CUSTOMS MODERNIZATION Handbook (GLWRUV /XF 'H :XOI -RVp % 6RNRO THE WORLD BANK Customs Modernization Handbook 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 All rights reserved. A publication of the World Bank. 1 2 3 4 08 07 06 05 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. 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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 pubrights@worldbank.org 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, 1982­2002 130 7.2 Distribution of Approved Operations with Customs Component by Project Category, 1982­2002 131 7.3 Pre-Project Diagnostic Analyses in Technical Assistance Projects, 1982­2002 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, 1982­2002 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. xi 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 Customs­Trade 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 todelaytheclearanceof cargoandconductoperations 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 com- ing 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 pro- cedures that takes this into account. These proce- Customs Valuation Is a Core Customs Function dures include the identification, analysis, evalua- tion, 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, straight- forward, 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 public­private 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 integra- tion--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 private­public 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 imple- ment 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 impor- tant 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 1 STRATEGY FOR CUSTOMS MODERNIZATION Luc De Wulf TABLE OF CONTENTS Further Reading 29 References 30 Objectives of Customs Operations 5 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. 82­83.) 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 com- ments to pursue a private sector­oriented 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 differ- ent 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 proba- tion 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 imports and exports will be made on a risk 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 in an Increasingly Globalized Environment technology (ICT) infrastructure that will allow 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 import­export 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 (1961­99) 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 audit of trade and transport services (Raven 2001).9 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 effi- cient 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 cus- toms 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 pro- gram, 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 Bank­funded 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 some, expensive, and provide temptation to of or improvement in cargo processing.14 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 num- ber of persons arrested, both incoming and outgo- 12. WCO (2002) provides a methodology to identify the bottle- necks 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 soft- ware. Automated Systems for Customs Data (ASYCUDA) and Efficiency Criteria Efficiency criteria indicators other country-designed software provide time-release data. In 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 extensively testing a methodology to do this.15 100 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 cus- toms 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 col- lected; 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 trad- ing 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 docu- mentary processing system, and ensures that all transactions are recorded, thus improving the rate 17. This has occasionally happened with the introduction of 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 advan- tages 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 sup- port, 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 sev- eral 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 de- claration) 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 communi- cation with all stakeholders to ensure that the reforms respond to their initial objectives and do Flexible Implementation 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 of donor support; such support must be seen as 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 takes for customs to release goods.20 For many times so that the findings are comparable across countries. The chain of processes that imports go through from the time of their arrival in a country to their 20. This appendix was written by Gael Raballand, Economist, 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 com- pare 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 opin- ions 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 trans- action, 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 1999­2000 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 gener- ally 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 meas- urement 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 There is a tendency in recent customs projects to 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 per- formance 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 exami- nation 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 Trade Superhighway. Westport, Conn.: Quorum Books:. Test the Commitment of the Government 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 26­28. 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 References 49 Human Resources: An Organization Is Only 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 nation, and it must be knowledgeable about The contributions of Michael Lane and the assistance of Melanie 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 consider- able 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 probation- ary 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 coun- tries 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. lem of staff continuity in specialized assignments. High-level officials also are known to have interfered frequently in the appointment of family members or members of their eth- nic 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 appli- cations 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 possibilities for appeal. External legitimacy refers to 4.In Ghana,the service agreements of the companies undertaking 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 sustained because of opposition from other civil salary of a gazetted officer. servants. It would appear that the strict conditions 6. Interesting background on this issue can be found in Van 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 promo- tions 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 responsi- bility 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 decentral- ized 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. otherrevenuedepartments,inthehopeof 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, includ- ing 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 sys- tem, 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 pri- vate 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 substan- tially speeds up the overall procurement process. 