exporter’s already high cost of financing the should not have been charged in the first place. This duties, and reducing its working capital. For is reflected in the kind of problems experienced instance, before Tanzania reformed its system a with drawback schemes in various countries, which few years ago, substantial arrears in drawback may include some of the following: refunds had accumulated due to both an inadequate budget for drawback and excessive docu- • The categories of goods that qualify for drawback mentary requirements. Similar problems prevail are restricted to encourage the use of domesti- in Nepal, India, and several African countries.9 cally produced equivalents of the imported • Excessive documentary requirements also con- goods. This handicaps the competitiveness of the tribute to delays in refunds, and add costs to the exporter. exporter (and customs). Some countries require • The exporter is not given full relief of the duty the drawback claim to be supported not only by burden because not all import-related taxes are the export entry and invoice, but also by the bill included in the system, or refunds are made only of lading, the landing certificate, proof of export up to a given percentage of what was paid. An proceeds, and import entries concerning the example of restricted access to drawback is the inputs for which the duties were paid. Apart Indian drawback scheme, which covers only from the fact that most of these documents those products included in an exhaustive list and should play no role in the routine processing of drawback claims, they are a major source of 7. Some countries use the term “drawback” for the refund of duties paid for any goods imported and subsequently exported delay because it may take the exporter months without undergoing processing. The appropriate customs termi- after exportation before being able to produce nology for such refunds is simply “refund.” some of them. 8. Some countries have applied a flat drawback rate per category of products. In this case, the refund will normally not equal the amount of duties paid on the imported inputs, because technical input/output coefficients, prices of inputs, and duty rates vary 9. Tax Notes International reports that the Nepalese govern- for each specification of export product. If the amount is too ment’s delays in duty drawback hurt the country’s export indus- low, the exporter does not receive full relief of the duty element try. Business opportunities have been lost as a result of the fail- in the export products. If it is too high, the drawback contains an ure of the Revenue Committee to refund the duties. The element of subsidy and does not comply with WTO rules. Kenya, government allocated only NPR 200 million (about US$ 2.8 mil- Bolivia, and Colombia used to apply a flat duty drawback rate. lion) for duty drawback, despite estimates that the total duty In Bolivia, a flat rate of 10 percent of the export value was in refundable at the end of the year would exceed NPR 1 billion place until about 1990. The drawback system has been reformed (about US$ 14 million) (Tax Notes International 2001a, p. 76; since then. 2001b, p. 168). 226 Customs Modernization Handbook

The absence of a well-designed drawback system, Guiding Principles for Drawback Design The or the inability of the customs administration to following principles should be followed in design- properly implement one, is frustrating and discour- ing a drawback system. aging for exporters and may make duty and tax evasion more tempting. The following summarizes • Duty relief should be complete (100 percent of principles and guidelines for the design and admin- all duties and taxes paid) and rapid. It should istration of an effective drawback system. cover all export products that incorporate imported inputs, as well as all raw materials and Determination of Drawback Rates The determi- intermediate goods used for the production of nation of drawback rates involves the following: final exports, including imported packaging. • The setting of drawback rates should be the Refunds should not exceed the duties actually responsibility of a high-level committee, which paid, ensuring consistency with WTO rules. should normally consist of industry, trade, cus- • The system should be simple, easily understood toms, inland revenue, and possibly other gov- by manufacturers, and easily administered by ernment departments. customs. It should operate at minimal cost to • Drawback rates should be based on calculations the exporter. This implies that the exporter is of the duties on imported inputs incorporated not charged any special service fee for obtaining in one unit of output. The amount to be drawback; the refund is immediate or within a refunded should equal the sum of inputs times few days after exportation; and the documentary their tariffs, for a given unit of exports. A certain requirements are minimal, while protecting rev- amount of aggregation may be possible in enue from abuse and fraud. setting drawback rates. For final goods that • The export declaration should be taken as suffi- convert inputs according to a standard formula, cient proof of exportation, and no other docu- product rates or fixed rates can be set. When mentation should routinely be required. Draw- input–output ratios vary, individual rates are back should not depend on proof of exchange more appropriate. receipts, but on the simple fact of exportation. If questions of underinvoicing or other fraudulent Under the fixed rate system the refund is calculated practices need to be addressed, this should not according to a set schedule for each exported good be done through the drawback system, but based on input–output coefficients. This provides through other appropriate control methods. ease of administration because it uses automatic • The scheme should include both direct and rates of drawback not related to the specific indirect exporters, that is, the refund should performance of the manufacturer. However, reflect all duties and taxes paid on the imported it requires the frequent updating of the input–out- materials that have been incorporated into the put coefficients. Korea and Taiwan use this system export product, whether paid by the exporter, or and publish updated drawback schedules every six by other traders from whom the materials were months. purchased.10 Under the individual rate system the drawback • Exporters should be accountable for revenue is based on the manufacturer’s performance, veri- losses resulting from failure to inform the cus- fied by audit of the books and records of the enter- toms drawback unit of changes in the factors prise. This system relies more heavily on self-assess- underlying the drawback rate. ment, because the manufacturer is responsible for • Customs should publicize and maintain per- establishing rates of yield or conversion ratios to formance standards in administering drawback claim drawback. It is the responsibility of the and, in particular, commit itself to paying draw- administration to verify the yields or conversion back within a set number of days following the rates through audits. This approach is fair to all receipt of the drawback claim. manufacturers because it relates specifically to the performance of an individual company and is not based on an industry average. Most industrial 10. This is done for instance, in Korea, Chile, and Colombia, but countries use this system. it is not the case in many countries. Duty Relief and Exemption Control 227

Operational Guidelines The main operational ing audit for drawback with audit for value- guidelines for a drawback system follow: added taxes (VAT). • A dedicated technical unit at customs headquar- • The drawback system should be the subject of a ters needs to be established to monitor and audit regulation that would set out the principles and the manufacturing companies approved under the main legal, administrative, and procedural the system and audit drawback claims. A requirements. Customs should provide further selected number of staff need to be trained in useful information to drawback users through the audit for drawback. information leaflets or seminars. • The drawback formula should be periodically • Claiming drawback and paying the amount of reviewed to take into account changes in the fac- drawback should require only a simple proce- tors underlying the drawback rate (changes in dure with minimal documentary requirements. input–output ratios, import prices, and duty The claim can be made on the same form as the and tax rates). export declaration or on a separate form. Pay- • Drawback control should be automated through ment should not be delayed until all controls are a module or program especially developed for finalized. Once customs has certified the expor- managing the drawback system, using the exist- tation of the goods on the basis of the export ing customs computerized system (for instance, entry, the drawback should be paid, with verifi- similar to the Fiji solution for TAP manage- cation of the validity of the claim afterward. In ment—see box 10.2). situations where delays are unavoidable because, for example, the drawback rate has yet to be Export Processing Zones determined for a product at the time it is exported, a provisional payment should be EPZs are geographical enclaves established outside made, perhaps 80 percent of the amount the country’s customs territory to encourage claimed by the exporter, subject to the necessary manufacturing for export and to provide services to adjustment when the rate is determined. foreign enterprises.11 The objectives for establishing • The drawback can be paid in cash, check, EPZs in general are to promote exports of non- electronic fund transfer, or in the form of a traditional manufactured goods, strengthen the credit certificate or voucher, which could be competitiveness of exporters, attract investors, used for paying duties on the next import con- diversify the economy, create employment, transfer signment. If the voucher is not sufficient to pay technology, and achieve development and growth.12 the duties and taxes on the next import, the difference is paid in cash. The advantage of the Issues In EPZs, enterprises can import raw mate- voucher system is that it is simple to operate, rials and components without payment of import not disruptive to government accounts, and less duties and taxes. In addition, they enjoy several conducive to corruption. (Such a system is in other advantages, which may include exemption operation in Brazil.) If payment is made in from sales taxes, excise duties, and profit taxes; cash, the budget for paying drawback should be exemption from industrial regulations applied set high enough to satisfy all drawback claims, elsewhere in the country; benefits relating to labor and procedures should be streamlined to avoid regulations, foreign exchange, and others; and lengthy delays. • The option to claim drawback and receive pay- 11. Export processing zones have been given a variety of names ment periodically should be made available for including Free Trade Zone, Duty Free Zone, Tax Free Zone, and exporters that have a large number of drawback Free Export Zone. claims on a regular basis. This simplifies the 12. Historically, free zones were originally established to facilitate entrepot trade focusing on commercial, warehousing, and work for both the exporter and customs. repacking operations, and not for export manufacturing. Pre- • Control of the amount of drawback should be sent day examples of such free zones are the Miami free trade made after exportation through periodic audit zone, which acts as a distribution center for European and Asian companies exporting into South America and the Caribbean, of the books and records of the manufacturer. and the free zone of Colon in Panama, which is concerned There may be benefit in periodically coordinat- almost exclusively with entrepot trade. 228 Customs Modernization Handbook

provision of infrastructure. These benefits are sub- books and accounts properly and are mostly tax ject to the condition that the manufactured prod- compliant, and customs has the capability to rely ucts are exported, and that all the imported inputs mainly on accounts-based controls, diversion of are either used in the zone or are re-exported. In EPZ goods to the domestic market is bound to be a some countries, sale to the local market of a part of problem, with revenue loss as a result. the output is allowed.13 In recent years, with the shift of emphasis from Customs Administration of Export Processing import substitution to export-oriented industries, Zones For application of the customs law, EPZs many developing countries have been attracted to are located outside the customs territory, although establishing EPZs, and their use has proliferated. they are physically located within the national However, experience has shown that only in a lim- boundaries and are part of the national economy. ited number of cases has the establishment of EPZs EPZs, therefore, require customs to arrange for two 14 been successful in promoting exports. Many of types of customs control. these zones have proved to be poor investments as a First, with respect to the movement of goods result of unwise location, high investment costs, from the EPZ to the local market and vice versa, the inadequate management, or, more profoundly, EPZ has to be dealt with like a foreign country. Cus- because the economic policy environment within toms posts need to be established on the roads from the country was not conducive to efficient produc- the zone to the rest of the country to ensure that the 15 tion for export. relevant customs laws are properly enforced. EPZs are usually restricted to a designated indus- Imports from the EPZ into the local market, if trial estate; but in some cases, and recently more so, allowed, need to be dealt with like imports from factories outside the restricted area have been abroad. Deliveries of goods from the domestic mar- 16 approved as single factory zones. Leakage of EPZ ket to the EPZ need to be dealt with like exports. goods to the domestic market without duty pay- Customs surveillance needs to be established, to ment has been frequently reported by developing prevent incidents where goods imported or manu- countries. This has been the case especially where factured in the EPZ enter the local market fraudu- the EPZs are not well separated geographically from lently. Insofar as the EPZ is a geographically the regular customs zone, and where several single enclosed area, all this should not establish major factory zones exist, making it difficult for customs difficulties for customs, because this is all part and to organize control over what enters and exits each parcel of normal customs operations. However, the of these zones. Unless the EPZ enterprises keep situation is different when the EPZ is not well separated geographically from the regular customs area, 13. For instance, in Mauritius, Israel, Syria, and the United and especially when it comes to single factory States. zones. As mentioned above, single factory zones are 14. Mauritius is probably the best example of a successful EPZ. Other successful cases are the Republic of Korea,Taiwan,Malaysia, difficult to police. and the Dominican Republic. Second, with respect to imports into and exports 15. For an analysis of the role of EPZs in promoting manufac- out of the EPZ, customs documentation is required tured exports see, for instance, Madani 1999. Madani concludes for control and statistical purposes. One of the main that EPZs have limited applications and that general liberalization of a country’s economy is a better policy choice. See also characteristics and conditions for smooth operation Warr (1989). Warr concludes that the experience of East and of the typical EPZ is streamlined administration. Southeast Asia confirms that the role of EPZs in promoting This includes streamlined customs documentation manufactured exports is at best minor, and that the most effective means of promoting exports is to ensure that the economic requirements for imported raw materials and policy environment within the country is conducive to efficient capital goods and exported final products. In coun- production for export. tries where customs administration is not up to 16. This is the case in Fiji, Korea, Mauritius, Mexico, Senegal, and modern standards, the customs documentary the United States. In Senegal, the single factory regime was requirements in connection with EPZ trade may introduced in 1991, but due to a wave of applications, approvals were suspended in 1992, and the regime became fully effective interfere with its smooth operation. To solve that only in 1993. The government explained the suspension and problem, a separate administrative branch has often delays by the difficulties of customs control and, more specifi- been created to mediate between EPZ firms and the cally, by the tax losses that would be incurred if existing enterprises were approved under the EPZ system. By 1995, eight government, with the purpose to reduce zone firms’ single factory zones were operating. administrative costs and to prevent unnecessary Duty Relief and Exemption Control 229 delays in their operations. However, as pointed out regime, they should be limited to wholesale trans- by Warr (1989), the degree to which these bodies are actions. It would be impossible for customs to empowered to act on behalf of the government effectively control retail transactions. varies, but other departments can resent interfer- If there is no adequate customs capability for ence with their “normal” functions and become auditing manufacturer’s accounts, single factories uncooperative with the zone bodies. The experience located outside the EPZ enclave should not be with the arrangements in Jordan’s Aqaba export granted EPZ status. However, such factories could processing zone illustrates some of the difficulties possibly qualify for the MUB regime. that, for instance, the creation of a separate customs agency for the zone can create. (See box 10.6.) Conclusions and Guidelines for Duty Relief Instead, the recommended arrangement is to give for Inward Processing responsibility for customs functions relating to the EPZ operations to an autonomous or semi- From both a tax policy and administrative point of autonomous division under the umbrella of the view, the first best practice for providing exporter national customs service. manufacturers access to industrial inputs at world prices is to have a zero tariff. In the presence of tar- Other Administrative Issues and Guidelines If iffs, the best system is the one that relieves export sales in the local market are provided for in the manufacturers from duty payment, fully and at the

BOX 10.6 Customs Administration of the Aqaba Export Processing Zone

The government of Jordan established the Customs replaced with a more contemporary Aqaba Special Economic Zone at the Red Sea post-transaction, audit-based approach. port of Aqaba in January 2001 to enhance eco- The existence of two customs agencies was nomic capability in the Kingdom by attracting difficult to manage. It is also not consistent with different economic activities and investments the Revised Kyoto Convention, and the resulting thereto. The zone began operations under the practices do not deliver the simplified proce- administration of the Aqaba Special Economic dures promoted by the Convention. Zone Authority (ASEZA). The zone has clear bor- Specific difficulties include the following: ders of its own, and to that extent is a territory • Zone operators have to deal with two agen- that has been separated from the national terri- cies with separate headquarters and facilities. tory of Jordan. ASEZA is empowered to make its • While both have access to ASYCUDA, the two own laws to apply within the zone, and is specif- agencies’ systems do not communicate, and ically granted authority relating to customs pro- there is a failure to share information. cedures. As a result, there are two separate cus- • Different procedures apply, depending on toms authorities operating in ASEZA: the which agency is involved in the transaction. National Jordanian Customs, which retains responsibility for administering the Customs Law As a consequence of these difficulties, there of Jordan to the extent that it applies in the are the following concerns: zone, and the customs agency within ASEZA, • Legitimate traders are not receiving the appro- which is responsible for administering ASEZA’s priate level of service necessary to attract customs regulations. investment to the zone; there is duplicate doc- The two agencies have very different cultures. umentation, and no “one-stop-shop.” The National Customs is a long-established • Fraudulent traders are exploiting the per- organization with a focus on ensuring that ceived lack of controls and there is a height- Jordan’s borders are properly protected. It has a ened risk of revenue leakage through inade- control-based approach to the clearance of quate management of goods moving in and goods, transport, and people. Its staff consists out of the zone to and from national territory. largely of long-serving uniformed officers with a traditional view of customs processing. The In view of these difficulties the Jordanian author- ASEZA is new, and is staffed largely by young tal- ities are considering integrating some of the ented graduates who are committed to the functions of the two organizations. development of the zone, and are impatient with process. They are keen to see the traditional Source: Harrison, Mark. 2003. Note prepared transactions-based approach of the National for this chapter. 230 Customs Modernization Handbook

least cost. Thus, the best options are systems that do This includes customs warehousing, temporary not require payment or advance payment of import admission for re-exportation in the same state, and duties on the inputs, and that involve no, or only transit.17 minimal, paperwork and no more than the routine formalities as applied to all imports. Customs Warehousing However, in real life, some administrative cost is unavoidable. Customs administrations are always Customs warehousing is the procedure under faced with the possibility that not all importers and which the importer stores the imported goods in a exporters are fully tax compliant. Therefore, safe- warehouse under customs control, without pay- guards against abuse and evasion are needed. In ment of import duties and taxes, until the goods are designing systems, procedures, and safeguards taken into home use, or until the goods are re- for the implementation of duty relief systems, exported, in which case no duties are payable. The countries can take into account the standards and customs warehousing procedure is available in vir- guidelines stipulated in the Revised Kyoto Conven- tually every country. tion, and incorporate these in the country’s laws, regulations, and administrative procedures, in line Issues This regime provides valuable facilities to with specific country circumstances. the trading sector; but if it is not administered The recommended practice for any particular properly, there may be costs that are too heavy to country depends on both tariff level and structure, the owner of the goods, or the government, or and administrative capacity. For countries with an both. This is especially so where customs still relies efficient and modern administration, in particular heavily on physical controls. for countries with the capability of accounts-based The establishment of proper control over cus- control, the temporary admission for inward pro- toms warehouses to prevent evasion and revenue cessing under any of its forms (TAP,MUB, and EPZ loss through leakage of warehoused goods to the if economically appropriate) should be available to market without duty payment, has at times gone reliable companies. Drawback should also be avail- beyond the capability of some customs administra- able, especially where the government fears too tions. This results from a multiplicity of ware- much revenue risk in relation to temporary admis- houses, inadequate documentary follow-up, poor sion regimes, as well as for all cases in which, for procedures, and generally weak administration. For one reason or another, the duties have been paid on instance, faced with rampant abuse and evasion importation of the materials when their use in and resulting revenue losses, as well as the inability import processing was not anticipated. of its customs administration to establish needed Countries with only limited control capabilities controls, Tanzania saw no better solution than clos- may have to rely mainly on drawback, but TAP ing down virtually all customs warehouses during facilities should be provided to companies that are 1997–98.18 in good standing with respect to their fiscal obligations. Duty relief should be provided in all cases in Economic Rationale Customs warehousing facil- which the interest of revenue can be reasonably itates import trade. When imports are intended well protected, while making all efforts to facilitate for home consumption, the procedure allows the trade operations. The customs administration’s importer to delay payment of duties and taxes until accounts-based control capabilities should be fully the importer actually clears the goods for home developed and temporary admission for inward use. When the importer decides not to clear the processing gradually should become the main method for duty relief. 17. The standards and guidelines of the Revised Kyoto Conven- tion with respect to the duty relief regimes are included in the Convention as follows: customs warehousing: Specific Warehousing, Temporary Annex D.1; temporary admission: Specific Annex G.1; transit: Admission, and Transit Specific Annex E.1. Customs warehousing is often referred to as bonded warehousing. This section reviews the customs regimes under 18. The bonded warehousing regime was made available again which goods are imported with suspension of duty shortly thereafter, but the number of warehouses was drastically payment for reasons other than inward processing. reduced and the control system improved. Duty Relief and Exemption Control 231 goods for home consumption but to re-export tioning of customs officers at licensed premises. them, perhaps because market conditions have The officers exercise control over warehoused changed, the importer obviates the need to pay the goods; supervise a range of commercial activities, duties. The goods can also be given another cus- including the movement of all goods entering or toms destination, such as TAP. Bonded warehouses leaving the warehouse, and the stuffing and are also used to store goods that are domestically unstuffing of containers; and authorized opera- produced under TAP or MUB, or that are subject to tions such as sorting, packaging, and conditioning. excise duties. Such storage clears the duty liability The control system often includes a requirement on these goods from the time they are warehoused, that customs locks the warehouse in the evening provided actual exportation follows. For drawback and reopens it the following morning. In addition, products, storage in the customs warehouse trig- without the physical presence of customs staff, no gers the refund. commercial activities are allowed to be carried out. Another advantage for the importer or owner of The warehouse operators are charged for the cost of the goods is that certain operations are allowed customs supervision, including officers’ salaries, during storage, including inspecting and sampling overtime, and the provision of appropriate on-site of the goods, packing and repacking, and other accommodation and equipment. operations aimed at improving the marketability of Many countries, both Organisation for Eco- the goods. nomic Co-operation and Development (OECD) and developing countries, have moved from physical Requirements for Effective and Efficient Adminis- control arrangements (closed bond arrangements) tration The customs department must be satisfied to documentary and accounts-based systems for that the goods can be stored in the warehouse with- customs warehouse control (open bond arrange- out serious risk of loss due to theft, diversion, and ments), thereby improving the efficiency of ware- other problems, and that the agency operating the house operations and reducing the cost of both warehouse takes responsibility for the safe custody regulation and compliance. For example, the prac- of the goods. Customs must also be certain that the tice of physically controlling bonded warehouses procedure for transferring the goods from the cus- was terminated in Australia in the late 1960s, and in toms warehouse for exportation (which cancels the the United States in the early 1980s. Following the exporter’s liability to pay duty on the goods) or for introduction of its new approach to warehouse clearing them for home consumption by paying compliance, the U.S. Customs Service announced duty is adequate. The administrative requirements The Customs Regulations were amended in may differ substantially according to the risk of 1982 ...toreplacephysical supervision by Cus- fraudulent removal or substitution of goods. In gen- toms with the audit-inspection supervision eral, requirements may include the following: method. Through this change, Customs reduced reimbursable costs to proprietors from $8 mil- • customs approval of the warehouse—among lion to $2 million annually, and allowed much other things, the warehouse needs to have rea- more flexibility in warehouse operations. . . At sonable structural security and safe access the same time, the change saved taxpayers • double-locking of the warehouse (warehouse almost $2 million annually in customs costs and keeper and customs) reduced the number of customs officers needed • permanent or intermittent supervision to supervise warehouses from about 300 to • unannounced spot checks about 50. (U.S. Customs Service 1996, p. 2-1). • keeping of stock accounts Following Hong Kong’s lead, Thailand introduced • periodic inventory an open bond arrangement in 2002. (See box 10.7.) • financial security, although this may be waived if there is no special revenue risk and if customs control can be adequately exercised. Temporary Admission

Traditionally, warehouse control has relied heavily Temporary admission is the customs procedure on physical control, typically involving the sta- that provides for full or partial relief from import 232 Customs Modernization Handbook

BOX 10.7 Thailand’s Move to Open Bond Arrangements

Thailand’s customs warehousing system is mov- and controls. The open bond arrangements to ing from a closed to an open bond system. Thai- which the Customs Department is moving rely land’s Customs Act No. 18 of 2000 provides for on computer-based controls to replace the phys- the legal instrument to establish bonded ware- ical presence of officers at the premises. This houses. Within the parameters of the law, the includes a warehouse inventory control system Customs Department has flexibility in adminis- that can be connected to the Customs Depart- tering the law. Following a government decision ment in real time, and the electronic monitoring that required all government agencies to of incoming and outgoing warehouse goods. streamline their services, the Customs Privileges The arrangement is reflective of a risk-based Bureau has focused on improving the customs approach to compliance management, due to control of bonded warehouses. The closed bond the greater reliance on warehouse operators’ arrangements, which Thailand has traditionally self-assessment of their compliance, verified applied to the management of bonded ware- through post-transaction customs compliance house compliance, was characterized by real- audits of the relevant systems and procedures to time physical control, with the compliance determine the integrity of such systems. assessment focus being directed toward individual transactions rather than the broader concept Source: Ue-srivong, Chintana. 2003. Note pre- of a warehouse operator’s systems, procedures, pared for this chapter.

duties and taxes on goods imported for a specific fic. International trade and economic and social purpose, on the condition that they are to be re- activities would be hindered if duties and taxes exported in the same state. As a rule, the procedure were to be paid on importation and then refunded allows for total conditional relief. In certain cases on re-exportation. Apart from increasing the cost the relief may only be partial. Temporary admission of the activity, it would also complicate customs is a widely used procedure. administration.

Issues Temporary admission is a relatively simple Requirements for Effective and Efficient Admin- customs procedure. The risk to government rev- istration The conditions and administrative enue of allowing the temporary entry of foreign requirements include the following: goods without payment of duties and taxes can be managed through proper use of documents and • Temporary admission is granted based on the financial security for the revenue involved. Never- intent to re-export the goods. theless, in a number of less advanced customs • A declaration for temporary admission needs to administrations temporary admission has been be lodged for importation. However, no declara- abused. This happens most frequently with vehicles tion should be required when there is no doubt of experts and other personnel visiting the country about the subsequent re-exportation of the for the duration of project implementation or for goods, regardless of their value (containers, for other temporary assignments. example). • The goods must be identifiable. Customs must Economic Rationale There are various economic be able to ensure that the re-exported goods are and social reasons for allowing goods to be the same as those presented at temporary imported temporarily without payment of duty importation. Customs may take identification and taxes. The main categories of such imports measures if commercial means of identification include goods for display or use at exhibitions, are not sufficient. fairs, meetings, and similar events; professional • Security is required for the duties and taxes that equipment of persons visiting the territory to carry would become due if the temporary out specific tasks; commercial samples; containers admission conditions are not complied with. The used in international transport of goods; travelers’ security may be furnished by an international personal effects; and vehicles in international traf- guaranteeing chain, as is the case under the ATA Duty Relief and Exemption Control 233

(Admission Temporaire-Temporary Admission) measures needed for the effective control of transit system. shipments are straightforward and simple. Never- • A time limit for re-exportation needs to be set; theless, few developing countries have succeeded in it should be adequate for the purpose of the establishing an adequate control system, due to temporary admission, should not encourage problems of infrastructure at the border offices, abuse, and should be easy to monitor. inadequate systems for securing the suspended • The re-export declaration should refer to the duties and taxes, poor means of communication, initial temporary admission document. Security and generally weak administration. should be released provided customs is satisfied The measures needed for customs control over that the re-exported goods are the same as those transit include, among others, restricting the licens- initially imported and that all conditions have ing of transporters for transit to solvent, reputable been met. transporters that are in good standing relative to their tax obligations; strictly monitoring transit As with the other customs regimes, follow-up on shipments through proper documentation; estab- goods admitted under the temporary admission lishing security measures to insure the suspended regime can be largely facilitated and improved duties and taxes; establishing an efficient system of when customs control is computerized. This is par- information exchange between the customs office ticularly so when re-exportation of the temporary of entry and the customs office of exit; and taking admission goods takes place through one or more rapid action if transit shipments are not presented offices other than the office of importation. at the office of exit in the time set for completing the transit. Transit Because chapter 11 is devoted to customs transit, Exemptions the comments here are limited to identifying transit as one of the duty suspension regimes, highlighting Exemptions are exceptions made to the application 20 its revenue risk, and summarizing some of the of the ordinary customs tariff. They can take the main requirements for effective customs control. form of a full or partial waiver of duties and taxes Customs transit is the procedure under which that would ordinarily be payable on imports. Unlike goods are transported under customs control from duty relief regimes, exemptions are unrelated to one customs office to another. When the whole exportation or re-exportation. They apply to goods movement is within the same customs territory, imported for home consumption by certain eligible this is referred to as national transit or removal categories of importers, and on condition that the 21 under bond. When the customs offices are in more goods are used for specified purposes. than one customs territory, it is international tran- Some exemptions are stipulated in the interna- sit. Customs transit procedures are designed to tional conventions to which the country adheres. facilitate the movement of goods crossing the terri- Others are established at the discretion of the tory of one or more countries, without jeopardiz- government for a variety of social and economic ing customs revenue, which is threatened by the purposes. Still others concern imports of a mainly diversion of goods to the local market.19 noncommercial nature, also called traditional The transit regime has often been used as a exemptions. For a more detailed classification, see means for fraudulent importation in both industri- box 10.1. alized and developing countries. Substantial revenue may be lost when transit goods are diverted to the local market fraudulently. The administrative 20. The standards and guidelines of the Revised Kyoto Conven- tion with respect to exemptions are included in Specific 19. To facilitate international transit of goods, standard proce- Annex B.3. dures have been established in bilateral and multilateral agree- 21. Exemptions are sometimes confused with zero tariff rates. ments. The main international conventions in this regard are the However, zero tariff rates are of general application to all Convention on the International Transit of Goods (1971) and importers, while exemptions only apply to selected importers or the Convention on International Transportation by Road categories of importers, to which the government gives preferen- (1975), usually referred to as the TIR convention. tial treatment for a variety of reasons. 234 Customs Modernization Handbook

Issues or mission. Instances of claiming exemption for commercial shipments have also been reported. For Exemptions are used to a greater or smaller extent customs, enforcement is difficult as customs has by most, if not all, countries that have a nonzero only limited authority to inspect diplomatic ship- tariff. Even if it is government policy to make no ments, and investigating suspected abuse may be exceptions to the application of the tariff, the gov- politically sensitive. ernment would still grant some exemptions, such as those stipulated in international agreements— those in the Vienna Convention on Diplomatic Government Imports Historically, many coun- Immunities, for example. Exemptions are pervasive tries have exempted government imports from in many developing countries, due to these coun- import duties and taxes. In recent years several tries’ large inflows of foreign aid that come in the countries have eliminated these exemptions form of development projects and relief goods; because they found that the disadvantages out- misguided policies with respect to investment weigh the benefits. It is often argued that there is no incentives; pressures for exemption from numerous budgetary benefit to the government collecting entities involved in educational, charitable, and a duties on its own imports because this would variety of other social projects; and often, an ill- amount to a zero sum operation. This argument designed tariff regime. In many countries the value ignores the fact that exempted government imports of exempt imports amounts to over 30 percent of can be, and often are, diverted to nongovernment all imports, and in some cases to over half of all use, thus creating a route for avoiding the duties imports. that are lawfully due on such imports. In addition, there are administrative costs for customs to verify that the goods imported under exemption by the Economic Rationale public sector are actually used for the stated pur- Good economic justifications for exemptions are poses. Apart from the budgetary and administrative rare. Most of the time exemptions have been incor- costs, exemption of government imports distorts rectly used as instruments for achieving policy the prices applicable to the private and public sec- objectives. Apart from causing substantial revenue tor and can distort decisionmaking, for instance, on loss for the government, exemptions create several the appropriate prices to charge for the output of distortions and costs that include destroying the public enterprises such as electricity. Furthermore, transparency of the import tariff, creating an exemptions for the government understate the true uneven playing field for foreign trade operators and cost of government expenditure, as they are not domestic industry, distorting producer and con- scrutinized through the budgetary approval process sumer choices, and complicating customs adminis- and, therefore, hide the real cost of government tration. operations. Thus, for the sake of transparency and good administration, government imports should not be exempt. Economic or Administrative Issues by Category

The economic and administrative implications and Investment Incentives Many countries offer tax issues for the main categories of exemption can be incentives, including import duty and indirect summarized as follows. import tax concessions, to attract new investments and encourage economic development. The ques- Diplomatic Imports This category comprises tion of whether tax incentives are a factor in busi- exemptions stipulated by the Vienna conventions ness investment decisions has been researched and on diplomatic and consular relations. Exemptions debated extensively in economic literature, and under this category usually make up only a small there is a virtually unanimous consensus that these part of all exempt shipments in a country. However, fiscal benefits are not crucial, because other consid- several countries have experienced abuse of these erations commonly weigh more heavily in exemptions, particularly in the quantities of investors’ decisionmaking. (See Zee, Stotsky, and imported goods for which exemption is claimed Ley [2002] for a more complete discussion of these that apparently go beyond the needs of the embassy issues.) Exemptions are vulnerable to abuse Duty Relief and Exemption Control 235 through leakage of the exempt goods to the private- quate. In many cases imported relief goods, espe- sector gray market, rather than being used in the cially foodstuffs and pharmaceuticals, are diverted most useful investments. Exemptions also give rise from their intended destination and end up being to unfair competition relative to businesses that do sold in the market. This is done sometimes by not benefit from such incentives. From an adminis- unscrupulous organizations disguised as NGOs trative point of view, these exemptions require cus- that abuse their exempt status to import goods for toms to devote a substantial amount of its scarce uses not related to the exempt justification. Yet resources to exemption monitoring and control another problem is that, in most cases, customs is activities, resources that could otherwise be not involved in the verification of the credentials of assigned to more productive uses. Developing the NGO, or consulted in the agreement between countries, therefore, would be well advised to abol- the NGO and the Ministry of Planning, Supply, ish these exemptions in combination with a ration- Cooperation, or whatever other entity is responsi- alization of import tariffs. A simple and transpar- ble for relief imports. Most of the time, customs ent import tariff with zero or low rates on appears only at the implementation stage and not investment and capital goods is likely to be a more at the point where the request is examined and the powerful tool for attracting investors than the conditions are established. The abovementioned prevalence of exemptions. problems can be avoided by following the guidelines in Establishing Effective Administrative Sys- Foreign Financed Projects Lenders and donors tems and Procedures below. generally do not finance duties on the goods they import for use on specific projects, because funds Imports for Charitable, Religious, Cultural, Edu- are intended to be used only on those specific proj- cational, and Similar Social Purposes In many ects and not to be contributed to government rev- countries the customs law and other laws provide enue by way of import duties. Experience in many exemptions for goods needed for the operation of countries shows that these exemptions lead to organizations or institutions with charitable, reli- abuse and problems of control. First, the quantities gious, cultural, educational, or similar social objec- of materials and items needed for the projects are tives. Often the Minister of Finance or Customs is not always properly determined. Even when they burdened with numerous, sometimes illegitimate, are, it is difficult to control the quantities imported requests from schools, churches, cultural, or similar and the actual destination of the goods. Second, the organizations for exempt importation of equip- exemption is at times extended to consumer goods ment, motor vehicles, and miscellaneous consumer for personnel employed in the project. In both goods. These exemptions are difficult to control cases, exempt items can easily be diverted to uses and are often abused through diversion of the not envisaged by the exemption. To protect them- exempt goods from the exempt purpose. Economi- selves against such abuses and the resulting revenue cally there is no justification for these exemptions, losses, a number of countries no longer exempt and they are equivalent to hidden subsidies. They such imports, but implement a system whereby the should be eliminated and support or relief for those duties and taxes are paid through Treasury vouch- organizations, if deemed necessary, should be pro- ers. See the section entitled Establishing Effective vided in the form of budgetary expenditure, subject Administrative Systems and Procedures. to the usual public scrutiny through the budgetary approval process. Relief Goods Many developing countries are dependent on foreign aid and the delivery of that Noncommercial Imports Exemptions under this aid through nongovernmental organizations category are generally based on tradition or inter- (NGOs). Food, medicines, and other items national practice. They are frequently abused. For imported under foreign aid programs are generally instance, migrant workers, persons settling or reset- given duty-exempt status on condition that they are tling in the country, and travelers often attempt to distributed at no cost to the needy. However, con- bring in more goods than they are legally entitled trol over the free distribution is difficult. Whatever to under the exemption allowances. Usually these control is established often turns out to be inade- are exemptions of minor importance and can be 236 Customs Modernization Handbook

administered fairly well, provided customs estab- financed projects, made by the investment board lishes clear and simple rules and procedures and or ministerial agencies, should be submitted to informs the public of them. the Minister of Finance for approval. They should include a list containing the description (and HS code), quantity, and value of the goods Rationalizing the Exemption System to be imported and a calculation of the revenue Exemptions are difficult to justify economically, cost of the exemption. have high administrative costs, and tend to be abused. They should be reduced to a minimum and Establishing Effective Administrative Systems effectively administered to avoid abuse. No other and Procedures exemptions should be maintained other than those required by international agreements and conven- For effective administration and control of exemptions, and those for noncommercial imports that tions the following guidelines should be kept in have been exempt traditionally (for example, trav- mind. elers’ and migrants’ goods). The administrative resources and effort needed • Rules. The rules should clearly stipulate the to administer exemptions places a heavy burden on processes to be observed in requesting and customs administrations and distracts them from authorizing an exemption and in importing the concentrating on more productive control, revenue exempt shipments, including documentary collection, and enforcement activities. Moreover, requirements, time frames, limits on value and customs’ ability to monitor exemptions effectively quantity, controls at the time of importation, is largely impaired when numerous exemption end use conditions, and punitive measures in cases have to be processed. cases of abuse or evasion. If the government cannot fully restrict exemp- • Request and authorization. The rules should tions as recommended above, it should remain on contain complete information about the goods guard against their proliferation. Major causes of to be imported for the execution of the project proliferation are (a) the numerous exemptions, as (investment project, foreign financed project, sectors, companies, and individuals that are not relief goods, imports by institutions with chari- exempt feel at a disadvantage compared to their table objectives, and the like). Thus, a list should exempt competitors and pressure the authorities to be appended to the request, showing the correct obtain similar preferential treatment; and (b) the description of the goods, as well as identification discretionary power granted to the Ministry of by HS code, quantities, and value. Finance, and often to other ministries, to grant • Controls at time of importation. This includes exemptions. Unless the conditions and limits of the verification of the eligibility for exemption, and exemptions are clearly specified in the law, it may determining that the type, quantity, and value be hard for the minister to withstand the pressures of the goods are as specified in the exemption for exemption that are exerted by certain authorization. Methods must be established to importers. To reduce the pressure for, and avoid monitor exempt imports that consist of more proliferation of exemptions the following measures than one shipment and that are cleared through should be in place: more than one customs office. Computeriza- tion can largely facilitate this function, • All exemptions should be provided for in the law as the Moroccan system example shows (see and the conditions for exemption should be box 10.8). spelled out in specific terms, including who • Checking end use. Customs needs to determine qualifies for exemption, what goods are eligible that the exempt goods are actually being used for exemption, and under what conditions. This for the intended purposes. This should be done would eliminate all discretionary exemptions through a combination of periodic verification issued by high officials and organizations. of the accounts of the enterprise or institution • Proposals and requests for exemption under the receiving the exemption or, where appropriate, investment incentives provisions and foreign through periodic unannounced visits to the Duty Relief and Exemption Control 237

BOX 10.8 Computer Application for Management of Investment Project Exemptions

The Customs and Indirect Tax Administration of offices responsible for processing the project Morocco recently introduced a computer appli- imports, allows for continuous online moni- cation for the management of the list of goods toring of the imports, computerized man- that are permitted for importation under agement of the list of exempt goods, and exempt status in the context of investment easy and automatic detection of cases agreements between the government and pri- of excess over the authorized quantities. It vate sector companies. allows the clearance offices to capture the These agreements stipulate the exemption of import data directly, to detect and regularize import duties and taxes and value-added tax for online the imports that are in excess of the all materials, tools, and equipment needed for authorized quantities or values, and to con- execution of the projects, and are valid for a trol the deadlines for the execution of the period of 36 months. These goods are specified projects. in a list attached to the agreement. The computer application, which can be Source: Steenlandt, Marcel. 2003. Note pre- accessed via the intranet of the customs pared for this chapter.

