Using a Trade Agreement to Address Corruption

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Article at a glance

  • The recently negotiated World Trade Organization Trade Facilitation Agreement will simplify customs procedures. A key outcome of these changes is less opportunity for corruption related to the import and export of goods.
  • This article discusses key Articles of the Agreement and how each one reduces corruption risk.
  • The long phase-in approach provided for in the Agreement, the flexibility afforded to developing countries, and the opportunity for technical assistance during implementation are additional factors that encourage adoption of the Agreement.

Introduction

In December 2013, the members of the World Trade Organization (WTO) concluded negotiation of an Agreement on Trade Facilitation, which will simplify customs procedures and in doing so reduce long-standing risks of corruption. The Agreement, which will be binding on all 160 WTO members, speeds up customs procedures; makes trade easier, faster and cheaper; increases transparency and efficiency in customs procedures; and reduces bureaucracy.1 To address the potential lack of capacity in many WTO members, the Agreement allows for an extended phase-in of obligations and establishes principles for providing technical assistance and training.

Opportunities for corruption in the movement of goods from one country to another are widespread. Goods are subject to sanitary and health inspection, taxation, valuation, and collection of import duties or export taxes (such as value-added taxes). The government agencies involved in these efforts maintain a monopoly over the process, discretion as to how they operate, and little accountability – preconditions for institutional corruption.2 Corruption in customs occurs both in the developed and developing world3 and exacts a high price in the form of lost revenue to the government and increased costs to businesses.4

This article highlights the provisions of the Agreement on Trade Facilitation that can reduce the opportunities for corruption where they are most likely to occur.5

  • Processing of import, export and transit declarations
  • Assessment of origin, value and classification of goods
  • Physical inspection, examination and release of cargo
  • Administration of concessions, suspense and exemption schemes and drawback schemes
  • Conduct of post-clearance audits
  • Issuing of import licenses, warehouse approvals and authorized trader status approvals
  • Processing of urgent consignments

Article 1: Publication and Availability of Information

The first goal of the Agreement is to increase clarity and transparency in import and export procedures and requirements.6 Article 1 requires “prompt” publication of all procedures, forms and documents, rates of duty and taxes, rules for classification and valuation of goods for customs purposes, rules of origin, transit restrictions and procedures, penalties, appeals procedures, trade agreements and tariff quota administration procedures. The most important of these – import, export and transit procedures, appeals procedures and required forms and documents – must be made available through the internet.

This will reduce the corruption risk in processing of import, export and transit declarations by standardizing documentation, decreasing the amount of discretion that can be exercised by customs officials and publishing procedures applicable to all traders.

Article 3: Advance Rulings

In order to cut down on discretion and enhance consistency, Article 3 requires each WTO member to issue an advance ruling on a good’s tariff classification and origin “in a reasonable, time-bound manner” upon request. Each WTO member is encouraged to issue advance rulings in other areas, such as the requirements for relief or exemption from customs duties or applications of quotas. Article 3 urges the parties to make all advance rulings public.

This will reduce the corruption risk in assessment of origin, value and classification of goods, and administration of exemption schemes by eliminating the discretion of individual customs officials and inconsistent rulings. It will also facilitate the release and clearance process for goods subject to the ruling. Advance rulings reduce the risk of disagreements with customs officials.

Article 4: Appeal or Review Procedures

Each WTO member must provide an administrative mechanism to appeal any decisions made by customs officials or allow for judicial review. In order to facilitate appeals, WTO members must ensure that it provides the reasons for any administrative decision. Parties are encouraged to extend the right to appeal to decisions by other border agencies.

This will reduce the corruption risk in all functions of customs by protecting traders against decisions or omissions of customs officials that are not consistent with law and regulations. Requiring reasons be provided for a decision enhances transparency and reduces the possibility of arbitrary decision-making.

Article 5: Other Measures to Enhance Impartiality, Non-discrimination and Transparency

This Article deals with notifications or guidance related to control and inspection of foods, beverages and feedstuffs in order to protect human, animal and plant life. Notifications must be based on risk and applied uniformly. Importers must be notified promptly when goods are detained for inspection and must be allowed to request a second sample test if the first is unfavorable.

This will reduce the corruption risk in the physical inspection, examination, and release of cargo by requiring a risk-based assessment to impose heightened inspections, non-discriminatory treatment of importers, and an opportunity to obtain retesting.