19. Nepal is presently considering creating an ARA, first at inter- nal revenue and later at customs. This would, among other ben- efits, 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 oppor- tunity to change its staff. In Uganda, most of the Lessons from Experience revenue administrations' staff retained their posi- tions 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 exemp- tion, 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 1996­99 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 accordingly, and find the organizational formula 24. The agreed on program plans were made up of 700 specific 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 man- agement'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 trans- parent 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 Tanzania and 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): 213­32. · 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):153­163. 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 23­24. 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 sec- tions, 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- Harmonization of Customs Procedures (entered sity of Michigan Law School, for her help in research. 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 econ- omy, 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 con- strain 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. their national procedures.7 Many countries have The Convention consists of the Body of the already reviewed their national legislation based on Convention, the General Annex, and the Specific Annexes.5 The main Body of the Convention is a the Revised Kyoto Convention, without waiting for 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- for all customs procedures and practices.8 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 con- signments to selective inspections. Such a program will enable a customs administration to optimize 9. Standards 1.2­3. 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 neces- sary 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 possi- ble quantity. 11. Transitional Standard 3.4 outlines joint operations at com- 13. Standards 4.1­3, 5­11, 13. mon borders by neighboring customs administrations, and 14. Standards 4.15­24. Transitional Standard 3.5 advocates coordinated inspections of 15. Standards 5.1­2. goods with other government agencies. 16. Standards 5.6­7. 12. Standard 3.39 stipulates that customs must not impose sub- stantial penalties for inadvertent errors and errors without evi- 17. Standard 6.1. dence of fraud or gross negligence. 18. Standards 6.3­8 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 effective implementation of the WTO Valuation the requirements of Article X of GATT 1994.25 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 management program because they can be con- of the changes entering into force.26 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 toms procedures and facilitate trade. This chapter without sacrificing confidentiality.27 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 The chapter mandates new or revised national legis- request.28 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 9.1­2. 23. Standard 8.1. 27. Standards 9.4­6. 24. Standard 8.4. 28. Standards 9.8­9. 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 regard- ing formalities prior to lodgment of goods declara- tion,33 as well as those for warehouses,34 transit,35 Preparing a Modern Customs Code 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 introduc- tion of the principles and practices contained in the 29. Standards 10.1­2. Convention, taking into account the local environ- 30. Standards 10.4­6. 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 dards have a 60-month implementation period. being re-imported in the same state (chapter 2), and the circum- 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-referenc- ing 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 examina- tion, the Customs shall ensure that the inspec- tions, 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 under- stand. This is partly because drafters in these coun- Organization tries have inherited the traditional style of legisla- tive 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. 76­84). 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 man- ner 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 imple- mented 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. 86­87). 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 dif- ficulties. 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 administra- tion. 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 man- agement 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 1994b).43 The WCO Intellectual Property Rights would eliminate complex or redundant customs formalities that delay clearance and create 42. World Customs Organization, www.wcoomd.org. 43. Articles of TRIPS relevant to customs are 51­60 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 develop- ment 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. 76­84; what exists in the current code. It is also highly London: HMSO. Steenlandt, Marcel, and Luc De Wulf. Custom Pragmatism and recommended that the national legislation of 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 Department of Homeland Security. www.Customs.ustreas national legislative framework, and should be .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 29­30. 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 4.1­4.7 and 4.9­4.11). 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 busi- ness 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 capac- ity 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 lia- bilities; 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. Nepotism in the customs context can include Transparency International1 (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 individ- ual, group, or organizational level. While this form A useful analytical framework to analyze corrup- of corruption has been reported in many industri- tion is proposed by Robert Klitgaard (1988).3 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 admin- istrative 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 customs­business 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 Bank­supported 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 sys- tems 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 cus- toms 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 15­30 days which identifies functional areas and processes that to 1­2 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 seri- To assist customs administrations in developing ous allegations against customs personnel, ICAC appropriate codes of conduct, the WCO has pre- has provided training to customs officials and has pared a Model Code of Ethics and Conduct7 that done much to increase the level of public confi- sets out the following key elements: dence in the customs administration. 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 h