plant to physically check whether the end-use but payment is made by way of Treasury credit conditions are being met. checks or vouchers issued by the government. • Exemption monitoring and control unit. Customs Donors and financing agencies are required to should establish a monitoring and control unit make their project tenders tax-inclusive. This with responsibility for overseeing all adminis- requires careful identification of the type and trative matters concerning exemptions. The unit quantity of goods to be imported, and a detailed should scrutinize exemption requests; monitor assessment of duties and taxes to be covered quantities imported by embassies, exempt enter- under the government budget for that project. A prises, and institutions; carry out post-importa- tax credit is then provided to the donor or tion visits to the enterprises or institutions; and financing agency in the relevant amount, in the monitor trends, revenue cost, and other indica- form of credit checks. The credit checks are used tors by category of exemptions. It should collect for the payment of duties and taxes on the the data on exempt imports and compile statis- importation of goods covered under the project. tics showing the revenue forgone, and prepare The monitoring system is automatic and works pertinent reports for the minister. as follows: If the bidder overestimates the • Reimbursement instead of immediate exemption. amount of taxes, the bidder will probably not An exemption control system based on payment get the contract. Conversely, if the bidder under- of duties and taxes at the time of importation, estimates the amount of taxes and wins the con- and reimbursement of the duties and taxes after tract, the bidder will then be responsible for the post-importation verification that all conditions difference between the actual and the underesti- for the exemption are fulfilled, was introduced mated taxes, because credit checks will only be in Mali in 1998 and has been successfully imple- issued up to the approved credit amount. This mented since then (see box 10.9). system does not require quantities to be moni- • Treasury voucher system. This exemption control tored. In practice, implementation results have mechanism has been introduced in a number of been mixed. The system has proven to work well countries to monitor exempt imports under and to reduce abuse and revenue loss in some NGO and other foreign financed projects, and African countries (Mali and Mozambique, for to avoid the diversion of exempt goods to the example), but has not been successful in some local market without the required duty pay- other countries (Benin and Côte d’Ivoire). ment. Under the system, duties and taxes on While the system is technically sound, failure has project imports are to be paid on importation, been due mainly to such factors as private sector 238 Customs Modernization Handbook

BOX 10.9 Reimbursement of Taxes and Customs Duties on Imported Petroleum Products in Mali

Mali successfully implemented a reform of the for petroleum products. After registration of reimbursement of tax and customs duty exemp- this file, the SGS conveys it to the Ministry of tions in 1998, doubling customs revenues from Finance for certification. Once certified, the the importation of petroleum products. Duties SGS enters the rights of the beneficiary into on petroleum products were an important its information system. The whole registra- source of fiscal revenue. These products were tion process takes less than a week. imported by a small number of companies 2. The beneficiaries of the exemptions buy the (around 12), making the management of the products, paying all taxes at customs. The program feasible. receipts are accounted for as customs revenues Three principles of the new procedure were and are entered as state budget revenues. set forth: 3. Reimbursement by the Treasury, of the duties • Full payment of all taxes and duties at the and taxes paid, occurs on a monthly basis in customs barrier on the import of petroleum two steps: products. — the issuance of a secure “reimbursement • The establishment of a system to quickly reim- coupon” by SGS in the name of the bene- burse paid customs duties and taxes to the ficiary. beneficiaries of exemptions from duties upon — the transfer of the amount owed by the justification of their right. At the time, these Treasury to the beneficiary’s account, on beneficiaries included, among others, diplo- the basis of the reimbursement coupon matic and consular representatives (Vienna and a copy of the invoice. Cash payment Convention), projects financed with foreign is prohibited. This Treasury expenditure is resources (including World Bank projects), and charged to an expense account to be conventions resulting from the Mining Code. adjusted. • The affirmed separation of functions between 4. Each month the Treasury conveys to the Bud- (a) the Customs Offices in charge of assessing get Department a summary of the reimburse- the duties and taxes and (b) the Treasury ment coupons paid by payment authoriza- Office in charge of reimbursement. tion for this expense. On sight of the authorization, the Treasury adjusts its This new procedure occurs in four steps: accounting situation, definitively entering the 1. At the beginning of each year, the beneficiar- expense as a budgetary expenditure. ies of these rights file, at the Societe Generale de Surveillance (SGS) office, the document Source: Finateu, Emilie. 2003. Note prepared attesting to their right to exemption accom- for this chapter. panied by a monthly consumption schedule

opposition to rigorous control and the lack of is normally the Ministry of Foreign Affairs. Cus- strong support by higher authorities. In some toms should always request a listing of embassy countries where it was introduced at the insis- staff that benefits from diplomatic status. Many tence of international organizations, it was not countries agree with the diplomatic missions on implemented in a convincing way. On balance, annual quotas for the goods most sensitive to provided there is a real will from the high abuse, that is, alcoholic beverages and tobacco authorities to make the system work, it is the products. The use of annual import quotas for only effective method to eliminate or greatly fuel is also standard in many countries. reduce abuse and revenue loss through these types of exemptions. • Embassy imports. For countries experiencing Operational Conclusions abuse of exemptions under the cover of diplo- and Guidelines matic privileges, the most appropriate action probably is to take the issue up with the diplo- The above review leads to the following recommen- matic mission using the proper channel, which dations and guidelines for customs administration. Duty Relief and Exemption Control 239

Duty Relief tries with only limited control capabilities may have to rely mainly on drawback, but TAP sys- In designing duty relief policy and administration tems should be available to companies that are in the following guidelines should be kept in mind: good standing with respect to their fiscal obliga- • There are valid fiscal, trade, and economic rea- tions and that pose little or no risk to revenue. As sons for customs laws around the world to make the customs administration refines its accounts- provision for the duty relief regimes discussed in based control capabilities, TAP should become this chapter. Therefore, policymakers should the primary method. design, and customs administrations should • The capacity of the customs administration implement and administer, these regimes in a should be taken into account in choosing secure and cost-effective way for both the user between alternative ways of providing duty relief. of the regimes and the government. Customs In particular, no facilities should be granted that management must understand that such systems go beyond the customs administration’s control are not subsidies to the exporters, only remedies capability. For instance, single factory zones to allow the user of the regimes (export manu- located outside the geographically separated EPZ facturer, warehouse operator, transit enterprise, area should not be established if customs has no sales prospector) to operate outside the tariff adequate accounts-based control capability. Sim- system and to do so at minimal cost to the ilarly, exemptions should not be granted if cus- business. In the presence of tariffs, the competi- toms cannot effectively monitor them. tiveness of the export sector and the country’s • Customs managers should take all possible appeal to foreign investors may depend on the measures to ensure that compliance with the availability of efficiently operating duty relief administrative requirements and procedures systems. The government must ensure that it is under duty relief regimes entails no more than safeguarded against loss of revenue due to abuse, minimal costs for the users. For instance, pay- and that these regimes operate efficiently. ment of duty drawback should be prompt and • Customs administrations should adhere to the the necessary checking should be done later. international standards and guidelines for the Wherever possible, closed bond systems of cus- administration of the duty relief systems, as toms warehouse control should be replaced by included in the Revised Kyoto Convention. open bond systems, thus eliminating the need to • The choice between prior exemption (temporary pay for the costs of customs surveillance of the admission systems) and drawback depends premises. mainly on the capacity and degree of modernization of the customs administration. Export Exemption manufacturers clearly have a preference for temporary admission as compared to duty draw- There are good economic and administrative rea- back, especially when tariffs are high, when sons for restricting duty exemptions and for main- inflation erodes the duty refunds, and when taining only those required by international con- interest rates to obtain working capital are high. ventions (such as diplomatic immunities) and However, governments in most developing those for noncommercial goods (for example, trav- countries require customs administrations to elers and migrants). Until the redundant exemp- focus primarily on revenue collection rather than tions are eliminated, customs administrations trade facilitation and, therefore, tend to prefer should devote adequate technological and man- drawback to temporary admission systems. For power resources to organizing and implementing countries with an efficient, modern administra- the necessary control and monitoring systems. tion, particularly those with accounts-based control capability, TAP under any of its forms should Other Conclusions be the primary method for duty relief. In addition, drawback should be available for cases The following conclusions and guidelines are appli- in which the use of the imported materials in cable to the administration of duty relief and inward processing was not anticipated. Coun- exemption regimes alike. 240 Customs Modernization Handbook

• Customs should move from physical controls to • Do exporters have access to industrial inputs selective and periodic compliance checking at world prices through one or more duty relief through post-importation accounts-based audits. systems—TAP, drawback, or EPZ (or any Effective use of information technology can sub- combination)? stantially contribute to such controls while facili- • Is the TAP system based on the initial determi- tating trade. This should be complemented by a nation of input–output ratios and are these consistently enforced penalty system to deter ratios periodically reviewed? abuse and fraud. • Is TAP control based on periodic global returns • Maximum use of computer applications should showing the goods imported under TAP or pur- be made to enable and strengthen duty relief chased from other TAP traders, and the destina- and exemption control. Functions and activities tion given to the goods after processing (expor- that should be computerized include the follow- tation or sale in the local market)? ing: tracking of goods imported for inward pro- • Does the drawback system operate through the cessing; customs warehouse inventory manage- initial determination of the drawback rate based ment; exchange of information and data on input–output relationships and are the draw- between customs offices of entry and exit for back rates reviewed periodically to take into goods under temporary admission and in tran- account changes in the factors underlying the sit; and the control of quantities and values of rate, such as type or mix of inputs, or changed exempt imports under projects involving multi- input costs? ple shipments or different customs offices. • Is the process for claiming drawback simple and • For all duty relief and exemption regimes, clear, with no requirements other than proof of simple, and easy-to-understand rules should be export? established and made known to foreign trade • Is drawback paid immediately, or within no operators, manufacturers, and, as needed, to the more than a few weeks after exportation, while public in general. Information notes should verification is performed periodically in the explain conditions, requirements, processes, and exporter’s books and accounts? procedural steps, and how and where to obtain • Does customs commit itself to paying drawback additional information. within a set short time frame? • Organizationally, customs administrations • Are exporters held accountable for revenue should establish an adequately staffed special losses resulting from their failure to signal unit for management of the duty relief and changes in the factors underlying the input– exemption systems. This unit should oversee all output ratios or drawback rates? duty relief and exemption control activities at • Are drawback rates set by a committee that customs, including developing efficient proce- includes representatives from customs, inland dures; developing operational instruction man- revenue, industry, and trade departments of the uals; checking the eligibility of importers for the government? special regimes they claim; monitoring the legal- • Are exporters and the public well informed ity and correct implementation of large duty about the available duty relief systems and relief and exemption projects (foreign financed, how they operate, and are these systems well NGO, and investment incentives projects); understood? assessing the credentials of importers, manufac- • Has customs organized a dedicated technical turers, and exporters for the TAP, MUB, unit to monitor and audit manufacturing com- drawback, and transit regimes; and compiling panies operating under the TAP (or one of its statistics showing trends in, and revenue costs variants) or drawback systems? of, exemptions. • Are TAP (or its variants) and drawback control computerized? • For occasional export processors (manufactur- Annex 10.A Checklist for Duty Relief ers exporting only a limited amount of their and Exemption Control production, or simple operations), are simpli- For reviewers of duty relief and exemption control fied TAP procedures in place or do they have systems the following checklist should be useful. access to drawback? Duty Relief and Exemption Control 241

Further Reading References Alter, Rolf G. 1990. “Export Processing Zones for Growth and Madani, Dorsati. 1999. A Review of the Role and Impact of Export Development: The Mauritian Example.”IMF Working Paper Processing Zones. World Bank Working Paper No. 2238. No. 90/122. Washington, D.C. Washington, D.C. Corfmat, François, and Adrien Goorman. 2003. “Customs Duty Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In Luc Relief and Exemptions.” In Michael Keen, ed. Changing Cus- De Wulf and José B. Sokol, eds. Customs Modernization toms: Challenges and Strategies for the Reform of Customs Initiatives: Case Studies. Washington, D.C.: The World Bank. Administration. Washington, D.C.: IMF. Tax Notes International. 2001a. January 1. International Trade Center UNCTAD/GATT. 1979. Duty Draw- Tax Notes International. 2001b. January 8. back on Exports.Geneva. U.S. Customs Service. 1996. “Bonded Warehouse Manual for Madani, Dorsati. 1999. “A Review of the Role and Impact of Proprietors, Importers, Customs Officers.” Washington, Export Processing Zones.”World Bank Working Paper 2238. D.C.: Department of the Treasury. Washington, D.C. Warr. P. 1989. “The Potential for Export Processing Zones: Warr, Peter. 1989. “The Potential for Export Processing Zones: Lessons from East Asia.” Pacific Economic Bulletin 8(1): Lessons from East Asia.” Pacific Economic Bulletin 8(1): 18–26. 18–26. Zee, Howell H., Janet G. Stotsky, and Eduardo Ley. 2002. “Tax World Customs Organization. 1999. International Convention on Incentives for Business Investment: A Primer for Policy the Simplification and Harmonization of Customs Procedures Makers in Developing Countries.” World Development 30(9): (as amended). Brussels. 1497–1516.

TRANSIT AND THE SPECIAL CASE OF LANDLOCKED COUNTRIES

Jean François Arvis

TABLE OF CONTENTS 11.3 Transit Procedures without Facilitative Measures 249 The Principles of Customs Transit Regimes 246 LIST OF FIGURES Description of a Typical Transit Operation 247 11.1 Typical Transit Operation 252 Major International Transit Procedures: 11.2 The Sequence of the TIR The Transport International Routier 254 Operations 256 Transit Facilitation Institutions 259 Operational Conclusions 263 LIST OF BOXES Further Reading 264 11.1 The Genesis of Transit Procedures in the References 264 Middle Ages 246 11.2 General Requirements with Respect LIST OF TABLES to Seals 248 11.3 ASYCUDA Customs Operations 11.1 Transportation Costs from Main World in Zambia 254 Markets for Coastal and Landlocked 11.4 The SafeTIR 258 Countries in Africa 245 11.5 The Unique Consignment Reference 11.2 General Provisions Applicable to Customs Number 259 Transit as Codified by International Conventions 247 11.6 TTFSE Indicators 263

Customs transit refers to customs procedures under the country of transit, and to avoid the circum- which goods are transported through countries stance that goods intended for transit are leaked to from one customs office to the other without paying the domestic market. Transit procedures should be import duties, domestic consumption taxes, or simple so as not to generate excessive delays and other charges normally due on imports. These costs. A poor transit system constitutes a major procedures are intended to protect the revenues of obstacle to trade. Many international organizations and transport facilitation forums have identified dysfunctional transit procedures as a major cost- Based on material prepared by ECORYS N.V.and supported by a increasing factor for landlocked developing grant from the government of the Netherlands. countries.

243 244 Customs Modernization Handbook

Transit most frequently refers to road transporta- and procedures—cross-border vehicle regulations, tion to and from landlocked countries. However, it is visas for truck drivers, insurance, police controls, useful to make a distinction between national transit infrastructure quality, quality of available transport and international transit. International transit refers services, and the organization of the private truck- to crossing national borders. National transit occurs ing sector. Even if transit procedures are made effec- when goods are transferred within national borders, tive and efficient, full trade facilitation will require from the first point of entry in the country to a loca- that these issues be dealt with, too. tion where customs procedures are undertaken (for The interdependence of these issues is well example, dry ports or inland container depots). The illustrated by the Action Plan issued by the Inter- two types of transit can be combined; in fact, this is a national Ministerial Conference of Landlocked standard situation in many landlocked developing and Transit Developing Countries (August 2003) countries. Imported goods arriving at national bor- that notes, “An integrated approach to trade and ders from transit countries are most often shipped transport sector development is needed that takes under national transit to the main economic centers. into account social and economic aspects, as well The basic customs mechanisms are similar in both as fiscal policy, as well as regulatory, procedural cases; however, implementation is easier for the and institutional considerations” (UN 2003 p. 4). national transit link. These concerns will be returned to in the Imple- Most transit takes place between landlocked mentation Issues section of this chapter. However, countries and countries with access to the sea. In the customs component is the principal bottleneck some instances, transit is simply from one country of transit and is a source of major inefficiencies to the destination country, and borders are crossed that affect many activities. only once. In other instances the transit shipment crosses several borders, as is the case when a ship- Costs of Transit Operations ment goes from the Netherlands to Russia, and crosses Germany and Poland. In other cases the The high logistics costs and the many developmen- cargo originates and ends up in the same territory, tal problems faced by the landlocked countries of but transits through a second country. For example, the world can be attributed to their geographical commodities destined for the northeastern part of fate. The importance of the transit facilitation India that originate from other parts of India transit agenda to these countries and to the countries of Bangladesh,as all alternative Indian routes are much transit stem from these circumstances.2 Indeed, out longer.1 When available, transit by rail offers a num- of 31 landlocked developing countries, 16 are clas- ber of advantages, including simpler customs transit sified as highly indebted poor countries (HIPC), mechanisms. Rail transit is widely used in central while 20 out of the 50 least developed countries Asia and is being rejuvenated in WestAfrica. worldwide are landlocked.3 Research conducted This chapter focuses on international transit.The by the World Bank and other organizations4 first section reviews the general principles of transit concludes that in typical landlocked countries, while the second section details a typical transit transport costs are 50 percent higher than in a operation. The third section reviews existing major typical coastal country, while the volume of trade is transit arrangements based on the Transport Inter- 60 percent lower. Furthermore, a substantial part of national Routier (TIR). The fourth section presents the cost may be attributed to border crossing. It is various institutions set up to facilitate transit, such as bilateral and regional agreements. The final section provides some operational conclusions. 2. Faye and others (2004). 3. The 31 landlocked countries are distributed as follows: Europe—FYR Macedonia, Moldova; Asia/Caucasus— The Case of Landlocked Developing Countries Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyz Republic, Lao PDR, Mongolia, Nepal, Tajikistan, Turkmenistan, Customs transit is only one part of a wider transac- Uzbekistan; Africa—Botswana, Burkina Faso, Burundi, Central African Republic, Chad, Ethiopia, Lesotho, Malawi, Mali, Niger, tion range that includes many other participants Rwanda, Swaziland, Uganda, Zambia, Zimbabwe; South America—Bolivia, Paraguay. 1. Lakshmanan (2001). 4. Limao and Venables (1999), Amjadi and Yeats (1995). Transit and the Special Case of Landlocked Countries 245

TABLE 11.1 Transportation Costs from Main World Markets for Coastal and Landlocked Countries in Africa (in US$ by TEU)

Origin

Destination Country Northern Europe Japan North America

Senegal $1,610 $4,100 n.a. Mali via Senegal $2,380 +48% $4,870 19% n.a.

Ghana $1,815 $3,025 $2,460 Burkina Faso via Ghana $2,615 44% $3,835 27% $3,260 32%

Cameroon $1,520 n.a. n.a. Central African Republic via Cameroon $2,560 68% n.a. n.a.

Tanzania $1,380 $1,350 $2,000 Rwanda via Tanzania $3,880 181% $3,850 185% $4,500 125% Burundi via Tanzania $4,530 228% $4,500 233% $5,150 157% Zambia via Tanzania $3,250 135% $3,220 138% $3,870 93%

n.a. not available. TEU twenty-foot equivalent unit. Note: Percentage refers to the increase in transportation costs for the landlocked country compared to its coastal country of transit. Source: UNCTAD 2003. estimated that the total cost of crossing a border in that, the trip from the sea gateway takes as long as a Africa is the same as the cost of inland transporta- month, due in large part to procedural delays.5 These tion of over 1,000 miles (1,600 km) or the cost of induced costs include the financial charges related to 7,000 miles of sea transport (11,000 km). This the guarantees, the cost of transport equipment held places landlocked countries at a great disadvantage. up by these transit procedures, as well as the require- In comparison, the cost of crossing a border in ment to maintain high inventories. Poorly function- Western Europe is equivalent to only 100 miles of ing transit operations also increase the vulnerability inland transportation. of transported goods to theft.6 Table 11.1 compares the costs of importing a Transit procedures in landlocked countries affect container into a few landlocked developing coun- exports and imports differently.7 The transit costs tries with the costs of importing the same container are somewhat less for exports than for imports. into the neighboring transit country. In many cases Exports frequently leave the country without pay- the costs for landlocked developing countries are ing any duties, so countries are less worried about significantly higher. The differences in absolute transportation costs 5. These can include customs documentation processing; immigration, insurance, and transit bond procedures; security inspec- between countries, as well as the increase in trans- tionsandweighstations;phytosanitaryandtrafficchecks. AWorld portation costs induced by borders, reflect direct Bank study conducted in July 2000 examined delays at selected transportation and legitimate fees. However, these Southern African border posts. Results showed that, for example, costs are increased substantially by cumbersome delays at Machipanda (Mozambique–Zimbabwe) amounted to 24 hours, 36 hours at Beit-Bridge (South Africa–Zimbabwe), customs transit procedures—excessive deposits, 36 hours at Victoria Falls (Zimbabwe–Zambia) and 24 hours at mandatory convoys, and gratuities to customs staff Kazungula(Botswana–SouthAfrica). and police—without which these transit operations 6. Although not easy to quantify, it is estimated that within cannot be undertaken. the Southern African Development Community (SADC) region, border delays cost between US$48 million and US$60 Transit operations often involve long delays that million per year in business revenues forgone (IntraAfrica substantially add to the transportation cost. For Ltd. 2001). instance, a recent trade audit for Chad estimated 7. Amjadi and Yeats (1995). 246 Customs Modernization Handbook

revenue loss, thus making complex controls unnec- payment of duties if the goods do not leave the essary. Also, exporters are fewer than importers and country of transit are better equipped to deal with transit logistics. • using an efficient information system that allows Therefore, for the most part, customs transit is an certification that the transit goods have effec- import concern. tively left the country of departure so that the security can be released. The Principles of Customs Over the years, transit provisions have been cod- Transit Regimes ified by a number of international conventions, the Transit regulation aims to facilitate the transport of most important being the General Agreement on goods through a customs territory without pay- Tariffs and Trade (GATT) agreements on transit, the ment of duty and taxes in the countries of departure World Customs Organization (WCO) Revised and transit. This is in accordance with the destina- Kyoto Convention, and the 1982 Geneva Conven- tion principle of taxation, which states that indirect tion on the harmonization of frontier control of taxes should only be levied in the country of con- goods. Annex E, Section 1 of the Revised Kyoto sumption. Transit legislation should be provided in Convention is about transit and focuses in detail on the Customs Code. In the absence of such codifica- applicable customs formalities and seals, the essence tion, transit can be regulated by a binding agree- of which is reflected in the section of this chapter ment between customs and the different parties titled “Description of a Typical Transit Operation”. affected by the transit operation. The core provi- Table 11.2 summarizes the key principles derived sions for customs transit have been around for from these international instruments. The actual centuries (box 11.1). They include the following: customs transit regimes across countries vary widely. In many countries and regions the basic • sealing of the shipment at the point where the transit arrangements, such as guarantees, are poorly transit operation is initiated implemented and greatly penalize landlocked coun- • providing financial security to customs in the tries. In other countries and regions, national tran- country of transit, which will guarantee the sit provisions have evolved into harmonized and

BOX 11.1 The Genesis of Transit Procedures in the Middle Ages

Today’s transit principles and procedures can be right to carry the goods and to establish their ori- tracked back to the trading revolution that took gin. Customs brigades could inspect these notes place in preindustrial Europe in the 12th and along the way. Rapidly, merchants asked for an 13th centuries. Seals, carnets, and guarantee sys- “acquis à caution” (the expression is still used) tems were designed at that time in major trading system, whereby merchants would purchase an centers. Compared to other regions of the world, underwritten guarantee instead of depositing Western Europe was fragmented politically, with the duty. a multiplicity of tolls and charges. The develop- In the Duchy of Milan in Northern Italy, a ment of inland transportation between major national transit system was available in the 14th cities stimulated creative solutions by the mer- century to facilitate the movement of imports chants and the rulers. inside the territory. Customs officers sealed ship- In 12th century southwestern France, the ments of goods at the main inland gateway of local guilds from Bordeaux were worried that the duchy. Carnets were issued and could be grain might be exported from the city—where it produced at checkpoints during the journey. At was needed—to other inland districts. There the final destination, Milan or another city, seals was, therefore, an export duty, which was differ- were broken and duties paid. Local officers of the entiated according to the relations with the vari- central office in Milan sent the information about ous “jurandes” of the region. The highest duty shipments at the beginning and at the end of was retained until the arrival note was returned transit. to the customs of departure with the signature of the customs of arrival. The carrier kept two Source: Adapted from Favier 1971. copies, one of which was used to justify the legal Transit and the Special Case of Landlocked Countries 247

TABLE 11.2 General Provisions Applicable to Customs Transit as Codified by International Conventions

Category Provisions

General • Freedom of transit • Normally no technical standards control • No distinction based on flag or origin ownership • No unnecessary delays or restrictions.

Customs diligences in transit • Limitation of inspection (especially if covered by an international transit regime such as TIR) • Exemption from customs duties • Normally no escort of goods or itinerary • No duty on accidentally lost merchandise • No unnecessary delays or restrictions.

In addition, when an international transit regime such as TIR is active Health and safety • The TIR regime applies to multimodal transport when some part of the journey is by road • Flat rate bonds are used for transit goods • No sanitary, veterinary, or phytosanitary inspections for goods in transit if no contamination risk.

Security offered by the carrier • Declarant to choose the form of security in the framework offered by the legislation • Customs should accept a general security from declarants who regularly declare goods in transit in their territory • On completion of the transit operation, discharge of the security without delay.

Source: UN/CEFACT and UNCTAD 2002. regionally integrated transit regimes. The best of customs procedures and the harmonization of working example is the TIR, detailed in the Major border controls. It also draws heavily on the Euro- International Transit Procedures section. pean experience. Article 10 applies to goods in tran- Article V of the GATT provides the freedom of sit:“contracting parties are bound to provide simple transit and determines that“[t]here shall be freedom and speedy treatment of goods in transit, especially of transit through the territory of each Contracting for those traveling under an international transit Party, via the routes most convenient for interna- procedure” (Grosdidier 2004, p. 24). Parties should tional transit, for traffic in transit to or from the ter- also facilitate, at the utmost, the transit of goods by ritory of other Contracting Parties.” Further, it containers and other vessels that provide adequate affirms that “...exceptincases of failure to comply security. Articles 4 to 9 posit the harmonization of with applicable Customs laws and regulations, such control and procedures. Contracting parties are traffic coming from or going to the territory of other bound to provide staff and facilities that are compat- contracting parties shall not be subject to any unnec- ible with the traffic requirement (Article 5),organize essary delays or restrictions and shall be exempt joint border processing to ease controls (Article 7), from Customs duties and from all transit duties or and harmonize documentation (Article 9). other charges imposed in respect of transit, except charges for transportation or those commensurate Description of a Typical with administrative expenses entailed by transit or Transit Operation with the cost of services” (Grosdidier 2004, p. 16). The 1982 Geneva Convention covers transit facil- Transit procedures should permit the movement of itation and recognizes the importance of transit for goods from the point of entry,into the customs terri- the economic development of countries.It promotes tory of the transit country, and finally to the country joint customs processing through the simplification of destination,withoutthepaymentof importduties, 248 Customs Modernization Handbook

BOX 11.2 General Requirements with Respect to Seals

“The seals and fastening shall: e) not permit use of more than once, except seals intended for multiple use (e.g. electronic a) be strong and durable; seals); b) be capable of being affixed easily and quickly; f) be made as difficult as possible to copy or c) be capable of being readily checked and iden- counterfeit.” tified; d) not permit removal or undoing without Source: Revised Kyoto Convention, Annex E1. breaking or tampering without leaving traces; www.wcoomd.org.

taxes, and other charges due on importation, and other charges due on importation in the transit without being subject to other import regulations, country, to cover cases where goods do not leave the such as health and safety inspections, applicable in country when using the transit procedure. This the transit country. In the absence of streamlined guarantee is used to recover the duties and taxes due operations,thetransitprocedurescanbedaunting,as if the transport forwarder does not pay the customs suggested in table 11.3. invoice for these duties and taxes when requested (if goods cannot be proven to have left the country of Three Key Elements of a Transit Operation transit as specified in the transit regulation). Documentation flow. To control the start and Seals, guarantees, and efficient flow of documenta- completion of a transit procedure, a monitoring tion are the underpinnings of transit. system for the flows should be operational. This sys- Seals. There should be a physically secure mecha- tem could be based on paper documentation that is nism so that goods present at the start of the transit shipped between the customs post at the exit of the operation will leave the transit country in the same country, after validation of the transit transaction, quantity, form, and status. The best and easiest way and the customs post that controls the origin of the to guarantee this is for customs to seal the truck8 to transit shipment. Increasingly the transmission of ensure that goods cannot be removed from or added these documents is done electronically. When the to the loading space of the truck without breaking copies of the documents match, the transit opera- this seal or leaving visible marks on the loading space tion is completed and the guarantee released. When of the truck. Seals and trucks approved for use in the they do not match, the transit procedure is not com- transit operation must, therefore, conform to well- pleted satisfactorily. The payment of the import specified criteria that guarantee their effective oper- duties, taxes, and other charges are due, and are ation and security. New transport seals are under increased by a stipulated fine. study and prototypes are already in use. One of these seals includes a microchip that is activated when Principal and Guarantor broken. When activated, these chips transmit a signal, picked up via a satellite network, and send infor- The principal is the owner of the goods, or his rep- mation to the organization or principal of the sealed resentative, such as the carrier, which is most container, including information on the location of often the case. The principal initiates the transit the container. Although the prices of such auto- procedure and is responsible for following the mated seals are relatively high now, it is expected that transit procedures—providing guarantees and the prices will decrease in the coming years. The require- necessary documentation. Companies that want ments for seals in the Revised Kyoto Convention are to act as a principal (or agent) making use of the presented in box 11.2. transit procedure must be registered; must obtain Guarantees. Customs must be given a guarantee a guarantee to cover the transit operations; must to cover the payments of import duties, taxes, and use a transit customs document and bill of lading; must present the goods and declaration at the 8. For illustrative purposes trucks are focused on; however, the customs offices of departure, transit, and destina- same applies for other modes of transport, such as wagons, tion; and must be responsible for sealing the tran- barges, and so forth. In practice, the procedures may be simplified for trains. sit vehicle. Transit and the Special Case of Landlocked Countries 249

TABLE 11.3 Transit Procedures without Facilitative Measures

Documentation Charges Comments

Sea transport Sea freight Unloading in port Bill of lading Port charges Inspection and clearance Invoice to determine value, Guarantee Deposit equal to part or by customs classification, and weight (deposit) total amount of duties, that permit the calculation taxes, and other charges of the duties to be due on importation in guaranteed country of departure Transit declaration

Loading of vehicle Seals applied Formation of a convoy Convoy Noncompliant with charges generally agreed principles, may lead to inappropriate practices Road transport in transit Road transport country charges Controls en route Noncompliant with generally agreed principles. Transit often is impeded by a number of road checks (police and customs) involving payments of gratuities Customs inspection Copy of transit document Seals are checked. If the upon exit from first transit operation can be country cleared, a copy of the transit document is sent to the central customs office and then the guarantee can be discharged Border inspections Driver’s license and (vehicle) insurance of vehicle checked. If invalid, change of operator needed Transfer to other truck Transfer Noncompliant with charges generally agreed principles. Cargo can be damaged, lost, or stolen Customs inspection upon Transit declaration Guarantee Deposit equal to part or entry in the destination (Beginning of a national (deposit) total amount of duties, country transit link) taxes, and other charges due on importation in second country Other inspections upon All documents Security, health checks, entry into second involving several stops. country Control of seals Arrival at destination All Costs of damage Seals broken; duties paid; or loss guarantee discharged

Source: Author. 250 Customs Modernization Handbook

A guarantor is a private or legal person who specified to the guarantors may be reduced by cus- undertakes to pay jointly and separately with the toms to 30 percent of the reference amount.In case of debtor (in most cases, the principal) the amount of movement of high-risk goods, customs can be duties and taxes that will become due when a transit allowedtocalculatetheguaranteeatapercentagethat document is not discharged properly. A guarantor is related to the risk of nonclearance. International may be an individual or firm or other body that is transit regimes such as the TIR allow for further eligible to contract as a legal third person. Normally savings. it is a bank or insurance company. Guarantors must Customs will only address its claim to the guaran- be authorized by customs, which usually publishes a tor for the full amount if debtors do not meet their list of financial institutions that are authorized to obligations. When goods are unlawfully removed act as guarantors. from the transit procedure the debtor is deemed to be one of the following:

Guarantees • the person who unlawfully removed the goods The guarantees acceptable by customs are defined from the transit procedure by the regulations of the transit country. Within the • any persons who participated in the unlawful open options of financial securities, the choice is the removal of the goods or who were aware or exclusive responsibility of the principal. A guaran- should reasonably have been aware of the tee can be provided by a bank (in the form of a removal of the goods bond) or as a form of insurance by a guarantor that • any persons who acquired or held the goods, and can be reinsured internationally by well-known and who were aware or should reasonably have been reliable insurance companies. Nonguarantee forms aware that they had been removed from the tran- of security, such as deposits, may still be in place in sit procedure some transit countries, although they are obviously • the principal. not recommended. A principal may also be its own guarantor. This is a common practice for rail trans- If the goods have not been unlawfully removed port, and grants customs access to more direct from the procedure, but one of the obligations or recourse mechanisms. conditions of using the transit procedure are There are two categories of transit guarantee: breached, the debtor is the person who breached the obligation or condition. • An individual guarantee covers only a single transit operation effected by the principal concerned. Applicable Documents and Flows It covers the full amount of duties, taxes, and A transit procedure requires a transport document, other charges for which the goods are liable. a bill of lading, and the transit customs document. • A comprehensive guarantee covers several tran- The transit customs document can contain four sit operations up to a given reference amount, copies: which is set equal to the total amount of duties and other charges that may be incurred with • Copy 1 is validated by the customs office of entry respect to goods under the transit operations of in the country of transit and forwarded to the the principal during a period of at least one central customs office (CCO) of the country of week. transit. This will permit later reconciliation when the transit is completed, and will also serve Ingeneral,thecalculationof theguaranteeisbasedon statistical purposes. These documents can be the highest rates of duties and other charges applica- transferred daily. ble to the goods, and depends on customs’ classifica- • Copy 2 accompanies the transit shipment to the tion of the goods. The amount covered by the com- customs office of exit from the country of tran- prehensive guarantee is 100 percent of the reference sit. This copy will be retained by customs as the amount. If the principal complies with certain crite- basis document for any succeeding customs ria of reliability, the amount of guarantee to be destination—warehousing, importation in free Transit and the Special Case of Landlocked Countries 251

circulation, or inward processing—at which document. If this administrative procedure fails, point the fiscal responsibility will be taken over the principal or agent should present Copy 4 of by the consignee. the transit document or be offered the possibility • Copy 3 also accompanies the shipment to the to deliver alternate proof to clear the regulation. customs office of exit. This copy, after being Such a request from the CCO should be made completed (signed and stamped) by that cus- within six weeks after the validation date of the toms office, is sent to the CCO. The CCO verifies document. the completion of the transit procedure by com- Principals or agents in possession of Copy 4 of paring Copy 1—which it kept at the start of the the transit customs document who do not receive operation—and Copy 3. If Copy 3 is not received any request from the CCO within six weeks of the within a period of typically six weeks from the date of validation can consider the transit proce- validation date of the document, the CCO will dure complete and can close the files. initiate an investigation. Principals or agents not in possession of Copy 4 • Copy 4 also accompanies the shipment to the of the customs transit document who receive a customs office of exit. This copy, after being request for further investigation on the clearance by completed (signed and stamped) by that cus- the CCO within six weeks can present alternate toms office, is returned to the principal or his proof. Such proof should always include official agent and gives proof that the procedure has stamps and signatures from the customs office of been completed, even before the CCO confirms destination. One of the following might serve as clearance of the operation. alternate proof:

In a situation in which the transit operation is not • a signed copy of Copy 2 of the customs transit completed satisfactorily, the taxes and duties calcu- document lated at the initiation of the transit operation would • a signed copy of the documents of the customs be due from the principal. If only one border is procedure succeeding the transit regime (con- crossed, this becomes a simple matter—the princi- firming that a customs debt is not related to the pal owes the full amount of the taxes and duties transit procedure). already calculated at the outset. When more than one border has been crossed, a decision needs to be Figure 11.1 depicts a Legitimate Transit Operation. made as to which duties and taxes are due, that is, the duties and taxes applicable in the country of departure, the country or countries of transit, or Nonclearance of the Transit Procedure the country of destination. To solve this issue, the transporters using the transit procedure are If the CCO cannot formally clear the customs tran- required to file a notification of border passing sit document, the nonclearance leads to a customs when they enter a new country of transit and when debt for the debtor. Although parties other than the they enter the country of destination. When a tran- principal can be debtors, the principal will always be sit operation is not completed within a specified jointly liable. time, the customs office of entry will ask every Where a debt arises due to nonclearance, the intended customs office at the borders of the coun- guarantor should be informed about such debt tries of transit and destination whether they have within a period of 12 months. If customs does not received a notification of border passing for that inform the guarantor within the set terms, customs specific transit procedure. can no longer collect a debt from the guarantor. Further, a debt can only be collected from the guarantor when the State collector has failed to collect Clearance of a Transit Procedure the debt from the fiscal debtors. The clearance of the procedure is formally based According to international standards, any party on the administrative confirmation by the CCO subject to the payment of a debt, as stated in a for- that it has received Copy 3 of the transit customs mal decision by its authority, has the right to file 252 Customs Modernization Handbook

FIGURE 11.1 Typical Transit Operation

Guarantee

Activate guarantee

If copies not cleared

If copies Issue cleared Reconcile copies Discharge of guarantee guarantee Central customs office Copy 2 Copy 1 information systems Copies 2, 3, and 4 Copy 4

• Issue transit documents • Affix or check seals • Check seals • Take copy 1 • Take copy 2

Point of entry Country of transit Point of departure Source: Author.

that party’s motivated objections to such formal regimes. There are several bottlenecks to over- decision. Reasons for objection might be alternate come in implementing the previously described proof of clearance; incorrect determination of mechanisms. value, classification, or debt; designation of the Availability of guarantees. The availability of debtor; and so forth. An objection can be filed actual guarantees constitutes the bottleneck for cus- within a certain period (in general, four to six toms transit in most developing countries. This dif- weeks) after the authority has validated the formal ficulty may reflect the immaturity of the financial decision. system in the country and the unwillingness of The debt that arises from nonclearance of goods international financial institutions to guarantee amounts to what would be the total of applicable transit transactions in particular countries. For cus- duties if the products had been declared for free toms, the calculation of the guarantee may be a circulation in the country of departure. In addition, problem when the value on which it is based cannot interest and fines may be due. The fines and interest be determined properly. In developing countries, are most often stipulated in the transit regulations. the carrier tends to provide undervalued invoices to These relate only to the fiscal debt. If nonclearance limit the value of the guarantee (or deposits). Thus, is the result of criminal offenses, criminal legislation the nondischarge of the security might not be an should specify a fine schedule. Interest becomes due efficient deterrent of fraud. on the debt from the date that nonclearance is Quality of transport services. The quality of trans- established, or from 20 days after the date of valida- port services in the transit country can also be a tion of the transit customs document. major constraint. Large operators are more likely to provide guarantees for customs and may be eligible for comprehensive guarantees. The extreme case is Implementation Issues that of railway companies, which are usually not International experience shows that many develop- subject to deposits or guarantees. Alternatively, as is ing countries could not develop smooth transit often the case in Africa, some guarantee may be Transit and the Special Case of Landlocked Countries 253 available but not at an accessible cost for the average facilitate the use of information technology for operator. Also, the vehicle might not meet the cus- information exchange. toms requirement for a secure transit.9 Hence, the need for convoys arises. Computerization and Information Technologies Convoys. Customs often suspects—as the result of experience—the presence of fraudulent practices A number of developing countries have developed in transit operations. In reaction, customs often different Electronic Data Interchange (EDI) sys- resorts to the use of convoys that accompany the tems adapted to their needs. Within the variety of transit vehicle during the transit trip, accompanied software employed, ASYCUDA (Automated System by police and a customs official. Convoys cause for Customs Data) has proved particularly popular delays as well as additional costs, borne by the prin- (see chapter 13). Automation brings a number of cipal, but do not fully eliminate all risk of fraud and positive changes for transit operations. Some appli- corruption. cations are virtually all-inclusive. For instance, the Corruption. Transit operations are vulnerable to European Union has developed a New Com- fraud and extortion because they take place over an puterized Transit System (NCTS), which is fully extended period of time, over long distances, and computerized. often with minimal supervision. One method to More directly applicable to developing econo- reduce corruption is to ensure that tamper-free seals mies, the UN Conference on Trade and Develop- are applied. It is also recommended that the transit ment (UNCTAD) has developed transit add-ons to operation be concluded at a level higher than the the ASYCUDA. The MODTRS (transit) module exit station, leading to the importance of creating handles transit documents in conjunction with the CCO and ensuring that it is well staffed and its other modules of the ASYCUDA++ functions. The operations periodically audited. module can be adapted to all types of transit and Weak enforcement. Independent of the corrup- can, therefore, electronically handle the TIR carnet. tion problem, enforcement in transit is not easy, Within customs in the transit country, the system as customs is not in a position to check consign- electronically informs the exit post of the arrival of a ments all over the territory. Conversely, other shipment within a plausible time frame. When the agencies involved in fighting national fraud are exit post closes the transit information, the infor- less concerned with transit. In most industrialized mation is keyed in and the guarantee is automati- countries, fraud in transit is treated as smug- cally released. gling and is subject to heavy penalties, including In developing transit economies that have seizing of the truck and shipment, as well as fines begun implementing EDI, it is likely that the tran- that can amount to three times the value of the sit operation will not be automated at first. Goods shipment. in transit will enter the country through the main Lack of standard documentation. Because a transit gateway (port or airport), whose transit processes operation normally involves at least two countries, will likely be computerized according to priority. the use of standard customs forms will facilitate the Most often, they will exit through a faraway border overall operation. Standard forms will prevent hav- post where EDI has not yet been deployed. Yet, ing to use new customs forms upon entering a new transit is likely to benefit from automation as it country, which certainly adds to the complexity of brings about a more efficient and centralized the operation and causes delays at border crossing information system overall. For instance, even if points. Using standard documentation will also the transit information is sent by traditional means to the CCO, the use of EDI already carries a lot of potential (this promise is exhibited by 9. If the truck cannot be sealed by customs, customs may con- Ghana’s expansion of its automated GCNet opera- sider, as an alternate option, limiting transit traffic to specific transit corridors where each truck carries a special transit sign tions to the border post with Burkina Faso). ASY- affixed to it or time limits are set for transporting the goods CUDA can be adapted to suit the specific needs of from the customs office of departure to the customs office where its different users, and it provides customs with a the goods will leave the transit country. Customs can then patrol these special transit corridors and concentrate inspections on variety of functions that support its activities and trucks with the special transit signs. increase its efficiency (box 11.3). 254 Customs Modernization Handbook

BOX 11.3 ASYCUDA Customs Operations in Zambia

Zambia has implemented the ASYCUDA transit customs premises and is managed by a private module between Chirundu at the border with contractor. Chirundu is one of the major entry Zimbabwe and Lusaka, using the Wide Area Net- points, with a high volume of traffic. From incep- work (WAN). This transit system calculates the tion, sufficient DTI terminals were available to total duties and taxes as the guarantee amount, cope with business volume. The declarations are which is deducted from the bond as security. sent to a specialized transit declaration desk, Once a transit document is processed and sent to which generates a transit document (T1). When the destination office, the record at the departure issuing the T1, the equivalent suspended duties office remains outstanding and is acquitted only and taxes (the bond) is deducted from the guar- when all items have been fully cleared or have antee. With the WAN in place, the T1 is automat- made an exit at the destination office. The avail- ically transmitted through the ASYCUDA mes- ability of the WAN between the two ports and sage manager module (Gateway) to both enhancements in ASYCUDA++ have, respectively, Chirundu and Lusaka. Finally, the release order is resulted in instantaneous data flow and efficiency generated as proof that the consignment has in management of transits. been released after full compliance with the rele- Transit guarantees. To carry out transit opera- vant transit requirements. tions, a declarant needs to have a Transit Guaran- Destination office—Lusaka. The declarant tee Account. Transit Guarantee Accounts have reports to the transit counter at the customs been set up on the accounting module of ASY- office and files the copies of the documents CUDA (MODAAC) by customs for all licensed issued by the departure office. The transit officer agents. For the account to operate, the maxi- will access the list, T1, transmitted on the com- mum authorized guarantee should be specified. puter. The details on the computer are compared This is the amount from which the suspended with the information on the hard copy of the T1. duties and taxes will be deducted as bond to If the information is correct and consistent with cover the movement of transit goods. Once this the physical consignment, the T1 is validated amount is exhausted, no further transits can be and the status of the transit document is processed. changed to validated. The bond is then credited Departure office—Chirundu. Submissions of all back to the Transit Guarantee Account. entries to customs is done through Direct Trader Input (DTI). The bureau is situated within the Source: UNCTAD 2003.