Article 6: Fees and Penalties

With respect to fees and other charges, this Article requires publication of all fees or other charges, the reason for their imposition, the authority responsible for imposing them and when and how payment is to be made. It requires advance publication of changes and a requirement to review fees and other charges periodically with a “view to reducing their number and applicability.” Fees and other charges should be limited to the approximate cost of the services rendered.

Penalties can only be imposed with a written explanation of the nature of the breach giving rise to the penalty and the applicable law, regulation, or procedure under which the amount is calculated. A penalty can only be imposed on the person responsible for the breach and must be commensurate with the degree and severity of the breach.

This will reduce the corruption risk by reducing the opportunity to impose arbitrary fees, charges, and penalties without explanation or recourse. Limiting fees and other charges to amounts that have been published in advance, and requiring that penalties be assessed in writing with an explanation and legal authority, severely curtail the discretion of customs’ officials.

Article 7: Release and Clearance of Goods

Article 7 streamlines the procedures involved in importing, exporting, and transiting goods through customs. It mandates pre-arrival processing, where appropriate, in electronic format. Where possible, it requires the option of paying fees, duties and other charges electronically.

The Article adopts a number of provisions to speed release of goods. It requires that goods be released prior to determination of final customs duties, though release can be subject to a guarantee. Customs control should be risk-based with efforts concentrated on high risk consignments. Customs must conduct post-clearance audits to ensure compliance with customs and other laws, rather than holding goods until such an audit is conducted.

For those persons who meet specified criteria, known as authorized operators, the Article mandates specific measures to speed import, export, or transit. Examples include low documentary and data requirements, low rate of physical inspections, deferred payment of duties, and other similar trade facilitating measures.

Article 7 also imposes obligations with respect to expedited shipments and perishable goods. It identifies the criteria which may be used to qualify as an expedited shipper and then requires Customs to minimize the amount of documentation required, provide for release of goods as quickly as possible and, where possible, not collect customs duties where there is a de minimus shipment value or dutiable amount.

Perishable goods must be released in the shortest possible time, allowing in exceptional circumstances for release outside normal business hours. To maintain the goods, the authorities must provide, or allow importers to provide, proper storage facilities and, where practicable, allow release to take place at those storage facilities.

This will reduce the corruption risk by speeding up the release of goods from Customs, decreasing the use of cash, diminishing the need of authorized operators or expedited shippers to pay bribes for enhanced treatment, and limiting the discretion of customs officials with respect to treatment of perishable goods.

Article 10: Procedural Formalities

This Article aims to simplify the import and export formalities in a number of ways. First, it establishes general principles against which formalities should be measured, such as a rapid release of goods and reduced time and cost of compliance. Customs must use the same forms throughout the country and accept paper or electronic filings but cannot insist on originals. To the extent possible, Customs must use international standards for the formalities and establish a single window for all documentation. Finally, the Article prohibits the mandatory use of customs brokers.

This will reduce the corruption risk by reducing the paperwork involved in the movement of goods, eliminating the need for a middleman and narrowing the opportunities for official discretion.

Implementation of the Agreement

The Agreement will enter into force when it has been ratified by two-thirds of the WTO membership, which will most likely be sometime in late 2015 to early 2016. The Agreement offers an extraordinarily long phase-in approach, in recognition of the limited technical capacity and financial resources of developing countries and least developed countries (LDCs). Implementation is based on the principles of “special and differential treatment” and “maximum flexibility.”

The Agreement will enter into force when it has been ratified by two-thirds of the WTO membership, which will most likely be sometime in late 2015 to early 2016. The Agreement offers an extraordinarily long phase-in approach, in recognition of the limited technical capacity and financial resources of developing countries and least developed countries (LDCs). Implementation is based on the principles of “special and differential treatment” and “maximum flexibility.”

The chart on the next page describes the implementation schedule based on the category chosen, measured from the date of entry into force (the “Effective Date”).

Category A Category B Category C
Developing Country

Immediate implementation upon the Effective Date

One year from the Effective Date, notify actual implementation dates

One year from the Effective Date, notify of needs for technical assistance.

18 months from the Effective Date, notify actual implementation dates

Least-Developed Country (LDC)

One year from the Effective Date, notify indicative dates for implementation of Category A and B

Three years from the Effective Date, notify actual implementation dates

Two years from the Effective Date notify technical assistance needs.