Major International Transit transport conventions, but also the only existing Procedures: The Transport universal customs transit system. In this sense, it International Routier serves as a benchmark for any future effective The previous section describes a set of procedures regional transit frameworks and deserves a specific to the country of transit. International detailed examination. transit procedures stipulate the harmonization of The TIR Convention allows the temporary sus- country-specific procedures and documentation, pension of customs duties, excise duties, and as well as an internationally accepted guarantee value added taxes (VAT) payable on goods origi- system. Hence, an international regime facilitates nating from or destined for a third country while transit further, compared to a chain of national under transport across the territory of a concrete procedures. The Transport International Routier customs zone. Such suspension remains in place (TIR) is a best practice that sets the standard until the goods either exit the customs territory in this domain and is discussed in detail in this concerned, are transferred to an alternative cus- section. toms regime, or the duties and taxes are paid and the goods enter free circulation. The TIR specifies The TIR Convention: General Principles five main pillars: The TIR Convention, based on the UN Customs • Secure vehicles. The goods are to be transported Convention on the International Transport of in containers or compartments of road vehicles Goods under Cover of TIR Carnets (1960), is not constructed so that there is no access to the inte- only one of the most successful international rior when secured by a customs seal, so that no Transit and the Special Case of Landlocked Countries 255

goods can be removed or added during the tran- guaranteespaymentwithinthatcountryof anyduties sit procedure, and so that any tampering will be and taxes that may become due in the event of any clearly visible. irregularity occurring in the course of the TIR trans- • International guarantee valid throughout the jour- portoperation. Theamountpayableisamaximumof ney. In the situation in which the transport oper- US$50,000 for normal carnets and US$200,000 for ator cannot pay for the customs duties and taxes tobacco and alcohol carnets.The national guarantee- due, this system ensures that the customs duties ing association is not a financial organization; there- and taxes at risk are covered by the national guar- fore, its obligations are usually backed by insurance anteeing system of the operator. policies provided by the market. The International • National associations of transport operators. Road Transport Union (IRU) can help national National associations control access to the TIR guaranteeing associations find such services. procedures by transport operators and issue the There are three types of carnets, each of which appropriate documents and manage the national contains two sheets for each country of departure, guarantee system. transit, and destination: • TIR carnets. This is the standard international customs document accepted and recognized by • The regular TIR carnet. all members of the TIR Convention. • The multimodal TIR carnet, which was intro- • International and mutual recognition of customs duced in 1987, and specifically caters to the control measures. The countries of transit and requirements of regional and intercontinental destination accept control measures taken in the multimodal transport. This carnet contains an country of departure. additional sheet identifying the persons who compose the transport chain. In essence, TIR operations can be carried out in par- • The tobacco/alcohol TIR carnet, which became ticipating countries by a truck operator member of an integral part of the TIR Convention in a national association, with the network of national 1994. associations acting as guarantor. The TIR system has been a success. The num- The transporter should execute a contract with the ber of TIR carnets issued rose from 3,000 in 1952 national guarantee association, which would include to 2.7 million in 2001. The main reason for its the obligation to meet all requirements set in the TIR success to date is that all parties involved (cus- Convention; to return the used TIR carnet after com- toms, other legal bodies, transport operators, and pletion of the TIR transport; and to pay any amount insurance companies) recognize that the system of duties, taxes, and other charges on first demand of not only saves time but also money, due to its effi- the national guarantee association. ciency and reliability. The TIR Convention is sim- To ensure the security of the revenues, the TIR ple, flexible, and cost reducing, and ensures the system is only applicable to containers or road vehi- payment of customs duties and taxes that are a cles with load compartments to which there is no result of the international transport of goods. interior access after a customs seal has secured it. If Furthermore, it is constantly being updated tampering does take place, it will be clearly visible. according to the latest developments, mainly concerning fraud and smuggling. The TIR is used The Sequence of the Transit Operation mostly in European countries but is also used in Under TIR Cover transit operations in Central Asia, the Caucasus, the Maghreb, and in some parts of the Middle A TIR transport is an international transport opera- East. tion. It is a transit operation of goods, across one or more borders, of which only a part of the transit has to be made by road. The transit operation itself Insurance and Issuance of TIR Carnets involves the movement of goods from one country In countries using the TIR,the national guaranteeing (country of departure) to another country (country association is recognized by the customs administra- of destination), through a third country (transit tion of the country. In most cases it is an association country). All countries involved should be active that represents the transporters. The association members of the TIR Convention. 256 Customs Modernization Handbook

The customs office in the country of departure customs will check the TIR certificate (stating that administers the seals. Both the country of transit and the loading space of the truck fulfills the require- the country of destination accept the control meas- ment of construction and can be sealed properly by ures taken in this country.Thus,at customs offices en customs) and customs will seal the loading space route (at border points between countries of depar- after loading has been completed. The customs ture and transit,and between countries of transit and office of departure will then validate the TIR carnet destination), only the seals and containing body are (put customs stamps on the manifest, and on each inspected.The goods are not inspected unless irregu- of the sheets for the countries that will be transited larities are suspected. Such spot checks should be the between the Netherlands and the Russian Federa- exception. The customs office of the destination tion, two copies for each of these countries). Cus- country removes the seals and controls the goods. toms removes one sheet of the TIR carnet and for- During this transit process, various steps can be wards this copy to the Dutch CCO. The rest of the discerned regarding the issuance of the carnet as TIR carnet is returned to the truck driver, who can well as the insurance situation. To illustrate the leave Rotterdam en route to the exit customs office. functioning of the system, an outline of a TIR transport from Rotterdam (the Netherlands) to Moscow Step 2. TIR Carnet Presented at the Customs (Russian Federation) follows. This procedure is also Office of Exit of the Departure Country The depicted in figure 11.2. Netherlands is a Member State of the European Union (EU), which is a customs union, so no cus- Step 1. TIR Carnet Presented at the Customs toms formalities need to be fulfilled at the internal Office of Departure The truck driver should border between the members. Therefore, the present the TIR carnet at the customs office of customs office of exit of the EU is, in this example, departure in Rotterdam. Before loading the goods, situated at the Polish–German border.

FIGURE 11.2 The Sequence of the TIR Operations Insurance

Info on carnet IRU

Departure Transit Claim duties country Claim country duties national national Carnet association association If copy not cleared carnet

Reconcile copy Discharged and clear

Copy 2 If no carnet, claim duties 1. Issue Central customs office Copy 1 carnet. information systems

2. Affix 3. Check seals. 4. Check seals. 5. Break seals. seals. Take copy 1. Take copy 2. Discharge carnet.

Country of Country of Country of departure transit destination

Source: Author. Transit and the Special Case of Landlocked Countries 257

The truck driver presents the TIR carnet at the found, duties are not payable. If Polish customs does German customs office of exit in Frankfurt not receive the documents or if irregularities are (Odder), Federal Republic of Germany. German observed, the duties are payable. Polish customs can customs inspects the Dutch customs seals and turn to the guaranteeing Polish national association whether the loading space of the truck is still intact. for payment of the demanded amount. The Polish If no irregularities are found, German customs association will then recover this amount from its removes a copy from the TIR carnet and stamps the Dutch counterpart. second copy in the TIR carnet. The TIR carnet is returnedtothetruckdriver,whoisallowedtoleave Step 5. TIR Carnet Presented at the Customs the EU and drive to the Polish customs office at the Office of Entry in the Country of Destination same border. German customs forwards the copy it The truck driver presents himself or herself and the removed from the TIR carnet to the Dutch CCO. TIR carnet at the Russian customs office at the Russ- Copies from the TIR carnet received from the ian–Polish border and performs the controls that customs offices of departure and exit are com- were described for leaving the German exit border pared at the Dutch CCO. If no irregularities are before sending the driver and the transit truck to determined, duties are not payable. However, if Moscow. This part of the journey is identical to a the second copy does not arrive at the CCO, goods national transit operation. Russian customs files the are considered to have remained in the EU and the copy it removed from the TIR carnet to monitor the duties and taxes applicable in the EU become due. clearance. The principal of the TIR carnet (that is, the transporter) is obliged to pay these duties and taxes. If Step 6. TIR Carnet Presented at the Customs the principal is not willing to pay or cannot pay Office of the Country of Destination The truck these duties and taxes on demand of customs, the driver presents himself or herself along with the TIR national guaranteeing association must pay the carnet at the customs office in Moscow. Russian demanded amounts. customs inspects the Dutch customs seals and whether the loading space of the truck is still intact. Step 3. TIR Carnet Presented at the Customs If no irregularities are found, Moscow customs Office of Entry of the Transit Country The truck removes a copy from the TIR carnet and stamps the driver presents the TIR carnet to the Polish customs second copy in the TIR carnet.After completion, the office at the Polish–German border. Polish customs TIR carnet is returned to the truck driver. The TIR inspects the Dutch customs seals and whether the transport operation is now complete. Moscow cus- loading space of the truck is still intact. If no irregu- toms forwards the copy it removed from the TIR larities are found, Polish customs removes a copy carnet to the Russian customs office of entry. from the TIR carnet and stamps the second copy in The copy of the TIR carnet received from the the TIR carnet. After completion, the TIR carnet is Moscow customs office at the Russian customs office returnedtothetruckdriver,whoisallowedtoleave of entry is compared to the copy of that specific TIR the Polish customs office and drive to the Russ- carnet in the files of that customs office. If no irregu- ian–Polish border. Polish customs forwards the larities are found, duties are not payable. However, if copy it removed from the TIR carnet to the Polish the second copy does not arrive at the Russian cus- CCO. toms office of entry,goods are considered to be in free circulation in Russia and the Russian duties and taxes Step 4. TIR Carnet Presented at the Customs become due. The principal of the TIR carnet (the Office of Exit of the Transit Country The truck transporter) is obliged to pay these duties and taxes.If driver presents the TIR carnet at the Polish customs the principal is not willing to pay or cannot pay these office of exit at the Russian–Polish border, and the duties and taxes on demand of Russian customs, the procedure that took place at the German border is Russian national guaranteeing association must pay repeated. the demanded amounts. The Russian national guar- Copies from the TIR carnet are received from the anteeing association will recover this amount, via the customs offices of departure and exit and are com- Dutch national guaranteeing association, from the pared at the Polish CCO. If no irregularities are Dutch principal of the TIR carnet. 258 Customs Modernization Handbook

Step 7. TIR Carnet Discharged by Customs of the • The system facilitates customs control and docu- Country of Destination After discharge, the prin- mentation. cipal or holder returns the TIR carnet to the Dutch • Use of central clearance points allows more effi- National Guaranteeing Association. The Dutch cient use of customs personnel. National Guaranteeing Association returns the TIR carnet to the IRU for control and archiving. However, in 1992, the TIR system had been endan- gered by its eastward expansion, especially in the Advantages of the TIR System former Soviet Union, where massive fraud The TIR system was devised to facilitate (under cus- occurred. A guarantee system that can collapse in toms control) to the maximum extent possible, the the final leg of the journey is not secure. Fortu- international movement of goods. Thesystempro- nately, Russian customs reacted to address the issue, vides transit countries with adequate guarantees to aided by a proper tracking system backed by cover customs duties and taxes at risk. TIR is a adequate investigation and enforcement mecha- win–win arrangement between the public sector nisms. As a response to this crisis, the IRU devel- and the private sector. The counterpart of the sim- oped an electronic backup of the TIR carnets called plification of procedures is the exercise of more SafeTIR that makes tracking easier (box 11.4). responsibility by the private sector through the Another reponse to this type of tracking problem national associations. is provided by the the Unique Consignment Refer- For the transport industry the benefits include ence Number (UCR) of WCO. The WCO has been the following: working for several years on the implementation of the UCR. The UCR has a broader customs purpose • Goods can move across international borders than transit; however, it constitutes a consistent with minimum customs interference. information system for tracking consignments. • The delays and costs of transit are reduced. Therefore, it can provide a reliable tool for customs • The documents are simplified and standardized. agencies willing to facilitate legitimate transit while • There is no need to make customs guarantee keeping control of the movement of goods in tran- deposits at transit borders. sit. From the carrier perspective, the UCR has a number of potential benefits, beginning with the Customs authorities enjoy benefits, too: fact that a single UCR is created and used by the • Duties and taxes at risk during international exporter irrespective of the number of transit coun- transit movements are guaranteed up to tries (box 11.5). US$50,000 (with a higher maximum for alcohol Experience also shows that the TIR mechanisms and tobacco). remain difficult to implement in some countries for • Only bona fide transport operators are permit- the same reasons that make a national-based system ted to use TIR carnets, thus increasing the relia- inefficient, such as the unavailability of an efficient bility of the system. guarantee system. If the private sector is not well • Disputes can be arbitrated through national organized, the national association may not be associations (the one in the country of transit strong enough. Even when a credible association and the transporter’s national association). emerges, quite often it is not in a position to set up

BOX 11.4 The SafeTIR

SafeTIR is a control system that aims at electroni- customs authorities, of the final or partial termi- cally confirming the termination of a TIR trans- nation of the TIR carnet, mainly to enable com- port at the customs office of destination and val- parison of this confirmation to the paper-based idating the certification of the termination termination. The electronic confirmation should demonstarted by a customs stamp affixed to a reach the guarantee chain without delay. TIR carnet. SafeTIR provides the status of the TIR carnet to customs and the TIR carnet issuing Source: IRU, available at www.iru.org. association with a confirmation, directly from the Transit and the Special Case of Landlocked Countries 259

BOX 11.5 The Unique Consignment Reference Number

UCR is a unique reference number that may be UCR is a 35-digit alphanumeric code bound required at any point during the customs proce- to the consignment. The agreed on structure dure. It should (a) be applied to all international consists of the following: goods moving under customs control, (b) be • a first character for the year over a 10-year used only for tracking, audit, and reconciliation period purposes, (c) be truly unique at the international • two-digit country ISO code identifying the level, and (d) be issued at the beginning of the nationality of the supplier trade process. • 32 characters used as the national identifying The objective of the UCR is to define a code of the supplier plus a transaction code generic mechanism with sufficient flexibility to created by the supplier. cope with the most common scenarios of international trade. UCR is making maximum use Source: Guidelines on Application of Informa- of existing supplier, customer, and transport tion and Communication Technology (Kyoto Con- references. vention, General Annex, Chapter 7, Appendix 9.)

the guarantee system due to the underdevelopment the transit procedures in the ECOWAS region still of the local financial infrastructure and the unwill- stem from bilateral accords and national regulations ingness of international insurance companies to and practices. These are, for the most part, inward provide a cover given their perception of political looking and protectionist rather than supportive of and commercial risk. In other instances, political the free movement of goods (N’Guessan 2003). tension between countries makes the mutual recog- Practical implementation shortfalls are often at the nition of carnets elusive, as is too often the case in root of the failure of regional or international Central and Western Asia. transit agreements.10

Attempts to Duplicate TIR Success Elsewhere Transit Facilitation Institutions Due to the enormous success of the TIR system, its Active cooperation between and among transit and concept has been the basis for attempts to establish landlocked countries can help ease trade barriers. bilateral and multilateral agreements between Such regional and bilateral cooperation can pro- countries elsewhere, such as in Asia, Africa, and mote an integrated approach to transit that goes South America. However, none of these initiatives beyond customs transit issues. Many agreements have been successful yet. A main reason for this has have a strong focus on the transit infrastructure, been the absence of a common regional guarantee and also deal with visa, permit, and vehicle regula- system. The internationally agreed on and recog- tion issues. This section presents a selection of such nized guarantee system is one of the core elements agreements and their accompanying institutional of the TIR system, and in its absence TIR-like sys- arrangements, and highlights those factors that tems will not be successful. On occasions, even have contributed to their successes or shortfalls in when such a system is included within a transit supporting transit. agreement, the failure to implement it fully jeopardizes the efficiency of the regional transit regime. For Bilateral Agreements example, the Economic Community of West African States’ (ECOWAS’) 16 member states Bilateral transit agreements are key building blocks of signed, in June 1982, a convention for the establish- customs harmonization initiatives. In the absence of ment of an ECOWAS Inter State Road Transit Sys- TIR-like conventions, bilateral agreements are tem commonly known as TRIE (Transit Routier Inter-États). Chambers of commerce are assuming 10. Regional TIR-like mechanisms are under consideration in the role of national associations. However, the TRIE Central Africa, Central Asia (under the leadership of the Asian has been largely ignored, and about 70 percent of Development Bank), and in Western Asia. 260 Customs Modernization Handbook

needed to make transit possible. They are also needed Regional Agreements as a basis for regional agreements. In practice, bilat- The last few decades witnessed a proliferation of eral agreements have strategic importance for devel- regional agreements between or involving develop- oping landlocked economies. ing countries. A number of them have direct impli- The scope of bilateral agreements is usually cations for customs transit: practical and reflects a balance between the interests of the two countries, which are not always in • the already-mentioned Transit Routier Inter- accordance with general principles of customs Etats (TRIE) in the ECOWAS, the only example transit (convoy practices , for example). It usually beyond TIR of an agreement dedicated only to includes preferred route and freight sharing transit agreements, as well as the location of warehouses • the Association of Southeast Asian Nations of the landlocked countries.11 However, some (ASEAN) Framework Agreement on the Facilita- core customs transit issues, such as guarantee tion of Goods in Transit procedures, are usually left out of the bilateral • the Greater Mekong Subregion (GMS) Agree- agreements. ment for Facilitation of Cross-Border Transport Together the Indo-Nepal Treaty of Trade and the of Goods and People Treaty of Transit govern transit operations between • Economic Cooperation Organization (ECO) the two countries. Both treaties, which are renewed Transit Framework Agreement—formed by every five years, go into great detail in outlining the Afghanistan, Azerbaijan, Iran, Kazakhstan, specific procedures required for the transit of Kyrgyz Republic, Pakistan, Tajikistan, Turkey, Nepalese imports and exports through India. The Turkmenistan, and Uzbekistan Transit Treaty includes specific points of entry and • Common Market for Eastern and Southern exit, a description of the 15 mutually agreed on Africa (COMESA) agreement on single adminis- transit routes to and from Calcutta and Haldia, a trative document. description of the warehouses and open spaces provided, and detailed guidelines on the simplified Except for the TRIE, these regional agreements tend administrative procedures involved in the import to lay down broad goals and policy directions. or export of Nepalese goods via India. The Actual customs transit facilitation may be depend- Nepalese–Indian example includes a number of ent on other existing agreements or procedures. A elements that can help facilitate transit operations 2001 UNCTAD report points out “there has not between the two countries: been any shortage of measures and initiatives to improve facilitation of transit traffic. COMESA, • a clear description of import and export proce- EAC,...andSADCallhavevarious measures that dures are in place to address transit facilitation. Unfortu- • simplified customs administrative requirements nately, the major problem has been poor implemen- and documentation (in this case, the Customs tation.”(InfraAfrica Ltd. 2001, p. 45) Transit Declaration) To achieve a significant impact on customs • a reliable guarantee framework (backed by the transit, regional agreements should address, directly government of Nepal) or through related mechanisms, the following • a clear distribution of responsibilities and duties components: among the different stakeholders • customs support infrastructure (warehouses, the • Common customs documentation and procedures. provision of dry ports) The use of common procedures and documents, • a description of the agreed on transit routes. such as carnets or Single Administrative Docu- ment (SAD), are now available in many regions or sub-regions. • Cooperation between authorities, or one-stop 11. Efficient dry ports, such as Ngaounderé in Cameroon or Birgajn at the Indo–Nepalese border, are also part of this frame- border posts. Within Africa, a number of initia- work of bilateral facilitation. tives have been discussed over the years on Transit and the Special Case of Landlocked Countries 261

one-stop border posts. Unfortunately, these An UNCTAD document, “Strategies for Land- have not been translated into concrete effective locked and Transit Developing Countries,” points measures. out that“experience shows that most effective facil- • Regional customs guarantee system. So far, the itation measures concentrate on trade and trans- guarantee system has proven to be the most elu- port corridors linking inland origins/destinations sive objective. in landlocked countries with entry/exit seaports in coastal countries” (UNCTAD 2003, p. 13). In prac- That regional agreements can work in the presence tice, the experience with transit corridors has been of political will is illustrated by the successful intro- somewhat mixed. Yet, there have been some duction of the COMESA Yellow Card or Third Party encouraging initiatives and results that provide a Regional Motor Vehicle Insurance Scheme. This basis for further developments in the field of tran- scheme allows prepurchase of insurance, honored sit. The following examples illustrate the potential by all participants, in local currency at the point of benefits conveyed by transport corridors for cus- origin. This means, for example, that a trucker trav- toms transit. eling from Zimbabwe to Uganda who has to tra- Walvis Bay Development Corridor. The Walvis verse Zambia, Tanzania,and Kenya does not need to Bay Development Corridor (now Trans Kalahari) stop at each border post to purchase insurance, but became operational in late 1999. The driving force uses the Yellow Card to gain access and coverage. behind the project was the Walvis Bay Corridor According to COMESA, the Yellow Card has, since Group (WBCG), a public–private partnership. In its inception, generated revenue worth US$2 mil- November 2003 the Trans Kalahari Corridor Mem- lion, with only US$200,000 worth of claims orandum of Understanding was signed. It intro- processed. In theory, transit guarantee schemes are duced a new single customs administrative docu- not that much more difficult to implement than this ment, which until then had been in use on a pilot insurance scheme. basis. This new simplified approach provides a streamlined and effective tool for managing cus- Transit Corridors toms transit transactions throughout Namibia, Botswana, and South Africa and will replace In transit corridors all relevant stakeholders aim to the cumbersome set of procedures involving up to work together to ensure efficient and secure transit 10 national documents in each country transited. along specific routes, to the benefit of landlocked Northern Corridor. This corridor provides a life- and transit countries. line through Kenya to the landlocked economies of The potential strength of transit corridors lies Uganda, Rwanda, Burundi, and the landlocked primarily in the possibilities they offer in con- areas within the Democratic Republic of Congo. fronting the concerns and interests of all relevant ThecorridorisgovernedbytheNorthernCorridor stakeholders, public and private, who can focus on Transit Transport Coordination Authority, which policies and initiatives to cater to specific routes and aims to help harmonize and simplify the procedures border crossings. Transit corriders thus offer the involved in transporting goods within the region. possibility of tackling transit in a holistic manner Significant achievements accomplished so far (institutional, administrative, and infrastructure), include the following: initiating and effecting changes that may otherwise be difficult to obtain at a wider national or regional • Simplification of port clearance procedures. level. In this sense, promoting specific transit docu- • Documentary simplification, achieved through mentation or introducing harmonized border the creation of the Road Transit Customs Decla- crossing procedures for specific routes are more eas- ration (RTCD), which is meant to be the single ily attainable objectives that, once in place, can be administrative document attached to a ship- expanded to national levels. The quality of the gov- ment through the corridor. However, in practice ernance structure of the corridor is of critical the RTCD is often copied at the border onto importance in achieving those objectives. Transit another RTCD issued by the next country, an corridors benefit greatly from the involvement of illustration of how difficult it may be to change private sector stakeholders. old habits. 262 Customs Modernization Handbook

• The use of the COMESA Customs Declaration countries involved fall within the TIR system, it is Document by Northern Corridor countries. already built on a strong transit base. • Reduction by half of the transit time between The design and implementation of the TTFSE Mombasa, Kenya, and Bujumbura, Burundi, was based on a participatory methodology to ensure from over 30 days to about 15 days. Some unnec- a sense of ownership among the various stakehold- essary border formalities along the corridor have ers involved—national agencies, customs officials, been removed. and transport operators. The TTFSE program builds on a number of regional mechanisms: TRACECA. TRACECA is an EU-initiated program, launched in 1993, to develop a transport cor- • a high-level Regional Steering Committee con- ridor on a west-east axis from Europe, across the vening all countries twice a year to facilitate Black Sea, through the Caucasus and the Caspian cooperation and experience sharing Sea to Central Asia (a modern Silk Road). It aims to • a regional Web site presenting all requirements harmonize the legislative base in the transport and and procedures of border agencies transit sectors of its member states12 and places a • public–private working groups interacting quar- great emphasis on infrastructure development and terly improvement. During its 10-year existence, • regional conventional and distance-learning TRACECA has implemented 53 projects and chan- programs to harmonize the quality of transport neled over US$120 million in infrastructure invest- service providers ment and technical assistance. • paired local project teams gathering all border A key tool in the execution of this project was a agencies at pilot border crossing points with border audit whereby the transit procedures at 70 interactions across the border designated TRACECA border crossing points (in all • indicators that monitor border crossing times. 14 countries) were observed and recorded into a database. This comprehensive set of data has been This customs modernization initiative has been the basis upon which subsequent recommendations implemented at a number of selected border crossing on harmonized procedures at border crossings have points and inland clearance terminals with a consid- been put forward. erable degree of success. The program’s progress report for 2002 highlights the significant reduction in waiting time, the establishment of a transparent and The Program of Trade and Transport Facilitation public customs performance monitoring system (see in Southeast Europe box 11.6), and the visibly improved dialogue among The Trade and Transport Facilitation in Southeast customs administrations within the region. Europe (TTFSE) regional program, supported by The success of this program so far can be attrib- the World Bank, the EU, and bilateral partners, was uted to reliable funding from the World Bank and set up in 1998 upon the request of the region’s coun- various other donors, strong commitment by the tries and the Southeast European Cooperative Ini- national governments involved, direct participation tiative. Its aim is to create a framework that will help of all stakeholders, extensive use of information to reduce transport costs, fight corruption, and help technology, the introduction of human resources customs administrations gradually align their pro- programs, and the emphasis on close and meticu- cedures with EU standards. The countries included lous monitoring to fine-tune and identify changing in this program are Albania, Bosnia and Herzegov- needs and priority areas. ina, Bulgaria, Croatia, Romania, Serbia, and the Two key ingredients of the success of TTFSE as a landlocked Moldova and Federal Yugoslav Republic transit facilitation initiative have been the develop- of Macedonia. Since most of the trade flows are ment of joint border facilities and the monitoring of bound to or from the EU and the majority of the indicators. TTFSE has a harmonized set of indicators (box 11.6). Joint processing allows all customs and noncustoms (veterinary, phytosanitary) proce- 12. Armenia, Azerbaijan, Bulgaria, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Mongolia, Romania, Tajikistan, Turk- dures to be carried out in a single stop in a common menistan, Turkey, Uzbekistan, and Ukraine. border processing zone. Transit and the Special Case of Landlocked Countries 263

BOX 11.6 TTFSE Indicators

Agreed to by all participating countries, the set of public agencies and the private sector (trucking indicators has allowed both general performance industry). Transit related indicators include the and the real time impact of the different pilot site following: initiatives to be monitored. To improve the efficiency and relevance of this initiative, the pro- • Trucks cleared in less than 15 minutes gram has tried to institutionalize the collection • Irregularities per number of examinations procedures at each of the pilot sites, relying on • Truck examinations local computer applications or simple measure- • Average border exit time ment techniques to obtain most of the key fig- • Average border entry time ures automatically. An important feature of tran- • Surveyed occurrences of corruption. sit-related indicators is that the design of the indicators and the data collection involve both Source: TTFSE report 2002 at www.ttfse.org.

Operational Conclusions The existence of an efficient guarantee system, which is adhered to by customs authorities and Customs transit is, in a sense, straightforward as it is proves not too cumbersome for exporters–importers built on proven principles: secure the cargo, provide and transport operators, is a prerequisite for transit a guarantee mechanism, and use a centralized flow operations. The TIR and its network of national of documentation. Customs transit is vulnerable to guaranteeing associations propose the best current poor institutional frameworks. Transit operations reference system. So far there is no convincing exam- are extended in space and time and are, therefore, ple of a fully functioning guarantee system available exposed to inefficient bureaucracy and to corrupt to transporters in developing countries. In part, this practices. The guarantee system needs a minimum is because financial institutions have not been in a degree of sophistication of the local financial infra- position to propose products similar to the TIR structure, which is not always available in develop- insurance in the development context. A working ing countries. Transit cannot work without a certain guarantee system is also dependent upon customs amount of trust between customs and the private enforcement and information systems. sector, which means cultivating a mature and Transit is dependent upon customs information organized private sector. systems within the country of transit. Customs While transit facilitation is a bottleneck to the should be able to efficiently track the transit flows in development of a number of developing countries, and out of the country. Information processing and this is precisely where the reforms face the most automation, particularly the implementation of e- daunting challenges. In many countries inadequate transit modules in information technology systems, practicesorprocedures,suchasconvoys,aredeeply will ultimately facilitate transit. entrenched. Here are some important operational Customs modernization programs should conclusions. encompass transit. The following components are Customs transit is only one part of a wider crucial for a transit module: range of policy issues that involves many other participants and procedures, including cross- border vehicle regulations, visas for truck drivers, • harmonization of procedures at the regional insurance, and police controls. The quality of level, for example, single documents infrastructure is also a major concern for many • development of enforcement capabilities beyond landlocked countries. Even if customs transit pro- the border to enhance the credibility of customs cedures are made effective and efficient, full trade transit provisions facilitation will require that these other issues be • consideration of the feasibility of joint border dealt with. Some measures can be taken at the processing national level while others require some form of • monitoring of indicators of transit performance, regional cooperation. as in TTFSE. 264 Customs Modernization Handbook

Transit facilitation institutions such as corridor References agreements promote active cooperation between Amjadi, A., and A. Yeats. 1995. “Have Transport Costs and among transit and landlocked countries, and Contributed to the Relative Decline of Sub-Saharan are a pivotal element in helping reduce or remove African Exports?” World Bank Policy Research Paper 1559. physical, administrative, and institutional barriers Washington, D.C.: The World Bank. Favier, Jean. 1971. Finances et Fiscalité au Bas Moyen Age. Paris: to trade. Transit agreements are important in form- SEDES. ing and shaping such cooperation, either at the Faye, Michael, John McArthur, Jeffrey Sachs, and Thomas Snow. bilateral, subregional, or regional level. In practice, 2004.“The Challenges Facing Landlocked Developing Coun- tries.” Journal of Human Development. 5(1): 31–68. such agreements promote an integrated approach Grosdidier de Matons, Jean. 2004. “Facilitation of Transport and to transit that goes far beyond customs transit, and Trade in Sub-Saharan Africa: A Review of Legal Instru- tackles issues such as infrastructure, visas, permits, ments.”SSATP Working Paper No. 73. Washington, D.C.: The World Bank. and insurance. InfraAfrica Ltd. 2001.“Review of Progress in the Development of Public–private cooperation will bring decisive Transit Transport Systems in Eastern and Southern Africa.” contributions to transit cooperation. It is recom- Prepared for the Fifth Meeting of Governmental Experts mended that appropriate frameworks, such as from Land-locked and Transit Developing Countries and Representatives of Donor Countries and Financial and National Trade and Transport Facilitation Com- Development Institutions. Document UNCTAD/LDC/115. mittees, be set up and be strengthened (UNECE New York. July 31–August 3. 2000). Regular exchange of information between Lakshmanan, T. R. 2001. Integration of Transport and Trade Facil- itation: Selected Regional Case Studies. Washington, D.C.: The public agencies and stakeholders will help to iden- World Bank. tify where the shortfalls lie in border crossing pro- Limao, N., and A. Venables. 1999. “Infrastructure Geographical cedures. Furthermore, basic transit provisions, Disadvantage and Costs.” World Bank Policy Research Work- ing Paper No. 2257. Washington, D.C.: The World Bank. including guarantees, work considerably better N’Guessan N’Guessan. 2003. La problématique de la gestion inté- with a mature and organized transport sector. grée des corridors en Afrique subsaharienne. The World Bank Reforms in this sector go far beyond customs and SSATP. Document d’analyse SSATP No. 3F. Washington, reform. Public policies must foster the emergence D.C. May. UN (United Nations). 2003. “Almaty Programme of Action: of modern operators, and phase out transit activi- Addressing the Special Needs of Landlocked Developing ties by obsolete equipment and informal opera- Countries within a New Global Framework for Transit Trans- tors, with whom efficient transit provisions are port Cooperation for Landlocked and Transit Developing Countries.”Adopted by the International Ministerial Confer- virtually impossible. ence of Landlocked and Transit Developing Countries and Donor Countries and International Financial and Develop- ment Institutions on Transit Transport Cooperation in Almaty Further Reading on August 28–29, 2003. www.un.org/special-rep/ohrlls/imc/ Almaty%20Programme% 20of%20Action.pdf. Global Facilitation Partnership.www.gfptt.org. UN/CEFACT (United Nations Centre for Trade Facilitation and Grosdidier de Matons, Jean. 2004. “Facilitation of Transport and Electronic Business) and UNCTAD (United Nations Confer- Trade in Sub-Saharan Africa: A Review of Legal Instru- ence on Trade and Development). 2002. “Compendium of ments.”SSATP Working Paper No. 73. Washington, D.C.: The Trade Facilitation Recommendations.” ECE/TRADE/279. World Bank. February. International Road Transport Union. www.iru.org. UNCTAD (United Nations Conference on Trade and Develop- UN/CEFACT (United Nations Centre for Trade Facilitation and ment). 2003.“Strategies for Landlocked and Transit Develop- Electronic Business) and UNCTAD (United Nations Confer- ing Countries to Plan and Implement Sustainable Trade and ence on Trade and Development). 2002. “Compendium of Transport Facilitation Initiatives.”Issue Note by the Secretary Trade Facilitation Recommendations.” ECE/TRADE/279. General of UNCTAD. Document UNCTAD/SDTE/TLB/ February. 2003/2. July 23. UNCTAD. 2003.“Strategies for Landlocked and Transit Develop- UNECE (United Nations Economic Commission for Europe). ing Countries to Plan and Implement Sustainable Trade and 2000. “Creating an Efficient Environment for Trade and Transport Facilitation Initiatives.”Issue Note by the Secretary Transport—Guidelines to Recommendation No. 4, National General of UNCTAD. Document UNCTAD/SDTE/TLB/ Trade Facilitation Bodies.” Document ECE/TRADE/256. 2003/2. July 23. Geneva. 12 THE ROLE OF CUSTOMS IN CARGO SECURITY

Luc De Wulf and Omer Matityahu

TABLE OF CONTENTS LIST OF TABLES Initiatives to Improve Cargo Security 266 12.1 Selected Operational Practices to Enhance Management Implications for Customs 273 Cargo Security 276 Technical Means to Assist Security Checks 275 12.2 Technical Means to Assist Security Operational Conclusions 281 Checks 277 Annex 12.A Port Risk Assessment 281 LIST OF BOXES Further Reading 283 References 283 12.1 Maritime Security Initiative at Panama Canal Waters 269

This chapter is intended to assist customs adminis- time of importation. Improving security in the trations in dealing with the security challenges supply chain, however, requires that this traditional faced by international transport and shipping serv- method of operating must change. For it to do so, ice providers. The guidance and concepts provided customs now needs to gather information and here are geared toward helping governments in the assess risk in advance of arrival, so that effective development of national security policies and action can be taken, preferably before a ship strategies, including preparing a needs assessment embarks or an aircraft takes off, or at the latest, and implementing the strategy within the context at the time of its arrival. The information needed of an overall risk management approach. for these security processes comes from several The emergence of international terrorism has sources, but a crucial element is the advance infor- caused the issue of security to become one of the mation available from the businesses exporting or major challenges facing customs administrations. transporting the goods. Customs’ skill in assessing In the past, many customs administrations per- the information through analytical processes, formed most of their preventive operations as deployment of resources, and effective communi- goods arrived at seaports, airports, and land bor- cation and decisionmaking, therefore, has become ders based upon an entry declaration made at the even more important than in the past. Security is of great importance to governments, but so is facilitating legitimate trade. If applied Omer Matityahu is a consultant for ICTS Global Security B.V., correctly, security can enhance facilitation by build- whose contribution was financed by a grant from the government of the Netherlands. The contribution of Will Robinson of ing business confidence, increasing predictability the World Customs Organization is gratefully acknowledged. and trade flow, and, as a consequence, improving

265 266 Customs Modernization Handbook

inward investment. The information required by Initiatives to Improve customs can also be enhanced by customs–trade Cargo Security cooperation. International trade involves many partners and Protecting society in an effective and efficient processes that together constitute a logistics chain. manner requires the international trade supply Each link in that chain is to some extent subject to chain to become the focus of attention in its security risks. These risks are not new and have his- entirety, rather than simply when goods are enter- torically concerned many professional organiza- ing, leaving, or transiting a country. This changing tions. The protection of society has always been one environment requires an “all of government” of customs’ main missions. However, with the approach. Governments would thus have the events of September 11, 2001, security has attracted opportunity to use customs as a key resource in renewed focus from governments. Existing initia- border security by using customs’ experience with tives to strengthen security have been revisited managing risks and its knowledge of international and new ones have emerged. Both international trade as important elements in addressing issues of and bilateral initiatives have been reviewed and national security. Customs’ roles in security and strengthened. This section briefly reviews these ini- facilitation complement those contributions made tiatives and details what these mean in the context by other competent agencies as part of an inte- of customs’ operations. grated response. Cooperation and communication between customs and the lead agencies for terrorism; immigration; and policing maritime, aviation, World Customs Organization and land transport; and intelligence operations are The WCO’s activities in the area of security are vital. In this manner, customs can contribute undertaken in close cooperation with the special- toward the wider security agenda as outlined in the ized international organizations that focus on spe- United Nations Security Council Resolutions, par- cific transport modes, such as the International ticularly 1373 (passed in 2001) and 1456 (passed in Maritime Organization (IMO), the International 2003), which call for an integrated response to Civil Aviation Organization (ICAO), and the Inter- fighting terrorism. Customs’ role is therefore national Air Transport Association (IATA). In light changing rapidly. of its mandate to enhance the effectiveness and effi- Developing and implementing security stan- ciency of customs administrations, the WCO aims dards across international borders is likely to pres- at building trade facilitation–appropriate security ent a formidable challenge, but doing so is essential initiatives, so that world trade is not unduly affected to safeguard the integrity of the international sup- or hindered by enhanced security measures.1 ply chain. Efforts to develop international stan- In June 2002, the WCO Council approved a res- dards are underway on several fronts, but much still olution on security and facilitation of the interna- remains to be done to standardize these norms and tional trade supply chain. This resolution led implement them effectively. Due to the number directly to the formation of an international Task and diversity of nations and stakeholders involved Force on Security and Facilitation of the Interna- in the international supply chain, achieving con- tional Trade Supply Chain, comprising customs sensus on these and other standards could be diffi- administrations, other international organizations, cult and time consuming. and international trade and transport organiza- This chapter examines some of the operational tions. The task force has produced a comprehensive and management considerations that will be of package of guidelines and other measures that interest to those establishing or reviewing customs’ would enable customs administrations to imple- security arrangements. The first section presents ment and apply modern risk-based control proce- initiatives relating to the areas of border security. dures. The security and facilitation concepts devel- The second section analyzes the management oped by the task force involve the submission of implications of the heightened concern for customs advance electronic information at the earliest security risks. The final section focuses on operational practices for customs in light of these 1. This section is based on information from the WCO Web site renewed concerns. www.wcoomd.org. The Role of Customs in Cargo Security 267 moment in the supply chain cycle, so that customs shipments and vessels to documentary fraud and administrations can perform risk assessment illicit money-raising activities by terrorist groups. processes well in advance of shipment. This approach allows customs’ security role to be per- International Initiatives Both international organ- formed at or before export, while goods are in tran- izations and national governments have undertaken sit, or at or before importation. The information initiativestoenhanceseacargosecurity. itself is provided by the most appropriate private International Maritime Organization. The Interna- sector entities involved in the supply chain, that is, tional Maritime Organization2 (IMO) is a special- the electronic information message is composed of ized organization within the United Nations information from exporters, importers, and service established to develop international maritime stan- providers such as carriers. The procedures are con- dards, promote safety in shipping, and prevent tained in the Advance Cargo Information Guide- marine pollution from ships. However, after lines, which form a central part of a comprehensive September 11 the IMO amended its International package of measures. The WCO has developed Convention for the Safety of Life at Sea (SOLAS) other instruments to fulfill its security mandate: and established an International Ship and Port Facility Security (ISPS) Code in December 2002. • a list of essential data elements required to iden- ISPS requires ships on international voyages and the tify high-risk consignments port facilities that serve them to conduct a security • a new multilateral Convention for Customs assessment (for details, see annex 12.A), develop a Administrations, which will provide a mecha- security plan, appoint security officers, perform nism for customs administrations to share rele- training and drills, and take appropriate preventive vant information on a bilateral, regional, or measures against security incidents. It is a com- multilateral basis prehensive, mandatory security regime for inter- • guidelines for businesses operating in the international shipping and port operators (at this national trade supply chain that describe the time, only the security assessments are mandatory), measures and procedures that should be adop- intended to enable better monitoring of freight ted by private sector operators flows to combat smuggling, and to respond to a • guidelines concerning the purchase and opera- threat of terrorist attacks. The International Labor tion of container scanning equipment Organization (ILO), also a United Nations agency, • a databank of modern technological devices. determines the requirements to be included in identification documents for seafarers. Since - The implementation of the guidelines is being February 2002, ILO and IMO have been working on managed through an international action plan and the issuance of seafarer documents, which would by a high-level strategic group of Directors General involve checking the background of crewmembers who provide strategic advice on the further devel- onboard ships transporting cargoes that are opment of security and facilitation methodologies destined for the United States. In addition, the ILO and standards. The WCO relies on voluntary com- may consider standards for port worker identifica- pliance of its members, because it does not have an tion documentation. Noncompliance with ISPS enforcement mandate. requirements can result in loss of revenue and the potential for increased liability in the event of a security incident. Sea Cargo: Organization and Initiatives Contracting parties to the ISPS Code are to World trade is dependent on maritime transport bring their national legislation in line with the and great strides have been made in recent years to code, ensure its enforcement, undertake security render this system as open and frictionless as possible to spur greater economic growth. However, the factors that have allowed maritime transport to 2. For details on the IMO, see www.imo.org/home.asp. Further contribute to economic prosperity also potentially information can be obtained from The Subcommittee on Coast Guard and Maritime Transportation Hearing on Interim Final increase its security risks. The risks range from the Regulations on Port Security at www.house.gov/transportation/ possibility of physical breaches in the integrity of cgmt/07-22-03/07-22-03memo.html. 268 Customs Modernization Handbook

assessments, prepare security plans, and notify the about US$30,000 in initial costs and US$17,000 in IMO of progress made with respect to these assess- annual expenditure per vessel (based on an esti- ments and plans. The code also requires the mate that 43,291 vessels were trading internation- national authorities to notify the IMO administra- ally in 2000). For international seaports the costs tion and its contracting governments of the control were estimated at US$963 million and US$509 mil- measures instituted for a vessel calling at a non- lion for initial and annual costs, respectively. For compliant port facility. Finally, IMO measures will the United States, the average cost per seaport was also contain a strong port state control mechanism estimated at US$4.26 million in initial costs and that authorizes taking control of vessels that have US$2.25 million in annual expenditures. called on foreign ports that are not in compliance See box 12.1 for an example of how the ISPS with SOLAS and the ISPS Code. Code is being implemented at the Panama Canal. The ISPS Code became mandatory on July 1, United Nations Economic Commission for Europe. 2004. This implies that by that date the prescribed The UNECE is currently reviewing its relevant security measures will need to be implemented for instruments in the areas of trade and transport.3 A ports and ships to be certified. The government useful basis for UNECE work in this area may be would issue the security certifications; but the local the Supply Chain Model and possibly the Interna- administrations that register ships may grant tional Trade Transaction Model, both developed by authorization to a private company to act as a Rec- UN/CEFACT (United Nations Centre for Trade ognized Security Organization (RSO) to approve Facilitation and Electronic Business). UNECE is ship security plans, audit ship security systems, currently updating both of these models. and, where appropriate, issue the certificates on behalf of the local administration. At this point the The United States’ Initiatives Since September 11, requirements for RSOs have not yet been agreed 2001, there has been growing concern that terrorist upon. The IMO intends to provide for ISPS certifi- weapons could be smuggled in some of the millions cation under strict conditions following a careful of maritime containers arriving annually at United inspection. Under the ISPS rules, the principal States seaports.Based on international legislation,the responsibilities of contracting governments are to United States enacted the U.S. Maritime Transporta- determine and set security levels, and communicate tion Security Act (MTSA) of 2002 to establish parallel information regarding security levels to ships flying domestic requirements for U.S. facilities and vessels. their flag, to their port facilities, and to foreign ves- While many of the requirements in the MTSA sels in or about to enter their ports. directly align with ISPS requirements, it includes Noncompliant ships or ports can be decertified, domestic vessels and facilities. There are several pending corrective action. If this occurs, such ves- U.S. government initiatives related to cargo security. sels will not be allowed to operate or such ports will The U.S. Bureau of Customs and Border Protection operate subject to international penalties. This (CBP) initiatives consist of the Customs-Trade Part- would have negative economic consequences for nership Against Terrorism (C-TPAT), the 24-Hour ships and ports that fail to meet the requirements Advance Manifest Rule, and the Container Security of the ISPS Code. The most likely scenario for a Initiative (CSI) to screen containers that pose a noncertified ship entering a certified port is that it potential risk for terrorism at overseas ports. The U.S. will be subjected to thorough and time-consuming Coast Guard initiative is the 96-Hour Notification of inspections once it enters a country’s territorial Arrival. waters. CBP Initiative—Customs-Trade Partnership Against Enhancing the safety of maritime cargo trans- Terrorism. In November 2001, the concept of port will not come cheaply. An Organisation C-TPAT4 was introduced to the trade community for Economic Co-operation and Development as a cooperative initiative with the private sector, (OECD) study published in July 2003 (OECD 2003) estimated that the initial cost to ship operators for ISPS Code compliance would be at least 3. See www.unece.org/trade/welcome.htm. US$1,279 million, with subsequent annual expen- 4. SeeCBPWebsiteat www.cbp.gov/xp/cgov/import/commercial_ ditures of US$730 million. This is equivalent to enforcement/ctpat/. The Role of Customs in Cargo Security 269

BOX 12.1 Maritime Security Initiative at Panama Canal Waters

The SOLAS amendments and the ISPS Code of risk assessment on the arriving vessels and their the IMO contain comprehensive measures that cargoes. provide the option of requesting vessels to Mobile Data Collection System (MDCS). provide preliminary information regarding crew, MDCS is an internal operating system that passengers, origin, and destination of cargo. allows ACP’s Canal Boarding and Security Offi- This information can be used by the Port cers to conduct inspections aboard the vessels Security Officer to perform risk assessments, but passing through Canal waters and ensures would need to be available before the vessel heightened general security within ACP’s juris- arrives in the port. diction. The data are collected and stored in real By virtue of its new framework, the Panama time using pen-based wireless mobile systems. Canal Authority (ACP) is responsible for ensuring In the next phase of the project, the MDCS will the most efficient use of its resources and for be linked to a data warehouse where a Risk providing an optimum level of service and secu- Assessment Analysis tool, linked to federal agen- rity to its clients. The ACP has deemed it neces- cies such as customs, national security agencies, sary to develop an adequate information system and the Coast Guard, will provide real-time to improve the information that is needed for information on all vessels passing through security verifications and transit operations. Panama Canal waters. The advance information Such a system will make possible the electronic would be beneficial for customs and other fed- reception of preliminary information, its proper eral agencies to more effectively monitor and analysis, and risk level assessments. The current facilitate the flow of cargo and to detect high- process is time and resource consuming for ACP risk shipments for security, contraband, and clients, particularly for Masters and Captains of other enforcement reasons. vessels, and involves manually filling out the The ADCS project is expected to generate the required forms to ensure a secure, safe, and effi- following benefits: (a) accurate and timely col- cient transit through the Panama Canal. It is also lection of security data and maritime operations prone to human error, leading to costly delays information to help optimize vessel schedules resulting from incorrect or untimely data. and enhance security in the Canal; (b) improved On September 2, 2003, ACP awarded its and more accurate data validation; (c) efficient Automated Data Collection System Project electronic information interchange between (ADCS) to CrimsonLogic Pte Ltd. The ADCS con- ACP and its clients; (d) improved user-friendly sists of the following elements: access through the use of the Web-based inter- Electronic Data Collection System (EDCS). The face by ACP and its clients, including customs EDCS allows international carriers and local administrations all over the world; (e) overall Panamanian carrier agents to submit Ship Due reduction in operation costs and improvement and Transit Booking requests to ACP via the in the competitiveness of the organization; (f) Internet through the World Wide Web, EDI, or reduced form processing time and overall XML, 96 hours prior to arrival in Panama Canal improvements in productivity; and (g) enhanced waters. It also facilitates the electronic submis- information and system security, ensuring that sion of passenger and crew lists, admeasurer hackers or saboteurs do not interrupt ACP’s data sheets, and other necessary documents to operations. ACP for advance processing. The advance document submission enables ACP to carry out Source: CrimsonLogic.

with the objective of fortifying the supply chain compliant cargo and conveyances. Companies fill and deterring terrorists and the implements of ter- out a questionnaire, pulling together internal infor- ror from being introduced into the international mation about a company’s security-related assets commercial environment. As of February 24, 2004, and procedures. C-TPAT continues to actively con- 5,730 companies had enlisted in C-TPAT. Through duct visits to its member companies to confirm C-TPAT, CBP and the trade community cooperate that their supply chain security measures contained in designing a new approach to supply chain secu- in their security profiles are reliable, accurate, rity to strengthen the borders against terrorism and effective. CBP is also working with its members while continuing to facilitate the legitimate flow of to develop and implement the CBP Smart Box 270 Customs Modernization Handbook

initiative. Sealing standards and techniques, cou- ists.6 The CSI moves the focus of container inspec- pled with a Container Security Device (CSD), are tion to the port of lading for early detection of any designed to detect evidence of tampering during potential threat. It aims to establish security crite- the transit process and to enhance container secu- ria to identify any container that poses a potential rity and the integrity of containerized cargo. C- risk for terrorism, prescreen those containers iden- TPAT aids companies in optimizing their internal tified as posing a risk before they arrive at U.S. and external management of assets and functions ports, use technology to quickly prescreen those while at the same time enhancing security. When containers, and develop and use smart and secure administered together, enhanced security practices containers. The CSI deploys U.S. officials to the and procedures, and improved supply chain per- host country to work in conjunction with local formance, mitigate the risk of loss, damage, and officials. This is a reciprocal program, and several theft, and reduce the likelihood of introduction of countries have stationed their personnel in U.S. potentially dangerous elements into the global supports as well. The objective of the CSI is to work ply chain. with the host country to identify and screen cargo CBP Initiative—24-Hour Advance Manifest Rule. to detect potential risks for terrorism at the earliest Advance information is the key component of possible opportunity. The first phase of CSI is CBP’s strategy to protect legitimate trade from ter- focused on implementing the program at the top rorists. The “24-hour rule” for advance manifest 20 foreign ports, which ship approximately two- information was put into effect on February 2, 2003 thirds of the volume of containers to the United (ref B-CBP). It instructs carriers in possession of States.7 So far, the benefits for goods in containers containers to be loaded on board a U.S.-bound ves- passing through CSI ports and destined for the sel to make a declaration to CBP at least 24 hours United States are not clearly spelled out, nor are before the cargo is loaded at a foreign port. This the disadvantages for goods moving through other declaration includes information pertaining to the channels. The CBP intends to expand the program shipper and consignee, as well as a precise descrip- to additional ports based on volume, location, and tion of the container’s contents. Vague descriptions strategic concerns. such as “said to contain,” “FAK” (Freight of All U. S. Coast Guard Initiative—96-Hour Notification Kinds), and “General Merchandise” are not of Arrival. Issued on February 28, 2002, the 96-Hour accepted. Upon inspecting the manifest, CBP will Notification of Arrival initiative requires 96-hour make a decision to load the container or send a advance notification of vessel arrival at U.S. ports “DO NOT LOAD” message to the carrier or Non- (Pluta 2001). This requirement includes the sub- Vessel Operating Common Carrier (NVOCC) mission of cargo manifests, itinerary, and thorough before the container’s scheduled load time. If a car- information about the crew, including ports where rier loads a container for which a “DO NOT they boarded and possible aliases that crew mem- LOAD” message has been sent, the vessel will not be bers are known to employ. The submission of crew allowed to unload at the U.S. port until the infor- details and cargo manifests is time-consuming and mation is amended. At this point, the clock for the may require investment on the part of carriers and 24-hour requirement starts again. The rule was effectively implemented in cooperation and in 6. See CBP Web site at www.cbp.gov/xp/cgov/enforcement/inter- partnership with the trade and transportation national_activities/csi. industry.5 7. As of mid-January 2004, eight European Union (EU) coun- CSI Initiative—Container Security Initiative. tries had signed bilateral agreements with the United States. The container traffic from these ports to the U.S. covers approxi- Launched in January 2002, the CSI involves mately 85 percent of all maritime container traffic from the EU bilateral arrangements between the United States to the U.S. The European Community has launched infringe- and foreign countries to reduce the risk of global ment procedures against those Member States that have signed containerized cargoes being exploited by terror- declarations of principle with the U.S. CBP. It is concerned that these measures will have negative effects on trade flows and will lead to competition between EU ports. It argues for an expansion of the 1997 EC–US Agreement to cover these aspects 5. See CBP Web site at www.cbp.gov/xp/cgov/import/carriers/ (www.europa.eu.int). For an update on the ports included in the 24hour_rule/. CSI, see the Web site of the U.S. CBP, www.cbp.gov. The Role of Customs in Cargo Security 271 freight forwarders to improve their information of September 11, 2001, the ICAO security model technology systems to ensure the timely and accu- was regarded as adequate and sufficient to ensure rate electronic submission of data. the safety of passengers, aircraft, and goods. Con- The European Union At the end of July 2003, tracting states are obliged to adjust their national the European Commission (EC) presented to the legislation to bring it in line with the ICAO Con- European Parliament and the European Council a ventions. series of measures to address security issues. Part of The Council of ICAO approved in June of 2002, this package was in response to U.S. security initia- in principle, an ICAO Aviation Security Plan of tives in the customs area. These measures bring Action for strengthening aviation security. A central together the basic concepts underlying the new element of this Plan of Action is regular, manda- security management model for the EU’s external tory, systematic, and harmonized audits to enable borders, such as a harmonized risk assessment sys- evaluation of aviation security systems in place in tem. The EC proposed a number of measures to all of the 188 member states of ICAO, and to iden- tighten security of goods crossing international tify and correct deficiencies in the implementation borders. These include requiring traders to provide of ICAO security-related standards. These audits customs authorities with information on goods should include aircraft security checks, background prior to importing goods to or exporting goods checks of any individuals requiring unescorted from the EU, providing reliable traders with trade access to a security restricted area, and screening facilitation measures, and introducing a mecha- ability to detect weapons, explosives, or other dan- nism for setting uniform community risk-selection gerous devices which may be used to commit an act criteria for controls, supported by computerized of unlawful interference. Security arrangements systems. A technical working group is to be set up and measures should be extended to all civil avia- to further develop these measures (European tion, whether international or domestic travel, and Commission 2004). should cover all areas relating to access to the aircraft for staff as well as passengers and cargo han- Air Cargo: Organizations and Initiatives dlers. Contracting states should share with other contracting states any threat information that The world has in the past spent billions of dollars applies to the aviation security interests of those on security initiatives to protect the aviation indus- States, as far as is practicable. They should also try as well as countries’ freedom of movement and empower the appropriate authority to manage the progress in spite of terrorism. Many countries and national civil aviation security program.8 industrial organizations have already enacted or followed up with air cargo security laws, rules, or The International Air Transport Association guidelines. These laws have affected the way that The IATA is the world trade association of sched- airports, airlines, and shippers worldwide must uled international airlines.9 Airline members now interact if they are to use, or be part of, the aviation total more than 260, under the flags of over community. Strengthening international standards, 150 independent nations, and carry more than 95 agreements, and common commitment is the logi- percent of the world’s scheduled international air cal next step to protect air travel and transport traffic. The IATA has a Security Advisory Commit- against terrorism. The main initiatives and organi- tee, which makes recommendations to airlines zations that strive to improve air cargo security with regard to the security of all international avi- worldwide, and with whom customs administra- ation. These recommendations pertain to the secu- tions need to enter into strategic alliances, are rity precautions that should prevail in all areas of briefly described here. the airport, including parking areas and boarding areas for passengers. Most airlines conform to The International Civil Aviation Organization these standards but adjust their implementation to The ICAO is a specialist agency of the United Nations that was created in 1944 with a mission “to 8. See the ICAO Web site at www.icao.int, and the Institute for ensure that International Aviation may be devel- Security Issues Web site at www.iss.co.za. oped in a safe and orderly manner.”Until the events 9. See the IATA Web site at www.iata.org. 272 Customs Modernization Handbook

local circumstances. IATA has established the U.S. Transportation Security Administration Cargo Security Task Force (CSTF) to define the Initiatives The U.S. Transportation Security airline industry’s position on cargo security and to Administration (TSA) issued an Air Cargo Strategic ensure that all members implement cargo security Plan, which will set in motion a course of action to measures properly. It deals with issues as they are significantly expand current security policies, pro- put forward by member airlines. The CSTF coor- cedures, and systems for the protection of both dinates its actions with the IATA Security Com- cargo and passenger-carrying aircraft, and all air mittee on issues relating to lobbying international cargo operations (TSA 2003). TSA has tailored the organizations and national regulatory bodies, and air cargo security program to manage various secu- promotes the implementation of unified cargo rity risks in a cost-effective manner. It is based on security standards worldwide. In that capacity it the TSA’s goal of securing the air cargo supply chain, works with customs, airline members, freight for- including cargo, conveyances, and aircraft, through warders, shippers, and government authorities to the implementation of a layered solution. This sys- improve standards in shipment documentation tem includes the screening of all cargo shipments to and the automated tracking of cargo. Working determine their level of relative risk, working with closely with IATA CSTF is the Global Aviation U.S. industry and federal partners to ensure that Security Action Group,10 which is an industry 100 percent of items that are determined to be of group that coordinates the global aviation indus- elevated risk are inspected, developing and ensuring try’s input to achieve an effective worldwide secu- that new information and technology solutions are rity system and ensure public confidence in civil deployed, and implementing operational and regu- aviation. latory programs that support enhanced security measures. European Civil Aviation Conference The Euro- TSA has established the Aviation Security Advi- pean Civil Aviation Conference (ECAC), based in sory Committee (ASAC), as a standing committee Paris, was established to promote the coordination, composed of federal and private sector organiza- better utilization, and orderly development of air tions (U.S. Department of Homeland Security transport within Europe, as well as to consider any 2003). The ASAC was created in 1989 in the wake of special problems. Its most recent directive (Decem- the crash of Pan Am 103 over Lockerbie, Scotland. ber 16, 2002), issued by the European Parliament Its members include groups representing victims and the European Council, aims to establish and and survivors of terrorist acts, corporate shippers, implement common basic standards on aviation freight forwarders, aircraft owners, airports, state security measures to prevent acts of unlawful inter- aviation officials, aircraft manufacturers, and repre- ference against civil aviation; provide a basis for sentatives of passenger and cargo airline manage- a common interpretation of the related provi- ment and labor. In May 2003, ASAC formulated sions, called those of the Chicago Convention;11 recommendations to enhance air cargo security. and set up appropriate compliance monitoring These recommendations focused on strengthening mechanisms. the known shipper programs, enhancing regulations of indirect air carriers, and strengthening security for all cargo aircraft. TSA will use these recommendations to develop a strategic plan. 10. Its members are: IATA, regional airline associations, Interna- tional Air Carriers Association,Airports Council International, the International Federation of Airline Pilots Associations, Interna- The United Kingdom—Known Shipper and tional Transport Workers Federation, Airbus, plus participation Cargo Screening The United Kingdom is a and input from Boeing, ICAO, and INTERPOL as observers. leader in “known shipper” programs, having 11. Annex 17 to the ICAO Chicago Convention (a convention enacted laws and implemented programs for vet- held by ICAO in response to hijacking and terror threats that increased prior to it), the document on security with its manda- ting shippers in the 1990s (Sander 2003). Opera- tory standards came into being on March 26, 1974. It is the reg- tion Safe Commerce and the TSA known shipper ulatory benchmark against which States are able to quantify programs are investigating, testing, and developing their contractual commitments to international civil aviation. From it should evolve compliant legislation, a national program, new technologies and alternative strategies for and airport and airline programs. cargo and container security screening, which for The Role of Customs in Cargo Security 273 the moment is usually conducted in facilities other reforms of a much broader nature. These reforms than those of baggage security screening at most are spelled out in the following sections. airports around the world. A future design strategy might be to consolidate baggage and cargo security Strategic and Operational Planning screening at the same location. A known shipper regime currently exists only Strategic and operational planning should take for U.K. airfreight and requires that the shipper account of the changing environment, including register its organization with the relevant authori- with respect to security threats. The fight against ties (U.K. or EU) on an official database of “known terrorism is a “whole of government” undertaking, shippers.” This information can then be sent elec- and customs should assist in defining its role and tronically to port and customs authorities to alert specific responsibilities within this integrated them of the shipper’s or the consignment’s approach. Customs should strive to establish tar- integrity. To achieve known shipper status, a com- gets and performance criteria for each of these pany prepares a Shipper Security Plan (SSP), which tasks. In the process, customs should maintain demonstrates to customs and to the security forces communication arrangements with other key that appropriate security measures are in place, stakeholders in the public and private sectors. covering premises and day-to-day operations, that To be in a position to implement these new secure and prevent infiltration by terrorists and responsibilities, customs should ensure that the their materials. Premises and security practices are necessary legislative and procedural frameworks checked periodically to ensure that SSP’s are still are in place. Customs also needs to identify the appropriate and are being observed by the shipper. resources required to implement these new assignments—human resources, technical infrastructure, and processes—and ensure that these Land Border Security resources are available where needed. Controlling cargo at land borders poses a different challenge for any country wishing to improve it. By Organizational Structure nature, a border control point does not always constitute a bottleneck, unlike airports and seaports, Customs needs to consider how well its current which are characterized as mandatory transit structures match up to the new operating environ- points for all regulated international shipping. ment and the enhanced security requirements of Because most countries lack “hermetically sealed” that new operating environment, without unduly land borders, smuggling of goods that can present hindering international trade. Ideally, this question security threats can take a variety of routes. Also, should be considered within the context of the land border control depends largely on local laws issues addressed during the strategic and opera- and regulations, making it difficult to set international planning phases. Each customs administra- tional standards for border control. For this reason, tion has a different range of responsibilities and a this chapter focuses on air and sea cargo control. different configuration and relationship with other Countries may use the security concepts and tools national agencies. As such, the new demands placed in this chapter and adapt them to meet their border upon customs with regard to security and facilita- control needs. tion and other national, regional, and international requirements may suggest some organizational restructuring. To become effective in managing Management Implications security risks, for example, customs will need to for Customs perform risk-based management and assessment Such major changes to the operating environment processes in the early stages of shipment, before of international trade require customs to review its ships or aircraft leave or arrive. It will also need to structure and operations to respond to the twin handle large quantities of data and enhance its ana- challenges of security and facilitation. Many lytical capabilities. There should be an ongoing administrations have started to adjust their techni- migration from the current control processes, cal operations, but there may be a need to consider which are performed at the time of the transaction, 274 Customs Modernization Handbook

to working intelligently by using data that becomes the time of loading of the container, or before available in advance of the arrival of cargo. Some export, and before importation. In the future, risk countries, such as Canada and the United States, assessment processes will be based on real-time have decided that a more drastic reorganization of information, supplied by those business entities customs is required to enhance the close coopera- that have ownership of the data, and sent via elec- tion necessary to address the security concerns of tronic means to customs at import or export. All of the day. The United States has created a Depart- these procedures will occur before the departure or ment of Homeland Security that has absorbed arrival of the vessel so that security concerns can be customs. fully addressed and the vulnerabilities of the cargo supply chain taken into account. Electronic Legislative Framework advance cargo information has therefore become a key factor in managing security risks. Each of the Because customs administrations will be required companies contracted to facilitate the handling and to significantly alter their operating procedures to movement of cargo through its supply chain needs manage risks in advance of shipment, there may be to be included in the risk analysis. The security pre- a consequent need for governments to review and paredness of each of these companies has an amend their national legislative framework to pro- impact on the level of risk associated with the over- vide an adequate legal base. An existing legislative all chain. This includes the companies involved in base for the sharing of information, and interna- loading the container at the overseas warehouse, tional or bilateral agreements on security and facil- the truck company that transports the cargo to the itation may have to be adjusted. warehouse of the port terminal, terminal operators, the carrier, and the ports where the carrier stops en Access to Information route to its final destination. Risk management can operate in any organiza- Because the new customs controls will be based on tion, can use manual or automated applications, information relating to goods and people associ- and can be used for either strategic or tactical ated with the supply chain, access to “real time” purposes. While the overall risk management prin- information from commercial operators and risk- ciples remain the same for all customs agencies, based information from within customs and other each administration will need to develop and refine government agencies becomes an important issue. its individual risk management regime to meet Customs administrations should review their national and departmental objectives. Such an sources of information, data-handling capabilities, approach has the potential to improve effectiveness and legal protection provisions as part of a wider and efficiency and can significantly help build the objective to develop policies and strategies for ability to deploy resources toward the greatest areas access to commercial and governmental informa- of risk. Customs management should recognize tion to aid risk management processes. that implementing effective security-oriented risk management implies a significant level of manage- Risk Management, Redeployment of Resources, ment attention. While the overall personnel levels and New Procedures may remain the same, many of the core activities of Modern customs practices and operations need to those staff members working within central policy fully reflect the principles of risk management. So divisions, as well as in regional and local offices, will far, risk management has largely been used to deal be affected. There will also be implications for with existing customs’ priorities, such as the detec- front-line control and enforcement units, intelli- tion of violations of legislation pertaining to valua- gence capabilities, and the supporting infrastruc- tion, origin, and so forth. Now that security has ture, including legal, information technology, and become a major policy objective of customs, risk training services. management principles need to be applied to meet There are multiple risks to be considered, this new concern. including targeting of the carrier by terrorists, using In the context of security, risk analysis is the carrier to transport weapons of mass destruc- required as early as possible in the supply chain, at tion, or using it as a weapon to launch an attack on The Role of Customs in Cargo Security 275 the destination country. Carriers can also be used to the International Express Carriers Association are disrupt the infrastructure of a country. The risks to prime candidates for involvement in an ongoing the destination country include the use of cargo to dialogue. smuggle people or weapons or both, and the use of cargo to transport conventional, nuclear, chemical, National and International Cooperative Arrange- or biological weapons into the country. The risk to ments Customs is not the only agency responsi- the port itself is the potential loss of life or damage ble for security; therefore, an efficient government- to property. In all cases, a terrorist incident creates wide approach to security will involve many the possibility of trade disruption and high security agencies. A review of the cooperative arrangements costs. between customs and other relevant agencies, at the The fact that customs administrations will be national and international level, should be part of performing many risk-based functions in advance the overall strategy. of shipment means that adjustments in customs systems and procedures will be required. Enhanced Intergovernmental and Internal Communication intelligence, dissemination of security related The renewed concerns of security in trade have information, and decisionmaking processes will given rise to the emergence of international agree- also require consideration. Procedures to deal with ments and bilateral security initiatives. The situa- security risks need to address issues of detection tion changes rapidly and the implementation of (screening, analysis, and focus on high risk) and regulations and practices also vary. Customs will deterrence (significantly reducing the terrorists’ need to stay abreast of these changes and open for- chances of success, and inducing them to invest mal and informal lines of communication with the greater efforts to achieve success). There is an relevant international agencies and trading partner advantage to developing a modular risk-based countries that develop such security initiatives. approach in that some or all elements may be applied according to needs and available resources. Technical Means to Assist These elements include, visual and physical cargo Security Checks inspection, document and manifest inspection, access control checkpoint, shipper and carrier con- Security enforcement can draw on a number of trol, security personnel, integrity, and technical techniques that operate together and reinforce one capacity. Examples of new procedures are con- another. This section focuses on how best to incor- tained in table 12.1. porate the available security technology to improve cargo security (WCO 2003, U.S. GAO 2002b). The aim is to allow maximum system performance Cooperation with Other Than National while ensuring the smooth flow of cargo. Customs Partners Effective security arrangements for goods and Transport security requires the cooperation of all passengers require that a central control point partners in the trade logistics network. (CCP) be established to enforce mandatory passage for all containers en route to and from the ship or Business Partnership Security has always been plane and to ensure that all ships and planes high on the list of traders’ concerns, because traders undergo the prescribed security checks. The CCP is have a commercial interest in secure trade prac- placed at the entrance to the seaport, pier, or air- tices. Customs can greatly benefit from a close rela- port to match the data to information that was tionship with the trading community. A large share received in advance.12 of trade is conducted among multinational enter- A number of technologies have been identified prises, which have tight logistics chains and system- for cargo inspection. These techniques vary in atic approaches to ensuring the security of those terms of their intrusiveness and their levels of chains. The information provided through advance notification can be used to enhance both security and trade facilitation. Representatives of the inter- 12. The process for receiving this data from the shippers must be national and local Chambers of Commerce and of established beforehand. 276 Customs Modernization Handbook

TABLE 12.1 Selected Operational Practices to Enhance Cargo Security

Practice Comments

Develop an industry-wide, computer- • Develop a known shipper database. assisted cargo profiling system that • Make the database available to participating air carriers can be integrated into air and sea and freight forwarders. carriers’ and freight forwarders’ • Define whether participation is voluntary. reservation and operating systems. Improve the oversight of and • Allocate personnel for cargo inspectors. enforcement pertaining to air and sea carriers and freight forwarders. Use identification card systems to • Require checks for individuals entering certain areas of verify individuals authorized to enter seaports and airports. cargo-handling facilities. • Determine requirements for identity checks at cargo facilities that are located off seaport or airport property according to the security plans of the individual facilities. • The use of technology such as smart cards can make this process more efficient and reliable. Conduct background checks on all • Require background checks for certain airport workers. individuals who convey and handle • Individual employers, in accordance with their security plans, sea or air cargo and who have determine requirements for background checks on other access to cargo areas and individuals who convey and handle air cargo. documentation.

Collect and disseminate information • Disseminate general threat information to the industry in concerning cargo security, including security directives and information circulars. threat-related information, to sea and air carriers, forwarders, and government agencies. Establish written policies and • Require sea and air carriers that transport passengers to have procedures and training programs security programs. for the employees of companies that convey and handle cargo.

Employ a sufficient number of • The use of security officers at cargo facilities is determined by qualified security officers at cargo the individual facilities in accordance with their security plans. facilities to provide physical security. Use physical barriers (walls, fences) to • The use of physical barriers at cargo facilities is determined by guard against unauthorized access the individual facilities in accordance with their security plans. to cargo areas.

Source: U.S. GAO 2002b.

Manual and Low-Technology Approaches technical sophistication. They can be categorized as manual and low-tech equipment, intrusive detec- The most important tool of any inspector is a sharp tion technology (seals), and higher technology eye. To augment this tool in manual inspections, equipment (radiation detection pagers, and X-ray fiber-optic scopes, hydraulic jacks, wet and dry vac- and gamma ray scanners). Each technology has its uums, torches, magnesium arc cutters, chainsaws, security-enhancing benefits as well as its potential drills, electronic stethoscopes, and many other drawbacks. Table 12.2 describes these technologies common and specialized tools are used. It is and the potential costs, benefits, and drawbacks unlikely that these tools differ greatly across the associated with each. Some of the technologies are international arena. then discussed in greater detail. These technologies Canines have been identified as one of the most can be used for both air and sea cargo. effective tools to screen cargo, and their use has TABLE 12.2 Technical Means to Assist Security Checks

Type of Technology Description Costs, Benefits, Drawbacks

Technology to Technologies capable of detecting Cost: Ranges from under US$50,000 per unit for trace or screen objects for explosives and WMD, including vapor detection and canine use to over US$10 million per threat radioactive, chemical, and unit for pulsed fast neutron analysis and certain X-ray biological agents. These include equipment. • Gamma ray Benefit: Can indicate potential presence of threat objects • Pulsed fast neutron analysis without opening packages and containers; canines are • Thermal neutron activation considered the best means to screen air cargo because they have the fewest drawbacks. • X-ray, including bulk EDS Drawback: Some technologies (pulsed fast neutron • Radiation detection analysis, thermal neutron activation) can take an hour or • Trace detection more per object to screen; some technologies (pulsed fast • Vapor detection neutron analysis, bulk EDS) are very costly; some technolo- • Canine use gies (X-ray, gamma ray) do not identify specific threat; some technologies (X-ray, gamma ray) cannot distinguish different materials in high-density cargo; some technologies (bulk EDS, pulsed fast neutron analysis) require building modifications to accommodate the equipment; all technologies have difficulty identifying biological threats. Seals and other Technology that can be used to Cost: Ranges from under US$1 per unit for tamper-evident intrusion determine whether a container tape to US$2,500 per unit for electronic seals. detection or conveyance has been Benefit: Easy and inexpensive way to verify tampering technology tampered with by visual with a container or other conveyance. inspection, or that emits an Drawback: All types of seals are known to be vulnerable to alarm, or notifies a central tampering, given the appropriate tools, time, and control station. Includes tamper- opportunity. There is no worldwide standard for radio evident tape that shows “void” frequency. when tampered with, tamper- evident seals and locking devices, and electronic seals that emit a radio signal when they have been tampered with. Blast-hardened Technology to harden cargo Cost: At least US$15,000 per unit. containers (air containers to control the Benefit: Designed to protect aircraft from catastrophic cargo only) damage caused by an explosion structural damage or critical system failure caused by an by confining it to the container. in-flight explosion. Drawback: Containers are expensive and heavy, which results in increased fuel costs. Access control and Technologies to identify and Cost: About US$100 per unit for card reader devices; cards authentication authenticate individuals or are a few cents each. vehicles allowed into a restricted Benefit: Ensures that only authorized persons are handling area, or to authenticate a driver cargo; creates a record of access to controlled areas. or individual loading goods. This Drawback: Does not protect cargo shipments from access technology includes picture by persons who are authorized to access cargo and badges, biometrics, and “smart cargo-handling areas. cards.”