Four years after the Effective Date, notify indicative dates for implementation.

Five and a half years after the Effective Date, notify actual implementation dates.

In cases where difficulties arise in implementation, developing countries may seek an extension of 18 months for implementation and LDCs can seek a three-year extension of implementation.

To complete the “special and differential” treatment provisions, the Agreement contains a “grace period” following the designated implementation dates, during which the dispute settlement provisions do not apply. For the provisions in Categories B and C, the grace period for LDCs is eight years.

Provision of Technical Assistance

A key component of the Agreement is the agreement of the WTO members to “facilitate the provisions of assistance and support for capacity building . . . either bilaterally or through the appropriate international organizations.” The Agreement sets out certain principles to govern the provision of support, such as factoring in reforms of the private sector, addressing regional and sub-regional challenges and promoting coordination among donors to ensure maximum effectiveness.

Conclusion

Reducing the opportunities for corrupt business and officials in the import and export of goods will be a long-term effort. The WTO’s Trade Facilitation Agreement establishes a roadmap for that effort. Anyone interested in fighting corruption should spread the word about the Agreement, the flexibility provided developing and least developed countries, and the opportunity for technical assistance to promote implementation. It is a major step in the battle against corruption.

References

  1. WTO Press Release, “Days 3, 4 and 5: Round the clock consultations produce ‘Bali Package,’” Dec. 7, 2013.
  2. Carlos Ferreira, Michaell Engelschalk and William Mayville, “The Challenge of Combating Corruption in Customs Administration,” in J. Edgardo Campos and Sanjay Pradhan, eds., Many Faces of Corruption (World Bank 2007), available at https://openknowledge.worldbank.org/bitstream/handle/10986/6848/399850REPLACEM101OFFICIAL0USE0ONLY1.pdf?sequence=1.
  3. The Times of India, “Top Customs official held for Rs 12.5 lakh bribe” (Mar. 8, 2013), http://articles. timesofindia.indiatimes.com/2013-03- 08/mumbai/37560184_1_red-sanderscustoms- duty-bribe-money; ABCNews, “Report details corruption among Customs officers at Sydney international airport” (June 22, 2013).
  4. Sofia Wickberg, “Literature review on corruption in crossborder business,” U4 Expert Answer (Aug. 22, 2013) at 2, available at http://www.u4.no/publications/ literature-review-on-corruption-in-crossborder- business/downloadasset/3269.
  5. The list comes from Gerard McLinden, “Integrity in Customs,” in Luc De Wulf and Jose B. Sokol, eds Customs Modernization Handbook, (World Bank, 2005) at 69, available at http://siteresources.worldbank.org/INTEXPCOMNET/Resources/ Customs_Modernization_Handbook.pdf.
    Whether implementation of the Agreement actually will reduce corruption is an open question. One study found trade facilitation programs decrease corruption “only if the customs agency undertakes serious and extensive (bigbang) anti-corruption and efficiency enhancing work.” Bryane Michael, Frank Ferguson and Alisher Karimov, “What Effect does Trade Facilitation have on Reducing Customs Corruption,” International Journal of Public Administration (Oct. 9, 2010), available at http:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=1705904).
  6. Much of the description of the Agreement is taken from International Trade Centre, “WTO Trade Facilitation Agreement: A Business Guide for Developing Countries” (2013), available at http://www.intracen.org/wtotrade- facilitation-agreement-business-guidefor- developing-countries/

Laura B. Sherman is Senior Legal Advisor at Transparency International-USA, a non-profit organization focused on combating corruption and promoting transparency and integrity in government, business and development assistance. She is involved in projects related to government procurement, advocacy before the U.S. Government on expanding commitments by trading partners to criminalize foreign bribery and enforce those laws, private sector compliance programs, verification of corporate anticorruption programs and many others. She is an Alternate Member on the U.S. Extractive Industries Transparency Initiative Multi-Stakeholder Group. In addition, Sherman provides legal representation and strategic advice to businesses, governments and international organizations on transactional issues, telecommunications regulation and international trade. She has extensive experience in negotiating trade agreements and advising on international trade obligations, such as compliance with World Trade Organization (“WTO”) obligations and various aspects of telecommunications regulatory reform.

Sherman has a J.D. from Georgetown University Law Center, magna cum laude, and a B.A., cum laude, from Cornell University. She is a member of the bars of New York and the District of Columbia.

The views expressed by the author are her own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE).

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