Tracking systems Technology such as global Cost: Ranges from about US$.50 per unit for bar coding to positioning systems and bar about US$3,000 per unit for some radio frequency tags. codes that can be placed on Benefit: Tracks the cargo throughout transport. cargo and used to identify Drawback: Does not protect cargo shipments from freight being shipped or to track tampering; technology only tracks the location of cargo. the shipment. CCTV Video camera to monitor and store Cost: Ranges from about US$50 to about US$1,000 per video images. CCTV can be used camera; cost of additional components (switching and to record the loading of a recording devices) vary greatly. container onto the ship or Benefit: Improves cargo surveillance by reducing time and aircraft and the container can be costs. inspected by viewing the Drawback: Video screens require continuous monitoring; archived video. does not protect cargo shipments from tampering.

CCTV closed-circuit television EDS explosive detection systems WMD weapons of mass destruction Source: U.S. GAO 2002b.

277 278 Customs Modernization Handbook

increased significantly in recent years. In addition illicit traders. Radiation detection pagers are small, to screening cargo, canine teams are used at sea- self-contained gamma radiation detectors that alert ports and airports to respond to suspicious events the wearer to the proximity of radioactive materi- such as bomb threats. According to the TSA, secu- als. Such devices, developed particularly for the use rity experts, and industry officials, canine teams of government agencies and emergency responders, have proven successful at detecting explosives and are approximately the size of common messaging are the most promising method for screening cargo pagers. Radiation pagers are several hundred times (U.S. GAO 2002a). more sensitive than commercially available Geiger- Muller tube-type detectors, which are of similar size. Using such pagers, the authorities were able to Intrusion-Detection Technology detect in March 2001, radioactive material shipped Several technologies, including electronic seals and through Uzbekistan en route to Pakistan. Future tamper-evident tape, could be used to help deter- developments could include the installation of mine whether cargo has been tampered with dur- radiation detection devices on quay cranes, gantry ing its chain of custody from the point at which a cranes, and other container-handling devices. package is sealed by a known shipper to its place- Trace explosives detection devices and bulk ment on a ship or aircraft. An electronic seal (also explosives detection systems, which are currently known as a radio seal), for example, is a radio fre- used to screen passenger baggage for explosive quency device that transmits shipment information material,can also be used to screen cargo containers. as it passes reader devices and indicates whether a container has been compromised. Container Scanning Equipment Once security staff members are alerted to a possible problem, they can physically inspect the Container scanning equipment can increase the cargo. Seals range in cost from less than $1 per unit number of consignments that receive customs for tamper-evident tape to $2,500 per unit for elec- attention without causing undue delay, and can tronic seals. Within the shipping industry, it is rec- identify illicit goods. The equipment requires a ognized that first generation seals can easily be large capital outlay, however, and the process of tampered with, either by entering the cargo area introducing it, from conception through operation, without breaking the seal or by removing and affects the entire control and intelligence sectors replacing the seal. Now there are more advanced and requires changes to the infrastructure and pro- seals on the market that report motion and report cedures of customs. To justify the outlay, and to any suspicious tampering exercise imposed on the ensure maximum return for the investment, it is container. In any event, seals should be used in con- necessary to ensure that scanning equipment is junction with other security procedures as part of a used effectively and that it is fully integrated into comprehensive security plan. Industry officials the risk assessment regime. The experience of cus- have expressed concern about the use of electronic toms administrations that currently use it suggests seals on aircraft because of the potential to interfere that planning for the equipment’s introduction with avionics. should precede the purchase of the equipment. The acquisition of scanning equipment should be based on sound cost-benefit analysis. Costs Modern Technology in the Service of Security include the capital, maintenance, and operational The high technology category includes radiation costs, while the benefits expected from the use of detection pagers, trace explosives detection devices, the scanner will depend on the specific objective for X-ray scanners, and gamma-ray scanners. its introduction. Potential returns will, however, Radiation detection pagers are specialist devices vary depending on the volume of traffic, its nature, used to detect the presence of radioactive material and the assessed risk. For example, if the principal that may present a potential health hazard and may purpose is to control revenue, the overall value of be used in the production of weapons that depend traffic, the level of duty rates, and the projected on this material. Rogue nations or terrorist groups level of misdeclaration are necessary components are prime suspects for buying such material from of the analysis. If drug interdiction is the major The Role of Customs in Cargo Security 279 concern, the level of traffic from source countries is entrance and exit, facilities for computer equipment relevant. Benefits will obviously be a function of and image interpretation, as well as sufficient space how effectively and efficiently the equipment to accommodate the traffic flow. Vehicles must have detects irregularities. This will depend on the rate adequate access to the facility. Observers note that of container inspection, which is likely to be faster this may require 5,000–8,000 square meters. Most than with manual inspection; the integration of the fixed units are X-ray units. Mobile and relocatable use of the scanner with the availability of well- units provide greater flexibility, and can be used to trained and experienced image analyzers; and the surprise traders that adjust their traffic pattern to adequacy of the infrastructure for the equipment. avoid scanners. These units tend to be less powerful Perhaps as important as those issues is the need to and would depend on a good energy source (X-ray). ensure that the risk assessment infrastructure is in These disadvantages could be a limiting factor; place before introducing the equipment. Inherent however, less fixed infrastructure would be required within this is a requirement for pre-arrival data to because units can be moved to where the traffic permit the risk assessment procedures to take place flow is. in time to advise necessary parties that a given con- To determine the most appropriate system for tainer has been selected for scanning. Good risk any administration, it is necessary to consider its assessment practices require that a percentage of principal intended purpose. Revenue evasion sug- containers be selected at random, as a control sam- gests quantity differences between the goods and ple to assist performance measurement of the risk the declaration. The better the image quality, the assessment system. more likely any such difference would be identified. Some goods, such as raw materials, fruit, and veg- Selection of the Appropriate System The pur- etables, and frozen foods, are denser than others pose of container scanning equipment is to allow and would require the higher penetration rates of inspection of what is inside a container without X-rays. For drugs concealed in the fabric of a con- opening the container; a process often called “non- tainer, a system with a backscatter facility (in which intrusive examination.”There are a number of ways the rays do not penetrate into the cargo but are to achieve this objective, although most systems are scattered back from the walls) is beneficial, based on either X-ray or gamma ray technology. although it will have limited use apart from this. If Whatever the energy source, it is governed both by prevention of human smuggling is a priority, lower the laws of physics and by economics. Higher pene- penetration rates are preferable so as to avoid hurt- tration of the contents of a container gives a better ing people. Some systems are designed to be highly quality of image but requires more energy, which is specific. For example, using a system that identifies more expensive; requires more operational space; the presence of Potassium K40, a chemical compo- provides less mobility; and must have higher levels nent of cigarettes, can target cigarette smuggling. of protective shielding. Lower levels of penetration have a corresponding decrease in image quality and X-Ray Inspection Systems X-ray based inspec- cost, but also have lower requirements for space tion systems are the most common form of nonin- and shielding, and provide greater mobility. vasive inspection technology currently in use. The Whichever type of system is selected, effective over- power source for X-ray systems is electrical, so the all operation, from a technical point of view, is power can be turned on and off. It also means that dependent on all of the parts of the system being in a site where the electricity supply is not certain, it effective. This includes the emission unit, the detec- is essential to have a back-up generator. X-rays tion line, the linked computer system, and the detect differences in material densities to produce image interpretation software. an image of the vehicle or container contents. Con- While both X-ray and gamma ray technologies traband detection is actually performed by the sys- are available in fixed, relocatable, and mobile system operator who visually inspects the X-ray tems, there are differences between the two, which images for anomalies, sometimes with the help of pertain largely to space and flexibility of use, as well sophisticated software. as to infrastructure requirements.Fixed units require When cargo and contraband are of similar a purpose building with high walls, safety doors for densities, contraband detection is difficult. For 280 Customs Modernization Handbook

example, the density of a plantain appears exactly investment, four to five times less in terms of instal- the same as that of cocaine molded and painted to lation, and when considering other benefits, resemble a plantain when both are put through an gamma ray systems can yield a cost per inspection X-ray machine. Density differences are projected that is 50 times less than that of conventional X-ray across the entire width of the container; if a con- systems. A downside is that gamma ray images are tainer is tightly packed, detection of contraband more difficult to interpret and would thus require may be difficult, as the X-ray image will also be better trained image analyzers. cluttered and visually complex. In addition, due to the projection methods, contraband could be hid- Cost of the Scanning Equipment Fixed units den in the shadow of a highly dense item of cargo. operate with the highest energy levels and are the However, the use of multiple X-ray beams can most expensive. X-ray units tend to have higher eliminate most of the shadow effects. Due to the penetration levels than gamma ray units and are nature of X-ray methods, specific materials cannot consequently more expensive. Costs include the be identified; but it is possible with gamma ray sys- following: tems to detect specific materials like drugs and explosives. • Capital costs. Fixed costs include both the pur- It generally takes X-ray systems only a few min- chase of the equipment and the installation of utes to scan a standard 40-foot container, while fixed equipment. Often new land needs to be some of the more advanced systems take only sev- purchased and access roads and parking facili- eral seconds. However, total inspection cycle times ties need to be built. may range from 7 to 15 minutes or longer, due to • Maintenance costs. In light of the safety issues image analysis (which could result in scanning less involved in operating the scanners, adequate than 100 containers per day). safety requires periodic inspections of the equipment to ensure proper functioning. Gamma Ray Inspection Systems Gamma ray • Operating costs. Containers need to be selected, inspection systems directly apply gamma rays, or released, and moved to the scanner and images fast-pulsed neutrons to generate gamma rays, that need to be made and interpreted. Staff members produce images of the container’s contents, three- need to be trained. dimensional mappings of content location, as well as other important information. Gamma rays are Other Operational Considerations for the Use of produced from natural isotopes such as Cesium-137 Scanners The introduction of scanning equip- or Cobalt-60. These are radioactive sources and the ment will have a significant effect on the customs energy emission is continuous. Because of this, the control staff. They should be fully briefed on the isotopes must be kept in a shielded cabinet at all new procedures, and their justified health consider- times. Over time, the radioactive isotope’s emission ations should be addressed early on. Similarly, staff decreases, and would need to be tested for effective- responsible for risk assessment should be brought ness. A gamma ray unit is much smaller than an on board at the early stages of the process to ensure X-ray unit, giving it a higher degree of mobility. This that they have adjusted their procedures to the new feature means that gamma ray units are far more technology. likely to be mobile than fixed. Much is to be gained from involving the trading Claiming many benefits over X-ray technology, community in the early stages of preparations. gamma ray systems may be a key step toward more They will need to be informed about the new pro- efficient container inspection. Gamma ray systems cedures, and assured that these procedures will not can scan standard 40-foot containers in a few sec- cause excessive clearance delays. onds and result in a total inspection time of less Port authorities should be made aware of the than a minute. The average inspection throughput need to facilitate the movement of containers. Port of gamma ray systems is more than 10 times greater authorities may be concerned about the additional than the fastest X-ray system. cost that new procedures would bring to port users, Gamma ray systems can cost 3 to 20 times and whether this will affect the competitive posi- less than X-ray systems in terms of initial capital tion of the port. The Role of Customs in Cargo Security 281

The use of scanners will interest other govern- terminal authorities, as well as the availability of ment agencies such as immigration, border police, infrastructure and management to ensure a and the nuclear agency. They should be kept abreast smooth flow of containers to the scanning unit. of developments. Staff must be trained and funding for maintenance and operation needs to be provided on Operational Conclusions time. Monitoring of the results against clear per- Despite additional security-related costs in all of formance indicators is also important. Neglect of the areas discussed in this chapter, the enhance- any one of these requirements will seriously ment of cargo security in air and sea transport and detract from the results achieved and impede shipping should ultimately benefit the countries rather than facilitate trade. implementing the measures described here. In an As with other elements of good customs opera- environment with greater security risks, such pre- tions, success will depend largely on the commit- cautionary measures should facilitate the flow of ment of port and customs leadership, the adher- trade worldwide, particularly to countries that have ence of the staff to the impending changes in strict security measures in place. Thus, it should procedures, the cooperation of the commercial prevent costly delays at the ports of destination and community (mostly exporters and shippers), and shorten the time to resume shipping operations in the ability to tighten relationships with them. Ports the event of a large-scale incident. should establish supervision and control mecha- Yet, the renewed attention to security issues is nisms for the security operation related to the port only a few years old and the many initiatives that and customs, including the training and qualifica- have emerged still need to be confirmed and trans- tion of customs and port security personnel. lated into detailed operational guidelines and instructions. The impact on trade is still somewhat Annex 12.A Port Risk Assessment uncertain. While it is desired that these new secu- The company or government agency operating the rity measures contribute to trade facilitation, some port facility (the port operator) is responsible for observers are not fully convinced. Some, particu- setting security policies for the facility. Customs larly from the developing world, wonder how secu- staff will need to be intimately familiar with these rity screenings that are certified by importing policies, and adjust their own operational policies. countries in some exporting countries but not in At a minimum, those policies must conform to others, will affect the competitiveness of these latter international and domestic requirements. Yet, they ports and of the goods that pass through them. should also reflect the port operator’s objectives in Some observers compare this situation with non- maintaining safety and security on board its vessels, tariff barriers, certainly as long as the advantages wherever they operate. This security concern will, and disadvantages of complying with these security by necessity, not be absolute because due consider- regulations and guidelines are not clarified to ation will need to be given to the delays it will traders (Raven 2004). impose on trade transactions. The use of new technologies such as scanners An effective port security system integrates holds promise for assisting customs in achieving information gathering, quality control procedures, its main objectives. Promoters of this equipment personnel, and equipment, and enhances the ability have at times simplified the process and inflated to respond to incidents appropriately and in a the expected advantages for customs. Hence, cus- timely manner. Port Risk Assessment (PRA) must toms needs to exercise due diligence in deciding carefully consider the various possibilities and vari- whether to acquire the new technology and what ants of security risks, including damage to facilities, technology to acquire. It is clear that the use of transport equipment, or cargo, and the use of this technology does not provide a magic solution. transport vehicles to smuggle persons or weapons, Effective use of new technology will depend on including nuclear material.13 several factors. Foremost, it requires that the use of the equipment take place in an environment of 13. See International Maritime Organization ISPS code Web active risk management. It also depends on good site at www.imo.org/Newsroom/mainframe.asp?topic_id=583& cooperation between customs and the port and doc _id=2689#code. 282 Customs Modernization Handbook

Methodology for Port Risk Assessment Recruitment of the most suitable candidate for each function is vital to the success of the entire The process of conducting a PRA should involve all operation, because security systems are too vulner- who are responsible in any way for maintaining able to allow even the smallest breach. Initial staff security at the port, as well as law enforcement and training provides awareness, motivation, and military staff of the facility’s locale. The PRA knowledge, and might well be combined with real- should address the particulars of the port facility; life simulations to provide the experience of deal- the types of ships, cargo, and passengers it serves; ing with potentially dangerous situations and to the locations from which cargo or passengers are ensure the prevention of errors, shock, or panic in accepted; and the likelihood of various security- an actual emergency situation. Personnel and sys- related scenarios and possible responses to those tem inspections and drills should serve to ensure scenarios. that the highest possible level of professionalism is The information should be collected and maintained. All personnel employed at a facility processed to produce a list of vulnerabilities to be involved in the security process, whether directly or used in the risk analysis. Today, new technological indirectly—including temporary employees who products provide automated tools to perform secu- have access to sensitive areas—must be carefully rity assessments. screened. A sampling of these employees should be interviewed in the PRA. Elements of the Integrated Security System The integrated security system is made up of various Technical Means The most suitable equipment elements. to be used at a particular facility must be determined, taking into account the equipment type, Information and Intelligence To learn about quantity required, and location. When selecting the potential threats and discern changes and develop- required equipment, the needs of the facility, the ments in a timely manner, information must be costs, and the dependability of the equipment must collected on a continuous basis and incorporated be taken into consideration. An analysis should be into current security principles, to ensure that the performed to examine the equipment in relation to system remains effective and appropriate. An all aspects of the integrated security system, includ- important starting point would be a historical ing maintenance and operating costs, benefits, as analysis of terrorist planning, organization, well as advantages and disadvantages. The selected weapons, and tactics. Careful analysis should yield equipment must have a direct impact when prop- reasonable, logical, and defensible assumptions erly implemented. Such measures ensure a high regarding possible capabilities. The information level of security, and must always be supported by should be collected routinely through several dif- operational procedures, training, and intelligence. ferent channels, including through local and international media sources, an incident database, Procedures A set of routine and emergency pro- national and international publications and cedures covering the duties of security personnel, research centers, international security initiatives, management, emergency service personnel, and and cooperation with local and international secu- crews must be formulated. These procedures should rity agencies. The information collected must be also outline the chain of command and the respon- processed and analyzed, and the risk analysis and sibilities of all involved parties, under both routine preventive measures updated accordingly. and emergency conditions. Each procedure will include definitions, methods (operational measures Personnel Personnel is the most important and and requirements), and responsibilities. The proce- most sensitive element, due to the potential for dures should be prepared and approved by the local human exposure to acts of malicious intent, and authority,communicated to all relevant entities,and must be handled accordingly. Customs staff should updated periodically based on changing needs. be included in these personnel action programs. Such programs should cover recruitment, training, Control, Audit, and Drill Control and audit and inspections. mechanisms must be established to continually The Role of Customs in Cargo Security 283 monitor the attentiveness, alertness, and effective- European Union. 2002. Regulation (EC) No. 2320/2002 of the ness of the security system. The mechanisms will European Parliament and of the Council of 16 December 2002 establishing common rules in the field of civil aviation security take into account the types of operations of the (Text with EEA relevance)—Interinstitutional declaration. port facility, personnel changes at the port facility, Official Journal L 355 of March 12, 2002. EU: Brussels. the types of ships served by the port facility, and International Civil Aviation Organization. 1944. Convention on International Civil Aviation. Chicago. December 7. other relevant circumstances and regulatory guide- OECD (Organisation for Economic Co-operation and Develop- lines. The results of these activities (simulations, ment). 2003. “Security in Maritime Transport: Risk Factors surprise visits, and so forth) should be recorded and Economic Impact.” Directorate for Science, Technology and analyzed to establish a cycle of continuous and Industry, Maritime Transport Committee. Paris. Pluta, Paul J. 2001.“Temporary Requirements for Notification of feedback and improvement. Arrival in U.S. Ports.” USCG News Media Advisory. United States Coast Guard. Federal Register, Volume 66, Number 193, Docket USCG-2001-10689, RIN 2115-AG24. Further Reading October 4. Washington, D.C. Raven, John. 2004. “Security’s Effect on Trade.” Journal of Com- International Maritime Organization. http://www.imo.org/ merce. January 19–25, p. 38. home.asp. Sander, Charles. 2003. “Initiatives in Aviation Procedure.” Jour- The Subcommittee on Coast Guard and Maritime Transporta- nal of International Security. 13(11/12): 377. tion Hearing on Interim Final Regulations on Port Security. TSA (Transportation Security Administration). 2003.“Air Cargo www.house.gov/transportation/cgmt/. Strategic Plan.” TSA Press Release, November 17. U.S. U.S. Coast Guard. www.uscg.mil. Department of Homeland Security. Washington, D.C. U.S. Customs and Border Protection (CBP). http://www.cbp. U.S. Department of Homeland Security. 2003. “New Recom- gov. mendations to Contribute to Improved Security in Air U.S. Department of Homeland Security. www.dhs.gov. Cargo.” Press Office. October 1. www.airportnet.org/depts/ U.S. General Accounting Office. 2002. Container Security: Cur- securitypolicy/DHScargoPR.pdf. rent Efforts to Detect Nuclear Materials, New Initiatives, and U.S. GAO (General Accounting Office). 2002a. Aviation Security: Challenges. Statement of JayEtta Z. Hecker before the Sub- Vulnerabilities and Potential Improvements for the Air Cargo committee on National Security, Veteran’s Affairs, and Inter- System. Report to Congressional Requesters. Document national Relations, House Committee on Government GAO-03-344. December 2002. Reform. Document GAO-03-297T. November 18, 2002. U.S. GAO (General Accounting Office). 2002b. Container Secu- U.S. Transportation Security Administration (TSA). www. rity: Current Efforts to Detect Nuclear Materials, New Initia- tsa.gov. tives, and Challenges. Statement of JayEtta Z. Hecker before the Subcommittee on National Security, Veteran’s Affairs, and International Relations, House Committee on Government References Reform. Document GAO-03-297T. November 18, 2002. WCO. 2003. “Container Scanning Equipment: Guidelines to EuropeanCommission.2004.“Commissionproposestostrengthen Members on Administrative Considerations of Purchase and securityinEuropeanports.”Brussels.europa.eu.int/. Operation.”Secretariat Note. Brussels.

13 THE ROLE OF INFORMATION TECHNOLOGY IN CUSTOMS MODERNIZATION

Luc De Wulf and Gerard McLinden

TABLE OF CONTENTS LIST OF FIGURES The Role of Information and Communications 13.1 Modern Customs Declaration Processing Technology in Customs Modernization 286 Environment 292 Key Customs Computer Applications 289 Developing a Computerization Strategy LIST OF BOXES for Customs 292 Systems Options 295 13.1 IT System Procurement and Costs: Case Study—Turkey 296 Operational Conclusions 309 13.2 Morocco Case Study 298 Further Reading 309 13.3 Customs ICT Deployment Case Study: References 309 Turkey 302 13.4 Ghana Gateway Project LIST OF TABLES Case Study 305 13.1 Customs Parameters and Information 13.5 Senegal Case Study 306 Technology Building Blocks 291

Customs administrations today face a variety of national trade and transport operators. To cope with political and administrative pressures and challenges. these pressures and challenges, the international cus- These include fluctuating workloads with static or toms community looks to the applied use of infor- declining resources, greater business expectations, mation technology (IT) as a catalyst for improving and continuing pressures to meet often-conflicting organizational and operational efficiency and effec- government revenue, trade facilitation, social protec- tiveness. As a result, many modernization programs tion, and national security objectives. Moreover, cus- in the customs sector over the last decade have incor- toms administrations are increasingly required to porated significant computerization components. integrate their systems and procedures with the Many customs administrations today use varying sophisticated global logistics networks used by inter- degrees of automation to support core customs func- tionssuchasgoodsdeclarationprocessing,revenue The contributions of consultants Tony Mort and Alan Hall and assessment, revenue collection, risk management, of David Kloeden and Patricio Castro of the International Mon- etary Fund are recognized with gratitude. and management reporting. 285 286 Customs Modernization Handbook

This chapter is not designed as a technical guide information and communications technologies. As for IT specialists, nor as a business process re- a result, such countries have computer systems that engineering guide. Rather, it summarizes the bene- reflect modern customs management practices fits of applied use of information and communica- such as self assessment, clearance on minimum tions technologies (ICT) in the customs sector, and information, deferred payment of revenues, an the important role ICT can play in the wider process intelligence-led and targeted risk management of customs modernization and reform. The chapter approach to clearance of international consign- discusses the advantages and disadvantages of ments, and sophisticated post-clearance audit nationally built ICT solutions and briefly presents regimes. the various off-the-shelf solutions that are presently The historical experience with ICT of many on the market. It draws on some important lessons developing and emerging economies has been learned by a range of organizations, donors, con- quite different and not without significant diffi- sultants, and customs professionals, and emphasizes culty and, in some cases, high financial cost. Lack- key issues to be considered when developing appro- ing the necessary financial and human resources priate computerization strategies for the customs and access to a well-established domestic IT mar- administrations of developing economies. ket, customs administrations of many developing The first section highlights the importance of countries have been slow to take advantage of the the use of ICT for effective and efficient customs full potential offered by the appropriate applica- operations. The second section focuses on the var- tion of modern technological advances. Fortu- ious components of a computerized customs nately, this situation has changed over recent management system. The third section presents decades, partly as a result of the commercial avail- the key points of a strategy for computerization ability of customs-specific computer systems, and of customs. The fourth section briefly describes the international donor community that has the advantages and disadvantages of adopting stepped up support to strengthen customs admin- national versus off-the-shelf customs manage- istrations. Yet, the technological infrastructure ment systems, and summarizes the major third- and support available in many developing coun- party products that are available. The final section tries lags far behind that which is available in contains operational conclusions. Where possible, more developed economies, and increasingly, case studies have been incorporated to illustrate behind the technology-intensive business prac- points made. tices of many international traders. Moreover, when automated systems are introduced, they are often not used to their full potential. At times, the The Role of Information and Customs Code requires the submission of paper Communications Technology documents for cargo clearance purposes, thereby in Customs Modernization duplicating information often provided to cus- While it is evident that IT is assuming an increas- toms electronically. More frequently though, cus- ingly important role in modern customs adminis- toms staff and management have been reluctant to tration, the priorities, expectations, experience, implement the processing simplification required capabilities, and resources of individual customs by the new IT systems or to adjust workflow and administrations vary considerably. Beginning in staff assignments accordingly. At times the ICT the early 1970s, customs administrations of many was introduced without first streamlining, stan- developed economies began to recognize the signif- dardizing, and simplifying existing manual icant advantages of using technology-based solu- processes and procedures. In such cases it is hardly tions to improve their operational efficiency. They surprising that the implementation fails to meet designed and developed their own customs com- business expectations. Experience clearly shows puter systems, tailored to meet national needs. that the basic principle should be to first stan- Over the years such systems have been enhanced, dardize, consolidate, modernize, and simplify simplified, and in some respects standardized in processes and procedures before computerization. line with international best practices. They were In the absence of such simplification, the ineffi- adjusted over time to capitalize on changes in cient manual system may at best be replaced by an The Role of Information Technology in Customs Modernization 287 inefficient computerized system, with no gain to compliance is self-assessment. In the customs anybody. context, this means less emphasis on extensive Designing new, simplified practices and pro- physical inspection at the point of entry as cesses inspired by international best practices that traders (or their agents) declare the revenues have proven to reduce the compliance cost to the payable—but with effective control exercised commercial community may require changes in after goods have been cleared for free circula- government policy, in the legislative base, in tion. Post-clearance control will involve audit the application of human resources management and other checks focused on addressing transac- policies and procedures, and in the way cus- tions in which the risk of incorrect declaration is toms policies and procedures are applied. Given greatest. Clearly, this will require reliance on an the possible implications of these changes, much intelligence-led and targeted risk management benefit can be gained from securing political sup- approach that isolates high risk consignments, port for the reform and full support from the gov- or consignments of special interest. Appropri- ernment and senior management of the customs ately designed computer modules can help administration. greatly. Customs often administers the value added tax (VAT) or similar consumption taxes. Hence, effective VAT administration at the border should be The Need to Integrate ICT in Customs with an designed along with effective customs management Overall Modernization Program practices. Customs initiatives, such as de minimis values for declaration, deferred payment of rev- In recognition of the pivotal role computerization enues, clearance on minimum information, peri- plays in modern customs administration, many odic goods declarations, tariff-free policies and customs reform programs have placed a high prior- duty-free imports, and so on have to be carefully ity on the selection and implementation of appro- reviewed and integrated with any new VAT legisla- priate and effective technological solutions. Indeed, tion. It should be clear, therefore, that the IT system donors have often allocated large percentages of should be designed to support a systems-based project funds to the upgrading or replacement of approach to total revenue administration at borders. such computer systems. In recent years, however, The automation efforts for customs processes there has been a growing acknowledgement of the must be cognizant of at least two key features of problems and limitations of fully technologically- modern customs practices: dominant modernization strategies and of the need to integrate technology into a wider and more com- • Modern customs processes must be simple and prehensive capacity-building effort across the transparent but cannot be simplistic. This does entire organization. not, however, prevent complex systems from A recent International Monetary Fund (IMF) emerging, as customs needs to cope with a wide publication (Corfmat and Castro 2003, pp. 119– range of special issues, many of which pose con- 120) addresses this issue and notes that “interna- siderable danger to revenue and other policy tional experience has demonstrated that customs objectives. For instance, some goods, imported administrations often find it difficult to imple- under suspense regimes on the grounds that ment . . . complementary components of the mod- they are not intended for home consumption, ernization effort [and that it is not difficult to find may be fraudulently diverted to the domestic examples] where inappropriate introduction and market. This will require that special safeguards use of computer systems have exacerbated existing be provided. problems. In both developed and developing coun- • Modern customs processes are migrating from tries a disturbing pattern has been observed in physical to post-clearance control, with substantial which investment in computer systems in customs reliance on self-assessment by taxpayers. It is departments has grown steadily, while the average increasingly recognized that the key to effective time needed for the release of cargo still exceeds revenue administration is voluntary compliance several days, with no clear improvement in assess- by the taxpayer, and that the key to voluntary ments and detection of frauds.” 288 Customs Modernization Handbook

The stage at which each administration is cur- characterizes the current situation in most devel- rently situated greatly influences both the IT solu- oped and middle-income countries. tions that might be appropriate and the range of In stage three, customs administrations rely heav- complementary reforms necessary to achieve sus- ily on information and accounting systems, and on tainable improvements in overall corporate effec- following the processes that constitute a trader’s tiveness. The three-stage typology presented by total activities. All information is exchanged elec- Appels and Struye de Swielande (1998) is instruc- tronically, decisions on treatment of consignments tive in this respect. are made on a risk management basis, and the com- In stage one, customs administrations concen- pliance record of traders becomes a key considera- trate on the physical control of goods, relying heav- tion. The focus is on informed compliance, inter- ily on high levels of physical examination and on the vention by exception, and rationalization of service submission and inspection of paper-based docu- delivery (for example, the single window concept). mentation. Where computerization is employed, it Customs resources are moved from resource- is usually only for processing goods declarations intensive, low-value activities at the time of arrival and performing revenue assessments. Furthermore, of the consignments, to low-resource, high-value the use of such systems is typically applied after the prearrival clearance and post event, systems-based goods have arrived in the country of import. In audit activities. All customs administrations in many cases, such systems merely replicate existing developed economies are now working toward manual processes and procedures. Customs officials achieving these methods of operation. typically perform data entry functions after submis- Each stage in this evolutionary model requires sion of paper-based documentation, which is time increased use of IT combined with the adoption of consuming and can result in high error rates. modern administrative systems and procedures. Limited attention is often paid to research However, while many countries have broadly fol- and analysis of the trader population, and risk lowed this evolutionary process, progression from management–based targeting of suspect consign- one stage to the next is neither necessarily linear ments is often limited or nonexistent. The focus is nor predetermined. The experience of many devel- on maximizing revenue yield and little attention is oped economies is that the need to redevelop or usually paid to developing trade facilitation initia- improve the functionality of computer systems typ- tives. Quite a few customs administrations in devel- ically followed, or occurred simultaneously with, oping and transition economies appear to be stage the adoption of new and more effective strategies one countries. and working methods, such as those described in In stage two, customs work emphasizes the col- stages two and three above. The key lesson here is lection and analysis of information, with deci- that automation must proceed as part of an overall sions on admissibility, revenue assessment, and modernization strategy for the institution, and intervention made on a risk management basis. must be accompanied by a range of complementary Such approaches require significantly more reforms in all aspects of customs administration. sophisticated IT infrastructure, both within cus- However, it is clear from many country examples toms and within the wider trading community. that IT can act as a catalyst for the simplification of Direct input of declarations by importers or customs procedures for no other reason than that a customs brokers is often a feature of such systems, good customs management system does not permit and there may also be a limited amount of the continuation of idiosyncratic and overly electronic information exchanged with other bureaucratic work procedures. This catalytic role of government agencies. Customs clearance of inter- ICT can at times precede the modernization of national consignments is typically provided in a many other aspects of customs, as was the case in timely manner; the use of resource-intensive Bangladesh and Ghana (see box 13.4), and can physical inspections is often reduced, and concen- achieve good results, if customs is ready to reflect trated on trade transactions that represent the the new discipline in its work procedures. Even in highest revenue risk. Such an approach is typically these circumstances, issues of sustainability need to designed to strike a balance between physical be addressed head-on, and may contribute to the control and trade facilitation. This description realization that non-ICT aspects of customs need The Role of Information Technology in Customs Modernization 289 to be dealt with to make the most of the possibili- • uniform application of customs and other ties offered by ICT. It should be clear that the use of border-related legislation IT is not a panacea, nor should it be seen as an end • increased transparency and predictability for the in itself. business sector The appropriate technological infrastructure • reduced opportunity for inappropriate exercise for a given customs administration will depend on of officer discretion a number of factors, many of which are outside • enhanced management information the direct control of the customs administration • more efficient revenue collection and itself. The World Economic Forum’s Global Infor- accounting mation Technology Report 2003–2004 provides a • more accurate and timely trade statistics comprehensive analysis of the ICT readiness of • more effective deployment of human and tech- individual countries and regions (Dutta, Lanvin, nical resources and Paua 2004). It takes account of the environ- • more accurate information for risk management ment, readiness, and usage of information and and post-clearance audit purposes. telecommunications technologies. The research suggests that a certain threshold needs to be These benefits are further enhanced when it is reached before there can be effective usage of, and decided to leverage the pivotal role that a customs consequent impact from, ICT. For customs administration plays in the entire international administrations the implications of this research trade cycle, to create an electronically connected are particularly relevant. They do not necessarily trade community wherein all stakeholders are need to employ the very latest and most sophisti- members. Conceptualizing and implementing such cated technological solutions available, but rather a national approach to trade community develop- the ones that are most appropriate for their own ment does not come spontaneously and requires a operating environment, resource base, telecom- clear vision and political commitment that goes munications infrastructure, and realistic develop- well beyond customs. However, successful implement ambitions. In other words, the solutions mentation is possible,1 either as national systems or should be coordinated, relevant, appropriate, and as local seaport or airport community systems, achievable to meet national needs, given local through significant cooperative efforts from all conditions and resources. They should be afford- concerned over many years. able and sustainable in the long-term, taking into account resource obligations, resource availability, Key Customs Computer political and administrative will, and long-term Applications system support, maintenance, and flexibility. Many customs functions lend themselves to the Clearly, there is no “one size fits all” approach for application of technological solutions. The follow- implementing IT in customs. ing areas are typically covered by customs-specific Summing Up: Benefits of Computerization computer systems: in Customs • inventory control of international cargoes Well-implemented computer systems linked to • processing of goods declarations for release of complementary improvements in customs prac- international cargoes tices will result in the following: • tariff and documentation control • determination and evaluation of customs value • enhanced customs control over international • control of goods in transit, entering warehous- consignments ing regimes, or imported under temporary • improved control of exemptions, concessions, admission and duty suspension regimes • reduced cargo clearance times for the discharge of customs formalities 1. Such as in Chile, Singapore, Mauritius, the United States, Great Britain, Ireland, France, New Zealand, and Australia. Work • closer cooperation and rationalization of activi- is actively underway to introduce such systems in developing ties with other border control agencies countries such as Ghana, Saudi Arabia, and Senegal. 290 Customs Modernization Handbook

• management and discharge of inward process- management principles. Under such a system, higher ing or drawback regimes risk consignments are identified through back-office • risk management (risk profiles, risk analysis, customs activities relying on intelligence-led, risk intelligence analysis) management–based analysis of historical customs • broker applications data. High-risk cargo is targeted and extracted from • management information systems the normal processing path through use of an effec- • customs enforcement tive selectivity mechanism. Such consignments may • revenue accounting then be subjected to full customs scrutiny including • production and maintenance of trade statis- extensive documentary or physical examination (or tics and statistical analysis for identification both). Nonselected consignments are typically of unusual trading patterns worthy of closer released with minimal scrutiny, as being of little analysis. interest to customs. This targeted approach to cargo processing Table 13.1 provides an overview of the customs represents the frontline activity of modern cus- processes and the ICT support that is normally toms administrations. It is extensively supported built into a customs management system. It sum- by, and reliant on, an effective feedback mecha- marizes the entry and exit points for the cargo, the nism being in place to channel the results of post- public and private sector stakeholders involved, the release controls and systems-based audit strategies controls required, the strategies typically employed, back into the risk management mechanisms so and the IT elements involved. Table 13.1 illustrates that profiles can be updated and risks continu- the complexity of the task and the interdependence ously reassessed. of the various elements necessary to establish effec- The post-release control and audit regime repre- tive ICT support for a modern customs administra- sents the safety net for the entire facilitation tion. Such systems result in faster processing of approach. It acknowledges that many aspects of cus- goods declarations, targeting of controls to specific toms interest, such as valuation verification, fiscal traders, improved revenue collection and control, evasion, smuggling, and customs fraud, cannot be data exchange, improved accuracy of data and detected through examination of individual customs accounts, improved management information, and declarations.Touncover such indiscretions it is often up-to-date statistics. All these, in turn, play a key necessary for customs to examine a trader’s entire role in supporting post-release control activities. international trading patterns, including the move- Figure 13.1 illustrates the concept of modern ments of foreign currency. This can only be achieved customs risk management practices in relation through systems-based auditing of the entirety of the to the processing of international trade transac- trader’s international trade transactions. tions. It shows the functions and processes that a In addition to these computerized customs modern computerized customs management sys- management systems that assist in the clearance of tem supports. cargo, the customs administration, like many other The typical goods declaration and processing large organizations, also uses computer systems environment as represented on the left of figure 13.1 and other technological advances to more effec- acts like a conveyor belt. Documentation for individ- tively and efficiently manage the organization as a ual consignments are lodged with customs and whole. This includes the use of technologies in sup- processed on a transaction-by-transaction basis. port of functions including the following: This is a repetitive, time-consuming, and mechanical process. It also tends to be excessively control ori- • human resources management—payroll, career ented if, as is the case for the majority of interna- development, personnel placement, vacancy tional trade transactions in mature countries, traders tracking, disciplinary processes, and effective tend to be in compliance with established customs use of resources requirements. To facilitate trade and more accurately • management information and executive sup- target deliberate revenue leakage, advanced ICT sys- port systems tems can support customs administrations in the • asset and estate management move toward an operational method based on risk • fleet management The Role of Information Technology in Customs Modernization 291

TABLE 13.1 Customs Parameters and Information Technology Building Blocks

Entry and Entities Controlled Controls Exit Points or Affected Required Strategies IT Elements

—Seaport —Shipping and Physical Information Conveyance registers —Airport airline —Secure entry —Planned and —Ships companies and —Border or and exit targeted —Aircraft agents free zone —Secure distribution of —Land transport information on —Post office movement Report (inward and outward) —Inland legal require- —Transport —Secure storage controlled ments, policies, —Ship’s manifest area companies and —Inspection agents procedures, —Aircraft manifest —Post office —Seizure incentives, —Port managers —Load list facilities, and —Consolidations (including —Airport sanctions managers Information couriers) —Free zone —Summary data —Passenger manifest Facilitation tools managers (manifest) —Crew list —Gathering and —Importers —Clearance data —Stores list (bill of entry) mobilizing —Exporters knowledge Licenses and permissions —Verification By customs —Customs data —Single regulatory brokers (inspection, window —Store —Freight additional info., clearance for —Move forwarders audit) transport mode, —Pack and unpack goods, and —Warehouses —Consolidate and deconsolidate passengers —Other Authorities to deal —Dispose regulatory —Prerelease of with goods By other parties agencies cargo and —To land (goods passengers —Reference data (Immigration; and mode) Agriculture; —Client —Licenses —To move Health; Cultural accreditation —Permits —To store or Heritage; Police; —Periodic Declaration regimes Central Bank) unpack or break declarations —Importation for home use —Banks bulk —Advanced —Exportation —Ship or airline —To treat or customs crew transform declarations —Warehousing —Drivers —To dispose —Electronic —Transit —Passengers processing, —Transshipment —Entity payment, and —Carriage of goods coastwise employees clearance —Inward processing —Outward processing Control tools —Drawback —Advanced cargo —Processing of goods for home and passenger use information —Temporary admission —International Goods declaration data customs cooperation —In accordance with WCO Data Model and including data —Effective threat fields necessary for all agency assessment regulatory requirements (intelligence service) Results of physical (by inspection) and documentary (audit) —Risk management verifications and profiling —Automated, online, real-time —Post-clearance input of results in standardized audit formats —Mobile inspection —Categories and audit teams —Variations —Treatment (consequences) Intelligence profiles —Information that has been analyzed, classified, and converted into profiles for targeting

Source: Hall, Alan. 2003. Prepared for this chapter. 292 Customs Modernization Handbook

FIGURE 13.1 Modern Customs Declaration Processing Environment

Future electronic lodgment

Valuation examination or inquiry

Classification determination

Declaration Selective extraction and Risk management approach processing examination of higher risk shipments Intelligence analysis

Targeted profiling

Post-event audit capability

Uncover customs fraud and serious smuggling

Input back into risk management regime

Source: Mort, Tony. 2003. Prepared for this chapter.

• inventory management of consumable assets and These applications are not directly related to cus- general logistics support for stores and supplies toms clearance, and before considering their intro- • management and disposal of seizures duction the administration should review its com- • operational planning and resource allocation to puterization strategy to decide whether to integrate achieve tactical objectives these noncore functions into its computerized • intelligence collection, analysis, and dissemina- clearance system. In many instances it is likely that tion to frontline staff developing separate ICT solutions for these non- • audit planning and control, both internal and core functions may be the best approach. external • physical examination of cargoes and persons, for Developing a Computerization example, X-ray installations, body scanners, Strategy for Customs chemical analysis, and so forth • technical support to customs laboratories Computerization is not an end in itself, only a • library management systems means that should lead to better customs operation. • technological tools and systems in support of Computerization of customs processes is likely to personnel development and instruction delivery bring about the full advantage of process improve- • general office automation tools. ments only if complemented by associated changes The Role of Information Technology in Customs Modernization 293 to legislation, a review of organizational structures Convention urges customs to adopt advanced ICT, and human resources management policies, revised and the World Customs Organization (WCO) has cargo clearance policies, and enhanced operational periodically organized ICT fairs at which vendors procedures. Failure to incorporate these associated present their wares and that constitute a forum for institutional reforms will prevent computerization customs officials of various countries to exchange from fully achieving its role as a catalyst for change, experiences. Also, much of the need to change ICT to make customs operations both more effective systems comes from the aging of the legacy systems and efficient. Note, however, that a careful introduc- and the difficulty of maintaining them. In some tion of appropriate ICT solutions, even unaccompa- instances hardware platforms are no longer sup- nied by the full range of customs modernization ported by their vendors and maintenance has features mentioned here, can at times lead to the become an extremely difficult and costly affair. simplification of clearance procedures, the acceleration of the clearance process itself, and the promo- Reliance on a Steering Committee tion of revenue mobilization. The planning process must clearly identify the It may take a steering committee to organize ICT capabilities and functions that IT will support in reform. The steering committee’s task is to initiate, meeting the immediate tactical needs and strategic guide, and review any computer project within cus- goals of the customs service and those of its other toms. This committee should have representatives stakeholders. from the management of the various departments The process can be thought of as consisting of that will be affected by the intended change. The five stages:2 Director General or Commissioner of Customs should chair this committee, as it will deal with • becoming aware of a need for change in the use core issues of customs control, revenues, and trade of ICT in customs facilitation—the three key objectives of the organi- • setting up a steering committee that will oversee zation. Also, the Ministry of Finance should be a and manage the change member of this committee as the preparation and • planning—strategic, project, and business implementation of the ICT solution will be costly, continuity and because the sustainability of the ICT solution • development planning that goes from detailed will require annual funding for upkeep and investigation and analysis of the current system upgrading. At times, it may be advisable to have a to implementation technical expert or external consultant on the com- • post implementation. mittee to advise the other members of the technical issues. The steering committee will need to con- Awareness of the Need for Change sider, at various stages in the process, what consul- Nearly all customs administrations realize that tancy services to call upon to assist it in determin- effective and efficient clearance of goods is a prior- ing a good strategy and in working out the details ity and have over the years come to rely in varying of the chosen ICT solution. degrees on ICT. However, the technology has changed drastically over the last few years and the Planning demands of the trading community for more efficient and transparent customs services also have Good planning, at both the strategic and project become more vocal. Examples of such technologi- levels, is crucial to the success of any IT program. cal changes are the increased facility and cost efficiency of using the World Wide Web, Direct Trader Strategic Planning The long-term computeriza- Input (DTI), Electronic Data Interchange (EDI), tion plan for the administration will be the result of and electronic payments. The Revised Kyoto a strategic planning process. Such planning must include the following steps: 2. This section is inspired by the WCO Revised Kyoto Conven- tion, General Annex Guidelines, Chapter 7 Application of Infor- • Determine the objectives and commitments of mation Technology and Communication Technology, available at www.wcoomd.com. customs—what are its strategic and tactical 294 Customs Modernization Handbook

objectives in the areas of safety, trade facilita- procedures, so as to instruct the detailed design of tion, revenue mobilization, and so forth? the new system. This will be the work of a systems • Obtain a good understanding of the current analyst and should result in the preparation of a state of the administration, operations, and sys- User System Specification that describes the main tems and technology infrastructure of customs. features of the new system and how it will affect • Assess how ready the organization, its staff, and management and staff. If the steering committee the trading community are to change the pres- decides to acquire an off-the-shelf solution, the ent way of doing customs business. Can the User System Specification will closely reflect that of organization change? Does it have the required the provider and will detail how customs will adapt staff or can it acquire such expertise where it is or modify and add on to the processes proposed, missing? and how this will affect processes, staff, and man- • Define the target state scenario. This will pro- agement. If a made-to-order solution is agreed vide a realistic and actionable transition objec- upon by the steering committee, the next step will tive for modernization based on current capaci- be to develop a specific system design. This speci- ties, tactical readiness, and critical transition fies the computer and manual processing require- requirements as defined by the key stakeholders ments, the inputs to the system, the outputs of the and decision makers. system, the computer files used to store informa- • Apply a gap analysis that will compare the target tion, and the segmentation of the processes into state and the current state so as to arrive at the program design. Programming of the new proce- Customs ICT Modernization Strategic Plan. The dures follows next. Care must be taken to fully doc- plan is a set of specific project recommenda- ument the exercise. A User Manual (for the customs tions, the details of which will be worked out in officers that will operate the system), an Operations the project stage of the planning process. Manual (for the IT department staff), and the changeover instructions to ensure a smooth transi- Project Planning The Customs Modernization tion from the old to the new system should also be Plan consists of a number of projects, each of readied. which will require individual planning and control. These projects may include detailed descriptions of Procurement and Installation of Hardware, Soft- the present processes, and may investigate whether ware, and Communications Equipment Equip- to go with an off-the-shelf solution or a national ment and software procurement is normally under- solution, look into the human resources aspects of taken in parallel with the system development the greater reliance on ICT, investigate how the new process. The type of hardware to be procured needs system will be implemented without disrupting the to be tailored to the specific computing require- ongoing clearance processes, study how customs’ ments of the solution chosen. Proper procurement business will be affected if the ICT system were to rules should be followed to ensure that customs gets fail temporarily and how the impact of such fail- value for its money. The World Bank has procure- ures can be minimized. Funding and project leaders ment guidelines that need to be followed when the need to be assigned. Project leaders should receive a project relies on Bank funding (World Bank 2004). budget and timetable and clear direction as to who The Bank frequently updates these guidelines. will be held responsible for what aspect of the pro- Box 13.1 describes the procurement process for ject. Progress reports must be provided to the steer- Turkey’s ICT project in customs, which complied ing committee, which should provide continuous with World Bank procurement guidelines. These guidance, clarify sequencing and dependencies, and guidelines should still be kept in mind even if pro- decide on the start of the development stage. curement uses alternative internal or external financing, as these guidelines provide best practice to obtain value for money. The installation also needs System Development Process to be carefully planned, as it involves site prepara- Depending on the solutions chosen by the steering tion, staff training at the ICT center, and commu- committee, the system development process stage nications planning, including the installation of will require a detailed review of the existing data circuits, modems, and other communication The Role of Information Technology in Customs Modernization 295 infrastructure. The system will only be functional Systems Options once fully tested in an operational environment. When considering the introduction of computerization in any organization, there is always the basic Implementation of the New ICT System Once all question of developing the system in-house, out- the ICT and complementary preparations are ready sourcing development to a third party, or acquiring and the system has been satisfactorily tested, it is an existing system from the market. Each option time to abandon the older processes and adopt the has its advantages and disadvantages, depending on new ones. There are various options for implement- the local business environment and the technologi- ing this transition to the new system. One option is cal environment in which the organization oper- to run the new system in parallel with the old system, ates. Also, there is the question of whether the sys- and compare the results. However, this implies that tem will be solely a customs management system or the staff is running two systems at the same time, will have broader ambitions, such as electronically which may be taxing. This is likely to be an option connecting all members of the trading community. only for customs services that deal with a relatively As noted earlier, computerization is not an small number of declarations per day, or can be done objective in itself. It only makes sense if it serves as a on a pilot basis at a site with few declarations per day. tool to support implementation of modern customs The generalized transition then takes place when the management practices. To do this, the technology eventual problems with the new system are ironed should fully take into account the practical realities out. If testing was done in a comprehensive manner of the local environment, resources, and capabili- this should not take too long. The second option is to ties. In particular it should be attuned to the size roll out the new system in a pilot site. The pilot site and scope of the customs function and the organi- can be a smaller site, with less risk of disruption and zational capabilities to deliver and support. The good back-up procedures. Airports are often used as solution must be coordinated, relevant, appropriate, pilot sites, as trade there is more streamlined and less affordable, and sustainable. There is no “one size fits varied than at major seaports and land border cross- all” solution. This section discusses the advantages ings. Trade documentation is often also of higher and disadvantages of national IT systems, the off- quality. With this option, the resource-intensive the-shelf solutions, and the “beyond customs” training of customs staff, traders, and brokers can be systems. Given the rapid developments in the IT phased out over time. Success in the pilot site then is arena, this section provides only broad guidelines followed by gradual rollout to the other sites. The and suggests that any decision on IT solutions care- third option is to organize the transition from the fully consider all the options available. The section old to the new system for a given day. In this case, also recommends that customs officials visit with solid testing and good preparation of a contingency neighboring customs organizations to learn from plan for major problems, or even breakdown, will their experiences in the selection and implementa- pay off handsomely. tion of the most appropriate system. Occasionally the decision to automate customs Post-Implementation Evaluation processes is made by the government within the context of a wider information and communica- Any good project cycle includes a thorough post- tions strategy for the public sector. This may nar- implementation evaluation, to verify that the initial row the options available to customs, yet it opens objectives of the project were attained and whether the way for substantial synergy and crossfertiliza- the cost estimates were realized. Obviously this tion. This will be particularly important if the evaluation will only be completely valid if the pro- objective of the government’s ICT strategy is to ject preparation phase clearly spelled out the connect the various members of the trading com- expected costs and benefits in terms of revenue munity electronically. mobilization, integrity, trade facilitation, and security. Customs staff and management as well as users Developing an In-House IT System should be associated with this evaluation. Their observations may serve to modify certain aspects of Developing an in-house system, whether through the new processes. use of existing resources or through an outsourcing 296 Customs Modernization Handbook

BOX 13.1 IT System Procurement and Costs: Case Study—Turkey

A major customs IT modernization project can complete such a contract. Six out of seven appli- be a complex, multiyear, and costly exercise. cants were prequalified following a yearlong First, a choice needs to be made either to adopt process that ideally should have been completed and customize a package to local requirements in half the time. All but one of the applicants or to try bespoke development. In addition to were multinational IT firms, with the exception the question of applications software, many being a Turkish conglomerate (and eventual more decisions are needed, including choices of winner) that was the agent for a United States database, operating system, hardware, network- hardware manufacturer. ing, training, transitional arrangements for The deployment contract required 50 cus- system deployment, and follow-on support. toms sites to be equipped with hardware and Turkey’s experience is useful in terms of its com- facilities, construction of a national network link- plexity, timeframe, and compliance with World ing all the sites, plus a new national center, with Bank procurement requirements, which can be a sophisticated data warehouse. The successfully extrapolated to other sources of funding or piloted SOFIX system had to be ported to the national circumstances. Although several years UNIX platforms offered by the bidder, and the and much effort were expended in Turkey, the contractor had to complete a massive training results were impressive and have been sus- exercise covering thousands of customs officials tained. and traders. Of the US$40 million budgeted, the Software selection. Given the poor results from following breakdown of costs was anticipated: prior attempts to develop their own systems, 55 percent for hardware, 20 percent for services, Turkish customs decided upon a package. Two 13 percent for training and implementation, and options were available in the mid-1990s, and 12 percent for additional system and application the authorities chose SOFIX over ASYCUDA, pri- software. marily because the source code that allowed for Two-phase bidding process. In phase one, bids subsequent enhancement of the software was were made against the clearly defined require- provided. The application, its customization ments, but without prices. Of the six qualified (including translation to Turkish), transfer of bidders, four submitted bids; one bid was made “know-how,” plus hardware, facilities, and sup- jointly by two qualified firms, and one bidder port for pilot implementation were provided at a dropped out. All bids were judged acceptable, cost of US$6 million under a contract with a so all bidders were given a chance to rectify defi- consortium of French customs and the French IT ciencies that were identified to ensure full com- firm, Bull S.A. Support and funding were pro- pliance at phase two. vided by the French government, but with sub- In phase two, updated and corrected techni- sequent system rollout dependent on World cal proposals were submitted, including full Bank financing, and technical assistance from costings. Bids were subjected to a thorough the IMF. technical evaluation and scoring that resulted in System deployment. Plans required SOFIX to the award of a contract for around US$28 mil- be deployed to 50 sites spread across Turkey, of lion, a substantial saving over anticipated costs. which six sites had heavy transaction volumes, The contract required delivery of all goods and 12 were medium-volume sites, and the rest had services over 30 months in five batches, with more moderate traffic. Concurrent with prepara- several implementation teams operating concur- tions to pilot implementation of SOFIX at the rently around Turkey in conjunction with a mas- busy Istanbul airport site, a two-year procure- sive training and change management exercise. ment process was undertaken to ensure that the Given the complexity of monitoring the prime most capable, and best value-for-money vendor vendor’s performance against the contract was chosen to deploy SOFIX under a turnkey terms, a separate contract was awarded to an contract that covered a multiplicity of extra serv- independent third party to verify compliance of ices and goods. The original selection of SOFIX the prime contract and to ensure systems, facili- was conditional upon open competition in the ties, and hardware were fully integrated, and award of the deployment contract, which was all services and goods were to the required expected to cost around US$40 million. standards. Prequalification of deployment bidders. A prequalification exercise was undertaken to limit bidders to those firms who could demonstrate Source: David Kloeden, Note prepared for this the wherewithal and experience to successfully study. The Role of Information Technology in Customs Modernization 297 arrangement, has certain advantages—such sys- customs have frequently been attracted by lucrative tems can more easily meet specific needs of the career prospects outside customs, depriving cus- individual customs administration, future modifi- toms of the in-house expertise. In Uruguay, the ICT cations can be prioritized and controlled internally, system (LUCIA) was built from the ground up and customs has full control over the computer through a joint effort between customs and a local software. Some countries initiated their own ICT software firm. Uruguay customs relied heavily on systems early on, at a time when the most readily the support of staff from Peruvian customs, which available system at that time (ASYCUDA) was still had implemented an in-house system in the early not the powerful system it is at present, and did not 1990s. The project used the functional specifications satisfy the country-specific ambitions and require- of the Peruvian system, adapted to the needs of ments of the time. For instance, Morocco, where Uruguay and to the local and regional norms and managing the temporary admission system was regulations, as the starting point for defining the sys- important as early as the early 1980s, chose to tem requirements. The system was gradually imple- develop its own ICT system gradually, fully taking mented (during 1998–99) throughout the country concerns regarding temporary admission into for all customs operations and is operated jointly by account. When that system became increasingly customs and the Broker’s Association. Maintenance obsolete, the solution was to build on to the exist- and support is outsourced. Uruguay customs is ing system rather than go for an outside solution, pleased with the system, and relies heavily on it to which, in the minds of the policymakers would support its control strategy. The user community is have involved changes they were not ready to make. also satisfied with the system, which they refer to Developing an in-house system has the additional as reliable and easy to use. The Senegal case study advantage that it may strengthen the local expertise (box 13.5) also contains some interesting features of that can be drawn upon later to support the long- building a national solution to computerized cus- term sustainability of the system. Whether local toms management, particularly as it has ambitions ICT capacity will be built up depends greatly on the of connecting to other members of the trading quality of the local staff that can be attracted to the community. project and how it is integrated into the external Experience has also shown that customs man- teams that are often called in to develop the ICT agers at times underestimate the complexity of pro- system.3 In the case of Morocco, the local customs gramming the various modules of the integrated staff is fully integrated into the foreign consultant customs processes and overestimate their capacity team, holding good promise for the ability of cus- either to adapt an off-the-shelf system to their own toms to maintain and further develop the system needs or to create a new system that reflects the once it is handed over to them. (See box 13.2.) In national preferences. It has often not been easy for some other countries, the national customs organi- customs technical experts to communicate these zation has not been able to attract expert IT staff complexities to the ICT experts, causing imple- (largely because of its inability to provide attractive mentation delays and cost overruns. Also, if these and competitive compensation packages) and has operational requirements are not well specified and to rely on local ICT consultants. Obviously, as their internalized in the customs management system at experience is outside customs and tends to rest in the outset, it becomes difficult to retrofit them. individual expertise, this approach does not pro- Designing national systems tends to be expen- vide the same assurance for the future availability sive and substantial cost overruns are frequent. of these resources to maintain and upgrade the sys- Customs managers should carefully review the tem once the project is completed. Also, ICT staff in advantages and disadvantages of trying to “reinvent the wheel.”Given the number of negative case studies to date in developing in-house systems, there is 3. In the case of Russia, given the extensive professional investment within customs, the customs administration chose to much to be gained from carefully studying the develop and maintain many of their computer systems in-house. generic software products currently on the market, This is acknowledged in the current Bank-funded initiative for and to review in a flexible and critical manner how customs reform, while at the same time various other elements of their reform program are testing the market through consul- to acquire the specific functionality not present in tancy support for specialist assistance in key areas. those products. After wide consultation with 298 Customs Modernization Handbook

BOX 13.2 Morocco Case Study

In the 1970s, Morocco implemented computer amenability to upgrades. The responsibility for support for the management of special import consolidating the existing systems to ensure bet- regimes—it was not much more than mecha- ter customs services in the transitional period was nized accounting support. In 1992, customs given to customs. To do this, customs strength- rolled out an in-house system that improved cus- ened its own computer management and devel- toms clearance, but fell short of meeting all of opment capacity by retraining its computer pro- customs’ business needs and was not responsive grammers and recruiting several computer to the rapidly changing needs of its users. Some scientists. Emphasis was placed on ensuring the key customs activities were only partially com- new systems would be responsive to the needs of puterized, and others were not covered at all. its customers and improving the quality of sys- In the mid-1990s, customs became increas- tem support, with revised procedures, standard- ingly aware of the shortcomings of SADOC (the ized operations, and documentation of changes. computerized support system for customs clear- The development and implementation of a ance) and undertook an in-depth assessment of totally new customs management system SADOC, and reviewed the future requirements involved the following: and the design of operational models reflecting the new customs environment. This led to the • the preparation of a detailed description of 1999 Customs Computerization Master Plan the various functions of the new system and that proposed to (a) consolidate the SADOC sys- an estimate of the development and imple- tem to ensure continuity of computer support mentation costs for customs clearances, (b) totally overhaul • the preparation of a detailed study of the new SADOC to bring it in line with the requirements IT system, taking recommendations of users of a modern customs organization and the latest into account technologies, including an advanced electronic • project preparation that involved a detailed commerce–based environment, and (c) build a study of system requirements for the new data warehouse that would support manage- computer network system, front-end hard- ment decisions as well as risk analysis. ware and software for customs brokers and Morocco investigated options of changing importers, as well as system requirements at over to an off-the-shelf system, namely ASY- the customs clearance locations and head- CUDA, and eventually chose to build on the quarters, and the development of all func- SADOC system. This decision largely stemmed tional modules of the new system and the test from three issues: customs’ desire for strong platform modules to manage temporary admissions and • detailing the implementation requirements, payments in dispute, which they viewed as not including process changes and staff training fully developed in the ASYCUDA system; their • gradual rollout, with modules launched one at belief that ASYCUDA was not sufficiently tested a time over the total territory of the country. in large countries with a complex set of trade Staff and clients were exposed to intensive procedures and regimes; and Morocco’s reluc- training before the rollout of each stage to tance to enter into a dependency relationship ensure smooth adoption. This rollout process with the UN Conference on Trade and Develop- also permitted full and thorough testing of the ment (UNCTAD) regarding operational support system in all its application environments. and maintenance of the software. The govern- The financing of the preparatory studies as ment wanted to develop the computer skills well as the required investments were fully within Morocco, at the customs department as borne by the investment budget of customs well as at local consulting firms. The fact that the through the Ministry of Finance, in contrast to in-house system was a national IT solution con- many other computerization initiatives by cus- vinced some to favor it. toms administrations that rely heavily on outside The Master Plan called for transitional imple- financing sources and technical assistance. mentation, including a five-year migration to an open standard operating environment (UNIX) that combined robustness, transparency, and Source: Steenlandt and De Wulf 2004. The Role of Information Technology in Customs Modernization 299

practitioners in the field, the authors find that there ASYCUDA The UNCTAD ASYCUDA (Auto- is a presumption in favor of off-the-shelf solutions. mated System for Customs Data) Program4 was developed in the early 1980s to automate the operations of customs administrations. It is presently Adopting an Off-the-Shelf Solution installed in 84 countries. The program was devel- There are a number of existing and emerging cus- oped to support customs administrations in their toms management computer systems available objective of trade facilitation and efficiency of cus- today on the market. All have a core of similar toms clearance control. The program is provided at modules that permit customs to manage its cus- no cost, which means that countries do not pay for toms clearance operations using computer and the software development costs. Countries do pay, communications-supported modules. Not all of however, for the system implementation that is these solutions have the same modules and some of undertaken by the UNCTAD Technical Assistance them have been more widely tested in the market project. The implementation comprises general than others. It is not the intention here to list the support activities, training, documentation, and functionality of each available system and compare development of specific support on a cost recovery them to each other. The products on the market (nonprofit) basis. In line with agreements between evolve rapidly and current details can be found on the UN and the international donor (UNDP or the the respective Web sites for each product. This list is European Commission, for example) and the UN also not intended to be exhaustive as new products guidelines in this matter, UNCTAD is limited to a are emerging on a regular basis. The Bank retains markup of 7–13 percent over cost.5 This markup its neutrality with regard to these products, in line can be partially used by the ASYCUDA Program to with its established procurement rules. finance further development. UNCTAD has devel- Note that many of the off-the-shelf packages do oped three versions of ASYCUDA so far and is cur- not provide all the necessary modules a country rently rolling out ASYCUDAWorld. might want to use, or provide modules that are not as well defined and articulated as particular • ASYCUDA Version 1 (1981–84). ASYCUDA Ver- country objectives and circumstances warrant. sion 1 operated on early personal computers This should not necessarily lead to rejection of these (PCs). Created at the invitation of the Economic off-the-shelf solutions in favor of a national solu- Community of West African States (ECOWAS) tion because most off-the-shelf solutions are Secretariat, its main achievement was to assist in designed with the capacity to interface with special- the preparation of trade balances and other ized add-on modules that can be custom tailored to related trade statistics. Implemented in three adequately respond to national objectives. Examples countries, it demonstrated that computerized of such add-on modules are the selectivity modules customs clearance systems could be developed that are presently made available by a number of on low-cost computers. preshipment inspection (PSI) companies. Another • ASYCUDA Version 2 (1985–95). ASYCUDA Ver- example is derived from the implementation of sion 2 took advantage of the availability of new ASYCUDA in Bangladesh, where an external programming languages and new operating contractor was recruited to prepare four country- systems for PCs. This version introduced Local specific advanced modules: risk analysis, manage- Area Network computing in hundreds of cus- ment information system, bonds and warehouses, toms offices, allowing for a comprehensive inte- and drawback system. What can be learned from the gration of functionalities. Initially running on Bangladesh exercise, financed by a Bank credit, is the only multitasking operating system (PRO- that the preparation of these modules needs to be LOGUE) available on the market, ASYCUDA carefully dovetailed with the main customs manage- Version 2 was, over the years, overhauled by the ment system itself and that to be fully operational, UNIX operating system, opening the way to these add-ons require the same attention to staff training, infrastructure changes, and modification 4. See the ASYCUDA Web site at www.asycuda.org/. of workflow and staff assignments as the main com- 5. This markup is modest compared with development expenses puterized customs management system. in commercial software ventures. 300 Customs Modernization Handbook

high transaction volumes and, consequently, telecommunications. Where telecommunications ASYCUDA implementations in large customs are more reliable, the traditional World Wide Web offices. UNCTAD does not develop its function- approach can be used. ASYCUDAWorld can work ality anymore. It was introduced in 40 countries with all major database management systems and still operates in 15 countries that have not (including Oracle, Sybase, DB2, Informix, SQL yet migrated to ASYCUDA++. Server) and most operating systems (Linux, • ASYCUDA++ (1992–present). ASYCUDA++ is Solaris, HP-UX, AIX, and MS/ Windows). The based on real client-server architecture, takes platform’s use of XML (extensible mark-up lan- advantage of the power of object-oriented pro- guage) allows the exchange of any document gramming languages and uses the potential of inside and outside the system, between customs relational database systems such as Oracle and administrations and traders and between customs Informix. From a technical standpoint, ASY- administrations in different countries. It is “Java- CUDA++ is an advanced customs information native,”meaning that it was designed as an open system that integrates a number of modern and standard to be used with Java and that countries robust technologies.6 ASYCUDA++ built on the can thus modify and extend the system without full suite of customs modules provided in ASY- requesting assistance from UNCTAD. It imple- CUDA Version 2, and added more customs ments the concept of “e-documents” that, once functionality, particularly in the areas of Direct plugged into the ASYCUDAWorld platform, Trader Input, risk management, and transit reflect in the IT world the paper documents used monitoring. ASYCUDA++ client computers currently and implement the required business feature a text-based, multiwindow user inter- processes. ASYCUDAWorld is being developed face. The most common operating systems on to coexist with and operate in the environment ASYCUDA++ client computers are MS/ of ASYCUDA++. Each beneficiary country can Windows 9x and MS/Windows XP. The decide when to implement ASYCUDAWorld ASYCUDA Program has incorporated the com- according to its technical decision and available plementary use of another generation of tech- financial resources. nological tools and the emergence of the widely used Internet environment. A first outcome of this work is that the current version of Trade Information Management System Trade ASYCUDA++ allows customs brokers to sub- Information Management System7 (TIMS) is a mit declarations through the Internet. The product of Crown Agents. It is a software package ASYCUDA++ EU Version is currently opera- aimed at supporting and sustaining the efficient tional in four European countries that became day-to-day operation of a modern customs depart- members of the EU in May 2004—Estonia, ment and consists of a full declaration system as Latvia, Lithuania, and Slovakia. well as stand-alone or integrated support modules. • ASYCUDAWorld. ASYCUDAWorld is UNCTAD’s The Declaration system includes the usual mod- solution for e-customs. The development of this ules, such as manifest handling and acquittal, data system began in 1999 and a first roll out (in entry, tariff management, receipt and validation of Moldova) was undertaken in early 2004. It allows Single Administrative Documents, accounting, and customs administrations and traders to handle trade and revenue reporting. The stand-alone or most of their transactions—from cargo manifests integrated modules include intelligence handling and transit documents to customs declarations— systems, risk management, price referencing sup- via the Internet.Its platform is based on a sophisti- port in accordance with GATT regulations, transit cated technical architecture that does away with control, exemptions management, and manage- the need to maintain permanent connection ment information. The system is modular in with a national server—something that is espe- design. It can be installed gradually, or some mod- cially important for countries with unreliable ules can be used in combination with other customs management systems. The system can be 6. UNIX servers, Windows 9x/2000/XP clients, Internet Proto- col, and so on. 7. See the Crown Agents Web site at www.crownagents.com/. The Role of Information Technology in Customs Modernization 301 implemented in environments with limited or various reasons. In Turkey, however, the local adap- advanced levels of communications capability and tation of SOFIX was undertaken with success (box can grow to maximize the benefits as more sophis- 13.3) and is still operational. Another version of ticated technology becomes available. The full SOFIX was adapted to the requirements of TIMS has been installed in Mozambique and Argentina, where it was rolled out in 1993, and was Angola, in conjunction with the management con- subsequently adapted for implementation in tract that Crown Agents has with customs in these Paraguay in 1995. Up-to-date versions are still in two countries. Partial rollout has been undertaken use in both countries. A simplified version was also in, among other countries, Bulgaria and Kosovo. implemented in 1999 in French Polynesia (Tahiti) All TIMS functions are structured using local and is still operational. and central (or regional) modules with EDI facili- SOFIX implementation is no longer directly ties allowing the transfer of data. Where it is possi- supported by French customs. However, a consul- ble to take advantage of a wide area network, TIMS tancy firm (Solutions Informatiques Françaises can be implemented in the distributed mode as a [SIF], one of the original partners in the joint ven- result of its modern two-tier database architecture. ture) continues to support SOFIX and its deriva- TIMS was developed using an open system technol- tives in Argentina, Paraguay, and French Polynesia ogy. The underlying database is ORACLE. TIMS is and is actively interested in applying its expertise in available on any UNIX or Microsoft Windows 2000 other countries.8 or XP platform. SIF is currently rolling out a new Web-based version of SOFIX, called SOFIWEB. SOFIWEB is SOFI and SOFIX The Solutions Françaises Infor- functionally equivalent to the current version of matiques (SOFI) system was developed by French SOFIX, and benefits from the use of J2EE technol- customs and became operational in 1974. Designed ogy and object-oriented development and imple- to run in a mainframe environment, it was first mentation tools. rolled out at the airports of Paris and was gradually extended to all Custom Houses in France. The orig- TATIS TATIS9 provides IT-enabled customs solu- inal system went through several upgrades and tions to customs administrations globally. These redesigns, and is still in operation today. solutions are marketed, delivered, and supported Several attempts were made at creating an by TATIS’ business partners, Hewlett-Packard, export version, and systems based on the SOFI con- Pricewaterhouse Coopers, and Société Générale de cept but still under proprietary mainframe operat- Surveillance, in combination or individually. The ing systems were successfully rolled out in Egypt scope of the product range extends from auto- and Côte d’Ivoire in the early 1980s. With the mated declaration processing through to manage- arrival of the open systems concept and the consol- ment of suspense regimes, such as transit, and is idation of the UNIX operating system, in the early completed by compliance and enforcement solu- 1990s French customs decided to support the tions with risk and valuation systems as well as development of SOFIX (SOFI under UNIX), both inspection and workflow management. These solu- as a replacement for SOFI for their own use, and to tions include guarantee management, covering risk offer the system to other countries. The develop- management, claims administration, financial ment was undertaken through a joint venture with clearing, insurance and guarantee placement for several French hardware and software companies. duty suspense regimes; and extend beyond customs The idea was to offer the system as an open code to include financial institutions, operators, and product, with a small kernel around which different traders. These applications can function independ- modules covering the main customs functions were ently or as an integrated suite. organized. One of the premises of this approach The solutions are along the lines of the Revised was that the system could easily be adjusted to local Kyoto Convention and are consistent with the requirements. In the end, SOFIX was never implemented at 8. See the SIF Web site at www.sifamerica.com/html/inicio.asp. French customs. Attempts to roll it out in Gabon 9. See the TATIS Web site at www.tatis.com/solutions/index. and New Caledonia were abandoned as well due to html. 302 Customs Modernization Handbook

BOX 13.3 Customs ICT Deployment Case Study: Turkey

In January 1996, Turkey entered into a Customs in Ankara where a national data warehouse was Union with the EU and worked as early as 1993 established to produce trade statistics and man- on the modernization of its customs organiza- agement information. The contractor success- tion. The World Bank supported this initiative fully trained thousands of customs staff and with a Public Financial Management Project loan traders, as the system was simultaneously rolled of US$62 million (US$48 million for customs). out across the country. Between 1996 and 1999, IMF technical assis- BILGE is a client/server application based on tance advisors worked with Turkish customs to an Oracle database that supports a full range implement modern, up-to-date customs legisla- of customs operations, including integrated tion, simplify and automate customs proce- tariff, accounting, import and export clearance, dures, introduce greater reliance on post-release inspection selectivity, transit and other tem- controls and reduce inspection rates and release porary admission regimes, and trade statistics. times, provide good service to the trade com- Traders were initially required to input manifest munity, and delegate increased responsibilities and declaration data in kiosks provided at each to regional and local offices. customs office, but are now encouraged to sub- ICT Strategy. A multifaceted approach was mit transactions electronically through EDI or a necessary to tackle the many reform challenges, secure Web site. although often the momentum was focused on Modernization Results. Today, customs oper- ICT. Previously, ICT support was relatively ations in Turkey are vastly different from 1996, insignificant, limited to trade statistics genera- mostly as a result of effective automation. tion and minor usage of an in-house developed Some improvements achieved include the legacy clearance system. To save time and cost, following: and to minimize implementation risks, customization of a package was chosen rather than • Ninety-nine percent of all transactions are bespoke development of a new system. Eigh- processed by BILGE and statistics are a by- teen months of intensive work was needed to product. Previously, all transactions were customize a software package to the new processed manually and subsequently input streamlined operational procedures and to for statistics generation. translate the user interface to Turkish, including • Only 25.5 percent of imports and 9.6 percent a transfer of know-how to Turkish customs staff of exports are subject to pre-release controls, so that they could subsequently maintain and instead of 100 percent of all consignments enhance the application source code that was being inspected, as had been done previously. provided. Additionally, pre-approved importers (356 as SOFIX/BILGE. The package chosen was SOFIX, of May 2002) are now entitled to immediate a derivative of the French customs administra- release of consignments subject to post-release tion SOFI system. In Turkish it was called BILGE. controls. The software was provided by a consortium of • Seventy-five percent of imports are now French customs and Bull S.A., with an initial con- cleared within 24 hours, and 83 percent tract covering the provision of the software within 48 hours. source code, its customization, hardware, and • Customs was the first implementation of EDI implementation support at a pilot site. It was in Turkey, and now 42 percent of all customs successfully launched in a pilot operation at transactions are submitted electronically (EDI Istanbul Airport—one of the busiest customs or via the Web site). facilities in Turkey—in the summer of 1998. • By 2001, staff numbers were reduced by 10 BILGE was installed in a distributed configura- percent, 73 offices with little or no operational tion at 59 customs offices throughout Turkey activity were closed, and the numbers and between 2000 and 2002 following an interna- locations of regional offices were rationalized. tional tender and contract award to Koç, a large A new customs law that complies with EU Turkish firm. In addition to installing a LAN and standards came into effect in February 2000. application/database servers at each site, a Wide Area Network (WAN) redundantly linked all Source: David Kloeden, Note prepared for localities with a center at customs headquarters this study. The Role of Information Technology in Customs Modernization 303

WCO Agreement on Customs Valuation. The focus PC Trade New Zealand’s Statistics Department’s is on both revenue protection and trade facilitation. PC Trade software was initially designed to produce The solution can be extended on a regional and national trade statistics, relying on ASYCUDA- global networking basis by incorporating features generated import data. Providing a basic front-end for customs unions and trade security. The technol- goods declaration processing and duty assessment ogy platforms used are Web-enabled, incorporate module has further enhanced PC Trade. The system mobile technologies, and are geared toward open- works on stand-alone PCs, but can be networked ness and flexibility. The software applications using Novell or Windows 95 Networking. It is also a themselves are modular and are designed to inte- full statistical analysis package. It is widely used in grate with existing customs systems. island states of the Pacific such as Tonga, French TATIS is currently engaged, through its business Polynesia, Vanuatu, and Guam. partners, in the systems procurement process of a number of customs administrations. ALICE The European Commission is currently developing, as part of its Customs and Fiscal Assis- MicroClear MicroClear is offered as a state of the tance Office program, a customs management sys- art, fully integrated, functionally rich system that tem that is compatible with the integrated tariff of delivers secure and efficient processing of all cus- the European Community. Called ALICE it is based toms-related documentation through a Web-based on the newest technology (.Net framework), and network.10 It is offered by Inspection and Control uses Oracle as its database management platform. Services (ICS) and developed using .NET technol- ALICE is scheduled to provide export, import, and ogy that is authenticated and supported by transit modules and to include all regular modules Microsoft. Current or previous releases of Micro- that make up a full customs management process- Clear—partially or the full solution—are working ing instrument. At present, ALICE is under con- in China, Dubai, Kuwait, the United States, the struction and testing with scheduled rollout at the Russian Federation, the United Kingdom, and India. end of 2004 in Bosnia and Herzegovina. If this In its promotional literature MicroClear notes that development is successful it is possible that ALICE its .NET architecture provides for flexible solutions will become the system of choice for future EU required to meet the enforcement of varying laws, accession partner countries. highly secured Web-based solutions, easy customization, fully integrated solutions, maximum Danish Customs Administration Solution The scalability, connectivity to external systems, and easy Danish customs administration developed a simple integration with existing systems. The system can goods declaration processing system in conjunc- easily translate paper-based documentation to elec- tion with Bull S.A. This product is now being mar- tronic protocols and standards in accordance with keted by Bull S.A. and is already incorporated as a WCO conventions. key element in a comprehensive computerization MicroClear provides for a back-office tool that is project being developed by the Cyprus customs used to configure the system to introduce new busi- administration. This project includes many inno- ness rules or duty calculation formulas, change vative solutions and will be totally Internet enabled existing logic, change the business pipeline system when implemented. process flow, define workflow, and build new e- forms or pages. These modifications require mini- Information Technology “Beyond Customs” mum coding. MicroClear considers this a main advantage, as it reduces future dependence on ven- A new trend in the use of ICT to promote trade facil- dor support. The license to use and modify the itation is to create an electronically connected trade source code is provided with the system with a view community that includes all trade partners. Such a to permitting future support of the system from community is made up of, among others, customs, domestic sources. The system is built on a platform banks, shippers, ports and airports, brokers, regula- that supports nonalphanumeric characters. tory agencies, statistics departments, and motor vehicle registration. Such a system is fully opera- 10. See the ICS Web site at www.icsinspections.com/. tional in Singapore and Mauritius. Based on this 304 Customs Modernization Handbook

model and using the same technology, Ghana is electronically connecting all trade-related institu- in the process of implementing its Tradenet. Tunisia tions (box 13.5). and Senegal are also committed to implementing a customs management system with the ambition Guidelines for Selecting an Appropriate of constituting the core of an electronic trade ICT System for Customs network. The Singapore TradeNet links multiple parties The evaluation of the appropriate IT solution is not involved in external trade—including 34 govern- an easy task, certainly now that so many alternatives ment controlling units—to a single point of trans- are offered on the market, and the option of building action for most trade-related transactions, such as a national solution is always present. The selection customs clearance and payment of duties and taxes, process could be done in two stages. First, the vari- processing of export and import permits and cer- ous possibilities can be scored against each other, so tificates of origin, and collection of trade statistics. that only a few solutions are retained for further One of the first steps was to review the prevailing investigation. At the second stage, the procurement and required trade documentation and to propose process can spell out more detailed requirements to reduce these multiple trade documents into one and let possible providers, and even the national single online form to serve nearly all trade docu- solution proponents, declare their preparedness to mentation needs in the country. CrimsonLogic11 bid—technically first and financially second. These was entrusted to own and operate the TradeNet sys- two phases can work in succession, with the first tem, with the Singapore Trade Development stage delivering a short list to be used in the second. Bureau, the port and civil aviation authorities, and This approach is now briefly described. the international airport as stakeholders. IBM developed an EDI system to allow computer-to- Prequalification: Scoring the Different Possible computer exchange of intercompany business doc- Solutions The prequalification stage requires a uments between connected members of the Singa- systematic evaluation of the various solutions and pore trading community. One document was to be their suitability for a particular country. This evalu- submitted by the trader, and had to contain all the ation would take place on the basis of a review of information required for that import or export by the product descriptions, and seeing the systems in any party involved in any way in that transaction. operation, where possible, in situations similar to The system was rolled out gradually in 1989 and by those in the country in question. The evaluation 1991, 95 percent of all air and ship transport was may want to score the various solutions (on a scale transacted through Tradenet. The progress of the from 1 to 100), and combine the component scores project benefited greatly from the fact that many of into an overall score. These scores can then be com- the members of the trading community had pared across vendors and possibly against an “ideal already acquired substantial computer knowledge ICT solution” that would follow all WCO guide- and relied on sophisticated computer equipment in lines and adopt the most modern hardware plat- their operations. forms. The providers with the highest scores would Other countries that desire to leverage e-gov- then constitute the short list to be contacted for ernment and e-commerce initiatives can adopt a further discussion and the second phase. The task customs solution that provides a single portal of developing such a solutions assessment could be through which traders and officials involved in the contracted out to a computer consultancy firm. transaction can submit and access all information The components to be scored for each provider associated with processing the consignments. may include the following: Such a portal can interface with a variety of existing customs management tools. In Ghana, the EDI • Provider strategy. The evaluation could include portal has been combined with the customs man- the provider’s vision and principles, the type of agement system of Mauritius (See box 13.4). In solutions and services it provides, its track Senegal, Orbus 2000 has the same ambition of record on capacity building and assistance, its experience and expertise, the company’s stability 11. Called Singapore Trade Services until 2002. and financial base, and its installed base. The Role of Information Technology in Customs Modernization 305

BOX 13.4 Ghana Gateway Project Case Study

The trade liberalization measures of the 1990s transferred to Ghana Ports and Harbors had for several years not delivered the hoped-for Authority new foreign direct investment or export expan- • Ghana Shipping Council, which obtains all sion in Ghana, and several studies suggested information regarding the movement of ships that for this to happen structural reforms were and airplanes required. To launch these reforms, a dynamic • customs, which obtains customs goods decla- export promotion strategy was developed. Its rations electronically main operational features were that (a) Crimson- • banks, which inform customs electronically of Logic, the Singapore firm that managed the Sin- payments made gapore TradeNet system would provide the soft- • the statistical office, which is connected to ware for the electronic commerce–based receive from customs all relevant trade community system, which would become the statistics—the statistical office has not yet core of the Ghana TradeNet community; (b) taken advantage of this connection Ghana would adopt the customs management • Ministry of Finance, which is connected and system that was designed for Mauritius and that can download all trade information as well as was successfully interfacing with the Mauritius all transactions of taxpayers identified by per- electronic commerce trade community; and (c) sonal identification number. a new company would be created to implement Lessons Learned. Private–public sector part- both TradeNet and the Ghana Customs Man- nerships along the lines of the BOT format can agement System (GCMS) at customs. This com- work. GCNet anchored the reforms and assured pany was to be given a Build Operate and Trans- continuity and focus on the reform objectives fer (BOT) contract. In return for its equity during a period of political transition. contribution and adherence to the service con- Drawing on IT can yield quick results. It took tract, it would receive annual payments for three-and-a-half years to roll out GCNet and services rendered and would transfer equity in GCMS in ports that account for more than 90 the company to the government of Ghana after percent of all Ghana’s trade. Clearance times 10 years. and revenue performance far exceeded expecta- The Ghana Community Network (GCNet) tions. The overall costs were reasonable. was created as a joint venture company with Change of customs operations can be foreign shareholders (Societe Generale de speeded up by hands-on technical support. Surveillance with 60 percent, customs with Whereas customs had struggled for years to 20 percent, the Ghana Shipping Council with upgrade its information system or to make the 10 percent, and two local banks, each with 5 per- best use of it, the reforms required an outside cent). In November 2000, GCNet was incorpo- push and hands-on implementation support rated with equity of US$5 million. It operates to force the process simplification through under a service contract with the Ministry of for the adoption of advanced computerization Trade and Industry. This contract lasts until 2010. processes. It instructs GCNet to install the electronic Top-level support helped to launch and sus- commerce–based system and a new customs tain the project. management system. Customs has actively participated with the GCNet adopted a hands-on approach during rollout of the ICT technology, but will now this whole process, and provided assistance to actively pursue its own modernization process in customs through local staff training and installa- nearly all areas but ICT and related processes. tion of the information technology. This modernization process will give the overall Community Networks. A start has been made project a better chance of being sustainable over to connect various members of the trading time. Also, a modern customs might be in a community. The following members are already position to take over from GCNet when the serv- connected: ice contract expires. • the shipping lines that provide electronic manifests to GCNet, which are then Source: De Wulf 2004. 306 Customs Modernization Handbook

BOX 13.5 Senegal Case Study

Senegal is preparing a suite of products to make TRADE X/ GAINDE maximum use of IT to facilitate trade through In the late 1980s the Technology Division of the initiatives collectively called GAINDE 2000. Ministry of Finance designed and operated a cus- These products consist of an electronic toms management system. One objective of commerce–based environment to accept and choosing a national solution was to improve the disseminate trade transaction data to all mem- country’s national IT skills. The system was intro- bers of the trading community; an advanced duced in 1990 and periodically upgraded. Trans- customs management system; and an electronic ferred to customs in 1998, the system was out- payment system. moded and expensive to maintain. Hence, TRADE X was designed as a replacement. The logic for ORBUS 2000 continuing an in-house solution stemmed from a ORBUS is intended to become a real preclear- legacy attitude, and, in part, from a deliberate ance system. It is designed to accept the pursuit of the development of national ITC capac- electronic declarations of traders (using Inter- ities as well as to gain acceptance for its adoption net connections) containing all information by customs staff and the private sector. The pri- requested by the various regulatory agencies; vate sector was intensively consulted as the mod- transmit this information to all pertinent agen- ules and their various aspects were being cies to provide electronic clearances; and trans- designed. Local consulting firms were twinned mit all this data to the customs management with customs experts to design the new TRADE X system. Members of the trading community to system and are expected to provide ongoing be connected include customs, banks, monetary maintenance services. The TRADE X system is authorities, regulatory agencies and agencies based on the most up-to-date technology and responsible for quality control, the federation of incorporates a series of new functionalities. It insurance companies, Directory of Foreign Trade interfaces with ORBUS 2000, has an advanced in the Ministry of Commerce, Metrology Depart- risk assessment module, a valuation database, ment, the PSI company, Treasury, and others. Its and cargo processing facilities, and anticipates design was inspired by the system operating in electronic payments. It will also interface with the Singapore. Using resources of a World Bank proj- simulator that permits traders to simulate clear- ect, the “Direction de l’Informatique de l’Etat” ance costs and find out what clearance regula- under the Presidency of the State financed the tions apply, and with a data warehouse. installation of the necessary communications TRADE X contains all the functions available and transmission equipment for all connected in most off-the-shelf modern customs manage- government agencies. The ORBUS 2000 module ment systems and is in full conformity with the is managed by GIE GAINDE 2000, a company WCO guidelines on computerization. The sys- created to ensure the proper installation and tem was rolled out on a pilot basis for imports to implementation of the electronic commerce selected locations in October 2003. Further roll- environment and the new customs processes. out is expected during 2004. Customs is now The technical architecture set up for the considering adjusting its organizational struc- ORBUS system is built on a data infrastructure ture, originally designed around manual cus- using the latest information technologies with toms processes, to fully leverage the enhanced the view to guaranteeing data accessibility, relia- use of modern customs management tools. bility of communications, system availability, data integrity, and security. System testing SEPAY—Electronic Payment System started in early 2004. Effective and efficient roll- A working group, bringing together staff from out of the full ORBUS 2000 with its various capa- customs, Treasury, and the banking sector, bilities requires that all members of the trading designed a system to permit customs brokers to community activate their connectivity and adjust pay duties and taxes electronically. Rollout is their own operating procedures to issue clear- expected during the second half of 2004. ances electronically; and the technique (front- end and operating system at ORBUS 2000) must prove itself to be robust and easily accessible by Source: Ibrahima Diane, General Manager of all involved. National rollout will require a major GIE GAINDE 2000. Personal communication. public relations and education campaign. The Role of Information Technology in Customs Modernization 307

• Functional architecture. How complete is the for bids, and so forth); (b) technical compliance suite offered? How do the functions offered against specified criteria using a weight-based scor- compare with the specific needs of the country? ing mechanism; and (c) value for money—which How easy would it be to add on more specialized balances the other components, subject to satisfac- modules? tion of minimum standards against cost. • Application architecture. What is the complexity, Terms and conditions of the tender. The bidding scalability, performance, security, and volatility document must provide detailed specifications. of the system architecture? The document should reflect a balance between • Software infrastructure. What is the software providing too broad and general specifications, basis for the user interface, the application which would qualify all possible providers, and server, data management, software integration, providing specifications that are too narrow so that and security? no provider can bid, or only one. Specifications • Technology infrastructure. What platforms are should cover a broad range of issues including proposed for the hardware, application server, functional requirements, technical requirements, data communications, system management, and project and implementation requirements, support security? requirements, security requirements, capacity • Implementation and deployment. How will and performance requirements, and contractual implementation details—project management, requirements. The bidder’s prior track record is design, development and delivery, change man- particularly relevant, with consideration given to agement, training and implementation, opera- successful outcomes with other clients under simi- tions and support—be carried out? lar circumstances. Vendor claims should be veri- • Deployment resources. What are the bidder’s fied. The quality of prior results is more important plans for resource management, technical than the quantity. A small number of very success- support, capacity building, governance, and ful contracts may be preferable to a large number of planning? mediocre outcomes. Additionally, in the rapidly • Deployment and delivery costs. What are the costs evolving technology world, new participants in the for software development and delivery, techno- market should not necessarily be disregarded logical infrastructure, implementation and because of a limited track record. However, the deployment, support and training? What are the issue that will determine the new entrants’ poten- options for operational funding, and system life- tial is their understanding of modern customs cycle costs? administration and how technology can be best applied to the business rather than knowledge of technology with an intention to learn about cus- The Process of Selecting the Provider At this toms operations on the job. point a choice must be made between the various Evaluation against technical requirements. An national solutions and off-the-shelf solutions, or application’s functionality should be the main simply among the latter if only off-the-shelf solu- driver of the decision. The functions should be tai- tions are being considered. Including a national lored to local circumstances and the extent to solution in the process should be a straightforward which modernization and reform have progressed exercise when the solution is proposed by a third (or will progress). Some functions will be core to party, but may be more challenging when the pro- any system, and some may be desirable. Functional- posal emanates from within customs. While diffi- ity determination is a task for customs administra- cult, a partisan decision in favor of customs’ pro- tors (that is, the users) rather than technologists. posal without adequate evaluation should be The functions need to be prioritized and weighted avoided. according to importance. Table 13.1 provides a list Three broad determinants can be used to evalu- of the desired functions. A scoring model is needed ate proposals, assign a score, and select a winner: to uniformly compare bids against technical (a) compliance with the terms and conditions of requirements. The actual score weighting needs to the tender (other terminology may be used, such as be determined carefully, but functional require- bidding documents, request for proposal, request ments should predominate in the decision. By way 308 Customs Modernization Handbook

of example, a model could assign a 40 percent permitting the adopting countries a proverbial weight to functional requirements (further sub- free ride on the massive investment undertaken divided for each function), 25 percent to project by UNCTAD in the process of readying ASYCUDA and implementation requirements (including ven- for implementation. Despite this free aspect of dor experience), 13 percent to technical require- the ASYCUDA solution, the implementation ments, 10 percent to vendor support, 5 percent for still requires substantial resources for hardware, security features, 5 percent for contractual issues, facilities, and communications. In Lebanon, for and 2 percent for local capacity building. instance, installing ASYCUDA++ in the late 1990s Financial evaluation. The financial conditions of had a total price tag of about US$5 million. In only those proposals that have met a minimum Bolivia, software maintenance costs are embedded technical standard should be considered. Anything into the operational budget of the National Bureau under the threshold should be eliminated, or of Customs. Total development costs for the overall depending on the procurement rules, given a project (the local project team plus the UNCTAD chance to be brought up to standard provided all team that assisted in transferring ASYCUDA), ran bidders have similar opportunities. The weighting to about US$3.85 million. Hardware, communica- between cost and scoring is important, as more tions, and infrastructure improvements for the 5 emphasis on cost will favor the lowest cost solution large and 19 medium and small offices throughout even if it is not technically the best (and maybe the country added another US$3.1 million to total even the worst). In considering costs, all proposals costs. The Philippines Tax Computerization proj- that meet the technical conditions must be consid- ect—using ASYCUDA—with the Bureau of Cus- ered equally. Therefore, all similar costs must be toms project came to US$28 million. included and properly quantified (including costs Other off-the-shelf solutions need be adjusted borne by the purchaser), and possibly including to local requirements and circumstances, and that lifetime costs of the project. does not come free either. For instance, SOFIX’s Costs vary widely from one project to the next. installation in Turkey required considerable modi- Obviously, the size of the country and complexity fication and rewriting (see box 13.3). This was also of the desired functions will affect costs. For a par- the case for the installation of SOFIX in Argentina. ticular country the hardware costs for customs as The TIMS solution is often bundled with a man- well as the front-end costs for traders are not likely agement contract, as was the case in Mozambique to vary too much from one solution to the next, as and Angola, and its implementation costs are con- they are more or less dictated by the available tech- solidated with the other interventions of Crown nology platforms of the day. Also, implementation Agents in these countries. In Ghana, the Crimson- costs that include training of staff and the trader Logic portal was bundled with the Customs Man- community also will not differ much from one agement System of Mauritius; the overall cost of solution to the next. Hence, costs will tend to vary the project was about US$5 million in equity for according to the level of design, programming, and GCNet plus about US$2.5 in loans taken out by modification that will be involved. The degree of GCNet, which included the acquisition of the soft- reliance on local contractors will also affect costs ware, the modifications for the Ghanaian context, substantially, as will built-in markups. the purchase of the equipment and infrastructure, National solutions tend to be expensive because as well as extensive training of staff and traders. In they require that the functions of the system be Bolivia, the National Bureau of Customs has devel- designed and programmed in detail. These design oped a number of satellite systems around ASY- and programming costs tend to be heavy. In CUDA++ to support post-release review and data Morocco, for instance, of a total project cost of warehousing functions, and has plans for addi- about US$10 million, US$6.5 million went to tional satellites to improve risk-assessment and development. data-mining capabilities. One of the great attractions of the off-the-shelf As noted earlier in this chapter, the costs of solutions is that the development costs can be implementing ITC at customs is only part of the life shared with others. At one extreme is ASYCUDA, cycle cost of these systems. All too often these main- which provides the ASYCUDA program at no cost, tenance and upgrading costs are underestimated The Role of Information Technology in Customs Modernization 309 and not adequately included in the life cycle available because unique systems tend to be expen- costs. As a result, many systems are implemented sive and often not as well designed as those on the without adequate financial support. The investment market. Many of the off-the-shelf solutions incor- required after a few years is then usually larger than porate the most advanced technologies and give the what would have been required if proper ongoing assurance that the functions of the different mod- financial support had been available. ules have been fully tested and the programs are stable and robust. Selecting a computerized customs management Operational Conclusions system is a complex affair and proper safeguards Information and communications technology can should be adopted to obtain value for money. The substantially contribute to making customs opera- chapter suggests how to tackle this process by sys- tions both more effective and more efficient. This tematically reviewing the technical and financial fact has been known to many customs administra- implications of the various options. tions for more than two decades. However, the pos- Customs needs to pay adequate attention to full sibilities of ICT change constantly. The newest funding of its ICT systems. ICT is expensive to technologies provide for more friendly user inter- install and to maintain, certainly in light of the faces by allowing electronic submission of data and rapid progress of technological change. Software electronic payments, better support for the man- programs and hardware platforms need to be agement of exemptions and suspense regimes, and upgraded to adjust to these technological advances. have made great progress in risk assessment and Hence, funding needs to be assured not only for the selectivity modules. There is no doubt that the use installation but also for the maintenance and of ICT has substantially contributed to safeguard- upgrading of the software and the hardware. All too ing the revenue mobilization function of customs often the ICT budget is starved once foreign and to speeding up the clearance processes. Every financing is depleted. This does little harm to the customs service must attempt to implement the ICT in the short-run, and may lead to complacency. most advanced ICT appropriate for its particular Yet, before long this will lead to costly ICT break- circumstances. Hence, managing ICT must be a key downs and the need to overhaul the system at costs function in customs administration. that are much higher than if regular upgrading and Implementing ICT is not an objective in itself. It maintenance had been undertaken. should be tailored to assist customs in attaining its objectives. Therefore, any ICT strategy should be pragmatic and realistic. It should be attuned to the Further Reading real needs of the country and the customs adminis- Corfmat, François, and Patricio Castro. 2003. “Computerization tration and to the capacities of customs staff to of Customs Procedures.”In Michael Keen, ed. Changing Cus- make the best use of the new possibilities offered. toms: Challenges and Strategies for the Reform of Customs Clearly, there is no “one size fits all” solution. Administration. Washington, D.C.: International Monetary Fund. Designing the appropriate ICT solution is only Lane, Michael. 1998. Customs Modernization and the Interna- part of the ICT strategy and can be dealt with by tional Trade Superhighway. Westport, Conn.: Quorum experts, consultants, and technicians. More impor- Books. World Customs Organization. Guidelines to the Revised Kyoto tant and more difficult than designing the system is Convention. Chapter 7. Brussels. www.wcoomd.org. to effectively implement the system. To do so, customs needs to adjust work processes, train staff and traders, and at times adjust the organizational References structure. All too often customs underutilizes the Appels, T., and H. Struye de Swielande. 1998. “Rolling Back the ICT system—paid for so dearly—by failing to make Frontiers: The Customs Clearance Revolution.” The Interna- the accompanying changes. tional Journal of Logistics Management 9(1): 111–18. Policymakers should review the pros and cons of Corfmat, Francois, and Patricio Castro. 2003. “Computerization designing a national ICT solution. The authors sug- of Customs Procedures.”In Michael Keen, ed. Changing Cus- toms: Challenges and Strategies for the Reform of Customs gest that most countries would do well to carefully Administration. Washington, D.C.: International Monetary investigate the various off-the-shelf solutions now Fund. 310 Customs Modernization Handbook

De Wulf, Luc. 2004. “Ghana.” In Luc De Wulf and José B. Sokol, Steenland, Marcel, and Luc De Wulf. “Morocco.” In Luc De eds. Customs Modernization Initiatives: Case Studies. Wulf and José B. Sokol, eds. Customs Modernization Initia- Washington, D.C.: World Bank. tives: Case Studies. Washington D.C.: World Bank. Dutta, Soumitra, Bruno Lanvin, and Fiona Paua, eds. 2004. World Bank. 2004. “Procurement Guidelines.”Washington, D.C. Global Information Technology Report 2003–2004. New York: http://siteresources.worldbank.org/INTPROCUREMENT/R Oxford University Press. www.weforum.org/site/homepub- esources/Procurement-May-2004.pdf. lic.nsf/Content/Global+Competitiveness+Programme%5C Global+Information+Technology+Report. Index

Boxes, figures, notes, and tables are indicated by b, f, n, and t respectively. absorption (or roll-up) principle, 196 organizational structure and training, 160, 177 ACV. See Agreement on Customs Valuation overview of provisions, 158–159 administrative interpretation of customs laws, 61, 76 Preferential Trade Agreement (PTA) proposal Advance Cargo Information Guidelines (WCO), 267 for changes to, 161n7 Africa PSI price verification, 170 See also specific countries and regional organizations risk management and, 98b5.1 autonomous revenue authority, 40, 41 shifting burden of proof appended to, 158, 174, 175 customs revenue for, 5, 23t1.A.1 special and differential treatment (SDT), 158 import tariffs, role of, 5 valuation procedures and control, 160, 176–177 regional trade agreements, 206–207, 207f 9.1 Agreement on Rules of Origin, 8, 186, 188–189 African Development Bank (AfDB), 4 Agreement on Textiles and Clothing, 187, 208 African Growth and Opportunity Act (AGOA), Agreement on Trade-Related Aspects of Intellectual 201–202, 206 Property Rights (TRIPS Agreement), Agreement on Customs Valuation (ACV), 8 64, 75, 76b4.2 case studies of reform and, 116 agricultural products developing countries export subsidies, 4 extensions for implementation, 158, 158n6, nonpreferential rules of origin issues, 189–190 159–160 time-release studies on, 27 implementation difficulties for, 161–163 air cargo, 271–273 special provisions for, 159–160 European Civil Aviation Conference (ECAC), 272 failure to follow, 140 International Air Transport Association (IATA), 266, fairness and uniformity of, 140n10 271–272 implementation issues, 56, 156, 160, 161–163, International Civil Aviation Organization (ICAO), 174–175, 177–178 266, 271 administrative limitations, 162–163 time-release studies on, 27 Doha Ministerial Conference, 163 United Kingdom, 272–273 high tariff rates, 161–162 U.S. Transportation Security Administration (TSA) lack of ownership, 161, 163–164 initiatives, 272 less compliant trading environment, 162 Air Transport Association (ATA) Carnet Convention, revenue loss, 161 75, 76b4.2 improvements in practices, 163–168 Albania creation of value database, 165–166 See also Trade and Transport Facilitation in Southeast exchanging information among exporting Europe program (TTFSE) countries’ customs administrations, case study of reform 166–167 human resources, 114 minimum values and reference prices, 167 cost per declaration, 16 ownership of issues by developing countries, recruitment of customs staff, 83 163–164 ALICE system, 303 strengthening organization and infrastructure, 164 amnesty as part of anticorruption strategy, 74 technical assistance, 167–168 Andean Community, 194, 201 legislation and regulations to adopt, 75, 76b4.2, 160, Angola 175–176 compensation of customs staff, 36 mandated use for WTO members, 156, 158, 158n4, management contracts, 45, 45n23, 46, 47 175–176 ANZCERTA. See Australia New Zealand Closer OECD adoption, effect of, 161n8 Economic Relations Trade Agreement operational conclusions, 174–175 APEC (Asia-Pacific Economic Cooperation), 107 311 312 Index

appeals, 76 Bolivia under Revised Kyoto Convention, 56–57 adoption of new Customs Code, 75, 79 ARAs. See autonomous revenue authorities corruption and integrity issues, 74, 108, 114, 123 Argentina Public Sector Management Technical customs management, 112 Assistance Project, 146b7.6 customs officials, 33n2, 34b2.1 Armenia, 136b7.2 bribery of as cost of doing business, 70 Arusha Declaration on Integrity in Customs, 68, 72–87, design, 110 114, 114n10 economic and population characteristics, 105, 106t6.1 ASAC (Aviation Security Advisory Committee), 272 enforcement efforts, 120 ASEAN. See Association of Southeast Asian Nations fiscal performance, 106, 106t6.2, 107, 119, 120t6.3 Asia human resources, 113, 123 See also specific countries and regional organizations information technology, 114, 308 autonomous revenue authorities, 41 objectives of reform, 108 customs revenue for, 5, 23t1.A.1 overall reform context, 107 import tariffs, role of, 5 physical inspections, 117, 118 TIR, use of, 255 political support and sponsorship, 110 Asian Development Bank, 4 processing time, 26, 27, 121–122, 121t6.4 Asian Free Trade Association (AFTA), 107, 193, 198, 204 technical assistance, 111 Asia-Pacific Economic Cooperation (APEC), 107 trader satisfaction with processing, 122 Association of Southeast Asian Nations (ASEAN), 194, valuation issues, 116 198, 201 BOO (Build, Operate, and Own) contracts, 44 ASYCUDA. See United Nations Conference on Trade BOT (Build, Operate, and Transfer) contracts, 44, and Development (UNCTAD) 305b13.4 ATA. See Air Transport Association (ATA) Botswana Carnet Convention Department of Customs and Excise, 167 audit-based controls, 6, 28, 287, 290 Walvis Bay Development Corridor (now Trans integrity issues and, 79–80, 80b4.6 Kalahari), 261 Australia bribes. See integrity issues audit and investigation, 80 Brussels Definition of Value (BDV), 156, 157, 170 Department of Trade and Customs, 37–38 Build, Operate, and Own (BOO) contracts, 44 full cumulation, 195 Build, Operate, and Transfer (BOT) contracts, Australia New Zealand Closer Economic Relations Trade 44, 305b13.4 Agreement (ANZCERTA), 193, 195 Bulgaria, 16 automation. See information and communications See also Trade and Transport Facilitation in Southeast technology (ICT) Europe program (TTFSE) autonomous revenue authorities (ARAs), 40–43, 47 Burundi, 261 See also specific countries checklist, 48–49 CACM (Central American Common Market), 194 compensation, 43–44, 43n20, 82 Cambodia financial autonomy, 41–42 compensation of customs staff, 82 human resources, 42–43 utilization rate for LDCs and, 201, 209 integrity issues, 44, 124b6.5 World Bank assistance, 129 management structure and responsibilities, 40–41 Cameroon’s adoption of new Customs Code, 75, 79 Aviation Security Advisory Committee (ASAC), 272 Canada See also NAFTA (North American Fair Trade Bangladesh Agreement) clothing imported from and regional cumulation full cumulation, 195 rules, 195 merger of customs with revenue agency, 38–39, 38n13 Export Diversification Project, 142b7.5 Public Safety and Emergency Preparedness Ministry, ICT and customs modernization, 288 37, 39 special bonded warehouse facility, 224, 224b10.5 Canada–Chile agreement, 199 Barbone, Luca, 151 cargo security. See security role of customs BDV. See Brussels Definition of Value administrations bilateral cumulation, 194, 206 Caribbean Common Market (CARICOM), 157, 201 bilateral security initiatives, 275 case studies of reform, 103–126 bilateral transit agreements, 259–260 See also specific countries BILGE system, 302b13.3 components of reforms, 111–119 Index 313

Customs Code adoption, 111–112 Colombia, merger of customs with revenue agency, customs management, 112–113 38, 39, 40 design, 110–111 Common Market for Eastern and Southern Africa donor assistance, 111, 125 (COMESA), 108, 198, 198n14, 203, 206 economic and population characteristics, 105, 106t6.1 Customs Declaration Document, use by Northern enforcement efforts, 119–121 Corridor countries, 262 fiscal performance, 105–107, 106t6.2 communications outcomes of reform programs, 119, 120t6.3 See also information and communications human resources, 113–114, 125 technology (ICT) information technology, 114–115, 125 exchanging information among exporting countries’ integrity issues, 114 customs administrations, 166–167 outcomes of reform programs, 123–124 international and bilateral security initiatives, interagency coordination, 125 importance of, 275 lessons learned, 124–126 compensation of customs staff, 17, 35–36 objectives, 108–110 autonomous revenue authorities (ARAs) and, 43–44, outcomes of reform programs, 119–124 43n20 overall reform context, 107 case studies of reform, 113 performance indicators, use of, 125–126 integrity issues and, 36, 36n8, 44, 81–83, 82b4.8 physical inspections, 117–118 sequencing of reforms and, 13 preshipment inspection (PSI) services, 116 compliance management, 93–94, 95t5.1 processing time, 121–123, 121t6.4 comprehensive approach to modernization, 12, 22, 148 reform experiences, 108–111 computerization. See information and communications regional and preferential arrangements, technology (ICT) 107–108 Congo, Democratic Republic of, 261 revenue and trade facilitation, 118–119 container scanning equipment, 278–281 sponsorship and political backing, 110, 124–125 Container Security Initiative (CSI), 268, 270 trader cooperation, 125 contraband, control of, 107n4 trader satisfaction with processing, 121–123 convoys, 253 valuation issues, 116–117 cooperation among agencies. See interagency CCP (central control point), establishment of, 275 coordination Central American Common Market (CACM), 194 cooperation with traders, 7, 125, 264, 275 central control point (CCP), establishment of, 275 corruption. See integrity issues; smuggling central customs office (CCO) role in transit procedures, costs 250–251 of administering rules of origin, 204–208 Chad Economic Recovery Credit Project, 128n2 Albania vs. Bulgaria, 16 change management, importance of, 140, 145, 149 of information technology, 19, 296b13.1, 308–309 charitable, religious, cultural, educational, and similar pre-project diagnostic framework and, 134 social purposes imports, 235 reduction of trading costs, 11 checklists of scanning equipment, 280 duty relief and exemption regimes, 240 of security initiatives, 11 human resources, 47–48 Serbia vs. Croatia, 16 strategy for customs modernization, 29 transactions, effect of, 4, 8 valuation issues, 180 of transit operations, 244–246, 245n5 & 6, 245t11.1 Chile Cotonou Agreement (EU), 192b9.1, 195, 196, 199, 206 Canada–Chile agreement, 199 cotton export subsidy, 4 U.S.–Chile agreement, 199 CrimsonLogic, 304, 308 clearance procedures Croatia See also inspections; time-release methodology See also Trade and Transport Facilitation in Southeast case studies, 108–111 Europe program (TTFSE) transit, 251 cost of collection, 16 clothing. See textiles and clothing Cross-Border Initiative (CBI), 108 Coast Guard, U.S., 96-Hour Notification of Arrival, Crown Agents, 45–46, 45n23, 109b6.1, 111 270–271 Trade Information Management System, code of conduct, development of, 80–81, 81b4.7 115, 300–301 case studies of reform, 114 CSI. See Container Security Initiative Model Code of Ethics and Conduct (WCO), C-TPAT (Customs-Trade Partnership Against 74, 80, 114 Terrorism), 268–270 314 Index

cumulation and rules of origin issues, 194–196, 194n13, government imports, 234 199, 202, 212 imports for charitable, religious, cultural, bilateral cumulation, 194, 206 educational, and similar social purposes, 235 diagonal cumulation, 194–195, 199 investment incentives, 234–235 full cumulation, 195–196, 199, 206 issues, 234 Customs Code. See legal framework, modernization of monitoring and control unit, 237 Customs Modernization and the International Trade noncommercial imports, 235–236 Superhighway (Lane), 10, 138 rationalizing of, 236 Customs-Trade Partnership Against Terrorism reimbursement instead of, 237 (C-TPAT), 268–270 relief goods, 235 Customs Union of Central African States (UDEAC), 157 rules, 236 treasury voucher system, 237–238 Danish Customs Administration Solution, 303 export processing zones (EPZs), 227–229, de minimis rule for nonoriginating material, 196, 199, 227nn11 & 12 202, 206 for inward processing, 216–230 Democratic Republic of Congo, 261 operational conclusions and guidelines, 238–240 Denmark prior exemption vs. drawback, 217–218, 239 Danish Customs Administration Solution, 303 temporary admission, 231–233 merger of customs with revenue agency, 38, 39b2.2, 40 economic rationale, 232 Department for International Development (DFID), 40, effective and efficient administration, 232–233 109b6.1, 111 issues, 232 design of reform projects. See strategy for temporary admission for inward processing (TAP), modernization; World Bank 219–224 diagnostic work. See strategy for modernization; duty suspension scheme, 222, 222b10.3 World Bank equivalence and prior equivalence, 220–221 diagonal cumulation, 194–195, 199 illustration of successful reform, 221–222, 221b10.2 disciplinary actions of customs staff, 36 issues, 219 documentation flow, 248, 250–251, 253, 260 manufacturing under bond (MUB), 222–224, Doha Development Round, 208–209 223n6, 224b10.5 Doha Ministerial Conference, 163, 164, 166 operational and administrative requirements and drafting customs legislation, 59–60 procedures, 219–220 duty drawback, 196, 217–218, 225–227, 225n8 passbook, 222, 223b10.4 defined, 225n7 transit, 233, 233n19 determination of rates, 226 guiding principles for design, 226 EBA (Everything but Arms) initiative, 195 issues, 225–226 Economic Community of West African States operational guidelines, 227 (ECOWAS) duty relief and exemption regimes, 215–241, 216b10.1 Inter State Road Transit System (Transit Routier See also duty drawback Inter-Êtats, TRIE), 259, 260 administration, 218–219, 239 EDI (Electronic Data Interchange) systems, 253 checklist for, 240 EEC. See European Economic Community customs warehousing, 230–231 effectiveness indicators for modernization economic rationale, 230–231 strategy, 14–15 effective and efficient administration, 231 efficiency indicators for modernization strategy, issues, 230 15–16, 25 economic rationale, 216–217 EFTA. See European Free Trade Association exemptions, 233–238, 239 Egypt checking end use, 236–237 interagency coordination and costs, 19–20 computer application for management of special services for large traders, 37 investment project exemptions, 237b10.8 tax farming, 44 controls at time of importation, 236 Electronic Data Interchange (EDI) systems, 253 diplomatic, 234 enforcement of laws, 32, 33, 63–64 economic or administrative issues, 234–236 case studies of reform, 119–121 economic rationale, 234 Revised Kyoto Convention and, 63–64 effective administrative systems and procedures, transit problems, 253 236–238 EPZs. See export processing zones foreign financed projects, 235 Ethiopia, 41 Index 315

EU–Mexico Free Trade Agreement, 199 rules of origin, determination of, 187 European Civil Aviation Conference (ECAC), 272 transit provisions, 246, 247 European Commission (EC) valuation standards and, 156, 157 blueprints to access customs administrations Geneva Convention on harmonization of frontier in accession countries, 11 control of goods, 246, 247 EC–U.S. Agreement, 270n7 Georgia European Economic Community (EEC) recruitment of customs staff, 83 adoption of ACV standard, 161n8 World Bank assistance, 129 adoption of BDV standard, 157 Ghana European Free Trade Association (EFTA), 108, 188, autonomous revenue authority, 44 194, 195 Community Network (GCNet), 122, 305b13.4, 308 European Union (EU) compensation of customs staff, 35, 43, 44 See also Cotonou Agreement customs management, 112–113 bilateral security agreements with U.S., 270n7 economic and population characteristics, 106t6.1 Customs Code of, 52, 61nn38 & 39, 111n7 fiscal performance, 106t6.2, 119, 120t6.3 customs services improvement efforts of, 4 human resources, 113 Customs Assistance Mission (CAM-A), 114 ICT and customs modernization, 115, 288, 304, General System of Preferences (GSP), 187, 192b9.1, 305b13.4, 308 194, 196, 200–201, 204–205 information technology, 115 methods for determining sufficient processing, objectives of reform, 109–110 191–194 overall reform context, 107 New Computerized Transit System (NCTS), 253 physical inspections, 118 rules of origin, 186–187, 197–198, 204–205 political support and sponsorship, 110 bilateral cumulation and, 194, 206 private inspection companies, 35n4 diagonal cumulation and, 194–195, 199 processing time, 27, 108, 121t6.4, 122 full cumulation and, 195–196, 199 technical assistance, 111 sea cargo security, 271 Trade and Investment Gateway Project, 111, 138n9, TIR, use of, 255 140, 305b13.4 TRACECA, 262 TradeNet, 18, 20, 112–113, 305b13.4 EU–South Africa agreement, 199, 203 trader satisfaction with processing, 123 Everything but Arms (EBA) initiative, 195 valuation issues, 117 evolution of customs role, 5–6 Global Information Technology Report 2003–2004 in 21st century, 6–7 (World Economic Forum), 289 exit strategy for World Bank project, 149 globalization, 7–8 explosives detection devices, 278 rules of origin and, 203 export processing zones (EPZs), 227–229 government imports, 234 customs administration of, 228–229, 229b10.6 guarantees for transit, 248, 250, 252, 254b11.3, 255, 261, historical background, 227n12 263, 264 issues, 227–228 names for, 227n11 Haiti, 129 other administrative issues and guidelines, 229 harmonized nonpreferential rules of origin (HRO), promoting manufactured exports, 228n15 189–191, 212 single factory zones, 228n16 Homeland Security, Department of (U.S.), 37 Hong Kong Independent Commission Against Fiji’s duty suspension scheme, 222, 222b10.3 Corruption, 74 fish and EU importing under rules of origin, 192b9.1 Hors, Irene, 70, 71n3, 78, 82b4.8 flexible interpretation of customs laws, 61 human resources and organizational issues, fraud. See integrity issues 16–17, 31–50 Free Trade Area of the Americas, 80n6 autonomous revenue authorities, 40–43, 47 full cumulation, 195–196, 199, 206 checklist, 48–49 compensation, 43–44, 43n20, 82 GAINDE system, 306b13.5 financial autonomy, 41–42 gamma ray inspection systems, 280 integrity issues, 44 GATT (General Agreement on Tariffs and Trade) management structure and responsibilities, See also Agreement on Customs Valuation (ACV) 40–41 Revised Kyoto Convention and, 52n1, 56, 56n25, case studies of reform, 113–114, 125 57nn31 & 35 checklist, 47–48 316 Index

human resources and organizational issues (continued) BILGE, 302b13.3 compensation, 17, 35–36, 43–44, 43n20 case studies of reform, 114–115, 125 integrity issues and, 36, 36n8, 44, 81–83, 82b4.8 computerization strategy for customs, 292–295 sequencing of reforms and, 13 costs of, 19, 296b13.1, 308–309 competency of staff, 32, 36, 47 creating interconnected trade community, disciplinary actions, 36 303–304 firing staff to hire new personnel, 83 customs staff’s need for expertise in, 32, 33 integrity issues, 32, 36, 81–84, 84b4.9 Danish Customs Administration Solution, 303 relationship with private sector, 85–86, 86b4.11 guidelines for selecting system, 304–309 internal organization, 9, 37 evaluation against technical requirements, management contracts, 44–46, 47 307–308 checklist, 48 financial evaluation, 308–309 merging customs with other revenue agencies, 38–40 prequalification, 304–307 Ministry of Finance role, 37–38 process of selection, 307–309 morale and organizational culture, 84–85, 85b4.10 terms and conditions of tender, 307 operational conclusions, 46–47 implementation of new system, 295, 309 performance evaluation, 84 in-house system, development of, 295, 297, 298b13.2, post-employment jobs of staff, limitations on, 35 299, 309 pre-project diagnostic framework and, 133, 134 integration issues, 287–289 recruitment, 33–34 integrity issues and computerization, 76–77, 78b4.4 integrity issues and, 33n2, 83, 134 key computer applications, 289–292, 291t13.1 rotation of staff, 33n3, 83 manifests and electronic transmission, 7 staff profile and desired skills, 32–33 MicroClear, 303 training, 8–9, 34–35 Ministry of Finance and, 17–18 integrity issues and, 83 modernization and, 9, 286–289 sequencing of reforms and, 13 off-the-shelf solution, adoption of, 299–303, 309 operational conclusions, 309 IATA. See International Air Transport Association options, 295–309 ICAO. See International Civil Aviation Organization PC Trade, 303 ICT. See information and communications technology planning, 293–294 IDB. See Inter-American Development Bank post-implementation evaluation, 295 ILO (International Labor Organization), 267 procurement and installation, 294–295 IMF. See International Monetary Fund project planning, 294 implementation of customs reforms Revised Kyoto Convention and, 56, 58 ACV implementation. See Agreement on Customs risk management, 290, 291f13.1 Valuation (ACV) risk assessment based on electronic information, flexibility in, 21 6, 28 information technology, 295, 309 sequencing of reforms and, 13 integrity issues, 14, 86–87 Solutions Françaises Informatiques (SOFI lessons learned from reforms, 88, 88b4.12 and SOFIX), 301, 302b13.3, 308 strategy for modernization, 20–21 steering committee for reform, 293 transit issues, 252–253 strategic planning, 293–294 World Bank technical assistance projects system development process, 294–295 correlation estimation, 150–151 TATIS, 301–303 implementation and outcomes, 142–144, 143t7.7, Trade Information Management System, 115, 300–301 144t7.8, 145 transit computerization, 253, 263 implementation complementation reports (ICRs), World Bank technical assistance and, 131, 143, 143n15 131n4, 134 implementation plans, 141–142 in-house system, development of, 295, 297, 298b13.2, Indian Central Board of Customs and Excise, 86 299, 309 Indo-Nepal Treaty of Trade, 260 inspections information and communications technology (ICT), See also preshipment inspection (PSI) services 285–310 delay due to, 15, 108 ALICE, 303 physical inspections ASYCUDA, 111, 115, 253, 299–300, 308 case studies of reform, 117–118 awareness of need for change, 293 less emphasis on, 287 benefits of, 289 as part of risk management, 27–29, 118n15 Index 317

pre-project diagnostic framework and, interagency coordination, 7, 19–20, 275 131, 133 case studies of reform, 125 selective inspection, 27–29 enforcement of customs laws, 62 acceptance by MOF, 18 Inter-American Development Bank (IDB) evaluation of, 28 customs services improvement efforts of, sequencing of reforms and, 13 4, 80n6 integrity issues, 6, 67–89 technology assistance, 111 amnesty as part of anticorruption strategy, 74 internal organization of customs services, 9, 37 analytical framework for understanding corruption, International Air Transport Association (IATA), 266, 71–72 271–272 audit and investigation, 79–80, 80b4.6 International Chamber of Commerce case studies of reform, 108, 114, 123–124 International Customs Guidelines, 10 code of conduct, development of, 80–81, 81b4.7 recommendations on harmonizing nationality of case studies of reform, 114 manufactured goods, 187 computerization, effect of, 76–77, 78b4.4 recommendations on reducing corruption, 78 consequences of corruption, 9–10, 68–70 Rules of Conduct, 86 corruption; defined by World Bank and WCO, 71 International Civil Aviation Organization (ICAO), criminal corruption, defined, 70, 71 266, 271 forgery of invoices, 116n12 International Convention for the Safety of Life at fraudulent corruption, defined, 70, 71 Sea (SOLAS), 267, 269b12.1 grand corruption, defined, 70 International Convention on the Harmonized human resources management, 32, 36, 81–84, 84b4.9 Commodity Description and Coding System autonomous revenue authorities and, 44 (Harmonized System), 8, 75, 76b4.2 compensation, 36, 36n8, 44, 70, 81–83, 82b4.8 International Convention on the Simplification and mobility and random job assignments, 33n3, 83 Harmonization of Customs Procedures. See morale and organizational culture, 84–85, Revised Kyoto Convention 85b4.10 International Customs Guidelines of International performance evaluation, 84 Chamber of Commerce, 10 recruitment and staff selection, 33n2, 83 International Federation of Inspection Agencies (IFIA), relationship with private sector, 85–86, 168, 178t8.D.1 86b4.11, 87 International Labor Organization (ILO), 267 training, 83 International Maritime Organization, 266, 267–268 implementation of strategy, 14, 86–87 International Monetary Fund (IMF) lessons learned from reforms, 88, 88b4.12 autonomous revenue authorities, support for, 40 international customs response to corruption, on computerization’s role in modernization, 287 72–87 customs services improvement efforts of, 4, 19 leadership and commitment, 74, 75b4.1 reforms of specific countries due to, 109 management contracts and, 46 technical assistance, 111 misappropriation, 71 International Ship and Port Facility Security (ISPS) nepotism, 70–71 Code, 267–268, 269b12.1 operational conclusions, 87–88 Inter State Road Transit System (Transit Routier petty corruption, defined, 70, 70n2, 71 Inter-Êtats, TRIE), 259, 260 pre-project diagnostic framework and, 133 intrusion-detection technology, 278 private sector’s advantages from corruption, 18 ISPS. See International Ship and Port Facility Security PSI services and, 116nn13 & 14 (ISPS) Code reform and modernization, 9, 78–79, 79b4.5, 87 Istanbul Convention, 75 regulatory framework, 75, 76b4.2 IT. See information and communications technology (ICT) routine corruption, defined, 70 strategies to reduce corruption, 72, 73t4.2 Japan transit, 253, 263 full cumulation, 195 transparency, 75–76, 77b4.3 time-release analysis in, 25 types of corruption, 70–72 Japan–Singapore agreement, 197, 204, 206 vulnerability of customs functions to corruption, 68, Jordan 69t4.1, 70 customs administration of Aqaba export processing World Bank project design, 141 zone, 229b10.6 Intellectual Property Rights Model Legislation World Bank assistance, 129 (WCO), 64 judicial interpretation of customs laws, 61, 76 318 Index

Kenya Macedonia autonomous revenue authority, 41n18 See also Trade and Transport Facilitation in Southeast Northern Corridor, 261 Europe program (TTFSE) trade with Uganda, 108 customs management, 112 Klitgaard, Robert, 68, 71–72, 71n3, 73t4.2 revenue and trade facilitation, 118 “known shipper” programs, 272–273 Madagascar PSI contract with Société Générale de Kyoto Convention, 53 Surveillance (SGS), 173, 173b8.2 See also Revised Kyoto Convention Mali reimbursement of taxes and customs duties on imported petroleum products, 238b10.9 La Ferme Générale, 44 management contracts, 44–46, 47 land borders, security of, 273 checklist, 48 landlocked countries, 243–264 integrity issues, 46 transit corridors and, 261–262 manufacturing under bond (MUB), 222–224, 223n6, Lane’s Customs Modernization and the International 224b10.5 Trade Superhighway, 10, 138 Maputo Declaration on customs integrity, 114 Latin America Mauritania preshipment inspection (PSI), 17 autonomous revenue authorities, 40–41 Mauritius import duties as revenue for, 5 combined information system with Ghana, 304, merger of customs with revenue agency, 38n13 305b13.4 Latin America Integration Association, 198 as successful EPZ, 228n14 Latvia TradeNet initiative and, 20 merger of customs with revenue agency, 38, 40 Mercado Comun del Sur (MERCOSUR), 198, 204 recruitment of customs staff, 83 merging customs with other revenue agencies, 38–40 leadership Mexico customs modernization and, 20–21, 21b1.2, 22 See also NAFTA (North American Fair Trade integrity issues for, 74, 75b4.1 Agreement) least developed countries (LDCs) and preferences, 201 EU–Mexico Free Trade Agreement, 199 Lebanon PSI services, 116n13, 173 costs of information technology (ASYCUDA tomato products, 185n2 installation), 308 MicroClear, 303 Revenue Enhancement and Fiscal Management Middle East, 5, 255 Technical Assistance Project, 141–142 Ministry of Finance (MOF) role legal framework, modernization of, 51–66 customs administrations policy, 8, 17–18, 22 See also Revised Kyoto Convention human resources and organizational issues, 37–38 ACV adoption into laws and regulations, 160 raising revenue, 5 adoption of new Customs Code, 105 reform supported by, 110 See also specific countries Morocco case studies of reform, 111–112 adoption of new Customs Code, 61, 75, 79, 111, 111n6 enforcement of laws, 32, 33, 63–64 adoption of Revised Kyoto Convention, 58, 60b3.3 case studies of reform, 119–121 corruption, decrease in, 74 HRO adoption into laws and regulations, 190 customs management, 112 obsolete laws, effect of, 52, 52b3.1 design, 110 obstacles to, 58–63 duty relief regimes, 221, 221b10.2 administrative and judicial interpretation, 61 economic and population characteristics, 105, 106t6.1 choice of legal instruments, 61–62 enforcement efforts, 120–121 determining which principles to implement and fiscal performance, 106t6.2, 119, 120t6.3 how to implement them, 62 human resources, 17b1.1, 113 drafting styles, 59–60 customs staff rotation, 33n3 interaction with other government entities, 62 information technology, 114, 297, 298 legal tradition, 59 intelligence and investigative function, 119 organization and consolidation of laws, objectives of reform, 108, 109 60–61 overall reform context, 107 translation, 63 phasing of reforms in, 14 operational conclusions, 64–66 physical inspections, 15, 118 preparation of, 57–58, 64–66 political support and sponsorship, 110 security issues, 274 processing time, 14, 27, 121t6.4, 122 Index 319

revenue and trade facilitation, 118 nonclearance of transit procedure, 251–252 risk profiles, adjustment of, 28 noncommercial imports, 235–236 survey of stakeholders, 21 nonpreferential rules of origin, 187–191 tax farming, 44n22 See also rules of origin technical assistance, 111 North American Fair Trade Agreement. See NAFTA trader satisfaction with processing, 122, 123b6.4 Northern Corridor, 261 transparency in customs administration, 76 valuation issues, 117 objectives of customs operations, 5–7 World Bank assistance, 129 World Bank projects, 134–135, 135n6, 135t7.4, 145 Mozambique OECD. See Organisation for Economic Co-operation adoption of new Customs Code, 75, 79 and Development compensation of customs staff, 36, 113 off-the-shelf system, adoption of, 299–303, 309 corruption and integrity issues, 108, 114, 123, 124 one-stop border posts, 260–261 customs management, 106t6.1, 112 ORBUS 2000 system, 306b13.5 design, 110 Organisation for Economic Co-operation and economic and population characteristics, 105, 106t6.1 Development (OECD) enforcement efforts, 120 ACV adoption, effect of, 161n8 First Road and Coastal Shipping Project, 147b7.7 study on cost of ISPS Code compliance, 268 fiscal performance, 106, 106t6.2, 107, 119, 120t6.3 human resources, 113, 123, 124 Pakistan implementation of reform, 109b6.1, 110 lack of transparency and reform failure, 75 information technology, 114, 115 preshipment inspection (PSI) company, 169n20 management contracts, 45–46, 47, 109b6.1 textile and garment exporters, 18 objectives of reform, 108 Web site links for price-related data, 165n13 overall reform context, 107 Panama Canal Authority, 269b12.1 physical inspections, 118 passbook system, 222, 223b10.4 processing time, 121t6.4, 122 PC Trade, 303 PSI company services, 116, 118 performance indicators for modernization strategy, regional and preferential arrangements, 108 14–16, 22 revenue and trade facilitation, 119 case studies of reform, 125–126 technical assistance, 111 corruption decrease and, 74 valuation issues, 116, 117 World Bank projects, 135–138, 136b7.2, 136t7.5, MUB. See manufacturing under bond 137b7.3, 150, 151 Peru NAFTA (North American Fair Trade Agreement) adoption of new Customs Code, 75, 79, 112 rules of origin, 197–198, 197b9.2, 202, 204 autonomous revenue authority, 41, 42, 43, 44, 110 methods for determining sufficient processing, corruption and integrity issues, 74, 79, 114, 123, 124 191–194, 196 customs management, 112 Namibia, 261 design, 110 National Trade and Transport Facilitation economic and population characteristics, 106t6.1 Committees, 264 enforcement efforts, 119 Nepal fiscal performance, 106, 106t6.2, 107, 119, 120t6.3 autonomous revenue authority, 42n19 human resources, 113, 123, 124 delays in duty drawback, 225n9 information technology, 114 Indo-Nepal Treaty of Trade, 260 intelligence and information gathering and passbook system, 222, 223b10.4 analysis, 118 salaries of customs staff, 35n5 objectives of reform, 108 Netherlands, merger of customs with revenue agency, 38 overall reform context, 107 New Zealand physical inspections, 117, 118 Australia New Zealand Closer Economic Relations political support and sponsorship, 110 Trade Agreement (ANZCERTA), 193, 195 preshipment inspection (PSI), acceptance of, 17, full cumulation, 195 117b6.3, 168, 169b8.1 rejection of BDV standard, 157 processing time, 121t6.4, 122 Nigeria, 129 revenue and trade facilitation, 118, 119 96-Hour Notification of Arrival (U.S. Coast Guard technical assistance, 111 initiative), 270–271 trader satisfaction with processing, 122 320 Index

Peru (continued) case studies of reform, 116, 118 transparency in customs administration, 76 conditions to examine when considering use of, valuation issues, 116, 117b6.3 171–172 Philippines customs administration impact, 171 adoption of new Customs Code, 79, 112 evaluation of effectiveness of, 170–172, 170n23 corruption and integrity issues, 70, 108, 114, 124 international value databases, 174 customs management, 112 new trends in, 172–173 design, 110 project design omission of, 140 economic and population characteristics, 105, 106t6.1 revenue impact, 171 fiscal performance, 106, 106t6.2, 107, 119, 120t6.3 trade facilitation, 171 human resources, 113, 124 traders’ behavior impact, 171 information technology, 114 traditional programs, 169–170 integrity improvements of, 77 prior exemption vs. drawback, 217–218 maintenance costs, 19 private sector stakeholders World Bank assistance, 131n4 business partnerships, cooperation with, 275 objectives of reform, 108 communications with customs services, overall reform context, 107 32–33, 66 physical inspections, 118 corruption and, 18, 85–86, 86b4.11, 87 political support and sponsorship, 110 See also integrity issues private sector stakeholders’ support for reform, 18 professional associations of traders and support processing time, 25, 26, 26b1.C.2, 121t6.4, 122 for reforms, 18 PSI company services, 116 PSI services, impact on traders’ behavior, 171 regional and preferential arrangements, 107 special services for large traders, 37 revenue and trade facilitation, 119 support for reform from, 18, 22 Tax Computerization Project, 131n4, 134 track records of and risk management, 28 costs of information technology, 308 trader satisfaction with processing in case study diagnostic framework, 133b7.1 countries, 121–123 modification of project objectives or components, transit, cooperation for, 264 147b7.7 processing time. See time-release methodology performance indicators, 136b7.2 PRO-Committees in Southeast European countries, preparation and design, 146b7.6 18, 122 technical assistance, 111 PSI. See preshipment inspection (PSI) services trader satisfaction with processing, 122–123, 123b6.4 valuation issues, 116 quality at entry as part of rating outcome, 143, 143n16 physical inspections. See inspections PLS RAMBOLL study (2001) on integrating customs radiation detection pagers, 278 with revenue agencies, 38 RCDP. See Russian Customs Development Project political support and customs modernization, 8–9, 22 recruitment of customs staff, 33–34 autonomous revenue authorities and, 43 “Reforming Tax Systems: The World Bank Records in case studies of reform, 110, 124–125 the 1990s” (World Bank’s Tax Policy and Tax World Bank projects and, 149 Administration Thematic Group), 147 Port Risk Assessment (PRA), 281–283 regional cumulation, 194–195 control, audit, and drill, 282–283 regional groups information and intelligence, 282 See also specific groups by name methodology for, 282 importance of, 7 personnel, 282 role of strategic partners, 16–18 procedures, 282 transit agreements, 260–261 technical means, 282 release times. See time-release methodology post-release verification, 6, 290 relief goods, 235 See also audit-based controls revenue role of customs, 6, 68 PRA. See Port Risk Assessment case studies of reform, 118–119, 120t6.3 preferential rules of origin, 186–187, 191–196 collected tariff rates, 24t1.B.1 See also rules of origin determining amount of revenue, 105n3 preshipment inspection (PSI) services, 168–174 as effectiveness indicator, 14–15 acceptance of, 17, 18, 68, 164 mobilization enhancement, 9–10, 17, 44 advantages and disadvantages of, 116n13, 169n21, 175 PSI services, impact of, 171 bidding procedures to select, 172, 172n24 as share of tax revenue, 5, 23t1.A.1 Index 321

Revised Arusha Declaration on Integrity in Customs, 87 checking authenticity and validity of certificates of See also Arusha Declaration on Integrity in Customs origin, 205–206, 205t9.1 Revised Kyoto Convention, 53–58 costs of administering, 204–208 anticorruption strategy, adoption of, 75, 87 definition of origin, 184–185 background and purpose of, 52, 53–54, 138, 138n8 Doha Development Round and, 208–209 duty relief regimes and, 216n2 economic implications of, 199–200, 200n18, 202–204 elements of, 54–57 in existing free trade and preferential trade enforcement issues, 63–64 agreements, 197–199, 197b9.2, 211t9.B.1 exemptions, 233n20 fish and EU importing, 192b9.1 General Annex principles and chapters, 54–57 globalization and, 203 guidelines for, 57 methods for determining substantial transformation, information and communications technology 185–187, 210t9.A recommendations of, 293 change of tariff classification, 185–186, 193, legislation consistent with, 59b3.2, 75, 76b4.2, 111 210t9.A as model for preparing modern Customs Code, specific manufacturing process, 186–187, 193, 57–58, 64, 66, 147–148 210t9.A obligations under, 57–58 value-added rule, 186, 193, 195, 198, 199, 207–208, ratifying countries, 54, 54n6 210t9.A, 212 risk management and, 13, 55, 97 nonpreferential, 187–191 rules of origin and, 185–187 capacity building and dissemination of information significance of, 5, 8 prior to implementation, 191 Specific Annexes, 57, 187n4 draft harmonized nonpreferential rules of origin transit provisions, 246 (HRO), 189–191, 212 seals, 248, 248b11.2 Harmonization Work Program (HWP), 189–190 World Bank project design and, 140 product-specific rules, questions concerning, Risk-Based Compliance Management Pyramid, 94–97, 189–190, 198 96f 5.3, 98 operational conclusions, 209, 212 risk management, 91–99 overlapping rules from multiple FTAs, 206–207, balanced approach to, 93, 94f 5.2 207f 9.1, 208t9.3 compliance assessment and trade facilitation, 97–98 preferential, 186–187, 191–196 compliance management, 93–94, 95t5.1 absorption (or roll-up) principle, 196 customs valuation and, 98b5.1 cumulation, 194–196, 194n13, 199, 212 development of risk map, 79 duty drawback, 196 facilitation and control, 92–93 labor requirements to deal with, 206, 206t9.2 matrix, 92, 92f 5.1 methods for determining sufficient processing, importance of, 92 191–194 information and communications technology (ICT), restrictive rules, 191, 192b9.1, 209 290, 291f 13.1 tolerance or de minimis rules, 196, 199, physical inspection as part of, 27–29, 118n15 199n17, 206 case studies of reform, 117–118 recommendations for, 212 pre-project diagnostic framework and, 133 survey on role of customs in checking certificates profiles, preparation of, 28 of origin, 205–206, 205t9.1 putting theory into practice, 94–97 utilization of trade preferences and, 200–202 Revised Kyoto Convention and, 55, 97 Rules of Origin in a Globalized World: A Work in Progress risk assessment based on electronic information, 6, 28 (Imagawa & Vermulst), 189 Risk-Based Compliance Management Pyramid, Russian Customs Development Project (RCDP), 128, 94–97, 96f 5.3, 98 130, 133b7.1 security issues, 274–275, 276t12.1 change management and sustainability, 140 sequencing of reforms and, 13 performance indicators, 135 Road Transit Customs Declaration (RTCD), 261 Russian Federation Customs Modernization Project, 10, Romania 64, 65b3.4, 297n3 See also Trade and Transport Facilitation in Southeast Rwanda Europe program (TTFSE) autonomous revenue authority, 41 release-time reduction, 15 Northern Corridor, 261 RTCD (Road Transit Customs Declaration), 261 rules of origin, 8, 183–213 SADC. See Southern African Development Community See also Agreement on Rules of Origin SafeTIR, 258, 258b11.4 322 Index

sea cargo, 267–271 manual and low-tech approaches, 276, 278 European Union, 271 operational considerations for use of scanning International Maritime Organization, 266, 267–268 equipment, 280–281 United Nations Economic Commission for radiation detection pagers, 278 Europe, 268 X-ray inspection systems, 279–280 U.S. initiatives, 268–271 U.S. customs, 37 seals, 248, 248b11.2 WCO initiatives, 266–267 SECI. See South East Cooperation Initiative (SECI) and Senegal Stability Pact Development Management Project, 129, 148b7.8 security role of customs administrations, 6, 265–283 information technology and GAINDE system, air cargo, 271–273 306b13.5 European Civil Aviation Conference (ECAC), 272 SEPAY (Senegal electronic payment system), 306b13.5 International Air Transport Association (IATA), sequencing and pacing of reforms, 13–14 266, 271–272 Serbia International Civil Aviation Organization (ICAO), See also Trade and Transport Facilitation in Southeast 266, 271 Europe program (TTFSE) United Kingdom, 272–273 cost of collection, 16 U.S. Transportation Security Administration (TSA) interagency coordination, 20 initiatives, 272 SGS. See Société Générale de Surveillance bilateral security initiatives, 275 Singapore business partnerships, cooperation with, 275 See also Japan–Singapore agreement communication re international and bilateral security TradeNet initiative and, 20, 112, 304 initiatives, 275 smuggling, 108, 118, 119–120, 273 cooperation with stakeholders, 275 See also integrity issues; security role of customs costs of, 11 administrations as effectiveness indicator, 15 Société Générale de Surveillance (SGS), 173, 173b8.2 information flow and access, 274 SOFI (Solutions Françaises Informatiques) and SOFIX, initiatives to improve cargo security, 266–273 301, 302b13.3, 308 land borders, 273 software. See information and communications legislative framework, 274 technology (ICT) management implications, 273–275 SOLAS. See International Convention for the Safety national agencies, cooperation among, 275 of Life at Sea operational conclusions, 281 Solutions Françaises Informatiques (SOFI and SOFIX), organizational structure, 273–274 301, 302b13.3, 308 Panama Canal Authority, 269b12.1 South Africa Port Risk Assessment (PRA), 281–283 EU–South Africa agreement, 199 control, audit, and drill, 282–283 Walvis Bay Development Corridor (now Trans information and intelligence, 282 Kalahari), 261 methodology for, 282 South Asian Association for Regional Cooperation personnel, 282 (SAARC), 194 procedures, 282 South East Cooperation Initiative (SECI) and Stability technical means, 282 Pact, 18, 110, 122 risk management, 274–275, 276t12.1 Southeastern Europe countries. See Trade and Transport sea cargo, 267–271 Facilitation in Southeast Europe program European Union, 271 (TTFSE); specific countries International Maritime Organization, 266, 267–268 Southern African Development Community (SADC), United Nations Economic Commission for 108, 201, 203, 206 Europe, 268 South Pacific Regional Trade and Economic Co- U.S. initiatives, 268–271 operation Agreement (SPARTECA), 193, 195 strategic and operational planning, 273 Sri Lanka handling of air express consignments, 97 technical means to assist, 275–281, 277t12.2 stakeholders’ involvement in customs modernization, 21 central control point (CCP), establishment of, 275 “Strategies for Landlocked and Transit Developing container scanning equipment, 278–281 Countries” (UNCTAD), 261 costs of scanning equipment, 280 strategy for modernization, 3–30 explosives detection devices, 278 checklist of guidelines to define, 29 gamma ray inspection systems, 280 comprehensive vs. partial, 12, 22, 148 intrusion-detection technology, 278 development of, 12–20 Index 323

diagnostic work and, 9–11, 22, 109b6.1 features of, 138–142, 138f7.1, 139t7.6, 141b7.4 World Bank projects, 129–134, 132t7.3, 134n5, human resources, 140–141 144–145, 148 implementation and outcomes, 142–144, 143t7.7, EC blueprints for accession countries, 11 144–145, 144t7.8, 150–151 effectiveness indicators, 14–15 implementation plans, 141–142 efficiency indicators, 15–16 integrity issues, 141, 148 external advice for, 18–19 lessons learned, 145–149 factors necessary for successful reform, 7–11 objectives of, 134–135, 135n6, 135t7.4, 145 financing plan of, 19 performance indicators, 135–138, 136t7.5, 137b7.3, flexible implementation, 21 150, 151 globalization and, 7–8 pre-project diagnostic framework, 130–134, implementation of, 20–21 132t7.3, 134n5, 144–145, 146b7.6, 148, 151 interagency coordination, 7, 19–20 quality at entry as part of rating outcome, International Customs Guidelines of International 143, 143n16 Chamber of Commerce, 10 temporary admission, 231–233 Lane’s Customs Modernization and the International temporary admission for inward processing Trade Superhighway and, 10 (TAP), 219–224 leadership, 20–21, 22 duty suspension scheme, 222, 222b10.3 objectives of customs operations, 5–7 equivalence and prior equivalence, 220–221 operational conclusions, 22 illustration of successful reform, 221–222, 221b10.2 “ownership” of reforms, 22 issues, 219 performance indicators for, 14–16, 22 manufacturing under bond (MUB), 222–224, 223n6, physical inspection as part of risk management, 27–29 224b10.5 political support and, 8–9, 22 operational and administrative requirements and private sector stakeholders’ support for, 18, 22 procedures, 219–220 realistic approach to reforms, 22 passbook, 222, 223b10.4 reduction of trading costs, 11 terrorism. See security role of customs administrations revenue mobilization and, 9–10 textiles and clothing role of strategic partners, 16–18 Agreement on Textiles and Clothing, 187, 208 sequencing and pacing of reforms, 13–14 EU imports and rules of origin, 200–201 stakeholders’ involvement, 21 NAFTA rules of origin, 197b9.2 time-release methodology, 15, 24–27, 25b1.C.1 nonpreferential rules of origin issues, WCO’s Customs Capacity Building Diagnostic 189–190 Framework, 10–11 preferential rules of origin issues, 193 World Bank trade facilitation toolkit and, 10 See also cumulation and rules of origin issues sustainability of project, 133–134, 140, 148 U.S. rules of origin, 201–202 Thailand open bond arrangements for warehousing, Tanzania 232b10.7 autonomous revenue authority, 42b2.3, 43 Thuronyi, Victor, 59, 62 compensation of customs staff, 44, 82b4.8 TI. See Transparency International Port Modernization Project, 147b7.7 time-release methodology, 15, 24–27, 25b1.C.1 Tax Administration Project, 133b7.1, 140n11 case studies of reform, 121–123, 121t6.4 trade with Uganda, 108 Crown Agents and, 46 upgrading of infrastructure, 36 customs-oriented approach, 26 TAP. See temporary admission for inward processing illustrative results, 26–27 tariff reduction, 4 reduction in clearance times, 11 TATIS, 301–303 special services for large traders, 37 tax farming, 44–46, 44n22 World Business Environment Survey, 25n21 technical assistance, 4, 18–19, 111 TIR Convention. See Transport International Routier for ACV introduction, 167–168 Tokyo Round case studies of reform, 125 See also Agreement on Customs Valuation (ACV) World Bank projects, 129–152, 130t7.1 failure to include in project design, 140 appraisal of, 151 objective of, 157n2 coordination with other donors, 142, 142b7.5, 148 valuation standards and, 156, 157–158 with customs component, 129, 131t7.2, 149t7.A.1 tolerance rule, 196, 199, 199n17, 202, 206 design of, 129–130, 134–142, 151 TRACECA, 262 evaluation of, 151–152 trace explosives detection devices, 278 324 Index

Trade and Transport Facilitation in Southeast Europe documentation flow, 248, 250–251, 253, 260 program (TTFSE), 11, 262 duty relief and exemption regimes, 233, 233n19 case study of reform, 104 ECOWAS Inter State Road Transit System customs management, 112 (Transit Routier Inter-Êtats, TRIE), 259 design, 110 enforcement problems, 253 enforcement efforts, 121 facilitation institutions, 259–262, 264 human resources, 114 guarantees, 248, 250, 252, 254b11.3, 255, 261, 263, 264 overall reform context, 107 history of transit procedures, 246b11.1 physical inspections, 117 implementation issues, 252–253 processing time, 122 international conventions’ provisions, 246–247, rapid change, effect of, 108 247t11.2 revenue and trade facilitation, 118 nonclearance of procedure, 251–252 technical assistance, 111 one-stop border posts, 260–261 declarations, number per staff per year, 16, 16f1.1 operational conclusions, 263–264 performance indicators identified by, 16, 135, 137b7.3, principles of transit regimes, 246–247 262, 263b11.6 public-private cooperation, 264 Regional Steering Committee, 21b1.2 quality of transport services, 252–253 time-release methodology of, 25 regional agreements, 260–261 trade facilitation targets of, 15, 262 Road Transit Customs Declaration (RTCD), 261 user survey, 21 seals, 248, 248b11.2 World Bank project, 130, 135, 142b7.5 TRACECA, 262 trade facilitation transit corridors, 261–262 See also time-release methodology typical operations, 247–253, 249t11.3, 252f11.1 case studies of reform, 118–119 Transit Routier Inter-Êtats (TRIE), 259, 260 conducting surveys on, 25 Trans Kalahari Corridor Memorandum of as effectiveness indicator, 15 Understanding, 261 effect of, 11 translation of legal concepts, 63 priority of, 5–6, 8 transparency, 75–76, 77b4.3, 123 PSI services, impact of, 171 Transparency International (TI), 70, 70n1 Revised Kyoto Convention and, 55 Transport International Routier (TIR), 108, 254–259 risk management and compliance assessment, 97–98 advantages of, 258–259 World Bank toolkit, 10 attempts to duplicate elsewhere, 259 Trade Information Management System (Crown insurance policies, 255 Agents), 115, 300–301 international and mutual recognition of customs TradeNet initiative, 18, 20, 112–113, 304, 305b13.4 control measures, 255 traders. See private sector stakeholders international guarantee valid throughout journey, 255 TRADE X system, 306b13.5 national associations of transport operators, 255 training of customs staff, 8–9, 34–35 SafeTIR, 258, 258b11.4 on ACV, 160, 177 scope of use, 255 case studies of reform, 113 secure vehicles, 254–255 integrity issues and, 83 sequence of transit operation under, 255–259, sequencing of reforms and, 13 256f11.2 transit, 243–264 TIR Convention, 254–255 See also Trade and Transport Facilitation in Southeast Unique Consignment Reference Number (UCR) Europe program (TTFSE); Transport of WCO, 258, 259b11.5 International Routier (TIR) treasury voucher system, 237–238 bilateral agreements, 259–260 TRIE. See Transit Routier Inter-Êtats central customs office (CCO) role, 250–251 TRIPS Agreement, 64, 75, 76b4.2 clearance of procedure, 251 TTFSE. See Trade and Transport Facilitation computerization and information technologies, in Southeast Europe program 253, 263 Tunisia Export Development Project, 129, 135, convoys, 253 140, 141b7.4 cooperation between authorities, 260–261 Turkey, 104 corruption, 253, 263 adoption of new Customs Code, 75, 79, 112 costs of transit operations, 244–246, 245n5 & 6, corruption and integrity issues, 114 245t11.1 customs management, 112 Index 325

design, 110 technical assistance, 111 economic and population characteristics, 105, 106t6.1 trader satisfaction with processing, 123 enforcement efforts, 120 valuation issues, 117 fiscal performance, 106, 106t6.2, 119, 120t6.3 UNECE (United Nations Economic Commission human resources, 113 for Europe), 268 information technology, 114, 115, 115b6.2, 296b13.1, Unique Consignment Reference Number (UCR), 302b13.3 258, 259b11.5 costs of, 308 United Kingdom World Bank assistance, 131n4 See also Department for International Development objectives of reform, 108, 109 (DFID) overall reform context, 107 air cargo, 272–273 physical inspections, 117, 118 autonomous revenue authorities’ model from, 40 political support and sponsorship, 110 “known shipper” program, 272–273 private sector stakeholders’ support for reform, possible merger of customs with revenue agency, 18, 123 38n12 processing time, 121t6.4, 122 tax farming, 44 Public Financial Management Project, 130, 131n4, United Nations Conference on Trade and Development 135, 142b7.5 (UNCTAD) regional and preferential arrangements, 108 computer systems and software (ASYCUDA), 111, revenue and trade facilitation, 118 115, 253, 299–300, 308 technical assistance, 111 customs services improvement efforts of, 4 trader satisfaction with processing, 123 “Strategies for Landlocked and Transit Developing transparency in customs administration, 76 Countries,”261 valuation issues, 117 study on release time in Zaire, 15 Turnbull, Ian, 60 study on utilization rate for LDCs, 201 24-Hour Advance Manifest Rule, 268, 270 study on value-added vs. regional cumulation, 195 United Nations Economic Commission for Europe UCR. See Unique Consignment Reference Number (UNECE), 268 UDEAC (Customs Union of Central African United Nations Security Council Resolutions 1373 States), 157 and 1456, 266 Uganda United States adoption/revision of Customs Code, 79, 112 air cargo, 272 autonomous revenue authority, 41, 42b2.3, 43, 44, Aviation Security Advisory Committee (ASAC), 272 107n5, 110, 112, 113, 124b6.5 clothing imports and rules of origin, 201–202 compensation of customs staff, 43, 44, 82b4.8 Container Security Initiative (CSI), 268, 270 corruption and integrity issues, 108, 114, Customs and Border Protection, Bureau of (CBP), 123, 124b6.5 268–271 customs management, 112 Customs-Trade Partnership Against Terrorism design, 110 (C-TPAT), 268–270 economic and population characteristics, 105, enforcement of laws, 62, 62n40 106t6.1 full cumulation, 195 enforcement efforts, 120 General System of Preferences (GSP), 201 fiscal performance, 106, 106t6.2, 107, 119, 120t6.3 Homeland Security, Department of, 37 human resources, 113 96-Hour Notification of Arrival (Coast Guard information technology, 114, 115 initiative), 270–271 intelligence and investigative function, rejection of BDV standard, 157 118–119, 119 sea cargo initiatives, 268–271 Northern Corridor, 261 24-Hour Advance Manifest Rule, 268, 270 objectives of reform, 108 Uruguay information technology system, 297 overall reform context, 107 Uruguay Round physical inspections, 118 rules of origin under, 188–189, 208 political support and sponsorship, 110 shifting burden of proof, 158, 163, 174, 175 processing time, 121t6.4, 122 valuation standards and, 156 PSI company services, 116 U.S.–Chile agreement, 199 regional and preferential arrangements, 108 U.S. Maritime Transportation Security Act, 268 revenue and trade facilitation, 118 U.S.–Singapore FTA, 197 326 Index

valuation issues, 8, 155–182 objectives of, 134–135, 135n6, 135t7.4, 145 See also Agreement on Customs Valuation (ACV); performance indicators, 135–138, 136b7.2, 136t7.5, Brussels Definition of Value (BDV) 137b7.3, 150 case studies of reform, 116–117 political support, 149 checklist, 180 project implementation and outcome, 142–144, historic overview, 156–158 143t7.7, 144t7.8 improvements in practices, 163–168 correlation estimation, 150–151 creation of value database, 165–166, 174 factors affecting outcome, 144–145 minimum values and reference prices, 167 recruitment of customs staff, survey on, 83, 83n9 modernizing customs administration, 164 “Reforming Tax Systems: The World Bank Records reforming tariff and trade regime, 164 in the 1990s,”147 strengthening organization and infrastructure, 164 structural adjustment loans (SALs), 129 technical assistance, 167–168 survey on role of customs in checking certificates international standards, 156–158 of origin, 205–206, 205t9.1 operational conclusions, 174–175 technical assistance loans (TALs), 129, 137 PSI services, use of, 168–174, 175 technical assistance projects. See technical assistance See also preshipment inspection (PSI) services time-release analysis by, 26 significance of, 156 trade facilitation toolkit, 10 underinvoicing, 156 World Business Environment Survey, 25n21 value-added rules, 186, 193, 195, 198, 199, 207–208, World Customs Organization (WCO) 210t9.A, 212 See also Revised Kyoto Convention VAT collection,5,6,287 Advance Cargo Information Guidelines, 267 Arusha Declaration on Integrity in Customs, 68, Walvis Bay Development Corridor (now Trans 72–87, 114, 114n10 Kalahari), 261 corruption defined by, 71 warehousing, 230–231 Customs Capacity Building Diagnostic Framework, open bond arrangements, 232b10.7 10–11 WCO. See World Customs Organization customs services improvement efforts of, 4 Web sites, use of, 76, 86 Expert Working Group on commercial fraud, 63 West African Monetary Union, 201 information and communications technology World Bank, 127–152 recommendations of, 293 See also specific projects Integrity Action Plan, 74 appraisal of projects, 151 Integrity Development Guide, 74, 86–87, 87n12 autonomous revenue authorities, support for, 40 Intellectual Property Rights Model Legislation, 64 corruption defined by, 71 International Convention on Mutual Administrative customs services improvement efforts of, 4, 12, Assistance in Customs Matters, 167n18 19, 128–129 International Convention on the Harmonized costs of, 19 Commodity Description and Coding System rationale and lending instruments, 128–129 (Harmonized System), 8 reforms of specific countries due to, 109 legislative role of, 31n1, 53, 64 scope and distribution of Bank assistance, 129 Model Bilateral Agreement on Mutual Assistance, 167 technical assistance, 111 Model Code of Ethics and Conduct, 74, 80, 114 diagnostic work Risk Management Guidelines, 27 pre-project, 129–134, 132t7.3, 133b7.1, 134n5, security initiatives of, 6, 266–267 144–145, 146b7.6, 148 survey on role of customs in checking certificates recognized as need by, 9 of origin, 205–206, 205t9.1 evaluation of projects, 151–152 Technical Committee on Customs Valuation, 166 Global Economic Prospects 2004 Report (GEP), 11 Technical Committee on Rules of Origin (TCRO), information technology guidelines, 294 188, 189, 189n6 Investment Climate Surveys, 68 time-release analysis by, 26 project design, 129–130, 134–142, 151 Unique Consignment Reference Number (UCR), 258, change management, importance of, 140, 145, 149 259b11.5 donor coordination, 149 World Economic Forum’s Global Information Technology exit strategy, 149 Report 2003–2004, 289 features of, 138–142, 138f7.1, 139t7.6 World Trade Organization (WTO) integrated approach, 140, 141b7.4 See also Agreement on Customs Valuation (ACV) Index 327

Agreement on Preshipment Inspection, Yugoslav Customs Code, 52b3.1 168, 170n22 Agreement on Rules of Origin, 8, 186 Zaire Committee on Customs Valuation, 166 customs staff rotation, 33n3 Committee on Rules of Origin (CRO), 188, 189, release time, effect of, 15 189nn8 & 9 upgrading of infrastructure, 36 Export Subsidies and Countervailing Duties rules, 217 Zambia Ministerial Conference in Cancun (2003), 4, 5 ASYCUDA operations, 254b11.3 Philippines trade reform compliance with, 107 autonomous revenue authority, 41, 42, 43 commitment to integrity, 76 X-ray inspection systems, 279–280 zero tariff rates, 233n21

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